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Buying the Dips in Gold & Silver

Buying a dip in gold or silver means you think the deeper uptrend remains...

as "Mexico Mike" for his column in Investor's Digest of Canada, Mike Kachanovsky is a consultant providing analysis of junior Gold Mining, silver and other mineral exploration stocks.

Founder of the website – which serves as an online community for the discussion of all topics relating to junior mining stocks – Mike Kachanovsky here talks to the Gold Report about why he thinks the market is now better than ever for precious metals, as well as the abating political risk for mining companies in countries such as Mexico, Colombia and Vietnam.

The Gold Report: Mike, in our last interview, you said you were optimistic about precious metals because government reaction to the financial crisis was to keep interest rates low and issue large amounts of currency. Are you still as optimistic about gold and silver?

Mike Kachanovsky: Absolutely. I've been probably more excited about the precious metals after the way things have unfolded in the last 12 months or so than I was even during our last interview. The same factors still apply in terms of having artificially low interest rates and quantitative easing, where many nations are debasing their currency and printing money. I believe that inflation is only just now starting to become a factor.

You're starting to see that commodity prices across the board are increasing and it's decoupling somewhat from the US Dollar. The US Dollar is showing a countercyclical strength in the last few months that's largely a reaction to what's going on in Europe. But the commodities are holding firm and in many cases are rising, nonetheless. I think it's just a matter of time until the US Dollar rolls over again and may begin to lose value relative to other currencies. That's when you're going to see the real upside potential in the precious metals become a reality.

TGR: Do you think the decoupling is ultimately a good thing and how much time is involved for this turnaround that you're forecasting?

Mike Kachanovsky: It's always difficult to put a timeline on this sort of thing. There's quite a number of moving parts and different factors that are having an impact. I mentioned the troubles going on in Europe. Some of the nations there are having fiscal difficulty in their own budgeting. You have a lot of feedback loops clouding the waters somewhat in terms of when all this is going to come to pass. I don't necessarily like to put a timeline on it. In fact, if you'd asked me a year ago I would've thought we would be much higher now than where gold and silver are priced.

Is it a good thing that resources are decoupling from the Dollar? Yes and no. I think what you're seeing is that investors are starting to put money into commodities as an alternative to traditional financial vehicles. People believe that commodities are going to hold value better than, for example, owning short-term treasury notes or owning Dollars themselves. And so, in that sense the fact that people are losing confidence in the more mainstream financial investments to me is a bad thing. It's a sign that our economy is under duress and that people don't feel that good about the future. However, if you happen to be an investor in commodities, of course it's a good thing that you have strength.

TGR: What kind of portfolio adjustments are you making right now? Are you accumulating more stock, precious metals, cash?

Mike Kachanovsky: Well, I've always had a mentality of being a very aggressive investor and as such I buy the dips. My portfolio is almost entirely weighted towards resource stocks. That's not just precious metals. I own oil and gas stocks. I have leveraged to rare earth elements, base metals and coal. I'm also looking at agricultural now as well. I think that's a sector that's going to outperform the overall broader market. When I see a pullback in the market, I use that as an opportunity to continue accumulating, buying the dips. I also buy physical bullion, gold and silver. I've never been a seller. I've always been a buyer.

I've owned silver since it was under $5.00 and I bought another bar just last month on the pullback then. I don't really overreact to what's going on, on a cycle to cycle basis. As long as I'm convinced that the fundamentals are still in place for a long-term secular bull market then I don't try to trade it. I just look for the opportune times to continue to average up as the market progresses higher.

TGR: Are you saying we're in a pullback now?

Mike Kachanovsky: It's hard to say. Commodities are notoriously volatile. To me a pullback is more a cyclical type of description and I think we're still in an uptrend. However, for gold, a $100 downside move over a period of two weeks is not uncommon. If you look, you could probably define this gold bull market as being about a 10-year long phenomenon so far. There's probably dozens of occasions where you had similar type dips in the value of similar magnitude and percentage. Did it constitute a pullback? Well, not necessarily, because gold has been up every year.

TGR: When you're talking about dips for the purpose of taking advantage of them, you'd like to see some sort of long-term trend more than just a few days right?

Mike Kachanovsky: That's correct. I should emphasize that part of the strategy of playing the dips is you have to be willing to sell the spikes. My personal strategy and philosophy is to maintain a core position in the stocks that I think are the best stocks that an investor has to be positioned in. Then I also maintain a trading position. I'll buy extra stock in some of these companies when they sell off. Then as they spike high, I'll unload that trading position and capture that net profit.

TGR: What stocks are you favorable towards right now?

Mike Kachanovsky: I still think silver is going to be one of the best commodities to be leveraged to. Silver is a frustrating metal for anyone that's been aware of it and following it. It doesn't seem to rise as quickly as we expect or hope. I still think silver has the potential to be one of those metals that can go from $15.00 to $50 or to have that 200% to 400% potential gain in one year that we've seen from some other metals like uranium. I believe that's sometime in the future for silver as well.

When I'm looking at specifics stocks to gain leverage to, I want to find companies that are developing silver deposits that are cash-flow positive, have a number of projects on the go and are aggressively acquiring other prospects in this market. Then they are better positioned for when silver lifts off. I also look at market valuations relative to the peer group. When I see a company that I think is above average in terms of its fundamental strength and it's trading at a discount to its peers in any sector, I'm going to want to buy some of that company. I feel that it's just a matter of time until the market recognizes that strength and prices it in.

TGR: Do you have a preference in terms of companies that are speculative in their focus and are hoping to sellout versus a long-term viable production company?

Mike Kachanovsky: I look at the market value of a company and decide. If I feel like I'm getting a discount of what the fair market premium should be, then I'm going to go after that company. Most of the time, the established producers are more conservative. A lot of the risk is out of the equation but their upside potential is also going to be less. I do not necessarily have a preference to more speculative stocks. I think it's more accurate to say I have less fear of risk. I'm willing to take a gamble and try a position in a stock that has more risk if I believe it's priced fairly and the upside risk is justified by the potential rewards that I'm going to gain by investing in those stocks.

TGR: Are you more likely to take those risks on a region like Mexico than you would anywhere else in the world right now?

Mike Kachanovsky: I think a lot of the places that investors consider risking today are maybe not as risky as they think. A few years ago I didn't want to touch stocks from Brazil. I had this impression that Brazil was a very risky place to invest and I just didn't want to go there. Instead you look at some companies that have been active in Brazil.

I think a lot of people still have this impression that Mexico is risky. Part of the reason is that the media focuses on what's going on in certain border cities and there's a lot of violence that's over-reported. I think Mexico has its challenges like any other nation, but overall it's a very stable country with a strong tradition of mining. There's well-documented legal processes in advancing mining claims. It's pro-mining, allowing foreign companies to come in and invest. You're seeing a lot of companies now that have been in Mexico for a year or two or five that are producing fantastic earnings and drilling their operations.

Other places like China are very popular for investing. But I don't see that same track record of strong performance for foreign companies that have been able to go in there and actually make money and build value for investors. So I don't look at Mexico as a risky place to invest. There are other places that I think are risky and I'll still go in there and look at them. If the value of those stocks is fairly discounted to that risk, I'll still participate. In my opinion, Mexico is not a risky jurisdiction. It's a great place to invest.

TGR: Do you think the investment "window" there is still wide open? Are there any new plays?

Mike Kachanovsky: I think it is still wide open. I think in a way this market meltdown and nasty correction that the entire precious metals mining sector went through over the last 18 months has been beneficial in some ways because it's really helped to separate out a lot of the pretenders. There were a lot of companies that just staked a property and raised some money and I'm not necessarily convinced they were seriously into advancing to become stable, producing mining companies. Those companies have disappeared or gone bankrupt or moved on to other speculative sectors. So the companies that are still there and still focused are able to raise capital and develop projects and increase the scope of their activity.

It's much clearer now to find who the winners are. Those companies continue to behave strongly and have that profile that I look for when I'm trying to pick from all the different companies that I think will be the best performers for the next few years ahead. Are there any new plays? I think just about every week you hear about another company that has established a position or bought up an old project or closed a transaction.

TGR: Thank you very much for a fantastic interview, Mike.

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