Is the bear market in mining equities finally over? It looks that way, says Ron Struthers, publisher and editor of Struthers' Resource Stock Report. In this interview with The Gold Report,Struthers explains what distinguishes this recovery from past ones: TSX Venture Exchange stocks, not the majors, are leading the way. But which juniors should investors favor? Struthers names several with proven management, ample funding and good share structures.
The Gold Report: Back in July, you said that the bullion banks' fractional reserve system was coming under stress. Do the big gains in gold and silver bullion this year suggest that this system is breaking down?
Ron Struthers: I believe the fractional reserve gold system has seen more stress and was probably in good part responsible for cementing the bottom in gold around $1,200/ounce ($1,200/oz). We know Germany has not even been able to repatriate the modest amounts it asked for. The gold is simply not there. The physical gold was leased or sold years ago.
We see that the gold inventories at COMEX and the bullion banks have been steadily declining for the past year. There are not too many places to turn to, if any, for physical supply. It is no secret that record amounts of physical gold have been moving into China, and India continues as a major buyer despite higher import taxes. I think that a change in the market sentiment, a belief that the bottom is in, and the large short position on the COMEX are the reasons for the recent rises in price.
TGR: Do you put any credence in the claims by the Gold Anti-Trust Action Committee (GATA) that there is an organized conspiracy by central banks and the gold and silver bullion banks to lower the prices of gold and silver?
RS: There has always been a lot of intervention in the markets by the central banks in currencies, of which gold is one. It wouldn't surprise me if there is front running by bullion banks as well that are privy to any such action.
TGR: Do you think that we could see a divorce between physical and paper gold?
RS: I think we've already seen some of that. For instance, the SPDR Gold Shares (GLD) has been at about a 4% discount to the metal for the last couple of years. We're seeing some very high premiums in Asia on the spot physical price compared to the COMEX paper price—as much as $70/oz.
TGR: The historical appeal of physical gold is that it is a real asset that cannot be duplicated endlessly, as fiat currencies can. That being the case, what is the appeal of paper gold?
RS: It depends where you are. Asians don't think of paper gold at all. To them, it's all physical. They buy it, keep it as savings and pass it from generation to generation. But North Americans like to trade things, to buy and sell for short-term profit, so they are more apt to buy paper gold products like futures and exchange-traded funds.
TGR: You've argued that quantitative easing (QE) is a ploy by the Federal Reserve to make the U.S. economy seem stronger than it really is. Does the tapering of QE indicate genuine confidence in the future, or is this another ploy?
RS: Actually, that is backward. I believe the Fed strives to make the U.S. economy look stronger than it is so it can try to reduce QE and increase confidence in the U.S. debt. If confidence existed, we wouldn't need QE. We have QE because the Fed is the lender of last resort. There is not enough confidence from U.S. or foreign investors to fund U.S. federal government debt and real estate mortgage debt. In 2013 the Fed bought 150% more treasury debt than all foreign investors combined. Nor is there the will to reduce this debt. This lack of will is another reason for the lack of confidence.
The Fed has long been on record saying that its low interest rate policy will repair the U.S. economy, so it needs QE to maintain these low rates. And it must do all it can to demonstrate that this policy is actually helping the economy. The Fed is walking a tightrope. It knows it cannot keep QE going forever. It wants to make the U.S. economy look as good as possible to increase market confidence and to manage the debt problem and, eventually, resolve it.
TGR: David Stockman, President Reagan's budget director, has argued that the hubris of the Fed and the U.S. Government has resulted in a situation whereby "gold could explode at any moment." Do you agree?
RS: Yes. The whole world financial system is walking a tightrope. Structural problems and large debt loads have not been resolved, only Band-Aids applied. The longer you walk a tightrope, the greater chance of a fall, in this case, a financial fall or collapse. This would result in a big vote of confidence in certain fiat currencies and a huge flight to gold. But so much physical gold has gone to Asia, and it's not coming back. So when investors come looking for it, there's going to be a shortage of supply.
TGR: What is gold's next resistance level?
RS: I'm looking at $1,360–1,370/oz.
TGR: If gold burst through $1,370/oz in the next couple weeks, would this signal a rather rapid acceleration?
RS: Yes, it could. The next level would be $1,450–1,500/oz; that could offer resistance.
TGR: Given the recent rises in gold and silver equities, is the bear market that began in April 2011 finally over?
RS: I believe it is over, but the equities have given little sign yet of a bottom or new uptrend. Gold just went above the 200-day moving average. I would say it's probably one of the strangest markets I've ever seen. We're really in unprecedented times with all the market interventions, record debt, currency wars, distortion of economic and market data, computer trading and alternate trading platforms on markets.
Looking at the NYSE Arca Gold BUGS Index (HUI) on the gold stocks, we've not seen much of a move yet. It looks as if my downtrend line might be broken, but we have not seen a higher high in the index since the last low.
TGR: What do the shorts tell us?
RS: I have not seen short covering in the gold stocks yet. As of Feb. 15, there were seven gold stocks in the TSX Top 20 short positions, which is pretty significant given that they have much higher short positions compared to other stocks that have a much higher number of shares outstanding. We've seen covering only in Osisko Mining Corp. (OSK:TSX), which is subject to a hostile takeover bid by Goldcorp Inc. (G:TSX; GG:NYSE).
Another strange thing is the S&P/TSX Venture Composite Index, which is a good measure of the junior mining explorers. Typically, the juniors follow the seniors or producers: the trickle-down effect. Once the bigger stocks do well, the little guys start to follow. In the past 12 months, however, the TSX Venture Index is down about 10%, while the NYSE Arca Gold BUGS Index is down more than 30%.
This time around, the TSX Venture is leading the way up. It broke through the 200-day moving average in early January. It tested that in early February, and now it has broken clearly to the upside, a second higher high above 1,000. The 200-day moving average has started to turn up as well.
TGR: Do you think that all the bad press that the majors have gotten for bad decisions, inefficiency, bloated projects, etc., has caused this anomaly?
RS: Somewhat. The producers' margins were hit pretty hard by the gold price decline. For junior explorers, however, $1,200–1,300/oz gold is still pretty good if an explorer makes a discovery. On the other hand, while the producers have struggled with rising costs, this bear market has cut the cost of exploration probably almost in half because of falling demand for related goods and services.
TGR: What qualities do you look for in junior explorers?
RS: I'm sticking with companies that have proven management, ample funding and/or good share structures, so they can still raise funds. Diversification is a good approach for investors.
TGR: After the gold price collapse last year, there was a renewed emphasis on the importance of high grade. How crucial is this?
RS: Grade is always important but becomes more so as the price of gold falls.
TGR: What are some companies leading the way in high grade?
RS: Roxgold Inc.'s (ROG:TSX.V) recent preliminary economic assessment at its Yaramoko project in Burkina Faso is projecting a metal grade of 11.9 grams per ton (11.9 g/t) in the first five years. That results in a low cash cost of just $455/oz, a high 47.7% internal rate of return and only a 1.4-year payback on initial capital. So you can see the big effect there.
TGR: Yaramoko's initial capital expenditure is only $93.8 million ($93.8M). Isn't that quite low?
Eastmain Resources Inc.'s (ER:TSX) Eau Claire deposit in Canada has at least 1.5–3 million ounces (1.5–3 Moz) and a grade higher than 3 g/t. The open-pit resource is 635,000 ounces (635 Koz) at 4.67 g/t, and the underground is 145 Koz Measured and Indicated at 6.3 g/t. These are attractive numbers. Goldcorp already owns almost 9% of Eastmain.
Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT) produces good grades but has seen a temporary rise in production costs because its grade declined from about 5.5 g/t to 4.5 g/t. That had quite an effect on its earnings. But I think these numbers will soon reverse, which should make for a good turnaround there. The company is driving down a ramp to produce from its Island Gold Deep deposit in Canada. In late January, it updated that resource to 169 Koz Indicated at 11.5 g/t, with almost 1 Moz in the Inferred at 9.29 g/t. Again, very good grades.
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