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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Louis James "I am Buying All the Gold Bullion I Can"

Commodities / Gold & Silver Sep 30, 2008 - 05:53 PM GMT

By: The_Gold_Report

Commodities Best Financial Markets Analysis ArticleIn this exclusive interview with The Gold Report, Louis James, Senior Editor of Doug Casey's International Speculator, describes a currency crisis of historic proportions that is dragging our economy down a dark and treacherous path lit only by the shining star of gold. James expects twists and turns in the precious metals sector and maintains his focus on the long-term bull trend. What stuns him, though, is the fact that Americans aren't "shouting in the streets" in panic now that the dollar is on death row with no pardon in sight.


In Part II, 'Screaming Buys' Among the Quality Juniors , he talks about how the big downhill slide in the junior sector has a real plus side for investors—a bounty of incredible bargains and gives the names of some of his top picks and explains why their prospects are so bright.

The Gold Report: When we last spoke in December, you talked about the gold market being governed as much by market psychology as by demand and supply fundamentals.

Louis James: I still see it that way. Ninety-five percent of all the gold that's ever been mined still exists somewhere on the earth's surface. Supply and demand is not limited to production and consumption. Market psychology plays a critical role.

I don't want to disparage calculations about how many ounces the mines are producing vs. how many are being bought, but what matters more is whether people are feeling inclined to buy or sell gold. We're talking about a psychological phenomenon, not something calculable or predictable. Zeitgeist can change suddenly. When things go bad in a very obvious and big way, gold will make a major move.

TGR: You're saying that the price would have to go up substantially for people to put existing gold back into the market.

LJ: Yes. There's been a lot of turnover. Many people holding gold now bought during the up cycle and they want a higher price. Those who bought gold on the downside of the bear market in the late '90s and are not in it for the long haul would have been content with an earlier exit point. Those with a higher cost basis have replaced those who are not long-term holders.

When gold corrected sharply in August, I went down to my local coin shop, but this time something was different. Usually, when the price goes up, some people are taking profits—but, because gold looks like it's trending up, others are buying. So there's been a balance. Dealers could hold inventory because the price movements have enticed both buyers and sellers. But that really changed in August. The U.S. Mint failed to predict the demand for gold bullion. There was a physical shortage of bullion product in smaller units, which is different from saying there's a gold shortage.

That caused a big disconnect. People were saying, “The price of gold is going down, but you can't buy any physical gold. What's wrong here?”

Well, the price of gold is set in New York and Hong Kong and elsewhere by big players. It's not determined by people buying gold bullion coins at their local dealer or even at a bigger dealer like Kitco. The point is that both higher and lower prices had been balanced throughout most of this cycle, but in August almost everyone was buying. Result: my dealer had no inventory. If I wanted to buy I had to keep calling because it's first come, first served. And if he had any product, then I had to hop in my car and buy right away, or else I didn't get any. That was different.

TGR: Why are the big players not as worried about getting physical gold?

LJ: They're not buying the same thing. If the U.S. Mint miscalculates the demand for one-ounce Eagles, that affects the smaller player who buys at the corner shop. For people buying 10-kilo bars in an allocated account in Switzerland—let alone futures contracts, etc.—the Mint's miscalculation doesn't affect them at all.

TGR: Right now we're paying over spot price at our corner market. Will that change?

LJ: I doubt it will any time soon. The Mint could see that demand was growing and increased production, but not enough. To me that's very significant.

All we hear in the news now are hair-pulling stories of the financial woes of venerable institutions. If there's anything that actually surprises me in this market, it's not so much that juniors are beat up or that gold goes down. I am dumbfounded that there can be so much economic turmoil and people aren't shouting in the streets. This stuns me because this is America. We don't have one or two bank failures every month. That's a third world phenomenon. I would have thought that the level of anxiety on Main Street and Wall Street would be much higher than it is now. I cannot fully explain that. People have a lot of faith in the "powers that be" to fix things—more faith than is justified, but the bad news we've already seen is of historic proportions.

TGR: Do you think that kind of anxiety could boost the precious metals sector, specifically gold?

LJ: The guy on the street is becoming more aware of gold. Bullion dealers are running ads in airports now. You hear more about gold on TV than ever before. I suspect that many Wall Street traders are very desperate to some new high-yielding sector—anything will do, even a barbaric relic like gold, if the yield is right. So unless the price of gold drops even more and stays down for a long time, the majors are going to reap the kind of record profits they've had over the last two quarters. If gold comes back up, in the next month or two, the realization will dawn on Wall Street that here's a sector showing record profits quarter after quarter. How long can that happen before they figure out that maybe mining is no longer an 18th century business? If only one percent of the traders on Wall Street make that leap, that's huge—it's much larger than the entire gold market.

[Editor's note: This interview took place on Sept. 16, which was before gold's record-breaking gain of more than $100 in less than 24 hours.]

TGR: Will Wall Street take an interest in gold or the precious metals sector?

LJ: Gold mining will be the bright shining star. We are going to see a lot of eye-catching profits across the metals sector. Copper is one that's most watched because it's seen by some as a kind of economic indicator. But there's something irresistible about gold. People will take notice if Newmont Mining Corp. (NYSE:NEM) or Barrick Gold Corp. (NYSE:ABX) can generate more profitable quarters, as they've had already this year.

TGR: Some speculate that a U.S. recession would drag China down and that would hurt copper.

LJ: Some believe that our economic woes are no longer relevant. But look at the worldwide repercussions of the sub-prime mess so far. Chinese exports are around 35% of GDP, with a little less than half or a third of that going to the U.S. A significant drop in exports to this country could have a significant impact, and a global recession could have a huge impact.

That having been said, most of China's growth engine is internally driven. There are a billion-plus Chinese who want refrigerators, cars, and all the goods associated with a better life style. And, unlike Americans, they have savings. So I don't see China going into reverse being likely. Demand for resources will be great even with modest growth. They're still building their infrastructure and will require more copper. Demand-side fundamentals in the Asian sector are very robust for the long term. There will be more short-term volatility.

We sometimes get a bad rap at Casey Research for having a bearish outlook on base metals. That's not our position. We believe that an economic blow up would result in a sharp correction over the short term and that would represent a great buying opportunity.

TGR: What do you think will happen with the paper assets and the fiat currency combined with inflation?

LJ: Doug Casey, my boss, our resident guru, made a most succinct statement on that. He thinks the current problems will lead to a depression, and he thinks it will be worse than the Great Depression. He calls it the "Greater Depression." He believes that there may actually be a new gold-backed currency established at some point following the very painful corrections ahead of us. The unfolding currency crisis is staggering. The magnitude of this crisis is historic and it won't just go away.

TGR: We did have a gold-backed currency in the Great Depression.

LJ: That's true, but there were many government interventions that created and then exacerbated the depression. Even with sound money, a determined government can still mess things up. One of the most interesting things in thinking about the Great Depression and now is to look at CPI data over the span of the 20th century. There is a blip in the early 1930s. It really is, at most, a blip during the Great Depression. It sounds simplistic, but it's true that the government couldn't just print as much money as it wanted to, and that was very important.

Then look at what's happened to the CPI since 1971. That's what is frightening about this. Every time we've veered out of control, the people pulling the levers have managed to steer the Titanic away from the tip of the iceberg. Each time they've been barely missed it. But the iceberg's still there. These attempts to avoid foundering were all inflationary. That hasn't been the case now for several decades. That's how this crisis has grown to such monstrous proportions

TGR: So what does a "Greater Depression" mean for investors?

LJ: Whoever thinks this talk of a serious economic correction, currency regime change or maybe even a "Greater Depression" is overblown probably shouldn't be in the sector. The volatility will just give you heartburn. But if you think there is potential for a big blow up, then you expect a lot of volatility along the way—it's confirmation that the trend remains on track.

As we confront the popping of this monstrous bubble, there will be unexpected kinks and curves ahead. We haven't been calling it a currency crisis for years just to sell newsletters, but because we expected things to get truly critical, as they have. We also call it a “currency regime change” because the hegemony of the U.S. dollar is coming to an end. That can't happen without a lot of thrashing about as the old system suffers its death throes. As that happens, you can't lose sight of the basic trend; the main thing is to focus on the long term.

TGR: Is that primarily a currency trend or an equity trend?

LJ: The currency crisis is driving equity market fluctuations, among many other things. We get questions about buying Euros and other currencies. Foreign exchange (forex) is not really our focus. That's a game for the pros and the big banks. Little players just get eaten alive.

I don't recommend forex to the part-time speculator. But if you think the dollar's going to go south or north, and you want to make a bet, it's not unreasonable to wonder where else one might put one's cash. We think the Euro is really no more solid than the dollar and will be the next domino to fall. That's not to say that the Euro wouldn't make a good short-term play.

TGR: A currency regime change here will clearly have international repercussions.

LJ: Absolutely. The dollar is the de facto reserve currency of the world and that's what makes this a historic occasion. The consequences of the dollar's fall won't be like when the Argentine peso lost two-thirds of its value. If that happens to the dollar, it has globe-shaking consequences.

TGR: So if we're looking then at protecting our nest egg through this currency regime change, then gold is an incredible buy in the high $700s.

LJ: Absolutely. I'm personally buying all I can get with both hands.

TGR: Are you buying bullion or are you buying through Central Fund of Canada (CEF:AMEX) , whose shares serve as a bullion proxy ?

LJ: Bullion. I still have some cash now for buying because, when we get a double on something (even if I still see a lot of upside) I usually take profits right away (unless I think the upside is highly imminent). And if it goes five times higher after that, I don't get bent out of shape because I could've gotten more, I'm just glad my initial investment is still working for me, at no risk to my initial capital.

I believe gold will rebound in the short term. It may not go to new highs in the next few months, but it won't stay this low for long, not with all the disastrous economic news.

Gold will come back, and a rising tide will lift ships—but not all ships this time. There are a lot of burned hands out there and they're not going to jump into any old stock.

Focus on the quality companies—specifically those that have the cash for at least a year's operation, ideally for two years of exploration. They have projects of real merit and 43-101 compliant resources in hand. Their management teams have a proven track record.

When all these advantages line up, and a company like that is on sale because the whole market is wiped out, that's a screaming buy. I don't care whether tax season could actually make the thing cheaper in a couple of months. That could happen if the market doesn't recover. But if it does recover and you didn't take advantage of it and buy at the cheaper price, you'd be kicking yourself. Quality companies with staying power will come back.

Louis James has a background in physics, economics, and technical writing, which prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Louis constantly travels the world, visiting highly prospective geological targets, grilling management and company geologists, and interviewing natives to find out what they really think (it helps that he's fluent in French and Spanish, and speaks a little German and Russian).

Visit The GOLD Report - a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. To subscribe, please complete our online form ( http://app.streamsend.com/public/ORh0/y92/subscribe )

The GOLD Report is Copyright © 2008 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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