Jay Taylor: Cashing in on deflationary forces

Jay Taylor: We’re in a deflationary environment that policy makers are trying to overcome with inflation. That won’t work as long as people remain confident in the currency—but if there’s a loss of confidence in the currency, deflationary forces will give way to inflation. It might even lead to a hyperinflationary situation down the road. That’s the worst outcome, but I fear it could happen.

TGR: The government is pumping money into the system. We have a window before the dollar crashes. How long is that deflationary window going to stay open?

JT: It’s very difficult to say because what we’re talking about is a con job. You can’t predict when people are going to lose confidence in the currency or the establishment. We probably have six months to a year, if not longer. Keep in mind, you don’t have to create more money to cause the value of it to go down. In Iceland, for example, the currency lost 50% of its value in 24 hours without increasing the supply just because people said, “Oh gosh, we’re in trouble. I don’t want to own this. I want to own something that is tangible.” And they dumped it.

It’s impossible to say when that day will come for the dollar, but people need to be ready for it because when it occurs, it could happen with frightening rapidity.

TGR: What do you believe is going to happen next for gold?

JT: The chances are better than 50/50 that we’ve seen the bottom and we’re just meandering around and building a base for the next major leg up. It’s not hard for me to imagine gold exploding off the launch pad to hit new highs. The question is: How much higher than $1,900/ounce ($1,900/oz) will it go? I don’t have a strong opinion on that. It depends on how the economy goes and the psychology of the masses.

TGR: Will silver follow suit or chart its own course?

JT: It will follow suit, to a great extent, because it will take on more of a monetary component; currently much of its demand is still from industry. Silver and gold nearly always move in the same direction, but because silver is more undervalued than gold, it could have a much bigger move in percentage terms.

TGR: Do you see the market’s blindness to gold as one of the few bright spots in gold space in 2013?

JT: It is for investors who have money. A lot of the people I know in Vancouver in the junior sector are just flat-out broke. There are companies out there that have great projects that are not being recognized. In that regard, it’s very bullish. I’m having a hard time keeping myself from jumping into things sooner than I should because stocks are so cheap—and yet they get cheaper. Gold shares have been punished unmercifully. When this thing turns, there are going to be some major profits made in the gold sector.

TGR: In June you told us that you were seeking cash-flow positive, small-cap gold producers with strong exploration potential. Are those still the tenets of your investment thesis for companies that size?

JT: Yes, very much so. I still look for companies that have cash flow, that have lots of exploration potential, that can grow earnings over time, combined with higher real gold prices and larger production.

TGR: Which companies fit that mold?

JT: Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has done extremely well and is earning good profits.Allied Nevada Gold Corp. (ANV:TSX; ANV:NYSE.MKT) was selling at $40/share and is now below $4. The company will be able to make money with the sulfide portion of its deposit, which is gigantic. It’s low grade, but I remain confident. It’s been making money with its oxides.

TGR: What’s the next catalyst for Allied Nevada Gold after a share price drop like that?

JT: Allied Nevada is developing its project. The company is fairly well cashed up and continues to improve its oxide production. It scaled back a bit from earlier targets, but it’s still on track to move forward on its sulfides. The major driver would be an increase in the gold price, but at less than $4/share, this is a good speculation.

I also like Dynacor Gold Mines Inc. (DNG:TSX), which has a different model. The company processes ore from licensed, small mines in Peru; there’s a huge market for that. There are a lot of very small, high-grade miners. It’s been turning out nice profits and growing nicely.

Dynacor also has its own deposit, Tumipampa in Peru, which has a high-grade underground vein system over the top of a copper-gold skarn target that has the potential to be massive.

The company has solid cash flows. It hasn’t had to issue shares, so dilution has been held down to less than 40 million shares.

OceanaGold Corp. (OGC:TSX; OGC:ASX) just reported nice profits and opened up a major gold-copper project in the Philippines, Didipio, that has reduced its overall cost of gold production very dramatically.

I still like Sandstorm Gold Ltd. (SSL:TSX), a gold streaming company, that reported a loss in the last quarter related to accounting issues not central to its business. It still had strong operating profits.

I also like Mandalay Resources Corp. (MND:TSX).

TGR: Mandalay’s Costerfield and Cerro Bayo deposits have gold and silver. Oceana has gold and copper. Do you like the multimetal producers?

JT: As a goldbug, I’m concerned about a major collapse in the economy sending the prices of copper and other base metals down. I look at it case by case and project by project.

TGR: In the November edition of Hotlines, you wrote, “When the real price of gold explodes as it historically does with credit implosions, the stocks that may seem like the riskiest in the lot, and as such sell at very low prices, have much greater potential in percentage terms.” Do small-cap gold equities have greater leverage to the gold price?

JT: I wouldn’t limit it to nonproducers. There are producers that I didn’t name earlier, like San Gold Corp. (SGR:TSX.V), Osisko Mining Corp. (OSK:TSX) and Petaquilla Minerals Ltd. (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE), that could benefit very dramatically. They provide a better leverage play on gold, but exploration companies that have the goods also will be leveraged to the price of gold.

When the real price of gold rises, you get a huge rise in the profitability of gold mining projects. The opportunity for a $4 stock like Allied Nevada to give you a big percentage gain is better than a $30 stock like Agnico-Eagle. The opportunity for San Gold to give you a bigger gain than any of those companies is better because it’s a bigger leverage play on the price of gold, and on the real price of gold. It’s the real price of gold that matters in mining. It’s not the nominal price.

TGR: Do those big companies, like Agnico-Eagle, act as the anchor in your portfolio?

JT: I build my personal portfolio around the producers and a couple of project generators that, even though their share prices have gotten clocked like everybody else’s, haven’t had to go out and issue huge numbers of shares to keep the lights on. I prefer project generators as a category. A fair number of companies out there are promising. When this market turns around and when the real price of gold rises, the big guys are going to earn big profits and then they’ll start looking down the food chain at the companies they might pick up to increase and continue production. There will be a big percentage gain for the more marginal companies that are in production.

TGR: Let’s talk about the other end of your portfolio. What are the exploration plays that you’re following?

JT: Columbus Gold Corp. (CGT:TSX.V) is one that I really love. I like it even more since it recently did a deal with Nord Gold N.V. (NORD:LSE), a Russian company owned largely by a billionaire Russian who made his fortune in the iron ore business.

Nord Gold has been aggressively growing its production. It’s getting close to being among the top 20 gold producers in the world. It acquired 50.01% of Columbus’ Paul Isnard project in French Guiana. The project has about 5.37 million ounces (5.37 Moz) of gold, with lots of exploration potential beyond that. Nord Gold can really get the job done, move this project along and put it into production.

The other thing I like about the deal with Nord Gold is that the least Columbus can own in the project if it doesn’t put any more money in after feasibility is 25%. The deal is that Nord Gold has to spend everything to take it into bankable feasibility. From that point on, Columbus can spend its 49.9% to stay at that level or it can get taken down to 25%, but not below that.

This could be a real big winner. No one is paying any attention to it now because no one is paying any attention to any of these companies, but Columbus has great upside potential when this market wakes up.

TGR: What other companies have upside potential?

JT: Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) is worth looking at. The company has about 10 Moz gold equivalent—although that number will probably increase soon because of drilling on its silver-gold San Miguel project in Mexico and the Sleeper mine in Nevada. Those two projects are substantial in size and will likely attract a major.

In addition to having two outstanding projects, Paramount has some real deep pockets behind it—billionaire goldbug Alfred D. Friedberg, who is committed to seeing this thing through.

TGR: Are Sleeper and San Miguel company-maker assets?

JT: Either of them could be. However, it’s more likely both multimillion-ounce deposits will be taken over by a household name.

Let me also tell you about Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK), which is more of a silver producer. The company is in Argentina, which is not a favored place to do business these days, but it has a project with a silver equivalent of just less than 100 billion ounces, with enormous exploration potential. It could be much bigger. The stock is selling for pennies, and it’s just a speculation, but I think it has the goods. Argentina isn’t the worst place to do business, and if people warm up to that market, Golden Arrow could be a real big winner as well.

And I should mention a real favorite of mine—GoldQuest Mining Corp. (GQC:TSX.V). It just announced a 3.2 Moz resource in the Dominican Republic. I like that the executive chairman, Bill Fisher, and Felix Mercedes, the general manager in the Dominican Republic, previously got a copper-gold deposit in that country into production. They have a good chance of moving this into production, and there’s still a lot of upside exploration potential as well.

TGR: They also seem to be doing things the right way with the environment and best practices.

JT: Absolutely. Bill Fisher is an above-board guy if ever there was one. He’s an honest guy, he works hard and he treats stakeholders very fairly. He’s a model citizen in this industry.

TGR: The end of 2013 is around the corner—not soon enough for some. What are you looking forward to in 2014?

JT: Well, I can sum up 2013 in one word—horrible. But if you’ve been able to squirrel away some cash, this year has provided great opportunities.

We’ve had 10 years of rising gold prices, so 2013 will be the first year with a pullback in a cyclical bear market within a secular bull. It’s very natural. If you compare this to the last great bull market, when gold went from $200 to $100 to $850/oz, the same kind of a percentage move could very well be in place in 2014. We could see a similar explosion in the gold price.

Deflationary implosion doesn’t bother me because I’m more favorably disposed toward gold in credit deflation such as what we had in the 1930s. It was very bullish for the gold mining sector. Catalysts for triggering an explosion in the gold price could be a loss of confidence in the mainstream assets: the dollar, Wall Street, a collapse of the London Bullion Market Association (LBMA) or the COMEX.

The speculative games that are played by the bullion banks are leading to some big problems. A default on either of those exchanges could shake the confidence of the other markets and play into the hands of China and other BRIC countries that are squirreling away as much gold as they can get at these cheap prices from the West. Those countries have made no bones about wanting to see the dollar replaced as the world’s reserve currency.

That fall could take place fairly soon in 2014. People that have cash now should look for these gold mining shares at bargain basement prices that we talked about today. I also still believe that people should have physical gold and silver as their core asset. That’s the best advice I could give: own gold and silver coins and then the gold and silver shares.

TGR: I’ve enjoyed speaking with you. Thanks for your time.

As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay Taylor’s interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. He began publishing North American Gold Mining Stocks in 1981. In 1997, he decided to pursue his avocation as a new full-time career—including publication of his weekly Gold, Energy & Tech Stocks newsletter. He also has a radio program, “Turning Hard Times into Good Times.”

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