Rick Mills: Cash In, Not Out on $1,500
Brian Sylvester of The Gold
Some pundits are
yelling for investors to take profits in junior resource stocks now. In this
exclusive interview with The Gold Report, Richard (Rick) Mills, host of Ahead
of the Herd online and editor of Ahead of the Herd newsletter, explains why
$1,500 gold means investors should be cashing in, not cashing out.
Gold Report: Last week, gold reached above $1,540/ounce (oz.) as fears
escalated over Greece defaulting on its sovereign debt, most of which is owed
to European banks. One telling figure is that the risk of default is so high
that the interest rate on two-year Greek bonds is about 29%. Should we expect
a continuing upward trend for gold throughout the rest of the year as
Greece's debt story and the fears of contagion play out in Europe?
Rick Mills: Greece is going to be bailed out. The EU cannot let Greece
default and there is no precedent for leaving; the legal complications would
be horrendous. Greece defaulting would trigger a train of defaults—European
lenders reduced their risk tied to Greece by 30% to $136.3B, but they still
have almost $2T linked to Portugal, Ireland, Spain and Italy. Gold will hang
out at the $1,500/oz. mark for a while and may be a little soft during the
summer. But come fall, we're going to see gold continue its uptrend.
There are more than enough impetuses to keep gold prices from falling.
Massive structural problems exist in the U.S. as well. The housing sector
continues to be a problem and the fiscal deficit is large.
TGR: The Fed plans to stop buying bonds at the end of the month and interest
rates are expected to go up, in turn strengthening the dollar. Could
"safe haven" purchases of gold ease at that point?
RM: No, I don't believe that will be the case. In fact, I believe that the
U.S. is going to have a third round of quantitative easing, or QE3. The U.S.
has committed itself to doing anything that it can to prop up its economy and
is going to continue monetizing its debt.
TGR: Where do you think gold's psychological floor is right now?
RM: For me, breaking the $1,000/oz. mark was extremely important. When India
came in and bought the equivalent of 8% of a year's production at $1,045/oz., that put a solid floor under gold at $1,000/oz. Now as
gold consolidates around the $1,500/oz. mark, I think that's going to be the
new floor and the support for climbing even higher.
TGR: How do you think silver will react to gold? Will it continue to track
gold much as it's done historically? Or will their paths begin to diverge?
RM: Silver is definitely going to track gold.
TGR: Do you think silver could get back to that $50/oz. high that it reached
earlier this year?
RM: I see no reason why not. Historically, the gold:silver ratio has been 15:1 but since silver made
its nominal high in 1984, the gold:silver ratio has
held fairly steady at 45:1. With gold at $1,540/oz. and silver at $36/oz.,
the gold:silver ratio
stands at roughly 43:1.
Silver will have to rise to $102/oz. to get back to the historical average
with gold at $1,540/oz. The higher gold prices go, the more consumers will
step down to silver. As the much cheaper precious metal, silver will win
market share from gold buyers—especially if they think silver is undervalued
compared to gold.
There was news that gold and silver bullion buying in India was up 222% over
one month. The country spent $22B on bullion in 2010 and in one month in 2011
they spent $9B. There's also something going on in the Chinese market that
most people don't realize—we're so worried about inflation in the Chinese
market, but they actually want some inflation. China needs to have its
currency strengthened against the U.S. dollar so they don't get branded a
currency manipulator. What that does for silver buyers in China is that it
gives them a little bit of an advantage over the U.S. dollar buyer's base.
Last year, China's currency went up about 3.5%. This year it is expected to
rise 5%. That's added leverage when it comes to the silver market. The
manufacturing use of silver went up 16% in China and the demand is growing as
TGR: In an article posted on your website, Toby Connor of Gold Scents said, "Don't let
the perma-bulls fool you, this is not a normal
correction, and it has nothing to do with Greece or Spain. This is the
beginnings of the next leg down in the secular bear market and the start of
the next economic recession/depression. And this time it's going to be much,
much worse than it was in '08." What are your thoughts on that
RM: The U.S. and EU are going to do anything that they can to keep their
economies afloat. Beyond credit creation and debt monetization, I think that
means we'll see more investments in new infrastructure. Upgrading and
maintaining power grids, railways, roads, bridges, sewers, water, airports
and hospitals is another way of putting money into the consumer's pocket.
Greece is not going to be allowed to default. I really don't see the worst
case scenario happening here. I don't believe it's
all gloom and doom. There are bright spots and I think they're going to grow.
TGR: Is there a situation where Greece could default, but still stay in the
RM: I don't see how. If Greece defaults it would lead to an implosion of the
EU. The only way out for many of the EU economies is to weaken the euro and
this isn't something the stronger economies want.
TGR: If the only way out of it is to devalue the euro, the U.S. dollar could
rise against the euro and that's generally bad for gold.
RM: Yes, if it happens from the coming bailouts. But in the meantime,
European economic problems will continue, the U.S. economic recovery will
continue to disappoint and doubts about China's short-term growth prospects
and the ongoing fighting and tensions in Africa and the Middle East will
provide support for gold at $1,500/oz. There is still a lot of demand for
gold. Consumption in China was 700 tons last year. The Chinese government has
been doing everything it can to encourage gold buying by its citizens,
including expanding the number of banks allowed to import bullion.
The World Gold Council
believes that annual demand for gold in India will increase to more than
1,200 tons by 2020. Everything I see is bullish for gold. Gold is integral to
all Indian wedding ceremonies—purchases relating to Indian weddings typically
account for 50% of annual jewelry demand.
With 50% of the Indian population under 25 and approximately 150 million
weddings anticipated over the next decade, the World Gold Council estimates
that wedding-related purchasing will drive approximately 500 tons of gold
purchases a year.
The Reserve Bank of India has granted licenses to seven more banks to import
bullion; this too has helped push up demand.
TGR: Some pundits are telling investors to sell their shares in junior gold
companies and take profits if there are profits to be had, and then buy those
same stocks once they bottom out. Do you agree?
RM: Investors in this game need to look at the best times to buy and sell.
Historically, the best time to pick up junior resources is during the summer
doldrums. A company goes to work all summer, there
is very little news flow and no one around to pay attention anyway. It does a
large drill program and news from the drilling comes out in the fall. That's
traditionally when you want to be a seller. Then the cycle starts all over
again in the late winter and early spring as companies put together work
programs and a budget.
Right now, investors should be looking at the stories, looking at the
management teams and slowly picking up promising stocks.
TGR: Are there juniors with some growth catalysts that you are watching this
Gold Inc. (TSX.V:KTN) is a prospect generator and has numerous joint
ventures, but I'm most excited about Kootenay's
100%-owned Promontorio silver project in Sonora,
Mexico. It has two drills working and a third diamond drill has been recently
mobilized to the site. Promontorio already has an
indicated mineral resource of 5.22 million tons (Mts.) averaging 52.7 g/t
silver, 0.86% lead and 0.96% zinc, containing 8.9 Moz. silver, 99.3 Mlb. lead and 110.8 Mlb. zinc.
This is a company that has great management, great projects, a tight share
count, money in the bank and is drilling a very decent size program.
TGR: James McDonald heads up Kootenay. He's had quite a bit of success before
Bull Resources Inc. (TSX.V:BBS), National Gold and White Knight. This is
someone who's been down the path a few times and knows what he's doing.
RM: Exactly. Kootenay has a great management team, is fully cashed up and
drilling 25,000m. I think Promontorio is only going
to get bigger and better over the summer.
TGR: What are some of the other names on your list?
Gold Corp. (TSX.V:TEN) is run by Todd Hilditch.
He had some fantastic success with Salares Lithium
Inc., which was sold to Talison Lithium Ltd. (TSX:TLH). The company has two
properties that excite me. The Moonlight Project in Nevada is 100% owned.
Gold and silver mineralization are known to be
controlled by northerly-trending structures at Moonlight. The Black Ridge
Fault Zone's eastern boundary controls the eastern margin of precious metals
mineralization at Rochester and Spring Valley. Mapping at Moonlight indicates
that this district-scale fault system continues northward through the
Moonlight Project properties. The company has been quietly consolidating and
increasing its land position over the last three years. Terraco
is going to drill it this summer. Moonlight could get exciting very quickly.
TGR: Even more advanced is Terraco's Almaden Project in Idaho. It has just less than 1 Moz.
measured, indicated and inferred there. Do you think that Terraco
will spin that out and just focus on Moonlight?
RM: Almaden created a lot of unrealized value for Terraco shareholders. I don't believe the company is
going to spin it out. No one had ever drilled the Almaden
below 400 feet before. Terraco put together a drill
program because it believes that underneath the existing resource are
high-grade feeder zones and shoots. The first hole, Hole 1, ended in
mineralization at 1,400 feet. Another hole went down 1,700 feet. Hole 4 is at
2,000 feet and we're awaiting assay results. This deposit already has 1 Moz.
and it could be significantly larger.
TGR: Do they have enough cash to continue working on both projects?
RM: They have enough cash to get the results they need. And the right results
could drive the share price higher.
TGR: What other companies are intriguing to you?
RM: I'm pretty high on a Robert (Bob) Archer play called Cangold Ltd.
(TSX.V:CLD). Bob and his team are responsible for Great Panther
Silver Ltd. (TSX:GPR; NYSE.A:GPL). He delivers on his promises and is
very experienced. Bob found the Ixhuatan
advanced-stage project in Mexico and signed a letter of intent with Brigus Gold
Corp. (TSX:BRD; NYSE.A:BRD). This project has 89,000m of drilling in 342
holes. It's over 4,000 hectares and host to the Campamento
Gold-Silver Deposit. It's got an NI 43-101 compliant resource of more than 1
Moz. gold and 4.4 Moz. silver. There is a lot of
blue-sky potential in this project. I believe Cangold is going to garner a
lot of attention.
TGR: What do you think about VMS Ventures Inc. (TSX.V:VMS)?
RM: I like the team behind it a lot and I think they have some exceptional
properties. VMS made a discovery at Reed Lake. The deposit is 2.55 Mt. at
4.5% copper in the indicated category with potential to grow. VMS joint
ventured this with HudBay Minerals Inc. (TSX:HBM; NYSE:HBM). VMS has a
carried-to-production interest; HudBay is the
operator with 70%. It's a high-grade, near-surface copper deposit and HudBay has a smelter in Flin Flon, Canada. Permitting and prefeasibility are going to
continue through 2011 and a construction decision could happen by year-end.
TGR: Is that a takeover target?
RM: I believe that in the future HudBay is going to
have to look at taking VMS out. The interesting thing is that VMS has a joint
venture with HudBay on Reed Lake and the four
properties that surround it. But it also has an option agreement with HudBay on four properties next door. HudBay
was drilling over there and made a huge discovery 1.8 km. northeast of the
Reed Lake deposit—7.44% copper over 7.18m. HudBay
is now drilling back toward the Reed Lake Mine. VMS is carried for $50M of
expenditures on this option. So, what we've got here on the JV and optioned
properties are very good backstops to what VMS is doing on its 100%-owned
The North Shore Group, which heads up VMS, is experienced and made up of
highly technical explorationists who have made
several recent discoveries. It has $5M worth of drilling lined up on top of
what HudBay is doing. It's a perfect example of
lots of work over the summer and huge news flow coming out in the fall.
Mining Corp. (TSX.V:NOX; OTCPK:NOXGF) is another good example of what to
look for. It has a very good share structure and money in the bank. It has a
joint venture with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK) where Aurizon has to spend $20M to complete 200,000m of
drilling during the next several years. ARZ has three drills working away
NioGold is also working at Siscoe
East with Alexandria
Minerals Corp. (TSX.V:AZX) in a 50/50 joint venture. It is drilling
between two of the highest grade mines ever in the Val d'Or camp, the
Sullivan and the Siscoe.
A fifth rig is drilling right beside Osisko Mining
Corp.'s (TSX:OSK) Canadian Malartic project
They got some early very exciting results on this 100%-owned property and
more assays are pending. NOX is a company with exciting properties, great
management, money in the bank and large drill programs being conducted over
the summer to give shareholders lots of news and increase interest in the
TGR: It certainly seems to fit your investment philosophy.
RM: Definitely. I look for a mine that's going to get bigger or a property
with the propensity to give up discoveries. I'm looking for the strongest
management teams that I can find.
TGR: You believe that gold and silver plays are ultimately going to hold
their value over the long term?
RM: Absolutely and if you look at the companies we talked about today, they
are the kind of companies that you can do due diligence on and feel confident
that you have a management team dedicated to increasing shareholder value
through the drill bit, or acquisitions, and put together a properly managed
exploration and drill program. Investors want to pick these up during market
weakness in the summer doldrums so positions can potentially be sold for a
profit in the fall.
TGR: That seems like sound advice. Thanks, Rick.
RM: You are welcome.
Richard is host of www.Aheadoftheherd.com
and invests in the junior resource sector. His articles have been published
on over 300 websites, including: The Wall Street Journal, SafeHaven,
Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell,
Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe,
Infomine, Huffington Post, Mineweb,
321Gold, Kitco, Gold-Eagle, The Gold/Energy
Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and
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1) Brian Sylvester of The Gold Report conducted this interview. He personally
and/or his family own shares of the following companies mentioned in this
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Talison Lithium Ltd., Great Panther
Silver, Ltd., Brigus Gold Corp., NioGold Mining Corp., Aurizon
Mines Ltd. and Terraco Gold Corp.
3) Richard Mills: I personally and/or my family own shares of the following
companies mentioned in this interview: None. The following companies
mentioned in the interview are sponsors of aheadoftheherd.com: Kootenay Gold
Inc., NioGold Mining Corp., Terraco
Gold Corp., Cangold Limited and VMS Ventures Inc.
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