Written by Karen Roche, Publisher, The Gold Report
Equities and Economics Report writer Victor GonÃ§alves, in this exclusive interview with The Gold Report, says the yellow metal will generally see more strength than weakness this year, hovering around $1,500. He's enthusiastic about some undervalued juniors and the prospects for rare earths, saying "a lot of projects are looking very economic and attractive."
The Gold Report: Victor, when we last spoke in October you predicted gold would see more strength through the end of the year and we'd see another market rally before a correction.
Gold has indeed strengthened and we saw a market rally, but not a correction yet. Does it mean we are due for a correction and, if so, in what time frame and by how much?
Victor Goncalves: I think we are due for a correction, yes. By how much and when, it's a little difficult to tell. One thing I can say is the market is rolling over now. We're seeing a bit of a top in the sense that the TSX has seen 12,000 for the first time in a long time. The TSX Ventures rallied very strongly. The Dow is kind of trending. We are in an anomalous situation, and could see one of the two things. We could see a sideways market and then a correction or a bit of a correction now, another rally, and then probably a bigger correction.
If you look economic fundamentals, they're not stellar. They haven't warranted the market doubling in price, basically. The TSX has gone from 7,000 to 12,000 in a year where the market hasn't strengthened a whole lot. On the Dow, for example, which has gone from 6,000 to 11,000, we've got a doubling in equity prices with a stagnated economy. Something's got to give.
TGR: Were some of the lows more fear-based and not based on economic fundamentals?
VG: I don't think the lows were more fear-based; I think the lows were a little more realistic, quite frankly. I don't think they were going to stay there forever. For example, the Dow went to somewhere in the mid-6,000 range. I think that was too low based on everything, but I don't think that at 11,000 the Dow is realistic. I would wager a guess somewhere between 7,000 and 8,000 is probably where the Dow should have landed due to economic fundamentals. All this growth we've had is not employment-based. It was credit driven and debt driven. The run we had in the equity markets, particularly in the U.S.-I don't like using the word because everyone else uses it-but it's a bit of a bubble. So 11,000 on the Dow is a little rich. The market doesn't think so and, based on that, I think the Dow could see a bit of strength or at least stagnation at this level for a little while.
TGR: You mentioned earlier that we're in somewhat of an anomaly because we have gold and equities both doing well. To what do you attribute that anomaly and how long will that last?
VG: Basically, what I attribute that anomaly to is the market really doesn't want to go down and people don't want the market to go down. It hurts; it doesn't feel very nice. So what has happened here is we've had an unusually high amount of money and liquidity injected into the system. All the institutions that receive this liquidity have actually used it more in the equity markets. For example, in a market that goes down like this, we should have seen the interest rates rise a little and they've stayed down, so money stayed cheap. So we have capital injections, cheap money.
We've got every government around the world trying to avoid a major recession, so all this money is in the system. Well, when the crash happened, the good stocks and a lot of the equities got hammered, so we're seeing a lot of people going to the equity markets because they're getting good returns. When you can just buy the Dow and double your money, people are going to do that.
So we've seen a lot of liquidity, but the price of gold has gone up because the fundamentals of the market are not good and anyone who understands the flight to safety would be buying gold. Additionally, as we discussed last time, the Chinese buying of gold is also very important. Up until the Chinese as a population started buying gold, we've had only 80% of the world's population participate in the gold market because 1.5 billion were not allowed to buy gold. So now we've got the Chinese buying as well. Obviously, there are other groups buying too, and buying on the premise that the U.S. is not in a good situation and that gold is a good investment. So you've got a bit of both.
Now, to answer your question, how long will this last? It'll last as long as liquidity is in the market, quite frankly. Now I suspect liquidity in the markets could go on a pretty long time. Those printing presses can print a lot of money, but that will at some point come to an end and that may be soon. I don't think we'll see equity prices continue on a strong rally much longer. Again, there are a lot of variables that go into determining exactly how long that is, but I do expect a decline in the equity markets, if not a small decline now, then a pretty major decline in several months.
TGR: Gold is now trading pretty firmly above $1,000. A lot of people are starting to say that $1,000 is a base now. Some say gold is going to take off to several thousand dollars and others think it's going to trade somewhere plus or minus $200 around $1,200 an ounce. What's your feeling on the gold price?
VG: Plus or minus $200 from $1,200 to $1,300 is probably a fair number over this year. Interest rates and monetary injections are already priced into the gold price and those will play out as well, but unless something changes I don't see having anything much more than $1,500.
Now we also have to understand that we're going into a seasonally weak period for gold in February or March. So we should see the price of gold actually drop off a good 15% to 20% between now and April before the base $1,000 comes back again. Any appreciation in price probably won't happen until about June when we get back into the seasonally stronger period for gold. So we do have a headwind right now on the price of gold. I'm not keen on it going up from here during the early half of the year, but the latter half of the year we could see a similar rally to what we saw late last year.
TGR: Gold equities have had, in many cases, a huge run up, even better than the general market performance. If gold's going to be trading in a range of plus or minus $200, what should we expect the gold equities to do?
VG: When we saw gold start to run up, it took some time for the equities to start moving up. Now because of the liquidity in the market and the fact that gold is over $1,000, a lot of projects are looking very economic and attractive. So a lot of people on the equity side are interested in gold because of the viability of $1,000 gold.
TGR: Are there other metals? A lot of people look at gold and they say if gold's going to really go up based on the fear factor, silver will go up as well. Are you looking at other metals along with gold?
VG: Silver certainly is going to track gold to some degree. I see silver as a poor man's gold. It has more industrial uses than precious metals per se. So for silver to do well, it's going to have to get that monetary value, that investment value. For that to happen, the price of gold is going to have to go up appreciably because it's still reasonably affordable to buy an ounce of gold for $1,000. It's obviously a lot more than it was, but it's still something in that price range where you can buy it and make some money on it.
Once gold really starts trending up, let's say $1,500-plus, the price of silver is going to have to catch up and actually continue going higher because silver is, at the end of the day, a precious metal and will become the precious metal of choice probably. We've seen a little bit of that in India. When gold started breaking $700-$750 in '06 or '07, the price of silver ran up quite heavily because silver was trading between 70 and 65 ounces per one ounce of gold and it traded as much as 50:1. So we can see that happen, but only when the price of gold starts moving away from people's ability to purchase it or wanting to purchase it.
TGR: You mentioned earlier that some of the equities still are undervalued and they need to catch up, even ones that have had some good appreciation in 2009. Can you share with us some of those companies that represent some good investment opportunities?
VG: Certainly. Kent Exploration Inc. (TSX.V:KEX) is one I've recommended. Investors who bought it when I first talked about it at 4 cents are very happy. And at 22 cents now, I'm still not recommending to sell it because there's quite a bit of room for appreciation on Kent. They have these assets in New Zealand and Australia that have gold on them already. They've done some work on the project and come back with some of the results, such as 80 grams a ton.
So it's certainly a very prolific area and Kent's right in the heart of it. I think they're going to see a lot of appreciation based on those numbers. Kent's still only worth in the neighborhood of $8 million at the most, so it's still a very undervalued company. Based on these results, I was actually very impressed and think that it wouldn't be unrealistic for the company to double again from here.
NioGold Mining Corporation (TSX-V:NOX;OTC:NOXGF.pk) is another we've talked about and they've, again, done quite well. A new and updated 43-101 was due out at the very end of last year, but with Christmas and other holidays my thinking is the engineers are taking little more time than anticipated. But we should see it probably by the end of this month or the beginning of next. The company has between $3.5 and $4 million in the bank right now, so they're well funded. The 43-101 should be a game changer for NioGold as it should give them a new base valuation of 60 to 65 cent a share just based on the assets. So looking at it from 30 cents here, again, is very nice and that's imminent. I've certainly been keeping close tabs on NioGold.
TGR: If everyone's expecting the 43-101 and the projects are looking good, won't they have priced in some of that already?
VG: I don't think the market's priced it in yet because they're not quite sure where it's going to come at ounces wise. It could come in a lot higher; it could come in a little lower, so that's really the uncertainty right now. But based on their history, I know they're going to deliver, so I'm going to come in and say that they should be able to deliver at least 800,000 oz. But even if it comes in at 700,000 ounces, it would still be a 50 to 55 cent stock from 30 cents, which is quite nice.
One other on my radar is Mexoro Minerals (OTCBB:MXOM). They've been progressing quite nicely over the past little while here. They are changing their name from Mexoro Minerals to Pan American Goldfields. They're on the verge of listing on the TSX Venture, which should be accomplished in the next month or so and I think that's one of the key things they need to do. The OTC is not quite as a recognized exchange as the TSX, especially for a resource company. So for a company to go on and list on an exchange where people can see it and buy it, it's going to make a lot of difference. So right now trading at 40 to 45 cents; just moving on to the TSX Venture alone should put a lot more visibility on the company.
They're also updating their 43-101 on their Cieneguita Project, which could turn out as much as 1.6 to 1.8 million ounces of gold from where it is now and they're producing already. They're upping their production. Their gold production target is upward to 100,000 ounces of gold per year and that would involve upgrading their mills and so on. But that is their goal. At 45 cents a share, that's a valuation of $22 million on a company that's already producing 30,000 ounces of gold. That's very, very undervalued and I think the reason is that people don't know about it yet. Those are the companies I like. Nobody knew about Kent, for example, eight months ago and, quite frankly, very few people still know about it. These are the companies I like because the less people know about them, the cheaper they are to buy. Now people do know about them and they have made my readers and me a bunch of money.
Richfield Ventures Corp. (TSX-V: RVC) is another, and has been the poster boy I've liked over the past year because from about June till now they've gone from a low of 12 cents to somewhere around $1.20. But they briefly hit $1.95 a couple of weeks ago on some amazing results. I say amazing and I'm not using that word lightly. They drilled 329 meters of 1.25 grams of gold. That is a long, long intersection. That's a drill intersection three-quarters the length of the CN Tower.
When it comes to drilling time next year, I think there will be a lot of interest in this company. So from this $1.20 range, it probably won't go anywhere significant over the next couple of months or so, but come about March-April-May when they can get back on the ground, even before they start drilling, I think we could see a significant lift in share price. They could easily be sitting on 3 to 4 million ounces of gold. This company has only 30ish million shares out trading at $1.20, that's very cheap. It's a very, very compelling story.
Paramount Gold and Silver Corp. (NYSE-A, TSX:PZG) is another one that I've got an eye on. The company has all the right tools and momentum to get to the next level of valuation, which would be comfortably higher than where it is now, with over 2.6 million ounces of gold equivalent and more than $25 million in the bank.
A little needs to be said about management. Christopher Crupi, the CEO, is a dealmaker and certainly understands finances and business. He was a former VP at Price Waterhouse Cooper and executed the sale of the Ottawa Senators among many other accomplishments. Bill Threlkeld, an advisor and qualified person under the National Instrument 43-10, is a seasoned gold finder with over 80 million ounces of gold discoveries in his career. There aren't too many guys who can claim that kind of track record. Larry Segerstorm is the chief operating officer and the guy on the ground. He has been the exploration geologist for Newmont Mining Corp. (NYSE:NEM), Noranda, and Phelps Dodge among others. All the above people have been pivotal in creating this company and the asset base it is trying to develop.
TGR: Let's move on to rare earths, which have been getting a lot of buzz at the various mining conferences. What's your viewpoint on them and the investment opportunities they represent?
VG: Rare earth elements and rare earth metals, in general, are going to be a huge phenomenon. It's like in '07 when we had a uranium boom and uranium went from $8 to $136.
What it comes down to is these rare earths are needed for so many things. For example, hybrid cars are really the driver for rare earths' increase in price. But not just hybrid cars. You've got tantalum and niobium being used in a lot of other things and these rare earths are going to be in huge demand.
I don't think we've gotten ahead of ourselves with the demand or with the price of these rare earths. We don't have enough to supply the markets fast enough. That's partially what's causing the price to move up. There's also supply constraint out of China. China controls 95% of the rare earths and says, okay, we'll just keep them for ourselves, thanks. You've got to fight for the rest of the 5% of them out there. So that's obviously causing major upswing in the price of rare earths. That has been the main driver. But that coupled with a shift in how we do things - we're going to see a ton more hybrid vehicles go on the road over the next couple of years and each one of them is going to require 50 pounds of rare earths. That's going to add up.
TGR: Jack Lifton, who speaks at conferences about the rare earths, asserts that it's really a rush to production. When the next two or three companies actually get to production, the amount they produce will probably satisfy demand for decades to come.
VG: Yes, it is a race to production. Like with uranium, for example, there's plenty of uranium out there for the market. It's just whoever does it first will obviously satisfy a lot of the market and I think that's quite the possibility for rare earths.
The best part for an investor is that it's not going to happen today or tomorrow or next year. We've got a little bit of time. We've got some idea as to which companies have been in the space for a long time and have had more lead time to develop a project and get to the stage where they're working the economics of it. Those are the companies I'm really interested in. Obviously, there's a lot of brand-new companies coming out of the gate who will represent an excellent investment opportunity because of the sizzle in the market, but I would have to hear something incredibly compelling from a very small junior to sway myself from some of the larger companies.
TGR: So who are you following, then, in the rare earths?
VG: Avalon Rare Metals (TSX:AVL) is kind of a darling because I bought it so cheap. I've been following that from around the 40 cent range. It had a very impressive run to over $4. The most important thing is not the tenfold run in price. It's also the increase in market valuation because a $4 market cap on a company with 80 million shares outstanding is a company that's worth a lot of money and is representative of what they've got.
They've got one of the largest deposits, they're working on feasibility, they're working on all the things it's going to take to put it in production. Based on its size, I don't think the fact that it's in the north is going to be a major hurdle. If anything, due to the relationship with the native communities up there, I think that's actually going to be a benefit. So Avalon I personally believe is going to be probably the first or second company to attain that status, and they're very well funded, working towards their end goal. They're considering actually using wind power to power their project because they are located in one of the windiest places up in the Northwest Territories. So I think that really attests to a legitimately green company. This company is the type that's just going to keep moving up and up and up because they're going to keep hitting the milestones without anything hindering it.
TGR: So they're one of the first one or two to get to production. Are there other ones that you are following that are in a similar situation?
VG: I think Rare Element Resources Ltd. (TSX.V:RES) is certainly in a similar situation. I have a personal bias towards Avalon just because I have so much more of Avalon stock, but that's not to say by any means that Rare Element Resources is not in a situation where they can really progress. They've had a similar run in their stock from give or take 40 cents to $4 as well. They have a tighter share structure, but they also have a bit of a small project. However, it's not in the remote situation; i.e., it's not in the Northwest Territories, so that's kind of nice. But I think both these companies are going to be real winners in this situation. It'll be like having a Goldcorp and a Barrick. It's not necessarily one or the other. I think it'll be really both.
TGR: On BNN you mentioned a company named Threegold Resources Inc. (THG:TSX.V) that seems to be in a similar space.
VG: Threegold is in the rare earth space. And, again, not a lot of the companies that are really in a low, low market cap (i.e., 15 cents and lower with not very many shares out) compel me in the rare earth space, but Threegold certainly did for multiple reasons. I've actually followed this company for quite a while, since inception actually, just haphazardly because somebody presented it to me. When I saw them come out with these rare earth numbers, I was quite intrigued and I sat down with the president probably a couple of months ago. He told me in University his Masters was on rare earths. A lot of these rare earths companies, especially the ones just sprouting up now, have nice projects, have good consultants, but the people who actually work for the company don't always have the highest expertise in the area.
Well, this is a company who has a guy in charge that spent most of his academic career working on and researching the rare earth space and that, to me, makes a big difference.
I think it's around 17 cents today. Right now we're still waiting on news on their gold project which could end up being a new discovery. If it comes back positive, I think it'll be a game changer for the company. This could have major potential. That's my opinion.
TGR: And we appreciate your time, once again, Victor. This has been very interesting.
A proud and avowed Keynesian, Victor GonÃ§alves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report , as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Kent Exploration, NioGold, Richfield Ventures, Avalon, Rare Element Resources
3) Victor GonÃ§alves: I personally and/or my family own the following companies mentioned in this interview: Kent, Richfield Ventures, NioGold, Mexoro, Threegold, Avalon. I or my family has been paid by the following companies mentioned in this interview: Kent.