By Sumit Roy
Chief metals and mining investment strategist for Casey Research discusses precious metals and miners.
Louis James is chief metals and mining investment strategist for Casey Research. He is senior editor of the International Speculator and Casey Investment Alert. James evaluates dozens of mining companies every month, hoping to uncover those that will provide rapid high returns for investors. HAI Managing Editor Sumit Roy recently caught up with James to discuss the state of the metals and mining sector.
Hard Assets Investor: Gold and silver have performed quite well so far this year after plunging last year. What's driving this current move?
Louis James: It could just be that Mr. Market has come to his senses. Whenever something gets oversold enough, at some point it has to turn around. And by any even semi-objective measure, in terms of gold as a commodity or gold as a currency, it was oversold. Maybe that's enough said.
There are a lot of other theories, and of course there's the Asian buying that is clearly important, too. When gold sold off, instead of throwing in the towel as people in the West did, people in the East said, "Oh goody. It's on sale," and started buying with two hands.
The charts for Chinese imports through Hong Kong are going vertical. It's really quite amazing. There's also evidence that the so-called bullion banks have shifted from being short to going long gold. And if that's correct, that's significant as well.
HAI: It's interesting that China overtook India as the world's largest gold consumer last year.
James: They also took over the No. 1-producing spot from South Africa. So if you add those two together, it's even more amazing because they don't export gold. They're producing more than anybody else. And now they're also importing more than anybody else.
HAI: Do you like gold or silver better at the current prices, as we stand right now?
James: It's interesting you ask that. In general, when people ask, I say, "Look, they move together." There's not really a need to write a whole separate report or a whole separate school of recommendations for silver vs. gold. Because, even when they diverge from each other, they're going to come back together and they generally move together. They respond to the same broader market dynamics."
But, as it happens, I was just talking to my boss, Doug Casey, and he said he likes silver better right now. He's a technophile; he's following a lot of the new applications with silver technology. We're using more and more of it in solar panels, for example, and other uses. So he likes them both, but he is actually a little more bullish on silver right now.
HAI: Do you like the miners better than the physical metal right now?
James: No, they're quite different and they serve different purposes. And here I'll have to quote Doug again; he says that "you buy gold for prudence, and you buy the stocks for speculation." They're very different things.
If you're worried about the world economic order, or you think the numbers from China are not really credible, or the numbers from the U.S. are not sustainable, then you want to have physical gold in your immediate possession and control to protect your wealth and to protect you against big, big upheavals.
But if you want to make money off of what's going on, that's not the role of gold. Incidentally, gold has sold off enough that it actually is a decent investment right now, and with the predictable rebound in gold, you may make money on that.
But that's not what gold is all about. The fact is that it's the only financial asset that's not simultaneously somebody else's liability. An ounce of gold in your hand is pure value that you can exchange with someone somewhere, under some circumstances, and under almost any imaginable future. That's value.
The gold stocks, on the other hand, give you great leverage. We've seen that in the last couple days. Gold will jump up to half a percent or a percent, and the gold stocks will go up 5% or 10%. It's amazing the leverage that the stocks offer to the underlying commodities. You can make a lot of money on the stocks if you bet on them when the trend is your friend.
HAI: Are gold miners funds, such as the Market Vectors Gold Miners ETF (NYSEARCA:GDX) a good way to invest in the sector?
James: If I knew nothing about the sector, and I wanted leverage to the underlying commodity, I might go that way. But personally, I would rather have more direct control. I wouldn't want somebody else to make the decisions as to which companies offer the most leverage. If I had my own portfolio, I'd rather bet on my stocks than somebody else's.
HAI: Are there any individual stocks you can suggest that our readers take a close look at?
James: Sure. The cream of the crop right now is the large, high-grade discoveries that have been made over the last 10 or 15 years that got whacked with the rest of the market. Exploration is a high-risk business; even with the best of management, the best of intentions, and a lot of money in the bank, you never know who's going to make the big discoveries.
But we have the advantage right now of having markets priced at levels they were at in 2001, though they've rebounded a bit in the last couple weeks.
But we know about the monster discoveries. We know who has these really big, high-grade stories out there. You can still buy these stocks sometimes with prices lower than their IPOs, and certainly at a fraction of what they were trading at just a year or two ago.
Examples of this would be the biggest, highest-grade story right now -- Pretium Resources (NYSE:PVG) up there in British Columbia. They have a monster gold deposit of more than 10 million ounces, and it's extremely high grade.
HAI: And how much upside do you see in PVG?
James: That stock is back at the range of its IPO. It was double or almost triple from there when the market was frothier. It's easy to see a double on that story without anything changing. But in addition, they're advancing the project. They've produced a lot more gold than expected from their bulk samples.
They're going underground now to expand their definition of the project and they're coming to the market with an updated feasibility study. It's a mine in the making, but there are still a lot of milestones along the way between here and there that would add value for shareholders. And it's not a penny stock; it was last trading between $6 and $7.
There are other large high-grade stories like that. Continental Gold (OTCQX:CGOOF) would be one, with a large high-grade discovery in Colombia. Dalradian Resources (OTCPK:DRLDF) could be another, with a large high-grade discovery in Northern Ireland. Rubicon Minerals (RBY) would be another one, a large high-grade discovery in Canada.
These are the kinds of stocks that offer a great deal of leverage and a lot less risk because you know that projects like this are the most likely to generate the margins that will become profitable mines in the future.
HAI: If we have the worst-case scenario -- a major black swan event -- how will the miners and gold fare?
James: I want to make money, not just survive. I still want to be in the miner side of the field. But at the same time, I have a significant position in physical bullion, which gives me the confidence to go out and maybe go where others dare not go to get the more speculative upside. But if there is a major market meltdown like there was in 2008, everything will get whacked, even gold itself.
You have people who have margin accounts, and you have people in panic mode. They've got to raise cash and they will sell anything they can get a bid on. That will include gold because there will be buyers. There will be buyers for gold at a time when there are buyers for almost nothing else.
We saw that in 2008. Gold did drop sharply, but it's rebounded very quickly. It was not a U-shaped bottom for gold; it was a very sharp V-shaped bottom. Even by the end of December 2008, gold was up strongly and it kept going up through 2009 and beyond. It took a while for the mining stocks to come back, so panic selling presents buying opportunities at times.
This is important to say, because if something bad does happen-be it a black swans or whatever-and gold goes down, an investor needs to have confidence in the underlying logic and see that as an opportunity to average down or just hold on. You don't want to get shaken out or stopped out at a time that is actually a very brief blip in the bigger picture.
That said, also going back to experience of 2008, it took until halfway through the second quarter of 2009 before the whole market started coming back. But the very best of the best companies recovered earlier than that.
We don't know what's going to happen. I want to speculate on the upside I see in gold now through the gold stocks and the leverage they offer. If the worst happens and there is a correction, then hopefully, if I've picked right and have the best of the best companies, they'll come back just like they did in 2008. And I can average down and do even better.