James West: Financial System Headed South
Source: Brian Sylvester of The Gold Report 08/13/2010
Midas Letter Editor James West is one of the sharpest minds in the gold business, and he puts his money where his mouth is. He owns gold equities, ETFs, coins and even a share of a private Peruvian mine. "Gold is the best investment at this time," he says, a thesis based on the "counterfeiting" of paper currencies and inevitable collapse of the global financial system. In this Gold Report exclusive, James suggests several ways to profit along the way.
The Gold Report: James, in a recent issue of the Midas Letter you said, "The world, according to gold, is in an absolute mess." We're not in a gold price mania, so how can the world be in an "absolute mess?"
James West: You say we're not in a gold mania, but that depends on the perspective of time. If you look at the gold price chart for the last six months, it has appreciated slightly from $1,075 in February, touched a high of $1,260 in June and is now a bit below $1,200. But from the 10-year viewpoint, it has increased about 500%. I would classify this as a very long and slow sort of mania, which might, in technical terms, be a contradiction. Perhaps mania is not the right word. But there has been an ongoing accumulation of gold by a lot of different investment entities around the world since 2000. It continues more or less unabated on a macro level.
TGR: How high do you see gold going?
JW: Well, that's another funny question. When people ask, "how high do you see gold going?" it's like saying, "how long is a piece of string?" It depends on the timeframe. Where is it going to be in 30 days? It could be up $100 or it could be down $100, but it's not going to be at the price it is today. If you're talking a year's time, I think the price is going to be a little bit higher. Gold has been growing at an average of $87 per year for the last 10 years, so if I were going to predict where the price is going to be in five years I would say $1,635. Where is it going to be in 10 years? There are many factors that can come to bear there.
TGR: What sort of factors?
JW: The printing of money is one way to look at inflation. That is going to continue unabated for the near term because all the G8 governments have more or less embraced the idea of quantitative easing or stimulus. I prefer to think of it as counterfeiting. They are printing money that has absolutely no relation to anything of value. No commodity, no currency. There is sort of a tacit collusion going on among the G8 Nations, and especially China. China says, "OK, we'll keep buying your treasuries and we won't sell them as long as you don't give us a hard time about our human rights abuses and our unwillingness to let the yuan float freely against other currencies." That's why I say that the world's in a big mess, according to gold, because you've got this situation where no one can afford to acknowledge the reality.
This tacit collusion has resulted in a collective untruth being the primary foundational circumstance upon which our financial system is built. To me that's like an inverted pyramid. As long as everybody keeps pushing on either side at exactly the right pressure, the pyramid can continue to balance on its pointy little head. But if one side gives even the slightest or pushes a little too hard or gives up on the support that they're giving, then the pyramid becomes much more difficult for the other entities to support and it's going to come falling over.
TGR: That's an interesting metaphor.
JW: That's the metaphor that I like. All of these different G8 entities and financial groups push on the pyramid, keeping it on its pointed head while all the governments keep printing money and pouring it on top, making the pyramid larger and more unwieldy. This is unsustainable. The systemic problems that are causing this unwieldy imbalance have accelerated in the last 10 years. We're headed to a point where this thing is going to fall over because it's built entirely on a falsehood-that we can continue to print money with abandonment and that's the way to run an economy, and nobody's ever going to call the loan.
TGR: Do you think that will ultimately result in a global deflationary scenario or an inflationary scenario?
JW: Both. I mean the inflationary scenario is happening now, as is the deflationary scenario to some extent. We've got all this money flowing into the system, but it's only flowing into selected segments. The banks that have been threatened by real estate loans that are now underwater because of the global devaluation in real estate are the recipients of most of this stimulus. Little of that stimulus is filtering down to small businesses and small employers on Main Street America. None of the benefit of these big institutions being rescued filters down to them. In those segments of the economy, there is a deflationary phase where there is no money flowing in. Nobody is spending money. Nobody's renovating their homes. Nobody's getting their trucks tricked out. All these little fringe businesses are stagnating. There's a lot of evidence to support that even in the mainstream media. In the Midas Letter, we find the stories to support the theory that this is all an illusion and these guys at the top of the food chain are in fact crooks. Until there's some major systemic change this is going to continue.
TGR: You talked about a line in the sand. What's the next leg down that will tell us that this line in the sand has been crossed?
JW: There are a few key indicators that everybody follows. First and foremost are the stock markets; they are the canary in the coal mine. The first sign that things are about to go very haywire is when those markets start dropping by 4%, 7%, 10% in a single session. When you see the market dropping off by huge quantities, you know that people are running for the hills. Now it's going to be difficult to see that because the President's working group has all these mechanisms to prevent the market from dropping more than a certain percentage in a day before it's shut down. That gives the government time to come up with something to stem the panic selling, so that indicator is not going to be readily available like it was in 2008 when we saw the Lehman Brothers crash.
Another sign would be when the big hedge funds are cashing in their chips and sitting in cash. Other indicators are already flashing warning signs. The Baltic Dry Index, which is one of my favorites, has dropped by half since the end of May. That means that the movement of commodities has fallen by half since then. Commodities are the building blocks of all industries. When the commodities fall off like that, it's indicative that there's a general absence of demand for raw materials. That's a serious sign that the point of no return has been crossed. You will know the financial stimulus, which had the net effect of offsetting the inevitable, has run its course and can't rescue the system. The deterioration in economic activity levels has resumed. Those indicators are the increased number of foreclosures in metro areas throughout the United States, and the spike in unemployment since mid-2009 that remains high.
TGR: Indeed. You have that graph on www.midasletter.com that talks about the U.S. Department of Labor numbers, which claim about 10% unemployment. But there are other sources on your chart. One says U.S. unemployment in July was 16%, while another one says 24%. Which one do you believe is closest to the truth?
JW: I believe that John Williams' ShadowStats is the closest to the truth. John has been hired by large institutions to predict various things. One of his earliest clients was a large manufacturer of commercial airplanes. They were looking to develop an economic model for predicting passenger miles. They essentially used GDP to predict what that would be, but their model wasn't working effectively. So they hired John Williams, who is an economist, to figure out what was wrong. He realized that the statistics that the government was putting out were not accurate because of their faulty method of determining GDP. He went into the data and fixed the model. Then he started to remodel all the government data and many other sources of data, stuff like retail sales and trade deficits, inflation versus production numbers, durable goods, home sales, housing starts. For all of those there's the government version, and then there's John Williams' version. I know some of John Williams' clients, and they unequivocally state that they put more faith in his numbers than they do in the government's numbers.
TGR: How should people get exposure to gold?
JW: That depends on your risk profile. If you're in the later stage of life and you've got assets that provide some kind of fixed income, then you want to go with the most conservative exposure to gold, which would probably be bullion. The problem with owning bullion is that if you can't protect it, you set yourself up as a target. Barring that, I think the best way to own gold is probably through the SPDR S&P 500 ETF (NYSE:SPY), which actually buys and holds physical gold. But if you're actually going to use gold as an instrument for trading goods, then that indicates that a line in the sand has been crossed and the financial system has crumbled. And you've got this hyperinflationary phase where it takes a wheelbarrow of cash to buy a loaf of bread and an hour later it takes two wheelbarrows. I caution that if you're going to own an ETF and the whole financial system turns to rubbish, an ETF is not going to be tradable. But let's assume that's not the case and you just want to expose yourself to gold as an investment; the conservative position is an ETF or bullion. Moderate risk would be senior gold producers. Higher risk would be junior producers. Highest risk exposure to gold would be gold explorers.
TGR: You hold positions in all three categories.
JW: I hold gold in every position imaginable. I am a participant in a gold mine in Peru. I own shares in milling operations in South America. I own gold dust, gold bullion, gold coins. I have some positions in ETFs. I have some senior producers, some mid-tier producers, some junior producers and some junior explorers.
TGR: Would you consider yourself a gold bug?
JW: No, I wouldn't because I really have no use for gold personally. It's just the best investment at this time.
TGR: Are there any circumstances under which gold is not a good investment?
JW: Oh, absolutely. Let's say we have a world full of economies that shepherd their currencies responsibly and circulate only money that is essentially the equivalent of their GDP and their asset base divided by their population. There would be no reason to own gold. The systems that issue money should own the gold. If we lived in a world where our governments and our financial institutions and systems were trustworthy, there would be no reason to own gold and invest in gold.
TGR: Well, that's not going to happen anytime soon. You hold about 50,000 shares in Western Pacific Resources Corp. (TSX.V:WRP), which is under The Gold Group umbrella. You like the management there, people like Simon Ridgway, Warwick Smith. Is your position in Western Pacific based on who is involved, or is it a combination of who's involved and its assets in Nevada?
JW: It's a Catch-22 because whoever is involved has allowed them access to these assets. The asset that I'm most excited about is this Mineral Gulch in Idaho, which had historical production of 525,000 ounces. These guys acquired the property simply for the cost of staking, which I think was about $28,000. Before this, Curt Everson and Eric Sanderholm were with US Gold Corp. (TSX:UXG, NYSE.A:UXG), which is actually Rob McEwen's company. Before that they were with Nevada Pacific Gold Ltd. (TSX.V:NPG) and its Magistral mine, which is now part of US Gold. Everson and Sanderholm discovered Magistral, and that's US Gold's most productive asset. Collectively they're responsible for the discovery of over 30 million ounces of gold in their careers. I get very excited when I see a team like that get together with guys like Simon Ridgway and Warwick Smith, who have financed over $300 million in deals in the last three years-when a lot of people couldn't raise a dime. Then I see a project like Mineral Gulch that produced 525,000 ounces in oxide mineralization in a Carlin-style system, where deposits start off small and often get bigger as they get deeper. They could be into 5-20 million ounces in sulfides. That's what they're about to drill on. That's what gets me excited about that company.
TGR: You take something of a brokerage style-approach to investing in these companies. For you, it's not about properties reaching production, it's about the shares appreciating over a given period of time. That's kind of how brokerages look at equities. How much are you looking for Western Pacific to appreciate over the next six months?
JW: Well, let's look at some of the other deals done recently. For example, let's look at Focus Ventures Ltd. (TSX.V: FCV).
TGR: Another Gold Group company.
JW: Yes, that's right. They hit about 20 meters of 5 grams per ton on their Nueva California property in Peru. The stock took off to around $1.40 from $0.60. It was a 100% double. When it does 100% I tend to exit my position, or at least half of it if I think there's a lot more to come. In this case I acquired the Focus shares in September and sold them all in less than six months; I doubled my money as did all of my subscribers. Basically the value proposition of my Midas Letter is that I offer my subscribers "the potential" to double their money or better in 6-12 or 18 months, in 8 out of 10 picks. That's our average. Nobody is going to be 10 for 10. I basically live and work and exist exclusively in the resource industry and have for 20 years, and that's why I can consistently make those calls.
I'm looking at Western Pacific's drill program. We know that they've produced 520,000 ounces from several pits. We know that the previous operators left behind several pits, so Western Pacific's team would drill where they knew they were going to hit gold. Then they would get a lift in the share price, and be able to raise money for an expanded drill program, which would be a responsible way to manage a company. The greater the share price at which they raise the capital, the less dilution they suffer every time the company spends a dollar.
TGR: Back in March, you told us about Antioquia Gold Inc. (TSX.V:AGD). The company was then trading at about $0.40. It's about $0.23 now. Do you still see value there?
JW: Oh, yeah. Absolutely. First of all, Antioquia is in Colombia. The size of some of the deposits there are simply huge. When I first visited the property last year, we were talking about only a 19-square-mile land package on which there was something like 90 artisanal operations actually ongoing or recently closed. We expected to see some great drill results; what we got were some OK drill results. A lot of people ran for the exits because it was Colombia and they expected fantastic results similar to those of Ventana Gold Corp. (TSX:VEN). Instead, they only got Greystar Resources Ltd. (TSX:GSL) results. They got 4.4 meters of 16 grams gold and 11 meters of 5.4 grams. If it wasn't in Colombia, the stock would've probably held on a lot better. Antioquia has a lot of drilling coming up. At the current price, I just can't see why you wouldn't pick up Antioquia and hold it. They are going to continue drilling, and they've got a bigger set of targets now than they had then.
TGR: Another gold play in South America is Colossus Minerals Inc. (TSX:CSI). You've exited your position in Colossus, but management there has proven adept at raising money and creating value for shareholders by taking that stock from around $0.50 to around $6.50 now. Colossus is making a push toward production at Serra Pelada, a high-grade precious metals project in Brazil. Could that stock be poised for another bump up if it brings that project to production?
JW: Oh, absolutely. You know if you want to compare Colossus to another company that's done well, you can compare it to Red Back Mining (TSX:RBI) (which was acquired by Kinross Gold Corp. (TSX:K; NYSE:KGC) since this interview). In 2002, Red Back was trading at less than a dollar. The Lundin Group took it over and also its Chirano gold mine in Ghana. Red Back additionally has the Tasiast gold mine in Mauritania. I wrote about Red Back at $6, and it's now at $26. Colossus has the potential to do exactly the same thing based on the strength of Serra Pelada. I follow guys like Colossus CEO Ari Sussman. He's also got a project in Colombia called Continental Gold Ltd. (TSX:CNL). We wrote that one up at $2-something and it's already trading well over $3. There's another one that's going to go. They bought the choice assets from Grupo de Bullet S.A. in Colombia. Grupo de Bullet was the largest private landholder of gold claims in Colombia, until they passed a law more or less forcing divestiture of anything that wasn't going to be producing income anytime soon. Ari's got the cream of that crop.
TGR: You seem to follow people. Who else do you follow?
JW: I follow George Salamis who was most recently CEO of Rusoro Mining Ltd. (TSX.V:RML), operating in Venezuela. Some would say that George was not a successful CEO because the share price more or less halved in the few years that he was the CEO. But during his CEO-ship, Venezuelan President Hugo Chavez told him that he would have to sell most of his gold to the government of Venezuela at half the spot price, which made it impossible to make money. Despite putting 17 million ounces into a 43-101 resource, the company still trades at below $0.40 because they can't get any money out of the country. George got fed up and he left. He's now with Edgewater Exploration Ltd. (TSX.V:EDW); they're part of the Featherstone Group. Featherstone are the guys who put together Terrane Metals Corp. (TSX.V:TRX), which is now controlled by Goldcorp Inc. (NYSE:GG; TSX:G) and is a huge success story. Edgewater is what we refer to as "Red Back Junior" because it's got the Enchi Gold project, 25 kilometers south of the 250,000 oz./year Chirano Gold Mine that Red Back is operating. Red Back owns roughly 9% of EDW, which is a strong indication of their belief in the project.
TGR: Where was Salamis before EDW?
JW: Before he was with Rusoro, George operated mines with Placer Dome and with Cameco Corp. (NYSE:CCJ; TSX:CCO). He's got real-world mining company experience. When you see the combined forces of Featherstone Capital and George Salamis and the Lundin Mining Group, it's going to be a homerun.
TGR: What other companies are you following?
JW: I'm focused on the juniors that have the potential to hit the huge homeruns like Golden Hope Mines Ltd. (TSX: GNH). GNH is operating a project in Québec that has a 20 km. strike length. It looks like it could be a whole new gold belt. It's a great story. In 2003, Osisko Mining Corp. (TSX:OSK) drilled 5,000 meters on the property that Golden Hope is now exploring.
Another one that recently got my attention was NioGOLD Mining Corp. (TSX.V:NOX; OTC:NOXGF.pk). I've been in and out of it several times. They just did a deal with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK) based on their Malartic gold project, which is also in Québec. NioGOLD has done this joint venture with Aurizon where they're going to partner up and bring an enhanced level of exploration to Malartic. NioGOLD CEO Mike Iverson has been patiently connecting dots between all of these smaller, older mines for the last five years. He's finally drawing the attention of Aurizon, which isn't a major but a mid-tier producer. It's a brand new day for NioGOLD and it's trading at about $0.30. There's one that could easily be a double. That could happen in weeks. If it goes to $2.60 it's a "ten bagger," which is sort of the Holy Grail in resource investing.
TGR: Could you leave us with one more pick?
JW: Minera IRL Ltd. (TSX:IRL) is another one that I should've mentioned. It just recently listed on the TSX. It's been trading on the AIM Board in London for several years. It's got projects in Peru and Colombia. I know one of the directors, Frank Kelly, so I've been getting the details on these projects and following their progress. I just think it's going to be a winner.
Publisher of Midas Letter, James West has devoted 20 years to helping small companies in the resource sector-helping them raise money, further their projects, build their identities and get their stories in front of investors on the lookout for quality investments with excellent returns.
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1) Brian Sylvester, of The Gold Report, conducted this interview. He personally owns 3,500 shares in Antioquia Gold Inc.
2) None of the companies mentioned in the interview are sponsors of The Gold Report: Antioquia, Aurizon, Goldcorp, Western Pacific, Terrane, Colossus.
3) James West: I personally and/or my family own the following companies mentioned in this interview: GNH, NOX. I personally and/or my family am paid by none of the companies mentioned in this interview. GNH, NOX.
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