When gold escapes the pork belly trap
TGR: The market seems hyper-focused on every twitch from the Federal Reserve and what it plans to do about interest rates. Brien Lundin recently said an interest rate increase is already priced in, and the actual event could be a good thing for gold because people can put that behind them. Do you agree with that?
LJ: The Fed may raise rates by some nominal amount, just so it has the option to lower them again later. Brien's right that that's largely been priced in, but the reality often comes as a shock to those who don't believe it. Even a nominal change can have dramatic results. There are so many fragile points around the global economy today. Any jolt can cause follow-on crashes, collapses—all the volatility we have come to know and love since 2008.
I understand why some investors are largely in cash right now. I can't blame them. But people going long things that do well in a crisis—like gold—are playing it smart. They should not panic: hold on. People who want to make new speculations need to be sure they know which way the Fed will go to go to place a bet. My general advice is to wait and see what happens. If you are absolutely convinced you know what the Fed is going to do, there might be some interesting options you can try, but don't kid yourself about the nature of your gamble. For most investors, that's just not wise.
TGR: If, as Rick Rule has said, we are getting close to capitulation and the metals prices will soon start to turn up again, what companies will benefit first—the majors, the junior producers, the explorers?
LJ: The majors are always the first line, the go-to money, when gold starts to shine. They are also, however, the least responsive. It takes a lot more to move a company with a $10 billion market cap 10% than one valued at $10 million, let alone double. But a highly prospective junior that has a rich discovery can easily move by that much just because of a turn in sentiment.
TGR: Is that true with both the explorers and the smaller producers?
LJ: The junior producers will benefit first along with the development stories. These are the people who have already made a discovery and are advancing toward production, or they've already gone into production and margins are high enough to endure the downturn. Those are the companies that will be best positioned when the market turns, the first magnets for new money coming back into the market.
That said, if you really want to buy low and sell high, the maximum leverage you can get is if you invest before a discovery is made. To do that, you have to follow the competent prospect generators who have, can and will come up with the next discoveries. Those stocks will not be the first to respond to a market rebound, but for people who want absolute maximum gain, they offer the highest leverage with the best risk mitigation possible.
TGR: Is there a prospect generator that would be a good example of this strategy?
LJ: Renaissance Gold Inc. is Ron Parratt's team. He's been a multiple winner for us in the past. The company spun out of AuEx Ventures Inc. and has projects in Nevada and Utah.
I also like Almaden Minerals Ltd.'s spinout, Almadex Minerals Inc. The original company has made a big discovery and now the same team is tasked with exploration on some 20 projects in Mexico, Nevada and Southern British Columbia.
Both of these teams are very strong. Both are stories that the market is yawning at right now, but if you believe in backing the jockey and not just the horse, these people deserve your attention.