Gold News

Paper Musical Chairs

"You're going to see gold go to levels that people can't even comprehend..."

SERIAL ENTREPRENEUR Greg McCoach has successfully started and run several businesses over the past 22 years, moving into Gold Bullion and investment newsletters at the start of this decade.

Editor of Mining Speculator – and president of AmeriGold, a dealer of coins and bullion to retail investors – McCoach here tells The Gold Report about why he favors junior over more senior gold-mining producers, and advises a combination of both physical metal and stocks for investors to protect themselves in today's market.

The Gold Report (TGR): In your January newsletter, there's a table that shows how the HUI Gold BUGS Index over 10 years was the top asset class. Can you talk about gold as the top asset class compared to these others?

Greg McCoach: We see by the statistics that the HUI Index, which is a measure of Gold Mining and silver precious metal stocks, has performed better than any other asset class in the past 10 years. Now what's interesting is that we're still in the process of watching this gold bull unfold.

In terms of the four stages of a bull market, we are probably past the midway point and heading into the latter stages. This is where the parabolic moves in the precious metals will start to happen. And with all that is unfolding in the world economic scene, it's not difficult to see why gold will soon be soaring.

TGR: So you definitely think this bodes well for the next phase of the gold bull market; there will be a parabolic move?

Greg McCoach: Yes. This is where you're going to see gold really go to levels that people can't even comprehend.

Up to this point, gold has been a surprise to many in the mainstream media. What investors need to understand about the bull market in gold thus far is that the numbers that we're dealing with...$960 an ounce right nowhere near the 1980 high in gold of $875 an ounce.

You have to inflation-adjust those 1980 numbers for 28 years of true inflation. If you did that, the $875 high in gold would have to be $6,500 an ounce in inflation-adjusted terms. For silver, it'd be $400 dollars an ounce. So when you see silver at its current rate of $14 an ounce and gold at $960 an ounce, in real inflation-adjusted terms, those prices are still dirt cheap, relatively speaking, compared to where they're went. And as we see the world financial system continue to unravel, the Dollar along with all fiat currencies will just implode leaving gold as the currency of last resort. Gold, and I believe silver, will go into the stratosphere as this happens.

People need to remember that what took gold and silver to their all-time highs in 1980 pales in comparison to what we are dealing with now. The world has never witnessed the likes of the financial destruction that is now underway. It is truly frightening.

TGR: You say in your "Greg's Crystal Ball" section that you think the mania phase is going to start happening sometime next year, in 2010.

Greg McCoach: I think by the end of this year things are going to be so bad worldwide that gold is going to become headline news and that will become the driving force towards the parabolic moves. What's happening right now is that the big money is still playing the paper game of musical chairs. "Paper musical chairs" I call it.

When the music stops, people run from one chair to the other chair looking for safety. They run from bonds to Dollars to Euros and so on, trying to find the safest place. But they're not finding it. Why? Because the paper system as we've known it is unraveling. So people are trying to chase safety. Well, they can't find it because it doesn't exist. They go into Dollars, and they feel comfortable there for a little while; then suddenly the Dollar tanks again, and then they run out of the Dollar to another paper currency.

Ultimately, when the music stops, they're not going to run to a chair; they're going to run for the exits. When that happens, they're going to discover the asset class known as gold. That's when these parabolic moves are going to happen. As that happens of course, the select precious metal mining stocks will move up accordingly. The leverage investors can get will be phenomenal during such a scenario.

TGR: You say the key is to own the physical metal, as well as the stocks. What do you recommend as far as percentages in a portfolio?

Greg McCoach: Right now my personal portfolio is 25% cash, 25% physical metals. I take physical delivery of gold and silver. [Ed.Note: Learn What Taking Delivery Means here...] I have 35% in select precious mining stocks, junior mining stocks mostly, and then the balance is in Canadian oil and gas trusts that pay a monthly dividend check.

TGR: You favor the juniors over the more senior producers simply because of the growth potential?

Greg McCoach: Yes, the leverage is better. For me, personally, I'm willing to take the extra risk with the juniors because I feel like I know what I'm doing and I'm confident about it, so I feel comfortable in being able to identify the juniors that are going to perform very well. The seniors will do well, but they won't do as well on a percentage basis. In other words, there's not as much leverage with the seniors as there is with the quality juniors. But the big problem for the average investor is trying to understand what a quality junior is.

There's so many of these smaller Gold Mining companies out there, 80% of which are nothing but moose pasture, and it's very difficult to sort through all the promotions and scams to find the real jewels. That's my job as a newsletter writer; that's what I do. I travel the world trying to sort through all the garbage to find the real opportunities that can deliver the big returns.

TGR: What do you see right now with the juniors? Some of them definitely are climbing back up.

Greg McCoach: I think it's nice to see them recover a little bit. This is a very good learning situation for investors of mining stocks. Look at the companies that are rebounding. If we have another implosion, which companies do you want to buy? The ones that rebounded the quickest and the most in the past several weeks, months.
Since the bottom in late November, early December, we've had companies that have doubled, tripled, and even quadrupled if you had enough courage, or any cash, to buy back then. But there are other companies that haven't moved at all, and they're just stuck in the mud. So, obviously, you have been given a great opportunity to see the companies that are more quality oriented, that have the value, that have what the market is looking for, and those companies are the ones you want to really pay attention to.

Since a lot of the stocks on our list bottomed out, the top 10 list, in particular, has had some of the stocks do quite well. Some of them have doubled, tripled, and have bounced back quite nicely from the bottom. Unfortunately, most of us probably bought at a higher level and so we're not even up to the point where we're at break-even again. Obviously, we're still waiting for higher levels.

Now what I've been saying is that, unfortunately, with the severity of the world economic events, up to this point our mining shares have been sucked down the drain, so to speak, when world stock markets sell off. Every day that the world stock markets have had a bad day, the mining stocks have had a bad day as well. What we're looking for is the precious metal prices to help us disconnect from that activity. It hasn't happened yet. I'm still worried that the next downturn in the world markets could affect our junior mining stocks again. I've been looking for this key disconnect moment, where the precious metal prices take us into another realm and help protect and insulate our select junior mining stocks You have to use 'select' because so many of the juniors are going nowhere. It's only the select companies that are going to be protected or insulated from other market activity that's going in the wrong direction. So I'm looking for that moment our quality junior stocks start to move on their own accord.

TGR: Can you give us an overview of what you consider a select company? What is the criteria?

Greg McCoach: They need to have exceptional management. In other words, out of all the management teams that exist out there, there's probably only a small handful that really have the quality background and experience to do what they say they're going to do. Most of these other people are just managers or lawyers who don't have experience or are hoping to get involved with a hot sector. They're highly promotional, and most often are only looking out for themselves.

So you look for the people that have the right resumes, the ones who have worked for the majors for 10, 15, 20 years or more and have the experience (paid their dues so to speak), learned the business, understand what they're doing and what they are trying to accomplish. Do they have experience in doing this specific task such as find gold? Did they mine gold or silver before? If they were mining for uranium their whole career and they jump into gold, well, that doesn't sound too good to me.

So you have to have the experience and the knowledge base. That's key. The way we've been playing this market the last eight years is no longer as valid as it once was. We need to adjust to the new rules on how to play this game and win.

What the market is looking for is very specific. If you make a good gold discovery, it has to be in an existing mining camp. It has to be in an area where the development costs aren't very large. If you make a big gold discovery, and it's in an area that's out in the middle of nowhere, the development costs are going to be too high. No one's going to fund it; no one's going to finance a project like this with the new market environment. It doesn't matter how good the results are.

So you have to find these discoveries in good jurisdictions that have short permitting times that have existing infrastructure. If it doesn't have those things, forget about it. There are plenty of great discoveries that I know of. They're just in the wrong area. Look in the areas that have plenty of existing mines and infrastructure. This is where plenty of experienced mining people already live and juniors who can make a discovery will most likely be bought out by a major who is in the area.

Now certain jurisdictions are better than others. The political risk now is more intense than it was. Political risk is always a big factor, but the political risk now is just amazing, so you have to be very careful where you're willing to invest your money. For me, I'm getting to the point where there are only a few jurisdictions that I'm willing to look at. Certain parts of Canada where there's existing mining camps, certain parts in the United States, and Mexico which still looks very good. That's about it. Everything else is no longer as attractive as it once used to be.

We're also looking for higher-grade resources vs. lower grade. We're looking for low-cost development situations vs. high-cost development situations. We're looking for economic deposits that can be financed.

Here's another situation – within mining, the different kinds of discoveries. A large copper-gold porphyry system is known to house large amounts of gold and silver; but, unfortunately, it's also known to have very high development costs. Who's going to finance that? I'm not as interested in those kinds of stories as I once was. You're better off looking for the higher grade – "epithermal" – smaller vein, higher grade, near-surface deposits that will have an easier time of actually going the whole distance and getting into production.

TGR: Greg, this has been great. We appreciate your time.

The Gold Report is a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. 

See the full archive of Gold Report articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals