Can you hear it? Brien Lundin does. It's the sound of the junior resource market mounting a comeback. Lundin, editor of Gold Newsletter, president and CEO of Jefferson Financial and the man behind the New Orleans Investment Conference, traces the rebound to Western speculators coming to the market at the same time that Asian buyers are maintaining a strong level of demand. In this interview with The Gold Report,Lundin pinpoints the fastest horses in his stable of top picks.
The Gold Report: I'm hearing something and I think it's the sound of a junior market rebound. What are you hearing?
Brien Lundin: Yes, I hear it. I've been very cautious despite a few rallies and bounces since last fall, but momentum is building. We saw a lot of tax-loss selling in the metals at the end of the year, and thus the beginning of the year saw a natural rebound in the resources markets. That momentum has been backed by metal buying in Asia, which, in turn, attracted more speculative buying from the West. In short, speculators and speculative enthusiasm are returning to the junior market.
TGR: In the March edition of Gold Newsletter you suggest that Asian precious metals demand is underpinning the rising gold price. That's not a new narrative, but tell us what's changing with that story.
BL: Asian demand wasn't surprising. In mid-April speculators, in what appeared to be a very coordinated attack on gold, drove the price down by hundreds of dollars an ounce in a couple of trading sessions. That spawned a burst of Asian gold-buying demand. Historically Asians are very price-sensitive buyers. What's surprising is that the higher level of demand has yet to abate. It's encouraging for gold bugs and somewhat surprising.
TGR: Alasdair Macleod, head of research at GoldMoney, puts China's gold imports at 2,668 tons in 2013. If he's correct, that would be one-quarter of all the gold reserves in the U.S. Do you believe his number is accurate?
BL: I do. He's done the best work I've seen. The World Gold Council places it at less than half his number, but that doesn't account for a lot of the buying that we've seen through the Shanghai Gold Exchange (SGE).
The SGE is essentially a physical delivery mechanism, unlike the Comex in the U.S., where gold investors and gold savers in China actually take delivery of gold. Macleod uses those figures as a starting point and conservatively nets out the various flows in and out of Hong Kong so that there's no double counting.
Still, his numbers appear to be conservative because there are other entry points into China that are not accounted for. His numbers are still much more accurate than some of the other more mainstream sources of information.
That number—2,668 tons of gold—is not much less than the entire level of gold production last year. In other words, almost every ounce of newly mined gold is going into China. That's important. That's dramatic evidence for a new secular trend of Asian buying.
TGR: Any theories on what China is going to do with that much gold?
BL: This level of demand implies that something is up—that there's some type of official encouragement or plan afoot. There was recently some speculation that China was about to reveal its level of gold reserves, but it hasn't. Whether the gold it is buying now goes into official reserves or into the hands of its citizens, it's gold in-country, which is effectively national reserves. It's part of a long-term plan to establish China as a preeminent global economic power.
TGR: And maybe world economic reserve currency?
BL: More likely as a global economic reserve currency of equal standing to the dollar, and perhaps to the euro.
TGR: Newsletter writer Jim Dines has been called a "connoisseur of bottoms." Gold recently put in a double-bottom. How have those been positive for the gold price?
BL: A double-bottom on a chart is a very powerful pattern that implies a robust rebound. That's exactly what gold has put in place since the first bottom in June 2013 and the second bottom in December. There's been a very steady and consistent rise recently, in contrast to the pattern of "two steps back, one step forward" that took hold in 2013. In 2014, it's been closer to five steps forward, one step back.
TGR: The junior market rebound is not just about higher commodity prices. What other factors are involved?
BL: Sellers got exhausted. Once there are no more sellers, there is a natural rebound. That upward trend is gaining momentum and in turn attracting more speculators as the technical picture improves.
TGR: As things heat up, how can investors identify the promising juniors?
BL: Go to conferences. Subscribe to newsletters. Find companies with proven resources. Investors can buy companies with established resources for the same price that ground-floor exploration companies were selling at a few years ago. Why take on the additional risk of exploration when you can buy ounces in the ground?
TGR: Many of the companies you follow in your newsletter are developing projects with resources in Mexico. What are three or four juniors that are poised to ride the rebound?
BL: Mexico is one of the most prospective exploration frontiers. Regulatory and tax events have thrown a damper on the area, but explorers and developers still have to go where the gold and silver is, and Mexico has proven to be one of the best places to find new deposits.
A number of companies in our portfolio are exploring there. I particularly like Santacruz Silver Mining Ltd. (SCZ:TSX.V; 1SZ:FSE). It has three projects at different stages—one in production, one nearing production and one that is defining a resource. Its future is laid out clearly for investors to see. It has great management with a proven ability to bring a project into production on a shoestring budget—and still ahead of budget and ahead of schedule. It's a silver growth story.
TGR: Santacruz is similar to other more established companies, like First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), in that it took a past-producing asset and made it work. Could Santacruz reach the level of those companies?
BL: Yes, it has a plan that's realistic and it has management and financial backing to bring it to fruition. The only question is the timing. If you're looking for a silver company that will grow significantly in resource and production over the next three or four years while you ride a rising wave of silver prices, then Santacruz is one of the best bets out there.
Another company I like is Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE). It's a company run by Duane and Morgan Poliquin, who I've known for more years than I care to mention. Almaden is an interesting company that's been able to keep its share structure tight and deliver value for investors. It's been a consistent winner in our portfolio during the past dozen years or so.
It was one of the companies that adhered very closely to the prospect-generator model before it became popular to do so. It farmed out every one of its projects. Almaden decided a few years back to finally drill a few of its projects. Sure enough, the second project it decided to drill itself, the Tuligtic project in Mexico, yielded a tremendous discovery on the Ixtaca gold-silver zone. Almaden has consistently expanded that discovery.
TGR: Almaden has 4.5 million ounces (4.5 Moz) Measured, Indicated and Inferred, which is a solid resource. Who is in the market for an asset like that?
BL: The majors are not in the market to any great degree right now, but eventually will be. If you buy value, everything else will take care of itself. Smart money was behind this stock at $3/share. At about $1.50/share, it's proven value.
Next page: Other hot names in Mexico