Speculating in Gold

Since Gold is a long-term store of value, Gold Buying needn't be driven by fear...

EXECUTIVE CHAIRMAN and founder of Augen Capital Corp., David Mason has an outstanding track record in sourcing, structuring and executing merchant banking investments in the gold and natural resources field.

In its first 10 years, Augen completed 250 investments and financings as an industry leader in tax-advantaged flow-through investments in Canada's resource sector. And here, in this exclusive interview with The Gold Report, Mason discusses the current market fears, a weakening US Dollar, and "the most important factor" that will drive Gold Investment ahead of the commodities pack in the first quarter of 2009...

The Gold Report: Why don't you give us some of the reasons that you're bullish about 2009?

David Mason: First of all, I ascribe to the idea that the world's still going to require basic materials. We still have a very strong economy in China from all accounts. I read that China is going into a "recession" and will only grow by 8% or 9% in 2009. We should be so lucky! I think it's going to be true of a lot of the emerging economies.

The Chinese are extremely good commodity traders; I think iron ore is probably a very good example. They've basically walked away from the iron ore market, and I would expect they would be back in again this spring because it is certainly an essential for their economy.

I noticed the same thing with some of the base metals in January 2004. You recall we had a really strong run up from August of '03 through to about the end of January, and I saw the Chinese traders walking away from the market for about six months before coming back in again.

This is probably going to be the leading event that will happen in '09. The emergence of Asia as a prime buyer of basic commodities and, at the same time, people are absolutely worried about liquidity. One of our directors, who has a home near Zurich, was at the Munich Resource Show in November, and he came back with the idea that there was only one interest in the whole show – and that was silver and Gold Coins. In other words, very conservative.

So it shows that people's only interest, at this point in time, is in what they can liquidate. And Gold Mining companies, already in production, are going to be the winners in the first part of 2009. But I think that the other commodities are going to take off after the first half of this year.

TGR: Do you mean the base metals or the juniors?

David Mason: No, I think base metals and steel additives. Coal, I don't think so, but I think the base metals – being copper, lead, zinc and steel additives (primarily nickel and molybdenum) – will have their day again later in '09.

TGR: Why later? Why not February?

David Mason: Because of the lag between the buying of materials and actual processing; it usually takes some time for it to feed through the system.

TGR: Now you mentioned you think the gold producers are going to enjoy the first quarter of '09?

David Mason: That's right.

TGR: Do you see that continuing? We talk to a lot of different people, and I'm hearing all sorts of comments regarding the first quarter of '09 being strong for Gold Bullion and gold producers. Do you see it continuing, or do you see it pulling back with some down draft in the markets overall? Do you think we'll see that same need to liquidate that we saw in '08?

David Mason: I don't think so. One of the big drivers in the world economy, of course, is what's happening with the US real estate market. I noticed the latest numbers indicate that the prices are down again in November. But, as someone pointed out, this is largely because the liquidation is still going on. People have thrown in the keys and have decided to just walk away and the mortgage holders are selling it for whatever they can get. That's bound to be a downer, but it doesn't mean that the overall real estate market's going to be anywhere near as severe.

Is there any more than two or three months of that liquidation in real estate in the United States? I kind of doubt it, and that's been a primary cause for uncertainty in our whole economic environment. That's my view.

TGR: What do you think is going to be the driver for leading gold and gold producers higher in the first quarter of the next year?

David Mason: Well, there's still a huge amount of money sitting there ready for speculation. Everybody that I talk to, very astute investors, are sitting there just waiting for the next move. When it happens, I think you'll find a major turn in speculation again. We've never seen so much capital sitting on the sidelines as this time around.

TGR: That's true. What do you mean by a "turn"...?

David Mason: The first to move is always the majors. Then you have your second-tier gold producers and then your explorers. We haven't seen the second-tier gold producers move yet, so I think that would be an obvious area to target. It's not the focus of what we do; we're involved at the exploration stage.

The exploration stage companies have been absolutely devastated, so a significant turn in speculation in the gold market – which has been strong right now – but a move to, let's say, $1,050 gold, will pump up the first-tier gold a little bit, the second-tier gold a lot, and the explorers will get back into orbit again. I'm sure, like me, you've looked at all the stats.

On the Toronto TSX Venture exchange, there are about 750 companies that are really active. There are a lot more than that, but as for the really active ones, most of them are down significantly; and the majority are down as much as 90% from their peak in '08. A lot of those companies – meaning at least 30% to 40% – are even trading below their working capital. So they're sitting there with working capital less than their market price, good enough cash to keep the company going for the next few years, and a great resource. So any kind of a turn in gold or silver, as a commodity, is going to have that ripple effect throughout our whole business.

TGR: What specifically are you looking for to drive the Gold Price to $1,050? What sort of events would drive this?

David Mason: I'm of the opinion that fear and the relationship with the US Dollar is, quite frankly, probably driving no more than 40% of the gold market. Fear will drive it, and a weakening in the US Dollar, which some people are betting will happen – those are only two components. Now the most important factor is just straight supply-demand imbalance.

The major companies are having one heck of a time finding enough reasonable targets. It used to be that the majors were looking for million-ounce deposits. Now that isn't enough. In order to get the growth they need and to support their infrastructure, they need three million-ounce deposits and those are extremely hard to come by.

I once did a calculation that if every wealthy individual on this planet (say 5% of the population) were to put 5% of his or her assets into gold, it would take something like 30 years of current production for demand to meet supply. So I think, because it is a store of value, it doesn't necessarily have to be fear driven.

During the 1930s, one of the greatest professions was being a geologist because gold (aside from the fact that it was fixed at $35 an ounce) was one of the few commodities that was stable; and I think we might see this even with freely traded gold markets.

TGR: What is the difference between your merchant banking portfolio and your consulting assets?

David Mason: You're familiar with the flow-through program in Canada?

TGR: Yes, I am. [Ed. Note: Flow-through financing is where mining companies enjoying a tax break choose to pass those tax benefits straight onto investors, potentially attracting more finance on easier terms...]

David Mason: Well, what we did going back almost from inception – I've been involved in flow-through financing since the early '80s, actually – I started doing small limited partnerships and we grew it from, basically, our shareholder base buying the limited partnerships to a much bigger platform.

What it amounts to is if you have a limited partnership that buys a portfolio of flow-through shares, everybody gets the write-off – it's passed on to the individuals. So, even though all the companies that are being bought are small companies, it's become really big business in Canada. Above all else, our strength lies in organizing, financing and promoting junior resource companies. We do that better than any other country in the world.

At this last peak, we were raising about $6 billion a year, which was – and remains – more than all other countries combined. So, considering that we're only a population base of 33 million, which is about one-twelfth of the United States, it's quite a feat.

Funds like CMP and Front Street raise between $100 and $200 million annually in their flow-through funds. As a business model, it's a very good one for us to have. We've been able to grow it from almost a mom-and-pop business to one that's widely sold. We also took on a partner, BluMont Capital; and, through them, we got into four of the five major banks in Canada, which is quite a big move for us as a company. The banks in Canada control most of the businesses. It's very different from the US and its banking system.

TGR: Great. Thanks David. We appreciate your time this morning.