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Brien Lundin: Look to History to Profit from Gold
Source: Brian Sylvester of The Gold Report (2/14/11)
Gold in the Carolinas? "Absolutely," says Jefferson Financial President and CEO Brien Lundin, who also publishes the Gold Newsletter. It's just one region where historic discoveries, ignored when gold prices were low, are now being re-examined with modern exploration techniques. The results, he says, are promising. Learn more about his take on the economy, the seasonal effect on gold prices and the "frothy" metals market in this exclusive interview with The Gold Report.
Brien Lundin: They have changed a bit. Back then, the investing environment was tough because it was so uncertain. There weren't any clear trends. We didn't know if the economic recovery was really taking hold.
At this point, we've firmly established that the economy is in a fairly steady uptrend. This is good for gold in the long term, though I believe it's a bit bearish for gold in the short term. As the economy rebounds over the long term, we'll see a lot of pent-up monetary pressure unleashed. For example, the Federal Reserve is now holding about $1 trillion in excess bank reserves. Right now, that doesn't count as money; but once the banks begin lending and those reserves are turned into loans, they instantly become currency and have a multiplier effect on the economy. We'll see a resurgence in monetary inflation as the economy rebounds and gets into a higher, more stable rate of growth.
Also, as the economy strengthens, we'll see more intense use of metals and commodities. There will be a wealth effect, which will be good for gold and for the rest of the metals complex, as well. But until we get there, it's a bit negative for gold because investors will perceive strength in the economy as negative for gold, anticipating that the Federal Reserve will begin to hike interest rates.
TGR: In the December/January issue of Gold Newsletter, you said that at $1,380/oz. there was $100–$200 of pure speculation in the gold price. How much pure speculation would there be at $1,300?
BL: Not much. Frankly, I think the decline from $1,420–$1,320/oz. pretty much wiped out a lot of the speculative excess. It blew away a lot of the froth, and we've essentially run out of sellers. Just yesterday I issued an alert saying that gold appeared to be bottoming, but that soon—for some reason yet to be discovered—it would be ready for a rebound. I was thinking in terms of days, not necessarily hours. Come to find out, today [February 3] gold is up $20. I've likened the market, as it stands now, to a stack of dried tinder just looking for a flame. The gold market is looking for a fundamental spark to carry it higher.
TGR: But you see a lot of fundamental support above $1,300/oz.
BL: Absolutely. I think we have strong resistance in the $1,320/oz. area. That's been established by previous corrections. I doubt there's more than another $50 of downside in gold from these levels. There really isn't much speculative fervor left in the market and not many sellers either.
TGR: How cautious should investors be about the emerging rebound in the U.S.?
BL: We've learned that anything can happen. The economic rebound, as it stands now, is not rock solid. It's vulnerable to a number of exogenous shocks, globally and internally. But I don't think we have the potential for a credit crunch like the one we saw in 2008. The Fed has demonstrated to the markets that it won't allow that. If anything resembling such a situation occurs again, I think the resulting flow of money from the Fed, and the Fed's track record from the last go-around, would lead to tremendous investment in gold.
TGR: Of all the ways the economy could go from here, what is the best- and worst-case scenario for gold?
BL: The best case for gold would be to muddle along with a bit of economic bad news here and there. That would signal the Fed's intention to keep loose monetary reins on the economy and continue flooding it with more liquidity. Frankly, I think we probably won't see that.
The worst case for gold over the short term would be major evidence of strong economic growth and a decline in U.S. unemployment. The Fed is watching the unemployment rate like a hawk. That will be the primary determinate of whether it decides to curtail quantitative easing 2 (QE2) and whether it decides to implement a third dose.
TGR: Were you in favor of the tax-cut measures invoked at the end of 2010?
BL: Absolutely. That was necessary for any prospect of an economic rebound. The tax cuts are one of the primary drivers of the strength we are seeing right now. We need these relatively lower tax rates to see some growth in the U.S. Just as importantly, it was necessary to get that question resolved and out of the way. The market hates uncertainty.
TGR: In the February issue of Gold Newsletter you discuss how the Bollinger Bands for gold often predict movements in the gold price. Briefly explain that concept to our readers, please.
BL: I'm not much of a technical analyst, but every now and then I find things that seem to be fairly compelling. This is one of them. Bollinger Bands are the lines that are drawn by, say, one standard deviation above and below a certain moving average. With my good friend Ron Griess at thechartstore.com, I have been tracking this technical indicator for some time. We noticed that when the Bollinger Bands for a moving average for gold start to pinch or tighten, it has historically signaled an impending price breakout. It works in other markets, as well.
In the February newsletter, we featured a 50-day moving average for gold and the associated Bollinger Bands, which began to pinch once again. There are a lot of ways to interpret this, but to me it signals that the market is figuratively coiling like a spring. When this happens, typically, there is a price breakout in one direction or the other. As in any consolidation pattern, that breakout is usually in the direction of the major long-term trend. With gold, especially over the last 10 years, that trend has been up.
TGR: So, when these bands contract, it signals that there could be a price breakout either to the upside or downside.
TGR: You also suggest there is evidence—from both a contrarian and a seasonal gold demand perspective—that gold should break to the upside. Can you talk about those two arguments?
BL: That's a good way to put it. From a contrarian standpoint, the sentiment in the market has fallen severely. Some of the indicators, such as the Hulbert Gold Newsletter Sentiment Index (HGNSI), had dropped considerably recently while gold was still trading at fairly high historical levels. The market was primed, from a contrarian perspective, to rise. It wasn't overbought by any means; if anything, it was oversold. From a sentiment perspective, that was a positive indicator for gold.
From a seasonal standpoint, we're in the midst of the Chinese Lunar New Year celebration as we talk, which historically is a period of strong demand for gold in Asia. We're also entering the Indian wedding season. Typically, springtime is a very positive period for physical gold demand, and that's usually reflected in the price.
Ron Griess and I were discussing this the other day. He compiled the most comprehensive study of seasonality in gold prices that I've ever seen, and turned up some surprises. Looking at the average one-month percentage rise or fall in the gold price from 1968–2010, we see that January and February are strong months, as are April and May. I was surprised to see that March is typically a down month for gold. Summer is slow, as we know, and it perks up in August. The best month of the year, on average, has actually been September.
TGR: Let's look now at some companies that may be able to capitalize on this potential movement upward. This month you recommended a junior with a gold play in North Carolina. Could you share that pick with our readers?
BL: I've recommended companies all over the world, but never one in the Carolinas. I was really unfamiliar with the area from a geological standpoint; but when I looked into it, I discovered a historic gold-mining district going back to the early 1800s. The problem has been fractured land ownership. There aren't huge slabs of land available for the taking. It takes a lot of legwork and luck to assemble property positions, and now some companies have done this. Romarco Minerals Inc. (TSX.V:R) has done it in recent years, and made a 4.5 million-ounce (Moz.) discovery there.
TGR: With the Haile Gold Deposit in South Carolina, correct?
BL: Right. The company that I just recommended, Revolution Resources Corp. (TSX:RV), assembled a patchwork of individual land ownership into a leasehold that's fairly extensive and covers some historic discoveries. Now it's going back to confirm those discoveries with modern exploration methods. The company is getting good news—much better results than it expected.
TGR: The property had been examined by Noranda Inc. before, right?
BL: Yes, from 1989–1992. Noranda did about 3,000 meters of drilling and 23 drill holes. It got good results, but gold prices were low at the time—and falling. The company stopped work and it lay fallow until Revolution came in.
TGR: What makes this project—Champion Hills—worthy of a Brien Lundin recommendation?
BL: To earn my recommendation you have to have a couple of things: 1) A fairly low valuation starting out; and 2) A very large, world-class target. Revolution has both. The management team is also critical. I'm very bullish on this management team; it includes Michael Williams, who founded Underworld and started the whole Yukon gold rush. It also includes Rob McLeod. To my mind, there's not a smarter geologist out there.
TGR: And Aaron Keay, who has the pull on the street to get the financing together.
BL: He really does. Aaron arranged $9 million in financing for Revolution, and it is well financed to explore the project for a couple of years. It's gotten wonderful drill results. The trend right now is about 3 km., and they're just scratching the surface of the project's potential. I see this project as having world-class potential, perhaps even rivaling what Romarco uncovered.
TGR: What sort of news should we look for from Revolution in 2011?
BL: The best sort of news for a mining stock speculator is drill results. The company's going to deliver a good bit of that to the market. Its next phase of exploration will encompass another 5,000m of drilling and another 22 drill holes. You're going to get a steady diet of drill results—it's a project that can operate 12 months a year. Nothing is going to slow this company down.
TGR: Let's continue talking about new names involved in old plays or new districts. What names fit those criteria?
BL: Right now, I'm very positive on Treasury Metals Inc. (TSX:TML). The company's got a bit over 1 Moz. gold at its Goliath Gold Project in Ontario. It's going back to a previous discovery with new geological ideas and new funding. These are projects that weren't working back when gold prices were much lower. Now Treasury is applying more advanced methods of exploration and development in a new environment for gold prices. It's taken a fairly high-grade project, added in lower-grade surface resources and come up with a gold resource that's over 1 Moz. at this point. The company is very well funded and has a great management team.
What's been particularly interesting to me is that the play is in the Kenora Gold District, which hasn't been as widely followed or developed as others in Ontario and in Canada at large. There are more than 20 companies and individual groups exploring in the Kenora area. Treasury has a central location, it will have central facilities and it has the largest resource. That makes it the natural choice to consolidate the entire district—and that's actually in its business plan.
TGR: You talked about Treasury's management, which has seen some changes. Scott Jobin-Bevans was president and CEO. The company hired Martin Walters, who's got a pretty good reputation, and brought in another vice president of exploration. What do you know about those changes?
BL: I've been a big supporter of Scott. I know him very well and he's taken the company a good ways. I think that the exploration and management teams are very impressive, and I think the financial and investment teams behind the company are just as impressive. Some very powerful interests in the mining industry are behind this company—people who can see the big picture and know how to go after large goals. As I've said, the consolidation of that district is a big goal and I think Treasury has the expertise and the support to reach it.
TGR: One of those names is Sheldon Inwentash at Pinetree Capital Ltd. (TSX:PNP).
BL: Yes and Marc Henderson is very big behind the company, as well.
TGR: What should we look for from Treasury this year?
BL: We're looking for drill results, plus some refinement to the preliminary economic analysis (PEA). The original economic report was very conservative, so there's tremendous scope to improve those numbers. Of course, the gold price will go a long way toward improving the economics of this and every other gold project. I think the market is starting to recognize this as a project that is going into production a bit quicker than previously assumed.
TGR: Could we see a revised resource estimate by year-end?
BL: It's certainly possible, given that one goal of the current drill program is to upgrade the resources. The company's trying to not only expand the global resource, but also upgrade its very sizeable inferred resources. That demonstrates to the market how serious Treasury is about progressing toward production.
TGR: What other companies are you bullish on heading into 2011?
BL: We're fairly confident about strong economic growth in Asia and robust demand for commodities. Copper has been a big star recently.
Some of our copper plays have done spectacularly well, one of them being Hana Mining Ltd. (TSX.V:HMG). It recently reached a high of around $5.50/share, then went back into the low $4 range; now, it's making an assault on its previous highs. We were, I think, the only newsletter to follow Hana Mining and recommend it. Our readers had a 15-fold gain in that recommendation.
Now another company has been spun out of Hana, called New Hana Copper Mining Ltd. (TSX.V:HML). New Hana's property is also in Botswana, adjoining Hana's Ghanzi property. The geology and geophysics are identical. It's still early, but a number of people are betting that this company will end up having a deposit of similar size to Hana Mining's Ghanzi deposit, which is an enormous, world-class copper and silver deposit. New Hana is actually a bit highly priced and a bit overvalued, in my view, for what it has. The company's trading around $1/share right now, but I anticipate that the release of a private placement that was done in early December 2010 may change things. In early April, the stock will become free trading. I see that as a potential entry point.
TGR: Did some of the management team come over from Hana to New Hana?
BL: Hana Mining President Marek Kreczmer is steering the ship at New Hana, as well. That's an example of one of the things I recommend companies do: When you have a major project that is the linchpin for all the market value, you might as well take the other projects that aren't getting as much value and spin them out into other publicly traded vehicles. That gives shareholders another bang for their buck.
TGR: It's certainly a pretty frothy market for copper, which recently hit $10,000/ton.
BL: Copper is trading at record levels. Although I'm very positive on copper prices for the long term, I am concerned about some overexuberance in the market right now.
TGR: So, temper that enthusiasm and wait on New Hana in April.
BL: Right. One of the early stage companies I like is Tintina Gold Resources (TSX.V:TAU). It has a very exciting copper project in Montana called the Sheep Creek Copper Property. This is another property that had historic results that it's going back to confirm. The company is drilling off pods of mineralization that are high grade, shallow and fairly small in terms of tonnage—but also fairly large in pounds of copper, thanks to the high grades. The interesting thing is that, if they are developed, they'll be high-grade underground copper mines. All the economics and the grades look very conducive to development. Tintina is going to advance toward development very rapidly. I don't think the market has really appreciated the company's potential at this stage.
TGR: Is there gold in that mineralization, or is it strictly copper at Sheep Creek?
BL: It's really a copper/cobalt project with some silver credits that could be sold off in advance to help fund the project's development. But the company also has some other interesting gold and base metals projects, which it's in the process of spinning out into a separate company or companies. In other words, this is another instance where investors may again have a chance to get a couple of different plays—or different lottery tickets, if you will—out of one stock investment.
The chairman of Tintina Gold is Rick Van Nieuwenhuyse. He's also the chairman and CEO of NovaGold Resources Inc. (TSX:NG; NYSE.A:NG). As you can imagine, the company has some very strong shareholders.
TGR: Rick has done a great job of developing a world-class gold deposit at Donlin Creek in Alaska, but Montana isn't very friendly to gold mining. How friendly is it to copper mining?
BL: I'd be worried about that, too, if we were talking about the kind of project that would scar the landscape. But you're dealing with private landowners here. You're dealing with a project that would be an underground, high-grade mine with little surface disturbance. I don't anticipate it being a problem.
TGR: Good to know. Can you give us one more name before we say goodbye?
BL: I like Gold Standard Ventures Corp. (TSX.V:GV; OTCQX:GDVXF), which has the Railroad Project in Nevada just south of the Rain Mine Project. It tied up a fairly large property position with some historic resources in the Rain District and just to the south. Vice President of Exploration Dave Mathewson was a former head of exploration for Newmont in Nevada. He developed the Rain model and discovered several deposits in the Rain District. Gold Standard's management was able to secure its property position through some creative negotiation and, frankly, some good luck. Then they brought in Mathewson to apply his expertise.
Mathewson was looking for the right rock packages in the area, and the company hit those in its first drill holes this year. It didn't get results that really pleased the market; they were fairly low grade. But the fact that it was able to hit gold intersections of, say, sub-1 g/t or around 1 g/t, over significant intersections in the right rock packages was a resounding technical success.
Right now, Gold Standard is vectoring in its drilling, closing into the projected higher-grade mineralization. It's getting stronger and stronger results. This is a sleeper stock because the market doesn't appreciate its technical success. There's a very good chance that Gold Standard could uncover one of those really large-scale, world-class Nevada gold deposits that the market's always looking for.
TGR: Given the number of other players in that market, is there a chance that Gold Standard could be taken over if it finds something significant?
BL: Oh, absolutely. Although Gold Standard would never say this, in my mind, if it made a discovery on the order of the Rain Deposit, there's little chance it would be the company to develop the deposit.
TGR: Could you leave us with some thoughts on what's happening in the gold market, and what people should expect over the next three to five months?
BL: I think that 2011 is likely to shape up as a very typical year for gold. We're quite likely to see early seasonal strength this spring, but this will probably be another "Sell in May, Go Away" year. Later this year, as we begin to see more positive economic data in the U.S., that news will weigh heavily on gold. We'll probably have a decline going into June and July, but I think we'll see signs of growing price inflation ahead of rising interest rates by the fall. Essentially, I think it's a case of play the market in the spring, get ready for a soft patch in the early to mid-summer and make sure you're positioned in early August for what should be a very profitable fall.
TGR: Excellent, Brien. Thank you for your time.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Brien publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971; he digs into not only small caps of every type but also macroeconomics and geopolitical issues that ultimately affect every resource investor. Brien also hosts the New Orleans Investment Conference, the oldest and most-respected investment event of its kind that, each year, gathers together the giants of investing, economics and geopolitics.
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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 interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Revolution Resources, Treasury Metals, NovaGold Resources, Pinetree Capital and Gold Standard Ventures.
3) Brien Lundin: I personally and/or my family own shares of the following companies mentioned in this interview: New Hana Copper Mining Ltd. and Tintina Gold. I personally and/or my family am paid by the following companies mentioned in this interview: None.