Investors unsure of which way to turn in this market need only watch the "smart money," says Jeb Handwerger, the editor and publisher of GoldStockTrades.com. Billionaires like John Paulson and Carlos Slim are plucking up mining investments on the cheap. In this interview with The Gold Report, Handwerger shares his favorite discount buys.
The Gold Report: Gold recently witnessed some upside price support after the Cypriot parliament proposed taking money from private bank accounts to raise the €5.8 billion needed to qualify for an international bailout. What was your first reaction to that news?
Jeb Handwerger: Any confiscation of bank accounts would just highlight what I have been saying for a long time—savers are losing money in their banks. Bank deposits are supposed to be a safe haven. Investors are going to seek out alternative hedges against the deterioration of currency and financial repression worldwide. This isn't just happening in Cyprus, but all over the world where there are citizens losing money in their banks and are experiencing negative real rates. Investors need to look for the assets that will protect and grow their wealth in case public policies continue to destroy wealth and savings.
TGR: How does this differ from what happened in Greece?
JH: This takes bailouts to a new level. The debt crisis still continues. The Swiss said they are devaluing the franc to keep pace with the euro. The Japanese are printing yen like crazy. Savings are already being stolen to bail out the banks. It has happened in the U.S. since 2008.
Precious metals are ripe to breakout. This is the environment where investors can get in ahead of the storms. We're seeing little waves, but they'll build up. It's like a coiling spring. There could be a breakout, panic move into precious metals and the mining equities as investors rotate from the overbought equity market into the undervalued precious metals and the even cheaper gold and silver miners.
TGR: If that is the case, why didn't we see a bigger run on gold when the news of Cyprus broke?
JH: In Cyprus there is panic because it tried to confiscate money outright, but the U.S. and Europe have been subtler about it.
What's going on with precious metals is also hidden. Right now, precious metals are out of favor and mining equities are oversold. Investors believe dividend-paying stocks are a safe haven.
This also happened in the 1990s before precious metals and mining stocks broke out. They pushed the dividend stocks up to a premium, and dividends became smaller and smaller. Eventually, investors realized that dividends weren't such a safe haven because they weren't able to beat inflation.
From 2000 to 2007, there was a massive move into the mining equities and commodities that was set up in the 1990s when dividend stocks were a craze.
Capital will eventually seek out the traditional safe havens, which are precious metals and mining equities, as it has done in the past. Because this sector has been hit hard in 2011–2013, the subsequent rally should be quite impressive.
TGR: Can other citizens of the world expect treatment similar to Cyprus when their governments are short on cash?
JH: They should not only expect it—they're experiencing it right now. Inflation is greater than what governments are saving. There's disruption of capital and wealth as we speak in many countries, including the U.S., most of Europe, Japan and in the Swiss franc. It might not be front and center, but people better start wising up to it and preparing themselves. Once the public realizes this, once inflation starts rearing its ugly head, it will be too late to get in.
To paraphrase Gerald Loeb, who wrote "The Battle for Investment Survival," the worst way to fight inflation is to buy assets at an inflated price. Mine equities are at historic discounted valuations compared to the overall equity markets. The long-term trend for inflation is that it will move higher. This is a significant discount for investors who want to prepare and be hedged against inflation with assets that are trading at deflated prices.