The unrest in North Africa and the Middle East could mean extra profits for US Gold Mining investors...
BEARING MORE THAN 21 years of experience in the investment industry, Charles Oliver joined Sprott Asset Management in Jan. 2008 to focus on strategy at the Sprott Gold and Precious Minerals Fund.
Now Oliver says the social unrest in North Africa and the Middle East could add a premium to the Gold Mining stock of junior and exploration companies working in North and South America, as he tells The Gold Report here...
The Gold Report: Charles, the Sprott Gold and Precious Minerals Fund had an impressive 74.7% gain in 2010. That same fund was up 114% in 2009. Congratulations!
Charles Oliver: Thank you very much...
TGR: Most of those gains came from dramatic rises in gold and silver juniors but more recently you trimmed back a lot of those positions in exchange for positions in large-cap gold producers. Why the change in philosophy after having such success with the juniors?
Charles Oliver: It's not actually a change in philosophy. I love the juniors. I believe juniors will give you the best long-term outperformance and alpha. I'm continually upgrading the portfolio and improving it. Generally speaking, I like to have about one-third large caps, one-third mid caps and one-third small caps. The large caps give you liquidity and act as an anchor. In 2009, we saw great performance from the mid caps, but in 2010 they slowed down and a lot of the small caps took off.
In 2003, I did something very similar. I took some of my stocks, which were getting a little expensive on a relative basis, trimmed those positions and redeployed them into the best opportunities out there. Right now, I'm finding the large caps are the cheapest segment out there. I am still buying some mid and some small caps, but I'm looking for those companies that are significantly underpriced. It's a continuing philosophy; there is no change.
TGR: But what's going to make those large caps move? We haven't seen a dramatic movement in large-cap share prices despite having a Gold Price above $1300 per ounce for some time.
Charles Oliver: You're absolutely correct. The large caps have performed terribly over the last four or five years for a couple of reasons. When the gold exchange traded funds came out, a lot of money that had been in large caps migrated to the ETFs. That's been going on for several years. When people migrate out of the large caps they help depress the price. So when I look at the large caps today I'm seeing valuations that are cheaper than I've seen this decade. The big boys out there are trading very close to where they were in 2006 and 2007 when gold was at $600-700 per ounce. Today, we've got nearly double that Gold Price.
These companies are making huge profits and generating a lot of cash flow. I think there's going to be a day when people suddenly wake up and say, "Wow, look at the value!" I think part of the driver will be new investment from dividend-seeking individuals, dividend funds and value funds. If you look at dividend funds, they never held a gold stock because, during the 20-year bear market in gold, most gold companies weren't paying a dividend and those that were certainly weren't increasing it. Today, companies like Barrick are actually increasing their dividends and have the potential to do even more. I'm looking for that tipping point and I believe it will come.
TGR: In a June 2010 interview with The Gold Report, you said gold would go above $2000 per ounce based largely on further paper currency debasement. But, supply/demand fundamentals don't seem to support a higher Gold Price. A recent World Gold Council report said total investment demand for gold fell about 14.3% in 2010 and scrap supply continues to pour in at record levels, reaching about 1,650 tonnes that year. Obviously, social unrest in countries like Libya and Bahrain continue to push gold higher based on the safe-haven bid but does it concern you that total gold demand is, in fact, retreating?
Charles Oliver: It doesn't, actually. If I thought that was a long-term theme, it would be a big concern. But, having said that, I think you have to look at the numbers and make sure you put them in proper perspective. Investment demand is often a plug for all the other numbers that go into the supply/demand numbers. Consequently, many numbers actually don't get included in that final demand number.
Let's look at it in a slightly different way. Gold Mining supply today is roughly 2,650 tonnes. We use the numbers from GFMS and if you look at investment demand over most of the last decade, basically it's been flat. You didn't really get significant investment demand until 2009 when, by GFMS' calculations, it was around 1,400 tonnes. Now going from practically nothing to 1,400 tonnes when mine supply is only 2,500 is a huge difference.
If you look at 2010, GFMS has an investment demand number of 967 tonnes. Is it a significant decrease? On first blush it seems quite significant, but it's the second-highest level of investment demand in the last decade. The trend is clearly up. I've been reading reports that Chinese and Indian citizens are increasing their gold purchases at record levels. When I look at the other things around me, they suggest that we are more likely to see higher demand in the future. When you look at sales from the US, Canadian, Australian or any other Mint, you'll find most of them are running at record production levels due to individuals buying Gold Coins.
TGR: And central banks have stopped selling their gold, too...
Charles Oliver: Yes, that's another good example. If you go back to 2005, the central banks, as a group, were selling about 600 tonnes of gold annually. When you have mine supply at 2,600 tonnes, and then you get another 600 tonnes on top of it, there's a fair amount of gold out there. Today, those 600 tonnes are no longer being sold into the market. And we are seeing central banks actually buying gold.
In 2010, we saw India announce that it added 200 tonnes. We've seen some of the smaller banks buying, too, like Mauritius, Sri Lanka. We've seen China indicate that it's been buying over the last several years, though, the country doesn't officially report that on a regular basis. And a Russian minister said the country was looking at adding about 100 tonnes of gold on average each year to its reserves. So, a lot of the anecdotal evidence suggests that investment demand is actually increasing.
TGR: Let's go back to the Middle East for a moment. The unrest there has pushed gold up about $100 over the past couple of weeks. Have the ongoing issues there or in northern Africa caused you to change your investment strategy in the near term?
Charles Oliver: One slight difference is that I've become a little more cautious on Africa in general. Many gold companies have exposure to Africa. The speed at which some of these countries are destabilizing has caused me concern. I think that most of the countries where mines operate will be fine; but having said that, I am cognizant there could be some nervous investors who decide they want to reduce their ownership in those areas. I've taken some profits from those areas and redeployed them back into what I deem are safer jurisdictions like North and South America.
TGR: Do you believe what's happening in northern Africa and the Middle East is the "mania" catalyst the gold bugs have been seeking?
Charles Oliver: Generally speaking, most crises pass and get resolved. Frequently, you see the Gold Price run up only to fall back down the next day. I try to block out these events because often they don't really change the long-term value of gold. The concern, however, would be if this becomes more systemic and global in nature. In that case, I certainly think it would have a larger, more-lasting impact. But, again, I think you want to look at how destabilizing this is on Europe and the US If it spreads to Saudi Arabia, that would cause me great concern.
TGR: Well, King Abdullah recently announced $37 billion in appeasement money over the next few years in an attempt to stave off any unrest.
Charles Oliver: That's a nice way to put it. The fact that they're actually doing that leads one to believe that these guys must be getting a little bit nervous about the situation.
TGR: You mentioned safe jurisdictions like North and South America. Is there a price premium on companies with gold projects in those jurisdictions due to the unrest elsewhere?
Charles Oliver: Over the last decade, there've been periods when I would say there was a price premium on North American projects and some of the other countries have versus those in other less-desirable or more-risky areas. I think we may be embarking upon that situation once again, but we haven't seen a huge movement occur yet. As I said, I've started trimming and moving more money out of my African countries. Again, that's commensurate with the discount rate that should be used for different countries and their associated risks.
TGR: Are you still finding value in companies with projects in North and South America?
Charles Oliver: When I look at the basket of opportunities in North America, some companies are expensive and some are dirt cheap. I'm finding lots of opportunities to add in the North American space.
TGR: Well, what should we expect in terms of the near-term Gold Price?
Charles Oliver: I'm still extremely bullish on the Gold Price. As I said, I expect gold to be at $2000 per ounce in the not-too-distant future. Otherwise, I will have to shave all the hair off my head.
TGR: Back in April 2008, you made a statement that gold would reach $2000 per ounce in four years and if it didn't you would shave your head. Are you still standing by your statement and is the deadline April 16, 2012?
Charles Oliver: Yes. My view is really based on the fact that anywhere I look, I see governments continuing to print money left, right and center. I see deficits continuing to spiral out of control. I think governments are helpless to do the right thing, which is cut spending, because if they cut spending they get voted out of power. Without any other answers, they ultimately decide to print some money. That's easy enough. Nobody complains about that.
TGR: Could gold eclipse $1500 per ounce in the near term?
Charles Oliver: I wouldn't be at all surprised to see gold break out, make a new high and take out $1500 in a very short period of time.
TGR: We'll look forward to that. Thank you for talking with us today, Charles.
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