And why the world needs Gold Bullion...
THE WORLD still needs Gold Bullion and other natural resources. But we may need a new investment model to sustain them, reckons Byron King, writer and editor for Agora Financial's Outstanding Investments and Energy & Scarcity Investor newsletters.
In this interview with The Gold Report, Byron King shares his perspective on the practical and political future of Gold Mining in South Africa.
The Gold Report: Among the 14 investments in your Outstanding Investments portfolio of precious metals companies and funds, there are 10 companies and 4 funds. All 10 companies have market caps above $1 billion. How did you select them?
Byron King: Let me answer the question by referring to something that Chuck Noll said when he coached the Pittsburgh Steelers in the 1970s. Every year, during the National Football League draft, people would ask him what position he was going to draft for. Noll's answer was that he didn't draft for position; he looked for the best all-around player.
I do the same for the Outstanding Investments list. I don't pick a particular type of play or method of operations. I look for the best particular company in any given month when I'm making a recommendation. I want a company with long-term potential and portfolio staying power.
TGR: Is it important that all of those companies pay a dividend?
Byron King: It is. I want paying the shareholders to be part of management's philosophy. I want paying the shareholders to be as important to management as paying their own salary, or paying the electric bill or anything else.
TGR: Was that important to you before 2008 or is it is a more recent preference?
Byron King: I've always liked dividends, certainly from large companies. Large companies with large cash flow spend money for all sorts of things. Companies pay big bucks for executive salaries, headquarters and corporate jets. Okay, I get it. Still, the company had better have money for its shareholders. Companies need to include shareholders as regular creditors.
TGR: What do the funds add to the portfolio?
Byron King: Trading flexibility, more than anything else. If you want to own physical metal, then own physical metal. Take delivery. But if you want to be able to trade in and out of metal movements, funds are okay. Also, funds offer investors a way to expose their portfolio to the upside of the gold and silver plays without locking themselves into a particular company. If you own a fund that owns a variety of Gold Mining companies or precious metals, you don't suffer the big hit from a one-off disaster at a particular company.
TGR: Some of the companies in the Outstanding Investments portfolio have large mines or significant exposure to Africa. South Africa, with its prolific Witwatersrand basin, is still the continent's largest gold and platinum group metals (PGMs) producing region, but gold production in South Africa went down in 2011 and there are whispers that the ANC wants to nationalize at least a portion of the country's PGM mines. What is your take on the current state of mining politics in South Africa?
Byron King: I was just in South Africa, in May. First, South Africans generally are nervous about what's happening with the Euro, the Dollar and the Chinese economy. As a major resource-exporting country, those economies are South Africa's markets. They're the cash register for South Africa. So with all the issues in Europe, North America and Asia, South Africans feel as if they are being pulled along by events that are far out of their control.
In addition, as the price of gold and other South African commodity exports drops, the South African national income account drops. What's more, because much of the accounting is done in US Dollars, the strengthening Dollar is creating cost inflation in the South African mining industry. The country is getting less money for its products, yet it is paying more to operate its mines. That is very troublesome for the political powers and for the industry.
Unfortunately, the way to deal with the immediate situation is to lay people off. In a country where unemployment is as rampant as it is in South Africa—5% officially, and more like 50% when you count underemployment—that becomes a very dicey political issue. Right now, the big issue in South Africa is the day-to-day economics of the mining business.
When you get into the bigger, pie-in-the-sky takeover questions, the South African political structure has to account for the fact that many of the largest mining operations are extremely expensive to operate because the mines are so deep and technically challenging. The future of deep mining in South Africa is not putting people in the ground to do the work; the only way South Africa can remain a large-scale miner, certainly in the Witwatersrand basin, is with robotic mining.
But automation and robots raise all kinds of technical and cultural issues. One miner down below might support 10 people working in the plant on the surface, and those 10 people working on the surface might support 100 people in their local village. So, one mining job underground in South Africa might be the key to 100 people eating or not eating.
TGR: Some of the bigger mines employ 10,000 people. They do not have the mechanized infrastructure of a North American operation.
Byron King: No, and mechanization is a very contentious issue with the National Union of Mineworkers in South Africa. However, the economics and safety issues are such that many of the large South African mines must move toward more automation or they will have to shut down the mines. The mining companies are already doing the research and development. I know this. I've seen some of the futuristic technology.
TGR: Is South Africa a safe place to invest?
Byron King: I am OK with investing in large, well-known, name-brand companies with liquidity on the markets in Johannesburg, London, the US or Canada. I am nervous about South African politics there in the medium to long term. For the average North American investor who wants an array of mining or energy stocks, owning shares in a few South African companies listed on North American and European exchanges is fine, but keep your eyes open.
TGR: Are there rosy days ahead or should investors expect continued volatility?
Byron King: I think we will have to live with volatility for the foreseeable future. The good news is that the world needs resources. There are seven billion people out there. A billion are doing all right, just now, and the other six billion want to get there, too.
The next big issue is whether the world economy supports the investing model we've grown up with. The China story is beginning to unravel. The Chinese are pouring less steel, and even rejecting shipments of iron ore. It's a slowdown that's been building for a while, and now we have to deal with it.
We have unending problems in Europe. No need to elaborate there, right? Meanwhile, the US is in the middle of a presidential election season. Everything that anyone says for the next six months will be nothing but political propaganda; you have to work really hard to decipher the truth. As the summer wears on, the US will reach its debt limit and we'll have those arguments and the threat of a US government shutdown all over again. All of these big picture things are weighing down on people's willingness to invest in the future.
I was at a conference last week at Harvard University. I was in the room with senior executives from high-tech firms, large money managing firms and such. Everyone talked about how nervous they are about the future. One person explained why he's sitting on a huge wad of cash and not spending. He said, "I can deal with a recession every 10 years, but if we are going to have recessions every two or three years, I am going to accumulate as much cash as I can. I will sit on it and ride things out, good and bad."
People are nervous about the future, about investing, about whether they will ever see a return on their investments. We're living in a world of return-free risk. Where's the future in that?
We have to learn to live with market volatility. That does not mean there are no opportunities out there. It just means that the risk profile of owning for the long term will be much more problematic.
TGR: You said the world needs resources, but does the world really need Gold Bullion?
Byron King: Easy question. Yes, the world needs gold. Gold prevents the people who make and run fiat currencies from doing anything too stupid, although I seldom fail to be amazed. The people in charge are really pushing the limits of that stupidity-envelope.
TGR: Thank you for your insights.
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