Jay Taylor: Printing Money Can't Make More Money

by: The Gold Report

The following is excerpted from The Gold Report's March 27th article:

Jay Taylor, who shares the results of his investment research with subscribers to his widely read Gold, Energy & Technology Stocks weekly e-newsletter, has just added a weekly radio program to his array of tools investors can use to survive in these dark days on Wall Street and Main Street—maybe even thrive. It’s called “Turning Hard Times into Good Times,” and aired for the first time on March 24. In this interview, he talks about the program’s focus, and reiterates what he told The Gold Report readers in December—that gold stocks represent the best investment these days. Buying gold stocks may be riskier than holding bars or coins, but the upside potential of owning mining shares is commensurately that much greater as well. Jay also argues against the folly of thinking we can cure what ails us by running the printing presses faster and faster to pump more and more paper currency into the economy.

TGR: Will gold retain its value if we move into an inflationary environment?

JT: Yes, I’m convinced it will. Let’s distinguish between an inflationary period and a period of global growth. We’ve had a lot of global growth until recently and gold was not a very good place to be. We can inflate the monetary system but we can’t really get the global banking system to inflate or to expand as it did in Bob Hoy’s six examples of the last 300 years. In fact, it’s really tough getting the banks to lend money now, for two reasons.

One, they’re not lending money to people because loans portfolios look like a black hole. In terms of loan losses, no one knows where bottom is. Because they can’t figure that out, they’re trying to shore up their capital base and trying to make sure their equity is intact.

Secondly, they’re having a heck of a time finding creditworthy borrowers. You can’t really get the system to expand if borrowers are not creditworthy. Finding customers who can pay loans back is a big problem. So many are so deeply in debt. They really need to repay their debts and get their personal balance sheets and corporate balance sheets back in order. Until that happens, how can the system inflate or expand? That took a long period of time in the 1930s. The New Deal didn’t work then and they’re trying to reenact it now. Well, how can they really get it to work now? It won’t solve the problem, but as Congressman Paul suggested in my pre-recorded interview for my April 7th radio program, Turning Hard Times into Good Times, there is now a mechanism in place that can allow them to re-inflate the system that they didn’t have in the 1930s.

Now, the government can transfer money to people very easily now through the IRS. Essentially they can just put money in people’s bank accounts and “bingo” Joe Sixpack or Ma and Pa Kettle can party on. Ben Bernanke used the image of a helicopter drop. We saw a tiny little example of that after Katrina, when they handed out $3,000 checks all over New Orleans. More recently, of course, President Bush pushed through a stimulus package that gave money to taxpayers. So they can do that and Congressman Paul is convinced that they will. In his view, it’s only a matter of time. And I suppose they can get people to start buying things in that way. They’ll issue checks and give income distributions to people who are likely to spend 100% of the money they receive. But can they get the economy to grow? Absolutely not, at least not in real numbers after inflation is factored out of the growth numbers. You just can’t create wealth by printing money though that very common sense fact appears to have escaped all those economists at the Fed.

When demand increases very significantly as it would if the masses were handed huge amounts of money to spend, you don’t get a corresponding increase in supply, so you are bound to get some very significant inflation. If that happens, you’ll start looking at a lot of things other than gold and gold mining shares to make money. Then I think we’ll be looking at tangibles in general. Whether mining companies will be the best place to go remains to be seen. In any event, the viability of mining projects will as always be on a case-by-case, project-by-project basis. But if the cost of producing rises too rapidly, it may be that people will forego mining company risks and simply buy commodities alone. But right now, some of the companies are really talking about the reduction of gold mining costs and production costs in the last quarter after the Lehman Brothers collapse. I think they’ll still do well during inflation, but frankly, gold mining has done absolutely the best in a deflationary environment. Profit margins have improved because production costs have gone down while the real price has gone up. That’s because when the global economy shrinks and there is fear in the streets, people buy gold as the safest monetary store of value. They don’t buy copper or other industrial metals.

TGR: You keep mentioning gold mining as opposed to physical gold.

JT: We’re really talking about buying two different assets. A deflationary environment is very, very good for increasing profits in gold mining companies. Let’s say the gold price goes up substantially and costs do not go up in line with the rise in the gold price, so margins improve. If earnings improve, the market will pay some multiple of those earnings. Suppose they pay 10 times earnings—all of a sudden the price of the stock can double. You usually don’t see that with the price of gold. You can see a very substantial increase in the price of gold, but a lot of these mining companies can go from 10 or 20 cents to $2 or $3 or much higher than that, so the potential gains are much greater in owning mining company than in holding the gold bullion. Always remember, though, that risk goes with reward, and you have higher risks with the mining companies.

The safest way to protect your wealth, of course, is not in gold mining shares because there’s always a level of risk in a business. You can own the metal and have it safely stored someplace. That’s very, very conservative wealth in your possession. It’s safe as long as someone doesn’t rob you or the government doesn’t take it.

TGR: You mentioned Goldcorp (NYSE:GG) earlier. What are some of other mining companies you’re looking at as relatively low risk if you want to get into mining?

JT: Primarily since mid-September last year when the market really fell apart, it became increasingly difficult for the more speculative mining companies to raise capital. So my focus has been more toward building around the core producers—like Goldcorp, Agnico-Eagle Mines (NYSE:AEM), Newmont Mining Corp. (NYSE:NEM). We also like Yamana Gold Inc. (NYSE:AUY) and IAMGOLD Corporation (NYSE:IAG). Those producers are sort of the core holdings, the companies that are producing profitably right now. Within what I call my “Progress A” companies—companies that are actually producing gold—are also some smaller ones that offer tremendous upside potential. These are companies that people haven’t really heard much about, but they have lots of exploration potential and lots of growth potential.

Another tier, our “Progress B” companies, includes those that are not producing yet but have progressed their projects through the feasibility stage and may be bringing them on line within a year or two. After the Lehman Brothers debacle and through the end of last year, it was very, very difficult for those companies to raise money. Now we’re starting to see some loosening up in financing availability, especially for gold mining, because investors are seeing the increased profit margins I’ve been talking about. So gold mining is attracting capital.

I met with some people in New York a couple of weeks ago who wanted me to introduce some companies to them because they have enormous amounts of capital to put to work and are aggressively looking for gold mining companies, especially those that are in or near production. They’re even interested in going down the food chain a little bit toward the more junior exploration companies, companies that may not have a feasibility study yet, but have gold deposits that are sizable or have the potential to get really big.

TGR: Could you share with us the names of some of the smaller companies in your “Progress A” category?

JT: Sure. One I like is a new gold producer, Alexis Minerals, which trades on the Toronto Exchange. It’s a new producer in Quebec. I love Quebec, by the way. It is one of the greatest mining jurisdictions in the world. They have the best balance. They understand that mining is a very basic wealth-creating industry that also create jobs. A company that builds a mine pays wages to the 50 or 100 people who work in the mine. Beyond that, something like six or seven times more jobs are created as wealth comes into that area. Smart governments such as the Quebec government understand that this is very. At the same time, they work hard to avoid environmental disasters.

Another new producer I really like and I think is really undervalued is Allied Nevada Gold Corp. (NYSEMKT:ANV). It’s not a high-grade deposit, but it’s huge, with 4 million ounces of oxides right now that can be produced with open-pit heap leaching. It has another 4 million ounces of sulphides and enormous exploration potential. I think Allied Nevada could very well be a takeover target in the not-too-distant future as well.

Great Basin Gold Ltd. (NYSEMKT:GBG), which produced some 60,000 or 80,000 ounces last year from Nevada, is another one I like a lot, and it’s not even officially in production yet. Great Basin also has a South African gold mine. They’ll be producing a very considerable amount of gold in the not-too-distant future. The stock has gone nowhere for some time, but I think it’s going to be a huge winner.

TGR: Any others?

JT: Starcore International Mines Ltd. is another little one—Mexican gold production and a silver producer as well. It’s another Toronto Exchange company that’s based in Vancouver. San Gold Corporation (OTC:SGRCF) is another one I really, really love. Most of these stocks trade primarily on the Toronto Exchange and secondarily on the PinkSheets so Americans can buy them that way. I don’t mind buying stocks on the PinkSheets if their primary markets are in Canada. By default, they start trading on the PinkSheets because Americans who want to buy them call their brokers, who then buy those shares in Canada and then trade them in the U.S.

TGR: These are all currently producing miners?

JT: Yes, those are some of the ideas among the producers. One that has not yet gone into production but which I think is going to be a huge winner is Romarco Minerals. This is a remarkable story, from South Carolina of all places. Yes, there’s lots of gold in South Carolina. It’s the first place gold was mined in the United States, not California, by the way. Romarco will be a huge project with very, very strong financial backing from a private company. Frank Holmes (U.S. Global Investors) and his mutual funds own over half the stock. Eric Sprott (Sprott Asset Management) is a big investor and also a bunch of funds out of Europe. Romarco is trading at something like 25 cents or 30 cents, and has a fair number of shares outstanding, but that’s one I think is going to do extremely well in the not-too-distant future. Lots and lots of exploration potential. I was down on the property at the end January.