Good Rocks in Bad Times

Crisis means opportunity for junior Gold Mining stocks...

GOOD ROCKS and good people are essential to successful Gold Mining juniors, says Casey Research senior editor and mining strategist Louis James.

Always on the lookout for the next double-your-money winner, Louis James is fluent in English, Spanish and French – and conversant in German and Russian, to boot – and regularly takes his skills on the road, evaluating highly prospective geological targets, visiting explorers and producers at the far corners of the globe and getting to know their management teams. In addition to subject matter expertise, he's built a following on the basis of a dynamic combination of investment savvy, practical advice, experience in physics and economics and a gift for comprehensible technical writing.

Here the master of metals at Casey Research – and the senior editor of the International Speculator – talks to the Gold Report about the combination of geopolitical and domestic uncertainty looks good for Gold Mining investors...

The Gold Report: You are a fundamental investor and as such you don't look at macroeconomic trends quite so closely. As you say in one of your reports, you "kick the rocks." But, are you still bullish on gold?

Louis James: I don't think those two are necessarily antipodes, nor is there any tension at all between keeping an eye on the big picture while looking for value in a specific opportunity. The one is the context for the other. I look at the overall picture, and the basic idea is to find a trend that's going to be your friend and place your bets accordingly. But, of course, you want your bets to be the best possible ones. A rising tide may lift all ships, but you don't want to bet on a leaky one. So, yes, I go out and kick the rocks to try to pick the best ones.

To answer the question – yes, I am very bullish on gold. Gold is in the midst of a $25 an ounce retreat as we speak, and I love days like that. That actually helps us to Buy Gold or gold stocks from weaker hands that are shaken by such moments.

The reasons for the bull market in gold haven't gone away; in fact, they've only gotten worse – or better, depending on your perspective. We were amongst the few contrarians that were calling for a financial crisis leading to a currency crisis, before the crash of 2008. Anybody can look back at our publications to verify that, and the reasons for those predictions are still in full force. If anything, they've been made worse by quantitative easing (QE), Bernanke's non-printing printing of money (he has claimed both that the Fed is and is not printing money) and all the other things governments are doing that are, as our founder Doug Casey likes to say, not only the wrong things but the exact opposite of the right things to do. And what's bad for fiat currencies is good for gold, so, yes, we're very, very bullish on gold. That said, one we should never forget that we'll be taking one step back for every two steps forward.

TGR: You believe there are fundamentals in global economies that are acting as catalysts for inflation?

Louis James: That is correct. And, not just inflation but, political...

TGR: Catastrophe?

Louis James: Trouble. Look at the protest in Wisconsin from the government trying to balance the budget there. Unlike the federal government, state governments can't print money. So, at some point, they have to cut somewhere or they won't have anything to pay the bills. The huge response in Wisconsin is quite interesting – part of a bigger trend that is much, much deeper than trouble in the Middle East. There's a lot of trouble on many different fronts. We don't think it's a coincidence that you see political unrest at times of economic difficulties. Look at the price of food and cotton and other commodities. These are things that have immediate and direct impact on the lives of the masses – the transmission belt between economic trouble and political trouble – and eventually social upheaval.

TGR: Were you implying that the Wisconsin protests are similar to the anti-austerity protests and rallies that we saw in Europe, particularly in Greece and Spain?

Louis James: I'm saying just that. Belt tightening is never popular, and it's just getting started. Americans are still relatively comfortable compared to people in other places. You framed your question about Europe in the past tense. That's just the warm up. The musicians tuned their instruments, and we heard the overture. All the ingredients for significant social turmoil are there, as the concert goes into full swing. The implications are quite significant and they're global.

TGR: You have written about black swans.

Louis James: Yes. A black swan is any unexpected event that upsets your projections. Many people were expecting Arab-Israeli tensions to increase, but weren't expecting the collapse of Arab despotisms. I can't say that we saw that specific thing coming either, but I can say that we have stated in print that such despotisms eventually have to go the way of the dodo bird. Actually, it wasn't so long ago that Doug Casey did a report on Egypt wherein he said it was basically a caldron that was waiting to bubble over. But those are just examples of certain kinds of black swan – anything can come and upset the apple cart. If, for example, some US state is suddenly unable to pay its bills and the lights go off, a lot of people will call that a black swan – though it should be no great surprise. Or it could be China, India or Japan. It could be the Koreas shooting at each other. I just think the climate is right; it's a black swan-friendly environment.

TGR: Given that you're a bit cautious currently, you were recommending a Dollar-cost-averaging strategy to enter new long positions that your readers didn't already own.

Louis James: Yes.

TGR: If we are in a rising market, a Dollar-cost-averaging strategy is a negative. It hurts investors...

Louis James: I disagree completely. This is not investing. This is speculation. To be able to sleep at night has enormous value. Of course, that's just a rubric for a larger financial concept here. We are dealing with serious risk, and I think it is very dangerous to imagine that you're investing when what you're really doing is speculating. These two are not the same thing.

The junior resource sector, our focus at Casey Research, is without question the most volatile market on earth. These stocks all correct. They all fluctuate. Even market darlings and great success stories frequently will retreat 50% or more, even without a 2008-style crash, before they go on to new heights. So, there's always reason to be careful, to deploy wisely, to wait for days when the markets pull back to buy, to take cash off the table when you accumulate gains.

Going all-in is a gambler's game. I can't stress this enough to people. Gains are not gains until you realize them. At Casey Research, when we report a track record it includes realized gains – not just high-watermarks stocks reach after we recommend them. We include the profits we've taken off the table, which we do routinely.

TGR: Back in the fall, you visited some mining operations in Colombia. It was a due diligence trip. What do you do on these trips? You're fluent, or at least conversant, in multiple languages and I'm sure that's a big help to you. What are you looking for?

Louis James: I use what we call the "8 Ps", Doug Casey's formula for resource stock evaluation. As the words "due diligence" imply, my function is to verify all of the Ps, as much as I can. But it does tend to boil down to a few things. One is to go and physically look at the rocks and see if they match what management is saying. They don't always. You can go down the ladder of the mine and look at the vein on one level, see that the vein continues on levels below and reasonably conclude that there's mineralization between. That's the kind of physical verification I do.

Particularly crucial is the first "P" – people. I meet with management and the technical people who will actually do the work that adds shareholder value. Do they seem to know what they're doing? What kind of experience do they have? Is it relevant to the task at hand? Will they look me in the eye when I ask them questions? Sometimes that's the most important thing. You could call it the smell test. And yes, the languages help.

TGR: So, you want to get away from the guided tour. What happens when you feel like there's a discrepancy between what you're seeing with your eyes and what management has said?

Louis James: It's rare to get a flat out lie. It's more common for something to be not quite as rosy as described. Typically, when there's some kind of discrepancy, I discuss it with management and give them a chance to explain. I'm not interested in conflict, and we don't generally report negatively on companies. If something doesn't make the grade, we just move on to the next opportunity.

TGR: Louis, are there any closing comments you'd like to leave with our readers?

Louis James: Yes. We see a great deal of possibility for correction ahead. If the trouble in the Middle East settles down, and if the economy seems to be continuing to recover and the fear factor recedes, we could see gold retreat significantly. The retreat we had in January was only about 5%, which is really quite small as far as gold corrections have gone during this cycle. Gold has retreated as much as 25% in this cycle before going on to new highs. We really haven't seen a major retreat in gold since the big ramp-up last year; so, we are urging people to be cautious. If you do buy anything now, make it a first tranche and keep some powder dry for lower prices ahead. If that doesn't happen, and if the market doesn't correct, the market may go really manic, inflating a major gold bubble. If that starts happening, you'll be able to see it and there will be time to redeploy into that bubble. So, we do urge caution right now.

TGR: Many thanks, Louis.

Louis James: You're very welcome.

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