The Gold Report: We just had a third round of bond buying in quantitative easing (QE). Will QE3 help the economy?
Brien Lundin: It will not help the economy, but it will help Wall Street. It will help elevate the stock market, including precious metals and resource stock prices. Although that was not the Fed's stated goal, it will be the ultimate result.
As I have written lately, we now have "QE as far as the eye can see." There is no end to it. The Federal Reserve will use QE until it works. If it does not work, the Fed will ratchet up the program and print more money until it does work.
The Fed is using the brute force of money creation to eliminate the U.S. unemployment problem, but that is not a foundation upon which a sustainable recovery can be built. At the same time that the Fed is trying to build a towering economy, it is eroding the very foundation of that economy by issuing vast pools of liquidity.
TGR: At a recent Casey Research Summit, some speakers suggested that the stage is being set for inflation. Do you agree?
BL: I see the danger, but I think it is important for investors to recognize the differences between monetary inflation and price inflation.
Price inflation is a symptom of the underlying disease, which is monetary inflation. Every new piece of fiat currency created in the world that is not backed by gold raises the relative value of tangible assets, primarily the monetary metals gold and silver, but also other commodities.
For a number of reasons, I do not think we will see soaring price inflation in the U.S. as we saw in the 1970s anytime soon. There are other very powerful parallels with the 1970s, but I do not think that retail price inflation will be one. We are living through monetary inflation right now. That is why precious metals prices are rising.
TGR: The August edition of Gold Newsletter predicted what happened in the beginning of September: a gold price close to $1,800/ounce (oz). Where do you see things headed?
BL: That prediction of a mid-to late-summer price breakout was based on two things. First, typical seasonality issues came into play. Second was seeing gold trade into a consolidation pattern of an ever-narrowing price trend.
This kind of consolidation pattern has been evident many times before in this long bull market for gold. Eventually, the price of any commodity will break out of such a pattern and typically will return to the trend that was in force beforehand. For gold, the earlier pattern was an upward trend, so the odds were that it would break to the upside, and it did.
Breaking to the upside, the price pretty much predicted some action by the Fed, but QE3 really exceeded anyone's expectations for such action. I think the near-term goal for gold is to exceed its previous highs of around $1,920/oz. That will create a foundation for further gains.
TGR: Silver has followed gold higher. What is your thesis for silver going forward?
BL: Precisely the same as gold. Silver provides optionality on gold. It is a lever to gold prices. Silver rises more quickly than gold and it falls more quickly than gold.
Despite its volatility, or rather because of it, silver is a way to realize greater profits along the long-term uptrend by playing the interim cycles.
A lot of people talk about the advantages silver's industrial uses provide. But the industrial uses really play into the price when silver is under, say, $10/oz. When the price goes north of $10/oz to levels that we see today, it is purely due to silver's monetary role.
TGR: You have gone from a largely passive position in most of the companies you write about to an aggressive position. What happened?
BL: This summer, a few of the companies that I recommended were too good to resist even in a down market. I recommended that readers peck away at these stocks and accumulate them, buying a little bit here and there on weakness. I advised not jumping in headfirst until we saw signs, or even confirmation, that gold was breaking out of its consolidation pattern. Once we saw that happening, I told readers it was time to get more aggressive and start building larger positions in junior mining shares that remained dramatically undervalued.
TGR: Did you see that as a bottom?
BL: Yes. We bottomed in late July or early August. It was the typical seasonal pattern we predicted, just like clockwork.
TGR: What are some of the companies you are being aggressive with?
BL: Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE) has a great project in Fiji progressing toward production in about 12 or 18 months. It has a feasibility study that just needs to be updated and remarkably low capital expenses to get back into production.
TGR: Lion One Metals is around $0.66/share. What are the catalysts between now and production?
BL: The numbers in its updated feasibility study should show the market that this is a viable project. That would be a catalyst.
Remarkably, it should take only $20–$30 million to get the project into production. Raising that kind of capital should be relatively easy, so the company does not have to get the economics buttoned down too tightly before actually going out and building a mine.
SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) has been one of our big winners. Not only is it growing production in a rising silver market, it has plans to double production. This is a production play, but also boasts an exploration upside in another project that it is drilling off. It offers a one-stop shop for investors who like producers, but also like the upside of a development and exploration story.
TGR: SilverCrest is in Mexico. How do you like Mexico as a jurisdiction?
BL: Mexico is a great place to invest. There has been a lot of news about the danger of the drug gangs, but the companies in production or working there are doing fine and handling any issues.
SilverCrest is a well-managed company with two very good projects in production. That is critical: invest in a company that will be there for the long term, is making money and is neither draining shareholder equity nor diluting its share structure to get into production. SilverCrest is ahead of the game, and has a very steep growth curve ahead of it.BL: I also like Seafield Resources Ltd. (SFF:TSX.V). It just put out a new, very impressive resource estimate on its Colombian project. The next step is to prove the project's economic viability. I do not think the market appreciates how advanced it is.
TGR: Seafield is at around $0.13/share. Where do you think it should be?
BL: I hate to give specific price targets, but Seafield, with its large established resource, has a lot of upside ahead of it. As the gold market continues to advance and the general market strengthens, companies with established resources will be the big winners.
I followed Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) long before its legal controversy with Coeur d'Alene Mines Corp (CDM:TSX; CDE:NYSE) in Nevada, and I still like it. The staking controversy over Coeur d'Alene's expired claims gives Rye Patch immediate upside that it previously lacked. I think the two parties will have to reach some accommodation—an accommodation that has a very good chance of being worth more to Rye Patch than its current market cap.
TGR: I was just near that property in Nevada. There is a lot going on in the area.
BL: A lot of jockeying here and there, a lot of people trying to get in on each other's grounds, court injunctions, lawsuits and a lot of staking. The lawsuit also has a lot of implications beyond that immediate area and beyond the specific issue involved. It could throw into the air the whole system of staking claims and mine ownership in the U.S.
TGR: That is something we all will have to watch together. Do you have other names?
BL: I like Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), which is expanding the discovery on its Tuligtic project in Mexico. The share price has come back a bit, and it is a great value right now. A recent step-out on its northeast extension produced a great hit. There are parallel zones for development, giving Almaden a lot of growth potential. Its first resource estimate could be a very big number.
TGR: When is that due out?
BL: Likely by the end of this year. Meanwhile, the company is busily drilling away and expanding the resource. Once it has enough to impress the market, a resource estimate would be the next step.
TGR: In out last interview, you talked about Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). What is happening with that?
BL: Its big mover is the Wellgreen project in the Yukon. It's a polymetallic project: platinum, palladium, gold, nickel and some of the rare and valuable platinum metals. It does not yet have good assays on the higher-end platinum metals, but they are there.
Prophecy acquired this large project thanks to the vision of its CEO John Lee. He saw that there were two significant deposits as yet unconnected by drilling. He realized that extending them to depth and connecting them would result in a world-class resource. He systematically drilled it off and proved the theory.
Its next stage is a prefeasibility study. That would be the next trigger point in showing the market greater value.
TGR: Do you have another name in the Yukon?
BL: I recently recommended Precipitate Gold Corp. (PRG:TSX.V), which was founded as a Yukon story. Some friends of mine, including the Coffin brothers, helped launch it.
Precipitate Gold's management team includes Adrian Fleming, who was the president of Underworld Resources. That company helped launch the new Yukon gold rush and was a big winner for my readers a few years ago.
Precipitate assembled a great land package from the Strategic Metals group, for many years one of the top exploration outfits in the Yukon. Precipitate went public through an initial public offering (IPO) with this big Yukon play.
Then came the big GoldQuest Mining Corp. (GQC:TSX.V) discovery in the Dominican Republic. As an example of how a good management team can benefit shareholders, Precipitate went in and quickly seized an enviable land position in the Dominican Republic on trend with the GoldQuest discovery. Now Precipitate has two tremendous land positions in two of the hottest gold exploration trends in the world. It's a great company. It hasn't really taken off yet, but I think as it begins its exploration efforts, we're going to see the market start to pay attention to it.
TGR: Since its IPO in May, Precipitate's stock seems to be rising.
BL: Yes. I see Precipitate as a longer-term winner that has tons of potential ahead of it and is a very good buy for investors.
TGR: The New Orleans Investment Conference is approaching. What can attendees expect to take away from this year's event?
BL: The conference always seems to come at a crucial turning point in the markets, but with the advent of QE3 and the November election, I cannot think of a more important time for investors to be prepared than right now.
We will have a blockbuster roster of geopolitical and economic analysts to talk about the election and its impact on the economy and investors. Charles Krauthammer, probably the most influential political commentator in America, will be there, along with Rick Santelli, the godfather of the Tea Party. Peter Schiff, Sarah Palin, Dinesh D'Souza and Marc Faber are coming. Doug Casey and many of today's top precious metals and resource stock analysts will speak.
We have some fun events planned as well. This year's political debate will pit the conservative Charles Krauthammer against the liberal James Carville, with Doug Casey defending the libertarian position. That is always a big hit.
TGR: Before we let you go, do you have an election prediction?
BL: Looking at the political landscape right now, I think the odds favor President Barack Obama's re-election. I would put the odds at 60/40 right now. Obama's re-election would be an extremely bullish development for investors in gold, silver and resource stocks.
TGR: Why is that?
BL: It would signal a continuation of government spending and money printing. Mitt Romney has spoken out against QE and has said he probably would not reappoint Ben Bernanke as Fed chairman. In contrast, the Obama administration would apparently continue the policies that have led to these high metals prices.
TGR: Brien, thanks for your time and insights.
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, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind, Oct. 24–27.
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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) 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.
3) The following companies mentioned in the interview are sponsors of The Gold Report: Lion One Metals Ltd., SilverCrest Mines Inc., Seafield Resources Ltd., Rye Patch Gold Corp., Almaden Minerals Ltd., Prophecy Platinum Corp. and Precipitate Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
4) Brien Lundin: I personally and/or my family own shares of the following companies mentioned in this interview: Lion One Metals Ltd., Seafield Resources Ltd., Rye Patch Gold Corp., Prophecy Platinum Corp. and Precipitate Gold Corp. 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.