The Gold Report spoke with financier and newsletter writer Darrell Brookstein about the turbulent gold market and the many opportunities he believes are out there as mining companies are oversold. He believes that this is just a pullback in a bull market, and we could very well see some all-time highs in the next 18 months. TGR: It's been a rough week for gold. As of today, gold is down to $822. You've indicated that gold would bottom out around the 20th. Can you give us some of your logic behind that?
DB: It’s based on several factors — proprietary pattern recognition technology that I developed in the late '80s and early '90s, and the fact that gold and gold stocks have a seasonal tendency to bottom in the July-August timeframe. And I have been saying since February that this year would be a year where it follows suit and does what it does more than 70% of the time, which is to bottom in the July/August timeframe.
So, it’s a combination of pattern recognition technology that I developed, combined with the normal, seasonal pattern. We’re seeing what is setting up to be a short-term, oversold period, which we just entered today (8/11/08), and it will probably become extremely oversold by somewhere between now and the 23rd. I am fully expecting that to be the case.
Now, a couple of other things bear witness that this is a normal pullback — a 33.33% pullback — in a bull market. I am marking an intermediate bull market that started around early 2005, and a normal pullback for that would take gold about $8 to $15 lower than it is now (at the 8/11/08 close). So, in other words, to my mind there is nothing to be afraid of and there’s everything to be excited about.
Take the August low against the high of the next 18 months — there will be an extraordinary difference between those two and an outstanding buying opportunity is setting up now.
TGR: So you’re looking at the bottom; this is not a trend.
DB: Oh, absolutely — this is a pullback in a bull market. The bull market is likely to carry to the TSX Venture Index ( ^JX:CA) to new all-time highs; it’s likely to carry the GDX (Market Vectors Gold Miners ETF, AMEX: GDX), which is the major gold mining stocks, to a new all-time high as well. It is likely to take gold to around $1,035 at a minimum, and silver to around $25 at a minimum. And I would say the odds are better than 75% that that will be the case.
If I am incorrect, and, in fact, it turns out that the March '08 highs of gold and silver, and the March highs in the XAU and the GDX turn out to be the all-time highs, I am still highly confident of at least one more significant rally to attempt to breach the highs. So, any way you cut it, I believe this is a great buying opportunity, and the worst case will be a substantial short-term profit. By short-term, I mean a six-week to six-month profit opportunity.
TGR: What factors should gold investors be looking at to try to determine whether it's a short-term six-month profit or a continuing trend that may reach an all-time high within 18 months?
DB: That’s a good question. I would say that two consecutive closes over a $1,035 price in gold, or two consecutive closes over any of those major indices, will signal that the game is on and that we’re definitely going higher. In which case, for example, you could see gold in the $1,200 to $1,400 range. You could see silver in the $28 to $35 range. And likewise you could see the TSX Venture going to a new all-time high, perhaps 30% to 60% higher than its previous all-time high.
TGR: Very interesting. So if we breach the March highs for two consecutive closes, you’re predicting that we’re going to continue to rally?
DB: That will be indicative that the previous all-time high was nothing more than a stopping point on a very long-term bull market. The interesting thing in all of this is that the TSX Venture, which is indicative of the performance of junior mining, micro cap and small cap mining stocks, actually topped in November '07, significantly before mining stocks in general, and they’ve basically collapsed since that all-time high. I waited until late April '08 to get back into the market. That was the first buying opportunity of '08, and this August timeframe is the second major buying opportunity of '08.
I think the average of those two prices—the late April lows and the August lows— is going to look like a fantastic place to have been a buyer in these stocks.
In November '07 there were significant problems in the TSX Venture and more problems followed in January for the underwriters of these companies in Canada. The combination of those two things really, really have hurt the TSX Venture stocks, and there are a lot of companies that would have been thought of as great companies a year ago, in mid-2007, which are now not going to be able to refinance and are not going to be able to get funding. So, the criteria for picking junior mining stocks has gotten a lot more specific – you’ve got to be a lot more careful than you could be in mid-'07.
TGR: And what would that criteria include now in mid-'08?
DB: You’ve got to have a company with a significant project and cash for it already in the bank to move it forward at least to the next significant level, and a tight share structure and a smart management team. Prior to this, cash in the bank was not that important because a company could easily finance the next round of funding. That is not the case today. They’re not going to be able to simply go out and say, “Hey, we need 2.5 million more dollars to do our next set of drilling.” The money is just not going to be there; they have to have the money already in hand.
It’s a financing problem. And it’s a terrible problem because these are not operating companies. The only way they advance is by working in the field, which either can be by drilling, or induced polarization or magnetometer work, etc. Something has to be done on the geology or the geophysics to move the property forward, and that takes cash and capital. If they’re not generating capital internally through cash flow, then they have to raise the money in the stock market; if they can’t raise the money in the stock market, they’re dead. Their stock is just going to keep going down, and they’re going to have to sell their property to a stronger, better company, or they’re going to have to joint venture it with a major on what would have been considered unreasonable terms. Something like that is their only way out.
On the other hand, a company with a great property and $5 million in the bank, with $2.5 million worth of drilling over the next months, will probably be just fine.
TGR: In the short term, how would you compare investing in a junior, which is capital intensive, versus a producing company, which does have cash flow to carry it through over the trough of the stock market?
DB: Well, there are some exciting stories in the major mining companies because they've been so slaughtered. Some companies are just going to keep making money, and they’re just going to do great whether gold is at $800 or $1,000; although obviously it’s better for them if gold is at $1,000. But they’re going to do just fine.
And some of these have come down so much that they are now low-P/E stocks, which is unheard of in mining, because most major mining companies are valued on assets in the ground and the new gold that they find. They’re very rarely valued on an earnings basis. Some of them, like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Anglo American (AAUK) and Goldfields Ltd. (JSE/NYSE:GFI), have fallen into the value stock area with P/E ratios of around 7 to 12. Companies like that are deeply oversold.
You have to have a long-term perspective and wait until these sell-offs start to go to the upside. Watch for this rise, combined with the normal seasonal pattern such as in August, and you can buy these stocks at once-a-decade prices or even once-in-a-lifetime prices. You can do very well over the next 16 to 30 months. That’s what I give the bull market in gold and other metals —16 to 30 months more before it tops out.
TGR: How would you balance your portfolio between majors and juniors?
DB: First of all you have to start with an overall understanding of your portfolio and at what level gold stocks and silver stocks play in at. The typical investor might have 5% in gold and silver mining stocks, and I think for a person like that I would say three or four-fifths of that in majors, and one or two-fifths in juniors. I think given the story of opportunity that is available today, I might divide that fifty-fifty, and I would put half in junior mining shares and the other half in the majors, because we have such a significant opportunity at this timeframe.
TGR: People say gold is influenced by the value of the dollar. Now Russia has invaded Georgia, and there’s still talk of conflict between Israel and Iran. Will those events impact the price?
DB: No, I don’t believe in looking at markets that way. That might sound a bit strange, but in the short term I think that stories are just excuses that pundits use for why things go up and down. As an example, Russia invades Georgia. Gold goes straight down. What if the opposite had occurred and gold had gone straight up? It’s very possible that gold could have gone up $30 today instead of down $30. There’s no reason why not. Then people would have said, “Oh, gold is going up because of the instability in the world because Russia invaded Georgia.” Likewise, Israel announces something with regards to Iran, and if gold goes down, it’s ignored; if it goes up, it’s pointed to.
These are really just excuses. Markets are made by very much larger factors specifically related to the metals themselves. So, for example, gold demand is pretty much ruled by dentistry, electronics, the Indian wedding season, the Christmas buying season in the West, and the time frame when jewelers buy physical gold. That is why gold tends to pick up after August. If you’re going to make a bunch of gold jewelry to have at Christmas, you need the actual gold in your hand in September or October to get it into the stores in December. So, it’s things like that that actually rule, and the rest of it to me is just stories.
TGR: Can we talk about a few mining equities, for example Animas Resources (TSX.V:ANI;ANIMF:OTO) and Rare Element Resources (RES: TSX.V; RRLMF: OTO)?
DB: Two of my favorite companies for sure — I just visited Animas, and the report on that is up on my blog (http://www.nanotechnology.com/blogs/). It was my first mining share recommendation in eight years.
They control a gold mining district in Sonora State in Mexico, which has the second most potential of any property at its current state of development that I’ve seen in my career. My career in the junior mining shares, by the way, started well before October 1981, which is when I started writing The Prospector newsletter.
So, it's the second best thing I’ve seen at this stage of development, and people always say, “Well, what was the first best thing?” And without a doubt the best thing was the Carlin Mining District, which I wrote about in 1982, and, of course, the Carlin is the largest gold producing district in the history of the United States—60 million ounces and counting. I haven’t seen anything like that until what I saw at Animas.
Rare Element (RES blog posting) is in Wyoming and has a gold deposit of some significance, and I say “some significance,” because Newmont is a joint venture partner, and Newmont keeps spending more and more money on it. It is my belief that Newmont doesn’t spend the amounts of money that they’ve spent on Rare Element unless they see a minimum of 5 million ounces of gold.
So, we’re very excited there, and more to the point, they have the largest disseminated rare earth deposit in the United States. And you’ll say, “Well, big deal.” Well, the rare earth deposit there is probably bigger than the gold deposit there. In other words, I’m saying there is a potential for it to be a 5 million gold ounce equivalent in terms of rare earth. And these are stocks with tiny market caps relative to what the market will grant them credit for once we see a little more drilling done.
TGR: And what’s the timing on the announcement of the size of the gold deposit?
DB: Newmont Mining (NYSE: NEM) is trying to get a permit to do drilling on an additional several hundred-acre area on that property, and we don’t expect the permits to be granted until later this year, and the new drilling to start until March/April of next year. So, we don’t expect to see a further big, gold story in Rare Element until 2009, but we think that there will be a significant story to be told on rare earths in 2008.
TGR: You have a new recommendation on Riverside Resources (TSX:RRI). Can you talk about that?
DB: Riverside has a lot of good people involved in it, and they have properties of merit in Mexico. And I think that in this August timeframe they’re a good speculation.
TGR: Just a few more we'd like comments on: Silver Standard (TSX: SSO; Nasdaq: SSRI), Hecla Mining (NYSE: HL), and Silver Wheaton (NYSE: SLW).
DB: Let’s start with Hecla. I started my work in the Coeur d’Alene district in northern Idaho where Hecla had its first major mine. Hecla is being slaughtered with the price of silver. It’s certainly going into the oversold area, and I think it will become deeply oversold before the end of the month and before the 23rd. Hecla is a major silver mining company that’s been decimated, and I think it’s a good representative stock.
The same applies to Silver Standard, which is a much higher priced stock. Again, you’ve got a quality major silver mining company that's been decimated. It’s in that oversold category. Silver Wheaton (SLW) is the same story. I pick the silver stocks on my list basically because they are quality companies that are oversold.
The exception is Orko Silver (TSX.V:OK; ORKOF: OTO). Orko is different. Orko is a true junior silver mining company, and I picked Orko because when you have a junior mining company with 100 million, much less 200 million, ounces of silver, you have to pay attention to it. These things are really, really rare. I don’t think you could name three other companies like Orko just in terms of the likely silver resources. So, that’s different; it’s a junior company that is almost a one-of-a-kind situation, and if you like junior silver stocks, you have to be a buyer of Orko.
TGR: Hecla, Silver Wheaton, and Silver Standard all have the cash to carry them forward?
DB: Yes, we don’t have to worry about those companies going out of business. Companies like Animas and Orko are perfect examples of companies that got cash before the collapse in the market. When Orko did their financing, they financed their company at $1.75 a share. Now you can buy it at a $1.15, so you’re paying a lower price than major financiers of worldwide silver mining paid. It’s a bargain price, and you don’t have to worry about the company going out of business. They have tons of money because they did that financing.
The same case with Animas. Animas did their financings when the top was in place and before the decline. They’re cashed up; they’re in the middle of a 10,000-meter drill program. It will finish in a couple of weeks, and they will start another 10,000-meter drill program in September or October. So, you’re going to have the drill results of 20,000 meters; and you have a company that has the cash to do it, and they don’t have to come to the market looking for money to stay in business or to do that drilling.
TGR: Any other companies you would like to comment on?
DB: Canplats Resources Corp. (TSX:CPQ; CPQRF:OTO) is a very well known speculative story on the TSX Venture. They had one of the biggest rallies in 2008 of any stock on the TSX Venture based on a set of discovery holes. And they’ve really improved the property since, but, of course, ever since those drill results, the stock has gone pretty much straight down. So, we have a great property, with great drill results and major discovery holes. And because Canadians tend to go on vacation in August and selling occurs for a variety of reasons, this stock is a perfect example of what you can buy. It was over $5 a share two months ago, and now you can buy it for $3 a share. That’s great, and it’s a better company today than it was then. When I say a better company, I mean that the project has moved forward; they’re actually doing well.
I will reference two things for your readers; they may not go back this far: take a look at a chart of gold from 1979 to 1982; it is a roller coaster of huge advances and huge declines over a three-year period. And there’s no reason why we’re not in one of those again. Also, take a look at the development of the Hemlo district in Ontario in the early to mid-1980s, and the stocks that came out of the development of the Hemlo.
From the first discovery hole in 1982, 1983, to 1985 when those stocks achieved their high valuations of their discovery holes, you had stocks that ran from 40 cents to $4 and then back to $1.50, and then up to $6, and then back to $2, and then eventually going to $24 or $32. So, in a major discovery it’s not always straight up.
Darrell Brookstein was a leading financier and newsletter writer on junior mining shares 1980 to 2001. His books and newsletters include the classic, "Small Fortunes in Penny Mining Stocks" (with Doug Casey), "The Prospector," "Nanotech Fortunes" and "Best of the NanoWeek. " To receive his free e-mail alerts, request at darrell@nanotechnology.com for Nanotech Insights and/or to darrell@resourcedevelopment.com for Mining Insights. Currently, Managing Director of leading “small” technology financier and advisory focused on The TSX Venture, The Nanotech Company, LLC at http://www.nanotechnology.com/.
After graduating from Duke, he specialized in trading and research related to gold, silver and copper. Named by Doug Casey as “the source for junior mining shares” in his classic, "Crisis Investing," and being the premier U.S. broker in Canadian mining shares in the 1980s, Mr. Brookstein made use of top geologists and geophysical consultants, and developed important relationships with Rick Rule, Robert Friedland, Adrian Day, Bob Bishop, the Coffin Brothers, Brien Lundin and Paul Van Eeden and others 1982 - 1997. During that period he called the Bre-X fraud early and was among first to call the Delgratia fraud. His subscribers made exceptional profits in names like Pennaco Energy, Galactic Resources, Sonora Gold, Cornucopia, Ultra Petroleum, Temple Mountain, Metallica Resources, Wavecrest, Gold Standard and dozens of other names, many of whom were also financial PR clients of his firm.
