Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter


Lawrence Roulston's Bringing Base Metals into the Spotlight

Commodities / Gold & Silver 2009 Nov 24, 2009 - 04:21 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleWith perhaps a short-term correction in store for gold, Resource Opportunities editor and publisher Lawrence Roulston is leaning toward base metals for more impressive gains in the coming months. And as he tells The Gold Report readers in this exclusive interview, the growth outlook for base metals doesn't rely solely on flourishing demand from developing nations. He also reminds us that "while most people focus on the day-to-day ups-and-downs in metal prices. . .the big money comes with owning a little company that proves up a big deposit."

The Gold Report: During our last interview in June, you said you didn't expect commodity prices to fall, and you were right. Many metals have hit all-time highs since then. Have they hit the top? If not, how much further do you think they'll go?

Lawrence Roulston: I'm not counting on higher metal prices in the near term. In the longer term, I believe they will go much higher. Copper, for example, rebounded from a low of $1.25 earlier this year to just under $3. That gain came with the U.S. and most of the Western world still in recession, or at best very modest growth. China and other developing countries are the drivers. These countries will continue to grow and in a year or two, the West will get back to growth too, which will push the prices higher. Current metal prices are still below the 2007 highs, and with a widespread recovery, they could surpass those levels.

TGR: The rates of new jobless claims and foreclosures are falling, we're getting reports of month-over-month positive economic news, the economy is showing signs of growth and the markets are reaching highs. Are we seeing real green shoots? Inasmuch as a major factor of the increasing gold price has been the falling value of the U.S. dollar, will these positive developments abate the dollar's decline and slow gold's climb?

LR: The story of the dollar is about rising government debt and about the amount of stimulus money that has been pumped into the economy, in the U.S. and around the world. The gold price has risen in dollar terms. It has also risen in terms of most other currencies. Many commentators, especially those in the U.S., tend to focus on the American economy, where debt and potential excess liquidity point to a further decline in the dollar. However, other areas face similar challenges.

Fundamentally, investors around the world have become cautious about paper investments and currencies. Governments, professional money managers and individual investors are all buying gold. Not a wholesale switch, but putting a little gold into a portfolio as an insurance policy. For several years, central banks were net sellers. They are now moving toward being net buyers. The Reserve Bank of India just bought 200 tons of gold from the International Monetary Fund. That was an important signal, but it only took gold to 6% of their reserves, up from 3.7%. We only see the value of the dollar measured against other currencies. No nation wants its currency to appreciate against the dollar, as that would make their exports more expensive. In essence, we will see all currencies declining in tandem relative to hard assets, like gold.

TGR: What would this concurrent decline in currencies mean for gold? Would that tend to drive it up?

LR: There's potential for a correction in the gold price after the big run-up that we've seen recently, but longer term I expect it to continue moving higher in U.S. dollar terms as well as in the terms of other currencies. The gold price has progressively moved higher, from $252 in the middle of 2001 to over $1,100 today. And I think we're going to continue to see that same kind of progression.

The price of gold correlates directly to the U.S. dollar's value because the price is measured in U.S. dollar terms. As the value of the dollar declines, by definition, the price of gold increases.

But more to the point and especially since the beginning of the financial crisis, as I say, a lot of investors have become very nervous about currencies and paper assets in general. So we're seeing a real increase in demand for gold. That may accelerate the upward movement in the real value of gold that we've seen since the middle of 2001.

TGR: When you pointed out India's 200-ton gold purchase, you noted it took gold to 6% of their reserves, up from 3.7%. Are we really seeing that much shift toward gold among investors that will drive the upward pricing mechanism versus the devaluing dollar?

LR: The devaluing dollar is an almost artificial mechanism; the real gain in value will come as investors around the world increase demand for gold. The Washington Accord brought together the holders of 80% of the world's official reserves, who agreed that they would not sell more than 500 tons a year. During the last couple of years, they've actually sold less than their quota. But still, because of the Washington Accord selling, central banks have been net sellers.

India's purchase, even coupled with speculation that China will increase its buying of gold, would not likely reverse that, because I think selling from the Washington Accord companies will continue to overwhelm smaller countries' buying. For example, Sri Lanka recently bought some gold, but it's inconsequential in relation to the bigger players' selling.

TGR: Do you suppose China's encouraging its people to buy gold will have an impact?

LR: Yes. Citizens throughout China have been significant buyers of gold over the past couple of years and probably will accelerate their buying. In the same way that India is the world's largest market for gold on a retail level and the bulk of that is as jewelry, the Chinese are buying much of their gold as jewelry.

But in reality it's much more than that. It's a long-term investment. India and China don't have IRA accounts, RSP accounts and other such long-term savings plans that we have in the western countries. Part of their rationale for buying a lot of jewelry is that it's a long-term investment. Increased buying in China has more than offset the massive decline in gold jewelry sales in the U.S. and western Europe in the last couple of years.

TGR: Arguing that underlying economic health doesn't justify current equity prices, some are calling for a pullback in the markets. Are you anticipating a major correction ahead, or will the market continue sideways?

LR: If you're referring to mainstream American stocks, we were supposed to have had that pullback by now. We've had a bit of a pullback, and maybe that's the extent of it. I don't think we'll see anything significant.

But I don't really follow the major markets. I focus more on the metals markets, which are much more global than the major American companies. I think it's very important to note that parts of the world are doing very well right now and those American companies that do business with the rest of the world are doing well while inward-looking companies may not be. In the near term that's probably going to be the way it goes. The U.S. is unlikely to enjoy a full recovery for another year or two, so companies that rely solely or primarily on the American markets may not do well for some time yet. However, much of the rest of the world is already doing well, with signs pointing to continuing recoveries.

Even there, though, you have to look closely. Some analysts say emerging markets are overvalued, but they are looking at trailing earnings. Earnings figures over the last year reflect the worst economic performance in decades. Analysts who look at projected earnings still see values in those markets. Clearly, the easy money has been made, but there are lots of opportunities for those who take the time to look.

TGR: In one of your recent newsletters, you also noted that while North America and Europe may still be in recession, from a world perspective we're looking at a positive economic environment. In that context, would you speak to an important story—that of the long-term shortage of metals that expanding economies need to grow?

LR: A few points here. First, even without increased demand, the mining industry would need to develop new mines each year just to maintain production. Each mine has a finite life, typically 15 or 20 years. Growth in demand over time adds new pressure to build new mines.

Secondly, as you know, much of the innovation in many industries comes from small, entrepreneurial companies. The mining industry is an extreme example of that, with the majority of new discoveries being made by the juniors. The metal deposits in the hands of the juniors now represent the future of the mining industry. There are huge gains to be had by shareholders in these little companies as projects evolve from discovery through to production or to a takeover by a larger company that will develop the deposit to production.

Most people focus on the day-to-day ups-and-downs in metal prices, but the big money comes with owning a little company that proves up a big deposit. With some due diligence, it is possible to develop a short list of the companies most likely to succeed. You don't need a gain in metal prices to make money from this approach. The inevitable gains in prices that will accrue over time add a bonus to what should already be a good rate of return.

TGR: Maybe a case of not being able to see the rising stars because the sunshine is so bright?

LR: I suppose so. There's so much focus on movements in the metal prices that investors in general are completely missing what I see as the biggest investment opportunity, which is focusing on the supply side of the metal story and looking at these companies that are developing metal deposits that will come into production in the near future. The gains in that space can be 10 times or more and that completely dwarfs the movement potential on the commodity price itself.

TGR: How do the precious metals compare to the base metals that an expanding economy needs?

LR: Even if they are not expanding, economies use base metals. U.S. metal production, for instance, is roughly where it was a couple of years back. Developing countries such as China are increasing their use of these metals over the previous year. The net effect of flat consumption in the West and growth in China and India has pushed up prices.

That said, the story for gold and silver is quite different from that of the base metals. The gold market is driven largely by investors seeking a hedge against currency devaluation. Silver roughly follows the gold market. The base metal markets are more a function of economic growth. However, as I said, the big profit potential for investors comes in looking at the supply side of the industry; the ongoing need for new deposits to be developed into mines. That applies to precious and base metals equally. The potential gains in value of a successful exploration/development story far outweigh the moves in metal prices.

TGR: To what extent are you and your newsletter looking at base metals?

LR: We've had a balance among precious metals, base metals and uranium all the way through, although now we're very definitely moving the emphasis more heavily toward base metals. Gold has had a big run, and our shift more in favor of gold and precious metals over the last year has worked out very, very well. Even though I see the longer term gold price being significantly higher, there's a possibility now of a bit of a pullback.

As for base metals, the copper price has more than doubled so far this year from its low and while major copper producers have had a nice run, we've seen very little reaction in the junior exploration / development companies. I think there are enormous opportunities in those little companies. We could be looking at multiples on the prices of some of these companies 12 months out as investor focus starts returning to the base metal sector.

TGR: Would you comment on some companies in that base metal juniors sector?

LR: The initial reaction is already starting to happen with those that have the most advanced projects. Capstone Mining Corp. (TSX:CS), for example, a producer, has moved up with the copper price but I think it's still undervalued. Going down a step, a company in the soon-to-be producer status is Baja Mining (TSX:BAJ), which was beginning development of a copper and cobalt mine in Mexico when the financial crisis hit and their debt financing got pulled out from under them. They have the equity component lined up now and they're getting close again to having debt financing. A company like that will be one of the early ones to respond when investors start coming back into the sector.

An example of a company still further down and the next to move would be Copper Fox Metals Inc. (TSX-V:CUU), which has a big deposit outlined, but hasn't yet completed a feasibility study.

TGR: Before straying from the topic of equities, could you talk about some of the other companies you follow?

LR: I don't comment much on specific companies in a public forum because my subscribers pay for that, but I can say a few words about a few of them.
  • Endeavour Financial Corporation (TSX:EDV) is interesting; it's like a mutual fund-merchant bank combination run by some of the top people in the mining finance business. Their current focus is on building another big gold company by pulling together smaller companies. It's a good way to get exposure in this market for people who don't have the time or the knowledge to do their own due diligence.
  • Northern Dynasty Minerals Ltd. (NYSE.A:NAK, TSX:NDM) controls what is likely the largest undeveloped metal deposit on the planet, a massive copper deposit with more than 80 million ounces of by-product gold. Anglo American plc (LSE:AAL.L; OTC:AAUKY.PK) is spending $1.4 billion to earn a half interest. The ultimate value is well beyond the current share price, but a project of this size takes a lot of time to bring to production.
  • Another one with a lot of potential is Jinshan Gold Mines (TSX:JIN), where the approach—to develop more gold mines and to consolidate small gold mines in China—shows a lot of potential.
  • Kiska Metals Corp. (TSX-V:KSK) has a number of high-quality gold and base metal exploration projects and a top-notch exploration team.
  • Rare Element Resources Ltd. (TSX.V:RES) has a gold project with big potential that Newmont Mining Corp. (NYSE:NEM) is spending money on to earn an interest, although most of the recent attention on this company has focused on its rare element project.
  • Quaterra Resources Inc. (NYSE/AMEX:QMM) has a top-notch exploration team looking at several uranium and base metal projects in the southwestern U.S. and Mexico. They just raised some money, so they are now in a position to carry out work and generate some news.
  • Miranda Gold Corp. (TSX.V:MAD) is a classic "prospect generator," acquiring interests in a number of exploration prospects and then bringing in joint-venture partners to carry out the exploration work. Although not well-understood by many investors, prospect generation is a great concept that reduces exploration risk to shareholders and provides exposure to a large number of potential discoveries.
  • Animas Resources (TSX.V:ANI) controls a past-producing gold district in Mexico and is exploring to build on the past results and test new targets.
TGR: When we talked with you in June, you'd indicated that considering uncertainties about the U.S. financial system, you consider gold of increasing importance as a currency/inflation hedge. In a recent conversation with the Gold Report, Louis James from the Casey organization agreed, saying that an investment in precious metals themselves is a hedge against inflation or currency fluctuations. But he also said that precious metal equities belong in the speculative part of an investor's portfolio. Do you agree with that?

LR: Absolutely—with the qualification that if you pick companies intelligently—companies with good management, good projects and a realistic business plan, and if you have a diversified portfolio of those companies—the overall risk on those companies is probably less than the speculative risk in the commodity directly.

That's because you have a number of companies that have potential to add value, and regardless of what happens to metal prices, if they're successful at carrying out their business plans, they can add value. Whereas, betting on the commodity price directly is pure speculation. Who knows what's going to happen with the gold price next week or next month?

Lawrence Roulston, a geologist with engineering and business training and more than 20 years of hands-on experience as an analyst and manager in the resource industry, founded the 100% subscriber supported Resource Opportunities newsletter—which provides objective commentary on the resource industry and emerging resource companies—in 1998. Having established an impressive track record, with a particular knack for picking emerging companies that delivered 10-fold or better returns, he launched GreenTech Opportunities in February 2009.

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 Expert Insights page.

    The GOLD Report is Copyright © 2009 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.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules