Tsunami Insurance: Greg McCoach on Financial Catastrophes and Outlook for Commodities
Source: The Energy Report††(9/2/08)
In this exclusive interview with The Energy Report, Greg McCoach, bullion dealer and author, Mining Speculator newsletter, forecasts a maelstrom of financial catastrophes with the potential to cripple the U.S. economy. While most Americans are clueless about the impending meltdown, investors in mining stocks, including uranium, could soon realize explosive growth.
The Energy Report: Not long ago we talked about gold being on the verge of a big upside move, the last opportunity to pick it up for under $1,000. What happened?
Greg McCoach: Thatís right, I did expect at the time that we were getting ready for the next big move in gold. The financial hell-storm that I believe is about to hit the financial markets was the reason I said that. When the bad news regarding Fannie Mae and Freddie Mac hit in July, gold began to rise rapidly and hit the $980 level before leveling off. This move in gold was premature to the bigger events that will soon be unfolding and taking gold to the next new high.
GM: I think the Fed is propping up the dollar in preparation for the financial tsunami thatís about to strike. This would explain why the dollar made an unexpected leap of 5% in the last two weeks, and why gold isnít moving as expected.
TER: Why would the Fed want to do that now?
GM: Because they know the dollar will be hammered as the bad news continues to come out regarding the collapse of various financial firms. We know that several major banks are in trouble, including Bank of America, Wachovia, Washington Mutual, and CitiGroup, to name a few. In addition, Lehman Brothers, Merrill Lynch and Morgan Stanley also appear to be in severe financial stress. The Fed, knowing they have a massive wave of financial stress that is about to hit the system, are trying to brace for the impact. They have propped up the dollar with the help of other central banks around the world in preparation for what is coming.
TER: The Fed is trying to prop the dollar up, yet the markets say itís headed down.
GM: Right. We've been hearing that the dollar is going to get stronger for five years now. All these people try to talk the dollar up, and what happens? It stays up for a couple of days, weeks, maybe a month and then it goes lower than before.
The 70 benchmark on the U.S. dollar index is an extremely critical level. They are doing everything they can to keep the dollar from sinking below this number. Because if it does, you would see a massive exit from the dollar worldwide, and it would take the dollar to, say 50 or 60. That would be very, very painful for the U.S. When the dollar dips below 70, gold will start moving up. Weíll start having $100-up days. There will be huge moves in gold and silver prices, as free-market forces overcome the many games that are being played in the paper markets of gold and silver.
TER: When investors give up on the dollar, will they turn to the euro?
GM: Youíll see a lot of flip-flopping from one currency to another, but ultimately investors will realize that all currencies are in trouble. Why? Individual debt loads, federal and state government debt loads, financial institutions debt loads. Thereís trouble everywhere you look and I think itís going to implode.
Here are a few examples of whatís in store. New York and Maryland are both suing Merrill Lynch and Citigroup, the institutions that sold them all this worthless paper for their pension funds. Iím sure more lawsuits are coming, and theyíre going to cause big problems as they ripple through the system.
Then thereís the mortgage situation. According to the latest figures, 70% of people who have purchased homes in America since 2003 canít sell their houses for what they owe on them. Thatís unprecedented. In 2.8% of the foreclosures, people are dropping the keys off at the bank and walking away. This situation is only going to get worse.
TER: It sounds as if youíre predicting a major financial disaster, but good news for gold and silver.
GM: I believe our financial system is in very deep trouble. And I think deflation is at the heart of it. Plunging asset values mean deflation is getting the upper hand and that means that the titans of U.S. finance are on the verge of systemic cross-defaulting. If this happens, it will precipitate an avalanche of U.S. bankruptcies Ė the tsunami, if you will. The general public doesn't have a clue. Those of us who understand the signs are running for the hills.
As far as gold and silver, frankly, Iíd rather see more stability. I liked the way gold was moving up, hitting a new high every year and then correcting back 10% to 15%, settling into a choppy, boring trading range, and then suddenly running up to the next new high. The volatility weíre seeing now is frightening. Something is clearly wrong, and I do believe itís going to lead to explosive moves in the precious metals.
TER: Thereís a lot of talk about how much money the Fed is going to have to create, and how thatís going to be highly inflationary. Whatís your take on this?
GM: I see this differently. In this deflationary economy, money is being destroyed; itís being taken out of the system. When the Fed creates money out of thin air to bail out all these financial institutions, it's just replacing money thatís been destroyed. That is not inflationary. However, if this trend continues, it will lead to hyper-inflation, because foreigner investors will look at the mess weíve created here and dump their dollars and T-bills. For now, I think foreign investors and central banks are colluding to help the U.S. get through this most recent wave of defaults. Eventually, there will be a rush from one currency to another, until people finally realize that the only currency of real value is gold. When that happens, weíre going to see shocking things here and around the world.
TER: What do you recommend investors do in this environment?
GM: Iíve been saying hold mining stocks because I donít think theyíve bottomed out yet. We may almost be there. The guidelines I use are the physical gold price-over-the XAU or the physical gold price-over-the-HUI. As for spot metal prices, I think we have bottomed out and are on our way to higher levels.
As the summer doldrums end and the big traders come back, I think the precious metals will lead the way, and mining shares will follow. This is probably the best buying opportunity weíve seen in the junior mining sector in the last five or six years.
TER: Can you give us an example of a good buy in that sector?
GM: Baja Mining Corp. (TSX:BAJ) is a fully permitted, fully financed resource stock thatís going to become a mine. Itís in Mexico, which is a favorable environment where I like to invest. The development costs are reasonable, but it doesnít have a precious metals componentóitís a copper and cobalt mine. But at 86 cents, this is a ridiculous value. I donít cover Baja in my newsletter right now, but it is a stock I am accumulating personally. Itís going to have a good upside at some point.
TER: Any others?
GM: Acadian Gold Corp. (TSX:ADA) had a bad second quarter because of a once-in-100-year rain event that caused the company to shut everything down. Could it happen again? Sure, but the problem has been fixed. For now, weíre in the slow seasonal period for base metals such as zinc and lead, which is what Acadian mines. The stock is trading at around 20 cents ó another ridiculous value. The companyís market cap is lower than the value of its Scotia mill equipment Ė which means all the gold properties come for free. This is a producer that has cash flow. They have in excess of 1.5 million gold ounces that are 43-101-compliant. They also have a near-term production scenario with advanced-stage properties moving towards permitting.
TER: The last time we talked you mentioned Uranium Energy Corp. (AMEX:UEC). Hayward Securities came out with a buy today. What do you think about that?
GM: Very few of us are still excited about this sector. Itís been bludgeoned. I mean some of these stocks are just going no bid; they actually make other junior mining stocks in the precious metals and base metals look fairly attractive. Uranium is dead at the moment.
That said, if you do have any interest or are a contrarian, this could be the bottom. I think this is one company in the uranium sector that you may want to take a hard look at. The number of uranium companies is diminishing very quickly because of an inability to raise funds in these tightened credit markets. For years Iíve said thereís probably only a handful of junior mining exploration companies that are worth the investment. I think the best are those with properties in the U.S. that are what we refer to as ISR (in situ recovery).
TER: Can you elaborate on what you mean by ISR?
GM: It means you donít have to dig an open pit or build an underground mine to access the uranium. These companies simply flush water through the mineralized system in order to extract the uranium.
TER: Donít they use cyanide as well?
GM: No. There are some other things you also need, but theyíre all very friendly to the environment. Essentially it extracts uranium the way Mother Nature deposited it there, which was with water. But itís a very technical process and very few companies have any experience doing it. UEC is one of them. Theyíve done it before and theyíre going to do it again. Theyíre also close to having their projects permitted and could be in production in late 2009.
There are other companies that also have that same signature situation with ISR and are near permitting in the right jurisdictions. I write a uranium letter that highlights these companies, and UEC is the number one company on that list and has been for some time. I think it may be the first company to be permitted in the U.S. with a new uranium mine. With such little production going on in the world, anybody who can bring near-term production in a market like this is a good bet. At some point, the uranium market is going to have to wake up because there is simply not enough production to meet the needs of all the nuclear power plants projected to come on-line. I think weíre looking at a real bull market in uranium when it gets going again. And the companies that will reward investors the most are those with ISR properties that are close to production.
TER: If the juniors look good now, why isnít there more activity?
GM: The smart people will eventually get into this market. But because of deflation, thereís a run to cash. The hedge fund clients have been big participants in the junior mining market. The cost of entry to some of these hedge funds is $10 million. These are people with a lot of money. As we got into the tax season last April, it was apparent that somebody big was selling junior mining shares. Turns out it was the hedge funds because they needed to raise cash. Juniors with no potential for near-term cash flow were sold off first.
Now, the best of the best companies are getting sold because the hedge funds are blowing everything out the door, not just mining stocks. Theyíve got to raise cash because their clients have sent in their redemption notices, and they need to raise a lot of money.
Cash is usually king in a deflationary period in the near term; gold can perform well in either a deflationary scenario or an inflationary scenario. In fact, gold holds its value in a deflationary period better than any other asset class.
TER: Do you think this is just a temporary rough spot for these stocks?
GM: This has been the worst time I can remember in the junior mining stocks since the Bre-X disaster. What we have learned from this chapter in our investing lives is that our junior mining stock prices are sometimes not dependent on what the companies themselves do or don't do. In the past seven months, the cause of our pain came mostly from a macro liquidity problem, not a micro issue of whether a mining company did or didn't do what they hoped or said they would do.
There are large pools of smart money that have been sitting on the sidelines who are monitoring the situation in the mining sector and are getting ready to pounce on the best values. When they decide to move into this market, the current prices will be a distant memory and we will be onto our next ride higher. As I have said over and over, the volatility will go both ways. As severe as the downside was this time, the next ride up could be a real rocket shot. For most of us who have been badly bruised and battered from the major selloff, that moment can't come soon enough. All of us have seen our junior mining stock portfolios take a major hit. A move to the upside would be a welcome relief for all.
TER: What do you think is the story behind the commodity going down in price when thereís demand that canít be satisfied?
GM: I think the problem is that the producers of the little round gold and silver plugs used to make the gold and silver Eagles simply canít keep up with demand.
TER: So, if you had a client call up who wants to buy $200,000 worth of product, youíre saying you canít get it?
GM: Iíve recently had several large orders. Buyers couldnít get what they wanted, so they opted to get whatever they could. In other cases clients decide to wait and see if the material they want to buy comes in. The problem, however, is that there are very few sellers and a ton of buyers.
TER: So, again, if I wanted to place an order for $200,000 for Swiss Francs, youíre saying you canít get them?
GM: The Swiss Franc is one of the items that are still available. I could get silver Maples by the case. The Canadian Treasury has not suspended operations, and several large depositories are getting huge shipments of Maples. And I was able to get 100-ounce silver bars from a new fabricator in Ohio.
Recently one of the depositories I work with said it was expecting an 800-bar order on Monday morning. When I called mid-morning, 600 bars had already been sold. Bars are flying out the door the day they come in. Usually an order like that would last a couple of weeks at the depository; now, it doesn't even last half a day.
TER: As you say, this makes no sense.
GM: Something is wrong. You canít have low metal prices when demand for the physical metal is so strong. And thereís something else unusual happening. The depositories, which make the market for all the bullion dealers, usually lock in prices so thereís little or no market volatility. They secure their metal through hedging. But now, the hedgers are saying they're not selling metal at these low prices. That means the bullion dealers, if they do get material, are marking it up more than usual.
So, even though weíre seeing very low prices, buyers are not getting the prices they would normally expect. With so little material around, everyoneís trying to maximize their profit on the few items they have left to sell. This could run bullion dealers out of business. Iíve been in this business for 10 years, and I've never seen anything like it.
Greg McCoach is an entrepreneur who has successfully started and run several businesses the past 22 years. For the last eight of these years he has been involved with the precious metals industry as a bullion dealer, investor, and newsletter writer (Mining Speculator). Greg is also the President of AmeriGold, a gold bullion dealer.
Greg's years of business experience and extensive personal contacts in the mining industry provide unique insights that have generated an impressive track record for The Mining Speculator since its inception in 2001. He also spreads his vast knowledge of the precious metals markets in a weekly column for Gold World.