A clear response to detractors of Gold Bullion over the last 10 years...
PUBLISHER of the Midas Letter, James West believes gold is the store of value everybody resorts to when times are rough.
Devoting the past 20 years to helping small companies in the resource sector raise money, further their projects, build their identities and get their stories in front of investors, James West here tells the Gold Report about how important he feels a strong position in Gold Bullion is for investors today...
The Gold Report: James, your work is based upon macroeconomic views. Can you give us some insights into how this plays into your thinking?
James West: Our viewpoint at MidasLetter, from a macroeconomic scheme on a global basis, first and foremost, is that gold is the standard by which all currency and all things of value are measured ultimately.
Gold is the only thing on earth that has for 5,000 years maintained some kind of value whereby it can be traded in exchange for materials and for services, labor and real estate. So there's really not been one currency in the form of paper or coin that hasn't actually been made of gold or represented a deposit of gold that has lasted more than 100 years as a global standard.
We're seeing the US Dollar deteriorate in value over time. On a daily basis it's like what Brien Lundin says about watching the fluctuations in prices of currencies in gold – "Don't focus on the bobbing cork because you will lose sight of the rising tide." He's the first guy who I heard say that so I will have to give him credit for that. And that is really a great statement; for example, they raised interest rates by a quarter of 1%, and of course, gold takes a dive on that news, and the Dollar bumps upwards, and everybody goes, "Ah, the Dollar is saved, everything is back on track, the economy is good, America will rescue itself." And, all it's going to take is another job report – we have lost another 400,000 jobs – and the markets are going to go in the other direction.
Yet, in the macro sense of time, if you look at how gold has performed against other currencies, it has risen in value on average somewhere in the range of $87 each and every year since 2002; so in that sense, you could say the value of the currency against which it's measured has deteriorated to an equal degree over the last 10 years or so.
To me, and to a lot of other people, gold is the store of value everybody resorts to when times are rough and when currencies become untrustworthy. We see that in times of national disaster, political upheaval, war and pestilence, the price of gold goes up because demand goes through the roof. People get a little bit scared and they know that whereas currencies can ultimately be inflated to the point of worthlessness, with gold there's always a finite quantity that can never really be added to – without great effort and great expansion of collective effort worldwide. And so all the gold that's been mined is more or less still around and very little has been lost through deterioration. The one thing that maintains its appeal in terms of something representative of value no matter what happens is gold.
Adopt that attitude, and then form your strategy in terms of wealth preservation and investment. Evaluate the performance of world currencies and world markets in terms of the Gold Price, and you start to see all kinds of other truths emerge. That helps you have a much clearer picture, a much more realistic picture of how the world actually works.
So we can't really talk about gold without referencing the work of GATA, the Gold Anti-Trust Action Committee and Bill Murphy. They have single-handedly – very stridently, energetically and enthusiastically – pointed out the fact that the United States Federal Reserve and the Bank of England have arguably, over the last 100 years at differing times and in different degrees of manipulation, used various devices to manipulate the precise price of gold to the system to preserve the illusion that currencies are in good shape and that interest rates are justified in either being very high or very low. From that standpoint you see how the bond markets work and how governments finance their own debt. It's very important to them how the shape of their currencies look to the rest of the world and one way to create that perception is to manipulate the price of Gold Bullion.
There are a lot of guys out there that say, "Well, the price of gold is manipulated; who cares?" Or, "the price of gold has not been manipulated; that's all conspiracy theory, and that's just complete bull."
But no matter what your thinking is, you come back to the realization that if you throw out the idea that the statistics put forth by governments and the value of currencies issued by various tracking outlets – Standard & Poor's, Bloomberg's – are easily manipulated when the price of gold is manipulated. And so, when these massive short positions in the derivatives market – either short against or long for gold – materialize by these big banks that are essentially both the originating party and the counter-party in these transactions, these massive transactions in the futures market form the price for the spot price of gold.
You can see how the price of gold can easily be manipulated because the Spot Gold price is influenced by the growing demand, which is influenced by what the futures markets are doing. So the mainstream news says, "Oh, the futures are down 15% this week; well, gold futures are up 20% over this period of time" and that forms the impression in the minds of investors that gold is desirable and currencies are not or vice versa.
TGR: Obviously, you're a bull on gold; are you recommending buying bullion, or are you recommending Buying Gold producing stocks or juniors?
James West: Well, I always refrain from giving a blanket recommendation. Different portfolios obviously have different levels of risk tolerance, depending on your age and income, what your ambitions and goals are for yourself financially. I can give you a risk profile that determines whether bullion, producing stocks or junior exploration stocks is appropriate.
It is my view that Gold Bullion is preferable at all times only in terms of your liquid portfolio because you don't have currency risks with gold. You've got the risk of fluctuations in small bite-sized periods of time like on a daily basis or on a monthly basis. But if you look at a chart of gold on any given year, for the last 10 years, the price has risen steadily in the one-year period. So those price fluctuations, up and down, that run the gamut from $50 to $200 over the 35- to 45-day window really don't add up to much when you're talking strictly about owning Gold Bullion for capital preservation.
And the detractors of owning Gold Bullion like to say, "Hey, this stuff never pays a dividend and has no cash flow; you shouldn't own gold for investment." To which, I say, "Well, no, you don't own gold for investment, even though, arguably, it does pay a dividend in that it has risen in value $87 per year for the past eight years, and so you can take that value out of your gold holdings, and there you would have your dividend. But gold itself does not function that way; it doesn't function like a public company. It doesn't decide when to issue stock or when to issue dividends. And so it's really disingenuous to compare gold to investment that way – the bullion I'm talking about now – because that's irrelevant.
I think people should own gold for the capital preservation, ultra-conservative side of their portfolio, much better than owning bonds or some fixed incomes where even fixed incomes are running the risk of blowing up in your face at some point in their evolution and wiping out all the capital they were supposed to preserve.
In terms of conservative investment, I think that senior Gold Mining producers are a good bet because in periods of history like this they tend to have a general increase in price. Ours is a conservative investment portfolio where the risk of the company evaporating from the face of the planet is minimal, considering the business they're in. If you look at new municipal bonds or all of the things that have blown up in everybody's face in the last two years – real estate, other commodities, etc. – the gold producers represent a very well-performing, blue-chip investment.
Now, in terms of higher risk capital – the Midas Letter itself focuses on capital sufficiency where we view our entire portfolio as a risk portfolio. That's our tolerance because I am a young man; I don't have to worry about retiring any time soon. I don't have a large family to support; I don't have kids going to a university. I don't have a mortgage because I don't believe in credit. And so my portfolio is all about looking for a company based on continuous monitoring of what's happening in the juniors space where capital appreciation happens on the scale of hundreds of a percent almost overnight.
I am going to look for stocks sub-one Dollar in hopes that the bulk of the ones I recommend are going to go up by 1%, 2%, 3%, 400% within 6 to 12 months, and we're going to be able to exit that investment. For our part, we don't care whether a company puts the mine into production or not. We don't care whether they find any gold or not; all we're interested in is buying the stock that is going to appreciate within that timeframe.
And so that's really contrary to industry where everybody says, "Oh, you got to look at the people; you've got to look at the project." Well, that's all true, but really, what you've got to look for is the stock going to go up 1%, 2%, 3%, 4%, 5%, 600% in 6 to 12 months and the factors that make that determination.
I've got the other portfolio, which we call our "Top 10 for 2009," and we've got a couple of open positions in this one, but the average performance with a basket of 10 stocks is up 157.7%, and within that portfolio, the average is low by our estimation.
TGR: Great – quite an interview today! I appreciate your giving us the time.
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