In the Gold Sector, Value Isn’t Always What It Seems…
The things that have moved in this market of course have been precious metal production and near term production stories, but people are coming to understand that high quality discoveries are rare.
There’s beginning to be a desire to get in front of the market and buy the next ‘thing’ to move…
When governments suddenly wake up one day and say, “Wait a second, all these people we tried to chase out of paper money, they’re going into gold.”—at that point, there will be a WAR ON GOLD…
I had the chance once again to sit down with Marc Faber, publisher of the Gloom, Boom & Doom Report.
It was a fascinating conversation, as Marc’s residency and travels in Asia provide him with a unique viewpoint of the world’s economic engine of the last few decades.
Speaking to the macro picture, Marc noted that, “The global economy is not as the Federal Reserve and other groups [suggest]…in terms of accelerating on the upside, but actually…it’s in contracting mode.”
When asked of the implications of a contracting global economy on world equity markets, Marc pointed to an ongoing struggle between, “[Two] opposing forces. You have a weakening global economy which is bad for corporate profits…[and] the opposing force is that as global economic conditions become worse…[central banks] will have to print more money. Printing money is the only thing they know.”
“If you push one wrong button, the whole thing melts down catastrophically. You create a chain reaction…[where] I see gold going to $5000, $7000, [even] $10,000 an oz.”
“[If] you have a global financial panic and need to restore confidence,” James concluded, “that’s the price of gold you would need…”
Bob Quartermain has been one of the most successful resource sector investors of the last 20 years.
He ran Silver Standard, acquiring silver projects and making discoveries during the precious metals bear markets of the early 90’s and early 2000’s.
Rick Rule was involved in financing the company in 1992 when it was a small company. Its current market cap is around $500 million1.
Mr. Quartermain is now the head of Pretivm Resources, one of the largest resource ‘juniors’ in the world, with an advanced-stage exploration project called the Brucejack mine.
Tekoa Da Silva recently sat down with him to ask for his comments on successfully acquiring and developing new mines, and what he believes investors and resource sector leaders need to do in a tough bear market:
Over the weekend, Sprott’s Tekoa Da Silva sent us a link to a fascinating discussion on gold recorded over 37 years ago. The two panelists were Dennis Karnosky of the St. Louis Fed and “money expert” Merrill Jenkins. This remarkably frank and informative program is certainly worth taking the time to review.
Again, this was recorded at a St. Louis, Missouri television station in 1978, near the height of the inflationary spike caused by the closing of the gold window and the subsequent surge in U.S. government spending.
“The whole precept that printing money is good…that somehow zero interest rates and negative interest rates are good, is totally fallacious…It’s so unimaginable and yet somehow the investment public has bought into it…Things are unstable here…
In less than 10 years we will see physical assets backing currency. Of course, the most likely physical asset is gold.”
Speaking to the abysmal sentiment toward the PM sector, John Embry explained that, “I’ve seen this sort of ‘bearishness at the bottom’ phenomenon many times …There was a really ugly bear period between ’74 and ’76 which I remember really well…”
Further describing that period, John noted, “When [gold] was down to $102, off the high of [near] $200, a lot of people were calling for it to go back to $35 again… in ’76 it turned around and started to move higher and then it just went nuts at the end of the 70s…and got up to $850-$875, which completed about a 25-fold move.”
John emphasizes the belief that this period parallels the mid-70s bull market correction, and when asked about the depth of the current sell-off, noted that, “I don’t think I’ve ever seen, in the 40 plus years I’ve been following the sector, the shares cheaper in relation to the price of bullion as they are now.”
The level of current pricing combined with sentiment, sets up, “An historic opportunity,”
Bonds and stocks are grotesquely overpriced and I think gold and silver and the mining shares in particular are ridiculously underpriced. Those who figure that out when the inflection point [arrives] are going to make a fortune.”
During a time in which sentiment towards natural resources is bordering on doom, Rick Rule, Chairman of Sprott U.S. Holdings was kind enough to share a few comments.
Speaking first toward the phenomenon of market capitulation Rick noted that, “Capitulation is a very dramatic event. It’s when most participants in the market give up completely and simultaneously. They are two or three week periods [of] extraordinary [share price] violence. They’re emotionally driven rather than arithmetically driven events.”
One of the more important utilities of a capitulation according to Rick, is that, “In my experience they have marked definitively the end of long bear markets.”
When asked for a prediction on the gold price, Rick concluded that, “[The fight] is between gold and the U.S. 10 yr. treasury—and I don’t see how over 5 years we can possibly lose that fight.”
Following another few weeks of cascading metals and mining equity prices, Michael Kosowan, Investment Executive and Investment Advisor with Sprott Global Resource Investments and Sprott Private Wealth, was kind enough to share a few comments.
Speaking towards to the psychological challenge resource investors face in this market, Michael noted, “It’s uncomfortable swimming against the tides of uncertainty throughout these markets and the volatility that we experience…the sentiment is just abysmal…[But] therein lies the opportunity.”
Reflecting on the 2000 bottom in natural resources, Michael commented that he witnessed many juniors selling “For less than the cash they were holding. Meanwhile, you were getting the mineral upside, or the mineral potential they contained—for free.” The subsequent recovery produced momentum of “10x and 12x moves on a few of [the] larger caps names,” he further added.
“The market itself is very healthy. You are seeing a transition…a transition that doesn’t suggest, but rather screams that [junior resource issues are] under accumulation—which is a very, very bullish sign.”
Sprott’s Tekoa Da Silva joins The Doc & Eric Dubin on this week’s Metals & Markets from the Sprott Natural Resource Symposium in Vancouver discussing:
- PM futures roller coaster: metals smashed under $1300 and $21 ahead of options expiration, but close week with a strong Friday afternoon rally- is the take-down over?
- Tekoa discusses his journey from PM journalist and pod-caster to Investment Executive at Sprott Global– what he’s learned from the brilliant minds there including Sprott, Rick Rule, and John Embry, and how SD listeners can apply lessons he’s learned at Sprott to their investing
- With the BRICS announcing the $100 billion central banking alternative to the West, Tekoa discusses the death of the US & the dollar as occurring gradually so as not to alarm the boiling lobster: “At some point the lobster will pass away, and be eaten by outside groups!“
- Tekoa reveals how he was able to get the ECB’s Mario Draghi to admit central banks’ gold leasing has been unsuccessful
- From the stunning “Castle in the City” in Vancouver, Tekoa gives an inside update on the Sprott Natural Resource Symposium, and reveals how excited the Sprott team is about the next major bull upleg in the PM and natural resource sector.
The SD Weekly Metals & Markets With Tekoa Da Silva from the Sprott Natural Resource Symposium in Vancouver is below:
The five biggest banks in the United States in 2008, today those banks are bigger. They have a larger percentage of the assets of the banking system. They have much larger derivatives books and if you apply what I use which is complexity theory, to understand the risk in capital markets, you know that when you increase something in scale, the risk does not go up in a linear fashion. It goes up in an exponential fashion so the risk is – the size of the system is greater than ever before and the risk gets exponentially greater than ever before.
So we have a lousy economy. We have massive risk. We have the whole thing getting propped up like money printing by the Fed. This is naturally going to happen except this time, the next time, it will be worse than 2008 because it will be bigger than the Fed.
We have an economic slowdown in emerging economies that is very pronounced and I think some emerging economies may be submerging soon, and have actually significant economic problems. Then the question arises, “Will they continue to buy gold?” Say if there was a recession in China, in the downturn, would people buy gold?
I think if the Chinese economy imploded, it is likely that the currency would begin to weaken, the yuan. Or the government would implement even a devaluation of the yuan. It could be the case. If that were the case, then I think that Chinese individual investors would rather shift some of their money into gold which they can buy in China nowadays than keep their funds in the local currency. So I think that’s actually a trouble in Asia and also geopolitical problems in Asia and in other regions of the world may actually lead to rather higher gold demand.
There have been some very interesting developments in the precious metals markets. BaFin, the German regulator came out & said that the main regulator said that precious metals are manipulated worse than LIBOR and that word “worse” is a very significant word in my mind.
Then when you think about some of the chronology for BaFin, they announced in the middle of November that they were going to investigate the possible fixing of gold prices or manipulating of gold prices on the London gold fix.
On the very next day, Deutsche Bank declined to continue being a member of the fixing of the London bullion market. When you think about what must have happened, my own feeling is that the regulator probably went back to Deutsche Bank having looked at their records and said, “Do you know what your boys in London have been doing here?” And of course the next day they quit the LBMA…
If you think about manipulation, there’s only one reason in my mind that bankers manipulate things. They don’t manipulate them for the bank to make money. They manipulate them for the employees to make bonuses.
The parabolic structure in stocks will collapse. It’s going to take a collapse in the stock market for Yellen to reverse the taper and I think she will not only reverse it, but I think she will double down on QE. Instead of $85 billion a month, we may get $150 billion a month.
The problem is that when a parabolic structure breaks, you can’t put it back together.
The Fed is going to make the same mistake when the bubble and stocks pop. They’re going to follow the same game plan they did in 2008. They’re going to get the same results. Liquidity is going to flow into the commodity markets. It’s going to spike commodity prices which is going to make cost of living expenses for the average person go through the roof, and that collapse is discretionary spending and that will send us down into another recession/depression that I expect will be worse than 2008, and I expect the stock market will fall below 666.
Peter Grandich is known for having donned his “bear-suit” in 1987 right before the largest stock market crash in Wall Street history, as well as in 2007, only months before the 2008 financial crisis.
Now, according to Peter, financial conditions have warranted a return of the “bear-suit,” led by two primary factors—both of which are long-term positive for gold!
“You have to be a buyer when people are non-believers. You have to believe in something based on data that says you’re right when the world will tell you you’re wrong, because when the world says you’re wrong and you’re right, you know that the return will be outsized because no one is there. It’s like buying gold stocks in 2000 which I did to a very large extent. The HUI index was at 35 and it went to over 600. It went up 1700% in eight years. And that’s because everyone was against it. It was like a killing field for an investor to go in and buy things cheap and I really believe it’s kind of a similar opportunity again today.
Once gold starts looking like, ‘Hold it now—maybe that secular bull market wasn’t over?’…All will be forgotten quickly. If the price of gold is $2000 Tekoa, you would not believe what the sentiment will be…They’ll all come in…you will have everyone trying to get through the same door at the same time and it could be quite stunning…stocks will go up multi ten thousands of percent!“