Willem Middelkoop and Terence van der Hout of the Netherlands-based Commodity Discovery Fund believe that when the world's reserve currency is reset away from the U.S. dollar in the next decade, gold prices will rise and mining equities will follow. Van der Hout and Middelkoop tell The Gold Report that by focusing on producers, near-producers and turnaround stories, they plan to capitalize on the opportunities in North America, Africa and beyond.
The Gold Report: Willem, your first book predicted the collapse of the global financial system a year before the 2008 fall of Lehman Bros. In your new book "The Big Reset: War on Gold and the Financial Endgame," you're predicting the demise of the dollar as the reserve currency by 2020. You said it can occur as a carefully planned event or as the result of a crisis. What would these two scenarios look like?
Willem Middelkoop: Authorities always prefer to act within a well-planned scenario. The U.S. and the International Monetary Fund (IMF) understand that the U.S. dollar has to be replaced one day. It could be 2020. It could be 2018. It could be 2023. It has to be replaced by another anchor to support the worldwide monetary system.
Both the U.S. and the IMF will try to stay in the driver's seat as they propose the transformation of the worldwide financial system. They could introduce special drawing rights (SDRs), an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. The U.S. and the IMF could propose that the SDRs be used to replace the dollar as the anchor for the worldwide financial system.
However, the IMF and its partners, the central banks around the world, will need at least five more years to prepare the system for such a change. A crisis of confidence around the dollar could occur before the IMF and its partners are ready for a reset operation. If a crisis of confidence occurs, the IMF would have to mount a rescue operation to save worldwide trade, as we saw in early 2009. We had some similar, but smaller, resets following the crisis in Germany after the Weimar hyperinflation in 1923 and, more recently, in Cyprus.
The SDRs could act like a monetary umbrella and consist of dollars, euros, British pounds and Chinese yuan after a monetary reset.
TGR: A lot of this plan is going on backstage. Most people don't know about it. What signs should we look for to signal the shift so we can adjust our portfolios?
WM: This is a very important question. Investors need to understand that such a transformation in our monetary system might be introduced over a weekend. In Cyprus, there were not many warning signs. That's why I started a new blog called thebigresetblog.com, where I follow the latest information, and I'm publishing the latest signs pointing toward such a reset. On March 17, I published a story that was based on an interview with George Soros. In that interview with The Financial Times, Soros said the system is broken and needs to be reconstituted. I also published an interview with Christine Lagarde, head of the IMF. She used the term "reset" multiple times in interviews during the World Economic Forum.
Another important sign is an editorial by the Chinese state press agency recently saying that the time has come for a new international reserve currency to be created to replace the dominant U.S. dollar.
Both East and West sent out specific signals pointing toward this transformation. Of course, it's important to watch the gold and dollar charts on a daily basis, because when a reset is close, you can expect major moves.
TGR: What does this mean for gold? The signs are out there—why is the price hovering around $1,300/ounce ($1,300/oz)?
WM: It's quite easy to understand why central banks would like to revalue gold to devalue the dollar at a certain stage of this reset. The U.S.'s official gold reserves, which are still 8,000 tons, are valued at the historical cost price of $42/oz. A revaluation toward $4,200/oz would grow the value of these gold reserves from the current $11 billion ($11B) to $1.1 trillion. Without such a revaluation, gold prices will have to rise as well given the structural deficits in the gold market. Worldwide gold production can't keep up with the growing demand for physical gold. Recent figures by the World Gold Council show a deficit of 700 tonnes physical gold.
We have seen lots of manipulation of the gold price, similar to the 1960s when the London Gold Pool was keeping gold prices at $35/oz. Central bankers have done this for a number of years by selling large amounts of gold from the official reserves of Western central banks. We've seen another round of manipulation of the gold price in the last few years. This can't go on for another 5 to 10 years.
TGR: If the gold price went up, would the precious metals mining stocks follow or, because of the manipulation, would there not be a connection?
WM: The gold price started to rise at the end of December. When the gold price went up 10%, precious metal mining stocks went up sometimes as much as 30%. Investors will come to understand that the gold price might trade higher in the following weeks and months, and precious metal mining stocks should also go higher.
Countries like China and Russia are also growing their gold reserves enormously. With estimates for yearly deficits in the physical gold market up to around 1,000 tons/year, more investors see precious metal companies as the only ones that own huge amounts of physical tons still in the ground. When they can be sold at higher prices, these companies will become hugely profitable.
We've seen that in the past. In the 1970s, we had the last gold rush and lots of free cash flow was generated by gold and silver producers. In the late 1970s and the early 1980s, these amounts were enormous. Senior producers had gains of 200–300% in the last two years of the gold bull market. The junior producers and the exploration companies showed gains of more than 1,000% on average.
TGR: What markets do you think are good right now? What commodities do you like?
WM: We still have 60% of our equity investments in gold-related equities, 20% in silver-related and the last 20% in base metals and specialty metals. The only change in the last two years has been that we decreased our investment in exploration companies and increased our investment in royalty companies and senior producers.
TGR: Why was that?
WM: Because of the low valuation in the correction since the middle of 2011. The valuation for gold producers became almost laughable. Of course, a producer, which is creating cash flow and is still profitable at these prices, has only upside in the current market. It was a defensive move. The current bidding war concerning Osisko shows it was a smart move to add to our position during the down turn.
Terence van der Hout: Technically, an exploration company that has no assets can just go to zero—there are a number that are doing that—whereas producers will always be worth something, even at fire sales.
That's another consideration that we've been looking at on the downside. Very recently, we've been subtly shifting from producers and near-producers to advanced developers. We see a turn in the markets. Those companies are well leveraged to the gold price and have a fairly extreme undervaluation to catch up with. Normally, they will be revalued to something relating to the amount of resource they produce.
One of the companies that we've been invested in for a while is OceanaGold Corp. (OGC:TSX; OGC:ASX). It has been producing gold in New Zealand at a steep cost, but it has a gold-copper deposit it brought to production in the Philippines that is performing very well. It's a classic story of a startup producer that is beginning to be valued at its full potential.