Switching from being a Gold Mining trader to an investor...
EVEN IN environment ripe for takeovers, finding and sticking with quality precious metals assets is the strategy favored by James West, publisher of the Midas Letter. Read about his philosophical and practical switch from "trader" to "investor" in this interview with The Gold Report.
The Gold Report: James, do we have to rely on a successful Greek bailout to push the Gold Price above $2,000/ounce (oz) in 2012, or will that happen regardless of events in Europe?
James West: I think the latter. The deterioration in European sovereign debt integrity is only one factor pushing gold up. Numerous other forces could push gold down. Foremost is the success US Dollar-backed interests in the banking sector are having in pressuring the government to induce positive pricing in commodities and in the markets in general.
The federal government, the Federal Reserve and the US Treasury understand that investor sentiment is influenced by the metrics issued at the close and during the trading day. Influencing those metrics causes equities to be bought or sold; it creates or perpetuates up and down days.
In an election year, President Obama and his advisers are doing all they can to create the impression of a robust, recovering economy, jobs growth and S&P Index growth. The Republican element is more interested in portraying the president as an economic bumbler who has done nothing to spur recovery, is responsible for the continued economic malaise and is an enemy of economic recovery and growth. Those forces obviously are interested in negative economic metrics.
Markets seize up when broad global investor sentiment is negative. Everybody sits on the sidelines, financing and credit grind to a halt, as do hiring and business. Then layoffs start and the cycle becomes actively negative instead of just passively negative. The government understands that and is no longer willing to let markets be unfettered. That's because, if left to a free market, the government's massive debt problem would be interpreted as terminally negative.
TGR: Which would be more positive for gold, a Democratic administration or a Republican one?
James West: I do not think it matters. We measure gold in currencies or we measure currencies by their value in gold. The most direct metric comes down to the quantity of a currency vs. the quantity of gold. Global output of gold is stagnant or in decline, and the availability of Dollars, Euros, Pound Sterling and Renminbi is in an ongoing, exponential growth cycle. As a result, the price of gold can only rise as measured by that metric.
TGR: Do you think commodity prices are strong?
James West: Certainly. Copper is heading to over $4/pound; gold is over $1,700/oz.
TGR: Commodity prices are strong, but share prices are not.
James West: That is true, share prices have not recovered fully from the Q411 slump, but they are starting to recover.
We have seen all the consolidation we will see from the Q411 slump. The question now is whether the companies that are acquisition targets can evolve or grow their assets enough to warrant higher valuations in the eyes of an acquirer.
TGR: Are takeovers resulting from across-the-board lows in share prices a near-term thesis for buying equities?
James West: I focus on the asset. If it is a great asset and I can get a position cheaply enough, I don't care if it is a takeout target. I don't care whether it goes to production or enters a joint venture. I follow the asset over time. It does not matter who owns it, as long as some major does not come in and opportunistically buy it at a price lower than my average cost.
Quality assets will always be developed. Stick with the asset, and ignore the short-term economic noise.
TGR: What other investment themes will play out in 2012?
James West: The key themes for 2012 are the elections and G8 governments printing money with abandon. More capital fabrication always means higher asset prices, a bull market.
TGR: But the elections are 10 months off and a lot could happen.
James West: As an investor, Q1 is the time to acquire positions in quality assets, when prices are coming off their lows. Then, you have to be prepared for post-electoral volatility. That is when they will seriously try to tackle the debt ceiling and will stop printing money. But that will not matter until 2013. This year, 2012, is all about the illusion of prosperity.
TGR: That sounds ominous.
James West: Our leadership has chosen delusion over hard reality. Down here on the street, we have no choice but to go along with it, capitalize on the opportunities and avoid the risks as much as possible.
TGR: In a recent interview, you said that the collapse of the junior mining sector in late 2011 made you "10 times more picky" about the equities you were buying. Are you doing anything differently now?
James West: I like to buy or participate in early-stage, pre-public opportunities based on management. If the stock is cheap, I will take positions in a wide variety of projects without necessarily knowing a lot about them, because it is a numbers game. If you take positions in 20 companies, one asset will emerge as a contender. Then, you lighten up on the other positions and add to the asset that seems to have real mine potential.
I used to be more of a trader, looking for the quick double. Now, I am more of an investor. I invest in the asset, sit back, let it grow, evolve, go through changes in management, whatever it has to do to get to production. That is what I am doing differently.
TGR: Any parting thoughts for us, James?
James West: I would emphasize that volatility in the market on a day-to-day and week-to-week basis is the new norm. To consider yourself a real investor who does well, you must ignore the economic noise. That is to say the volatility caused by mainstream media coverage of issues like sovereign wealth and sovereign debt. Investing in a quality asset and a quality management team is all that counts.
TGR: James, thank you for your time and your insights.
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