INTERNATIONAL. The gold rally that began last fall and drove gold through the US$1,200 resistance level in late November doesn't seem to be panning out the way the rallies of 2005 and 2007 did.
In this exclusive Gold Report interview, Gold Newsletter editor and publisher Brien Lundin admits he's a bit worried about this run's breakout.
He hasn't lost hope, he says, but "we really need to clear $1,250 over the next six to eight weeks to validate the continuance of this as another one of these major gold rallies" that would carry gold up to the US$1,350 to US$1,500 range that he had anticipated. However that turns out, he expects gold to remain strong and gold stocks, particularly juniors, to outperform the market in general. Brien is stoked on silver, too, and in fact in relative terms expects it to rise further and faster than gold.
The Gold Report: It's been a fun quick ride up to US$1,200 gold and another little correction. Where do you see us going from here?
Brien Lundin: Quite honestly, I' m still trying to figure out that myself. I rarely make specific price predictions, but let myself be goaded into it by the power of the rally that began last fall, when we burst through US$1,000 and just kept going up.
It was a very close analog to the two previous breakouts that the metal had exhibited in 2005 and 2007, each of which followed nearly a year-long price consolidation. I believe those rallies took the price up 75% and 56%, respectively.
Based on those performances, I projected that the rally that began in the fall would take gold up to between US$1,350 to US$1,500 by sometime this spring. We traced those three rallies, the first two plus this one, in an analog chart that we published a couple of times in Gold Newsletter. It's in the current issue, in fact.
That chart shows that the correction that gold underwent this January-February kind of broke the trend that the two prior rallies exhibited. So this is a crucial time. It's not that hope is lost, because the recent recovery in gold has me heartened a bit.
But this rally is in danger of failing unless the metal really continues upward now and in the near future. I think we really need to clear US$1,250 over the next six to eight weeks to validate the continuance of this as another one of these major gold rallies. If that happens, I'll put that US$1,350-to-US$1,500 target back in place for this run.
TGR: Okay, so you're hopeful that we get back on course by mid-April. Ian Gordon, who founded the Longwave Group, is looking at the Dow getting down to 5250 this year, having a correction and then starting to move down toward 1000. He sees gold as the ultimate safe haven and, of course, moving the opposite direction.
Are you concerned about the Dow right now, the S&P, and the overall market? What's the possibility that what Ian sees could be the catalyst to gold's move up to $1,250?
BL: I can see just about anything working in gold's favor right now. Very roughly, very generally, if you look at the two possible scenarios facing the US and the world economies right now, you essentially have two options. One would be recovery; the second would be relapse. Under either scenario, although there would be some extreme—and I stress the word "extreme"—volatility involved, gold would end up the winner in either case.
If we had an economic recovery, the Federal Reserve in the U.S., for example, would be reticent to raise rates to strangle that nascent recovery. So we'd still have a very easy-money environment, despite what the Fed may say now.
That recovery would prompt bank lending again and there's about a trillion dollars of excess bank reserves just hovering over the US economy, like an ocean in a water balloon. Just the start of bank lending would turn those excess bank reserves into new currency, into liquidity overflowing the economy.
That would be highly inflationary and bullish for gold. In addition, any type of economic recovery would be bullish for commodities in general and gold would benefit from that, as well.
The other scenario, where you would have an economic relapse, a double-dip recession, or worse, would prompt more government spending, more government debt, more government currency creation. Gold would ultimately benefit from that scenario as well.
So either path would end up, over the long term, being bullish for gold. However, again, that would be a very bumpy road, especially if we went into an economic relapse, because there would be liquidity crunches. As you know, those have not been very good for gold or gold investors in recent history.
TGR: So it's that liquidity need again.
BL: Yes, absolutely. If you remember back in September of ‘08 we were really just a hair's-breadth away from global bank runs. People were rushing for the safety of gold bullion and cash and were shying away—running away, in fact—from equities or any other type of paper investment.
TGR: And, of course, the next black swan could arise from what's going on in the European Union with Greece and Ireland and Spain, some of these other countries.
BL: Absolutely. You won't see this angle really reported much in the mainstream media, but it reflects on fiat currencies in general. In the current environment, where many if not most of the world's currencies are being looked at askew, the dollar is the healthiest one standing and it's not looking so good itself. It's only a matter of time before the world's investors and savers, to an even greater extent, look at the dollar and say it's no great shakes either. What's left? Gold.
BL: That's already happening to a growing extent, especially outside the borders of the U.S. And it's not just in Asia, but also in Europe.
TGR: So you obviously believe that investors should own gold, but I'm assuming also you believe there are some opportunities in gold stocks.
BL: I do, and partly that's because I don't really forecast the type of equities crash that Ian anticipates, although we think very much alike in the terms of the value of gold and the future of gold-oriented stocks. In particular, I focus a lot on the special situation stocks, the juniors that are actually exploring and finding gold, or are on the verge of major discoveries.
TGR: Could you tell us about some companies you recommend our readers take a look at?
BL: Sure. One of my favorites right now is Underworld Resources Ltd. (TSX.V:UW).
You look at that Yukon gold rush, that new Klondike gold rush that Underworld spawned over the last couple of years with its White Gold discovery.
While there are a lot of well-placed players in that area, I think that Underworld is going to be the biggest winner. Not only do they have 1.5 million ounces of gold already outlined, but they have that deposit pretty well figured out and know where it's trending.
They know just where to look. They know what rock types, what type of soil anomalies to look for. In the Golden Saddle deposit, which is their primary discovery, they ended drilling last year in some of the richest, most intense mineralization yet discovered on the property. They're starting to drill again very soon, precisely where they left off in that gold-rich trend. And they've outlined some other targets. The drill season probably will begin a bit earlier this spring than most people expect.
TGR: The snow is not as deep this year.
BL: Right. You're in the Yukon, though, and you can't get in there too early. Most of the companies are looking at starting in late April or May or thereabouts. Underworld may be able to get in there a month or so earlier. They're very aggressive and frankly, they don't have much to do in preparation as compared with a lot of these other companies. They know precisely where to drill. The drill pads are there waiting and they're just going to go start it up.
TGR: When would you expect to get drill results? They don't have to wait in line so much as in the good old days, when you had to make an appointment for an assay.
BL: I don't think the company knows at this point, but since most companies are likely to be starting in May, Underworld may be getting its first drill results out around that time.
TGR: Who else do you like?
BL: Another one in that area is Kaminak Gold Corporation. They've outlined some soil anomalies on their properties in that White Gold District. They have the same rock types as Underworld's Golden Saddle. In fact, Underworld management is one of Kaminak's biggest promoters. They will very freely tell you that the rock types look very good on Kaminak's properties.
TGR: The chart of their stock sure looks good.
BL: I know. I've been very frustrated that the price hasn't come back and I have not been able to buy it yet. I'm probably being too smart by half. I don't think it's going to come back, so I'm going to have to just break down and buy some.
TGR: Any more favorites?
BL: Millrock Resources Inc. (TSX.V:MRO). It's a very early stage exploration company. Good management group, very large property position as well. It's in Alaska primarily, although it also has several projects in Arizona too. A lot of my colleagues in the industry also like the company, and the Estelle property in Alaska is one that people have been waiting for the company to drill for awhile. They will be drilling it this season. That's kind of a Donlin Creek analog, except for the fact that it's very early stage, so it's really hard to draw those comparisons right now.
TGR: What's driving Millrock stock?
BL: It was stuck at about 20 cents forever and finally broke through on a spate of news and prospects for a good bit of drilling this year. They haven't been doing much drilling to this point, and they'll be turning the bit on about five properties this season. They'll be drilling about mid-summer on the Estelle property that I mentioned.
They've also got two great copper properties in Arizona that probably will be drilled toward the end of the summer.
TGR: We've had some readers ask about some of the stocks you've mentioned before. Could you give us some updates?
BL: Sure. I talked with you about Animas Resources Ltd (TSX.V:ANI) before. I think if you don't own Animas yet, you buy it on dips. If you own it, it's a hold right now. They've got a large, district-scale play on their Santa Gertrudis property, and one of the best teams that's been assembled in the industry working on the project. It's just going to take some time for them to figure it out.
They're getting sniffs here and there of the type of very large-scale system that they're looking for.
We just have to be patient and give them a bit more time on that property. I really like the management team and I like the investment group behind the company. They've got a lot riding on this, not just in terms of money but also reputation, so they're going to make it work at some level. It always pays over the long run to invest with people like that.
Treasury Metals Inc. is a gold play, and one of the best ones I could recommend right now. They're expanding on their property—their flagship asset, the Goliath Gold Project near Dryden, Ontario, which is fairly deep, but well-defined.
It has great potential economics. They're expanding that property not only along trend, but also getting some good indications of high-grade gold at depth. Treasury's next drilling program will test that deep potential.
TGR: That sounds really promising.
BL: Not only that, Treasury's business plan encompasses a consolidation of that region with a central mill facility and bringing together a lot of gold deposits in an area that really is one of the unrecognized gold trends in Canada. It's one of the better and yet unrecognized gold trends. I really like Treasury as a gold play.
TGR: And one of the key shareholders, as I remember, is Mark Henderson.
BL: Yes, and that's good backing. They're benefiting from the Aquiline Resources Inc. buyout by Pan American Silver Corp and bring a lot of money, a lot of financial and management capability to the table. And, in fact, Treasury has some Aquiline stock, which I guess is now Pan American stock, and that boosts their bottom line as well.
So, yes, it has great support. You get the feeling that it's going to be one of the highest priorities in that stable of companies coming out of Mark's group. I think it's going to get a lot of attention and as a rollup play, you like having that kind of management expertise behind the company.
TGR: Another company I think you followed is Linear Gold Corp (TSX:LRR), which seems to have sold off a little bit.
BL: They have and I really view that as an opportunity. This is a company with good financial resources, a great management team, and a very aggressive business plan to go from a junior explorer into a producer.
They have the project in hand to do that. I think they will be in production probably within a year. Although they may not have detailed the timeline yet, the project is sitting there—the Goldfields Project with the Box and Athona mines in Saskatchewan. Linear made a tremendous acquisition by buying that project at a fire-sale price from a financially distressed company coming out of the global credit crisis.
They quickly updated the feasibility study and improved the numbers tremendously. It has great economics. There's really nothing holding the company back and, moreover, they have the financial resources to acquire new projects and are pursuing them aggressively. I really like Linear both as a direct play on gold and a growth story in its own right.
TGR: And with the stock selling off from its peak.
BL: Yeah, it's a great entry point.
TGR: Any others on your radar?
BL: Golden Predator Royalty & Development Corp. (TSX:GPD) is one. Great projects, great management, and an exciting plan. The management team can put that plan into effect. When you talk rollups, there's no better manager or executive to have on your team than Bill Sheriff. He did such a great rollup in the urani-mania play a few years back.
TGR: He's now part of that Yukon story.
BL: Yes, the Yukon story, and the Nevada story. They have a tremendous property position in the Yukon. The Nevada story encompasses having a central, even portable, mill around some satellite high-grade deposits that are being overlooked by the majors, getting revenue from their satellite deposits' really early-stage gold production, as well as property royalty payments. In fact, the company may never need to finance again.
TGR: Because of that royalty.
BL: Yes. Its goal is to get cash flow positive.
Another company, Great Panther Silver, is my top silver play. Long term, its Guanajuato property is just tremendous, particularly when you realize that over 500 years of mining, development there really didn't venture below the water table. Not only is Great Panther finding new areas and new resources above that level, but also deep resources that could essentially double what's been mined over the history of that project.
In many respects, it's a typical Mexican silver play, where there's as much silver ahead of the company as they can mine. But in this case, it's multiplied because they're expanding their capability and they just won't run out of ore.
I really like that. I like the team. Bob Archer does a great job at that company, great local relations. The mine is a standard for the region. For a play on silver, I think it will get a much higher profile in the months and a year or two ahead as they dramatically expand their production capacity.
TGR: The stock has done incredibly well. I think it's up close to 100% from last year.
BL: Yes. And frankly, I forecast similar gains over the next year to 18 months, especially as Great Panther continues along its development plans. But also I think silver has a big bounce ahead of it.
TGR: Why do you say that?
BL: The last correction in gold and silver was much more dramatic in silver.
TGR: But isn't there always?
BL: Yes, the swings are more volatile in both directions, but silver hasn't made up that ground yet.
TGR: Going back to what you said earlier about see gold up to US$1,250 in the next six to eight weeks, if that's the case could silver could have a run to, say,US $20?
BL: Oh, absolutely, to US$19 at least. The gold-silver ratio has gotten out of whack once again and silver's just due for a bounce. I may have seemed a bit pessimistic on gold. I am worried about it, but over the last couple of weeks it seems to me that gold has exhibited a real desire to take off. All that's really kept it back have been headlines here and there about tightening in China, etc.
That's exacerbating the volatility in speculative, derivative gold —speculators going in and out of the futures markets. Overseas and worldwide outside the U.S., we've seen very strong physical demand and some of the commercials have begun rolling back their short positions. So from a technical standpoint, gold looks fairly positive in the short term.
TGR: But you're even more positive on silver.
BL: Oh, yes.
TGR: All right. Finally, Brien, what's your take on the rare elements story? Is it a bubble or is it just the beginning?
BL: I think it's very similar to the uranium story of a few years ago, where the logic is inescapable, but the timing is indeterminate. It obviously got ahead of itself last year, and I think our good friend, Jim Dines, had a good bit to do with that. It was kind of a self-fulfilling prophecy, but as usual, he was very smart in pinpointing an area that deserved attention. So I think it's going to be here for a while, but be cautious and play it correctly.
TGR: Who do you like in that space?
BL: I was a very early investor in Rare Element Resources Ltd. back when nobody knew or cared about rare earths. At that time, the company was trading as a gold play more than anything else, and really didn't stress its rare earth aspect. I'm still a very large holder of Rare Element. If it gets in the mid-US$4 area, people who were early in the play need to take some profits.
It's probably a buy anyplace in the low- to mid-US$3 area. I expect it to oscillate in that range for a while, until we get some more meat on the bone of the overall story. A general economic recovery obviously would help that as well.
TGR: As usual, you've been very enlightening and full of lots of ideas for our readers to digest. We appreciate it.
BL: It's always a pleasure.
Note: With a career spanning three decades in the investment markets, Brien Lundin runs Jefferson Financial, a respected publisher of market analyses and producer of investment-oriented events. In addition to being Jefferson Financial's President and CEO, he serves as publisher and editor of Gold Newsletter, the cornerstone of precious metals advisories since 1971. It covers not only resource stocks, but also the world of investing, macroeconomics and geopolitical issues. He also hosts the annual New Orleans Investment Conference.
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