Gold Mining firms which can't make money at $1000 an ounce don't belong in the business...
ITCHY MONEY made 2009 one of the best years ever for junior mining stocks according to Mickey Fulp, editor of the Mercenary Geologist.
It won't be so easy to make money buying Gold Mining stocks in 2010, says Fulp, a professional geologist with more than three decades' experience – but he's still confident about the prospects for specific companies that remain undervalued.
Furthermore, as he tells The Gold Report here, careful consideration of three key criteria – share structure, people and projects – should give investors a strong chance of picking up equities that could double within 12 months, based on the continued bull run for precious metals...
The Gold Report: 2009 turned out to be quite a successful year for equities, even though a lot of the economic trends showed only mild improvement, if any. How would you summarize what happened...?
Mickey Fulp: The markets were so beat up in 2008 that equities became a place of safe haven. A lot of cash – itchy money, if you will – sitting on the sidelines poured into equities. In times of financial duress equities can become the preferred investment vehicles. It surprised everybody, I think, but 2009 turned out – especially in our junior mining sector – to be one of the best years on record.
TGR: And what do you think 2009's performance means for 2010...?
Mickey Fulp: I don't want to venture there right now. I am still digesting things that happened in 2009 and trying to make up my mind where I see things going. Maybe we can talk about that next time we meet.
TGR: Certainly. Your specialty is to find undervalued junior resource companies and clearly there were a lot of them at the end of '08. How does that picture shape up going into 2010?
Mickey Fulp: I don't see a lot of undervalue in the precious metals sector, but there are specific companies that haven't reacted yet or have catalysts pending. So there are a few of those that I'm looking at.
TGR: Would you say the market's overvalued at this point?
Mickey Fulp: The market is valued at what the market says it is. It's oftentimes driven simply by psychology and those are touchy-feely things that are hard to get a handle on. The junior resource sector is certainly valued a lot higher than it was last year. Will it go higher or lower or will we see a correction? I think a lot of that depends on the Gold Price.
TGR: In your latest Mercenary Musing, you wrote about how we are led to believe things from trusted sources such as Santa Claus and the Easter Bunny. More relevant, you discuss the government talking about organizations that are too big to fail that we have to bail out, and – for hard-assets investors – pundits telling us that Gold Prices will climb to multi-thousands of dollars per ounce. As an investor yourself, what are you hearing that really can't be trusted?
Mickey Fulp: I mitigate the risk of undeserved promotion with very detailed due diligence and research. You too need to do your own due diligence and your own research on anything you consider, looking at the three key criteria – share structure, people and projects. If you follow my investment philosophy, you're looking for stocks that have a strong chance to double within 12 months.
Everything gets promoted. Reduce your risk by doing your own research and figuring out what stories are real and which aren't.
TGR: Adrian Ash of BullionVault recently wrote that holding or Buying Gold today is a "bet on things staying all too much the same," rather than expecting a change in the economic and monetary outlook. This is interesting because most people who urge Buying Gold now expect inflation, hyperinflation, value devaluation and all of that. What's your viewpoint?
Mickey Fulp: My view on gold hasn't changed. It's been the same since I bought my first gold nuggets in 1979...more than 30 years ago now. It is simply a safe haven. It's an insurance policy. You can speculate in gold if you so choose, but it is a horrible investment. It should not be bought as an investment.
Except for the "Decade of the Aughts", the decade that just ended, gold has provided no return on investment since 1979. You would have made more money if you'd put your hard-earned dollars in a savings account in your local hometown bank back then. The idea that gold is going to thousands of dollars – which we've heard continually since the early '80s when newsletter writers were talking about $1000 to$4000 gold…well, in my opinion, these gold bugs are promoting their own publications.
Gold is money. It goes up and down based on speculation, but there is a fair market value of gold that basically has to do with the money supply and the gold supply, and the inflation of the money supply and the gold supply – which is basically annual Gold Mining production.
TGR: So if it's based on money supply and we are increasing money supply, will gold escalate in synch with the money supply? Or at a different rate?
Mickey Fulp: That's just up to the speculators. I haven't seen Paul van Eeden's latest charts, but if memory serves, he last calculated the fair market value of gold based on the money supply at about $850 an ounce. I'm comfortable with that. I'm also comfortable with $1100 gold. Gold miners who cannot make money at $900 or $1000 an ounce do not belong in the business. There are good mines; there are bad mines. My holdings of gold at any time are at least 10% of my net assets and always will be. I Buy Gold and sock it away for a rainy day. If the world goes into financial crisis again, I will be a well-to-do man because I own real money.
TGR: And many are saying that we are heading into a financial crisis. Our increasing money supply is going to cause inflation. Why wouldn't you buy more insurance when you believe the impending risk is even greater?
Mickey Fulp: Number one, I don't think that, and number two, I don't buy the hyperinflation scenario that the gold bugs promulgate. They will latch on to anything that gives them some fire power to convince the general populace that gold's going to the moon. I've been in this game for 30 years. I haven't seen gold go to the moon once. Have you?
TGR: Not at all.
Mickey Fulp: I'm not a gold bug. I never have been. Gold closed at $1096 at the end of 2009. I know one guy who guaranteed it was going to be $1500, and another who guaranteed $1260. And some people are way out in left field. Show me the beef. I'll stand behind my record of being bullish on gold, but not a gold bug. One of these years perhaps those of us who aren't gold bugs will be proven wrong. But so far we have a track record and the gold bugs don't.
TGR: Let's talk a bit about Gold Mining equities. A lot of the companies that couldn't make money at $900 gold have seen amazing increases in their stock prices this year. Granted the market was beaten down in '08, but considering where the Gold Price is now, do you think gold producers are generally valued correctly?
Mickey Fulp: It has to do with market psychology, and certainly the sector as a whole is valued much higher than a year ago. We all knew some good gold companies were undervalued a year ago. Whether they're going higher or lower or are due for a correction is tough to say. I think, again, it depends on the price of gold.
Suppose the Gold Price goes up $100. I don't think it will, but if it goes back up to $1220 an ounce, the gold companies will go up. If it drops to $1040 or even below $1000, those companies are going to go down. It's difficult for me to get a sense of whether the gold sector as a whole is going higher or going lower. In times like these I would look for specific companies that are grossly undervalued with respect to their peers.
TGR: With the amazing increase in Gold Prices over the last two years, why is profit growth in Gold Mining nowhere near the increases in equity values?
Mickey Fulp: It's because operating costs have gone up too. Mining is such an energy-intensive industry that the price of oil, and therefore fuel, tires, mining equipment and so on, all came to a head with $145 oil prices. Crude oil prices are high again, so operating costs have increased. Getting an ounce of gold out of the ground costs considerably more today than it did three years ago. That's really why you don't see Gold Mining companies making windfall profits.
In addition, all the major miners are scrambling to keep their production up. They're mining lower grades and less economic portions of their deposits, because in a capital market environment they strive to maintain their ounces of gold production. There just aren't enough new good gold deposits being found and developed for the majors to be able to do that without mining lower grades, less economic ounces, and with higher strip ratios.
TGR: With this increased cost of production, what would you consider a fair market price for gold now?
Mickey Fulp: I'll go back to Paul van Eeden's concept of what gold is worth. A fair market price is probably somewhere between $800 and $900 an ounce now.
TGR: How do you rate silver in comparison to gold as an insurance policy?
Mickey Fulp: Silver falls down drastically by that metric, because silver generally functions as an industrial metal. Most of the silver in the world is a byproduct of lead, zinc or copper mining, so the silver price tends to track base metal prices when the world economy is humming along. In times of financial distress it tends to operate more like gold, as a precious metal.
TGR: So you aren't big on silver?
Mickey Fulp: I personally hold silver – bags of junk silver, silver bars and silver coins. I hold silver as a hedge and as a safe haven against financial calamity, but these are holdings for the worst-case scenario. If the world goes to hell in a hand basket, it will be a lot easier to take a Mercury dime to your local baker and trade for a loaf of bread than it is to shave off a piece of a Gold Coin.
TGR: But you aren't seeing that worst-case scenario unfold?
Mickey Fulp: I'm not as concerned about financial calamity as I was 12 to 18 months ago. In the summer and fall of '08, I was very concerned.
TGR: It's interesting that you're not as worried about financial calamity when so many other people are saying we've now spent even more money than we'd ever dreamed of spending, we're inflating the M1 money supply, and we have the cost of national healthcare pending. Most people think it's worse today than it was a year ago.
Mickey Fulp: I would agree that those things are happening, but here are the reasons I'm less concerned than I was. First, I'm more financially comfortable now. 2009 was my best year ever in the stock market, and now I'm pretty much convinced the United States and the world are not going to melt down financially. Whereas 12 to 18 months ago, that scenario looked like a possibility. Being an exploration geologist, I am by nature skeptical but an optimist at heart.
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