Tips on Junior Gold Miners

Putting money in the junior Gold Mining sector takes 3 things...

EQUITIES AND ECONOMICS analyst Victor Gonçalves is enthusiastic about some "undervalued" junior Gold Mining stocks, as he tells The Gold Report here.

Alongside his Equities and Economics Report, Victor Gonçalves now produces the Green Dollar Report and writes for a number of leading print and electronic finance publications, including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco.

Here he says that Gold Bullion as simply met its typical summer lull, and will generally see more strength than weakness this year...
 
The Gold Report: The price of gold has dipped to below $1,175 this morning [late July]; do you see this as a sign that the general economy is improving and that inflation is not on the horizon? Or perhaps it's just a summer lull?

Victor Gonçalves: This is basically the traditional summer lull, so I'm not overly concerned. In fact, I talked about this very thing in one of our previous interviews. There are certainly other factors involved. Typically when we have mid-term elections with a democratic president and what could be a republican house, this will be good for gold and the markets, but until that happens, the markets and the price of gold will be at a standstill.

TGR: In terms of Gold Investing, do you advise your readers to have a certain percentage of gold bullion along with gold equities?

Victor Gonçalves: In terms of Gold Bullion, I always say to have some, but the definition of "some" is a little ambiguous.

I like gold, but I also like the moves that occur in the junior Gold Mining sector. One of the issues with gold bullion is the spread between the buy and sell side; the built-in "lose" in the spread between the buy and sell prices. That is to say, for those who want to trade gold, I don't recommend trading it frequently. For somebody who wants to buy it now, in the summer, I think they will strongly benefit as the price is probably at one of lowest points we will see going forward. So to answer the question, for conservative investors I recommend 10-20%, and for aggressive traders, 0%, as they would have more opportunities with gold equities.

TGR: If an investor were building a gold portfolio today, would you recommend they start with a base of seniors, juniors and ETFs?

Victor Gonçalves: Juniors and emerging producers hands down. This is probably the best piece of advice that anybody can take from this article. If there is one asset class that will outperform, it is the emerging Gold Mining producers. Basically, these companies trade with the price-earnings multiple of a junior, which is basically none, but will more than likely have a producer's asset base and earnings in a reasonably short period of time. That, in my opinion, is a very sweet deal.

Having said that, however, I believe having one or two solid senior Gold Mining stocks in your portfolio is not a terrible thing. They will hold their value and perform according to the price of gold. Right now, with most equities prices being depressed, the best "bang for your buck" will be in the emerging mid-tier producers. There are some juniors that will be a great value eventually, but as a solid base, I don't recommend them as they carry much higher risk when compared to a company that has a mine, mill and production.

TGR: In terms of gold miner equities, I know you're partial to select juniors. What are the most important criteria to you? Management, project, jurisdiction, drill results or other factors?

Victor Gonçalves: There are several factors, but I can never stress the most important one enough – management. Management is the root of all that is good for any company. Good management will know (or have a reasonably good idea) where to drill and get the good results. Good management will do the right deals to acquire the right projects; proper management will know which jurisdiction to be in, and if the jurisdiction is poor, then they will know how to mitigate the risks. All the good news we hope to see on the newswires stems from the management team's calculated decisions. This is why this is the quintessential element of a company; the rest will follow naturally.

TGR: Victor, thanks for your latest insights. Much appreciated.

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What Will Happen With Deflation?

Will there be deflation, what will it mean...?

NEWSLETTER WRITER Michael Berry, PhD, is a respected economic strategists and a frequent to contributor to The Gold Report. On this occasion, Michael's son, Chris Berry, joins the discussion on deflation and protection methods. They address the problems and likelihood of deflation, as well as the ways you can protect yourself from it.

The Gold Report: People are hearing and reading about the potential for deflation. On its surface, paying less for everyday items seems like a good thing, but please paint us a picture illustrating why we should all fear deflation.

Michael Berry: I want to point out that deflation isn't foreordained; it just looks likely. Given the history over the last two or three years, where there's been a lot of money printed, some people have assumed that we would hyperinflate. But when you look at the macroeconomics in the US, you see almost 10% unemployment and in various groups it's much higher. It really looks like we're not going to pull out of this, and then you have the overhang with respect to debt. There's a lot of potential for deleveraging, for a higher Dollar, as Dollars are sought to deleverage.

People fear deflation because basically, nobody's really experienced it since the Great Depression. Central bankers think they can do something about inflation; Paul Volcker did in the early 1980s, but central bankers don't really have tools to deal with deflation. Deflation occurs when the money supply shrinks; prices tend to fall in a deflationary environment, and there's not very much you can do except let it run its course. This is very painful.

The other aspect of a deflationary environment is that if you have a lot of debt, either public debt or corporate debt, deflation works against you. On the other hand, inflation works for the debtor; deflation works against him. In that kind of environment the system wants to deleverage, and consequently asset values fall, demand for Dollars rises as the system deleverages. The value of the Dollar increases; interest rates tend to fall. Basically, the bond market strengthens but not the stock market. It also introduces a completely different investment scenario for individual and for institutional investors.

TGR: If such a scenario did occur, how long would it last?

Michael Berry: That's really a tough question, but a very important one. If you talk to some of the top economists, such as Professor Krugman, who believe that we're going to head into a deflationary spiral, the consensus is two to five years. We're probably a year into that now. When you look around and you see what's happening with Greece and the European banking system, the overhang on growth is significant. You're going to witness significant austerity programs in Europe; growth is going to be restrained. And perhaps the only place on earth right now that wants to continue fiscal spending is Washington. Of course, if you look at the Japanese situation, starting in about 1990, they've never really been able to inflate out of their problem. Deflation can last for a very long time if bankers don't get hold of it.

You remember back in 2002 then Fed Governor Ben Bernanke said we could cure deflation because we have a printing press, meaning that we can print Dollars. They've tried to do that and it's failed. The fiscal programs they've put in place really have not worked to restore growth, and it does not look as if they're going to.

TGR: Given what you said about deflation being a problem for those carrying debt, it seems deflation would have a larger impact on the US than other nations.

Michael Berry: That's an interesting thought; actually, because we have the world's reserve currency, we can continue to borrow for awhile. But at what point does the rest of the world say, "No, we're not going to bank the Dollar anymore?" Then, the level of deficit and the debt to GDP ratios become very, very large and serious. No one knows when that tipping point in the US is; that's the problem.

TGR: What would happen to Gold Prices in a deflationary environment?

Michael Berry: I am not sure. Most people would say that gold works well in an inflationary environment, and it appears to, because it holds its value well; at least some gold stocks did well in the Great Depression. I think there's another rationale in this particular environment we're in now; gold isn't necessarily being viewed as either a deflation hedge or an inflation hedge, but more likely a flight to safe currency or real money. In other words, gold is becoming money because of what people are finally beginning to understand. People distrust the Euro. They really don't trust the Yen. They don't trust the Chinese Yuan; and people are slowly but surely losing trust in the US Dollar. I think under a nascent deflationary environment that we have now, where the Gold Price is around $1,200, it's more a flight to safety than a hedge against deflation.

TGR: In July's Morning Notes, you refer to having precious metals exposure in an ever-weakening economy as another leg of the survivor stool. In your view what's the best way for investors to gain precious metals exposure?

Michael Berry: I think it's pretty critical that you look at what's happening with fiat money. We've only been on fiat money since 1971, thanks to President Nixon. That's 39 years now, and you know fiat money is going the way of the wind. I think you've got to have precious metals, either silver or gold, preferably gold, and you need to have some in-kind. I think you need to own coins or, if you can afford it, some bars and also some exposure to some top-quality stocks.

TGR: Yes, you're a big believer in silver.

Michael Berry: We've spent a lot of time analyzing silver. I was involved in a big gold-silver find a few years ago, which was Penasquito, and that is now over a billion ounces of silver. I think silver is undervalued. Silver was the original money, if you will, that was used in the ancient days. The Greeks used silver from Laurion to defeat the Persians and restore democracy in Athens in the fourth century BC. When FDR sponsored the special silver purchase in 1934 some academics believe he broke the back of deflation. I think silver is very much undervalued, and it will be pulled along with gold. It's very wise to have silver exposure, and with silver you can actually afford to own it in-kind. You can own silver coins. We've seen silver go from $4 maybe eight or nine years ago to about $18 today. Silver hasn't performed quite as well as gold, but it's moved up well.

Chris Berry: Silver's one main difference from gold is that silver is an industrial metal as well as an investment metal. It sort of depends on your view of where you think the markets are going, but the "poor man's gold" is certainly one way to accumulate hard assets and protect against some of these geopolitical hiccups.

TGR: Going back to Michael for a second, what are the other legs on that stool?

Michael Berry: After I came out of academia and spent some time on Wall Street, I began to realize that despite the fact that some of these markets were moving up significantly, we still had the potential for a deflationary depression. I don't think we're going to have a depression, but certainly we could have a double dip here, so we developed what I believed would be an investment approach for all seasons. We called it a barbell. At one end of the barbell you want to own precious metals, primarily gold and silver, in the forms that we talked about. At the other end you want to be in cash. Deflation is much more likely today than it was a year ago. Following a two-to five-year hiatus of deflation, I think we could inflate out of this and have very high rates of inflation. The barbell portfolio could conceivably work in all economic "seasons."

Essentially, precious metals and cash were what I call two legs of the survival stool at this point.

And then, of course, the third leg. Discovery is going to go on because we have to continue to make discoveries in high tech, resources and biotech. I think you need to own a discovery portfolio that's suitable for your risk preferences, and that's the third leg of the stool.

TGR: You're slated to talk to the Fed about emerging economies, which provide the high percentage economic growth that investors want. Can you tell us a little bit about the importance of emerging economies and some highlights from your presentation?

Michael Berry: You're beginning to see the impact of debt, the overhang of debt, spread to the rest of the world, particularly in Europe. Some of the dangers are coming from countries such as Greece, Spain, Italy and Ireland, and perhaps Austria and France as well. The banking systems are being stress tested, but no one believes the test will be strong enough. Other than Canada–which I think is probably held in the highest regard for not having allowed its banking system to go into freefall–the countries that appear to have weathered the storm are the emerging markets. Colombia, Chile, China, India, Brazil and probably Russia all obviously have a lot of natural resources and growing populations.

At this stage of the game, it seems that the engine of growth will come from the emerging world because the emerging world must provide its citizens, who have been denied a better quality of life, new opportunities. That is where the infrastructure build will be; demand for energy will come from this. I think the emerging markets are going to be very important to global economic growth in the next five to 10 years.

Chris, you're involved in that area.

Chris Berry: I would really echo what you said and add that emerging markets will be important engines of growth for arguably longer than the next five to 10 years. It may be perhaps 20 to 30 years, as the debt burden in the West–we are hopeful–slowly unwinds. Everybody talks about the BRICs (Brazil, Russia, India and China). A huge amount of growth has been, and still is, coming from those four countries in particular, but I see a number of other interesting plays out there as well, Colombia being one of them. Mexico has a lot of problems, but still some substantial economic growth potential from the mining industry there.

Going back to what we were talking about beforehand with deflation, every Dollar of debt you issue is going to have to be paid back, and it ultimately can't be paid back with additional debt. It's going to have to be paid back with organic growth, and when you see China growing at 10% and India growing at 8% and Colombia growing at 4.5%, that's the type of growth an economy needs to sustain to ultimately maintain a healthy fiscal balance. The growth in emerging markets isn't debt-fueled growth the way it has been in the US and in Europe. When you look at it from a standpoint of fiscal balances, it's definitely going to be the emerging markets that lead us out of this over the long run.

TGR: You mentioned Colombia running at 4.5% growth. Michael, you were born in Colombia. Tell us about what's changed in that country.

Michael Berry: I think what's changed is the leadership, and leadership is everything. There's been a freely run election; democracy is now in place. The drug problems are under control. I'm delighted; I've chaired a couple of Latin American mining congresses, and they care about capital coming into the country; they care about safety, about laws, about the environment. Colombia is rich in gold, uranium, emeralds and oil. Oil is another big area in Colombia now, which is where my father was working when he was there in the 1930s and 1940s. In fact, there's a really big stampede into the country to explore for oil. There's plenty of it there.

TGR: Moving north, one of your Morning Notes had a little bit about the Yukon and how it's a hot play. You talked about three categories of discovery companies: incubator, mature and legacy. What are some Yukon plays in each of those categories?

Michael Berry: The Yukon is hot indeed. A huge gold belt goes through it called the Tintina Gold Province, where pretty high-grade gold is near the surface. And of course, it's in Canada. The stars are almost aligning. People want to go to Canada for a good reason; it's a stable country with great resources, and the Yukon is underexplored. I think in a few years this Tintina Gold Province will look like Nevada's Carlin Trend looked in the early days.

TGR: How do you define political will?

Chris Berry: The Yukon has a single window regulatory process so that there's no going back and forth to Ottawa to try to get mining permits; everything happens through Whitehorse (Yukon's capital). This process is known as "devolution" and has made the permitting process much more efficient.

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Gold Volatility Coming from “Summer Lull, Not Deflation”

Why current gold market volatility is not caused by deflation, but by seasonal factors...

A SPEAKER at major resource conferences, including the Cambridge House resource conference series, John Lee CFA has gained invaluable insights by living in three continents and making frequent globe-spanning visits to Gold Mining and other mineral sites.

Founded in 2004, John Lee's Mau Capital Management hedge fund is based in Vancouver and invests mostly in junior mining companies. Here he speaks with The Gold Report, John Lee deflates the deflation argument, discusses why he favors near-term gold and silver producers over early stage explorers, and reveals some of his fund's top holdings.

The Gold Report: Everyone is concerned with the volatility in the markets. What's going on out there?

John Lee: Well, there's the proverbial "sell in May and walk away" going on, even though commodity prices have stayed fairly buoyant. In the junior market, there's a lot of paper that came out and began trading from the financings conducted in November and December. I think we're experiencing a little bit of a weak season where equity markets are vulnerable.

TGR: I was reading some of your presentations and one thing that you talk about is paper currencies being at the mercy of government and you consider gold a hedge against paper. On July 1st, one of the more popular gold futures contracts lost $40, its biggest drop since February. Investors seem to be gravitating toward T-bills because they fear deflation. Should we fear gold's prospects in a deflationary economic environment or should we expect Gold Prices ultimately to continue their record bull run?

John Lee: Well, you touched on a number of issues there. July 1 was Canada Day and Canadian markets were closed and you had the futures markets trading. There is actually some evidence to suggest that the markets, on a given Friday or the day before a holiday, will see a heavy correction—a one-day correction. However, Gold Prices are around $1,211 right now (July 2). It's only $50 from its all-time high. And so, the market is really healthy.

In terms of the discussion of inflation and deflation, I am firmly in the inflationary camp. In the history of fiat currency, there has never been a scenario where deflation has occurred. You have to adhere to the real definition of deflation, which is a decrease in money supply. The money supply is, in the history of fiat currencies, always on the way up, not on the way down. There may be brief periods when the increase in money supply slows, but rest assured that the money supply is still increasing. With deflation we're talking about an actual decrease in the money supply.

I think it's almost nonsense to become concerned about deflation. Going back to the Great Depression of the 1930s, the reason we had a deflationary scare was because the Gold Price was tied to the Dollar. But this time it is not tied to the Dollar. So in a true deflationary scenario, gold's purchasing power will go down because the paper currencies' purchasing power is going up. But this is not what we have today.

TGR: Right, but people like T-Bills because if you buy a $100 T-bill and you cash it out a year later or even three months later, it is still going to be worth at least the original $100. They're safe. Should people be buying T-bills, gold bullion or shares in gold companies as a hedge against what's happening right now in financial markets?

John Lee: You should have bonds and equities and in cash. Then you can break it down further: the equities into international equities and domestic equities; the cash, into precious metals and currencies. Also, you should really allocate a basket of commodities, and get some real estate as well. Depending on your risk tolerance, you may structure your portfolio differently. There is a place obviously for T-bills in the cash category. I think in terms of Gold Bullion and precious metals, it's money so it belongs to the same category as T-bills. And it's not necessarily a good idea to put all your T-bills in US Dollars.

I think in a reasonable portfolio you should have about 30% cash, which is a prudent way to go. I would say 10% in foreign currencies, 10% in US Dollars, and 10% in precious metals. It depends on which country you live in, because I think a number of currencies trend together.

TGR: Is there anything that you put faith in when it comes to monitoring global economic conditions? Charts? LIBOR rates?

John Lee: Usually commodity prices are a good indicator or forecast of what is to come, and so are equity markets, particularly the emerging equity markets such as Brazil, Shanghai and Hong Kong. What they're telling me is it's a pretty mixed picture, but I would say growth in commodity prices such as copper and oil, and growth in emerging equity markets are good signs. You talked about the bond prices; usually, if bonds and equities both go down together, that is a signal of something severe that could be coming into place. But right now the bond markets are still staying fairly stable, even though the equity markets have corrected somewhat from earlier this year.

It looks to me now like there is some profit-taking, given that all the major indices, including the Canadian TSX and S&P and the Asian markets, have racked up over a 50% gain since their low in March 2009.

Another gauge is the Baltic Shipping Index. It tells you the global shipping activities from everywhere else are pretty much gravitating toward Asia and China. Since the financial crisis (in 2008) it has recouped a lot of its losses; however, it's gone down the other way quite severely; 30%–40% in the last 30 days.

I think it's a mixed picture. Nobody really knows what's going on. Even within Asia there are mixed pictures between, say, Korea, Taiwan, Thailand and China. Only in China are things going on all cylinders.

TGR: Really? I think Hong Kong's Hang Seng Index is down about 20% so far this year.

John Lee: Yes, and the Shanghai is down more than that.

TGR: So if China is going on all cylinders, shouldn't those markets be performing better?

John Lee: In the short run, there is obviously a disconnect between the equity markets and the economy. Although a lot of times the equity markets are forecasting what's going to happen, you can't read so much into the markets as they go up 10% and down 10% on a monthly basis. Keep in mind, China is very centralized; it's not a free economy. The government has $2.2–$2.5 trillion in their coffers so they can easily weather any sort of a storm and dictate the pace of progress. For example, they're spending around $1 trillion building high-speed railways; in three years time they're going to have more high-speed rails than the rest of the world combined. Any short-term corrections are not going to dissuade them from their plans. And they're building buildings, a lot of them. Their low occupancy rate is not going to stop them from trying to deploy as much of their $2 trillion as they can before the Dollars go bad.

It's the first time since the 1960s that the dividend yields are lower than the interest rates. So, basically you have this giant casino going on; you have money coming in, going out; and you have the Greek situation and the Spanish situation. Every time the US market rebounds, they're crediting that to Chinese growth, and every time you have an equity correction it's going back to China again. China has already surpassed the United States in both automobile purchases and auto production. Their rate of auto consumption is growing somewhere around 50% annually.

TGR: What did you think of today's job numbers out of the US? 83,000 jobs added.

John Lee: Some people will tell you they're suspicious of the numbers and the way the numbers are calculated. If you look at the foreclosure rate, it's in the range of 15%–25%, depending on the region of the country. I think that's probably a better indicator of the employment rate than the government's stated numbers. Even though the official unemployment rate is 9.5%, the real numbers could be twice as much, depending on how you define that.

The US economy is no longer the world's largest consumer of commodities; they're no longer the world's largest auto purchaser; they constitute 6% of the world's population. At the same time, they're not even the main influence on the US equity market, given that S&P 500 companies derive somewhere around 50% of their revenues and profits from outside the US

TGR: But you're still a big believer in junior mining companies, correct?

John Lee: Yes, I am. That's my specialty.

TGR: Can you talk about some of your favorite names among the junior miners?

John Lee: Yes, but first I would like to talk about the junior market scene. For example, on the TSX Venture Exchange, about 70%–80% of the companies listed are mining related in one way or another. It went from c$600–C$700 in 2001 to a high of C$3,300 in 2008, so that's about a 500% increase. In December 2008, it was down to C$700, and now it's back to about C$1,400. It's still less than half of what the peak was, and I think there's a lot of people who say, "You know what? If gold prices are $50 down from an all-time high, and copper is not that far from its all-time peak either—copper went from $0.70 in 2001 to $4 in early 2008, and now is trading around $2.80—then surely the juniors will have to follow, if not exceed its previous high of C$3,300." It would make sense because commodity prices have resumed their bull run.

TGR: What do you look for in a junior?

John Lee: I would not be so much focusing on value because a lot of management has lost a lot of their traditional means of financing. I mean it used to be that you could just walk down a Vancouver street and get broker financing at a 20% discount (to market price). It doesn't work that way anymore; the model has broken down. So, you have a lot of companies that are sitting on very good assets, but the management doesn't have the energy to go to unconventional financing sources such as the Chinese, the Middle East or the Europeans.

Therefore, I tend to focus on companies with a higher market cap and—I can't believe what's coming out of my mouth right now—the companies that are trading at a slight premium. Those companies are on the path of becoming a producer. What I am trying to say is that the gap between a producer and an explorer is widening, and I don't see that trend changing anytime soon.

More than ever you've got to be really selective on the junior market. There is not a lot of stupid money around chasing promotional stories, and when there is, instead of driving it much higher, it's barely a blip on the radar screen. I would say that with the junior market today you've got really to be cautious and look for stories that will be in production in the near term. Or gold exploration companies that have legitimate ounces in the ground.

I am not so much into drill plays because these near-term producers are still selling at extreme discounts. You don't really have to go down that far in the food chain to gain leverage.

TGR: But what do you define as a good asset?

John Lee: A good asset is one that has a reasonable time line and road map into production. I would not be so much into a gold deposit way out there in, say Nunavut, that has tens of millions of ounces or tens of billions of pounds. I am more into where you have a modest size, say 1–2 million ounces, in a good jurisdiction, and also you have to look for management that has a history—proven history—of an ability to raise money. Ideally, the company is aligned with one of the big backers, whether it's Lukas Lundin or Ross Beaty or Hunter Dickinson; you really have to identify a company with a good management group that can raise money. And with a deposit that doesn't require billions of Dollars for infrastructure because, like I said, money is very hard to come by now.

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Gold Mining Juniors: People, Not Projects

Despite 2,000 junior gold miners digging for gold, only 15-20 have been bought in the last 5 years...

ECONOMIC REBOUND? Not with 22% unemployment. Banking reform legislation? Loaded with pork. Bankrupt nations? Rock-solid, lead-pipe cinch, says the Gold Report.

"We need to start all over," says the inimitable Bob Moriarty of 321gold.com in this Gold Report interview. "And in the end, we will."

Meanwhile, he's keeping an eye out for the few-and-far-between Gold Mining juniors that manage to get things exactly right...

The Gold Report: Just in time for President Obama to meet with the leaders of the G20 nations in Vancouver over the last weekend in June, Congress finalized a sweeping bill to overhaul the banking system. These reforms are touted as the most ambitious rewrite of financials since the Great Depression. What impact will this legislation have on protecting us against another financial meltdown similar to 2008?

Bob Moriarty: Not a person I know, including myself, can actually say one thing of significance about this bill because no one actually understands what it says and what it does. Congress is voting for bills, while they have no clue as to what's in them. Senator Dodd from Connecticut says, "Well, we'll have to see what the effect of the bill will be." Well, I'd like my representatives in Washington to understand the effect of a bill in advance of writing the damn thing. It's going to be another bill totally loaded with pork, totally out of control. Accomplishing nothing.

Actually, what we need is another Glass-Steagall Act. We need to take banks back to being banks instead of casinos underwritten by the United States government and with their losses paid by taxpayers. If they actually reported their assets, you'd see every bank in the US underwater financially.

The biggest of the big banks are doing something called High Frequency Trading. Basically, they are getting data a half second before the rest of the market and they are front-running their own customers. HFT is 70% of the market trading and it's stealing. Congress didn't even address the issue. Because they have been bought and paid for by Wall Street and the biggest of the banks. It's all corrupt and nothing is going to get fixed until we demand an honest monetary system.

Banks are supposed to be conservative. When I go down to the bank and deposit a check, I want to know that money is going to be there a week from now. I don't want those guys flying to Vegas shooting dice with my money. That's what they're doing. We are at a pivot point in world history. The people in Greece understand they're being screwed by government. The Greek government made all these promises they can't possibly keep. People in the US are waking up to the fact that we're $150 trillion in debt and we only have $50 trillion in assets in the US

We need to go back to Economics 101. We need to put people to work doing real things rather than make-work. We need to get government off the backs of taxpayers. We need to declare bankruptcy. We need to reduce the size of government. We need a lot less government and we need to start all over. And in the end, we will. Individuals around the world understand that we are at a turning point in world financial history. Governments don't.

TGR: You mentioned Greece. China came in and bought a bunch of its debt, helping bail them out. The government is also doing some massive restructuring and cutting.

Bob Moriarty: Have you ever seen the guys playing the shell game in New York? Shuffling the three walnuts and there's supposed to be a pea under one of them? This is a shell game. Nobody is addressing the issue; there's more debt in the world than money. It's simple. It cannot be paid. It makes no difference who's on the hook for it. There's not enough money in the world to pay down the debt. Greece is bankrupt. Spain is bankrupt. Italy is bankrupt. Ireland is bankrupt. The UK is bankrupt. The US is bankrupt. Japan is really bankrupt. Those are the issues we need to address – the issues for which governments are giving lip service. They're just as effective at solving this financial disaster as they are the Gulf of Mexico oil spill.

TGR: Is this a house of cards? Where finally one nation declares bankruptcy and others follow suit?

Bob Moriarty: Of course. This is an instant replay of 1931. An Austrian bank went bankrupt and, when it did, it took everybody else down. You can think about it as a circle with say 10 people in it. One guy has $1 million and loans it to the next person. He loans it to the next person. He loans it to the next person, and on and on. The last guy in line is a crack addict who goes out and blows the money. When he defaults, how many people lose a million Dollars?

TGR: Nine others.

Bob Moriarty: Exactly. So we have this incredibly leveraged system that cannot possibly pay the debts down. When Greece or Spain goes, there's going to be a cascading default and everybody is going to go. This is not a "prediction." It's a rock-solid, lead-pipe cinch. There's no other possible alternative.

TGR: Where will the first card fall?

Bob Moriarty: It's really hard to tell. A whole flock of black swans is circling and we aren't exactly certain which one will land first. But who cares who defaults first? They're all going to go in the end. I think 20 states in the US are functionally bankrupt right now and are very near the point they tip over the cliff.

TGR: Some people say we've seen a rebound from the depths of the recession. Others are talking about a double-dip recession. Where do you stand on that?

Bob Moriarty: There was no rebound. You can't have a rebound with 22% unemployment. In my entire life we have never had 22% unemployment. There was the appearance of fewer problems, which was total fiction. We're in a depression.

You have to get to where government revenues equal government spending. Nobody wants to do it, but we'll do it in the end because believe it or not the law of supply and demand does work. Economics 101 does work. Governments fight it tooth and nail, but you have to balance your books sooner or later.

TGR: Are we looking at decades of depressions while we transition from overspending to balanced budgets?

Bob Moriarty: It didn't take very long in Iceland. The government will get very attentive when there are riots in the United States. When people understand their life savings have been destroyed, their pensions are gone and their jobs have all been exported to China, they're going to be furious. Guys like Peter Schiff and Gerald Celente and I have been calling for it for years. When Americans understand how big a mess we've got down in the Gulf and the government isn't doing anything about it, they will be furious.

TGR: The Gulf of Mexico – that's obviously a situation that's nowhere near under control.

Bob Moriarty: That's an understatement. I went through flight training in Pensacola 45 years ago. It had the most beautiful 15-mile-long beach of gorgeous white sand. It's covered with tar balls now. There is nothing you can do about it. It doesn't make any sense to even clean it up, because nobody's done anything about the spill.

TGR: What can be done?

Bob Moriarty: That's where it really gets scary. Probably the best guy I know, the real expert in the business, is Matt Simmons. He says we need to do what the Russians did – go in and nuke it in the hopes that'll seal the wellbore and it will stop leaking. Unfortunately, there's a 40% probability that it won't work; and if we pop off a nuke, we'll have something that goes on for 10 years and we'll be going four feet deep in tar balls in England. This is beyond stupid. This is truly catastrophic.

TGR: Was it stupid? Was it cutting corners? Was it just bound to happen at some point with deepwater drilling?

Bob Moriarty: They were on the edge of the envelope, they were cutting corners and there was greed and stupidity involved. The impotence of government is just laid out for everybody to see.

This is not just environmentally catastrophic. They may have to evacuate New Orleans, Pensacola, Tampa. What happens if they decided to evacuate Tampa? The US would go into a third-world country literally overnight.

We're talking about 100,000 barrels of oil a day. That's 4.2 million gallons. It's serious and it's out of control. The knock-on effect to the economy? If we were in great shape financially this would cause a depression. BP doesn't have the resources to pay for this.

TGR: What about the impact on future drilling?

Bob Moriarty: That's a really interesting question because, obviously, we need more regulation – some effective regulation. We didn't have it. In this situation, everybody involved was guilty. There will be far more rules on offshore drilling in the future and it will drive the cost of energy up.

TGR: That sounds odd coming from you. Normally you're sort of an anarchist and oppose regulations. You're anti-government – you call government impotent, useless and stupid. But in this case, if we'd had better regulations this wouldn't have happened.

Bob Moriarty: If you want to live in a country with no government regulation, move to Zimbabwe. Government regulation is appropriate in some situations. But it has to be efficient. We are at an end of empire. It couldn't possibly be any clearer – we are losing three and a half wars. We want to go nuke Iran, which is not the enemy of anybody, under the theory that they have nuclear weapons when 16 US government agencies agree they don't. It's end of empire.

We are in a state of entropy. Entropy is when something physical degrades into a state of chaos. A tropical depression hitting Grand Cayman could turn into a hurricane in the Gulf of Mexico. We could be raining oil on Louisiana, Mississippi and Florida in a week. We could kill everything – all the crops, all the trees, all the fish in a half a dozen states in a week. If we don't do it this week, we'll do it next week or the week after. Oil, literally, is raining on Florida already.

TGR: Will this be the rallying cry to really usher in an era of alternative energies?

Bob Moriarty: Alternative energies are a 3% solution. We have too many people. Look at the curve of energy production and the curve of the population growth. They're identical. Sooner or later, we're going to run out of cheap energy. In fact, we're there.

TGR: Let's shift to some more solid ground – gold. In our last interview, when you were talking about junior Gold Mining stocks, you said, "The more projects I go to, the more cynical I tend to get. I don't believe for a minute that every scam artist in the world is in Washington or New York City. There are tons of them in Toronto and in Vancouver, too. The basic business model of most juniors is flawed." Can you explain what about it is flawed?

Bob Moriarty: The most common business model is to raise a lot of money, spend it, raise a lot more money, spend it, raise a lot more money and spend it. If you don't run out of people willing to invest, eventually you'll have one million ounces, two million ounces or 50 million ounces of gold, and sell out to a major.

TGR: Doesn't sound so bad...

Bob Moriarty: The problem is that 2,000 juniors believe they're going to do this; there have been maybe 15 or 20 deals in the last five years. Mathematically, the odds are about 100-to-1. If the business model is to develop a resource, raise money to put it into production and put it into production at a profit, that's a business model that works.

But 60% or 70% of these companies exist for the benefit of management. People with no experience whatsoever go in raise a bunch of money and have a good time with it. They have no intention or ability to actually produce anything at a profit. There is so much demand for resources, and the price for resources is so high it's created the illusion that a lot of these guys who have no sense, no cents and no experience in running companies can succeed. They only succeed in running these companies right into the ground.

An ideal environment would be a company that pays its president or CEO say, $100,000 a year with a boatload of options – not a quarter million Dollars a year plus unlimited expense accounts plus a boatload of options, where they make out no matter how much money they destroy for others.

TGR: So when you invest in Gold Mining juniors, you choose from among the 40% that have decent people trying to do something effective.

Bob Moriarty: Here's the deal. The mistake most people make, myself included, is focusing on the projects. It's easy to do, because you can see good ones, so-so ones and bad ones. The most money you'll lose is on the very best projects because you start to believe that nobody could screw up such a great project. But they can and they do.

TGR: So you say investors need to focus more on management.

Bob Moriarty: 100%. That's the only thing I've learned in the last 10 years. You have to go in and ask, "Is there any chance whatsoever that these guys actually will succeed?"

TGR: If your only focus on is management, why fly around to all these sites instead of just hanging out in Vancouver, Toronto and New York?

Bob Moriarty: Because I want to see these people in their environment, and I want to see what they're doing. I want to see if they have any chance of actually accomplishing something. I get to see some really good management teams and some really good projects, too.

TGR: What's your view of Silver Investing vis-à-vis gold as we face a deeper depression, oil rain and the financial devastation you see on the horizon?

Bob Moriarty: Funny you should ask. I know of no other commodity where the experts – and I use the word "experts" in big quotation marks – are so full of crap. They've been touting the stuff for 10 years, talking about some shortage of silver, saying silver is going to go 10 times faster than gold. It's never happened and they've never changed their tune.

Silver is a commodity. It is not money. Gold is money, as well as being a commodity. Silver will go up relative to everything else only when it becomes a monetary metal. My belief, my opinion, is that we will go back to a silver and gold standard. When we do, silver will go up relative to gold. But these guys who say silver will go from 70:1 to 16:1 have always been wrong and always will be wrong. Silver's not going to change relative to gold until something changes in supply and demand. That something is using silver as money.

TGR: Your investments are primarily in gold and platinum?

Bob Moriarty: Pretty much gold. Platinum's a really tough area. Interestingly enough, Del Steiner has a platinum project in Montana, near Stillwater. I would love to see that advanced. Really big potential there.

TGR: In terms of price points, can he develop that project at current platinum prices?

Bob Moriarty: Oh, yeah. $1,500 or $1,600 platinum is a lot of money. $1,230 gold is a lot of money. $19 silver is a lot of money. For all the guys who are running around saying, "Oh it's a catastrophe. It's controlled," those are pretty good prices. Anybody with a silver, platinum or gold deposit who can't make money at these prices is running a scam. I'm serious. If you can't make money at $1,230 gold what are you doing? Wait until it hits $10,000...?

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Gold Bull: “No End in Sight”

Gold is simply the best alternative to paper currencies...

FINANCIAL COMMENTATOR and analyst Peter Grandich sees no end in sight to the "mother of all gold bull markets," says the Gold Report.

Grandich expects the price of the yellow metal to climb past $2000 an ounce before the ride eventually comes to an end. But while Gold Prices have been riding high, its glitter isn't blinding Peter or his Grandich Report readers to the opportunities others may be overlooking, as he explains in this Gold Report interview...

The Gold Report: Peter, you accurately forecast the market crash of 1987, the peaks of 2000 and 2007 and the bottom in 2009. Where is this volatile market headed now?

Peter Grandich: I've been looking for over a year for a countertrend bear market rally to end in the June-July period around 11,000. I think we are getting very close to that. There's still an argument to make that the market could rally a bit longer into late summer, early fall. But after that, the next part of my forecast was that the US stock market would enter a long period – several years if not a decade or longer – similar to Japanese market trading after it peaked in 1989; and for 20 years, literally, went nowhere but had major bear market rallies and declines. That's what I'm looking for in the US stock market.

TGR: How long do you think that could last?

Peter Grandich: Years. It could be many years. I clearly believe that the US equity market will underperform most other Western world markets. In other words, both could go down – but the US market will go down more. After this summer and early fall, one of the last places people would want to invest will be the US market. As much as it used to be the world's leading market, I think it's quickly becoming the market you least want to be involved with.

TGR: Is another market poised as an attractive alternative?

Peter Grandich: I don't know if we'll have real bull markets in major markets in the coming years because, while acute in the US, the debt problem, obviously, exists in many other parts of the world, including Europe. We're living through that now. In the end, look at who the creditors are. Which economies are still able to lend to all these indebted areas of the world? They are likely the economies that also will do well.

TGR: Such as China?

Peter Grandich: Yes, places like China, and to a lesser extent, Brazil. But I also want to point out that, while the US and Canada are still somewhat joined at the hip as the world's two largest trading partners, Canada is fiscally light years ahead in terms of its balance sheet. Canada remains a very favorable place of mine and has a strong currency. It's the one currency outside of gold that I would have no problems holding.

TGR: And the Russians just bought some Canadian Loonies...

Peter Grandich: That's correct. Russia has diversified. I think we're going to see more of that. It's interesting about Canada; Canada was really a basket case in the early '80s. It was looked upon poorly in the Western world at that time. Now, of all the Western world economies, none is in as remotely good shape as Canada from a federal level. They'll suffer a little bit because they'll still be big trading partners with the US, but Canada will stand out. Its natural resources will continue to do well and there's no denying the fact that Canada has been far more fiscally responsible than the US I certainly would be invested in Canada markets before I'd be invested in the US market.

TGR: So you're pretty bearish on the US...?

Peter Grandich: Actually, since January, many people have emailed and sometimes called to say I've made an error by not turning outright bearish again as I did at the top of 2007. I parted ways with the bearish camp on what turned out to be, literally, one day before the bottom in March of 2009. Unlike many bears who stood in the way of this tremendous countertrend bear rally, I did not suggest putting my bear suit back on yet.

I have noted certain support levels. If they were broken I would put my bear suit back on but we haven't reached that. As we speak, a formation is starting to take place technically on the Dow, a head-and-shoulders pattern. If you can envision a picture of someone's head and their two shoulders, we've had the left shoulder drawn. We've had the head. Now, we would form the right shoulder if we rally back to that 10,800–11,000. I would be much more comfortable turning bearish not only because fundamentally I'm bearish, but also get because of what I believe would be a very bearish technical signal. That's what this reverse head and shoulders would be in my mind. So I wanted to alert my readers to watch for this potential formation.

People always think you have to bet either on a major decline or a big rally. Since the bottom in March of 2009, my argument has been that the market would enjoy the eye of the storm, during which we would have a tremendous countertrend bear market rally. Those who are bullish are bullish because they think the 2009 bottom signaled a new bull market. My argument has never changed. This is what's known technically as a "countertrend rally" in an overall cyclical bear market – a bear market that actually began back in 2007.

So all I've been looking for is a countertrend rally tied into a fundamental argument that we will go back into a double dip recession, etc., being lead fundamentally by two factors. 1) What's going to happen politically come November? And 2) What's taking place and developing in the Middle East?

TGR: So you did not turn from a bear to a bull?

Peter Grandich: I would never say that I've been a bull. I just removed my bear suit. I wasn't one of those people who made gains in the decline only to see them given back by staying short during the rally. I don't consider myself a bear until I actually say: "It's time to sell the market again." I haven't done that yet.

TGR: When do you think you will?

Peter Grandich: I don't believe it will go past late summer or early fall. This time last year, I was in a very small camp to argue – and now and it's becoming more popular – that as we approach mid-term elections, there would be a revolt against incumbents in general – and Democrats, in particular. That will create a political nightmare in Washington, with what many will perceive after the election a lame duck one-term president who was swept into power and within two years turned out to be one of the least popular presidents. I think whatever political processes that might have been in place to take care of America's numerous problems will grind to a complete halt after the election. That will just add a log to the fire of how the world perceives the US as a country totally in a mess. So that's been my argument and I still see that developing.

TGR: With that in mind, do you believe that now is a good time to get into the market?

Peter Grandich: First of all, I don't believe in trading. I don't believe there's any reason to try to trade a few percentage point gains in the Dow or the S&P. I also have to say that Wall Street developed "speculating" as a replacement word so it wouldn't have to use the word "gambling." Those who trade might as well go to a casino because so much is up against you these days.

What's more important, and what we spoke about earlier, is the longer-term bigger picture for a bunch of reasons. You probably don't have time enough to write them all down; the US is deep in serious fundamental problems – economic, social, even spiritual. It's going to be one of the least attractive places, globally, that people would want to be seriously invested in.

TGR: Having said that, the 200-day moving average seems to be one of the tools you put a lot of stock in to determine where the market is going. What appeals to you about it?

Peter Grandich: First, let me clarify that I think of technical analysis as a good accessory. I don't believe in using it strictly as the only thing on which to base a decision. I have a lot of respect for some great technicians out there. But in my opinion, at the end of the day, fundamental analysis overrides technical analysis. I like technical analysis when I'm uncertain or not absolutely clear on a fundamental direction. If I'm leaning one way or another and my technical analysis supports that argument, the combination of the two determines my decision. Within technical analysis, moving averages are important.

Very short-term moving averages have no real significance to me because, as I said earlier, I don't believe in trading. But the 200-day moving average – the granddaddy of all moving averages – is something I look at. I also know it's important to look at, because the world at large looks at it. A lot of things that happen in the markets are borne out as self-fulfilling prophecies. If enough people report and comment on something and it starts to develop, it begins to feed on itself. So it's a very important technical tool and one of the few that I rely on a lot.

TGR: Is that primarily what you used to determine the crash in '87 and the peak in '07?

Peter Grandich: No, it was always fundamental argument, but the technicals always supported it. Technical analysis has come a long way since the '87 crash. Back then, there weren't many people using it. I really didn't use it much either, but it helped in 2000 and, of course, getting out. Also when we took off our so-called bear suit on March 8, 2009, the main reason was because we'd become so oversold. All of the technical indicators I was using suggested that at the bare minimum, it was going to be a major relief rally. So I think technical analysis is a good aid, but I don't believe in using it as my sole compass.

TGR: You talked about gold hitting $1300 an ounce in what you've called the "mother of all gold bull markets."

Peter Grandich: The foundation of my bullishness on gold has been a few key points I've hammered home. Two of the main ones used to be big negatives for gold. It wasn't that many years ago that central banks were net sellers of gold. After the Washington Agreement, they started to measure their sales, and they've actually become net buyers in recent years. So one key bullish factor was the fact that a group that had been a major seller no longer was.

TGR: What else shifted from a negative to a positive?

Peter Grandich: I used to argue that the mining industry was cutting off its nose to spite its face by hedging so much of future production. But the same hedging that had been so widespread has become like a four-letter word for mining executives. Even the mere thought of speaking about it brings the ire of institutional and retail investors. That's the second key point, and the second bearish factor that's become bullish.

The third thing that's accelerated the Gold Price beyond $1000 is the realization that gold is simply the best alternative to paper currencies. About 6 or 12 months ago, I said the US Dollar was going to rally and that gold would rally in the face of that. Even gold bugs questioned that; they'd been weaned on the theory that a rising Dollar was bearish for gold. My argument simply was that, for a while, the Dow would rally just because the world would concentrate on other bad currencies until coming back to the USD. I said the fact is that no one currency anywhere in the world – euro, USD, what have you – would do anywhere near as well as gold itself; therefore, look for gold to rise in most major currencies. That's exactly what's happening now.

None of those three bullish factors are even remotely close to changing direction. We don't see any sign of a central bank pickup in net sales. We certainly don't see the industry hedging. We definitely see the money flows into gold, and we see more and more counties and people of influence noting that gold is the only true money. That's why I still call this the mother of all bull markets.

TGR: Are you willing to put a timeframe on a price higher than $1,300?

Peter Grandich: Our target for 2010 was $1,300 as a low end, and it could go as high as $1,500 if certain events unfold in the Middle East – which, realistically, are closer today than ever before. So even though we haven't printed it yet, $1,300 is a "gimme," and there's still the potential to run as high as $1,500.

Gold will never shine or look positive to many investors because to support it and to believe in it would be detrimental to the financial assets the world revolves around. The mistake people make is in waiting for world confirmation that everybody's on board on gold. It's never going to happen. And in my opinion, and that's a good thing.

TGR: A good thing?

Peter Grandich: Yes. The day that it even remotely looks as though everyone's on board, we'll know we're very, very close to whatever the run is on the gold market. But my personal opinion is that the gold run won't end until at least it has a "two handle".

TGR: A two handle?

Peter Grandich: That means gold will get to $2000-plus before this great bull market ends. That time is not yet in sight.

I'm looking in some areas that have been cast aside. One in particular is the uranium market. As exciting as it was a few years ago when many so-called experts were hammering home triple-digit uranium prices, a lot of those forecasters seem to have selective amnesia and forgot about that. I fell on my face and thought that uranium prices would have gone much higher and stayed there, too. They didn't, and the market continues to beat down anything related to uranium.

TGR: What else has been cast aside?

Peter Grandich: One segment in the rare metals that doesn't get much attention because not many are involved in it is cobalt, which is also demonstrating a real need for strategic investing. Cobalt is among the minerals that the European Commission recently identified as having high supply risks, with potential shortages resulting from limited production and high demand. Cobalt is a component of our renewable and sustainable energies, from batteries to solar elements to powering turbines for wind generation. The US consumes about 60% of the world's cobalt, yet produces none of it.

TGR: You like Canada's currency and fiscal responsibility, as you said earlier, but also a lot of the projects you see there. Quite a number of the companies you've mentioned have a strong presence in Canada.

Peter Grandich: It's funny. When I started in this business, you could count on one hand the countries that people in exploration and mining avoided because they could present problems. Now 20, 30 years later – people count on their hands the places to go without having a problem and Canada is one of them. The one area people could take exception to that statement would have been British Columbia; but, in recent years, the somewhat anti-mining stance there has changed. So there's a lot of focus now on Canada's natural resources, as well as the fact that Canada isn't facing some of political and social issues that are in other areas of the world now.

TGR: Such as those we're facing south of the Canadian border?

Peter Grandich: People have been searching for the solution to the United States' problem. It may sound too simplistic, but it really is simple. Americans have too much stuff. You can't drive many roads in America without running into a public-storage facility. Our parents and grandparents never needed public storage. Until America realizes it has too much stuff and has to lower its living standard – and that it can't borrow against what it can't afford – all these other arguments and bailouts and so on will never get to the root of the problem.

It's like putting on too much weight; you can't take it off in six months. You can't take decades of overspending and being unproductive and fix it in six months, either. Unfortunately, I still see a very dark period ahead in the US because there really isn't any movement yet to take those steps. Until America changes its attitude, nothing can be fixed.

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Gold Exploration Hits Trouble

Gold Mining needs successful exploration to keep boosting reserves...

JUST AS THE PRICE of gold is hitting record highs, the major Gold Mining companies face declining production, says Brent Cook of Exploration Insights, writing for The Gold Report.

Geologic success can only come about if a company is exploring in the right geologic terrain – a terrain that is capable of hosting a major deposit. This is, of course, easier said than done, and it is critical that the speculator in this sector be able to recognize the difference between a legitimate play and a questionable story.

Unfortunately for the speculator, Mother Nature has been very generous and supportive to the exploration sector. She has scattered gold, copper and silver anomalies all over the world, then hidden what lies beneath them under gravel and jungle. She has then left the elucidation of what lies below the surface to a discipline that is best described as art informed by science: geology.

Geology and minerals exploration are not exact sciences. Minerals exploration is not accomplished through the careful mixing of measured quantities at a sterile laboratory or by complex mathematical calculations done on a computer. It is done by geologists working in the frozen wastelands and barren deserts of countries that most of us didn't know existed 10 years ago. They are invariably dealing with a limited data set and projecting that information into the third and most important dimension, depth. Testing that dimension requires drilling, an expensive endeavor that usually provides more questions than answers.

Success for the speculator therefore depends on:

1. investing in management that is intelligent, honest and financially committed; and
2. properly assessing a property's potential to host a major deposit as early as possible.

The "Life cycle of a junior explorer" graph presented below illustrates the normal evolution of a successful discovery from startup to production. The time to buy is when you find the right management team exploring in the right place – at the right price, of course.

Knowing when to sell becomes a more complex issue after the initial success: you have to know what the mineral deposit could actually be worth.

To do so early on requires a realistic estimate of the probable mining, processing and capital costs, plus, metallurgical recovery, strip ratio and local infrastructure. Tax rates, royalties, permitting, and social and political issues all have to be factored in as well.

Ultimately, your sell price should be dependent on a rough net present valuation (NPV) estimate of the deposit the junior company has discovered, or at least appears to have discovered. That basic knowledge provides the edge that allows an investor to sell a stock when other less informed speculators are still buying.

Major Gold Mining companies are facing a big problem. They are unable to find and develop enough ounces to keep up with demand, for the simple fact that economic gold deposits are extremely rare. The chart below, taken from the GFMS consultancy's latest Gold Survey, shows global gold mine production during the past 30 years, and it demonstrates this fact.

Overall, production shows a very simple trend: it rose until about 2000 and has fallen since then. This reduced production occurred even as the price of gold has increased nearly 400% in the past 10 years. This incongruity tells us something fundamental – there's a problem.

From 1980 to about 1992, production from South Africa, North America and Australia increased dramatically. Since then it has been falling just as dramatically. Production in the rest of the world picked up at about the same time production dropped in the established mining districts, and has been filling the gap in production since then.

The reasons for the early increase in production from South Africa, North America and Australia, and the later increase in the rest of world are due to factors that are not likely to be repeated. This has important implications for major Gold Mining companies, exploration companies and ultimately us here at Exploration Insights.

There are three main reasons why gold production increased up to 2000, despite declining gold prices:

• The advent of new mining and processing technologies made previously uneconomic low-grade deposits economic. This was mostly a result of heap-leach technology and bulk-mining methods. This meant mining companies could now scrape up large areas of low-grade mineralization and sprinkle a cheap solution of cyanide on the rock to recover the gold. This primarily worked on near-surface oxidized deposits in relatively dry climates;
• Vast regions of the world that had previously been closed for various reasons were opened up to exploration. These new areas include much of Latin America, Africa and the former Soviet Union. I was part of that movement; we were able to walk onto obvious deposits with new eyes and rapidly drill out those resources. It also became markedly easier to get into these areas, so we were able to go deeper into the jungles and deserts;
• Geologists had a whole slew of new exploration tools with which to scan the earth. These include satellite imagery, geophysics and more sensitive chemical tools.

The net result was that new technologies kept old deposits going longer and made previously uneconomic ones viable, thereby ramping up production into the early '90s.

New deposits in previously unexplored and off-limits areas kept that production going until about 2000. All well and good, but as the image below shows, the industry is not finding as many new deposits as they need to in order to maintain current production levels. And, although we can expect incremental technological improvements in processing, mining and exploration, there is nothing revolutionary on the horizon.

This is a worrisome slide for major gold producers – they are unable to sustain themselves. For the most part they are surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the "old" deposit category. Reserves from these aging deposits are not being replaced by new discoveries. Producers' problems are further exacerbated by rising exploration and development costs, plus the significant time it now takes to permit and finance a new deposit, if they are able to at all – a subject for another day.

Everything I have said up to now is good news for the junior Gold Mining explorers and for those of us speculating in this sector. If a company can make an economic discovery, there are ready buyers willing and able to pay a significant premium for something they want and need.

But now for the Bad News: It ain't easy. Consider this next diagram...

This very complex schematic diagram, a small cross section through the earth's surface, illustrates all of the deposit types and settings associated with subduction related magmatic mineral systems: essentially the Pacific Ring of Fire and some zones running up through Central Europe and Eurasia. With each of these individual settings comes a characteristic mineral and alteration assemblage that changes with distance from the hydrothermal source.

This "zoning" reflects and is a result of different chemical, pressure and temperature environments. On top of those primary factors we have to overlay the structural setting and rock type, either of which can be the make-or-break feature for the formation of an economic mineral deposit. An economic mineral deposit results from the unique combination of all of these features, a combination that rarely occurs in nature.

Although nearly every intrusive magma body (the hatched bodies in the diagram) will have some of the right stuff, I would estimate that 90% of these mineral systems do not contain a geologically economic deposit – they have anomalies; the very same anomalies that keep the exploration industry in business. That "geologically economic" classification doesn't consider the added criterion that takes the mineralization into the truly economic category: it has to be near enough to the surface and recoverable to be economically viable. To those hurdles we can add political, environmental and social obstacles.

Now place the same diagram under thick jungle cover or hundreds of meters of gravel and you begin to get the sense of how hard it actually is to make a real discovery. This is why maybe less than 1% of the exploration projects out there will ever turn into an economic discovery, and nearly all the exploration companies eventually go broke.

If, for example, you are a company exploring for gold, you have to know where you are, and, more importantly, where you are not in these geologic models. If you are an investor in said company, you had better know too. It means all the difference between making a fortune on what the market has presented you – a sweet spot where the major miners need new deposits and can afford to pay top Dollar for discoveries – and missing a real opportunity.

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Risk-Free Return vs. Gold

The outlook for gold and Gold Mining stocks as real interest rates stay below zero...

A PROFESSOR of economics for nearly two decades, John Doody became interested in gold through an innate distrust of politicians, says The Gold Report.

In order to serve those that elected them, politicians always try to get nine slices out of an eight slice pizza, debasing the currency via inflationary economic policies. Success with his method of finding undervalued Gold Mining stocks led John Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. In the last decade, Doody has seen his top-listed equities skyrocket a combined 1000%, including an eye-popping 130% in 2009.

Subscribers pay a lot for his knowledge and expertise in the Gold Stock Analyst; but in this exclusive interview with The Gold Report, you get a few of his favorites Doody-free.

The Gold Report: We're about 1.5 years into the Obama administration's multi-trillion dollar bailouts and expansion of the Fed balance sheet to $2.3 trillion from about $800 billion. What are your thoughts on that?

John Doody: I think it's a bailout that continues with $1 trillion-a-year deficits as far as the eye can see. There's no end to it; unless we get some significant tax increases and/or spending cuts, there's no hope to ever to pay down the debt. The best hope is to get the economy growing faster than the debt so that, as a percentage of GDP, the debt level shrinks.

TGR: Do you agree with the administration's fiscal policies?

John Doody: Oh, yeah. I really don't know where we'd be if we didn't undertake all these remedies from the Treasury side on the deficit side, as well as the Federal Reserve side. The mess that this economy was in as a result of the Wall Street and housing collapse continues. You go by a strip mall here in South Florida with 10 stores, and at least one or two are empty. Almost 10% of workers are still without jobs. I was surprised to read that about 11% of all prime mortgages – these are the best mortgages – are either in foreclosure or delinquency. People are hurting.

TGR: How do you see all of this affecting the gold market?

John Doody: Everything that's being done creates inflation. You don't really care if somebody gives you a $1000 government bond as payment for a debt or $1000 cash. They're equivalent. We're creating a tremendous amount of money trying to get the pump primed to get the economy moving, but it's obviously a very difficult task.

TGR: You mentioned inflation and, in your last interview with The Gold Report, you said: "Bernanke and the Fed are pursuing a loose monetary policy with a 0% interest rate. There's actually no way we cannot end up in inflation." We're starting to see signs of it now. How is gold going to act in an inflationary environment and, perhaps, even in a hyperinflationary environment?

John Doody: Gold's going up now; it's going to go up more. One of the uses of gold is to protect your purchasing power from inflation, and it's done a damn good job! It always drives me crazy when these talking heads on TV talk about gold now vs. $850 in 1980. They say, "Oh, look where it's gone!" It's gone nowhere. That was a one-day high. The next day the Gold Price was $738. More important is to look at the Gold Price from when it was set free in 1968. It was fixed at $35 for over 30 years. If you just took that $35 from March '68, and I did in a recent issue of the Gold Stock Analyst, and adjusted it by the Consumer Price Index (CPI), gold would have grown from $35 to about $225. That's your inflation protection; everything above $225 all the way up to the current price and the next $1000 – that's all investment gains. From '68 to the present, gold had had an 8.6% compound annual growth rate that was 4.4% above the inflation rate for the period.

TGR: But you hold Gold Mining equities, and you don't hold bullion. In the last market crash, everything crashed – even the gold equities.

John Doody: That's true. The reason that I hold gold equities is because you get better leverage to the Gold Price. We always have to remember that while the stocks are derivatives of gold, they are stocks first. If the buyers disappear for stocks, they disappear for gold stocks too. But when they come back, they come back with a vengeance. In 2009, the Gold Price was up 28% and the XAU was up 37% but the Gold Stock Analyst's Top 10 was up 130%. That's the leverage you can get from owning the right stocks.

Investors in exploration stocks got killed in the 2008 crash. There were no fundamentals underneath those stocks. All the stocks I cover are producers or very near producers. We know there's something there, so we're not just arm waving over some drill results. That's one of the things that makes Gold Stock Analyst unique: We don't cover the exploration stocks, because I'm not a geologist. I can't interpret drill results. I want data. I want data that you can analyze and that's productions and reserves.

TGR: In a recent issue of Gold Stock Analyst you said: "As we're in a bull market underpinned by negative real interest rates, loose monetary policies and exploding government deficits, it's best to keep riding the bull and don't let it throw you off." How high can the bull ride through the end of 2011?

John Doody: First we've got to understand what the real interest rate is. That's the risk-free return on money, such as short-term US Treasuries. The US Treasury can't default. They can always print more dollars and give them to you. I like to use 90-day T-bills. Or you can use savings-account rates, which are about 0.1%. It's trivial. If you have in a savings account or in 90-day Treasuries and you start the year with $100, at the end of the year you're going to end up with $100 plus 0.1% interest. But if inflation is 2%, the money is going to buy you only $98 worth of goods. When real interest rates are negative, and people can't get positive return on their money by putting it in the bank or risk-free situation, they naturally flock more to gold to protect the purchasing power of their money. Gold has been a sanctuary in monetary crises and inflation for centuries. In the 2000s, Chairman Greenspan lowered the Fed Funds rate to 1% and the inflation rate has generally been higher. That's why gold has done so well.

TGR: What Gold Price will we be looking at through the end of this year and 2011?

John Doody: Well, I'm not a guy who predicts the Gold Price because my philosophy is I can find value at any Gold Price. I'm just looking at the next $100 ahead. People who predict $1,500 or $2,000 or $5,000 are foolish because there's no basis for that. I don't doubt gold will get to those levels, but I have no idea when. I find undervalued stocks now and profit as Mr. Market discovers them. So, if gold does nothing, we can still profit. If gold goes up, then we've got two ways to profit.

TGR: Alright, how long do you think gold's bull run will last?

John Doody: I think it's got a lot longer to run because the negative real interest rate environment is going to run a lot longer. When's the Fed going to raise interest rates significantly? They can't raise them now. We've got almost 10% of the country unemployed and that much, again, underemployed. So, until the economy gets going, we're not going to see any real change.

TGR: What about holding Gold Bullion vs. equities?

John Doody: The reason the stocks give you more leverage than Physical Gold is because all of the ounces are yet to be mined. Typically, a gold mine is going to have 10 times or more reserves in the ground than what they're producing in the current year. If a company is producing one million ounces a year and the Gold Price goes up by $1, that dollar falls right to the bottom line. That's $1 million more in profits. But because they've got 10 million ounces still in the ground, those ounces are now worth $10 million more than before.

That's what gives you the leverage that owning bullion just doesn't give you. If you own bullion and gold goes up $1, your coins are worth $1 more. No big deal.

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Aussie Mining Tax

Policymakers should be careful what they wish for, says this Gold Mining analyst...

NOW IN THE MIDST of a boots-on-the-ground survey of Australian precious and specialty metal projects, The Emerging Trends Report's Managing Editor, Richard Karn took time between mine site visits to share his insights about the controversial Resource Super Profits Tax that's pending Down Under with The Gold Report...

The Gold Report: As an American involved with the Australian Gold Mining and minerals industry, can you give us an overview of the Rudd government's proposed Resource Super Profits Tax (RSPT)?

Richard Karn: Certainly, but from the outset keep two things in mind. First, the tax scheme is very complicated. Some details are murky and seem to conflict with others in a number of ways. Secondly, the mining industry itself has argued for streamlining the existing system, which entails companies paying as many as six or seven different state or territory royalties on the minerals they extract. Apparently, they were prepared to pay a higher tax for a simpler system. They did not, however, expect the tax reform the Labor government wants to implement, which the Conservative Party is now calling Prime Minister Kevin Rudd's "great big new tax".

TGR: Sounds like a case of "be careful what you wish for..."

Richard Karn: Exactly. In essence, the RSPT has been derived from aspects of the Henry Tax Review and, if passed, it will apply to all existing and future non-renewable resource projects beginning July 1, 2012.

TGR: Who is Henry?

Richard Karn: Treasury Secretary Dr. Ken Henry chaired the review panel formed when the Rudd government established Australia's Future Tax System Review in May of 2008 to examine Australia's tax and transfer system.

TGR: Without getting into every nut and bolt, what is the RSPT basically about?

Richard Karn: It has four basic tenets. First, profits derived from Australia's non-renewable resources in excess of the rate of return from the 10-year bond (currently 5.7%) will be taxed at 40%. Let me point out that this is in addition to the existing 30% corporate tax and royalty structures.

The tax will not be collected on individual mining projects until the project becomes profitable; in the event of a loss on the project, the federal government guarantees to credit mining companies for 40% of the extraction costs – but not until the government has determined that the expenditures could not be carried on to another project.

Current state and territory royalty arrangements would remain in place, which mining companies will be required to continue to pay, but the federal government will issue rebates of a corresponding amount to offset the royalties. When RSPT takes effect, the rebate probably would be sufficient to offset the royalty rate; but there's nothing to prevent states and territories from increasing their royalties in the future.

TGR: How would they use the tax revenues?

Richard Karn: The federal government expects to make about A$12 billion over the first four years after the tax is introduced and plans to direct the revenues toward several things. It intends to increase the compulsory superannuation (retirement program) contribution by working Australians from 9% to 12% over seven years, and to provide low-income workers with as much as A$500 a year to supplement their superannuation. The government also says it will reduce the corporate tax rate from 30% to 28% over two years, and create an A$700 million fund to boost resource-related infrastructure around the country in the first year.

TGR: Which issues are the most contentious?

Richard Karn: First, let me make a brief disclaimer. We are guests in Australia and have been treated very well by everyone we have come in contact with during the four months we've been investigating precious and specialty metal projects. Our approach is predicated on the notion that many of these companies have significant resources but are not well-enough capitalized to put together road shows to North America or Europe to bring their projects to the attention of investors there. We are, thus, in a position to help each other; and we don't want to jeopardize this relationship by being seen as outsiders editorializing on the Australian political system.

That being said, in addition to a couple peripheral matters, the three most contentious issues are 1) the 5.7% threshold at which the 40% RSPT is levied, 2) the retrogressive nature of the tax, and 3) the manner in which the administration is trying to force mining companies to make the government a 40% partner in resource projects.

TGR: Okay, would you address those issues one by one?

Richard Karn: The ascendance of Australian mining over the last three decades is attributable to previous administrations, Labor and Conservative alike, embracing policies that encouraged competition. Those policies fostered an environment in which mining companies could attract the capital investment needed to put remote, high-risk, very difficult projects into production. A significant portion of this capital originated overseas, and the investors put up only the capital for the chance of reaping large profits.

The RSPT would vault Australia from its current 38% cumulative tax rate to more than 55% and into the dubious position of having the second-highest mining taxes in the world behind Finland. According to Citigroup, Australia's tax rate would rank well ahead of the USA's 40%, Brazil's 38%, South Africa's 33%, Peru's 32%, China's 30%, Russia's 30%, Chile's 26% and Canada's 23%. All things being equal, capital tends to go where it is treated best, which makes it hard to imagine that the new tax regime would help raise domestic or foreign capital investment in Australian resource projects.

Policymakers don't seem to appreciate that the A$202 billion mining industry – which contributed 18% of GDP and accounted for 42% of total exports last year – has itself been relying on a 17% annual growth rate in foreign direct investment to make its fabulous growth possible. Incidentally, that foreign direct investment amounted to A$92 billion in 2009.

Further, the notion that an extractive project earning profits in excess of 5.7% constitutes a "super profit" appears not to consider the fact that no company would take on the kind of risks these projects entail for that kind of pre-tax return. It would be significantly below the cost of capital needed to undertake the project.

The cost of capital today is roughly 8% for the majors, capital may run as much as 13% to 14%; but a greenfield development, which carries an even higher-risk premium, would pay more along the lines of 16% to 18% for capital. Combined with other aspects of the tax, this essentially would put many projects underwater from the get-go.

TGR: And if a major company as big as Macarthur Coal pays 15% for its capital, small companies will pay considerably more.

Richard Karn: Some critics suggest that the academics, economic modelers and politicians behind the RSPT seem to believe the expertise to develop massive Gold Mining and diversified projects, such as Olympic Dam, is widely available. They figure that if the BHP Billitons and Rio Tintos of the world won't develop Australia's vast but remote resource wealth, an army of Andrew Forrest-like entrepreneurs waiting in the wings will. And they apparently assume that banks will develop loan products at little more than the 10-year bond rate.

A number of commentators have pointed out that it's as if the Rudd government formulated the RSPT in a vacuum, seemingly unaware that the cost of capital is increasing at the same time its availability is decreasing – in itself a foreboding prospect. Because decisions about which projects to develop or fund are based on what promises the greatest after-tax returns, the RSPT significantly undermines the attractiveness of a whole range of projects.

As it stands, it appears that roughly A$275 billion worth of mining projects are on hold simply because long-term investment assumptions cannot presently be factored into their risk/reward models. Very few financings will get done until RSPT details are ironed out and the matter is resolved.

TGR: That's what Graham Frank at Ernst & Young meant when, last month, he wrote that Australia is "at risk of killing the goose that laid the golden egg" with the RSPT.

Richard Karn: Some claim the RSPT wants to cook the goose's ancestors, too.

TGR: Which brings up your second contentious point – that the tax is retrogressive.

Richard Karn: Yes. They claim the retrogressive aspect makes the tax both punitive and likely to discourage future investment in Australian resources. It introduces policy instability and ex post facto taxation to long-term investment decisions that were made under an entirely different set of sovereign-risk and tax assumptions. That amounts to reneging on an agreement.

The combination of this retrogressive aspect and mining companies having to take on the government as a partner leads some people to refer to the RSPT as a 'resource nationalization ploy.' The retrogressive tax sets a precedent that, in and of itself, will stifle foreign direct investment.

TGR: How so?

Richard Karn: It introduces the possibility that the risk-reward parameters can change materially during a project's lifetime at the apparent whim of whichever administration happens to be in power – potentially undermining a project's profitability and continued economic viability. As a result of all of this, at least one financial institution now ranks Australia on a par with Indonesia in terms of sovereign risk.

TGR: You've mentioned having the government as a partner in mining projects. Can you explain that for our readers?

Richard Karn: The idea of a resource rent tax was developed by American Economist Cary Brown in 1948 and stipulated the government would supply the cash for its share of a resource project – not, as is the case with the RSPT, to essentially require mining companies to lend the government its 40% share, which would be repaid to miners over time via tax concessions at the 10-year bond rate. The RSPT amounts to demanding that a mining company lend money to the government at a rate significantly below what a company pays to borrow capital itself.

Further, Larry Summers, President Obama's chief economic advisor, wrote a paper in the 1980s concluding the hurdle rate for assessing US firms' resource project viability far exceeded their cost of capital – in fact often requiring twice that much. Thus, this de facto loan to the government for its share of the project would constitute a material expense. The notion that the government will cover 40% of the losses incurred in a project with credits, rather than contributing development costs, is such a hollow promise that some financiers view it as an incentive to fail. They would attach zero value to it in their loan decisions, simply because it is unlikely any of the guarantee would find its way back to them.

TGR: What's the story with those credits?

Richard Karn: The government has guaranteed to credit mining companies if they have a loss on a project. But there's a catch. The credit – 40% of the firm's extraction costs paid over time at the 10-year bond rate – will not be paid until the government determines the expenditures could not be carried over to another project.

TGR: You mentioned a couple of peripheral issues, too. What are they?

Richard Karn: State and territory royalty programs now account for roughly $1 of every $9 of pre-tax mining profits, just as they have for about a decade. By and large, royalties are ad valorem – or levied on the value of the resource extracted, so the Dollar value has increased in lock-step with commodity prices.

Many people consider this to be an RSPT in itself, and it's understandable that states and the Northern Territory are loath to relinquish control of such substantial sums of money. In fact, they may have a Constitutional defense for not relinquishing that control. The RSPT also wants to broaden the scope of what is taxed to include both the resource extracted and the value added in logistics, processing and smelting; but it is difficult to conceive under what circumstances 'the people' Mr. Rudd constantly purports to defend would have a right to a share of such capital investments in a capitalist system.

Further, because they could not agree with the states and Northern Territory on the issue, the Rudd administration proposes to levy the new tax on top of the state royalties, and then to give mining companies a rebate for state royalties. Ironically, this would further complicate the system rather than streamline it; it would create a whole new layer of bureaucracy to deal with compliance issues.

More than one pundit has quipped that soon mining companies will employ more accountants and lawyers to deal with compliance issues than miners to extract resources.

TGR: What else do you find troubling about the RSPT?

Richard Karn: Admittedly, I'm a bit cynical these days; but the RSPT being announced during the height of the European sovereign debt crisis I find highly suspect, because history has borne out FDR's comment: "In politics, nothing happens by accident. If it happens, you can bet it was planned that way."

It turns out the Rudd administration had the Henry Tax Review in its possession since December 2009, which moved to circumvent its own campaign promises regarding the use of public money for political advertising purposes by arranging for a A$38 million television campaign in support of the RSPT well in advance of the announcement. They also chose the very time that markets everywhere were under significant pressure from the sovereign-debt crisis to announce what many suggest are the most sweeping changes in Australian economic history. Clearly the administration knew the RSPT was going to adversely affect the Australian Dollar, stock market, foreign capital investment and superannuation accounts, because they made a frantic attempt, initially, to attribute the effects of the RSPT announcement to the sovereign-debt crisis – this despite the Australian Dollar and stock market falling far more dramatically than any other developed country, including both its resource-producing peer Canada and the European markets at the epicenter of the crisis.

TGR: Any other peripheral issues you'd like to discuss?

Richard Karn: Only that the RSPT seems apt to have unintended consequences.

Mining projects are not light switches that can be thrown on and off; sometimes billions of Dollars are spent just to get a project ready to go into production. Right now, the majority of project funding has been frozen until some kind of decision is reached. Because the RSPT will not be debated until after the Federal election, slated for September or October, it is creating a gap in the continuity of Australian projects coming onstream to meet global mineral demand. And when a decision is eventually reached regarding changes to the tax regime, all of the projects currently in limbo will have to go back to square one and restart feasibility studies and the like based on the new parameters.

This means the RSPT has effectively slammed the door not behind companies operating today, but in the face of companies trying to go into production tomorrow. It can be argued that the uncertainty surrounding the RSPT has, itself, raised significant barriers to entry for both exploration and upcoming development projects, because funding will not be forthcoming in the current environment. Companies that are cashed up, free of debt and in production now may, in fact, be provided with competitive advantage in that they have to opportunity to act while others do not. The longer the issue remains unresolved, the weaker the companies in the latter group will become – rendering them increasingly vulnerable to acquisition at a discount.

TGR: Is your hunch that RSPT will be the law of the land soon?

Richard Karn: My opinion, which $5 will buy you a cup of coffee, is that the RSPT will not stand in its current form. I think either a significant compromise will be reached, or the RSPT will be voted down in the Senate. But until the issue is resolved, we think the best way to proceed is to tighten our screening criteria further; it is clear that we cannot recommend precious and specialty metal companies whose projects are unfunded or underfunded at present, regardless of their potential.

TGR: So you have no plans to cancel your circumnavigation of Australia?

Richard Karn: No. The damage to Australia's reputation, currency and stock markets by the less-than-optimal way in which the RSPT was framed and introduced – the impact of which we believe was compounded by its poor timing – will be only a temporary affliction. Barring an outright global economic collapse, demand for base metals, and gold, will not abate significantly. Most are price-inelastic and have no substitutes in a range of primary applications. If anything, the RSPT will contribute to a shortage of these metals and correspondingly higher prices by slowing the development of Australian projects.

Eventually, though, the market will recognize that precious and specialty metal companies that are in production today – and have the cash flow to expand production tomorrow – should command a premium. The pullback that has been exacerbated by the introduction of the RSPT affords long-term investors the opportunity to pick up a number of excellent companies at a significant discount.

TGR: This has been really informative, Richard. Thank you so much for your time and insight.

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“Always Start with Gold Bullion”

This asset manager is amazed by Gold Mining stock investors who don't first own any Gold Bullion...

A FREQUENT guest on CNBC and the Wall Street Journal radio network, Adrian Day is a British-born writer and money manager.

Graduate of the London School of Economics – and now head of Adrian Day Asset Management – he specializes in global diversification and Gold Mining equities for individual and institutional clients.

Adrian Day's forthcoming book, Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks, will be published by Wiley this autumn. Here he talks to the Gold Report about the near-term outlook for Gold Bullion, mining stocks, and other US-Dollar hedges...

The Gold Report: Earnings numbers are up for US companies, the US Dollar is gaining strength, unemployment numbers are improving; yet, as you said in a recent newsletter, you remain cautious on the market and are generally looking for opportunities to sell. What do you see in the economy that makes you cautious?

Adrian Day: That's a good question. First of all, we have to recognize that the economy and the market don't always go hand in hand. The market tends to anticipate developments. That is very clear that at the bottom of recessions when the market turns around and starts moving up because it anticipates recovery. What perhaps we're seeing with the market's action this year – and particularly in the last six weeks – is a look ahead to a second leg down in this recession.

But what am I seeing? Clearly there's been some positive news on the economy, but there's also been negative news – especially if you look at consumer spending, which was up at the end of last year and the beginning of this year, but the most recent consumer spending numbers turned down again. I think that speaks to the psychology of people – they pretty much went a whole year without spending a lot of money, certainly not spending money on discretionary items. A lot of people said: "We gave up Christmas last year; we're not giving it up this year whatever we have to do." So people spent money on the holidays, but there's a limit. If you don't have the cash and your credit card company doesn't increase your limit, there's a ceiling on how much you can spend.

TGR: But the employment numbers are higher.

Adrian Day: We're seeing a little bit of improvement in the employment numbers, though we have to recognize that a lot of that is temporary jobs and government jobs; in last month's report, new jobs were almost entirely temporary census jobs. Unemployment still remains very high. It's a mixed picture but at this stage of the recovery, things should be considerably better than they are.

One of the things that concerns me is the lack of lending by the banks, particularly to small businesses – that is of grave concern for the economy. As for the stock market, you just have to look at a graph to see that it's stopped going up; it's rolling over. I am not a technician by any means; but you can that see it bounced right up against that 200-day moving average and fell, and you know the market just looks very much as though it is moving downwards and the risk in the market has gone up.

TGR: Are there any particular areas where you're looking to sell?

Adrian Day: It's generally across the board, and it's really a matter of valuation for us. Clearly, one tends to sell things either when – or I do because I am a fundamental value investor – things go wrong or when the company deviates from its strategy. But I certainly don't sell because a good quality company that is doing everything right goes down and becomes a better value. I don't sell on that. We're just selling things that look overvalued to us. We have also been selling some things in Japan, for example, because the economy in Japan appears to be turning downward again.

TGR: You said earlier that at this stage of the recovery things should be better and that you were specifically concerned about the lack of lending by banks. Is it a matter of a reluctance to lend or is it that there are few good lending opportunities for the banks?

Adrian Day: The banks have a good deal going frankly. Banks have been able to borrow from the Fed in almost unlimited amounts at exceptionally low interest rates. If you could borrow billions of Dollars at a quarter of a percent from the Federal Reserve, perhaps you wouldn't feel inclined to take risks. You'd just put it in Treasury Bills and make a nice risk-free profit. That's what the banks have been doing. That is one reason I like some of these business development companies. These are companies that lend money to small businesses; that's their job – the banks pull their horns in, which means that the business development companies (BDCs) are able to see better opportunities at higher rates of interest.

TGR: Yesterday, the European Central Bank (ECB) warned that the region's banks may face losses of 195 billion Euros in a second wave of potential loan losses over the next 18 months. In light of this, many investors are turning to gold as a safe alternative to paper currencies. Do you expect the Gold Price to soften for the summer, and where do you see it heading by the end of 2010?

Adrian Day: I would definitely say that the risk of a decline has increased in recent weeks. Clearly in the past five to six weeks gold has risen well above trend – a lot of it from frantic buying from Europe, particularly Germany. We're also seeing signs of scrap sales in India picking up; and, if that continues, it could put pressure on the price because that's a very large market for gold. Of course, seasonality is the foundation of the question. June, July and the beginning of August are typically the weak periods for gold. There is a risk of gold being soft over the next couple of weeks, but I am certainly not suggesting anyone sell. A little bit of caution is called for in chasing gold right now.

I always like to focus on the big trend, and the big trend for gold is up. A period like this might give me pause, but we want to avoid trying to be too clever in selling and buying back and that kind of stuff. I definitely think gold is going up by the end of the year, by how much I don't know. Someone once said: "Never predict the price and the timeframe, either one or the other." I definitely think it's going up. All the reasons people have been Buying Gold over the last six to nine months are still there; they haven't diminished at all, in fact, the reasons have even increased due to the sovereign debt risk.

TGR: You said people were frantic Buying Gold in Germany. Please explain why.

Adrian Day: With the bailouts, essentially from Germany to Greece, which is what it was, a lot of Germans are extremely concerned about the value of the Euro and what's next. Is Spain next? Is Italy after that? Is Portugal behind that? And so a lot of Germans have been moving out of the Euro and putting their savings into gold, gold coins. Most of the mints and refineries in Europe and the storage companies are sold out and way behind. Premiums on coins have gone up; premiums on Krugerrands – a popular coin in Germany – have gone from 3-4% to 7% or 8%. There is no room in storage vaults. Those are indications of a mania, but it's very new and very short-term. There's no sign of a mania in this country – increased interest, but not a mania.

TGR: Are you using currencies as a way to hedge against USD devaluation along with Buying Gold?

Adrian Day: Yeah, a little bit; I prefer gold for a lot of reasons, and let's not forget that every currency we look at is simply paper; there is no currency backed by gold. But clearly some are stronger than others, and it strikes me that the Asian currencies, outside of Japan, are the strongest of all. The governments have better balance sheets, the banking systems tend to be stronger. The Asian currencies tend to be less leveraged, and so we like some of the Asian currencies a lot. Two that we hold right now are the Singapore Dollar, which is extremely liquid and can be purchased in small amounts; the other is a little bit unusual – the Hong Kong Dollar. Some people might say: "Why buy the Hong Kong Dollar? It is tied to the USD." That's actually true, and that's partly the rationale to buy it. If you're a USD investor, the downside risk in buying the Hong Kong Dollar is extremely low. The thought that Hong Kong would break the link and that the Hong Kong Dollar would decline against the US Dollar is such a low risk that you can almost call it 'zero'. However, at some point given the stronger balance sheet in Hong Kong, one can easily see that it's going to rebound against the Dollar. I should point out that neither of these are investments; they're merely ways of holding savings.

TGR: There may not be any gold-backed currencies but there are ways to get exposure to gold. What are some of those?

Adrian Day: I think people should always start with Gold Bullion. I am always amazed at how many people own a bunch of tiny little Gold Mining stocks, but don't any bullion or own any of the big royalty, or more-established, companies.

TGR: What are some ways you recommend people hold bullion?

Adrian Day: There are many different ways to own it, and a lot depends on your timeframe for owning. Obviously, if you own bullion and store it, that's a very safe way – except there are costs to storage. We're perfectly comfortable buying the GLD, the ETF, which is extremely liquid and reflects the price of gold.

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Gold: 87 Trillion Per Ounce

Rob McEwen, the innovative Gold Mining CEO, sees Weimar Germany inflation risks in the US today...

ROB MCEWEN has worked in the gold-mining and resource industry for nearly three decades, now serving as CEO of US Gold Corporation and chairman of its board of directors.

Building his reputation as the founder of Goldcorp, which has what is still considered the richest gold mine in the world at Red Lake Mine in Ontario, he took it from an investment company worth $50 million to one of the largest Gold Mining companies in the world, with an $8 billion market capitalization by the time he moved on.

Recognized with awards such as Canadian Business' Most Innovative CEO, Northern Miner's Mining Man of the Year, Ernst & Young's Ontario Entrepreneur of the Year (2002) and Prospectors and Developers Association of Canada (PDAC) Developer of the Year, Rob McEwen also encourages excellence and innovation in healthcare and education, his generosity helping establish the McEwen Centre for Regenerative Medicine at the Toronto General Hospital, and supporting the Red Lake (Ontario) Margaret Cochenour Memorial Hospital.

Rob McEwen's Midas touch in mining has been as transformational as anyone's over the last decade and more. Here he sits down with The Gold Report to share his views on how Gold Investment, mining and exploration will develop from here...

The Gold Report: We see a lot of troubling scenes on the global economic landscape – from the bailouts in Europe to ever-increasing deficit spending in the US to talk about a housing bubble about to burst in China. What's your view of all of this turmoil?

Rob McEwen: I think the economic news will continue to get worse. We've had a lot of monetary stimulation by the governments of the West. In Europe, we're seeing that not only were corporations levered, but governments used off balance sheet techniques to alter the appearance of their financials. Greece and Portugal and Italy and Ireland are all part of that, but I suspect it's even larger. It all goes back to people taking advantage of very easy, low-cost credit, believing the economy would continue to grow endlessly.

Then people began to realize they got overextended. In the Middle East and Far East, nations started moving money out of Dollars into alternative currencies, the most significant of which was the Euro about a year to 18 months ago. Iran said they were going to price oil in Euros because they thought the Dollar would get weaker and weaker and wouldn't be defended by the US government. China started to diversify its huge foreign reserves out of Dollars. They viewed the Euro as the alternative to the Dollar. Of course today there's a tremendous rush out of Euros.

Europe's as much a mess as America, but ironically, the Dollar now offers refuge because you can take money out of the Euro (or any other currency) and put it into a Dollar very quickly. From that standpoint, America looks better than Europe right now, but I believe that's a short-term view. It won't be long before people look around and say, "Let's not forget about the debts and the weakness in the US economy. Where do we go next?"

TGR: What about gold?

Rob McEwen: Gold came down but it's only temporary. The trend is up. Gold ETFs are surging ahead right now. We don't need much of a move in terms of percentage of assets into gold to start seeing some very powerful moves. The pressure is building up and we're getting closer to a boiling point where we'll see gold go quite a bit higher.

TGR: Six years ago you projected gold to be at $2000 by the end of this year and $5000 further out. A big part of that was based on what you were just explaining. It's growing debt, the uncertainty in fiat currencies, and ultimately the inflation that will result. Do you anticipate any sovereign debt defaults or US state defaults that may abate this impending inflation?

Rob McEwen: Definitely. Individuals and corporations and states and countries all grow accustomed to certain income streams. We're approaching that point when someone will say, "We can't lend you any more, certainly not at these rates. Interest rates have to be a lot higher and your collateral has to be better." It's almost inconceivable that major Western nations could be in that position – but everybody should be thinking about that possibility.

I recommend Tom Cammack's book, The Inflation Nation: Wise Investing in a Foolish Age. It's a quick read that very succinctly puts out a message of where we are and why we should be concerned about it. The environment we're moving into will steal money from the conservative, the prudent, the cautious investor – through currency debasement. You need to read a book such as Cammack's to appreciate what's going on. I'd hope that will motivate Gold Report readers to shift their thinking. They have to understand that they have to work to protect themselves because I see a time coming that's going to be very painful. I hope it doesn't come, but I think it will.

TGR: Describe that worst case scenario...

Rob McEwen: I can see strong parallels between what happened in Germany post World War I, the Weimar Republic, and what's happening in America today. That might seem a big leap, but if you know your history, you know that Germany entered World War I as one of the richest and most powerful nations in the world. It did a lot of damage in Europe but it lost the war. The Allied nations that fought Germany said, "Look, you have to pay for it, compensate us for all this damage. We're going to take the few working factories you have left and you're going to owe us this big debt."

Post World War I, the US was the largest creditor to Europe and to Germany, lending for the reconstruction of the continent. At one point Washington said, "We're not going to lend you any more money." Germany had huge debts to repay, but no tax base. Industries had not survived. Most areas of employment had been reduced to rubble. The German government responded by printing money.

TGR: That sounds familiar...

Rob McEwen: In 1919 you could buy an ounce of gold, valued at $20 at the time, with 170 German marks. Germany kept printing money to pay their debts and to keep money in circulation, but food prices, clothing prices, housing prices all started climbing. Inflation started to soar. If you go forward to November 30, 1923 – about four-and-a-half years later – to buy that same ounce of gold took to 87 trillion marks.

TGR: Impressive illustration of hyperinflation; 87 trillion as opposed to 170.

Rob McEwen: It was terrible. German citizens whose money was denominated in German marks were wiped out. If I'd had the equivalent of $1 million in German marks in January 1919, it would have been all gone before the second year had passed. Let's try $100 million. That's a huge sum of money today, but back then it was colossal. But if you had the equivalent of $100 million in German marks in your German bank account, you would have received less than one penny for it if you tried to convert those marks into Dollars by September 1923.

TGR: Considering the US role in conflicts around the world, would America face a situation like Germany did, where the conquerors come back and demand reparations?

Rob McEwen: Well, if you go back to 1980, America was the world's largest creditor nation, undisputedly the most powerful, and it had a very strong industrial heartland. Today, large parts of that industrial heartland have been outsourced to the developing world, while the US has become the largest debtor nation in the world, with China being its largest creditor. China's enthusiastic participation in US Treasury auctions has declined measurably. Suppose they were to stop buying Treasuries altogether. Suppose suddenly the lending to America that allowed our lifestyle to be what it is stopped. Remember, the tax base has been hollowed out by outsourcing, and a lot of people are unemployed because there aren't enough jobs. Many people would have to declare bankruptcy.

TGR: And meanwhile, the printing presses run, as they did in the Weimar Republic about 90 years ago.

Rob McEwen: Exactly. What governments can do is print money. The US government can make sure Dollars circulate, but each Dollar they print buys less. The only value in any paper currency or what is called fiat currency derives from confidence in the underlying issuer. The Fed printing Dollars endlessly without concern for US debt – that's the darkest hour I see.

In prior periods of hyper inflation, keeping your wealth in bank accounts was probably one of the worst places to keep it. Such periods drives everybody who wants to survive to become a speculator, to take on debt, to do all the things that aren't prudent in normal times. But in these days, an era where the government is printing huge amounts of money, it is the prudent, the conservative, the majority of citizens who are the most harmed.

TGR: And I'd assume they hold gold. If it gets to your projected $2,000 by the end of the year, we're looking at about a 70% return in a year. Under those circumstances, would gold be a better short-term investment for conservative investors than equities, with equities having all the operational and political and discovery risk?

Rob McEwen: Bullion should be a key component of anyone's Gold Investing strategy. Yes, gold could outperform the gold shares. Your readers should understand that at certain times the price of gold bullion and gold shares can go in different directions. One instance was back in late 1979-80 when the price of gold ran up from about $400 to $800 per ounce in four months but the gold stocks basically stood still. It was as though the market said that Gold Price wasn't sustainable. Gold peaked in January of 1980, but the gold stocks didn't reach their peak until a full nine months later when the positive impact on earnings was clearly evident.

TGR: Would it make sense to over-leverage on gold short-term and then shift over to the juniors when gold looks as if it's peaking?

Rob McEwen: I happen to like having a portion in bullion and a portion in juniors, but most would consider my portfolio skewed to the high risk end of the investment spectrum. An investor who wants exposure to gold should own some bullion. They could buy some seniors. Seniors will participate in this move, but there could be some shocks to the system, too.

TGR: Shocks such as?

Rob McEwen: In a few jurisdictions, governments are already putting in excess profits taxes, and I'd expect other governments to do the same. It's a very short-sighted move that can reverse capital flows dramatically in future investment in those countries, but these governments are thinking that mining doesn't have a lot of friends, and therefore taxing them will fill some short-term need without creating a lot of noise.

TGR: Speaking of seniors, at PDAC, you said that you don't agree with growth for growth's sake, and that you like to see acquisitions that enhance share value. Many of people we've interviewed recently project a time of mergers just ahead because some majors need to replenish their reserves. That sounds a lot like growth for growth's sake.

Rob McEwen: I do believe we're entering a period of increased M&A activity in the mining sector. The growth curves of most majors are flattening. They have to replace reserves and bolster their growth profiles to keep current multiples. They have the ability to make acquisitions now, because they've been benefiting from higher Gold Prices.

It is important to appreciate that the junior exploration companies have no revenue, no earnings until they put a discovery into production while the intermediate and senior producers have money coming in now that is building up in their treasuries, and this group also has greater access to capital. The intermediates and seniors have a definite advantage, which I expect they will start using soon.

One problem with M&A is the pursuit of growth for growth's sake, which very often leads to excessive dilution, due to paying high takeover premiums. You are usually better off owning shares in the target company rather than the company making the takeover.

As an investor all you have to do is look at the compound annual growth rates (CAGR) for share price of some of the big ones once they started making major acquisitions – Barrick Gold Corporation (NYSE/TSX:ABX), Goldcorp Inc. (NYSE:GG; TSX:G), Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU), Kinross Gold Corporation (TSX:K; NYSE:KGC), Newmont Mining Corporation (NYSE: NEM; TSX: NMC). Their share price growth rates have definitely slowed.

For instance, Barrick share price's CAGR was plus 50% from '85 to '94. But if you held it from '95 to the present you would have realized a disappointing 2% compound annual growth rate. You can get carried away fairly easily with M&A activity, once you get into the chase and premiums get ramped up. Existing shareholders of the acquiring company get diluted. That's why I suggest looking to the smaller explorers that are close to production and the junior producers with growing reserves, because those companies are likely to attract a premium in this market. I don't think many of the mining companies' management really care about growth per share. They might say it, but their actions haven't demonstrated it.

TGR: You've indicated that you like to buy under certain criteria – when there's been a market correction, where odds favor finding a large discovery because other large discoveries are nearby, or where technology has changed the game. If you're buying now, which of these criteria drives your investment these days?

Rob McEwen: At the moment I'm developing a couple of large purchases. I think US Gold Corp. (TSX:UXG, NYSE.A:UXG) will have a big silver mine in Mexico and I'm quite intrigued by some work Minera Andes (TSX:MAI: OTC:MNEAF) is doing in Argentina. At this point I'm inclined to put more money in these projects that I'm working on when we need to do financing, as opposed to stepping outside. I can just see a better return, personally.

TGR: Well stated. You bring up US Gold. Tell us why US Gold is one of the leading Gold Mining companies and a good opportunity for investors.

Rob McEwen: We have a large land package in Nevada next to Barrick's Cortez Hills Mine, which is a very large gold mine that should producing a million ounces this year. We're exploring for a similar Cortez Hills type deposit. In the interim, we have a preliminary economic assessment on one part of our property for a small gold mine that would provide 50,000 to 60,000 ounces of gold for six to seven years. The next step is to complete a feasibility study and expand the size of the deposit.

The real excitement has come from our Mexican properties, where we own about half a million acres. We started drilling on a target in November '08, and it's grown quickly. We'll have a resource estimate out by early July. It's a high-grade silver deposit that starts at surface and extends down to about 500 feet. I expect this discovery will become a low-cost open-pit mining high-grade, high-margin silver. It's gone from nothing to quite a large area – over 1.5 kilometers long and still growing.

We think within our half million acres, a couple of other areas have a chance of growing into deposits that could be mined. We have the largest exploration program being staged by a junior in Mexico right now. It's an $18 million program to do 100,000 meters of drilling. We're going at it very quickly. News on this property has been coming out every three weeks since the start of the year. It's quite exciting. We have money to go at a pretty aggressive pace for the next two years. I also like it because I think we can produce silver in the low cost.

TGR: What leads you to believe that?

Rob McEwen: A close model to what we believe we could have is Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS)'s Alamo Dorado silver mine, which is located several hundred miles away. While the geology is different, most other aspects are similar. It's a near-surface deposit mined by open pit methods, the strip ratio is low, the ore is milled and labor and fuel costs are expected to be comparable. They're doing about 5 million ounces of silver a year at a cost of about $5 an ounce. While we haven't completed all of our numbers, general indications are that we should be within that range plus or minus 20%. That's a really good start, and it wouldn't require huge amounts of capital to get up and running in the next two-and-a-half to three years.

At the end of March 31, 2010, US Gold had in excess of $33 million in cash and another $4 million in gold bullion. We believe gold bullion will go higher so rather than just sitting on cash and earning a paltry interest rate, we've bought some gold.

TGR: And you own 21% of the company. I like that – putting your money where your mouth is. You also mentioned earlier that you're developing some of your large properties and doing some financing. That didn't sound like US Gold.

Rob McEwen: Right. Minera Andes. It has a 49% interest in the San José Mine, a producing silver/gold mine in southern Argentina. I bought into this company because that area's geology looks an awful lot like Nevada's. It's located next door to a discovery where Andean Resources (TSX:AND, ASX:AND) has outlined 2.5 million ounces of gold. There are few places in the world like Southern Argentina from an exploration standpoint.. Amazingly, this area had not been explored until 20 years ago. Since then four mines have started, and one or two more mines are slated to go into production in the next couple of years. San José has just under 80 million ounces of silver and silver equivalent. By Dollar value, its production is about 50% silver, 50% gold.

TGR: What else is Minera Andes up to?

Rob McEwen: Minera Andes also has a large copper project with an inferred resource in excess of 11 billion pounds of copper, located in northern Argentina. It's a major copper project, larger than 83% of the undeveloped porphyry copper deposits in the world.

One way to look at Minera Andes is it large assets on a per share basis. So, behind every share is an inferred resource of 42 pounds of copper, one-seventh of an ounce of silver and silver equivalent and 5 cents in cash – and it's trading for under a Dollar. With copper at over $3 and silver close to $18, it's an interesting combination of assets. There are just a couple of issues that need to be worked out in that company but I like the scale of the assets. They're global.

TGR: Isn't Rubicon Minerals Corporation (NYSE.A:RBY; TSX:RMX) another junior you have a major investment in?

Rob McEwen: I am not part of management or on the board, but I do act in an advisory role and I do own 21% of Rubicon. When I left Goldcorp Inc. (NYSE:GG; TSX:G) and bought into US Gold, I thought I'd leave the rest of my money in Goldcorp, collect the monthly dividends and watch the share price zoom over $100. Unfortunately, the new management that I put in place went out and bought a number of projects, including Glamis Gold, for which they paid a 30% plus premium and issued 80% of the stock without a shareholder vote. After spending $1 million in legal fees trying to battle for a shareholder vote against the 22 lawyers Goldcorp hired to deny shareholders a vote, I decided it was time to sell my interest and look for other more promising investments.

Since then, I have made large investments in exploration companies when the market has corrected and when these companies needed money. My terms were few but specific: I'd offer input as to how they could build their companies but not serve on their Boards, I required a veto on major acquisitions, divestitures, joint ventures, and first right of refusal on future financings for a period of up to two years until I got to know the management better.

TGR: Why not be a director?

Rob McEwen: I consider some of the corporate governance issues are another tax on shareholders. They distract directors and management from building value per share on a sustainable basis. There's a lot of box checking. Did I do this? Did I do that? It's a large transfer of wealth from shareholders to lawyers, accountants and other advisory groups jumping into this feeding frenzy.

Rubicon has about $100 million in their treasury and a large land package in a very prolific gold area – Red Lake. They've had good exploration success. The stock's been under considerable pressure since their second financing last year, but I think they're pretty much through that now. They're positioning themselves underground to get a better shot at the structures they're drilling. These are high-grade, narrow structures and not all the holes hit. They're good geologists, have a great property, very well financed so no problems with money. It's just a matter of time. In Red Lake it pays to explore aggressive and be patient for the discovery.

TGR: Apparently you like the geology further north in South America, too.

Rob McEwen: Yes. Back in a much earlier time in earth's history, it is theorized that South America and Africa were part of the same land mass. The rocks that make up Africa's Gold Coast fit nicely into the rocks of the northern part of South America. They're the same rocks. Africa's Gold Coast has a long history of producing gold; the history of producing gold in what's called the Guiana Shield – in parts of Guyana, Venezuela, Suriname, French Guyana and northern Brazil – is spottier, but the similar geology seems to be over a large area. Guyana Goldfields went in there in 1996. Big land package. They're continuing to drill and get good results. They're getting close to 5 million ounces. I got to know Claude Lemasson, who's basically running the show there today – the operations, exploration and most of the marketing – when he ran Goldcorp's Red Lake Mine.

It's one of those candidates that you'd think at some point a larger company would pick it up. They'd want companies with growing reserves, the higher the grade the better. The larger the resource, the more attractive exploration company is to the senior companies.

TGR: To make it worth their while.

Rob McEwen: Yes. For instance, if Barrick's going through close to 8 million ounces a year, buying a company that has 5 million ounces doesn't even cover one year's production. They would have to look at a resource thinking it could grow to maybe 10 or 15 million ounces.

TGR: Switching gears completely, you have earned a reputation for being ahead of the curve in the mining industry. For instance, you were using 3D models in mining back in 2000. You put out the online challenge to find new resources. You've applied investment insights to what had been an industry totally focused on geology. What do you see ahead of the curve for mining now?

Rob McEwen: The industry needs to get more serious about making a smaller environmental impact. It has to look at nontraditional sources of energy, and take advantage of the solar, wind or hydroelectric resources. It has to move toward becoming almost invisible in terms of its environmental and visible impact. Granted that's pretty hard when you're digging a big hole, but it needs to do it.

The car industry has got knocked aside by people coming out of the computer industry who basically said, "We use lots of compact and portable batteries. Why don't we use that technology and create an electric car?" That's going to happen to mining. Someone is going to come along with smaller power sources, more efficient recoveries. They'll camouflage facilities so they disappear into the background. There's a responsibility to have a smaller footprint and I believe it will also improve the economics of mining.

TGR: Have you made any progress along the lines of leaving a smaller environmental footprint?

Rob McEwen: On the exploration front in Mexico, US Gold is using smaller drills and equipment to minimize the surface disturbance. Looking ahead in Argentina to a day when we will be producing copper in the high Andes, we have been looking into opportunities to reduce our dependence on diesel fuel with wind generators, solar and hydroelectric alternatives. It is very early days for us but that's our direction.

When I was running Goldcorp and we built our mine in Red Lake, we did some innovative thinking in terms of air circulation in the mine. Even though we kept pushing on it, most people told us there's a compromise. If you want to build the mine quickly, go with tried-and-true technology. If you want to test some of these other technologies, you're going to slow it down. We didn't want to slow it down, but as you mentioned, we put a 3D virtual reality lab on site, which was the first of any mine in the world. You could see the whole mine and all the infrastructure and the deposits and how it was going to be developed. It was a great tool for communicating among geologists, operations people and management people – who don't get close enough to the mine. Geologists say they can see in 3D, but I think they're the only people that can see in 3D.

TGR: Did you slow down production to implement these technologies?

Rob McEwen: We did a couple of things differently in a couple of areas, but in terms of large systems for air moving around and preheating it with some of our other equipment, we didn't do it to the degree we could have. Part of that was trying to get through the door as fast as we could. There's also a great reluctance in industries that are driven by engineers to use new technology.

TGR: Why?

Rob McEwen: If they're wrong, their career is over or certainly a pause button has been pushed. Investors view the industry as risky, but most people in the industry are very risk-averse – probably the same as in the auto industry and a lot of big organizations. Hierarchies are well developed and don't embrace change in a bear hug.

TGR: "Embrace change in a bear hug." That's good for a bumper sticker. Thank you for your time and your insights, Rob.

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