TGR: It seems that economists can plan and recommend, and politicians can negotiate and maneuver, and pundits can analyze and predict all they want, yet when the people don't want to play along, it can all mean nothing. Of course, we're talking about the elections in France and Greece. What's going on?
Leonard Melman: What's going on is that the monetary authorities in Europe have decided that austerity is the only way out of the financial dilemma, which I find kind of amusing, because it is their Keynesian activities that created those policies in the first place. Their decision now is that austerity, which is cutting back government programs, is the only thing that will work. The problem is that the public doesn't want their government benefits cut back. So, the message from the French people was that Nicolas Sarkozy, with his austerity, was no longer their friend and François Hollande, with his promise to end austerity, is now the new President. In Greece it's even more dramatic. Greece has been a funny culture for about 40 years living in a dreamland, thinking that nobody has to work and nobody has to pay taxes, which is sort of their national sport.
TGR: Not paying taxes is a national sport?
LM: It's a high art with the people in Greece. Yet they still expect their government to give them early retirement, generous unemployment benefits, etc. That has been supported for the last 40 years by massive government borrowing. And, that's the reality after this election. The people voted out those politicians who, at least on paper, wanted to cut back the size of government. Now there could be a real crisis directly ahead of us.
TGR: Does that mean the Eurozone is going to blow up?
LM: It's under the strongest threat since its creation 13 years ago. Greece cannot pay its debts. Because of the recent election, the monetary authorities who had been providing Greece with funds can no longer be sure that their program is going to be approved by the Greek government. If that's the case, they may suspend further payments to Greece and Greece will officially begin to default on its debt, which will be a likely cause for expulsion from the Eurozone.
If that happens, all Greek monetary matters will be restored to the previous currency unit, the drachma. Nobody has the foggiest notion of what the drachma will be worth because it's a totally artificial currency to begin with. We are seeing one consequence that has showed up in the market the last couple of days. Many people in Greece are getting scared and are converting their funds primarily into euros and U.S. dollars.
That's one of the reasons why the dollar has become stronger and precious metals have become weaker. It also raises the specter of a true run on banks as people withdraw their euro assets. Lying in the wings are Spain, Portugal, Italy, Ireland, Iceland, etc. In fact, there are nine Eurozone countries that are in recession. So, if the question is could the Eurozone blow up, I think it is a genuine possibility that several nations could be forced out, which would leave the Eurozone in a shambles.
TGR: With all of this bad news, the precious metals markets don't seem to be responding positively. When will they be impacted by this?
LM: For most Europeans, the U.S. remains the financial bastion of the world. So, when Europeans look to convert assets from weakness into strength, they usually look for U.S. government debt paper. Buying that debt paper makes the U.S. dollar stronger and gold and silver weaker in reflection. That will end when the U.S. dollar weakness begins to show itself; then we should have much more positive action in the metals.
TGR: In light of what's happened here recently, what are your expectations now for gold and silver?
LM: The number of people who are losing, or have lost, faith in conventional politicians and economists to guide the world's affairs is growing. As that continues, I believe more and more of their assets will be turned into the precious metals as the haven of last resort. The question is when. In my annual forecast I said, and still believe, that this trend would accelerate throughout the second half of the year, creating pressure for the precious metals to rise dramatically. October, November, December, I believe, will be great months for the precious metals.
TGR: Is it going to take some great catalytic event for this to happen or will it build slowly?
LM: The French and Greek elections could have provided that catalyst although they're talking about another election in Greece within a month. But, this has shown there's a great difference between what the politicians and economists want to do and what the public will accept.
It's like a drug addict who vows to quit because he knows the harm drugs are doing to him. Three or four days after quitting he's in the agony of withdrawal and will do anything to get more of the drugs. That's the case with several of the nations in Europe. They know the damage that excessive borrowing has done and now they're going to stop cold turkey. But, the people relying on that government borrowing don't want to lose their welfare, retirement or other government checks and they're rioting in the streets. That rioting and disillusionment is in its early stages and could get much worse. That's another reason for precious metals to go much higher. The resolution to undergo austerity is not going to be matched by the public's deeds.
TGR: So how high could gold and silver go?
LM: The downside over the next two months could be about $1,400/ounce (oz). During the latter part of the year, I have forecast a top in gold of about $2,400/oz and a top in silver about $55/oz.
TGR: It seems like $55/oz is a little low on silver compared to $2,400/oz gold. You're not a major silver bull?
LM: I am. Let's say gold bottoms at $1,400/oz and then goes up to $2,400/oz. That's a gain of about 65% or 70%. If gold gets down to $1,400/oz, silver could hit $24–25/oz. If it goes to $55/oz from $25/oz, that's a gain of about 120%. So, as the acceleration develops, I expect silver to go faster than gold. It's been weaker than gold, so it will take a little longer to advance. But, I have always believed that in powerful metals bull markets, silver outperforms gold on the upside, just as during declines it falls faster than gold.
TGR: So, you aren't looking for $75/oz silver as some people are?
LM: Not quite this year. But if this massive disillusion and even distrust of public monetary authorities occurs, who knows what numbers we could be looking at in 2013? But, $55/oz seemed about right when I made the forecast in writing and I'll stick with it.
TGR: Going to mining stocks, which you cover in your Melman Report, the big question that most investors have is when are their mining stocks going to take off and start behaving the way they expect? What do you think?
LM: A couple of numbers illustrate just how much mining stocks have underperformed. In mid-2008, gold was about $900/oz and the Philadelphia Gold and Silver Stock Index (XAU) was 205. Now with gold just under $1,600/oz, the XAU is 147. So, while gold has almost doubled, the major mining shares have dropped by an average of about 40%, and many of the junior shares have fallen by more. So, it's been a dismal period, especially in the last year.
The major difficulty during the past few years has been the longer timelines in advancing exploratory projects to production, due to the regulatory and environmental hurdles. When I started writing about gold and trading shares as a stockbroker in the mid-1970s, it wasn't unusual to advance a project from discovery to production within two or three years. So, you only had to raise sufficient capital to cover that period. Now projects can take 8–15 years to get to production, if they succeed at all. That results in greater capital requirements and a lot more share dilution. That's having a negative impact in the junior sector. The major mines seem to correspond much more closely to the price of the metals themselves. But for the juniors, that long regulatory process creates a major problem for share prices and dilution.
TGR: Let's revisit some of the stocks you talked about last April.
LM: Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) continues to produce and have positive cash flow. Its share price in the last year pretty well corresponds to the price of silver, being leveraged in both directions. I like what Great Panther is doing and have no problem suggesting to people that this is a share of real interest.
We also talked about Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) last year. Commerce has done excellent exploration work. It still has the major tantalum project that has been its focus for many years. But, it's also advancing rare earth projects in Québec and other places. So, Commerce continues to do the things that in the past have produced positive results. It's just simply faced with a very adverse marketplace at the moment.
TGR: What do you mean by "adverse"?
LM: The rare earths have been hot numbers and then cooled off. When China first announced that it was going to reduce exports to the West, rare earth shares in North America went crazy on the upside and have come back almost as rapidly. So, it's a different situation with them. They're more a hot play of the moment as opposed to gold, which is much longer term.
TGR: But, it's not too late for rare earth to help Commerce's stock price?
LM: Not at all, because rare earths blows hot, then cold. But, then they could very easily blow hot again. The fundamental argument for rare earths is excellent. They are absolutely essential for modern technology, including defense weaponry systems. The fundamental demand for them has nowhere to go but up and questions have been raised about Chinese supply, among others. So, I think the North American rare earth junior mining shares could easily get hot again.
TGR: Will the fact that Commerce has both heavy and light rare earths make a difference?
LM: That's certainly a positive. The more markets you can attract, the better the prospects become.
TGR: How about some of the other companies you talked about that you think are pretty attractive at this point?
LM: I just visited El Tigre Silver Corp.'s (ELS:TSX.V; EGRTF:OTCQX; 5RT:FSE) project in Sonora State, Mexico. It's a fascinating story. The previous operators from approximately 1900 to about 1935 mined approximately 75 million ounces of silver. It was incredibly high-grade material grading an average of 40 ounces per ton (oz/t). They left behind tailings containing around 2.6 to 2.7 oz/t silver. At current prices, that's potentially very profitable material. I believe there are about 1.2 million tons of tailings plus other material that was used to backfill where previous operators had mined.
The net result is that El Tigre is working to get those tailings into production as fast as possible. It hopes to start producing revenue in late 2012 or very early 2013. The project area is entirely prospective. It has very large landholdings near the tailings deposit with the prospect of very early revenues, which will then finance continued exploration. There certainly is the possibility of finding more 40 oz/t ore in the future. Plus, it is also searching for gold and has some very good target areas for that. So, I like the El Tigre story from that basis along with the revenue coming in to finance exploration and development.
TGR: How is it going to reprocess these tailings?
LM: It's going to build a Merrill-Crowe process facility adjacent to the tailings. The material's already crushed so it can do the basic recovery right near the project. That is a very good simple plan.
TGR: What about SilverCrest?
LM: SilverCrest Mines Inc. (SVL:TSX.V; STVZF:OTCQX) is another company I like that is in a similar situation. It has a producing project in northern Mexico called the Santa Elena mine, northeast of Hermosillo in Sonora State. It produced 134,000 oz silver and 9,000 oz gold in the first quarter of the year, giving it significant revenues. It's using those funds to develop additional resources around the mine, particularly to advance a very prospective project called the La Joya, which is in Durango State. So, again, it has revenues, financing and significant exploration and development, rather than having to raise borrowed capital or encounter heavy dilution.
TGR: How soon might it have results or a preliminary economic assessment (PEA) on La Joya?
LM: It's moving very rapidly but I have not yet heard of a PEA or a bankable feasibility study. But, it is advancing its exploration quite rapidly and it could be a very sizeable discovery. Those are the kind of companies that I really think people should do their own due diligence on and explore seriously because the long-term prospects seem to be valid.
TGR: How about some others?
LM: One of the companies I wrote about several years ago is Barkerville Gold Mines Ltd. (BGM:TSX.V), which started production, but apparently encountered some sort of difficulty and temporarily suspended it. It's near the town of Barkerville, which is a great historic mining site in British Columbia surrounded by active exploration and development, where the prospects for future discoveries appear very solid. Now it's just a question of getting back into production and kicking up the cash flow once again.
TGR: What about anything in South America?
LM: I was recently on a tour of GMV Minerals Inc. (GMV:TSX.V) in Guyana, which has great mining prospects and excellent geology. GMV has a very prospective property, which it's already drilled and it has a new program underway. Given the potential for sizeable discoveries, it's a prospect with an excellent risk/reward ratio. Unfortunately the shares have been beat up in this dismal market and have fallen fairly rapidly, from about $1/share last summer, and are $0.09 to $0.10/share now. So, you're risking $0.09 or $0.10/share but with a very significant upside if it makes an excellent discovery.
Just a little note about the geology of northern South America. One of my noted geologist friends told me that the region from Colombia, across Venezuela and the small three countries of Guyana, Suriname and French Guiana, and all the way across to Africa, is excellent elephant hunting territory. So, GMV's in a good place and just has to overcome some problems.
TGR: Would you put Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX) in Ghana in that bucket?
LM: I've recently talked to Abzu and it is exploring and developing some very excellent projects in Ghana in areas where many of the majors have opened mines. It appears to have great potential. I've only had one telephone meeting with the president of the company and I'm still in the learning process on Abzu. It has what appear to be some very exciting prospects and Ghana has a reputation for being one of the very best African nations for mining/development.
TGR: How about companies in the U.S.?
LM: I like good projects in the United States. Bullfrog Gold Corp. (BFGC:OTCBB) has two projects, one in Arizona and another in Nevada, that have had a lengthy history of exploration and a mountain of material to work with, so it's not starting exploration from scratch. Besides the Bullfrog Hills project in Nevada, its Vulture Mountain project in Arizona has metallurgical work showing gold recovery of up to 90% and even 96% on finely ground material, which is very high. Again, it's early stage but the potential exists for some very excellent risk/reward ratio investing.
TGR: Any others in North America?
LM: There is another company of significant interest called GreenLight Resources Inc. (GR:TSX.V). Its projects are located in New Brunswick and Nova Scotia in the Canadian Maritimes, which haven't had a lot of precious metal mining. It's mainly been coal mining. Coincidentally, New Brunswick was just named the number one jurisdiction in the Fraser University survey of mining jurisdictions. The province encourages mining very significantly. GreenLight has a host of projects and it's already found joint venture partners for two of them, enabling the company to bring in cash for other purposes plus having other companies advance the projects on their own dollar. Greenlight has properties that include graphite and rare earths, which are certainly as hot as you can get, along with magnesium, gold and silver. With a good inventory of projects, joint venture partners and cash at its disposal, I think this is definitely a company worth investigating.
TGR: Where do you think things are headed from here and what should our readers be focusing on to avoid the pitfalls and make some profits when this market turns around?
LM: I like the juniors with production financing that are actively building facilities to go into production, or those like SilverCrest that have already achieved production. That enables them to grow so much faster without serious dilution.
I still love gold and silver. Silver has the added bonus of being an industrial as well as an investment metal. My big picture tells me that the great force behind gold and silver in the coming months and years is the growing fear factor. Once the public perceives that international financial matters are really getting out of control, they will start moving assets from conventional investments into the precious metals.
There was an article in Barron's in December 2010 where the author stated that, according to his research, when inflation begins to accelerate toward hyperinflation, the precious metals tend to rise 2,000% to 50,000% faster than the rate of deterioration of currency. That's an enormous factor down the road and I think, historically, it makes some sense. So, my big picture is that disillusionment with international financial monetary authorities is growing and fear will be rising. Once the image of the U.S. dollar as a pillar of strength begins to diminish, which I expect in the second half of this year, I think we will see real fireworks in the precious metals.
TGR: What is the best investing advice you've ever received, that you've either taken or wished you had taken? And, what's the best advice that you have for people who are just starting out as investors?
LM: The best investment advice that I've received and want to pass on is to look for the one play that, considering the risk involved, has odds that are truly powerful in its favor and that will provide outsize rewards. And, I'll tell you exactly which one I like; the only question is the timing. Right now, interest rates are the lowest they have ever been in history. The one interest rate future that stands out in my mind is Federal Reserve funds that are yielding virtually zero for the short term. Short-term notes are quoted at about 99.87 vs. 100.00 face value. So, they're yielding 0.13% with virtually no risk to the downside. All you're risking is 13 basis points because interest rates aren't likely to ever go below zero. The kicker is that those contracts extend more than two years out. The spring of 2014 contracts are trading now at about 99.65. So, there's 35 points potential downward action. Over the next two years, the pressure to start raising interest rates is going to become severe. If rates reach 3%, these contracts fall to 97.00, which would provide about 265 points of potential profit. Anytime you can put logic behind an investment and have a potential reward that's 9 or 10 times the potential risk, then I'm very interested. I think the logic behind interest rates starting to rise within the next two years is quite powerful.
TGR: Great advice. Thank you so much.
Leonard Melman will be sharing his Precious Metals forecast for the for the 2nd half of 2012 during the World Resource Investment Conference in Vancouver, which takes place on June 3-4, 2012. Click here for more information.
Leonard Melman, publisher of The Melman Report, has been writing about precious and base metals for more than two decades as monthly columnist for California-based ICMJ's Prospecting and Mining Journal and Vancouver's Resource World Magazine. He focuses on how political and financial considerations impact the world of mining and the prices of the metals.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.
1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family owns shares of the following companies mentioned in this interview: None.
2) JT Long of The Gold Report conducted this interview. She personally and/or her family owns shares of the following companies mentioned in this interview: None.
3) The following companies mentioned in the interview are sponsors of The Gold Report: Great Panther Silver Ltd., Commerce Resource Corp., SilverCrest Mines Inc., Barkerville Gold Mines Ltd., GMV Minerals Inc., Abzu Gold Ltd. and Bullfrog Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
4) Leonard Melman: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: SilverCrest Mines Inc., El Tigre Silver Corp., Great Panther Silver Ltd., GMV Minerals Inc. and Greenlight Resources Inc. I was not paid by Streetwise Reports for participating in this story.