The Gold Report: 2009 turned out to be quite a successful year for equities even though a lot of the economic trends showed only mild improvement, if any. How would you summarize what happened in 2009?
Mickey Fulp: The markets were so beat up in 2008 that equities became a place of safe haven. A lot of cash—itchy money, if you will—sitting on the sidelines poured into equities. In times of financial duress equities can become the preferred investment vehicles. It surprised everybody, I think, but 2009 turned out—especially in our junior resource sector—to be one of the best years on record.
TGR: And what do you think 2009's performance means for 2010?
MF: I don't want to venture there right now. I am still digesting things that happened in 2009 and trying to make up my mind where I see things going. Maybe we can talk about that the next time.
TGR: Certainly. Your specialty is to find undervalued junior resource companies and clearly there were a lot of them at the end of '08. How does that picture shape up going into 2010?
MF: I don't see a lot of undervalue in the precious metals sector, but there are specific companies that haven't reacted yet or have catalysts pending. So there are a few of those that I'm looking at.
TGR: Would you say the market's overvalued at this point?
MF: The market is valued at what the market says it is. It's oftentimes driven simply by psychology and those are touchy-feely things that are hard to get a handle on. The junior resource sector is certainly valued a lot higher than it was last year. Will it go higher or lower or will we see a correction? I think a lot of that depends on the price of gold.
TGR: We'll come back to gold prices specifically in a moment. In your last Mercenary Musing, you wrote about how we are led to believe things from trusted sources such as Santa Claus and the Easter Bunny. More relevant, you discuss the government talking about organizations that are too big to fail that we have to bail out, and—in terms of gold price—pundits telling us that gold prices will climb to multi-thousands of dollars per ounce. As an investor yourself, what are you hearing that really can't be trusted?
MF: I mitigate the risk of undeserved promotion with very detailed due diligence and research. You too need to do your own due diligence and your own research on anything you consider, looking at the three key criteria—share structure, people and projects. If you follow my investment philosophy, you're looking for stocks that have a strong chance to double within 12 months. Everything gets promoted. Reduce your risk by doing your own research and figuring out what's real and what isn't.
TGR: Adrian Ash of BullionVault recently wrote that holding or buying gold today is a "bet on things staying all too much the same." This is interesting because most people who urge buying gold now expect inflation, hyperinflation, value devaluation and all of that. What's your viewpoint?
MF: My view on gold hasn't changed. It's been the same since I bought my first gold nuggets in 1979; that's more than 30 years now. It is simply a safe haven. It's an insurance policy. You can speculate in gold if you so choose, but it is a horrible investment. It should not be bought as an investment.
Except for the "Decade of the Aughts," the decade that just ended, it has provided no return on investment. You would have made more money if you'd put your hard-earned dollars in a savings account in your local hometown bank in 1979. The idea that gold is going to thousands of dollars—which we've heard continually since the early '80s when newsletter writers were talking about $1,000 to$4,000 gold…in my opinion, these gold bugs are promoting their own publications.
Gold is money. It goes up and down based on speculation, but there is a fair market value of gold that basically has to do with the money supply and the gold supply, and the inflation of the money supply and the gold supply—which is basically annual mine production.
TGR: So if it's based on money supply and we are increasing money supply, will gold escalate in synch with the money supply? Or at a different rate?
MF: That's just up to the speculators. I haven't seen Paul van Eeden's latest charts, but if memory serves, he last calculated the fair market value of gold based on the money supply at about $850 an ounce. I'm comfortable with that. I'm comfortable with $1,100 gold. Gold miners that do not make money at $900 or $1,000gold don't belong in the business. There are good mines; there are bad mines. My holdings of gold at any time are at least 10% of my net assets and always will be. I buy gold and sock it away for a rainy day. If the world goes into financial crisis again, I will be a well-to-do man because I own real money.
TGR: And many are saying that we are heading into a financial crisis. Our increasing money supply is going to cause inflation. Why wouldn't you buy more insurance when you believe the impending risk is even greater?
MF: Number one, I don't think that, and number two, I don't buy the hyperinflation scenario that the gold bugs promulgate. They will latch on to anything that will give them some fire power to convince the general populace that gold's going to the moon. I've been in this game for 30 years. I haven't seen gold go to the moon once. Have you?
TGR: Not at all.
MF: I'm not a gold bug. I never have been one. Gold closed at $1,096 at the end of 2009. I know one guy who guaranteed it was going to be $1,500, and another who guaranteed $1,260. And some people are way out in left field. Show me the beef. I'll stand behind my record of being bullish on gold, but not a gold bug. One of these years perhaps those of us who aren't gold bugs will be proven wrong. But so far we have a track record and the gold bugs don't.
TGR: Let's talk a bit about gold equities. A lot of the companies that couldn't make money at $900 gold have seen amazing increases in their stock prices this year. Granted the market was beaten down in '08. Considering where the gold price is now, do you think gold equity companies are generally valued correctly?
MF: Of course, it has to do with market psychology. And certainly the sector as a whole is valued much higher than a year ago. We all knew some good gold companies were undervalued a year ago. Whether they're going higher or lower or are due for a correction is tough to say. I think, again, it depends on the price of gold.
Suppose the price of gold goes up $100. I don't think it will, but if it goes back up to $1,220, the gold companies will go up. If it drops to $1,040 or even below $1,000, those companies are going to go down. It's difficult for me to get a sense of whether the gold sector as a whole is going higher or going lower. In times like these I would look for specific companies that are grossly undervalued with respect to their peers.
TGR: We'd like to hear about some of those companies, but first, help us understand why—with the amazing increase in gold price over the last two years—profit growth is nowhere near the increases in equity values.
MF: It's because operating costs have gone up. Mining is such an energy-intensive industry that the price of oil, and therefore fuel, tires, mining equipment, etc., all came to a head with $145 oil prices. Oil prices are high again, so operating costs have increased. Getting an ounce of gold out of the ground costs considerably more today than it did three years ago. That's really why you don't see mining companies making windfall profits.
In addition, all the major miners are scrambling to keep their production up. They're mining lower grades and less economic portions of their deposits because in a capital market environment they strive to maintain their ounces of gold production. There just aren't enough new good gold deposits being found and developed for the majors to be able to do that without mining lower grades, less economic ounces, and with higher strip ratios.
TGR: With this increased cost of production, what would you consider a fair market price for gold now?
MF: I'll go back to Paul van Eeden's concept of what gold is worth. A fair market price is probably somewhere between $800 and $900 an ounce now.
TGR: Now, could you tell us about some of those specific companies that you consider grossly undervalued vis-à-vis their peers?
MF: Sure. I have a few new ones. One company I'm looking at and haven't said boo about previously is Otis Gold Corp. (TSX:OOO), a very well-run company with a low number of shares operating in southeast Idaho with an advanced deposit. Otis did a 65-cent private placement in the late fall and is currently trading in the 55-cent range.
I also like Amarillo Gold Corporation (TSX-V:AGC), a company with two advanced gold projects in Brazil, superior management, and drill results expected soon. Sierra Minerals (SIM.TO) is another. It is a small gold producer in Mexico that is looking to grow much bigger. An explorer I follow is Canadian Shield Resources (TSX.V:EXP), which has a very tight share structure, a new leader, and a new focus on prospect generation in southern Peru.
A company that I've watched for two years and just wrote up in December, is Oremex Resources Inc. (TSX:ORM), a pure silver play in central Mexico. It was a 15-cent stock when I wrote it up and it's been trading as high as 20 cents recently. Oremex was on my radar screen because it has a very nice silver deposit, but it has had surface rights problems. It's making progress on those, and I think we can expect some positive news to come out on Oremex in the short- to mid-term.
TGR: How do you rate silver in comparison to gold as an insurance policy?
MF: Silver falls down drastically by that metric. Silver generally functions as an industrial metal. Most of the silver in the world is a byproduct of lead, zinc or copper mining, so the silver price tends to track base metal prices when the world economy is humming along. In times of financial distress it tends to operate more like gold, as a precious metal.
TGR: So you aren't big on silver?
MF: I personally hold silver. I own bags of junk silver, silver bars and silver coins. I hold silver as a hedge and as a safe haven against financial calamity, but these are holdings for the worst-case scenario. If the world goes to hell in a hand basket, it will be a lot easier to take a Mercury dime to your local baker and trade for a loaf of bread than it is to shave off a piece of a gold coin.
TGR: But you aren't seeing that worst-case scenario unfold?
MF: I'm not as concerned about financial calamity as I was 12 to 18 months ago. In the summer and fall of '08, I was very concerned.
TGR: It's interesting that you're not as worried about financial calamity when so many other people are saying we've now spent even more money than we'd ever dreamed of spending, we're inflating the M-1 and have the cost of national healthcare pending. Most people think it's worse today than it was a year ago.
MF: I would agree that those things are happening, but here are the reasons perhaps I'm less concerned than I was. I'm more financially comfortable now. 2009 was my best year ever in the stock market. I'm pretty much convinced the U.S. and the world are not going to melt down financially now as opposed to 12 to 18 months ago when that scenario looked like a possibility. And being an exploration geologist, I am by nature skeptical but an optimist at heart.
The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has nearly 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst for public and private companies, investment funds, newsletter and website writers, private investors and investment brokers, Mickey launched MercenaryGeologist.com in late April 2008 and can be reached at Mickey@MercenaryGeologist.com.
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.
DISCLOSURE:
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Otis Gold Corp., Canadian Shield Resources.
3) Mickey Fulp: I personally and/or my family own the following companies mentioned in this interview: Otis Gold, Amarillo Gold, Sierra Minerals, Canadian Shield Resources, Oremex Resources. I personally and/or my family am paid by the following companies mentioned in this interview: Oremex Resources is a sponsor of my website.
Mickey Fulp: The markets were so beat up in 2008 that equities became a place of safe haven. A lot of cash—itchy money, if you will—sitting on the sidelines poured into equities. In times of financial duress equities can become the preferred investment vehicles. It surprised everybody, I think, but 2009 turned out—especially in our junior resource sector—to be one of the best years on record.
TGR: And what do you think 2009's performance means for 2010?
MF: I don't want to venture there right now. I am still digesting things that happened in 2009 and trying to make up my mind where I see things going. Maybe we can talk about that the next time.
TGR: Certainly. Your specialty is to find undervalued junior resource companies and clearly there were a lot of them at the end of '08. How does that picture shape up going into 2010?
MF: I don't see a lot of undervalue in the precious metals sector, but there are specific companies that haven't reacted yet or have catalysts pending. So there are a few of those that I'm looking at.
TGR: Would you say the market's overvalued at this point?
MF: The market is valued at what the market says it is. It's oftentimes driven simply by psychology and those are touchy-feely things that are hard to get a handle on. The junior resource sector is certainly valued a lot higher than it was last year. Will it go higher or lower or will we see a correction? I think a lot of that depends on the price of gold.
TGR: We'll come back to gold prices specifically in a moment. In your last Mercenary Musing, you wrote about how we are led to believe things from trusted sources such as Santa Claus and the Easter Bunny. More relevant, you discuss the government talking about organizations that are too big to fail that we have to bail out, and—in terms of gold price—pundits telling us that gold prices will climb to multi-thousands of dollars per ounce. As an investor yourself, what are you hearing that really can't be trusted?
MF: I mitigate the risk of undeserved promotion with very detailed due diligence and research. You too need to do your own due diligence and your own research on anything you consider, looking at the three key criteria—share structure, people and projects. If you follow my investment philosophy, you're looking for stocks that have a strong chance to double within 12 months. Everything gets promoted. Reduce your risk by doing your own research and figuring out what's real and what isn't.
TGR: Adrian Ash of BullionVault recently wrote that holding or buying gold today is a "bet on things staying all too much the same." This is interesting because most people who urge buying gold now expect inflation, hyperinflation, value devaluation and all of that. What's your viewpoint?
MF: My view on gold hasn't changed. It's been the same since I bought my first gold nuggets in 1979; that's more than 30 years now. It is simply a safe haven. It's an insurance policy. You can speculate in gold if you so choose, but it is a horrible investment. It should not be bought as an investment.
Except for the "Decade of the Aughts," the decade that just ended, it has provided no return on investment. You would have made more money if you'd put your hard-earned dollars in a savings account in your local hometown bank in 1979. The idea that gold is going to thousands of dollars—which we've heard continually since the early '80s when newsletter writers were talking about $1,000 to$4,000 gold…in my opinion, these gold bugs are promoting their own publications.
Gold is money. It goes up and down based on speculation, but there is a fair market value of gold that basically has to do with the money supply and the gold supply, and the inflation of the money supply and the gold supply—which is basically annual mine production.
TGR: So if it's based on money supply and we are increasing money supply, will gold escalate in synch with the money supply? Or at a different rate?
MF: That's just up to the speculators. I haven't seen Paul van Eeden's latest charts, but if memory serves, he last calculated the fair market value of gold based on the money supply at about $850 an ounce. I'm comfortable with that. I'm comfortable with $1,100 gold. Gold miners that do not make money at $900 or $1,000gold don't belong in the business. There are good mines; there are bad mines. My holdings of gold at any time are at least 10% of my net assets and always will be. I buy gold and sock it away for a rainy day. If the world goes into financial crisis again, I will be a well-to-do man because I own real money.
TGR: And many are saying that we are heading into a financial crisis. Our increasing money supply is going to cause inflation. Why wouldn't you buy more insurance when you believe the impending risk is even greater?
MF: Number one, I don't think that, and number two, I don't buy the hyperinflation scenario that the gold bugs promulgate. They will latch on to anything that will give them some fire power to convince the general populace that gold's going to the moon. I've been in this game for 30 years. I haven't seen gold go to the moon once. Have you?
TGR: Not at all.
MF: I'm not a gold bug. I never have been one. Gold closed at $1,096 at the end of 2009. I know one guy who guaranteed it was going to be $1,500, and another who guaranteed $1,260. And some people are way out in left field. Show me the beef. I'll stand behind my record of being bullish on gold, but not a gold bug. One of these years perhaps those of us who aren't gold bugs will be proven wrong. But so far we have a track record and the gold bugs don't.
TGR: Let's talk a bit about gold equities. A lot of the companies that couldn't make money at $900 gold have seen amazing increases in their stock prices this year. Granted the market was beaten down in '08. Considering where the gold price is now, do you think gold equity companies are generally valued correctly?
MF: Of course, it has to do with market psychology. And certainly the sector as a whole is valued much higher than a year ago. We all knew some good gold companies were undervalued a year ago. Whether they're going higher or lower or are due for a correction is tough to say. I think, again, it depends on the price of gold.
Suppose the price of gold goes up $100. I don't think it will, but if it goes back up to $1,220, the gold companies will go up. If it drops to $1,040 or even below $1,000, those companies are going to go down. It's difficult for me to get a sense of whether the gold sector as a whole is going higher or going lower. In times like these I would look for specific companies that are grossly undervalued with respect to their peers.
TGR: We'd like to hear about some of those companies, but first, help us understand why—with the amazing increase in gold price over the last two years—profit growth is nowhere near the increases in equity values.
MF: It's because operating costs have gone up. Mining is such an energy-intensive industry that the price of oil, and therefore fuel, tires, mining equipment, etc., all came to a head with $145 oil prices. Oil prices are high again, so operating costs have increased. Getting an ounce of gold out of the ground costs considerably more today than it did three years ago. That's really why you don't see mining companies making windfall profits.
In addition, all the major miners are scrambling to keep their production up. They're mining lower grades and less economic portions of their deposits because in a capital market environment they strive to maintain their ounces of gold production. There just aren't enough new good gold deposits being found and developed for the majors to be able to do that without mining lower grades, less economic ounces, and with higher strip ratios.
TGR: With this increased cost of production, what would you consider a fair market price for gold now?
MF: I'll go back to Paul van Eeden's concept of what gold is worth. A fair market price is probably somewhere between $800 and $900 an ounce now.
TGR: Now, could you tell us about some of those specific companies that you consider grossly undervalued vis-à-vis their peers?
MF: Sure. I have a few new ones. One company I'm looking at and haven't said boo about previously is Otis Gold Corp. (TSX:OOO), a very well-run company with a low number of shares operating in southeast Idaho with an advanced deposit. Otis did a 65-cent private placement in the late fall and is currently trading in the 55-cent range.
I also like Amarillo Gold Corporation (TSX-V:AGC), a company with two advanced gold projects in Brazil, superior management, and drill results expected soon. Sierra Minerals (SIM.TO) is another. It is a small gold producer in Mexico that is looking to grow much bigger. An explorer I follow is Canadian Shield Resources (TSX.V:EXP), which has a very tight share structure, a new leader, and a new focus on prospect generation in southern Peru.
A company that I've watched for two years and just wrote up in December, is Oremex Resources Inc. (TSX:ORM), a pure silver play in central Mexico. It was a 15-cent stock when I wrote it up and it's been trading as high as 20 cents recently. Oremex was on my radar screen because it has a very nice silver deposit, but it has had surface rights problems. It's making progress on those, and I think we can expect some positive news to come out on Oremex in the short- to mid-term.
TGR: How do you rate silver in comparison to gold as an insurance policy?
MF: Silver falls down drastically by that metric. Silver generally functions as an industrial metal. Most of the silver in the world is a byproduct of lead, zinc or copper mining, so the silver price tends to track base metal prices when the world economy is humming along. In times of financial distress it tends to operate more like gold, as a precious metal.
TGR: So you aren't big on silver?
MF: I personally hold silver. I own bags of junk silver, silver bars and silver coins. I hold silver as a hedge and as a safe haven against financial calamity, but these are holdings for the worst-case scenario. If the world goes to hell in a hand basket, it will be a lot easier to take a Mercury dime to your local baker and trade for a loaf of bread than it is to shave off a piece of a gold coin.
TGR: But you aren't seeing that worst-case scenario unfold?
MF: I'm not as concerned about financial calamity as I was 12 to 18 months ago. In the summer and fall of '08, I was very concerned.
TGR: It's interesting that you're not as worried about financial calamity when so many other people are saying we've now spent even more money than we'd ever dreamed of spending, we're inflating the M-1 and have the cost of national healthcare pending. Most people think it's worse today than it was a year ago.
MF: I would agree that those things are happening, but here are the reasons perhaps I'm less concerned than I was. I'm more financially comfortable now. 2009 was my best year ever in the stock market. I'm pretty much convinced the U.S. and the world are not going to melt down financially now as opposed to 12 to 18 months ago when that scenario looked like a possibility. And being an exploration geologist, I am by nature skeptical but an optimist at heart.
The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has nearly 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst for public and private companies, investment funds, newsletter and website writers, private investors and investment brokers, Mickey launched MercenaryGeologist.com in late April 2008 and can be reached at Mickey@MercenaryGeologist.com.
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.
DISCLOSURE:
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Otis Gold Corp., Canadian Shield Resources.
3) Mickey Fulp: I personally and/or my family own the following companies mentioned in this interview: Otis Gold, Amarillo Gold, Sierra Minerals, Canadian Shield Resources, Oremex Resources. I personally and/or my family am paid by the following companies mentioned in this interview: Oremex Resources is a sponsor of my website.
