The Gold Report: Last November, you talked about indicators you use to make investment decisions, mentioning the S&P 500, the PHLX Gold/Silver Sector Index (XAU:NASDAQ), the AMEX Gold BUGS Index (HUI:NYSE) and the TSX Venture Exchange. You recently predicted junior explorer stocks would stay low over the summer before recovering, along with the commodity price. What indicators are behind that, and do you foresee a dramatic rise or a gradual slope?
Ron Struthers: We have seen a downward correction in the market space, a deflation scare because of Europe, and that has been the theme for some time—a battle between deflation and inflation—while central banks print money to make up for a contraction in money because of imploding debt and slowing economies. But everything has corrected substantially; the senior gold stocks bottomed in May, and since then, gold has gone sideways. Gold stocks and the S&P 500 have rallied, but we've only seen part of a potential summer rise so far. Now the S&P 500 is at 1,400 and the high before the correction was 1,420. There will be substantial resistance, but the S&P 500 should rise above that.
On the correction, the S&P held its 200-day moving average and bounced off, forming pretty close to a perfect doji star reversal pattern. That's a strong candlestick indicator of a major bottom. With gold stocks measured by the AMEX Gold BUGS Index, we've seen the same doji star reversal pattern (that is a dark, down candle in a downtrend, followed the next day by a doji cross indicating indecision and the third day a long up or white candle); thus the predicted bottom during the early summer. A nice rally went into mid-June, came back down in mid-July and then bottomed close to the May bottom but above it, which makes sense, since the doji star reversal pattern indicates a bottom. The July lows were close enough for a double-bottom, meaning we have a strong base to rise from.
I closely watch the old Reuters Commodity Index, referred to as the Reuters
Meanwhile, while some say the commodity bull market is over, we are really seeing a correction in the continued bull market. The new CRB index has gotten nowhere close to its 2008 high, but the true measure of commodities, the CCI , reached well above the 2008 high of about 600. It fell back to 600 in late 2010 and went to a new high of almost 700 in 2011. The higher inflation scenario from excess money printing is alive and well.
Short term, both commodity indexes bottomed in May, and are moving steadily higher. The old CCI bounced off 500; now it is at 563, and it was 566 a few weeks ago. The bottom stands mainly because agriculture prices won't come down anytime soon, but there has been a strong correlation between both the CRB and CCI indices and the TSX Venture Index going back to 2008. We have seen a substantial rally in the CRB, so the TSX Venture should soon follow, and the move will be dramatic because the gold stocks and juniors are so depressed. They have not seen such low valuations since the 2008–2009 bottom, when there was severe panic in the market. We had an average gain of 155% in 2009 with gold stocks in my newsletter. I see the same opportunity now for late 2012 and 2013.
TGR: So this could be a sharp jump instead of a gradual increase?
RS: We could see a strong move over a six-month period, which most would consider short term.
TGR: How can you tell the difference between a correction and a turn toward a bear?
RS: I watch for several things in the long term. To be termed a bear, it should break substantially below a previous long-term low. The S&P 500 held above its 200-day moving average, so it didn't get into bear territory. You might call gold stocks a short-term bear market—the correction is about nine-months long. However, we have not broken down below the early 2010 low where the 2010–2011 rally started, so long term on a 5- or 10-year chart, we have not seen a lower low.
TGR: What impact could the presidential election have?
RS: Elections are not a factor. Whoever is elected will work for Wall Street and the big investment banks. There may be short-term reactions, but we will continue our course, with artificially low interest rates, quantitative easing and money printing until the bond market cracks and interest rates rise. The U.S. debt is bigger than Europe's; it just has not received the same attention.
"Gold stocks and the S&P 500 have rallied, but we've only seen part of a potential summer rise so far."
In addition, the Federal Reserve will probably hold off quantitative easing (QE) until after the election. It wants to maintain the illusion of being unbiased and doesn't want to be seen as affecting the election. After its September meeting, something could change; it could argue that changes won't have an effect until after the election, but for now, it will stay the course and use the QE3 when they really have to—after the election.
TGR: You say it is easy to outmaneuver automatic trading systems. Does that impact the junior market, where volumes are lower and volatility can be affected?
RS: It is surprising that computer trading has entered the smallest juniors, even the thinly traded nickel and dime stocks, but computer trading is taking advantage of their volatility. With these little stocks, the programs look for ways to come between the buy and the sell and skim pennies. It sounds like nothing, but it is happening with thousands of stocks daily. Computer trading is also active in the higher priced juniors with more volume, trading between $0.50 and a few dollars a share; you will also see this with the huge amount of 100-share trades.
Something else happens with computers, but is attributed less often to automatic trading: that is severely shorting the junior gold stocks. In the past, we have seen short trading on the senior and midtier gold stocks, but now we see a lot of shorting on junior producers, too. For instance, New Gold Inc. (NGD:TSX; NGD:NYSE.A) has 10% of its stock shorted, and Argonaut Gold Inc. (AR:TSX) has 14%. We never would have imagined that in the past, so I am closely watching the short positions. Strangely, most of the short positions came at the bottom of the market in May /June, so it won't take much to put them underwater, and short covering could add fuel to a rally.
There has been a big increase in computer trading; there are more professional traders in the market and fewer retail investors. There are also more exchange-traded funds that hedge in a lot of these stocks. With the extensive shorting, we are either seeing intervention in the gold stocks or the reflection of strong beliefs that the gold bull market is over. However, in the latter case, they will be proven wrong, and that is why short covering could be substantial.
TGR: Last year you were liquidating your portfolio, based in part on the jump in the price in silver, and by extension, gold. Silver is now at $28/ounce (oz) and gold is still around $1,600/oz. How are you adjusting your portfolio to fit this new reality?
RS: Gold and silver often rally together and both are in short physical supply and highly leveraged—the same ounce of gold or silver has been sold 50–100 times. We are in a currency war. Countries are fighting to keep the fast-moving money in their currency to prop up their huge debt loads; gold and silver are competing currencies.
The U.S. has intervened to keep interest rates low, trying to keep the system afloat and intervening to keep the stock market up, but commodities and gold lower. Europe is doing the same thing. Meanwhile, a lot of Eastern countries, with huge U.S. dollar and euro reserves, are trying to diversify out of these debt-ridden currencies into other currencies, including gold. Every month we see news of mostly Eastern central banks—including India, China, Russia, and Korea, etc.—buying gold. Physical gold is in short supply, but they know the price is being held down with intervention in the paper commodities market. We are seeing a continuous flow of gold from the West to the East, the same thing that sparked the big rally in the late 1970s to 1980. This will happen again; it just depends on when the West does not want to give up any more physical gold to the East, at least at these prices. In that case, we will soon see gold move easily above $2,000/oz, taking silver higher with it.
TGR: How high could silver go?
RS: It will hit resistance at $50/oz again, but eventually it will break through. If that does not happen on this next rally, it will on the next one. We are speaking in dollar-inflated terms; $50/oz was the high from 1980, and we still are not above that, but gold has gone up well above the 1980 high of about $850/oz.
TGR: What percentage of your portfolio do you have in cash versus stocks, and juniors versus mid and large caps?
RS: It has been about the same since 2008, adjusted a bit here and there, but we keep about 20% in physical gold and silver, keep cash up around 30% because of uncertain times, and then keep about another 15–20% in good dividend stocks. With the low interest rates, some good dividend interest is great. These dividend companies have served as pillars of strength in our portfolio during this period. I devised what I call a Millennium index of dividend stocks we use to invest here. The last 30% or so we invest in gold stocks, mining and energy stocks.
TGR: Are you looking mainly at gold juniors or producers?
RS: I have a mixture. I have about 20% in the senior and midtier golds. There is a lot of leverage in the junior producers and advanced juniors, so I have about 25% in small and emerging producers and another 20% in advanced. We put about 15% into the small exploration plays that seem promising and 20% into some of the energy stocks—I call them energy and cleantech, but they can involve some of the other areas, like graphite.
TGR: You talked about the leverage available in the juniors—what are some of the junior companies that could be successful in the macroeconomic environment we've just discussed?
RS: Right now I'm looking at the juniors with a good share structure that can finance when the market improves, ones with good gold deposits and resources and ample cash, and there's a lot of potential takeovers as well. I'm also looking at ones moving into production. Urastar Gold Corp. (URS:TSX.V; URNRF:OTCQX) is in play. The company is hitting good drill results. Urastar is surrounded by Alamos Gold Inc. (AGI:TSX) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), and both companies would like the ground to add to their deposits.
"Right now I'm looking at the juniors with a good share structure that can finance when the market improves."
TGR: So you like Urastar because it is a takeover candidate?
RS: Yes. Even though it really does not have a resource yet, a lot of these large companies are loaded with cash, and the juniors are priced so cheaply that you will see mergers and buyouts just based on strategic landholdings.
TGR: Urastar is trading at about $0.40/share. Do you see any takeover bids going much higher than that?
RS: It wouldn't be much higher in today's market, maybe $0.45–0.50/share. And potentially you could have two companies go for that. However, I couldn't see it going much higher than $0.55–0.60/share, given where it is in exploration.
TGR: What other companies do you like?
RS: Canaco Resources Inc. (CAN:TSX.V) has a million-ounce gold resource and a large land position it hasn't explored yet. The company was trading under cash value at $95 million (M) at the end of May. This allows it to compete and buy out some of the other cheap juniors, too.
Roxgold Inc. (ROG:TSX.V) has a lot of cash on hand. The company is getting good drill results and is still going on what will be a good-sized and high grade deposit in West Africa.
TGR: Roxgold is down quite a bit from where it was even a month ago. Do you see any catalysts that would take it higher?
RS: There has been a bit of a positioning battle there with current shareholders—perhaps wait on it a bit longer. However, that seems to be concluding, as it sorts itself out with a good outcome, getting some new people, and then getting back to business. Roxgold has a good gold discovery, and it seems there are always battles when there's a good gold discovery. Thus, in one sense the battle is a good sign.
TGR: It has a large number of drill results expected in the next couple of months, correct?
RS: Yes; the company still has six drill rigs turning—it is pretty actively drilling. In time, we should see a continuous flow of drill news and updated resource numbers.
Levon Resources Ltd. (LVN:TSX.V; L09:FSE; LVNVF:OTC) has a large polymetallic discovery in Mexico. It's up to 360 million ounces (Moz) silver and 1 Moz gold with lead and zinc. The company has lots of cash as well, with $56M. Levon is another company that fits the criteria.
A new producer is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.A; GV6:FSE). The company is restarting silver production at its Avino mine in Mexico. It also has ample cash and soon will have the cash flow and earnings from mining. The mine was profitable in the past at low metal prices. While costs are higher now, it has electrical grid power for the first time, the grid power to the mine should help costs.
A cheaper one is Majescor Resources Inc. (MJX:TSX.V), with a substantial copper-gold-silver discovery in Haiti. Haiti is not well known for exploration, but it's well known enough that the company's ground is surrounded by Newmont Mining Corp. (NEM:NYSE) and it has a large exploration budget there as well.
TGR: Could Majescor be a takeover target as well?
RS: Eventually Newmont could take over, unless Majescor can make a large enough discovery to bring another major in. But Majescor is really on the same trend as Barrick Gold Corp. (ABX:TSX; ABX:NYSE), which made a discovery across the border at Pueblo Viejo in the Dominican Republic. That is more than 25 Moz gold, so that is the potential in this mineral belt shared by the Dominican and Haiti. It is getting good results.
"Many exchange-traded funds and gold are so leveraged that I am worried a lot of people have ended up paying for the same gold ounce."
Another cheap one is Zonte Metals Inc. (ZON:TSX.V). It is under $0.10/share, but only 20 million shares out, so the market cap is only $1–2M. The company has strong management experience at Linear Gold Corp. (LRR:TSX), Paramount Gold and Silver Corp. (PZG:TSX; PZG:NYSE.A) and Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE). Interestingly, Zonte has discovered Carlin-style gold mineralization in Newfoundland hosted in a porous shale-type rock. If future drilling proves a deposit, Zonte won't only have a deposit; its large land position means owning a whole Carlin-type trend. I also expect Zonte to take advantage of this market and make some acquisitions of projects or properties, not necessarily other companies. Because of the market situation, vendors are trying to sell all kinds of properties and projects, so it is a very good time for companies to acquire these. Companies can get far better deals for their money and shares than they could six to nine months ago.
TGR: They just have to have the money to buy them.
RS: Prices have come down so much, companies don't need a lot of money. They can set up deals where they put a little bit down up front and much more down the road if they find something. There are plenty of good projects out there that are at bargain prices.
TGR: Do you like any companies working domestically?
RS: I follow a number in Nevada, definitely a well-known jurisdiction. Asher Resources Corp. (ACN:TSX.V), a junior, has a really nice exploration property there called the King project, with a well-defined gold zone on surface and with old adits. Surprisingly it has never seen a drill. Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX) has quite a good discovery at the old Atlanta mine in Nevada, with over 500,000 ounces now and that can easily be multiplied with more drilling. I also follow Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) in Nevada; now it is up to 2–3 Moz. It was able to snatch a bunch of claims from Coeur d'Alene's Rochester mine last year that Coeur let lapse by mistake, so there are plenty of good domestic companies. Another one is Otis Gold Corp.'s (OOO:TSX; OGLDF:OTCBB) Kilgore project in Idaho. I think that its stock is beaten down to a dime, and it has a good gold resource close to 1 Moz now.
TGR: So what advice would you give an investor who wonders what to do going into the fall?
RS: Always diversify. Returning to my portfolio weightings: keep a good cash cushion because if you don't have cash, you don't want to sell at potentially depressed prices to raise it. Keep 20% in physical gold and silver—you know you have it in your possession—or something like the Central Fund of Canada (CEF:NYSE; CEF.U:TSX), which has been around a while and is audited, so you know the gold it is actually there. Many exchange-traded funds and gold are so leveraged that I am worried a lot of people have ended up paying for the same gold ounce, and you don't want to be one of them if the financial system falls apart further.
Dividend stocks are also a good idea; it is nice to have income coming into your portfolio. The rest should be in some gold stocks, the juniors, but again—diversify. It is good to own 10–15 stocks in that sector, since it can be volatile, especially on the exploration side. You can lose money in some, but if you hit it big in just one or two others, your portfolio's still up substantially.
TGR: Thanks for your insights.
Ron Struthers, editor of Struthers' Resource Stock Report, retired at an early age from IBM, where he spent many years in customer service and as a systems, business and inventory analyst. He began the Struthers' Resource/Tech Stock Report almost 20 years ago. The report covers senior and junior companies with ample trading liquidity. Since 2000, $1,000 invested in Struthers' Model Portfolio ended 2011 at $9,244, $1,000 in Struthers Newsletter Stocks ended at $22,270 and $1,000 in Struther's Millennium Index, started in 2003, was worth $3,884 at the end of 2011.
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1) JT Long of The Gold Report conducted this interview. She personally and/or her 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: Argonaut Gold Inc., Urastar Gold Corp., Roxgold Inc., Majescor Resources Inc., Evolving Gold Corp. and Rye Patch Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ron Struthers: I personally and/or my family own shares of the following companies mentioned in this interview: Levon Resources Ltd., Avino Silver & Gold Mines Ltd., Zonte Metals Inc., Asher Resources Corp., Urastar Gold Corp., Otis Gold Corp, Majescor Resources Inc. and New Gold Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.