Gold Market Wasteland

Patience and caution needed as capitulation fails to show up...

 

MARKETS are cyclical, and even though it feels like the end of the world after years of junior resource stock market declines, history indicates bear markets are actually an opportunity to own tomorrow's superstars for pennies on the Dollar.

 

In this interview with The Gold Report, market veteran and Exploration Insights author Brent Cook shares his travel stories and his expectations for the commodity prices when the sun begins to shine.

 

The Gold Report: You recently wrote a piece in Exploration Insights reminiscing about the 1997 to 2002 resource market. What did we learn about investing in gold and silver in that five-year window?

 

Brent Cook: I first started working for Rick Rule in 1997, just as the last resource bull was dying. The market just kept going down, way below where people thought it could possibly go, and it continued to get worse in 1998, then 1999 and 2000. Eventually it did stop dropping; people started putting money into this sector, and it leveled off.

 

What I learned is that successful investing in a bear market takes patience and caution. When you do make an investment, make sure you're betting on good people.

 

TGR: One of the things Rick Rule always says is that he's waiting for capitulation. How can you tell if we've had capitulation, and what causes it?

 

Brent Cook: I don't think we're going to see a capitulation moment; I think it will be more gradual. I see it in my newsletter subscribers. Most of them have been around for a long time, but in the last few months, people who have been with me from the beginning have started falling by the wayside even though we had a 16% gain last year and we are not doing too awfully bad so far this year. They all say they will be back as soon as the market turns. This is what it starts to look like on the bottom.

 

I envision it as a band of pioneers walking across the salt flats in July, one by one dropping to the side. One day, we'll turn around, look back and notice the hills are starting to get greener. That's how we'll know capitulation happened, by looking behind us at the wasteland and desolation we crossed.

 

TGR: Rick also says that bear markets create bull markets. The years 2002 to 2010 were pretty good for the commodity markets and everyone started to look really smart. Are there lessons to be learned from a bull market?

 

Brent Cook: There always are. A big one is to take profits along the way and keep some sense of perspective with regards to what a project is actually worth. This is a cyclical business. We go up and down. This has been true going back to the salt traders in early Africa. Supply and demand drive markets. During the last boom, China was building infrastructure and the world was growing. That created a metal shortage, which drove prices way up. That has busted. China's growth is slowing. I don't know what's going to bring the bull market back in commodities this time, but it always comes back and is usually the result of something we were previously unaware of.

 

TGR: How is the wasteland you describe as our current market scenario different than what you went through in 1997 to 2002?

 

Brent Cook: There are actually more similarities than differences. In 1998 nearly every economist said gold was antiquated and of no value in the new age. Financial publications all said you would have to be a fool in a tin hat to buy gold. Today, investors and financial publications are shunning this market again, and to some degree with good reason. In the most recent boom, profits barely increased due to increased input costs and the shift to mining lower grade ore. That left a lot of investors who got the commodity price rise right disillusioned with the sector. The metal prices rose but profits didn't. It is going to take a fair bit of time for previous investors or new investors to see a reason to be in the natural resources market. But it will happen.

 

TGR: Does that hold true both for the retail and the institutional investors?

 

Brent Cook: Yes. Retail investors were hammered in the 1997 downturn. The Bre-X scam triggered the realization that everything was overvalued and much of what was being presented was not true. New NI 43-101 requirements were put in place in an effort to provide more transparency for investors. It certainly helped, but the reality is that a technical report is only as good as the data that goes into it and the persons doing the report.

 

I am afraid a lot of these reports are poorly done and do not reflect reality. People must still do their own due diligence and follow results closely. One of the most common problems I see in these reports relates to the resource estimates. A large number of those turned out to be inaccurate, making the financial models based on them wrong. So investors got burned again, this time believing the final mine economics in the report that may have been based on sloppy resource estimates. When a company spends hundreds of millions buying trucks, building mills and excavating rock only to find out the ore in the ground is not what was presented in the resource estimate, it usually loses money. There is a long list of mines that fall into that category.

 

TGR: Who are some of the trustworthy veterans still around putting their experience to work in the market now?

 

Brent Cook: Rick Rule, Ross Beaty, Lukas Lundin and Frank Holmes are people I would listen to when they speak. A number of experienced brokers in Vancouver have proved to be smart people. Those people have been through this before and recognize that now is the time to really make money by buying when the market is down. You just have to be patient.

 

TGR: You've traveled the world visiting projects. Do things look rosier in other countries? Has the impact of the strong Dollar on projects in Canada and Mexico been good for the bottom line?

 

Brent Cook: Most certainly. The drop in oil and energy prices, as well as the drop in the Canadian Dollar, the Australian Dollar, and even the Euro, has been an advantage to companies operating in those countries versus in the US We have seen a decrease in operating costs. It is a real advantage to companies mining in Australia and Canada, especially.

 

We have also seen mining companies severely cut back on development, exploration, and even maintenance. This will lead to the next bull market when supply is eventually constrained due to these short-term cost cutting measures. The metal prices are going to have to move up because companies can't make money right now, and if it isn't profitable to mine, there will eventually be a shortage.

 

TGR: You're speaking at the Sprott-Stansberry Vancouver Natural Resource Symposium at the end of July. What do you hope attendees will take away from that event?

 

Brent Cook: This bouncing along bottom could go for a long time, but this is the time to start identifying the groups, the managements and the projects that really have a chance at succeeding. You can buy them for a lot less now than you will be able to buy them somewhere in the future. My guess is next year things start to look better, but this takes patience.

 

TGR: Thank you for your time.