Gold News

Apples to Whales in the Gold Market

Comparing now to the early 1980s just doesn't work for gold prices...
LOUIS JAMES is senior editor of renowned gold and mining investor Doug Casey's International Speculator, Casey Investment Alert and Conversations with Casey.
Fluent in English, Spanish and French, James 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.
Now Louis James says the market seems in agreement that December was the bottom for gold, and value is becoming evident to investors. In this interview with The Gold Report, James discusses the new landscape for gold and silver and how to read the field for the best route to profits.
The Gold Report: Jeff Clark, senior precious metals analyst at Casey Research, recently countered a chart making the rounds which shows gold matching its 1980 inflation-adjusted Dollars peak in 2011. The chart implies we should now expect a decade or more of lower prices. Aside from the fact that John Williams of Shadow Government Statistics might have a problem with how inflation is calculated today, how are gold's fundamentals different in 2014 than they were in 1984?
Louis James: The fact that things are different today than in the 1980s is a really good point. The argument over methodology almost doesn't matter. Even if it were true that the gold price of 2011 matched the inflation-adjusted gold price of 1980, that wouldn't mean that gold has to go down the way it did in 1980. There wasn't a near collapse in the banking sector back then. There wasn't the Lehman Brothers upset. The government did not triple the money supply. We're dealing not with apples and oranges, but apples and whales.
TGR: If history is not a map for the future, is John Williams correct that we are getting ready for hyperinflation?
Louis James: History never repeats itself, but it does rhyme. I agree with John Williams. On a fundamental level, profligate governments around the world have been spending beyond their means, and eventually they have to pay the piper. The longer they put it off, the bigger the bill gets. Is it all going to unravel this year? I don't know, but it's impressive that someone as cautious as John Williams seems to think that it will. But whether it happens this year or next, it doesn't really matter as long as you're investing with a long-term view.
TGR: In hindsight, a lot of people have targeted last December as the bottom of the gold market. Do you look at those sorts of things in the rearview mirror? 
Louis James: On January 6, I published a statement to the effect that both Doug Casey and I thought our market would turn upward in 2014. On February 3, I said in print that the gold price bottom was in December. I wasn't willing to say that until the upturn was reasonably clear, but if we wait too long to take the plunge, it's of no use; when it's obvious to everyone, you lose much of the upside. Those of us who started buying in January and bought aggressively in February have benefited enormously. We were actually able to issue some profit-taking calls in March before the market started correcting again.
TGR: What gold number are you using to evaluate whether a company can be profitable for the rest of 2014?
Louis James: I have two numbers I keep in my head: spot and the three-year trailing average. It used to be cautious to use the three-year because gold prices were rising and the averages were lower than spot. Now the three-year is $200 above spot, so there are serious perception and credibility issues with using it in print. But I do still look at the three-year, because these low gold prices we have now will not last.
Right now, the price of gold is flirting with cost of production – it's not sustainable. Some companies are using three price scenarios in their feasibility studies: a base case near spot, a scenario at significantly lower prices and another at significantly higher prices. Today, that more optimistic scenario is often the three-year trailing average. I like this approach; I want to see that they have a project that works right now. I want to see that if gold goes lower for a while, they're not going to dry up and blow away in the wind. And I want to see if gold goes higher, how much higher my return will be.
TGR: Are you investing based on the fundamentals of the macro gold and silver market or based on the challenges and opportunities of the individual companies?
Louis James: The macro picture sets the stage, but it doesn't help you pick a stock. I'm very much looking at the individual companies. 
TGR: It has been a tough couple of years for junior mining companies. Some haven't made it. Is it easier to spot the good ones than it used to be because there are fewer of them?
Louis James: Yes and no. The field has not been cleared that much at all; many penniless companies have gone into hibernation – a few have even left the field and become medical marijuana companies – but the oft-predicted tsunami of bankruptcies has not appeared. On the other hand, if you see a company that's got the goods that was previously trading at two or three times its current price – and has the cash to keep advancing – it's not a bad bet that it will rebound with the market. It doesn't even have to hit a new high to make you a bunch of money.
Because there are many opportunities today to buy companies that have already produced extraordinary discoveries, there are far fewer grassroots-type projects in our portfolio. It's not that we don't like early-stage exploration – those companies actually have the most explosive upside potential – but that with so many less risky, quality plays on sale, it's just too tempting to go with the safer bets.
TGR: What are your thoughts about silver compared to gold?
Louis James: There are vibes about silver volatility being at near-decade lows and that always precedes a surge. I'm not sure the numbers actually bear that out, other than to say, generally speaking, that low prices precede high prices because markets are cyclical. If we're at a cyclical low, it's not rocket science to say it's going to go up. 
That having been said, there are so many new uses for silver out there, I see very strong demand, particularly in solar panel use, which is rising and rising. 
My way of looking at it is that silver and gold always move together. Sometimes the ratio stretches. Sometimes it contracts. But they always move together. If you're a gold bull, you have to be a silver bull.
On top of that, silver is an industrial metal, while gold is primarily a safe-haven metal. If the economy is successfully reflated by the governments of the world, then demand for silver rises. You have a safer bet on silver than gold in that respect. If, on the other hand, government efforts to save the collapse of the global economy are unsuccessful, then industrial demand may fall off, but the precious metal safe-haven demand will pick up. Where gold goes, silver goes also. It's a win-win metal.
TGR: What do you look for in a prospect?
Louis James: I'm looking for, and happy to find, something that is legitimately undervalued. The company should have great management. Its flagship project should have a net present value multiple over the company's enterprise value (or a clear shot at that), cash in the bank to advance, and be delivering excellent exploration or development results. Then the stars are aligned and it goes on my shopping list.
When will we see payday? As above, it could be this is the year – Doug Casey thinks so – but regardless you should come out well if you buy value on sale.
And it could happen very quickly: If the Ukraine situation pushes Russia and the Western countries into an economic tit-for-tat that sends the Dollar over the edge, it could trigger the proverbial "it." You don't want to be short when the train is leaving the station. 
TGR: Thank you for your time, Louis.

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