Financial Sense Newshour
The BIG Picture Transcription
March 1, 2008
- Monetary reflation, bailout, helicopter drops & other forms of intervention = Hyperinflationary depression
- Other Voices: Eric King, Analyst/Trader
- Other Voices: Mark Bailey, Director, President & CEO, Minefinders Corp. Ltd.
- Other Voices: David R. Webb, President & CEO, Tyhee Development Corp.
Monetary reflation, bailout, helicopter drops & other forms of intervention = Hyperinflationary depression
JOHN: Well, it's time we do some business and housekeeping here on the program. Just wanted you to know, first of all, I think Warren Buffett is coming around to your point of view, Jim, because Buffett's outfit Berkshire Hathaway took a major stake in the manufacturers of – drum roll – Oreo cookies. So apparently he seems to be agreeing with your Oreo theory. He thinks it's going somewhere.
Basically, he took a $4.32 billion stake in Kraft Foods which makes Maxwell House coffee and Oreo cookies and cheese whiz, all of that good junk food for you. Something else I have here. We're going to hold it up to the microphone. I'll sell this to you for $1000. I'm sure you're find this of value. This is a bill for 100,000 marks, Reichsbank note, written in 1923. It even says if you falsely reproduce this, you could be put in jail for over two years because this 100,000 marks, Jim, you going to give me a thousand bucks for it? Huh? I've got it right here. Of course that was from the time of the great inflation back in Weimar, Germany.
Well, where are we at the end of the week? Gold was floating somewhere around 972. Silver 19.78 last time I checked heading towards 20, just a few pennies shy of $20 now. Commodities are at double digits.
Have you been watching Bubblevision this week? They were talking about that, “is this a commodities bubble.” Are we on the same planet?
There are comments and articles about the great Bernanke reflation, which is sort of what it is, but even more important, Jim, more and more people are beginning to draw parallels between what happened in 1929 and the Great Depression and what we are setting the stage for today. So that's what's going to frame everything happening here on the Big Picture.
JIM: Yeah. We've been talking on the program. We did a series last fall on the great reflation. We talked about Germany, what happened there. And here's the conundrum that the Fed finds itself in. I mean if you were to listen to Bernanke on Capitol Hill he sounded like a battle field commander coming in on a war that is not going well. We have problems on two fronts: We have a financial crisis (the AIG losses reported after the market closed on Thursday); you also have an economic slow down. And then at the same time, you also have rising inflation.
So the more the Fed does to fight the financial crisis and the potential recession, the worse the inflation threatens to be. And quelling the financial crisis and lifting the economy remains right now, as the Fed indicated – and we're going to play a clip here shortly – remains the Fed's top priority.
And it's amazing all of the things that have come out this week, you've got – let me just get to this article. There was an article on the FDIC. They are hiring the FDIC staff for financial institutions that are closing down, they are even calling back retired employees. They are down to 223 employees according to FDIC spokesman Andrew Gray. The FDIC is looking to bring back 25 retirees from its Division of Resolutions and Receiverships, and that goes back to the late 80s, 90s crisis with the S&L where there were more than 1000 financial institution that failed amid the Savings and Loan crisis.
And so they are going to beef up the staff. They need to beef it up back up to about 400, and the regulators are bracing for well over 100 bank failures in the next 12 to 24 months; and they said they need to beef up their Receivership Management division, so if you're looking for a job as an auditor, the FDIC is currently rating 65 banks and thrifts as problem institutions at the end of the third quarter, up from 47. And, for example, in the S&L crisis, they had 572 problem banks and thrifts and even though more than a thousand.
So we have all kinds of financial problems that seem to be escalating out there, so as the economy weakens, we're seeing more signs of that. As financial conditions and credit tightens and gets worse, the Fed is going to respond with more money printing. And it was amazing because you had all of the Fed doves out this week. And they are making sort of the intellectual argument, if you will, for all of this money inflation that's coming. In fact, the Fed announced on Friday that their Term Auction Facility, they are going to beef that up to 60 billion for two credit auctions in the month of March. Since the TAF began, they've injected 160 billion, and by March, they will have injected 220 billion. And John Williams from Shadow Stats reports that M3, as of last month is growing now at about 16 ½%.
Let's go to that Bernanke clip where he is indicating that the Fed stands ready to basically chop down every tree in the forest.
BERNANKE: The FOMC has responded aggressively to the weaker outlook for economic activity having reduced its target for the federal funds rate by 225 basis points since last summer. As the committee noted in its recent post-meeting statement, The intent of those actions has been to help promote modern growth over time and to mitigate the risk to economic activity.
A critical task to the Federal Reserve over the course of this year will be to assess whether the stance of policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risk to growth, stressed financial conditions and inflation pressures.
In particular, the FMOC will need to judge whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore our policy stance must be determined in light of the medium term forecast of real activity and inflation as well as risks to that forecast.
Although the FMOC participant's economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain. The FMOC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely matter as needed to support growth and to provide adequate insurance against downside risks.
JIM: So, John, there you have Bernanke basically saying, look, we've got a lot of problems out there, and chief among them is what's happening with the economy and what is happening to the credit system and banking system.
And the Fed knows if the economy goes into a recession, then the credit situation and banking situation gets all the more worse because what happen is people lose their jobs in a recession, they can't make their mortgage payments. So you may have people right now that are perfectly fine financially, they are meeting their debt obligations, they are meeting their credit difficult card payments, mortgage payments, but in a recession people lose their jobs; and yet it is absolutely amazing as Ron Paul was talking about economic growth is healthy for the economy, but creating all of this inflation, there are going to be consequences. And that's what people don't realize is, look, everybody wants the government to bail people out, they want stimulus packages, they want tax rebates, they want all kinds of bailouts. But, John, all of that costs money.
And what people don't realize, the consequence of all of this intervention, the consequence of all of this money printing, the consequence of this government spending is the higher inflation rates that people are experiencing. I mean I don't need to tell anybody that has gone to a grocery store lately what is happening to their cost. I mean you've got gasoline prices in the mid-threes going up to four. You've got $2 for over a carton of milk. Everywhere you look, it is just absolutely amazing to see what's happening to costs. And unfortunately, you've got Fed governors coming out sort of preparing the intellectual arguments for, well, you know, if you look at the core rate –there were two Fed governors this week, Mishkin was one of them, coming out and saying, “you know what, well, the core rate of inflation isn't going up as fast.” The problem is, you know, most people don't pay the core rate of inflation. Americans don't pay their bills with core dollar bills. They have to pay them with regular dollars. And unfortunately it's going up much higher than what the Fed is leading on. [9:03]
JOHN: Yeah. But also because people don't understand that, then they turn to the politicians and say, “do something!” In other words, they don't understand the source of this. They understand that they are hurting, but they don't understand the source of the pain.
JIM: Yeah. Because they are saying, look, food costs are going up. We know food costs are going up because of government policies to divert almost 25% of our corn crop into the production of ethanol which is highly energy inefficient, so that is the government policy that is driving inflation.
This week we had a shut down of a nuclear power plant that cut power to a lot of Florida residents. John, we don't have spare capacity in the grid system. In California, any time during the summer when we experience a heat wave that comes through the state, we get rolling black outs because they are not building power plants. We’ve decided even though we're going to export coal to other countries where they are building clean coal power plants, we are not going to build them here. We are still late in getting our nuclear power plants. So all of these government policies are creating this and then Obama has got a UN tax that would impose almost a 1% tax on the gross domestic product of this economy and that tax would be imposed on energy producers.
And John, you and I know corporations don't pay tax. Individuals do. Because what's going to happen, it's going to drive up the cost of producing power, and that cost is going to be passed on to you and I as consumers. [10:32]
JOHN: Yeah. I think what you're trying to say there so people understand is yes, there is a corporate income tax, but what the corporations do is just simply fill out the forms, they write the check, but they pass that cost on through to their clients who are using their services or their goods. So ultimately, the tax just funnels right around back through to the normal tax payer.
JIM: Just take a look at this Obama UN tax on the US, equivalent to 1% of our GDP. That's going to be a 75 to $85 billion tax that's going to be placed on the energy industry, and this is a Senate bill that he's proposed. And what is a utility going to do? If you increase a utility’s cost by 10%, what are they going to do? They are going to go to the rate commission and say, look, our cost just went up 10%. We need to have a certain rate of return in order to produce power. We're going to apply for a rate increase to cover this cost, and it's going to be passed on to the consumer.
So there are consequences to all of these actions that the government creates these problems, and then we as consumers see it in our day-to-day lives. It's absolutely amazing. I started out my career in this business in the late 70s, and the two words in the financial planning industry that we were helping people to cope and plan for were: taxes and inflation. And here we are, John, almost 30 years later. We've come full circle again to rising taxes and inflation, and people kind of wonder, “well, gosh, why are milk prices, why are beef prices, chicken prices, why are my utility bills doing up, why are gas bills going up.” And it's simply this: The government is spending more than it takes in and in order to pay for that, they create inflation. [12:18]
JOHN: Let's put this into some perspective because a lot of times here on the program we become what I call US centric, and the whole issue of monetary expansion is not just a US phenomenon. That's the first thing. This is happening worldwide. All of the major central banks are expanding their currencies. I guess you can compare currencies to ships on an ocean. They've all got holes in the bottom, and some are sinking faster than others, but they are all sinking.
Number two, as a result of that, we're finding commodities worldwide continue to soar upwards, and always keep that in mind as we say that, that people in different countries always turn back to governments the cause of the problem to say “fix the problem.” And that's the conundrum that the tax payer worldwide gets stuck in.
JIM: Yeah. We comment on this periodically, but I think it just stresses the point. I mean you have Russian money supply growing at 44%, India's money supply growing at 23%, Australia's money supply growing at 23%, Brazil growing at over 18%, Denmark at 17, China at 17, England's money supply growth rate at 12%, Mexico's at 12, Korea's at 11, the US is at 16 ½.
Now, when money is created, people don't take this money and credit that these central banks and governments create in the economy. It doesn't go under a mattress or somebody buries it in the backyard. It finds an outlet to some form of investment, either a tangible good. And one of the areas it's finding way in is into the commodity sector.
Now, this is how you do get bubbles created. You have a supply and demand imbalance, which is what you have in commodities today. You have more demand for energy than there is supply. Supply is struggling to keep up with that demand. So as money is created, it's going to find the outlet. And commodities are not a bubble yet, but I believe very strongly by the time we're done with all of this that will be the ultimate bubble.
Now, putting this into perspective, last year we had oil prices up nearly 60, 70%. Already, year to date, we've got oil prices up over 6%. We've got heating oil up over 7. You've got natural gas prices up 27%. You have coal prices up 17. Steaming coal up 15. You've got gold prices up 17%. Silver up 33 ½%. Remember we said one of our predictions is that silver would out perform gold this year and that's proven to be the case. Platinum prices up 39, almost 40%. Palladium up 43. Aluminum spot prices up 30. Copper prices – remember, with the economy is slowing down, copper was going to decline. Huh-uh. Copper prices up 28%. Led up 32. Nickel up 21. Tin up 14. Zinc up 16. Ethanol prices up 7. Corn up 20. Wheat prices down slightly this year, down about 6%. Soybean prices up 24%. Sugar prices up 26%. Cotton prices up 18.
John, I could go on and on. When you see those raw inputs into the production process, whether you're making food or you're building something, steel or whatever it is, these are the raw inputs. And when they are going up like this, manufacturers have no other choice but to pass these costs on to the consumer.
And so while all of these costs are going up, while we are begging for the Fed to lower interest rates, we're begging for the government to intervene, give us rebates, take away this pain, what we don't realize, it's just going to make it worse, which is what Ron Paul was basically talking about that. [16:14]
Chairman Bernanke, earlier you were asked a question about the value of a dollar, and you sort of deferred and said, “you know, that's the Treasury’s responsibility.” I always find this so fascinating because it's been going on for years. Your predecessor would always use that as an excuse to not talk about the value of the dollar, but here I find that the chairman of the Federal Reserve who is in charge of the dollar and in charge of the money and in charge of the what the money supply is going to be, but we don't deal with the value of the dollar.
But you do admit a responsibility for prices. But how can you separate the two? Prices are a mere reflection of the value of the dollar. If you want to control prices, then you have to know the value of the dollar. But if you're going to avoid talking about the dollar, then all you can do, then, is deal with central economic planning. If we stimulate the economy, maybe there will be production and prices will go down. And if prices are going up too fast, you have to bring on a recession. You have to try to balance these things, which I think is a totally impossible task and really doesn't make any sense because in a free market if you had good economic growth, you never want to turn it off because good economic growth brings prices down just like we see the prices of computers and cell phones. Those prices come down where there is less government interference.
But you know, the hard money economists, who have been around for a while, they have always argued that this would be the case. Those who want to continue to inflate will never talk about the money because “it isn't the money supply that is the problem. It's always the prices.’ And that is why the conventional wisdom is everybody refers to inflation as rising prices instead of saying inflation comes from the unwise increase in the supply of money and credit.
And when you look at it, and I mentioned in my opening statement that M3 now measured by private sources is growing by leaps and bounds. In the last two years, it increased by 42%. Currently, it's rising at a rate of 16%. That is inflation. That will lead to higher prices.
So to argue that we can continue to do this, continue to debase the currency, which is really the policy that we're following, is purposely debasing, devaluating a currency, which to me seems so destructive. It destroys the incentives to save, and if you don't save, then you don't have capital.
Then it just puts pressure on the Federal Reserve to create capital out of thin air in order to stimulate the economy. And usually that just goes into malinvestment and misdirected investment into the housing bubbles, or the NASDAQ bubble. And then the effort is once the market demands the correction, what tool do you have left. Let's keep pumping, pump, pump, pump. And it's just an endless task. And history is against you.
I mean history is on the side of hard money. If you look at stable prices, you have to look to the only historic sound money that's lasted more than a few years. Fiat money always ends. Gold is the only thing where you get stable prices. For instance, in the last three to four years, the price of oil has tripled. A barrel of oil 20 to $30 up to $100 a barrel. And yet, if you look at price of oil in terms of gold, it's absolutely flat. It's absolutely stable. So if we want stable prices, we have to have stable money. But I cannot see how we can continue to accept the policy of deliberately destroying the value of money as an economic value. So immoral in the sense of how about somebody who saved for their retirement and they have CDs and we're inflating the money at a 10% rate. Their standard of living is going down, and that's what's happening today. The middle class is being wiped out and nobody is understanding that it has to do with the value of money – Prices are going up.
So how are you able to defend this policy of deliberate depreciation of our money? [20:11]
JOHN: Of course, that was congressman Ron Paul this week testing the value of Ben Bernanke’s anti-perspirant because it's getting harder and harder to slough that off; isn't it? As things continue to unravel in this area here, the value of what he's saying is becoming clear to a lot of people.
JIM: You know what's interesting, if you go back and study the great inflation in Germany, you had members of the Bundesbank (at that time it was the Reichsbank actually) making the intellectual arguments about, well, you've got all of this rising prices, but it's due to the falling Reichsmark, and that's not our fault. Now this week you had two or three governors come out and say, basically, they are making the intellectual argument for further inflation. And that is a warning, John. And I think it's one of the reasons why you've seen since the beginning of February the dollar has lost about three or four percent of its value, and many think it is going much, much lower. But bear in mind, we're not the only ones doing this. Other currencies are losing their value. As the great market technician Richard Russell recently wrote: “There is something strange going on. There is something that nobody is picking up. Gold is going up against almost everything.” Meaning that everything else is depreciating in value against gold. [21:14]
JOHN: Yeah. But having said all of that, Jim, that mind set that you're talking about that, in other words, that even Ron Paul is talking about that we need sound money it's making a huge amount of traction. However, at the same time we have Wall Street crying for cheaper money; and out of Congress, now, there is a plethora of intervention proposals now on the table. Why don't you list some of these because this is going in exactly the opposite direction.
JIM: Yeah. And what is absolutely amazing is now the next stimulus program – it’s been called ‘Son of Stimulus’ is they want a tax payer bail out program for these bad loans and mortgages. You've got almost five or six of them out here. You've got representative Barney Frank who wants to allow the Federal Housing Administration to help up to one million distressed homeowners refinance into government-backed loans and spend 10 billion on loans and grants so states can buy up foreclosed properties.
The most dangerous one is by Senate leader Harry Reid. He wants to allow bankruptcy judges to alter the terms of mortgages in foreclosure. So what he's arguing for here is let's say you buy a house for 100,000. You have a 95,000 mortgage on the house and suppose you can't make your payments as they are reset. So now the value of you're property has dropped to, let's say, 70,000. You file in foreclosure. What happens is the bankruptcy judge can say, “you know what, your new mortgage is not 95,000. We're knocking it down to 70,000. And instead of a 6% interest rate, I'm going to determine your interest rate is going to be 3% because that's all you can pay.”
What people don't realize that does is first of all, that would dry up credit. And secondly, it would almost cause interest rates to triple because if you're a banker, how do you make a loan under the premise that the terms of the loan agreement that you've made may be changed arbitrarily by some judge.
And John, just imagine the fraud that can take place. Someone goes out and lives way beyond their means, charges up a bunch of things on their credit cards, they default on their mortgage and then they get their mortgage reduced and the interest rate reduced because some judge says, “okay, this is all you can pay, well, we'll knock 30 grand off your mortgage and we'll drop the interest rate in half.” No lender is going to want to operate in an environment where the sanctity of contract law...you know, there was – you've seen the book and I think you’ve read it, John, I interviewed the gentleman many, many years ago, not on this web cast but when I was doing local radio in San Diego, and he wrote a book called The Mystery of Capitalism and his name was Hernando de Soto, and he did a study of why there was poverty in the world and why there was prosperity. In other words, why was South Korea prosperous and why was North Korea filled with poverty. And he looked at that and it was the sanctity of property rights that distinguished the difference between those countries. And everywhere you look around the world, when there is no sanctity for contract law, there is no sanctity for property rights, there is no capital build up. There is no capital accumulation because there are no safeguards for accumulating capital.
And Harry Reid's proposal to basically leave judges to decide what happens in a mortgage foreclosure...You've got another proposal by Chris Dodd, for example, which would be similar to the Depression era Homeowner's Loan Corp, which would buy troubled mortgages from banks and investors and move borrowers into more affordable loans with government backing. You have Credit Suisse recommending that thousands of additional borrowers to qualify for loans backed by the FMA. We just had the caps lifted this week for Fannie and Freddie to allow them to make jumbo loans up to 700-and-something thousand dollars.
And there was a proposal this week by a very well known economist that says that policy makers should consider – and this is by the way on the agenda – a tax payer finance fund to buy mortgages and mortgage securities. So we would bail out the banks, and we would bail out people that have got into debt over their eyeballs. The question is for those people that are working hard and making their mortgage payments, they are going to get stuck with this because you can't do these bailouts, you can't print money, you can't guarantee loans without it costing anything.
See, what politicians don't tell the voters is this is all going to come at a great cost: Your personal freedom, jeopardy to property rights, higher rates of inflation. And yet what do we hear? There is a chorus in Washington calling for bailouts. [26:34]
JOHN: Yeah. What it's doing is taking people who made good loans and still maintaining them, they are going to fund the loans that went belly up. That's sort of putting it in vernacular that people can understand. It's also interesting, there was an article by Ambrose Evans Prichard in the London Telegraph – I've been reading his stuff for years – and he said inside the Fed right now there was an obscure paper written by Fed staffers David Small and Jim Clouse exploring what could be done under the Federal Reserve Act when banks refuse to loan because, as I was talking to one loan officer for a bank, he says “we're trying to figure out what's going on because in trying to package loans for people now, the prime will go down and yet the interest rates bankers are willing to loan at goes up.”
And apparently according to section 13, sub 3, allows the Fed to take emergency action if banks become unwilling to provide credit. A vote by five of the Fed governors can in exigent circumstances –is what it says in this paper – authorize the bank to lend money to anybody and take upon itself the credit risk. And it's been ages since that clause was evoked, but that's exactly the situation you’re talking about here as banks go, “whoa, this is getting a little flakey.” [27:44]
JIM: That's interesting that you bring up that article because we're going to start another series called helicopter drops. And during 19 – I think it was 1999, Ben Bernanke wrote a piece for Foreign Affairs saying, “look, if we get into a deflation, here are some steps we ought to take.”
Now, for example, the Term Auction Facility that the Fed is now using as part of its tool box including another 60 billion coming next month, that was in these papers. And there was a series of papers written by the two Fed research staffers that you just mentioned. There was also a paper by Bernanke, and is there was a series of papers written between 1999 and 2002. And remember when we were going through the tech bubble, the events of 9/11 and a recession, and Greenspan cut interest rates from 6% down to 1% and the economy was having a difficult time gearing up again until finally they cut it so low that they gave us the real estate bubble; and now we're dealing with the consequences of that bubble as it burst.
But I want to go through those research papers and we'll do that. We're going to start another series because as these traditional remedies do not work, you are going to see more intervention and you're going to see Fed policy expand in ways that we've never seen. And this is the guy that says, look, forget about deflation. A central bank can always create inflation because there is no limitation in terms of the amount of money and credit that we can create.
And unfortunately, John, all of these bailouts, all of this money printing, all of this lowering of money is going to cause great harm to the economy, our economic freedoms and higher rates of inflation and it's going to hurt the middle class and the poor who are crying for the very remedies that are going to make their life miserable. [29:44]
JOHN: Yeah. But that is the limitation. I think he's wrong about that. I mean there is a real world limitation in that at some point the middle class and the lower classes can't take the abuse anymore. And as I mentioned earlier, remember earlier in the conversation, the middle to lower classes when they see this still don't understand what causes it, and call for those things that you're talking about that. It does make it worse, but sooner or later, there is a blow out. It just can't go on forever.
JIM: But unfortunately, if you look at the sequence of events, I mean imagine the steps that Congress is now taking right now when we have a 5% unemployment rate and economy – well, you know, the numbers are somewhat suspect, but let's say we're not in a recession yet officially; I think we are if you use real inflation numbers – but what are these guys going to do by 2010 when we're in a depression because the sequence that we're projecting here is this year we've got a rough first quarter – the Oreo theory – we're going to have a creamy filling because listen, there are going to be enough stimulus packages, they are working full-time right now in Congress on a series of new stimulus bail out programs and that will give us that creamy filling. But John, the hard outer core by the fourth quarter, the headline inflation numbers are going to come back to haunt the Federal Reserve and to haunt politicians, but right now, politicians don't care because right now they are trying to preserve their jobs because everybody's job is up for a vote here coming up in November.
So like we say, this is the silly season. They are going to do every dumb and stupid thing possible to interfere in the economy, and what's going to be – depending on what the outcome of the November election is going to be, then we may have a very anemic recovery from the recession. The recession may last longer than the experts expect, and even when we come out of it, then they are going to enact, depending on who is elected, a whole series of things that are just quite frightening. And that's going to take us into another recession in 2010. And it will be the policy response made by government that will turn that recession into a Great Depression, but this time it's going to be hyperinflationary. [32:10]
JOHN: Yeah. In other words, we'll bail it out this time, but when they try it again, it will blowup in their faces. That's what's going to happen.
JIM: Yeah. And even though they are going to be able to throw enough stimulus, cut interest rates, I mean they are going to be chopping trees down and printing more money like you've never seen before, and it's just going to barely bring us out of a recession. In other words, you're going to experience stagflation, higher rates of inflation, anemic economic growth. And then they are going to make a series –depending on who is elected if they raise taxes, if they are talking about all of these massive regulations and programs. And we're not going to get into that in this program. We're going to wait until the candidates are confirmed in both parties and then we're going to examine their policies and then we're going to talk about exactly using historical precedent what has happened when you use these policies. And what I expect that we'll also be going into, John, is capital controls and wage and price controls because there will be a clamor from the public, just as they don't understand what's causing the inflation that they are experiencing in their personal lives, there will be a clamor to come in and freeze prices and freeze wages and, you know exactly what happens when you do that, John, you get shortages. [33:30]
JOHN: Could you explain to people how that works. As you mentioned that, it just really occurred to me, when we do try wage and price controls what is the steps. First of all, people say stop the price – freeze the price and wage. Next step, okay. The government does that. Then what happens?
JIM: Well, your producers stop producing. You see as a classic example is rent controls. Governments will come in to a local area and they won't allow landlords to raise rents and what that does is stop new supply. No landlord is going to go out and finance a new apartment complex and built it with the cost of money and then have the government tell them that you're going to limit them in terms of what you can produce. A good example of this is from China. In China, there are small oil refiners. They call them tea pots. These are refiners that produce maybe 10 to 20,000 barrels of oil a day. Well, in China, energy is subsidized, so you cannot sell gasoline products or diesel products at market prices because the government limits the price.
And so what has happened, and especially last year when we saw the price of energy go from $50 to almost $100, well, these refiners who have to import energy in the world markets could not import oil and refine it and sell it at a price where they could make money. They were losing money, so they stopped producing. And as a consequence, now, China is now going into the world markets and they are buying refined oil prices from gasoline to diesel to jet fuel.
And so there was a shortage that was created, and that's what happens. You stop production when you do this because no business is going to operate at a loss. You can't say, all right, we want you to stay in business, we want you to produce something and do it at a loss to yourself. I mean what happens, people just throw up their hands, they shut down their business or they stop producing. But that will not stop the politicians from appealing to the cries coming from people as they see their wages stagnate because their wages aren't keeping up with inflation. Employers, if you're a wage earner, you can't go into your boss and say, “look, my cost of living is up 10%, you're raising my taxes, so I need a 15 to 18% pay raise to stay even.”
And one of the reasons we did the Great Depression book with Murray Rothbard is the very policies that turned a recession and a stock market correction into the greatest bear market and greatest depression in history are exactly the policies that are being implemented, being recommended and are now being advocated by a broad group of individuals in this country and the consequences, we're seeing them right now when you talk about the inflation rates that people are experiencing. [36:25]
JOHN: Let me ask you a question. Is there a sort of a round two when the – you've got my curiosity here – when we start waging price control and government sets it into effect and businesses say, “oh, phooey on that, we're just going to shut down, we're going to lay people off” – unless they've prohibited that. Does government try to come back in and force business to do something? Has there ever been a historical record of doing that?
JIM: Well, they can try it. What you do is you get into rationing at that point because production stops, it's curtailed, shortages arise and then you have the government rationing. And I can see that. We're not too far away from that.
JOHN: So that's round two, in other words of the whole process.
JIM: Well, round two will be bailouts, more tax payer bail out of Wall Street and these homeowners. And what was amazing, John, when you looked at the defaults in 2007, over 60% of the real estate loans defaulted on had to do with fraud. In other words, when you got these no-doc loans, people were lying about their income to qualify for the loan. So, yeah, they talk about some of the abuse of the lenders, but you know what, there were a lot of people out there that were lying on their mortgage applications. I have a friend who works for a very well known national bank, and the abuse and the lying and the cheating that was going on in the loan process was absolutely amazing. And this friend of mine, they called him Dr. No because he turned away more mortgages and that was his job at this institution was find and make legitimate loans, find legitimate income, and that one of the reasons this particular institution does not have the loan write-offs and problems that some of the other banks did.
And it's absolutely amazing, but this is the world that we live in today, and yet the consequences of inflation – the symptoms, rising prices, if oil goes to 150, they will penalize the oil companies. They already have plans to do that, which means they will produce less.
And this is what happened last time they passed a windfall profits tax. Congress in looking back in their own Congressional study came to the conclusion the result of the windfall profits tax is that it drove our imports up, drove production down in the United States and caused us to produce less. So it's amazing. It's almost like no one has ever taken a history course or read history to see what happens. It's like we have short memories, or we think, well, this time we can do this better because we're smarter than those guys that did this the last time. And that's why, John, you are seeing as a consequence of all of this, you're seeing gold at 974, you're seeing silver at close to $20, you're seeing soy beans at 14. I mean there are consequences to these kind of actions, which is what Ron Paul was trying to hold Bernanke accountable saying that by doing all of this, here is the consequence; this is what's happening to the value of the currency; you're just going to bring more pain for the poor and the middle class in this country. [39:31]
JOHN: Yeah. I don't think they think – maybe some idealists think they can do it better. I think politicians just run before the wind, so to speak, and they don't care about next week, next month, next year. It's just “what do we have to do right now to keep this whole game afloat.”
JIM: Yeah. I mean right now, this is an election year, and the only thing they are worried about is maintaining their jobs and that's why they are coming with all of these proposals. And it's one of the reasons we're doing a gold show this week is why do you think the price of gold is at almost $1000? And as you will hear or at this part of the program if you listen to the roundtable why many on the roundtable feel that gold is going to 3 to $5,000.
JOHN: You know, I guess, as we talk about all of this, one thing keeps pinging in my mind, and that is you and I can sit here and talk about what should and should not happen. But we both know that historically governments and politicians go down this trail almost inexorably. So if there is one lesson that history is teaching us right now, we're condemned to repeat this because they are insisting on doing it right now. And that's where we're going.
So if we know that's where we're going, what are investors supposed to do? How do people literally defend their money, their retirement, their savings in an environment like this. And I'm predicting – I'm going to lay money on this – I guess I forgot who’s going to bet me against it – we're going to hear terms like “economic terrorism” in the near future. And that's going to be anyone who tries to defend themselves against the ravages what’s coming.
JIM: Obama has a bill called the patriot act, a bill where he's going to punish businesses if they don't do what he wants them to do. And John, that's already coming. And so that's why we've done this gold roundtable. The only thing you can do is protect yourself.
Now, people outside of the United States in Europe, in the Middle East and Asia understand this concept. They've gone through the ravages of inflation. They've gone through dictatorships. They've gone through tyrants, and that's why gold is held with such greater sanctity in these kind of cultures versus what is held here. I mean, you know, you've got commentators on TV, “gee, there is a commodity bubble” and they have no clue in terms of what is causing inflation. Or they'll say, “well, the oil prices are up. It's OPEC.” They don't understand what inflation is. And that's why I think you've got to protect yourself.
And there are two themes. We're going to be developing a new theme and pair that theme with an old theme that we've had. I wrote a piece going back to the year 2000. I said, look, if you want to make money in this decade and thereafter, you need to be into things that people need. So we talked about precious metals because of inflation, energy for peak oil and rising demand coming from China. We talked about water, which is a precious resource, food, and then I added infrastructure. Those are the five themes.
And what you're going to want to move away from is the age of consumerism in the United States is coming to an end. Are retail sales going to fall off a cliff? No. But gradually consumerism is going to decline a slow death. And the reason, John, is inflation and taxes. As individuals see the cost of living go up for chicken or for gasoline prices or utility bills, they are going to have to cut back. As the government raises taxes –depending on who is elected – as their tax rates go up and as inflation goes up, that simply means they are going to have less money to spend on consumer discretionary items. So that's a thing that we're going to be developing here and hopefully help you to protect yourself because if you're relying on government to protect you, you're going to be sadly disappointed, and you're going to end up in poverty, so the best thing you can do is fend for yourself because it's “history is doomed to repeat itself.” And we're seeing that unfold with such clarity here. People are going to see their savings wiped out – the value of their assets if they are in the wrong asset category; they are going to experience real impoverishment. [43:53]
JOHN: Yeah. You know something that's a side effect to this by the way we haven't mentioned today, and that is a vibrant underground economy not just for illegitimate things like drug running or something along that. And you're beginning to hear the rumbles of this from small businesses. Every small business person you hear talking in an interview lately over the last couple of weeks I've noticed the one comment they all make are: “taxes are killing me.” They make it all uniformly.
And the second rumbling, and you get this only by way of indirectly talking to people as people are going, okay, that's what the law says “now here's what we're going to do” –that type of thing. So that actually forces people into that position. I remember Ron Paul 25 years ago saying that as a congressman he believes in telling people to obey the law. But on the other hand, he said, when they get pushed into these circumstances, can you blame them for doing what they do because it's hitting the point when they [have no other choice]. So he said there is a real conundrum there.
JIM: Yeah. So we're going to start a series. One series that we're going to start up next is I'm going to take the Fed research papers written from 1999 to 2002, just to let you know where we're going with helicopter drops and the various things that governments are going to do. And like I said, we're going to repeat all of the great mistakes made during the Great Depression.
In fact, there is a great book written by John Thomas Flynn called The Roosevelt Myth, which just talks about all of the mistakes the Roosevelt administration made that lengthened the Great Depression and actually made it worse. And in fairness to Roosevelt, I mean, he just copied what Herbert Hoover did. And one of my themes for next year is get ready for Hooverization because it's coming. [45:40]
JOHN: And as we fade into the distance here at the end of the first hour of the Big Picture, maybe we should run a clip here from senator Jim Bunning of Kentucky who on Thursday challenged Ben Bernanke on the whole issue of unemployment and the fact that the Fed should have seen it coming.
BUNNING: The unemployment rate in the United States of America, and that moved from 4.9 to 5% in the fourth quarter. Where is it now? Where do you estimate it to go in the first quarter of 2008?
BERNANKE: It jumped in December from 4.7 to 5.0 which is a pretty significant jump and it was certainly something that we looked at.
BUNNING: Well, that was kind of indicated by the low growth rate and the reasonable expectation that the job rate would be higher unemployment in the fourth quarter. I'm asking about 2/08.
BERNANKE: Well, I recorded our projections for the fourth quarter which were 5.2 to 5.3% in the fourth quarter. We're seeing unemployment insurance claims rising, which I think is consistent with the somewhat higher unemployment rate going forward.
BUNNING: What are you telling me?
BERNANKE: That the unemployment rate is likely to go up from here.
BUNNING: How bad? Are you seeing 5.6? 5.7?
BERNANKE: The baseline projection we've made for the fourth quarter is 5.2 to 5.3, but there are downside risks. Things could get worse than that. We don't know, but it's not our main projection. It's just a risk that we see out there.
BUNNING: Then does that bode well with the lowering of interest rates in the higher rate of unemployment? That indicates to me that someone in the Journal today that talked about stagflation might be talking more sense than we might anticipate.
BERNANKE: Again, Senator, we're just trying to balance the risks of growth, inflation and financial stability. Monitoring policy works with a lag and therefore we have to –
BUNNING: I understand that very clearly. We should have lowered rates earlier and all of a sudden we lowered them 2.25 basis points. 225 basis point in less than, what, six weeks, eight weeks.
BERNANKE: It was 125.
BERNANKE: Yes, senator.
BUNNING: Well, if you count the fourth quarter of last year, what was the total?
BERNANKE: We lowered 50 base point in September, 25 in October, 25 in December and 125 in January.
BUNNING: And it was 225.
BERNANKE: Not in the forth quarter.
BUNNING: No. No. In total. In total since the last quarter.
BERNANKE: That's right.
BUNNING: That's considerable. And the market conditions indicated that that was absolutely necessary.
BERNANKE: I think so. The housing market decline and weakness in the credit markets were suggestive of the solid –
BERNANKE: The weakness in the credit markets, chairman Bernanke, were signaled last year early in the year. It didn't take a rocket scientist to figure that out. And I know with all of the great economists that you have on the Federal Reserve and your members of the Federal Open Market Committee are a lot sharper than the people sitting up here at this table, and you had a big heads up signal that the housing market was in the tank early last year.
BERNANKE: But the housing market was not affecting the broad economy. When we lowered interest rates on the last day of October, that morning we received the GDP report for the third quarter of 3.9%, which was subsequently revised to 4.9% and inflation was a problem. So in fact, I think as we look back on this episode, we will see that the Fed lowered interest rates faster and more proactively in this episode probably than any other previous episode.
As you point out, the unemployment rate is still below 5%.
BUNNING: I lived through the Greenspan years. I know exactly what you're talking about. [49:11]
JOHN: And the voice of senator Jim Bunning of Kentucky. You're listening to the Financial Sense Newshour at www.financialsense.com as the Big Picture continues.
JOHN: Well, Jim, you know, there are a lot of people who have jumped into doing financial radio broadcasting on the net, so what we try to do being one of the first shows ever out there is to stay ahead of everybody else and I figured out that we're going to try to improve the Financial Sense Newshour, keep the level of quality and professionalism, and what we're going to do next here is come up with a whole new concept for Financial Sense Newshour and incorporate the information that the financial channels display at the top and bottom of their picture frames into our radio program.
JIM: This is radio, and just how do you propose to do that?
JOHN: Well, it's not hard. For example, we need to have the network logo in the lower right-hand corner of the picture <sotto voce> “FSN, FSN, FSN”. So there you are. There you have the logo running constantly in your sort of audio picture here, and then you want to animate the logo so it sort of flips around, sort of like this: “FSN, FSN.”
JIM: Okay. Then what?
JOHN: Then we need market indicators displayed across the top of the screen just like they do on big things like Fox Financial and CNBC, so here goes.
[robotic voice] S&P down 13 points.
JOHN: Wait. Wait. Wait. There is more. Then we add the ticker at the bottom of the screen here. Watch this.
The DOW down 1 ¾.
JIM: wait a minute. Wait a minute.
JOHN: Wait a minute. It's getting better and better. Now we have to add count downs on the screen to important metals report.
15 seconds until the metals report.
JIM: This is getting out of control.
JOHN: Okay, Jim. Now, do your market wrap –
JIM: What? I can't hear you.
[voices of Jim and John getting drowned out]
JOHN: I said do your market wrap.
JIM: Did you say the market is going to crap?
JOHN: No. Do the market wrap.
JIM: John, John, this isn't going to work.
JOHN: What? I can't hear you. If you don't do it, it's not going to work.
JIM: Turn it off.
JOHN: You don't think it will work, huh?
JIM: John, I think we're just going to have to jettison this idea.
JOHN: Oh, bummer. Can't even use a logo, huh. You know, alittle logo at the top of –
JOHN: All right. Back it the boring, ordinary, normal Financial Sense Newshour. [sotto voce] FSN. FSN. FSN. [mischievous laughter]
Other Voices: Eric King, Analyst/Trader
JIM: Well, we’re off to another good start for the gold market this year, even though there’s been some corrections along the way. We’ve got gold prices just about $40 away from the $1000 mark; we have the gold indexes – the big boys – are up nearly 19% for the year. But it’s been a wild ride.
Joining me on the program this week is private investor Eric King.
Eric, I wanted to have you back this week on the gold show. Last time I had you on the show, I usually bring you on whenever there’s a major correction and people are jumping out of windows. I think the last time you were on the program was in the middle of January when we had quite a nasty correction in the last couple of weeks in January in the HUI. So I want to get your perspective because you’re one of the best chart readers I know of and let’s talk about this market technically because there are a lot of technicians out there saying we’re headed for a double top; some people are calling for a correction to go down quite a bit. So let me get your take of the charts right now.
ERIC KING: Well, I tell ya, the charts are interesting. And I say that only because from a longer term perspective you really do have gold extremely over bought. But let me say this also, that’s what happens in bull markets; they kind of surprise you habitually on the upside. And then of course in the gold market we seem to have these nasty shake outs as well. So I think that with regard to some of these stocks – I know last time we were on, Jim, we had the HUI had a nasty 13% correction. There are two issues with sentiment right now. And I find it kind of interesting – if you look at sentiment on gold and silver, I think we have gold at around 93% bulls, I think silver is 94% (silver is the highest it’s ever been in history I believe) so as they push towards the magic $1000 gold and silver $20 area, you know, some place up here, could we get a nasty set back and sort of shake people out and have a correction? I would say, you know, it’s quite possible. And so you’ve got people that are holding GLD or SLV and so you may have some people who try to kind of flip out of some of those instruments and maybe try to repurchase –those who are traders – at lower levels. I don’t know how high silver will go in here before we get sort of an intermediate top or how high gold is going to go. There are some red flags as I said with sentiment. We’ve got some kind of goofy money coming in to the metal market, too, but there’s also some selling going on so it’s sort of a hard read. It’s kind of an art form trying to pick a top. But you know in my discussions with some other folks, we really don’t see the manic behavior in certainly some of these juniors that have just been cratered; and we don’t really see a tremendous participation broadly by the American public or even by fund managers for that matter. So it tells me that, yes, we’re still somewhat early on in the bull market but also from a shorter term perspective we’re definitely going to have some hiccups and some type of corrective behavior as we go through here. Like I said, we’re very over bought on the longer term charts and with sentiment, again, being as bullish as it is on the consensus people should probably – some of the professionals may very well lighten their loads as we push to $1000 or through it, and on silver as we get to 20 or get through there (but, you know, then they’re gambling that they can buy it cheaper), so it’ll be interesting to watch. It’s one hell of a ride that’s for sure. [56:04]
JIM: What is it, Eric, technically that are about even numbers whether you’re looking at the S&P 500, you talk about a 1400 level for S&P; the same thing with gold. You can remember this gold bull market the 300 level for gold, then it was 500 and then we blew through 600 and it went all the way to 750. And so 1000, that’s a four digit number but it’s an even number. Technically, is that significant?
ERIC: I think the 850 was more significant because that was the old high and we breached it obviously, but to your point on the $1000 I guess maybe what you and I keep asking ourselves is – and I don’t want to speak for you, maybe you can pipe in on this, but when is the American public going to wake up to this bull market because they certainly haven’t yet. We’ve had gold up for eight straight years it’s been up. It’s outperformed every single major currency and yet we are just not seeing participation by the American public yet in a broad manner in this market. So I think when we talk about the significance of $1000, maybe $1000 will light some bells for people in the press or something will wake up people in the United States to want to participate in this – and I mean both on the fund level and on the investor level. It’s been a very quiet bull market. It’s just very quietly gone up – what has the HUI moved? Let me see where it is today. Of course, we’re doing this on a Wednesday, but it’s 485.90 and as you said last time people were worried because the HUI had pulled 13% and here we are at basically new highs, so that’s what bull markets do: They just try to shake people out, get rid of the weak hands. But this one has been interesting because it’s just sort of keeping the American public out of it somehow. And I don’t quite understand that, but I think we’re close to the public really starting to get involved and the fund managers starting to get involved. And then as I said also thought, the caveat to that is we’re sort of getting to some nosebleed levels on some of these charts on a longer term basis. [58:21]
JIM: Here we are, it’s February coming to a close, spot gold is up 15% for the year, spot silver up 30%, platinum is up nearly 40%, palladium is up 43%. We had a roundtable discussion this week, Eric, quite a few people on the program –and one of my comments and something you just mentioned is if you look at a chart, I don’t care if you look at gold, if you look at silver, if you look at the HUI, if you look at the XAU, they’ve been going up for eight years and my goodness, you would think, you know, after going up eight years it would have got the public’s attention; but so far, one of the members of the roundtable this week said, “I don’t think the public can spell the word gold yet.” Because it’s certainly not on people’s radar screens.
I want to get back to charts here for a minute. One thing that I’ve seen when you’re looking at long term charts (whether you’re looking at the HUI, you’re looking at actual bullion or the stocks themselves) a lot of people place a lot of emphasis on charts and that’s fine – but there’s one clear indication if you look at a long term chart that trend has been going up at a 45 degree angle.
I want to move into an area that sort of marches to its own different tune and that’s the juniors. And if you look at a chart of a junior they don’t necessarily follow the gold market. I know we get a lot of questions and emails on this show: “Gosh, gold’s up 20 bucks today but my junior didn’t go anywhere.” And I wonder if you might talk about, looking at charts as it relates to juniors as opposed to let’s say looking at a chart of let’s say an HUI Index, or let’s say a large cap stock like a Barrick or a Newmont.
ERIC: You know, that’s a great question, Jim, and I was wrestling with this the last couple of day because I was looking at some of these extremely over bought long term charts and that’s sort of been something for me that helps me sort of exit from some positions that I’ve had on the trading side, and then repurchase those. And I don’t normally recommend that for people, as you know, Jim. But what’s interesting here as it relates to the juniors is you’ve got gold really over bought on the longer term; and believe me it can get more overbought but you know, you’ve got these sentiment readings like I said that are very out of the ordinary for both gold and silver. And so as it relates to the juniors, the last time we were in this kind of a situation the juniors were flying. And I exited out of some of my positions and was able to buy those stocks back extraordinarily cheaper when we got into sort of the fear phase of the decline on the HUI. But this time, the juniors really haven’t done much of anything and so I’ve been trying to think, okay, what is a scenario that could possibly allow let’s say for maybe gold hits $1000, goes a little bit above it, and silver hits 20 or a little above it, but then eventually has some type of corrective activity. And it occurred to me that maybe like you said, gold, and we’ve talked about gold has been up for eight straight years, so let’s say we had a consolidation where things had to consolidate. If you started to see the majors and the mid-tiers pick up some of these juniors and make acquisitions and really get that phase going that could be a situation where we had sort of a stagnant gold market or a correcting gold market that could go on for some time, but at the same time create a favorable environment for the juniors. So they might say, well that’s crazy, How could you pull back on gold – have a significant pull back on gold and have the juniors do well. And I throw it right back at them and say, well, look, gold going from the mid-500 level to almost $1000 the juniors have sorted drifted lower and lower so we can’t correlate juniors necessarily to the HUI; we can’t correlate it to the price of gold and silver because they’ve been negative performers. So I think, you know, they’re on their own timetable and that’s what’s important for people to understand because – and we’ve talked about this before, Jim, but you get somebody who says “I can’t take it anymore. I don’t care what the price is just get me the hell out of these things. I don’t want to own them anymore. It’s getting scary. Gold’s correcting and now the HUI is correcting now and these things have been terrible.” And that’s sort of the last element to punch out of these things before they just sort of turn on their own timetable and begin to enter a bullish mode and begin to accelerate and get strong gains and have their own really experience which seems to be totally different from what the HUI and gold and silver are experiencing. So I guess what I’m saying is that there is a possible scenario there where you could have the HUI and gold and silver operating on completely different timetables, and juniors could go counter trend to them. [1:03:21]
JIM: One of the things that we have to deal with in terms of managing accounts when we go in and take a position in a junior, it can be quite sizeable, and as you know sometimes Eric, some of these juniors will go from trading when everybody is giddy and everybody wants to own them where the liquidity comes in they’re trading several hundred thousand shares if not five or six hundred thousand shares a day, and then all of a sudden everybody gets scared and the market dries up. And it was amazing because if you were looking at the charts of a junior, I mean there was one company that we wanted to own and December we held off because we knew there was going to be year end tax selling – it had been down – and there was a whole wave of tax selling that came in December and that gave us the opportunity to load and actually achieve our position in this company. And during that process what we did is absorb all the selling that came into this stock and you know, once we were done the sellers were gone and then in January when everybody wanted to own it, now that thing is up 25, 30 percent. So I guess the point that I would make is when you’re dealing with some of these companies as a junior where liquidity can change from a lot of shares being available to hardly any shares being available and all of a sudden you have somebody that comes in and wants to buy – an institution – you can change that whole chart pattern.
ERIC: You know, Jim, it’s amazing. And I guess...we’ve talked about this on other shows but people love a sale, you know. The wives will go out and hit Saks or whatever and things are on sale and you know, “I got Gucci,” or whatever the hell they’re buying for 50% off, but yet these shares go on sale and people don’t want to touch them with a 10 foot pole. In fact, they’ll wait till they are going back up and making new highs a lot of times before they’ll buy them. So I don’t really understand that mentality, I don’t think you understand that mentality and that’s what habitually hurts the investing public time and time again.
Now, what you and your fund did was the right thing because you guys were buying into the weakness, you were buying when there was liquidity, you got your position going. And all of a sudden the chart turns around and heading up and it goes from a bearish chart to a bullish chart and meanwhile the liquidity’s gone, so if somebody wants to buy in they’re going to have to chase the offers. And that’s another thing for people and they’re looking to get into a stock: Just buy it! Sometimes it’s like, “well, let me bid it an 1/8 lower or ¼ lower and they never get their position and the thing will go dollars higher. So if you want to enter a position, buy it. Try to buy it on weakness like you’re saying, try to buy, obviously, quality and try to buy things when they’re on sale. I think there’s a great opportunity for people on these juniors and a number of people have been discussing this because the smart money – the really smart money – and I don’t want to mention any names, but people are coming in with big, smart money and picking up large chunks of these juniors. And it’s the smart money that’s doing it. I don’t know who’s doing the selling; I don’t know if it’s the hedge funds shorting because they’re long gold and they’re trying to do some kind of naked short sell hedge program with juniors – which I’ll never understand. But I don’t know who it is that’s doing the selling. But like you said, there’s liquidity and people need to take advantage of it and buy into those things. If they’re not sophisticated though, then they need to go into a fund like a number of times I’ve mentioned John Embry over there at Sprott, and you have a fund, Jim, because it’s so important to be in quality with the juniors. [1:07:00]
JIM: When we talk juniors –about how they’re a little bit different, they have their own cycle as you made reference to – when you’re investing in a junior, Eric, it’s not like they’re a producer so, you know, every quarter a company can announce, okay, this is how many ounces we’ve produced and this was what our profit was, or the cash flow per share. But another metric you can look at is, all right, out of every dollar a junior raises, let’s say 75, 80 cents goes into drilling or goes into exploration, what are they finding gold at? So let’s say they’re finding gold at a cost of $15 an ounce, $20 an ounce and they’re going to spend $10 million, you can sort of look at these companies and say, “well, last year they spent $10 million, they found gold at roughly $20 an ounce, they’re going to spend $10 million this year, this is what their ounces should be,” so you could almost look at forward ounces because you can’t look at a junior and say they have earnings and cash flow. Producers have that. So juniors have their own different metrics and you’ve seen this on many of the juniors where you can have a company and I can think of a company like Aurelian that sat there for two years, they were proving out the property, they were exploring the property and for almost two-and-a-half years the stock of Aurelian fell. Each year it hit a lower low. A lot of people were upset, they sold it, they got out of it and then all of a sudden the market wakes one day and says, “Oh my God, this is a heck of a project,” and then the rest is history. I mean that is just the way things go in juniors. We had a uranium stock on the day you and I are talking they just made a new discovery and they’ve been drilling this property, it was up 126% in one day. I mean that’s what happens to juniors. And I think if people are going to get in this sector, they want to own quality, they want to own a number of juniors. But also, wouldn’t you say you also have to be patient?
ERIC: I would say you have to be patient but that really is the whole key isn’t it with juniors, Jim, when you look at that? And I’m kind of going back a little bit to I was talking to Sean Boyd today from Agnico-Eagle about his company and the subject of Canadian banks came up, and we’ll go into that later in this show, but these banks like you said will really just torture shareholders in these stocks. And the funny thing about that is it kind of drives people insane because you almost have to have the patience of Job and just be able to sit through torture and kind of have a happy ending. And it’s set up kind of that way on purpose because when these things go, when they really start to go, it’s not going to have anything to do with rationality, it’s not going to have anything to do with fundamentals and I say because the junk will be going, the scams will even be running. And they’ll be going to prices that are astronomical that don’t make any sense at all, so this long process – and this is interesting in this bull market, isn’t it? Because here we have gold taking off and the HUI is taking off and everything is going so well, and the juniors are cratered. And it’s almost like they’re just trying to get the last of the weak hands to push the sell button and get out of these things and maybe they can cover some of their shorts and then when the time comes they’ll just let them rip. And when they go, they really go. And then people start seeing that they’re going and it’s you know, let me buy a pull back, and you know, it’s the pull back that never comes, Jim. And it’s opposite side of the coin; right, Jim? Because then it’ll be: “I sold it and I didn’t care what the price was and I’ve been waiting patiently Mr. Broker to get back in to this thing, but you know what, I can’t take it anymore. I don’t even care that it’s up there. Just buy into buy into the thing for me.”
Well, what’s that thing, Jim? That’s the intermediate top or the top. So it always seems to be the public does on the wrong side of the trade, and if they just buy quality into weakness during bull markets, that’s the way to really, really accelerate their gains in the bull market. But it takes guts, it takes courage. And it takes almost a belief, like religion. You have to believe in the bull market to do that. When everybody is afraid around you, when everybody is frightened and we’ve done some gold shows, Jim, and roundtables and it’s been the epitomy of fear in the markets, you have to believe. If you don’t believe, if you really don’t believe, you can’t do that! You can’t have the courage to step in to that stuff and buy it and take those positions and hold it for the long term. You’ve got to be a believer in order to do that, and that sometimes is what hurts the investors. They just don’t believe. And it’s a big bull market and a long bull market and they need to stay patient like you said. [1:12:03]
JIM: it’s absolutely amazing, I think sometimes if people would treat their investments in the sector much like they do their homes – Eric, if you and I were looking to buy real estate and let’s say we know right now that real estate is selling off, prices are going down, home owners are losing, foreclosures are up, there is a definite bear market in real estate. But if prices are weak, and let’s say that you wanted to for example buy a house in a certain neighborhood, you didn’t want to buy it because maybe say it was out of a price range, now the thing is selling at a 30, 40% discount, you know what you would do Eric, you’d be jumping on that home, you’d buy it, you’d take advantage of the marketplace, but as you mentioned, it’s just like people go shopping, if they put something on sale at Nordstrom’s or Coach or Gucci or something, you know, they’d be flocking around. It reminds me during Christmas at one of the outlet malls, Coach was having a special with $25 off, and they discounted their purses, Eric, there were lines outside the store. When they do the same to juniors and they discount them, 40 to 50% below market, people shy away and they come back and say, “call me when it’s selling at a 50% premium and then I’ll go in.” And it’s almost the opposite because we get flooded with money any time the market goes up like it is right now. Whereas the time I wish we would get flooded is the time when the market is weak which is usually by the time when they’re having a big correction, and things are really bad and people are jumping out of windows. Usually, we’ll have you on the show and you’ll tell them, hey, go kick a soccer ball, add to your position. That’s what we were saying in January and here we are it’s February, stocks are higher.
ERIC: But we’ve done that for years, Jim. We’ve been saying that to people for years on this show. And one of the key points, and I’ve always stressed this – at least I think it’s important – is if you’re buying quality and let’s just say, Jim, you went and bought something in the bull market yourself personally. Newmont may or may not be something you’d want to own, but let’s use Newmont as an example, say the stock pulled back from $60 to $35 and you went ahead and bought the company. It really doesn’t matter if the stock pulls back more for you – and let’s say it went under $30 briefly, to 28, $29. And let’s say you made a worse entry point than that. Somehow you were in at $45. Look, if you make a bad entry point but you’re buying a significant pull back and buying quality during the bull market, if you make a bad entry point the bull market will rescue you later on. That’s the good news. But that’s where the faith comes in. The faith part of it: You’ve got to have faith that it’s a bull market; you’ve got to understand the fundamentals; understand why it’s a bull market and understand that when things are on sale and when people are frightened to death and let’s say you’re going to buy something and you feel like before you do it maybe you need to take a trip to the restroom, that’s probably a pretty good time to buy, right? [1:15:07]
JIM: It’s amazing when it comes to investing that people feel much more comfortable buying something when it’s going up, in fact, the noted technician John Murphy who typically buys things when they break out on the charts, but he said, “it’s almost works for the opposite when it comes to gold.” You’re better off buying it when things are going down than when they’re going up. And that’s because when things turn around in the gold market they can do so very quickly. I mean we had mid-January we had that 13% correction and you know, within a matter of days we were making new ground. So you know how quickly this market could turn on a dime, and I think it’s Bill Murphy who’s favorite saying is “you’ve got to be in it to win it.”
Now I want to talk about investing. You know, the thing that amazes me is as you look at the junior sector, I mean if we were talking about General Electric you’re unlikely to get on the phone and get Jeffrey Immelt, but with the junior sector I highly recommend that if investors want to get information on a company, they go directly to the company’s website. I mean go right to the horse’s mouth. That’s the best place to get information. And secondly, you can pick up the phone with most of these companies and call the top execs, the president of the company and they’re happy to talk to you. You know, maybe they issued a press release, drill results you don’t understand. Pick up the phone, do your research, your homework.
A lot of people go to chat rooms and I think they’re a lousy place to go because you’ve got a lot of manipulation; the one exception, there is a new chat room out there, it’s called Agoracom (www.Agoracom.com). It’s probably the only legitimate chat room that I’ve seen out there, none of this bashing, none of the pumping or rumor-mongering that you see on Yahoo or Stockhouse and so I would say generally I’m against chat rooms but Agoracom is one company that is cleaning this process up and they’re doing it right. So I want to make an exception there.
ERIC: Well, I don’t want to spend a lot of time on the question of chat rooms, but let me say this, and obviously this is to the non-professionals that listen to your show, the institutions, this is to the small guy: Don’t go to the chat rooms! Don’t do that! Don’t subject yourself to that if there’s a correction. Well, for god sakes, let me go to some chat room to get some information and you’ve got some guy on there who’s you know for whatever reason putting a bunch of derogatory stuff on there because he’s sure trying to push the stock down and wants to buy it cheaper so he’s trying to create more panic, which is illegal but is done, and people and caught from time to time. Don’t go to those chatrooms. Don’t do that. Stay away from them, stay out of the chat rooms period and permanently for this bull market. Go to quality places like you said, Jim, the website; people can listen to your show; there are other websites that people can go to for information where articles are published such as Kitco etc. So stick with the fundamentals. Stay with the fundamentals; stay away from anything that’s going to cause you to have indigestion when there’s panic because you don’t want to add to that, you want to keep your head straight. Almost like a filter, keep the negative stuff out of your head, keep your head clean and your mind clean and just make sure that you’re focused on the fundamentals. And like you said, Jim, go to the websites. If things aren’t good in the gold market, go back to the websites. Look at the investor presentations. As you said, Jim, run through those and remind yourself why you own that company in the first place. And ask yourself: the price has changed but fundamentally has anything really changed fundamentally with this company that I’m in. And if not, and it still has great fundamentals I wouldn’t sell it. If you’re planning to be in it for the long term stay in it. [1:19:93]
JIM: As we come to a close, Eric, any bit of advice for investors. What are you doing, any recommendations?
ERIC: You know, it’s interesting, we talked on the gold side and I think that it was interesting today – this was from Bloomberg – but the bottom line is that the Fed is basically saying that they are going to cut interest rates because the bottom line is we’re not going to worry about inflation right now because this slow economy poses the greater threat. Over in Atlanta they had 10,000 people trying to get a job at Walmart. I mean it’s just insane out there what’s happening in the economy, how bad it is. So they’re going to keep cutting rates and so you have gold kind of marching forward, but again it’s in this parabola – meaning should people be running out today and pouring into GLD or SLV? Again, it’s better to buy those things on significant corrections. If you want to buy physical gold and physical silver, I think both you and I both agree, Jim, in the end gold and silver are going to be a hell of a lot higher than they are today in this bull market. But again, buy when there’s significant, major corrections. Buy into that weakness if you want to pick up physical silver or physical gold. Yes, the fundamentals say that gold and silver will be a lot higher, but again on some of these longer term charts we’re in this over bought phase and sentiments get a little bit goofy. So, you know, try to buy the corrections I guess is what I would say on the physical side.
With regard to equities, July 21st last year I recommended Agnico-Eagle to investors in the low 40s. Let me look at it. I think the stock today – and again, we’re doing this on a Wednesday but I think the stock is trading near $70 – 69-plus dollars a share, so after the close today. So there might be people who kind of peel off some profits on that who are traders who say, “hey, I’m just looking to get the meat out of the middle and the next time there’s a major correction, I repurchase that one.” And talking with Sean over at Agnico to kind of get caught up with him and where he is, it really is an amazing story. Basically I asked look you’ve had a big run up in your price so the Agnico shareholders have benefited, but where does that leave you in terms of valuation? And he commented to me that some analysts were moving the stock to neutral; some were moving the price target to the mid-70 dollar range, so they were just sort of moving the price target a little bit higher. But he said, “you know, Eric, you pay for quality in this market. And the next bump in this market will be when the US money moves into the gold market in earnest.” And I agree with him. His company is growing production five times going forward, and they’re growing their deposits organically: Three acquisitions in the last three years, they’ve got a $65 million exploration budget.
But one of the things that Sean found interesting at the BMO conference that he just presented at in Miami was – Jim, you’ll get a kick out of this – the guys come up to present for 30 minutes, right? Well, it seemed like for half of the time the CEOs were explaining away – so for 15 minutes of 30 minutes, CEOs were explaining away the problems they were having with their companies. And that gets back to what Sean was saying and you look at the acceleration in his stock price and again longer term that’s things getting very over bought, but you know, you have to pay for quality in this market. So he didn’t have to go up there for 15 or 30 minutes, Jim, is what I’m telling you, to explain away all the problems that Agnico-Eagle is having because they’re not having them. He said that reserves are going to grow to over 20 million ounces. I found this interesting too: He told me that Agnico quote “has never, ever sold a single ounce forward.” And Sean said that has been the case for the 20 years he’s been at Agnico. He also stated the company never got caught up in the need to grow in the bull market just for the sake of growing. And this gets into acquisitions. And I asked him: In a bull market it’s very tricky, Sean, because you know, you have a conservative style and god knows, you’re growing your company. I mean you can tell by the go forward production that you’re having phenomenal growth with your company. But how do you balance that because as bull markets wear on, the Street wants to see a lot of growth to really pump the stocks up? How do you balance that?
And he said, “you know, Eric, we don’t pay much attention to the Street. I’ve been CEO for 10 years. We never fell into the temptation by the bullion banks to get into forward hedging in any way, so we don’t pay much attention to the Street. And many banks don’t like us, particularly in Toronto.” I knew you would get a kick out of this. “We don’t need anybody’s money and we don’t need anybody’s property. And he had three acquisitions and he said, “Eric, we brought those acquisitions to our bank, they didn’t bring them to us.” So these guys are just sort of mavericks. They do their own thing. They live in their own world, they remind me of one of the safest banks in the United States, Farmers & Merchants Bank. They just do their own thing. They don’t follow the heard. They’re very conservative, they’re doing all the right things and I know, God knows, that Farmers & Merchants Bank is no big fan of the Federal Reserve. I get the feeling that Sean is not necessarily of the banks and vice versa. So these guys march to the beat of their own drums. And he also said that a lot of gold companies fly their shares out there. And in the last 10 years, Agnico’s share count has roughly doubled but they’ve increased their reserve base 13 fold. So there’s a real quality story going on at Agnico over there, Jim, and I’m sure I don’t have to tell you about that. Having said that, moving away from Agnico and because some people, again, Jim, if they bought in the low 40s they may say, “Eric, you know what I was in this for a trade and hell, you’ve made me over 50 percent on my money or whatever the number is, I’m just going to clip out of this thing and try to re-enter it later.” And that’s fine and dandy. In the longer term, shareholders would just hold.
Go into Yamana – obviously recommended that on a couple of gold roundtables we did together, Jim, one with John Embry; recommended it in the high-2s, low 3s, and I was talking to Peter [Marrone] today, Chairman and CEO of Yamana Gold about his company and the big run up in price in his stock, right? Because it’s moved from the high 2s and low 3s to over $18 a share today. And you know, interestingly Peter feels his company is trading at a discount to net asset value and cash flow as compared to the peers in his group. And he commented that Yamana has the lowest cost basis in the industry when including credits from base metals. So they actually produce gold at a net cost that is less than zero. They’ll produce 1.3 million ounces gold this year, with cash flow expected to be in the $600 million range. But that’s based on $700 gold, and of course we’re around 950, 955 today. So that’ll result in higher cash flows and the company is fully funded. [1:25:42]
JIM: So are you recommending it?
ERIC: Well, look, again the stock was in the high 2s, low 3s, Jim which is kind of where you and I like to buy stuff and it’s closer to the $20 area today. So, again, some of the traders may peel out and take profits. Even some of the other shareholders might do that. But you know, Peter is trying to make the case for higher prices. And look, I believe Yamana can go higher – it will go higher with the bull market, Jim, and nothing against Peter and Yamana, he’s done a phenomenal story over there and a phenomenal job of execution, but there are probably other things where people could go and get greater gains on their money I guess is what I’m trying to say. But again, that’s not a knock on Peter Marrone or the company at all, and he certainly makes a good argument that the stock price could go much higher. And you know, getting away from his company for a minute, he commented about the gold market like Sean, the fund managers are just now starting to understand and get involved in the gold markets, so over time that’s going to add additional flow and lead to higher prices long term. [1:26:44]
JIM: I think the expression of his is trying to...
ERIC: He basically says it’s like trying to fit a golf ball through a water hose, it just doesn’t fit, so as this money starts to come in it’s just going to create an explosion. And that kind of goes back to what Sean was telling me about today. He basically was talking about the fact that we’re just now getting this interest coming in from the money managers and from the funds and that when the money from the US comes in to the market that’s really going to be the next bump in the gold markets themselves. And one other company I’d like to recommend to people is Kimber Resources.
JIM: Eric, I didn’t realize you were going to mention Kimber but I need to interrupt you for a moment to disclose a conflict of interest since I’m on the Board of Directors of the company, so I need to make it clear that this is not a solicitation to buy.
ERIC: Very good, Jim. And I think people need to do their own due diligence and none of the views I’ve expressed are necessarily the views of the three companies that I’m discussing today. They’re just my own personal views. But the bottom line is that I think the Kimber story is a great story and I think on a go forward basis this is a company that has a couple of million ounces of gold in the ground. They’re in the heart of the Sierra Madre gold belt; they’re right across from Palmarejo; down the street from Pinos Altos, Agnico-Eagle; to the west you have Glamis their El Sauzal property; they have two other sizeable land packages including the Pericones silver property. And so now they have three land packages with roughly 50,000 hectares of land, so this is a company that’s really grown in size and had a management change. Their primary property was a large producing mine for both the Spanish Empire and for Mexico, so it’s definitely been used in the past for significant mining, so with the ability to utilize technology today I think there is probably a lot of underground potential that this company is going to begin to exploit. They have a world class geologist in Marius Mare. So I think the focus going forward is basically going to move away from the old management’s desire to just sort of show this mine can go into production to getting into some of the blue sky that was never looked at or never really tapped into. And I think that possibly could create a lot of ounces on the balance sheet on a go forward basis. So I think the new management is focused on increasing the silver recovery rates and therefore the reserves, and then exploratory drilling including underground. The company sells for roughly $25 an ounce of gold in the ground. I participated in some financing myself. Recently I have acted as a finder for a small portion of this most recent financing, so I bought some people into the financing. I own shares in the company, I’ve been a shareholder for almost five years, so I want to have full disclosure for people here certainly but I think this is one that over time, even though it is speculative (and the symbol is KBX on the Amex) I think this is one that could actually do well and be a big performer going forward. [1:30:21]
JIM: Once again, one of the things that you and I like to do is – this may surprise people – you and I are happiest is when gold is down 40 or 50 bucks or if it hits 1000 and pulls back to 875 or 900, or the HUI hits a new record and drops 15 to 20% - I mean that makes you and I happier than it does seeing it go up like that because you and I are accumulators.
ERIC: I think Warren Buffett talked about it in his annual reports that he put out and he talked about basically people having emotional stability. And that’s what I’ve stressed on the show a few times from that report that he put out. But that emotional stability is very, very important particularly in the gold bull market because unlike the dotcoms or some of this other technology fluff where the commercial banks were willing to pump those into the stratosphere, sort of seemed to have marching orders or at least according to Bill over at GATA to sort of suppress the price of gold and silver and sort of keep people out of it, maybe attack those markets. So it’s not necessarily very shareholder friendly in terms of how they draw the charts on those and run those plays. And you just have to understand it, know it, believe in it, staying in it and ride it out for the long because over time the fundamentals are probably going to dictate that we have significantly higher gold prices. And even though gold can correct, as you said, Jim that’s when you and I are the happiest because we basically say, hey look, we can go in and buy things cheap right now. And the bulk of the investing public just gets frightened from that and that’s really not the way for them to handle it, which is why I think it’s better for them to be in a professionally managed fund like the one up at Sprott or you have one, Jim, and there are others but that’s because there’s an investing professional there. You know, if they’re nervous they can call somebody, but it keeps them from just panicking a little bit more. And it also makes sure they’re in quality and that their money is being managed wisely. And I know sometimes people may put money into a fund but somebody like Sprott might say, you know, the money’s in there but we’re going to sit in cash right now because we feel things are frothy and then they’ll wait for a pull back. Sometimes the investors are frustrated “hey, why aren’t you putting my money to work.” But it’s not that simple; they’re going to do the right thing for you. And you may even do this with your fund, Jim, you may wait for things to pull back and then begin to deploy some of those investors’ money and then later on of course they’re thankful because, golly gee, you did it a hell of a lot more intelligently than they would have done on their own. So I think there is something too that for the individual investors that either don’t have time or just want to avoid some of the land mines or pit falls of this thing, or some of the psychological problems that people go through during this type of a bull market. Because remember what Warren Buffett says: Emotional stability – and I always say this on the shows; of course, we’re riding high right now in the gold markets – don’t panic. Whatever you do, do not panic. If you plan to be in this for years, be in it for years. If you were in some of these for intermediate term trades like a Yamana or an Agnico and you made a hell of a lot of money on those recommendations from me and you want to take some off the table, by all means do that, you know, just get the meat out of the middle on those trades, don’t try to be a hero and get every nickel out of it just take the meat of the middle and be happy with...and then buy the big significant pull backs in those equities if you want to continue to trade those. [1:34:02]
JIM: All right, Eric, well listen, as we close, do you take emails now. I know you’re thinking of starting a newsletter, but if people wanted to get in contact with you, how could they do so?
ERIC: I haven’t set anything like that up just yet, Jim and you’ve asked me to get a newsletter over the years so we’re definitely kicking that around right now, but I think for now I just enjoy my privacy or what little time is left of it before we kick this newsletter off, assuming it happens this year. Yeah, no contacts, please.
JIM: Okay. Well, I’ll have you back next time if we get a severe pull back or correction, you can come back and we’ll kick the soccer ball. Eric, thanks for joining us on the program.
ERIC: All rightee. Thank you, Jim.
Other Voices: Mark Bailey, Director, President & CEO, Minefinders Corp. Ltd.
JIM: Well, joining me as a special guest this week in our special on gold is Mark Bailey. He's the president and CEO of Minefinders, a company that's going into production this year.
And Mark, let's talk about Minefinders's grass roots. When you got started and tell people about where you're located and sort of a quick summary in history, and then we'll talk about what you're doing now.
MARK: Okay. Well, Mine Finders has been around as a company for some time. My involvement started in 1994 as a consulting geologist, and then in 1995 with the efforts of shareholders, there was a proxy contest, and they asked if I would come in and run the company.
Basically from 95 on, we started working hard in Mexico on some properties that I had put in the company in 94 and including the Dolores property, which we were acquiring in 93, 94 and hadn’t already been worked. We basically took that and our other properties in Mexico, which were staked, and had never been drilled and took them from grass roots through discovery. We started with La Bolsa in Sonora, and that was our first drilling discovery. And then once we got Dolores mapped and developed targets on there, we start drilling in September of 96, and our first hole was a discovery hole.
So basically, what's unique about us, I guess, is we've taken the Dolores property from a grass roots discovery –the first drill hole ever drilled – to production. And that was a lot of work. It took us 14 years, but we did lose a few years there when the markets were so bad, it didn't make sense to dilute our shareholders by raising money in 98, 99, 2000, so we pretty much curtailed all activity until the markets came back in 2002 so I could raise the money to continue drilling and go to feasibility. And we've drilled over 200,000 meters. Most of that time diamond core – not cheap – and done several feasibility studies to come up with the current open pit mine plan, which is 18,000 tonnes per day. And we're just completing construction of that. We bought all new equipment, which is all on site and operational. We're in the process of commissioning our crushers and power has gone to those this week. We hope to be able to start loading the leach pad, which is ready to phase when the leach pad is ready, and start loading that in March and be producing gold and silver in early April, and then ramping up to commercial production probably in the third quarter now. [2:33]
JIM: You know what's remarkable about this, you started this project in 95 in what was still the bear market. You had the Bre-X scandal that hit the markets, and then of course you had the tech phase, and you've been able to do this, Mark, with minimal shareholder dilution. You've got about 50 million shares outstanding. I mean that is a remarkable story in itself.
MARK: Yeah. It was unique, I think. We worked really hard not to dilute the shareholders that we had who stuck with us all of these years, and ourselves included, we really liked the project. We believed in it, and we didn't want to go out and just raise money for the sake of having money to pay ourselves large salaries, so we very much husbanded the cash on hand.
And as you said, during those lean years when the Bre-X and the market collapsed and gold went to $250, it was a bit nerve wracking, a little bit of white knuckle time for us, but we always believed that gold and silver prices would come back; and we didn't know when, and we hoped it would be sooner than later because we weren't sure how long we could hang on, but we had a couple of very lean years there. And fortunately we made it through those and have been very successful since without much dilution to our shareholders. [3:43]
JIM: You know, originally you had a pre-feasibility study that was done in February of 2006. Recently you just released your updates on the economics on the reserves and I'm just going to go through some of these numbers which I find remarkable. Since 2006, you've increased the probable reserves by 37%. You have extended the mine life from 12 years to 15 years, which is remarkable in itself. The pre tax internal rate of return on this project is now 26%. Now, when you released this information, your stock sold off and I saw it bandied around – I saw one brokerage firm downgrade your stock; and your cash operating cost went from, I think, what was it, Mark, 228 to around 297?
MARK: That's correct. [4:43]
JIM: But since 2006, that's what we've seen in the mining industry. I don't care if you're taking a look at steel, cement, personnel, energy costs. We've had mining inflation, so, you know, your 297 cost is not out of line, but unlike 2006, the price of gold today is close to $950.
MARK: Well, exactly. We've done, I think, very well. Most of our peers are, I think probably the average cost is more in line of 350 to $400. I noted that Barrick's costs are close to $400 an ounce. Most of the producers out there are spending that sort of money to produce ounces of gold. At 297 we think that's a pretty good cost for us, especially with the increase in the gold and silver price where we're talking 297 gold equivalent and we're talking 900-plus dollars gold prices today. That's a pretty healthy premium. [5:38]
JIM: When you guys are up into full commercial production, how many ounces a year, is it 200,000 you hope to produce?
MARK: Yeah, it should be more than that on a gold-equivalency basis. We'll produce, on average, it fluctuates year by year depending where we are in the pit, but just straight heap leach, it averages about 125,000 ounces of gold and about 4.8 main ounces of silver a year. Now, we'll improve that with the addition of a mill, which is one of the things we're working on now which will improve our recoveries and allow us to take the high grade out of the pit and run it through a mill. And we get much better recoveries with the mill than we do with the heap leach. And there is some very high grade ore at Dolores. Right now it's all being thrown on a heap bleach pad and getting 72% recovery for the gold and 51% of the silver where in the mill we’re getting 92% for the gold and 90% for the silver. [6:30]
JIM: You know what is remarkable? If you look at 200,000 ounces a year of gold equivalent and your cash costs are going to be $300, Mark, and we've got gold at $950, so let's just round it off and make this simple. Gold is at $900, and by the way, you haven't hedged any of this, have you?
MARK: No. We have not. Neither gold nor silver. [6:51]
JIM: Okay. So you haven't hedged your gold or silver. If you produce 200,000 ounces at a cash cost of 300 and you've got gold at 900, that's $600 an ounce profit times 200,000. You guys are going to make a ton of money and with only 50 million shares making that kind of money, your stock is incredibly cheap. What am I missing here?
MARK: You're not missing anything. That's absolutely true. The stock is incredibly cheap. I was shocked when we brought out this news that the market went the other way. I think there was some misinterpretation on the remaining capital to be spent as we ramp up to production, we mentioned an additional $50 million in capital expenditures. We didn't break that down, and actually, that $50 million was $10 million of contingency, about $25 million of operating capital. It wasn't construction. It was our – we're actually mining. We've been mining on the property since November. We've already moved 3 million tonnes of material and we're stock piling ore and doing pre-strip and building haul roads with some of our waste rock. So we're full on in mining right now with all of our equipment and that's what some of that capital cost is: It's actually operation. And I think people thought we didn't have enough money to complete construction to get into production. We’ll have plenty of money to complete construction, continue on with operations and we'll have positive cash flow this summer and be back to basically generating positive cash flow by the end of the year where we've paid off all of our debt and are positive; and then next year will be a very robust year for us. [8:23]
JIM: Well, if you look at that, you know, at over $100 million in profit with 50 million shares, you could be selling at five times next year's earnings. I mean this is phenomenal. What really surprises me, I've seen three – we've analyzed your stock and figured it’s selling between a quarter or a third of the value of your mine. And three other analysts that we follow, you've got the Coffin brothers who believe that your project is selling at a third of its value. You've got guys like John Doody who has put your stock in his top ten, feels that, you know, your stock is easily a $20 stock. You've got two other analysts I've seen. Why do you think the market has played such a low premium where I have seen –and I take my hats off to you, getting through a bear market and taking this company through the hard times with the minimal shareholder dilution and you've delivered on everything you said you were going to deliver, why do you think there is skepticism out there?
MARK: Well, there were a couple of companies that built mines recently in Mexico and had some difficulty with their start up. And we may be suffering a bit of that. When they were racing to production and got into production sooner than we did, we were accused of not being as good as them and not being like them because we were too slow and too ponderous. And I begged the question to the analysts, the people who said that to me, that we were being very thorough in our work. We wanted to make sure when the mine started up it met and exceeded the expectations and didn't fall apart. So we've been very thorough in the construction of this mine. We've actually only been doing earth works on the property for a little over 14 months and we had to do a lot of earth works to start building everything, so we've actually accomplished quite a bit in about 14 months as we started actual construction of the site.
And I think that these two companies that built and had had some difficulties in Mexico with their start up not meeting expectations from shut downs due to equipment failures, that sort of thing, the market now is waiting to see if we have those problems. We shouldn't. We've been very cautious and thorough in our development. We did buy all new equipment as opposed to used equipment, which both of these other companies bought a lot of used equipment. And we have what's called a marked contract, it’s with Road Machinery out of Cananea and Tucson, they’re the Komatsu dealer and they will provide maintenance and service of all of our mining equipment and they do that at obviously a fee, but they are providing us 90 maintenance people on site. And as a junior company, I can assure you, it would have been very difficult for us to go out and hire 90 qualified people to maintain our equipment to where you could get 90% utilization. And so we knew we couldn't find those quality people when we started up and be able to hire them in time, so we did this contract where we have an outside contractor doing that, and they provide us the 90 people with expertise. We hope to eventually probably three to four years from now, take over maintenance ourselves once we can build up that team of maintenance experts. [11:32]
JIM: It's just amazing, as I mentioned, these analysts, including our own internal analysis of your project, are selling at about 25% of its value or a third of its value depending on what assumptions you make. But even that, if you just look at something that is just straight forward type of analysis that John Doody does where he takes the market cap per ounce of proven and probable reserves, I mean your gold going into production is selling at $130 an ounce at a time that gold is selling at $950 an ounce. I look at other producers. They are selling at 5 and $600, $700. I've even seen here one of $800 or more. I mean what an incredible, incredible undervalued situation that you have. Okay. So when you're up and running and let's say you go to a mill, that will increase your silver recoveries and gold recoveries. Tell us about some of the blue sky because you have other projects in Mexico that you've been working on.
MARK: We have blue sky still at Dolores. We have a fair amount of mineralization that we've defined that lies beneath the pit, and we'll develop that through underground development. There is also mineralization north and south of the pit and a structure that we call the East Dyke which lies about 100 meters to the east of the pit. All of these are high grade mineralized structures that we would look at mining underground and maybe with some of that having a small pit on it to take the near surface. So we have that at Dolores to add production there and increase the production at Dolores in the next coming years.
We've also got our northern Sonora properties, which include the La Bolsa, which has – we're drilling there right now actually at La Bolsa doing some metallurgical test work and some in-fill follow-up on some high grade. La Bolsa has about 208,000 ounces of gold, two million ounces of silver defined at a near surface oxide deposit. Near by about 15 to 20 kilometers away in the same general area in plain block, we have both the Planchas de Plata and the Real Viejo. Both of those systems are silver-dominant-lead -zinc systems with a little bit of copper. They would be mill ore for sure because of the silver. And we've kept some very good intercepts there at both deposits, and we're hoping we can bring those two together. They’re about 7, 8 kilometers apart and then we can bring those up to where they have an economic deposit on each and we'll put in a central processing plant, and we're looking to develop somewhere around 100 million ounces of silver between those two projects.
And then we have a large land position surrounding that with another half a dozen prospects that we have not drilled yet: Durazno, which is a gold, got some high grade surface gold and a couple of others. We also have a stake, 75,000 acres of land in the northern Sierra Madre in Sonora with some very good surface mineralization that we're just starting to work on. We've got rock chip samples over 5 to 10 meters running up to ten grams of gold, and we're working on those properties now. They won't be drillable until probably late this year or early next year before we can actually bring those to a drill stage. So we're continuing to add properties at the grass roots exploration stage, which we have a very good team of professionals working on, and then once Dolores is in production, we will look at some more advanced projects that are available in Mexico and other jurisdictions to see if there is something we would want to step up and put into production through an acquisition now that we have a very good production team on site too. [15:02]
JIM: Mark, once you get into full production by, let's say, the end of the year – full scale commercial production – at that point, you really are self financeable, aren't you?
MARK: We are. Yeah. As you pointed out, this project is going to generate over 100 million dollars of free cash flow a year, and that is a lot of money for a small company. We should be able to do that, use that money to advance our own properties and also take on some properties that other companies have that they are unable to advance and apply our exploration and development team expertise to bringing those properties to production.
We'll obviously stay focused in Mexico because we have a real synergy down there with the people we have. We have some property in Nevada. We have a project in Montana. We have looked in South America for other projects too so we'll continue to throw – cast a wider net here, but we'll stay in the Americas. We don't have any real interest in going across the ocean. [15:58]
JIM: As the company CEO, where do you see Minefinders five years from now, 10 years from now?
MARK: Well, I would hope that we'll be successful with some of our other projects and maybe an acquisition that would bring us up into the mid-tier producer where we would be an equivalent to one of these companies that's producing steady state half a million to a million ounces of gold a year and have two or three projects to work off of so we have some nice spread around of risk, so it's not a one project company. Our goal here is to develop our own properties through grass roots. We can add the most value by discovering new deposits and also bringing, as I said, acquiring some more advanced projects and bringing those into production in the near term. And my goal would be to have three to five mines operational in five years – five to six years – or coming into where we knew we had a deposit that could be mined and then grow this company into a mid-size producer. I don't really want to compete against the big companies, but I think it's difficult to replace those kind of ounces, so I'd like to get into a niche here, which is pretty much non-existent anymore because that mid-tier group is disappearing as the bigger companies gobble them up and I think there is a great market for, you know, the companies like the used-to-be Meridian and some of these mid-size producers anywhere from 300 to a million ounces a year. [17:22]
JIM: And a tougher question. You've done a good job on execution. You've done what you’ve said you're going to do. You're now going into production, so you've gone full circle from grass roots to producing your first ounces of gold. Mark, what can go wrong?
MARK: Yeah. I'm hopeful that the market won't collapse on us. There is always the risk of that, you know, that there is some sort of worldwide recession or something worse and you see the commodity prices go down and everything just collapse and you can't do much about that, so that would be the worse thing possible for all of us. And I don't envision that happening, but that would be the one thing we would have no say over. I don't see any other issues with us. We've been very thorough and cautious and conservative in developing the Dolores project. It is going to meet and exceed our expectations. And we will use that as our flag ship property to build the company. We'll be cautious in anything we move forward on with our own exploration of whether we acquire something it will have to meet our pretty stringent criteria, so I think we don't see any real problems for us. We stay in fairly stable countries. Again, we're not looking to get invested in countries that I still see as way too politically risky, even though some of those have very good geology, I would have to wait a few more years before I feel comfortable. I don't see any really critical or fatal flaws in our near future. I except like I said that unknown where the entire world economy starts to collapse on us. [18:53]
JIM: Even then, I would imagine material cost, energy costs would go down with that, and then if your costs are 300 and gold drops to 500, you're still making money.
MARK: Yeah. This is a very profitable mine, and keep in mind, it has a fair amount of high grade material in there. We could change the cut off grade in the pit as the price went down and just process higher grade material. We would not have to process the lower grade material. So that would cut our cost also. This is a mine that's not going to go away irregardless of what the price of gold and silver do. It's just that you don't know what's going to happen geopolitically if something goes wacky, and it's difficult to work in foreign countries or something that you just can't predict. The unknown, I guess, is the only concern I would have. [19:39]
JIM: Mark, finally, if you were in front of a group of investors right now, give me three reasons why you would want to buy the stock. I could give ten, but –
MARK: I can give quite a few. I think the most glaring and most obvious reasons are the fact, as you point out, we have less than 50 million shares outstanding. We are fully funded to complete construction and bring this up to commercial production and continue our exploration while we do it. We have less than 50 million shares, which gives us a market cap of around 500 million dollars. At current prices, we've got deposit that has an NPV of about 1.7 billion dollars. Even at a discount, it's still over a billion dollars at a 3% discount. So it's a very profitable mine for us. Most mining companies trade at a one-and-a-half to two times their NAV. We're trading at about a third of ours, so I think that makes us a pretty good value play. The mine is built or just commissioning and tweaking the final pieces of it and we'll be operational. So that risk is gone. It's fully permitted. Everything else is in place. We have good exploration up site, so I think we have growth potential with our other properties and Dolores. We have value, extreme value right now because we're undervalued and we have a mine that's going to go into production with $950 gold and $18 silver. That's pretty sweet when you look at the cost of producing at Dolores, which is less than $300. [21:10]
JIM: I'll tell you as an executive of a company that's taken it from scratch into production this year, you've got to have the sense of fulfillment seeing this dream come true.
MARK: I do. As a geologist, and an exploration geologist, I know how difficult it is to find economic deposits and especially larger ones. And you know, we've got one now with proven and probable reserves of almost two and a half million ounces of gold, 126 million ounces of silver; and measured and indicated of almost 6 million gold equivalent, you know, over three million ounces of gold and 150 million ounces of silver. So it's an exciting time to be able to take a project from zero to that level and then actually fund and build the mine and put it into production. That's a very big rarity for an exploration geologist to accomplish, so I take some pride in having been able to go through this 14 years and come out the other end. [21:54]
JIM: Well, I want to congratulate you and once again, thanks for joining us on the program. We're talking to a couple of mining companies in this week's gold show, and I thought of you, Mark, because you've taken it from grass roots all of the way into production, so keep up the good work.
The name of the company is called Minefinders. Its ticker symbol is MFN. You can find that on the AMEX. Also MFL on the Toronto exchange. Mark, thanks so much for joining us on the program.
MARK: Great. Thank you for having me. [22:24]
JOHN: So this is the Financial Sense Newshour at www.financialsense.com. You're listening to the Big Picture, and remember that all of the information presented on this program is for information and educational purposes and some of the stocks featured on the program today may be personally owned by Jim Puplava. This is not a solicitation to purchase or sell any companies mentioned on the program.
Other Voices: David R. Webb, President & CEO, Tyhee Development Corp.
JIM: Well, here we are this week with gold prices nearly approaching $1000 an ounce, silver is just pennies away from $20 an ounce, a great time to be invested in the gold market and especially gold equities. We're going to be talking to developing companies this week. We're having an interview with one company that's going into production.
Our next interview is an up and coming development company. Joining me on the program is Dave Webb. He's president of Tyhee Development.
Dave, as we begin, I've got quite a few questions here, but why don't you give us a background on your company, how you got started, what's happened overtime and then we'll get into more specifics. But why don't you give our listeners a bit of a background on the company.
DAVE WEBB: Okay. Appreciate that. That's a great opportunity to let people know where we've come from. Tyhee development got going up in the Yellowknife in late 2000, early 2001. With the purchase of two partially developed gold properties. One actually occurred on a past producing property, the Discovery mine, they produced from 1949 to 69 a million ounces of gold from one million tons of ore. And that obviously would have attracted a lot of attention, but 2000 the price of gold was plumbing new lows. We were close to $250 an ounce, so we got in pretty cheaply. The adjacent property had been developed by a separate company and we started consolidating and put the two projects together. Since then with that half a million ounce starting point, we've added about 200,000 ounces of gold to our resource category each year and brought ourselves up to a point where we have 1.2 million ounces in our measured and indicated category and 350,000 ounces in our inferred category, so quite a bit of growth each and every year for the last five years. [25:15]
JIM: Now, you originally started out with the Yellowknife gold project where you had Ormsby, Discovery and Nicholas lake. In the last couple of years you’ve staked some new claims. I wonder if you might tell our listeners about that.
DAVE: Yeah. Yellowknife is an area of Canada north of Alberta, north of Great Slave Lake and it got started back in the 30s with the discovery of some pretty high grade gold deposits in what eventually became the city of Yellowknife. And the gold development boom that was established in the 30s and really came to the forefront to the 40s and when all is said and done, they had mined a total of 14 million ounces of gold of largely the Con mine, the Giant mine and the Discovery mine. And this developed a stretch of ground that was about 120 kilometers long, and when we moved in in 2000, really all we could afford was the two established deposits that we picked up, but subsequently we can go out and pick up some other more grass roots project that we're quite enamored with.
We have the Goodwin Lake property which is immediately south of our Yellowknife gold project. It's about 12 kilometers away, and here we have geology that is remarkably similar to the Ormsby zone. It has some known gold showing but it had never been drilled, so we stepped on there last year, did a fair bit of mapping and in September we got four drill holes completed on it; we got caught up in the Christmas breaks, but we have all of the assays back except for one drill hole, and as soon as we get that, we'll release what our findings are from that property.
So after that we have the Clan Lake property, and it was discovered over 40 years ago. Some people went in and they actually took a bulk sample of recovered 485 ounces of gold from 1150 tons of a bulk sample, so we're dealing with almost a half an ounce grade material and that unfortunately was done in 64. So at $35 an ounce of gold, that was not economic, so that has sat there really with that level of development up until we picked it up. We went in, spent most of the summer mapping it in great detail, resampling what we could and we moved the drills on the that property in February and we've got two holes completed now and the drill’s going to keep spinning there as long as we can I guess until break up.
And then the real exciting property, I think personally, although it is a grass roots property and subject to all of the whims of Mother Nature, we acquired a rather large property package right beside the Bluefish power plant tying onto the historic giant Yellowknife mine that had produced 8 million ounces of gold. And what we found there was the same type of shear zones that the Giant mine had operated on. And lo and behold, we found out it contains substantial gold values. So the level we have it from acquisition to grab sampling it to demonstrate that there are gold values up to, I guess our highest grade is around 51 grams a gold per tonne to the point where we drilled four holes in December. And three of those holes hit material gold values, you know, several grams of gold up to, I guess, 8 grams of gold over narrow intervals. All in all quite a success in finding giant shear zone don't type of gold deposits.
We're so pleased with it, we actually moved three drills on it, and at that level of activity, we're generating about one drill hole per day right now. As a side note, what really got us into the BigSky property area was this rather large ten kilometer diameter granite intrusion that upon inspection seemed to have significant sized alteration patches. These are hundred hundreds of meters by kilometer scale alteration packages where the granite – a real nice pink granite – has turned white. And we started grab sampling this looking for rusty areas or anything that might indicate mineralization. We found quite a large number or proportion of our samples came back highly, highly anomalous gold values. Unfortunately not economic looking at first glance, the 0.1, 0.2 gram gold per tonne, but we did get some samples, multi grams of gold per tonne, and it really warrants another look just because of the size of the deposit and its proximity to hydro-electric power and then the road ways south to yellow knife. [30:07]
JIM: Now, this year you're stepping up because of financing your exploration budget and drilling. How many drills now do you have total in operation?
DAVE: We have four drills in operation right now, three on the BigSky property and one on Clan Lake. We're focusing on where we can go right now because of winter. Clan Lake is ideally suited for putting one drill in and using a larger machine just to drag it incrementally as we expand the known zones of mineralization. And then come summer this year or spring break up, we'll move one or more of the drills up to back on to the Ormsby property so we can assess Ormsby, Nicholas Lake and Goodwin lake for follow-up work, if it's warranted. [30:51]
JIM: Now, your latest resource estimate, you have 1.2 million ounces of gold in measured and indicated; 300,000 ounces inferred. You've done a lot of drilling towards even last year. What about future resource estimates from the drill programs conducted towards the last half of last year? Where are you in terms of updating your resource estimates?
DAVE: Boy, that's probably the most commonly asked questions from investors that phone in. We have finished all of the assaying on our Nicholas Lake program and we have been working on compiling that data to calculate a new resource. In fact, I have seen a series of calculations, so I really can't talk about what I expect to get out of it, but what I can say is that we're in the process now of checking the numbers to make sure that we don't make a mistake. It's kind of nasty when you have to make a retraction out there, so we expect that that should be available to release to the public in about four weeks, three-and-a-half, four weeks.
And quickly on the heels of that, we have close to 25,000 meters of diamond drilling completed in 2007 on the Ormsby zone. And this is largely stepping out to the north where we have a small resource that whether we did some pit modeling we found there was isolated, so we drilled stepping out from Ormsby north or our Ormsby north extension and hope to bring that into one larger pit as part of our economic assessments that we're doing. [32:23]
JIM: I want to talk and turn our attention on the company itself. I wonder if you can give us a little bit of background on management and board of directors if the company, your backgrounds.
DAVE: We have five board members, and all of us have worked in the mining business for certainly several decades or in some instances many decades. We have one chartered accountant on the board. He's our chairman, Denis Taschuk. We have one engineer on our board, Bill Burton, and he's formerly manager of mining for Echo Bay mines and former general manager of the Lupin mine up in the Northwest Territories. So operations guys, myself and Dave Nickerson both have engineering degrees and geology degrees. I went into geology after my engineering degree and did a masters and a PhD focused on Yellowknife. So this is one of the things that attracted me to Yellowknife is I understand it well. And Roger Sylvestre is our self-made mining man. He started off in the mining business. He started his own mining drilling company and worked internationally for many decades, often for government projects around the world and for the United Nations and he’s founded a number of junior mining companies and forms our fifth board member.
Our management includes two of the board members Roger and myself. Plus we have another chartered accountant who was formerly the Chief Financial Officer and Treasurer for Glamis gold, so Lorne Anderson is our Chief Financial Officer. [33:52]
JIM: Okay. So you have quite a few people that have come from the mining industry, successful companies that have been taken out, both Glamis and Echo Bay.
Dave, the value of your company right now is somewhere around $78 million. What do you personally think of the value of your company and would you contrast that to the value of several of your peers?
DAVE: Well, like most company executives, I think we're undervalued, but we have some metrics that have been put out by other people just analyzing junior mining companies in general. And if you look at the resource space that we have compared to, say, 39 or 40 companies that brokerage firm like Canaccord Adams puts out, they have shown that on average non-producing juniors trade somewhere around 70 to $80 per ounce, generally the higher end of that. And we currently are trading somewhere around $49 per ounce, so we're about 50% undervalued by that metric using their figures. And that of course assumes that resource that we've reported doesn't change. We’ve already spent the money in diamond drilling so that we can report the changes that should come out very shortly. So that's one of the most glaring ways of measuring companies and the easiest way for an average person to look at junior mining companies. [35:12]
JIM: I guess a question that a lot of investors would want to know and a very important one, Dave, how do you plan on making money for your shareholders and when will shareholders realize full value? You just pointed out you're selling at about $48 an ounce, and we know your resource estimate is going to go up here in the next month. Your peers are selling at 75 to $80 an ounce. So two questions: How do you intend to make money for your shareholders, and when do you think your shareholders are going to realize that value?
DAVE: I think that you’ve hit the nail on the head there. Business is about making your shareholders money, and we have to have a well defined growth path. So what we intend to do is probably a four fold way of increasing shareholder value. The first, the basic way is to keep growing our resource, so historically we have found gold at about $25 per ounce, so for every $25 we spend, we generally will add one ounce to our resource base, 43-101 resource. So as long as the evaluations are above that, there is a value that's growing in the company. I think secondly, and this again is another path that we're on, is to demonstrate the economic viability of the resource. A resource that is not economic is worth one thing, and you can just hope and pray that the price of gold will go up and make it viable, but more to the point is can you demonstrate today through engineering studies that your value is there on today's gold price. And today's gold price is classically discounted by all of the people that are working. We're looking somewhere between a 650 and $700 gold price. Can we demonstrate that we can make money mining what we have? So we're on the way to do that. It's been delayed several times for many reasons, not the least of which is our resource keeps changing. Fortunately, it's growing.
I think the third item is our exploration properties. We have to demonstrate to the shareholders that there is a potential for a home run hit that at least from the work that we're doing that we may one day pull several tens, if not hundreds of meters of tens of grams of gold's per tonne or more. The Aurelian kind of hole. The project that we're in won't typically give us the hundreds meters of that kind of results, but it can give us tens of meters of that kind of results because historically it does happen.
And I guess the last item, we have to get the story out. Are we undervalued just because people don't know us or because they don't believe us? Either way, we have to start talking to people, go to the conferences, get in the papers, start meeting and talking to the fund managers, get the story out. [38:01]
JIM: This is a new year. We're two months into it already. The first quarter will be over in about another four or five weeks. What are management's goals this year? And second to that question, what are you going to do to help achieve those goals.
DAVE: Well, I think in sequential order or in time order, we will have several revisions on our resource estimate come out. So we will see Nicholas Lake resource revised and we'll have both underground resource there and an open pit resource. We have 15,000 meters of new sampling there that should be reported within four weeks. We have some numbers off of the Ormsby zone, 25,000 meters in new drill holes there. We've released the drill hole results so the shareholders can get an idea of what might happen, but ultimately, unless all of those holes hang together, you're not going to get a lot of ounces. We know we historically have hung these ounces together. They've formed cohesive zones, so we should be able to add ounces, and that's one of management's targets is to get that information out there as fast as we can. The demonstrating the economic viability, the engineering studies, the preliminary assessment that we're working on, it has to come out and we're working hard on getting that out, and that should be out before June of this year. That's our target date and if we get it out sooner, terrific, but we really don't want to get it out any later than June.
We have some grass roots exploration properties on the go, and every one of these each day has a chance of giving us that home run hit. But barring that, if we continue to demonstrate results coming in and we can work on improving these results and finding more of them together, we will be adding ounces and growing our resource in different areas, so we've been consolidating in the Greenstone Belt. We have development projects on the go and we have grass roots projects on the go, and we're just advancing that pipeline of projects. So that's the plan. [40:02]
JIM: All right. So the business plan this year is you've got two resource estimates coming out, a new one on the Ormsby, one on Nicholas Lake. You mentioned earlier in the interview you have three drills going on BigSky, which has a lot of exciting – as the word would imply – upside. Do you anticipate any kind of resource estimate that would be put together if you're going to be doing a lot of drilling this go year?
DAVE: Yeah. The way we intend to approach BigSky is that we will first do a pass testing our models, so based on the work that I've done in Yellowknife over the last 20 some odd years and the work that some of our consultants have done like Peter Datsan [phon.], Jim Kelly, or our chief geologist, Val Pratico, we've all been working in the belt for many decades and we all have our preconceived ideas how best to look. And when you get all of us in a room, it's really kind of a heady experience to have all of these ideas thrown out there, but we believe we have techniques to prioritize where we might want to look in shears almost to get that home run hit. And we intend to test as many of those targets as possible during this winter drilling season, and it is still winter up in Yellowknife, that we can identify centers of mineralization that come summer or post the spring break up, we can go back to and drill some definition to see if we can build some resources. So the first pass, take a look and see what we can find, find out where the hot areas are, second pass is to build the resource, drill on either side of hotholes and see if you can build something up. [41:39]
JIM: Let's talk about the company's viability. What is your cash position currently, and is it sufficient to scary out your goals for the year?
DAVE: Yes. We were fortunate to complete a financing just prior to the downturn in the junior markets. We raised $12 million in December of 07, and we have a budget for 2008 of $12 million. We have a few warrants that are coming due in March and April, and our plan is to proceed according to our budget and our exploration project. However, if we do pull a multi-meter hit of multi-gram per tonne material on BigSky and it warrants a fourth or fifth drill, then we'll have to reevaluate our budget plan to maybe shift some of our numbers around a little bit so it's spent where the shareholder gets the best bang for the buck. [42:30]
JIM: All right. Let's talk about your position in the company and one of the things I think that is important for any company that shareholders would invest in or investors is management's ownership of the company. And I wonder if you might address the ownership position of the management and board, and personally, are you buying shares?
DAVE: Yes. The management and board of Tyhee owns about 2 ½ million shares directly, and a similar number among friends and family that don't have to file with us. So we have a – that's a direct share position, and of course we have warrants and options outstanding. The warrants we buy and that comes on share issues and options are granted to us always at market or above market prices. So Tyhee has a policy of not issuing options at a price that somebody couldn't buy the shares at on that day. So with the options wrapped in there as well, that would be another 14 million shares.
Have I been buying lately? The majority of our management team has purchased shares in the past that have come with warrants, and we've exercised those warrants recently, so the sum total position of management's position has been increasing over the last several months. [43:50]
JIM: You indicated earlier in a question when I asked you what you thought your company was worth and in comparison to your peers, you’re selling at almost a 50% discount to your peers and you have a substantial possibility for two new resource estimates going on. One question you brought up, is it a question of people don't believe you? Or is it an a question of people don't know the Tyhee story? I think that's more, in my opinion, what it is, but how do you intend to market your company? What kind of marketing programs do you have in place now to get your story out?
DAVE: Certainly, we're not well known in the markets. Generally, when we go to a forum where we're meeting individual fund managers, they'll ask a question similar to what you ever asked but put a different way. They'll ask why are we so undervalued? And my response is generally, “have you heard of us before?” And there answer would be, of course, no. That's why. So we are making a concerted effort to get out to maintain our communication level or expand that. We're looking at – these are one on one shows presentations to people or trade shows. We go to about 12 different trade shows a year. It's getting just our name in front of people, to advertising in newspapers or magazines. The industry standard publications. We have to get that story out to people. That is what our goal is this year. It's got to be a little more expanded than it has been in the past. [45:23]
JIM: And the way to get in front of institutions, are you doing road shows? Do you have somebody that's helping? Are you making appointments with fund managers?
DAVE: Absolutely. We have four different groups that are engaged in investor relations for us. These are individuals or companies, and some come and go. We've changed over the years to find a good fit for people that can convey our story in a manner that we like to work with. So we have shows and one on ones through Vancouver, Toronto, Montreal, New York, San Francisco, Boston and London. We also have included stops in the past that are generally group presentations through Geneva, Zurich, Paris and Brussels. And these are all arranged and professionally orchestrated events. [46:14]
JIM: I asked you a question earlier: What was the company's business plan this year, how you intended to make money for your shareholders. You talked about a resource estimate coming out on Ormsby; one on Nicholas Lake; a preliminary economic assessment coming out maybe by summer, perhaps hitting a home run, Aurelian type drill result on some of your exploration properties. That's all fine and dandy, but Dave, tell me what are two or three things that can go wrong with your business plan, number one. Number two, what are you doing to monitor or anticipate these possible problems. And three, if the problems occur, what would you do to mitigate your position? What is your backup plan?
DAVE: These are all great questions. I think one of our concerns because we're in the permitting stage on our Yellowknife gold project, we've been working quite hard to keep community support going, and if we lost community support, that would be a blow. That would be difficult, so we are spending quite a bit of time and money to maintain close communications with the community groups, the native groups and making sure they're aware of what we're doing, and we're looking to expand our presence in Yellowknife. So we've considered opening an office. We've looked at different sites. We want to make sure we're part of that community and people can see us, and if there is questions, they can deal with us directly. It's possible given the markets that we could have financing problems going forward. We don't acquire any additional financing for 2008 as things stand right now, with the caveat that you know if we pull an Aurelian hole and somebody says put another drill on it, we might have to tip into the market to finance that. But I think more importantly is that we're planning too put in a mine and mill complex that could cost north of $150 million and obviously we have to go into the market for some. Do as much debt financing as possible to avoid excessive dilution. And it really depends on what the financial circumstances are at that time. So we have to be quite confident that we can proceed in that event. We have to look at some external factors and these are all issues that are very difficult to deal with things like gold prices. Fortunately, they are going the right way. Energy prices, exchange rate, skilled personnel shortages; everybody is suffering from difficult-to-obtain people and Tyhee has been interviewing mining engineers for far too long to try to bring on in-house engineering group. We've been using consultants, very well qualified consultants all along, but it's time to bring that on board and have that done in house. So we're advertising and looking to pick up that person. The other things that we can't deal with like gold price, energy prices, exchange rates, I don't want to use that hedge word, but that's one way that you can deal with volatility both up or down. [49:18]
JIM: You're talking about eventually going into production, and one of the big cost factors for many mining companies today has been energy. What is the energy set up around your main project, Ormsby. And in that area what is the infrastructure look like in that area? Do you have access to power? Do you have roads? Do you have access to places, towns where you can get supplies? Talk about the infrastructure surrounding the project if you would.
DAVE: Okay. This is the one of the key attributes or benefits that our project has over many others. In talking to our engineers, they've used comparisons such as Hope Bay or comparisons like Cumberland Resources and their projects. Those are quite a bit removed, although some of them have near tide water access. We are just ninety kilometers north of Yellowknife, so it's a 20 minute flight to our air strip, or it's a two and a half hour drive up the winter road. For energy, we have been using diesel generation, we have a large tank farm on our property right now, and we have just filled up our tanks at $1.05 a liter, so that's bringing our tanker trucks directly from the refineries in Yellowknife, filling up at the refineries, driving on to our property, paying all of the road tax, the GST coming out at a 1.05 a liter delivered to our tanks. That's more expensive, Jim, than what I can fill my tank up with here in Vancouver today. So logistically, it's not so bad to go by diesel. Fortunately, in the northwest territories, at least this part, does have a hydroelectric grid together; and one of the power plants is just sixty kilometers south of the Yellowknife gold project. So there was a power line in the past that came up to the Yellowknife gold project area. It was removed as part of the clean up of the old mine site, and that would bring us cheaper power, should it be worth while to bring in the power line from the power plant. [51:24]
JIM: You know, there is another project to the north of you.
JIM: Miramar, the Hope Bay project that was bought by Newmont. How would you compare the southern end of Yellowknife to, let's say, Miramar?
DAVE: Miramar’s Hope Bay project was an opportunity for Miramar to get in on an entire belt, so they are the dominant holders, not the only holders but by far and large the dominant holder in that belt that had been relatively unexplored and I believe they purchased it initially from BHP who had discovered the original gold showings there. So they have been very successful in finding both high grade small deposits and low grade bulk mineable deposits.
What Tyhee has is the dominant position in the Yellowknife Greenstone belt. It's a little bit closer to a population center and all weather roads heading south on our BigSky property for example. Communications can be maintained by cell phone, for example; we're that close. Logistics is important, and it does increase your cost overall, but I think I agree with Miramar's target of going after consolidating an entire belt, and that has been our plan as well. So we now have a package of land there where we have high grade small showings. We have lower grade bulk-mineable targets and we have a pipeline of grass roots through to development projects that will keep us busy for a long time. [52:51]
JIM: I have a couple of other questions, and this is, I think, very important. You grew up in this area, you did a Masters and PhD. You're a key employee of Tyhee Corporation. What is your succession plan? Heaven forbid, Dave, what if you got on the wrong freeway or wrong airplane, what happens to Tyhee?
DAVE: This is a subject that came up when I sat on a small airplane ready to go up to our mine site. It's a small little 20 minute flight, but I looked across at our vice president, our CFO and four of the remaining board members. I said, “guys, we can't ever do this again. This is not the way to travel.” So we have recognized that there are issues, and we don't do such foolishness as all of us getting on the same aircraft. But individually, I think we all have been working hard to make sure there is people to replace us. As it is, when we started on the Yellowknife Greenstone belt project and Yellowknife gold project, I did a lot of the geology, I was out there breaking rocks and siting drills and doing a lot of the grunt work. I've moved away from that the last few years and we have some tremendous geologists out there, very experienced, very well qualified people, and they've come up with some fantastic ideas to really add to the resource. So I think technically, we've got some great people on board and in management. We have some very experienced people in management and on the board that could fill the shoes of anybody here. [54:23]
JIM: And are there any issues that you've run into with land claims or any issues in terms of advancing permitting in the area? In other words, are there any environmental groups of issues that are contesting your land claims or coming against you in terms of trying to stop a mine from coming into production?
DAVE: We have just by virtue of being in Canada, native land claims are a very serious and big issue throughout all of Canada, and we do have to be very respectful of the negotiations that's going on between our federal government and the various first nations groups. We have tried to curry favor with the First Nations recognizing that they are a power broker. It is their land and they will have a say in how it's developed. So we welcome them as partners, be it as contractors to do some of the trucking, some of the rock breaking, some of the drilling – whatever it is that they wish to step in and assist us in the project, that's fantastic. They've proven to be great partners. They know the land quite well. We have had some issues in the past when communications haven't been as good as they should be, and we've taken immediate steps to rectify that. So we're right on up front making sure that we're talking with the First Nations. As far as environmental groups go, the Yellowknife project site is a past producing mine site. It's not a green field project area. It would be described as a brown field project area. There were buildings, there were air strips, there were tailings. What we've done today from our development work in the area made it a lot cleaner than what it had been in the past. When we come across old rusty drums in the bush or coils of wire that have been left there or whatever, our employees are instructed to pick it up, clean it up, bring it back and we'll haul it to a certified waste disposal site. So we are greening our project area at the same time that we're drilling and expanding the resource there. [56:29]
JIM: A couple of years ago at the San Francisco Gold Show I had talked to you and at that time you were hoping at some point with the inclusion of Nicholas Lake, the company would be over 2 million ounces in gold. Where do you see Tyhee going in the next year or two in terms of resources if you were to give a ballpark?
DAVE: Well, because I've seen a – had a look at some of the Nicholas Lake numbers that we're working on, I really can't get too specific, but what I can say is that historically for every $25 that we've spent, we've found an ounce of gold and added it to our resource base. I don't see it changing substantially. First, when we talked in San Francisco, I said the easy stuff has been found. It's going to be a little more expensive to find gold now, but in fact, with a little bit smarter thinking, we've managed to reduce the cost of some areas, and it does increase in other areas. So on balance, I think that figure is a good way to look at it and move us from our – if you added all of our resource space together and came up with one and a half million ounce aggregate resource, then I would look to see it moving towards the two million ounce mark, and we can certainly mark off potential for much more than that, although it will not be drilled this year or next year just by virtue of it being too deep for us to wisely add it to our resource today. [57:52]
JIM: A final question on financing. What proportion of shares and warrants are in right now?
DAVE: We've had a lot of warrants exercised over the last six months, so we are now moving to a total fully diluted if all warrants and options were exercised, we'd be sitting somewhere around 184 million shares out, and I can say with great pleasure that our warrant position has dropped from 40 million warrants outstanding to about 10 ½ million warrants outstanding right now. And I can assure you by the end of April that our warrants outstanding will be zero. [58:24]
JIM: A couple of final questions, Dave. Is there anything else I have forgotten to ask you that you would consider important?
DAVE: I think you’ve touched on everything that is pretty significant. The questions that I saw sent to me by various investors overtime have all been touched on there. There has been some little bit off the wall questions by people who don't understand the business so much, but I think the job you've done in educating people on what's important and these are critical questions, they should pay attention. Those are very valid and should be asked of everyone that comes on. [58:58]
JIM: If you were to put your money into your competitors, who would you be buying?
DAVE: That is a tough question. I generally invest by people. There are good people out there, and I'm sorry to say there are some bad people out there. I've invested in companies where I know the people, and if a project fails, I don't really worry too much because I know they are going to get up on the horse again and find another project. So I have invested in companies such as Fortune Minerals that is working west of us. They have got a gold project, NICO, on the go with a bankable feasibility study completed. They have some coal assets in British Columbia.
I've invested in Luna Gold working in Brazil. Quite a comfortable place to work politically. It's run by Tim Searcy who used to be an employee in ours, a great guy, very smart and a couple of base metal companies, I follow VMS ventures, Johnny Roozendaal used to be our senior geologist on the Yellowknife gold project when it was operated by another company in the past. Murgor Resources is another one. These two, VMS and Murgor are looking for volcanogenic massive, massive sulfide deposits. They are not direct competitors to us, but they are using modern technology looking in old camps and the new technology for finding volcanogenic massive sulfide is phenomenal. It's outstanding and they’ve had some tremendous success. [1:02:06]
JIM: Last question, if I was an investor and analyst, how could you find out more about your company, what analysts, firms or newsletter are covering your stock?
DAVE: Unfortunately because of the size of our company being the sub-100 million dollar total capitalization, it's generally the smaller brokerage firms that follow us, so Canaccord Adams tracks us on their junior precious metals list, Dundee Capital tracks us on their annual and weekly reports that they put out and Loewen, Ondaatje, McCutcheon or LOM who was involved in the last financing also follows us. There are some other brokerage firms where we've made presentations, but we are too small for the likes of BMO Nesbitt Burns or National Bank or some of the larger institutions. They may like us, they may know us, but they can't follow us.
JIM: I was going to say Ormetal Report follows you.
DAVE: That's one I haven't actually seen. I've heard about that, but I haven't seen it. I know that we've had write-ups from Frank Barbera and David more began. Frank basically is enthusiastic. I think he really understands the potential of t he project. David Morgan also likes the project but thinks the share capitalization is too high. He's a firm believer of the small number of shares issued out there, so that's a personal opinion. Me, someone says you should only have 50 million shares out, and be trading at three times your price or four times your price. That's just an opinion.
JIM: If you were it to speak in front of a group of investors right now, give me three reasons why they should buy your stock.
DAVE: It's been said what are we going to do to increase shareholder value, and I think you will see us continue to find gold with the drill bit and will continue to find it very cheaply. I think you'll see a preliminary assessment coming out in less than six months, and that should demonstrate the economic viability and perhaps move our ounces of gold from where it stands today at under $50s an ounce towards our peer group average which is somewhere between 75 and $80 an ounce, to those that have demonstrated economic potential and they generally trade in the 100 and 200 dollar an ounce range for the resource. And lastly, I guess the BigSky, the Clan Lake, the Goodwin lake, the home run head potential there where we'll find something where nothing has ever been found before, it may just wow people. We're working on it. [1:02:55]
JIM: The name of the company is called Tyhee, and it's listed on the TSX venture exchange. And Dave, any chance of moving to some of the bigger changes.
DAVE: We have discussions on that, and we’re actually...and once we started, we're not allowed to talk about it.
JIM: All right. We'll end on that. The ticker symbol is TDC and you can find that on the TSX venture. Dave, I'd like to thank you for joining us this week, and this was an interview we were hoping to do at the gold show in November. Unfortunately during a finance, we couldn't do that. I want to thank you for joining us on the program.
DAVE: Thank you for having us, Jim.
JOHN: It is indeed time for the Q-Line segment of the program. The Q-Line is open – meaning the Question Line – is open 24 hours a day to take your phone calls, your ideas and comments and questions. We ask you to keep them as brief as you possibly can because if they get too long it’s hard to follow etc. etc.. Our toll free number from the US and Canada is 800 294-6480. And that is toll free US and Canada. It does work from the rest of the world but it’s not toll free from the rest of the world.
And as you listen to our responses here, please remember that information presented on the Financial Sense Newshour is for informational and educational purposes only and you should not consider it as a solicitation or offer to buy or purchase or sell any securities. And responses to your inquiries are based on the personal opinions of Jim Puplava and don’t take into account your suitability, your objectives, your risk tolerance – we don’t know enough about you. Financial Sense Newshour is not liable to anyone for financial losses that result from investing in companies or stocks or other things profiled here on the Financial Sense Newshour. Always consult a qualified investment advisor before you make decisions; and preferably someone who shares your worldview on economic investment.
The first call is from Alfie in Spain:
Hi, this is Alfie from Spain. Jim, what is your best guess about what will happen to the stock market given the hyperinflationary depression. How will you modify the composition of your portfolio once you feel that the hyperinflationary depression is closer in time? Thank you so much.
You know, Alfie, I expect the stock market to remain within a narrow trading range. I think that the powers that be will do all they can to keep the markets inflated. But, as you’ve heard us talk about money supply growth rates and the increase in inflation, you know, we’re invested in five primary areas: precious metals, energy, food, water and infrastructure; and that’s going to be the focus or the main drive of our portfolios because we see these as basic necessities and so in this inflationary era (and it’s not just here, it’s globally – I mean even China itself is experiencing 7% inflation). So those would be the areas I would be investing in, and I would expect that with all this monetary reflation you’re going to see prices move up in the market. [2:34]
Hi, Jim and John. This is Charles from Huntington Beach, California. First I have a suggestion for Washington. If they are afraid that not all the rebate checks will be spent right away back in the economy, they should forget about sending the checks to the tax paying adults, instead they should turn the checks over to all of America’s kids. They have no debt to pay down and nowhere to save it. As such, all that money will be spent back to the economy that same day the checks are mailed. I guarantee it.
As for my question, I recently read an article about overseas investors coming to the US looking at properties as they are cheap to them to the tanking dollar. And number one, is this going to be a problem leading to protectionism and 2) if not, will the overseas investors keep the real estate prices level in cities like San Diego, LA, New York and Miami? And 3) if this is the case, as I’ve been looking to buy a condo in downtown San Diego are we already looking at the bottom for markets like these? Thanks.
JIM: Charles, they’re going to throw enough monetary reflation and if you listened to Bernanke this week they’re just getting ramped up. You haven’t seen anything yet. And of course, as we cut interest rates as we inflate the dollar gets weaker making other currencies stronger. I mean you’ve got the Swiss franc almost equal to the dollar now. Can remember when it used to be 4 Swiss francs to the dollar. So from a foreign perspective our markets look pretty cheap. On the protectionist front, I think the unions are more worried about protecting their little monopolies in manufacturing and so, if there’s protectionism look at all the properties we haven’t stopped foreigners from buying in the past. I mean in the late 80s it was the Japanese buying Pebble Beach and buying Rockefeller Center and other places like that – I don’t see them stopping that. We don’t save in this country; we have policies that penalize people for saving and so if you don’t save and you need capital, that’s why foreign capital comes here. [4:25]
Hello, Gentlemen, this is Eric from Calgary, Canada. I’d like to thank you for your show, it’s provided me with a macro view and a truth I’ve always been missing. I’ve come to the conclusion that the single largest threat to my investing and my family’s well-being is government. If the oil companies I’ve invested in actually hit the huge find the country will nationalize it; if I invest in gold because I’m theoretically smarter than my government, when they realize their mistake they will confiscate my physical gold and I imagine renegotiate mining royalties on stocks or tax them to death; and lastly there’s no relief from taxation. So I’m considering switching from stocks to actual futures to eliminate country and government risk but this still doesn’t solve all my problems with the sense of despair there’s no place left in the world for people who want small government. I’ll move my family if that’s what it’s coming to but I’m left wondering where. I hope you could discuss or get an expert on regarding the best places to live keeping in mind the threats of global warming, energy wars and of course, rampant populism. Thanks guys.
JIM: Well, in the words of President Ronald Reagan: government isn’t the solution it is the problem. And you’re seeing that problem break out all over the world. That’s an interesting topic where are all the best places in terms of where are property rights and governments aren’t as rapacious. Thanks for that suggestion, Eric, we’ll have to do something about it. But once again, as we’ve been talking about in the Big Picture taxes and inflation are going to be the number one problem for most citizens. [6:02]
Hi, this question is for Jim or John. I was viewing Fox News’ website and I was looking at their primary results side by side and it seems to me that the Democratic candidates, whether it be Clinton or Obama are just overwhelming the Republican candidates just in sheer numbers of votes. Would this be indicative of what the general election might look? Thanks.
JOHN: Well, I would think like that; doesn’t it at the moment? What you’re seeing is a breakup of a number of things in the Republican party among whom are the Religious Right who are beginning to feel they’ve been disenfranchised. But there are other people who have felt that way as well. And so that’s what’s causing the disillusionment on the Right, which of course gives the impetus to the Left. So if it keeps on this path then he’s right and it does seem to be leading in that direction. But we are still 248 days to go in silly season and as you well know in an election or a court process anything can happen; there are twists, turns and curves, so one never knows. And someday, I keep thinking Jim, there’s going to be a day unlike any other day when lives will change again and we’ll never go back to that; and that could also have some effect on elections if that were to happen.
JIM: As you mentioned, John, we’re well over a couple of hundred days away from the election; a year ago Hillary Clinton was thought to be the shoe-in for the Democratic party and look what’s happened with the Obama-rama phase. So a lot can happen. And then the other thing too, remember in the primary season both candidates appeal to their constituents in their own party and you get a lot of the slogan stuff. Once the candidates have been chosen, then you start getting into specifics: Okay, you’re the candidate, if you’re president what are you going to do? Okay, you’re going to do this; how are you going to pay for it? Those are the questions that have not been answered in this campaign. I mean the word change sounds great. Okay, but what kind of change and how’s that going to impact me and will I benefit and if I am, am I going to have to pay for it or is someone else going to have to pay for it. Those are the questions that will come out in the election and we’re still far enough away from that. [8:14]
JOHN: Yeah, especially I think tax policy issues when people can see hardball numbers: “if you make $30,000 a year, here is what you paid in taxes then here’s what you’re going to pay now.” And if you could see that in concrete numbers that could radically change everything, plus as I said anything on the geopolitical area could shift things overnight as to how the public perceives what needs to happen in that area, especially if there are more terrorist incidents.
Hi Jim and John, this is Tim from Ontario. I’ve got to tell you I love your show; I’ve been listening for a few months and I find the information really, really valuable. I have a question for you regarding uranium. I purchased a junior stock several months ago beginning of the year, the stock symbol is TEL.Z. It trades in Vancouver; it’s Trigon Uranium. I’m wondering if I could get your thoughts on that and just the uranium sector altogether and what’s happened with the stocks. It looks like they’ve been beaten down quite a bit and whether we should continue to hold on to those juniors or sell them off. So, that’s pretty much it. Thanks for all the information on this sector and the financial markets and the gold markets.
JIM: Tim, since probably going back to last March around this time, the uranium stocks in general including the stock you’re talking about have all been coming down; they’ve been consolidating here and that stock you’ve been talking about has been consolidating in the 18 to 20 cent range as other uranium stocks have. I would hold on and if you have extra money you might want to consider adding to your position – spot uranium is around $75. We’ve had a pull back and a big sell-off. A lot of the hot money that was moving into this sector exited this sector last summer and a lot of the juniors – I don’t care whether it’s silver, precious metals stocks, or even uranium stocks have all taken a hit. So they’ve been bottoming out here and consolidating – I would hold on. [10:14]
JOHN: Can you buy uranium bullion coins? Do they come in little lead wrappers?
JIM: Yeah, you may be…next time you have a power out you just stick your coin in the socket and power the house. We may have to get to that.
JOHN: Oh look, he’s just bought his thousandth coin, he just put it in the stack and it just fissioned and the whole house blew up.
Good Afternoon, this is Heinz. I live in Las Vegas. I have been very puzzled by the fact that so much is made of the Fed injecting currency into the system because of all the bankruptcies that have taken place. What puzzles me is the fact that the bankruptcies extinguish the money, so whatever the Fed did feed in probably just replaces what used to be there. It seems to me that it doesn’t increase the money supply at all. Is my belief correct or not? Thank you so much and I love your program.
JIM: You know Heinz, they are the keeping the system liquid for the very reasons you’re talking about. But remember, just about single financial institution that has announced write-offs whether it’s Citigroup or anybody else they’ve replenished their capital base even before they announced the write-offs, so it’s not just the Fed but a lot of these institutions have been going to sovereign wealth funds, private equity or even hedge funds to get replenished. What the Fed is trying to do is make sure the banks have enough money to keep lending even though at the same time bank lending standards are tightening. So the money supply is still expanding. [11:55]
Jim and John, this is Mark from Seattle. I’ve been listening to your program since the beginning actually, and you do a very good job overall, Jim, but I notice you seem very frustrated with the governmental interference of the economy and the regulations and the inflation caused by the Federal Reserve’s activities etc. And I just wanted to have you question your own perspective a little bit here. The government is the biggest of the organized crime syndicates and as they use squares and just like the Mafia do they raise taxes to create money out of thin air in spite of the negative impact on the economy, it’s because these criminals are focused on their income flow and are uninterested in the health and efficiency of the golden goose they are choking to death. You have to remember the perspective of the criminal mind is a thug who is not able to comprehend their activities dragging down society. So I actually saw the question in relation to how you see government; government has always behaved this way and you always seem to want to have this hope in your voice that underlies the idea that the government can be an official when they’ve proven it over thousands of years that thugs can do no right. So that question is more or less for you to mull over and maybe for some of your listeners to consider. And thanks for your time and I enjoy the program.
JIM: Mark, I’ve thought a lot about what you’ve said and I’ve been thinking about this question for quite some time throughout most of this decade actually. It’s one of the reasons why I’ve been studying the Roman Republic as I think the Republic is going to fall and we’re heading towards dictatorship following the complete evolution of as you mentioned where this eventually leads to because this is certainly a pattern throughout much of history. I guess you know maybe you’re right. I’ve lamented a little bit that they’re going to put people through such suffering because you hate to see people suffer; they’re going to cause people to lose their jobs and they’re leading us right into another depression. So knowing that that’s coming it’s sort of saddens me to see these same mistakes made but you know what we’re just trying to help people out here and get them to prepare for it. If you can’t stop it you might as well profit from it. [14:02]
Hi Jim and John, it’s Bill from Ontario. I really like your segment on dividends and using GE as the example because I really like GE and I think you guys have pointed out that they’re in all the right things for the future. Anyway, I think it would be very instructive both for me and your other viewers if you could respond to this two part rather complex question on GE as an example again: If I had bought GE – I’m a Canadian – five years ago, the Canadian dollar was about 60 cents, so $1000 Canadian would have bought maybe would have bought $600 US worth of General Electric stock. If you considered dividends and everything else how much would that be worth today in Canadian dollars? The b) part of the question and this is where I think would be very instructive is given Jim’s vision of hyperinflation, depression etc. for the future, if I purchased $1000 worth of GE stock today how much do you see it being worth in five years from now in Canadian dollars. I really look forward to your answer and thanks and keep up the great work. I really appreciate your program.
JIM: Bill, in the last five years one of the things that you’ve seen in General Electric’s stock it’s been sort of basing, it’s gone nowhere. Even though their earnings have gone up General Electric hit a peak at around $60 a share back in the year 2000; and then it went from about $60 all the way down into the low 20s. And so if we’re going back five years from now you could have picked up General Electric at probably 22, 23 dollars a share; today it’s worth about 34; it did get as high as a little over 40 last year. But the Canadian dollar has gone from what, about 65, 70 cents to almost a dollar today. So in Canadian dollar terms you would have gone nowhere but the stock hasn’t really gone that much assuming you would have bought it at the low. So in terms of currency depreciating…although one thing we do see coming up here in the next decade is the emergence of the amero which would be all three currencies – the US dollar, the Canadian loonie and the Mexican peso merged into one currency and that’s something I suspect we’re going to see unfold especially if we get into a dollar crisis by the year 2010. [16:39]
JOHN: Well, Jim, you’ll never guess what the most famous pastime in Germany right now at least it’s becoming a very popular pastime: it is called tax evasion. It’s a popular sport there apparently and there are books out in Germany such as one by Franz Koentz [phon.]who has 1,000 legal tax tricks. He’s helped middle class and lower class Germans cut their tax bills for 20 years. Now that’s legitimate. His book is a bestselling tax volume on Amazon.com’s German language site. The number of tax laws have multiplied and as a result since German reunification in 1990 the number of tax advisors in the country has jumped 60% since just 1990 because of that and a lot of Germans say for example you walk into a shop –they have a story that Bloomberg quoted here – the clerk offered it for 127 euros or whatever (it was a hard drive) if you get a receipt; or 80 euros without it. And so of course the buyer took it without the receipt and remember what we said about underground economies, as soon as tax rates become abusive then underground economies begin to flourish. And that’s pretty much the way it does.
JIM: Well, the well known tax historian Charles Adams he’s written two excellent books, one is very hard to get right now and I was fortunate enough to get one when I interviewed him back in the 90s; it was called Fight, Flight or Fraud and it was a history of what happens when government becomes rapacious. That’s exactly what you get, you get fight – remember the Prop. 13 fight in California. You get flight – I’m out of here I’m going someplace else or you get fraud. It happens and it’s happened throughout all of history. [18:18]
JOHN: All right back to the Q-Lines.
Hi Jim and John, it’s Hugh calling from Vancouver. I just listened to last weekend’s show. So many great topics covered, thanks for all the wonderful work. On the show you mentioned in Ian Telfer. Ian is quite the guy. I don’t know if you know it or not – you probably do – but he was on Howe Street back in the late 70s with his first vehicle, I believe it was Vengold but that was a long time ago. Once the gold stocks had had their run I guess the next time I found Mr. Telfer was at the head of a little internet incubator – who remember those, eh? That’s a painful education – called Itemus. And when the techs had their run, where does Mr. Telfer appear again but back in the gold sector with Wheaton River. I guess the point I’m trying to illustrate is that Ian’s not just a gold executive but he is a deal maker a promoter and currently he believes in the gold market which is great. But I’d love to hear an interview with him as he seems to be able to recognize capital flows and where the money is going not where it’s been. So it would be really interesting hear him interviewed one on one or as a member of a gold panel and what his views might be on after the bull’s off where he’s going to positioning himself. Just a fascinating guy.
Secondly, another point I’d like to raise, you mentioned that the Northwest Territories is one of your favorite jurisdictions, I wonder if you’d looked at Quebec – another Canadian jurisdiction. Lots of good activity there with Goldcorp and Rob McEwen, ex of Goldcorp – both having large investments in the James Bay region. As a mining jurisdiction, Quebec has to be one of the best in the world; the government is very mining friendly. They actually rebate 50% of all money spent on exploration to the companies working in their jurisdiction. It’s a very, very open-to-mining production and getting companies up and running and creating those jobs. Anyway, love to hear your comments. Thanks.
JIM: Well, you’re right, Hugh, Ian Telfer is a deal maker. He put together quite a program with Wheaton River. And the fact he’s in the sector, will we interview him? He’s a pretty hard guy to get. The way to get him is sort of, John, I think we interviewed him in 2006, we got him at the San Francisco Gold Show. I didn’t go up to the gold show last year so we didn’t get some of the big guys, although we got Sean Boyd from Agnico. I haven’t decided whether I’m going to go up to San Francisco for the Gold Show this year. I probably might want to do something from the Denver Gold Show where you get all the top execs to come in. I prefer to go to the Denver Gold Show where you get more information from the company’s CEOs because it’s designed more for analysts, investors, fund managers. So hopefully maybe if that happens we’ll get a chance to talk to him. [21:00]
Hola, Jim and John, this is Richard calling from Buenos Aires, Argentina. Jim, this is possibly a very naïve question, but I am a small investor and like many in your listening audience when I want to invest in a company I do my due diligence from publicly available information. You’re not a small investor. Do you have information that gives you an edge in investing that is not publicly available to the rest of us.
JIM: Well, you know I guess Richard like you I do a lot of my own due diligence. I subscribe to a lot of what I call good institutional independent research and one thing I have is sometimes that may be other people don’t have is boots on the ground. I will use if I’m going to finance a company or get involved in a major way, I’ll send a geologist out to the field or I have contacts that I have networked with geologists who I’ll call up and say hey, have you heard of this company what do you think about the people running it, what do you think about the property. Yeah, you’re right, I’ve got information some people don’t have available to them but quite honestly like yourself, as I’ve talked so often on the program, if you’re getting involved in a company, you can go to the company’s website, you’d get that information – of course, a lot of that is public. And then also I’d talk to the company’s CEO. So you get on the phone, talk to the company’s CEO, this is what I read, what does it mean, ask that company’s CEO questions. These are things that I think the average guy can do that you’re able to do at least in the mining sector. You know, you may have a hard time getting a hold of the president of IBM to take your call but in the mining sector you can certainly do that. But I think having access and doing a lot of reading, but I think most of what I do during day is I spend probably eight to ten hours a day reading, both at the office and at home in the evening. And the more you read the more the information you get and then I think once you get the information it’s a matter of putting the pieces together because information is information. It’s what you do with it. [23:06]
Hi, it’s Jeff calling from Nevada. I’m curious, it’s not specifically investment related where you would go for jobs as far as white collar and blue collar jobs when the next big slowdown occurs, insurance I imagine would do better, real estate obviously would be a place you would not want to be. I was just wondering your general thoughts and specifically related to a lot of the research that you are doing on a switch from a consumer society to more commodities based.
JIM: Jeff, if I was looking for job security here it would definitely be in the energy industry, in the commodity industry. A lot of the people that ran the energy companies and the mining companies are getting old; they are retiring. There is a shortage of personnel in the mining industry and believe me there is a shortage. It is hard right now to get qualified people and if you can get them you’re going to have to pay a premium for them. And look, we’re not going to stop using energy so that’s one area I would expect to do well over the next decade. Another area that I think we have is a shortage of engineers. I mean this country graduates 10 lawyers for every engineer. And infrastructure is going to be a big thing. So engineering I think, and also getting into geology; finding out and learning farming techniques; basic necessities. The age of consumerism is coming to an end and I think getting involved in those areas you’re going to have good job security. [24:34]
Hi Jim, this is Matt in Denver, Colorado. You guys talk a lot about inflation on the show and I was hoping that you guys could go into a little more detail about the logistics of how that expansion of the money supply really finds its way to different assets such as real estate, food and what not; how inflation is created.
JIM: Well, when more money and credit are created artificially through government intervention and expansion what happens is you didn’t create any wealth when that money was created – in other words, if savings increased in a country based on let’s say production, people produce more, they save part of what they produce and that goes into savings you’re creating real wealth. The savings was backed by real wealth where when you just print it out of thin air. There is no production, there is no capital assets behind it, it was just created out of thin air. And when you have more money chasing too few goods then what happens is the extra money out their creates the demand for the goods but the goods weren’t created or the money that’s chasing those goods wasn’t created from wealth it was created artificially and therefore it drives up the price of those goods and that’s what you’re seeing occur globally now. That’s why if you listen to the first part of the Big Picture when John and I are talking about helicopter drops and I mention commodities…now, when that money is created is created the central bank and the government can’t always direct where that money goes to, and usually the reason it’s going into asset bubbles normally there’s got to be a story out there that attracts money – a supply/demand imbalance as we have in commodities today or for example the technology boom and then the bubble money goes into that sector and it creates a bubble because it was artificially created and it expands. And inflation can show up in many ways. It can show up with people taking that extra money buying goods and services driving up their prices; or it can go into assets driving up their prices whether it’s technology in the 90s or real estate in this decade and now commodities. [26:54]
This is Phil from Arizona. I have a couple of questions. One is I understand the definition of what a recession is. I know you’re talking about a possible depression. What is the difference between a recession and depression or real bad recession. What makes a person all of a sudden saying yeah, this is a depression. And the next thing is in regards to the hyperinflation scenario, if a person has a lot of debt wouldn’t that really be almost a salvation if you’ve got a big mortgage or you owe on cars and stuff if you can pay it off with inflated dollars. Is that really a salvation then for people who have high debt; do they hope for hyperinflation. What are all the ramifications of that. If you could go into it I’d really appreciate. I enjoy your show. I think I’ve learned a lot and I hope to learn more. Thanks.
JIM: Phil, the definition of a recession is two consecutive quarters of negative economic growth. What’s the difference between a recession and a depression. A real bad one. I guess it’s what? An extended period of severe economic decline for example the Great Depression in the 30s, the GDP fell by nearly 50%. And what’s that old saying, John? A recession is when your neighbor loses a job; a depression is when you lose your job. So it’s higher rates of unemployment. I think it’s like 10 or 12% unemployment would be considered depression. And it’s just a matter of the difference between a recession and a depression is I guess a matter of severity. [28:20]
JOHN: Yeah, and a recovery is defined as when the politicians lose their jobs.
Hi, this is Ken calling from Mexico. I’ve recently discovered your program and enjoy it and want to thank you for putting it on. I was wondering if you had any info on variable Swiss annuities which I’ve been investigating primarily for their tax advantages as well as diversifying out of dollars as a hedge against inflation. And the problem I’m having is finding any independent advice about them as most of the people boosting this appear to have a direct interest in selling you products. I was wondering if you have any feelings about these or could suggest places to find some independent advice about these investment products. Thanks very much.
JIM: Ken, I’m not very big on Swiss annuities as an inflation hedge. I mean the Swiss franc is a fiat currency like any other currency, although it has gone up against the dollar. I think we are almost ready to hit parity between the Swiss franc and the US dollar. They have some you can denominate in fixed Swiss francs or you can have like a variable where you can invest in mutual funds and preferably foreign mutual funds if you want to get the double kick against the dollar. But when people are looking for inflation hedges I mean it doesn’t get any more simple than this: Gold and silver. [29:37]
Hi Guys, amazing show. This is Tim from Newport Beach and I had a simple question I’m sure a ton of your listeners are wondering the same thing. The simple question probably a complex answer and that’s why I’m calling you: How does the small investor pick a junior? What are the fundamentals and what is a comprehensive list of juniors to pick from? The reason I ask is the more and more I think about this the more articles I read, it seems like the general consensus is that gold mining stocks are undervalued and especially juniors. And I think very little is known to the general public even how to pick a mining stock, let alone a junior. I think unlike investing in something like Apple or Google or stocks whose products are used by the small investor, a lot of people just don’t know how to get in to the details of the miners. And I think this is a real compelling question everybody would be happy to hear the answer. Thanks
JIM: You know, Tim, when you’re picking a junior the most important thing is…you know, we did a show on the 10 questions to ask a junior mining company; I think we did that a couple of months ago. You might want to look in the archives of the transcripts of the Big Picture. The most important thing that you’re looking at is management because when you’re investing in a junior typically they’re on the exploration and development side and you’re probably going to want to know more about management because they don’t have any revenues and what you’re really counting on is management: 1) they have the experience and expertise; they know what they’re doing; 2) they’re going to be shareholder friendly. And another thing besides management you want to take a look at where they’re operating, what country. Is it a prolific precious metals belt; in other words, have other mines been producing in the area or have there been other discoveries or has this completely been in an area that nobody has been into before. And if you want to hear in terms of the kind of things you want and know as an investor listen to the second hour of the Big Picture when I interview Mark Bailey and especially the Tyhee Dave Webb interview where I go through a series of questions. And as I go through those questions, those are questions I think you can use and find helpful in trying to pick a stock. [32:02]
This is Bob from Texas. It is often recommended to buy physical when it comes to purchasing gold – usually in the form of coins. Jim, you have recommended to not store coins in a US bank safe deposit box. Last year on your show, you recommended to store physical in a foreign country such as Switzerland. I have gold coins located in a safe deposit box. I’m getting a bit nervous. What would you recommend I do? Move them to a safe deposit box in Switzerland? That seems difficult logistically and how would I sell them for desperately needed cash during a possible economic disaster. Or would you recommend I sell my coins, take the spread loss and repurchase gold in the form of shares in the Central Fund of Canada or GoldMoney. This would in effect be a recommendation to not purchase gold coins in general; your thoughts are appreciated, thanks.
Bob, we’re having a bank problem right now and a credit crisis. And you know, what happens if the bank you’ve got your safety deposit box and we go on a bank holiday. Bear in mind that FDIC is putting out offers to double their staff on bank foreclosures because they’re expecting a wave of them. So I like keeping bullion outside the country. The Central Fund is one way. You can own shares. But also there is nothing wrong with keeping your bullion where it’s at right now, I’d just make sure about the strength and safety of your bank. I think that’s going to be important in case, you know, maybe not now but as this gets worse but especially as we go into a depression in the year 2010 where you would see a lot of bank failures. And what you don’t want is to be in a period of crisis and the bank that you have your bullion in is closed down. I don’t know how much you have, don’t want to know how much you have. You don’t want to be saying how much you have on this show either. GoldMoney is another way to keep and own gold and silver outside the country and it makes it easy. [33:55]
Hi Jim and John, this is Dilip from Santa Clara. I would like to thank you for all the questions that you’ve answered over the past few weeks that I have asked and I also noticed that during your second hour you get a lot of interesting guests to interview and usually they are authors who have written books recently. I would make a request about inviting one Adam Hamilton. I have been using his Zeal investing newsletter for quite some time now, maybe for the last three or four years; and he specializes in energy investments and precious metals investments so he would be a very good fit for the Financial Sense Newshour interview. You can access his website at www.zealllc.com. So I would look forward to you interviewing Adam Hamilton. Thank you very much.
JIM: You know, Dilip, we’ve tried to get Adam on the show and haven’t had much luck in getting a response. [34:58]
Hi Jim and John, it’s Ed calling back from Toronto with another question. I just today came back from a talk given by the president and CEO of this CD Howe Institute up here. They have their well respected conservative shtick. And Bill Robson, the economist who’s considered a Canadian fiscal and monetary policy expert, I asked him the question regarding fiat currencies and how they are all inflating and how Canada in particular [inaudible]. What did he anticipate would be the real value of the Canadian dollar six to ten months from now? And his comment was that he first said and not in a disparaging way, he said that he was a monetarist and might have concerns about the long term value of the Canadian dollar but he said that the result of Canada’s policy of having a targeted inflation rate of 2% every year was working very effectively in creating a controlled inflation rate environment that would not go out of control and hence he felt very secure about the Canadian dollar. I’ve been listening to you long enough that I think I know what Jim’s response would be to that but I would like to put it out there and actually get Jim’s response to what was said. Thanks. [35:58]
JIM: Ed, the Canadian dollar is strong because it’s almost considered a petrocurrency because of your oil exports, and especially the amount of oil you export to the US. You also have a lot of hard commodities and so the country is doing very, very well. But in terms of he’s a monetarist then he should know as a monetarist higher rates of money supply growth breeds inflation. And right now, Canadian M3 monetary growth is 7.13. So the monetary growth is higher than that 2% inflation rate would warrant. [37:00]
Hello, Jim and John. This is David from Kingstown, Pennsylvania. I’ve got a question but first let me say congratulations on the recent edition to your family. Great news and I wish you and your family all the best. Now, my question concerns the IMF gold sales that are coming up and this might be better suited to David Morgan but we know that there’s a large short position on the Commitment of Traders Report, is it possible that when the IMF decides to sell the gold and they get permission to sell the gold that they will use this gold to offset the short position on the Commitment of Traders Report that the unknown four or eight less traders currently hold. Look forward to your response. Thank you.
JIM: You know, that could be one possible solution because we know the bullion banks have been heavily short not only gold but also silver. This may be one way to get them off the hook, but you know, any time they have announced this in the past any time a central bank auction would be announced they’d hammer the gold market. Notice this time around with the IMF announcement it went nowhere, gold actually shot up. It’s one possible reason why they might be doing it. [38:21]
Hi my name is Tony from Toronto. I don’t have a question I just wanted to make a comment, I hear a couple of listeners calling in and looking for safe mining areas, and the usual names of Canada, the US, Mexico but nobody ever talks about some of the Scandinavian countries like Finland – I believe Agnico-Eagle has a property there that’s developing. And Sweden I mean there’s GeoZ [phon.] on Vancouver, they have a mine there. And the Lundin family, well, they grew up in Sweden – they’re all Swedes and they have quite a great operation all around the world including Sweden. So those are my comments, thank you.
JIM: Tony, thanks for bringing that to our attention, you’re right, the Kittila mine coming on stream this year with Agnico-Eagle is in Finland. There are a couple of areas in Eastern Europe, there’s a company in Romania and it’s questionable whether they’ve got their permits yet. They’re having some environmental problems but, yeah, sure, mining in that neck of the woods is considered more stable. Thanks for bring that to our attention. [39:22]
Hi Jim and John. My name is Jim, I’m from Phoenix, Arizona. First I want to thank you for the gift of your shows. It’s absolutely great and very informative. For some of us newbies in the financial world you’ve mentioned a lot of things that don’t make sense to me; and if you could explain these three phrases you use I really would appreciate it. M3 – what is that? Keynesian – I don’t understand what that is in relation to a method of financial planning or whatever. And the carry trade. Those three things are a puzzle to me, if you could explain them I’m sure I would be feeling really good about it. Thank you again for your show, and tell John now I am more informed and I do not consider him a whacko.
JIM: Well, John, you’re not a whacko.
JOHN: Thank you so very much.
JIM: Jim, why don’t we begin with M3. It’s a component of the money supply. It has all of the components of M1, M2 – checking, currency in circulation – the non-M2 components that M3 consists of are: institutional money funds, certain managed liabilities of depositories, large time deposits and repos. That would take up quite a bit of time just to explain all that. It’s just an expanded form of money. If you think of money as the money in your wallet, the money in your checking account, the money in a CD, well, just expand that to large institutional CDs, large institutional money funds and repurchase agreements where the Fed repurchases securities from banks. It’s a way that they try to inject liquidity into the banking system.
Now, Keynesian refers to John Maynard Keynes who wrote a book on the General Theory of Employment and his whole theory it became the justification for the New Deal, it was government interfering in the marketplace is the whole thing behind Keynesian economic theory. In other words, they don’t believe in free markets; that the government has to go in and tinker with the economy and the markets and adjust it. If the economy isn’t growing fast enough then the government prints money, spends money to stimulate the economy, then we have a bust like we have now; then the government has to come in and tinker again. It’s mainly tinkering with the economy which creates the mess that we’re in today.
The carry trade is sort of borrowing in one currency or one asset class to invest in another. So for example in Japan today where the interest rates are one percent or less, you would borrow in Japan at a one percent interest rate and invest in a currency or an asset in another part of the world. So let’s take US Treasuries. Let’s say you could invest in a 10 year Treasury at close to 4% but you’re only borrowing money at one percent, you make the difference on the spread. That’s the carry trade. [42:15]
JOHN: But Jim, the Fed isn’t reporting M3 now, in other words that was a key indicator and they quit doing that about a year ago. So has anybody made that difference up; is anybody reporting the equivalent of M3?
JIM: Yes, John Williams at Shadow Stats (www.shadowstats.com) compiles the old M3 and the latest figures it’s growing at 16%. They got rid of reporting M3 just before Bernanke came in and for good reason; he’s known as Helicopter Commander and he’s doing just that: dropping helicopter drops in the economy by expanding the money supply at over a 16% rate. [42:47]
JOHN: So this was in essence covering their tracks is what it was.
JIM: Absolutely. It’s get rid of the evidence. It’s like the Economic Indicator page that the government just got rid of.
I came across an exchange traded note that tracks the price of livestock. It’s under ticker symbol COW. And it’s actually down for the year, and I looked back at the prices of hogs and they’re about where they were in the year 2000. So my question is: Are the fundamentals that are driving the prices of almost everything else higher somehow not the same as that which would apply to livestock, or this just a great opportunity to get in at levels that we could only dream of getting in on in oil gold and other commodities.
JIM: Actually, if you look at that exchange traded fund COW and then take a look at some of the agricultural commodities – let me just pull up a graph here – I’ve got live cattle and then I’ve got a graph here of your commodity fund and live cattle futures hit a peak around earlier September at 101.00 and then they’ve gone down now to about 94. So some of this decline that you’ve seen is actually occurring in the cost of livestock here. Let me check something else here. Let’s go to hogs and check those prices. That’s pretty much the same thing. So you know, eventually I expect the price of this to go up, especially as the cost of feedstock goes up, so you may be getting in on a low here. [44:19]
Afternoon, I’d just like to ask you a question if it would be possible if you guys could interview Andre Eggelletion again. I know that he was on a while back, but I’d like to hear him on your show again. You guys do a great job. All right, thank you.
JIM: You know, whether we get to Andre on the show here, we’ll put that on the backburner. There’s got to be motivation; somebody writes a book or comes out with an article that is usually what triggers a lot of the guests here on the program. If Andre comes out with something revealing I’m sure we’ll have him back on. [44:50]
Hi Jim and John, this is Rob from Edmonton. My question is about silver and the relative value of silver compared to other tangible assets. I just got done reading Jens O. Parsson’s book and he made a great distinction between money wealth, meaning cash, bonds, life insurance – versus real wealth meaning commodities, real estate or stock ownership. And we know that in times of inflation, money wealth implodes compared to real values. But how do we compare historically one tangible versus another. You know, in his book he loves the stock market and he really trashed gold. I was amazed. Jim, I’d love to hear your thoughts on Jens. O. Parsson’s opinion on gold; but he obviously got that call wrong writing in 1973 and then look what happened to gold versus the stock market in the next five to six years. And when you try to bring that to light today it seems like if you go back in time it seems to me that the current real relative value of silver is extremely undervalued on a historical scale even at $20 compared to other tangibles, namely real estate and equities, when you look at the total worth of all the real estate in the globe and all the stock and all the bonds that are out there. I mean everything is amazing, but how to really research this. I know David Morgan throws stuff out there that there’s maybe only one billion ounces available or five billion, but we don’t really know out of that 40 billon how much is available and my question is basically historically how many ounces of silver would one have to have to be considered a very rich person? And with the population being greater now and the money wealth massively larger, it just seems silver is an unbelievable opportunity and I don’t know how to go back historically and measure that versus other pieces of wealth so I’d love your opinion on that. Thanks.
JIM: Rob, on Jens O. Parsson let me address that. He’s one of my favorite authors. Remember, when he wrote that book in 1972 or 1973 we had just gone off the gold standard and remember from 1945 all the way up until of August 1971 when the dollar was backed by gold, the price of gold was frozen at $35 an ounce; and right about that time gold was only in the $40 range, so he was probably looking at stocks as being a better inflation hedge. But remember we had just come off gold in August of 1971, so we hadn’t much of a run up yet. By the time he published that book in 1973, I think he wrote it in 72 gold hadn’t really done much from the time it was deregulated. Actually, the run up from 73 to 74 where it went all the way up to $200 an ounce before the 74 bear market correction it got down to 100. In terms of measuring wealth, one indicator you can use is the gold to silver ratio; you can use the gold to Dow ratio in terms of measuring the price of gold compared to the Dow. These are two indicators measuring the relative value of tangible assets such as gold and silver to paper assets such as the Dow. [47:56]
Hi Jim, this is Dan in Missouri. Invest in inflation. I hear it’s going up. The question to you, Jim, is how fast is inflation going to go up and in the short to long term will it be a steady climb or a major jump? Comments, Jim?
JIM:I tell you, Dan, if the way things have been hopping lately if you listen to the first part of the Big Picture where John and I talk about helicopter drops and just some of these double digit rates that we’re seeing in inflation right now, it’s going to keep accelerating. I expect it to accelerate even more so next year and the year 2010, as the real fertilizer starts to hit the fan as a result of government policy. Remember, the difference between a recession and a depression is it takes a politician to turn a recession into a depression. [48:43]
Hi Jim and John, my name is Pablo calling from Argentina. I have a quick question regarding your hyperinflationary depression scenario for the US, say coming in the next couple of years. What type of hyperinflation do you think is coming to the US. Is it something like we’ve seen in Argentina in 1989 over 1000% annually, or are you envisioning something more like 30 to 40% annually in annual inflation as a hyperinflation; I don’t know. I would like to hear from you on that subject. It would be interesting. Thanks.
JIM:Pablo, you know, we’re definitely going to be seeing double digit inflation rates. There are many that already think that we’re close to that right now between an 8 to 10% even though the headline inflation number is only reported at 4.4; we’ve seen the PPI come in at close to 7%, so we’re not too far from double digits. How far or how bad it gets, at this point it would be difficult for me to guess. I expect it’s going to be 20% or more, if not more maybe 20 to 30. I’ll have a better perspective on that as this election cycle develops and as this credit crisis develops as I see what the government is doing; it will give me a better idea in terms of how bad this is going to get. But everything that I see that government’s proposing, everything I see the central bank’s proposing tells me it’s going to be bad. [50:24]
Hi guys, thanks for the show. This is Eric from Aspen, Colorado. I had a couple of questions. I’ve been trying to diversify my portfolio with gold, silver and oil and energy. And now I’m looking into food. I’ve been trying to focus on sugar first. I’m kind of confused on where I should head, there’s a bunch of different stuff out there. There’s IPSU which pays a good dividend and it’s close to its yearly low; but all the other ones – there’s Delta it’s in Egypt, there’s Pelwatte which is in Sri Lanka, there is another one Lllovo (LIV) which is in Africa. A lot of these other things are in unstable areas of the world. What is your take and what would you recommend. I know you guys don’t like giving out names. But I’m kind of confused on which way to head but is there is any other ones which pay a dividend.
JIM: I’ve got to avoid, Eric, making specific recommendations. What I’d recommend doing is I’d look at some of the commodity ETFs that are related directly to the commodities that you’re interested in. I think there is one with sugar. And as far as the stocks I’d probably try to stay in unstable areas and especially where the governments aren’t rapacious or all of a sudden decide that, “you know what, we want the asset that you own.” [51:33]
Hello, Jim and John and everybody at Financial Sense. This is Chris from the Florida panhandle. I had two questions if I could ask them quickly. The Yahoo stock screener shows the short position in Coeur D’Alene is about six days of trading volume and the shares owned if you calculate it exceed the shares issued by about 18%. This is a tough question but I’m wondering: Do you have any feeling for how far the silver prices have to be knocked down for the shorts to cover without driving up the price; and can they do it at all?
Question two, Penn West Energy’s website shows that PWE has about 38% of its production hedged for 2008 and roughly is at a 20 to 25% discount to current market prices for energy. I’m wondering if this will impact the dividends they pay this year and would it be a reason to avoid the stock now. It’s around 28, 29 right now. Thank you for all you do for us. Listening to Financial Sense is the highlight of my weekend.
JIM: Chris, looking at Coeur D’Alene first, I’m showing the short interest in the stock is about 8% of their outstanding stock. And I think the hedge funds are getting themselves in a very dangerous situation here where you’ve got a lot of these funds that are shorting their stock – let’s see, they’ve got 44 million shares outstanding on the short side but I’m showing on the day that we’re talking on Friday, almost 12.4 million shares have traded in Coeur D’Alene. So that shows to me it’s about four days worth of trading. But when you’re trying to cover shares of that massive volume at a time when the metals are going up and remember it’s not just the shorts that are going to have to cover because there might be other investors coming in. So that’s a dangerous position to be in.
And Penn West Energy. I happen to like Penn West even though they’ve got a portion of their assets hedged. They’ve done very well this year. The stock is up close to about 18%, pays a great dividend as well. So I like it. [53:30]
Hi Jim, this is Tony from Lafayette, California. I had a question if you could address that large silver miner with the large naked short position. On Tuesday, silver was up 70 cents but it was down 4 cents. What is going on with that stock; can you talk about it?
And also, Warren Buffett had a large amount of silver. He sold it. Who did he sell it to and what are they doing with it? Thank you.
JIM: Tony, I’m going to avoid the large short position in the silver stock. And it is not just one silver stock, I’m looking at a screen here of silver stocks – you just heard the previous caller talk about Coeur D’Alene – these guys are short not only the silver stocks they’re short a lot of the gold stocks, a lot of the gold juniors have been shorted, so it’s not just one particular silver stock or one particular gold stock. It’s all across the whole sector. If you listen to the gold roundtable, Rob McEwen talked about how the hedge funds exited the mining sector last May, and you remember, they play both sides of the fence: they can be long – that can be a trend with the hedge funds. And just as easily as they can go out of their long positions they can go short. And right now the hedge funds are short. So you’re seeing it not just in one silver stock, you’re seeing all away across the board.
And as far as your question re: Warren Buffett selling his silver. It is widely believe that that silver was taken up or sold to the silver ETF. [55:00]
Hi Jim and John, this is Cameron from the live music capital of the world: Austin, Texas. I’m starting an excellent MBA program in the fall of 08, and I want to know your opinion on the best approach to business schools given your views on the economy and the future of the business climate. What sectors and industries do you recommend studying for MBA grad students? What skill sets and functions will be in demand for the next few years? Jim, I know you’ve recommended geology as a field of studies for undergrad students in the past and I’m just about what your take on an MBA program would be.
JIM: You know, Cameron, if you could do a joint degree, get an MBA, couple that with a degree in geology, or get an MBA, couple that with a degree in engineering because we don’t have enough engineers in this country, we don’t have enough geologists and infrastructure and energy – not just the stuff we put in our cars. I’m talking about creating power plants. I mean just look at what happened to Florida this week. The grid is falling apart. We’ve used up all the capacity already of all the surplus power plants that we brought online in the 90s. The next two decades we’re going to move from consumerism back to saving and investment. It is going to be forced upon us and governments are going to have to be forced to deal with crumbling infrastructure. One of the themes that we have talked about on this program is infrastructure, energy, commodities, getting into agricultural, figuring out ways to produce and increase the yield on crops at a time when energy prices are going up, drought resistance – all of those areas. So if you’re get an MBA couple that with the specific expertise in an area and to me that’s going to be a killer combo. [56:56]
JOHN: Okay, next week on the program we’re going to have another boring Financial Sense Newshour in which Jim will talk a lot. I’ll talk a lot. His guests will talk a lot and basically we’ll all talk a lot.
JIM: And that’s the name of the show: Talk-A-Lot. Aagh, it’s Friday, late Friday afternoon, folks. It’s been a long day.
Coming up in the weeks ahead, my guest next week will be Sy Harding. Sy has written a new book called Beating the Markets the Easy Way. Alex Doulis Lost on Bay Street, March 15th. Josh Peters The Ultimate Dividend Play Book March 22nd. Steve LeVine The Oil and the Glory – the story about the quest for oil in the Caspian Region and the Great Game. William Fleckenstein will be my guest April 5th Greenspan’s Bubbles. I’m looking forward to that. Lila Rajiva Mobs, Messiahs and Markets April 12th, and Richard Lehmann Income Investing Today on April 19th. So a lot of great stuff coming up and we’ll try to do more roundtables. We’re working on a roundtable in silver that we’ll have coming up, maybe in late April or maybe early May. Then also we’re going to do a roundtable on agriculture. A lot of great stuff that we’re going to do. And we hope that you’ll be there to listen to them and hope that you can profit from all of this.
Anyway, on behalf of John Loeffler... [58:15]
JOHN: No, no. I want to say it. I want to say it.
JIM: Oh, you get to say it?
JOHN: I get to say it.
JIM: You get to say it tonight.
JOHN: Anyway, on behalf of Jim Puplava and myself John Loeffler we hope you have a pleasant weekend.
How’d I do?
JIM: You did pretty good.
JOHN: Thank you.
JIM: Maybe you do it next week.
JOHN: Oh really, can I, can I?
JIM: If you’re lucky...