Source: Barbara Templeton and Karen Roche of The Gold Report 5/26/10

http://www.theaureport.com/pub/na/6390

Replacing most of Europe’s colorful notes and various coins less than a decade ago, the euro is on the brink of extinction, according to Trader Tracks’ Roger Wiegand, sharing news and views of Euroland’s critical condition with Gold Report readers in this exclusive interview. Roger says the euro at $1.20 is the “line in the sand where big trouble will start. . .and that’s dangerously close.” On the other side of the world, he sees China doing well now, but doesn’t pin his hopes on China as the engine for global economic growth as so many others do. In fact, he says things there are “fraying a bit on the edges.” So, is there a white horse waiting in the wings to lead the world back to economic good health? Read on. . .

The Gold Report: You put a rather provocative quotation in a recent Trader Tracks. It says: “The destruction of a currency does not follow a straight, predictable course. . .like a cancer, the disease breaks out anew because inflation cannot be cured through monetary and fiscal measures alone; it requires a fundamental change in social and political attitudes and this change usually does not occur until complete monetary chaos forces a change.” The quotation credit reads, “G. Carl Wiegand, ‘The Great Inflation: Germany,’ 1923.” Two questions: First, is Carl Wiegand among your ancestors?

Roger Wiegand: He’s not. I found that particular quote in a book, Golden Insights. It was written by James U. Blanchard III out of his Gold Newsletter of many years ago. He’d put together a collection of his favorite quotes, and that particular quote was among them. I thought it intriguing that the quotation came from someone with my surname, and it was a very interesting quote.

TGR: Very interesting indeed, and it leads right into the second question: What do you think of Carl Wiegand’s observation in light of the euro’s troubles and what’s happening in the European Union now?

RW: I think the statement was very appropriate for what’s going on in Europe today. We’ve been doing a lot of writing on this lately, and based on latest information Germany has become the engine of Europe. Its share of the huge Euroland rescue package will come to between $154 billion and $185 billion in loan guarantees. It’s going to be mostly German money and savings that was going to have to do it—their credit.

Chopper Ben (Federal Reserve Chairman Ben Bernanke), Timmy the G (Treasury Secretary Timothy F. Geithner) and the New York banksters turned up the heat and the German Parliament approved that ridiculous package in mid-May, contrary to Chancellor Angela Merkel’s urging lawmakers to reject the whole deal. They think they can blunder through to help the euro. They cannot. Germany goes down with the rest. I think the German people are very angry about this. They don’t want to be Europe’s paymaster.

I said back in 2003 that Euroland (i.e., the European Union); the European Central Bank and the euro would fail. Now it’s coming true. It’s in writing, seven years ago. I said that because I thought it was ridiculous idea for a group of countries with major cultural differences and languages, disparate economies that don’t match up at all, with their abilities to buy and sell and obtain credit being so different. There was no way to achieve parity to reach a point where they could participate as equal members. Germany is expected to save all its neighbors and it cannot.

TGR: Do you expect to see the return of guilders and schillings, pesetas, francs and marks as one outcome from all of this?

RW: Yep. Absolutely. It won’t happen overnight. It would be too much of a big changeover at once. There may be a “mini-euro,” a higher-quality currency probably established by Germany, running alongside the current euro. I contend that Germany will be the first to bail out of the European Union and abandon the euro. I have said numerous times that the German mark probably would come back, run in parallel with the euro, and eventually the euro would just be cancelled out as a currency in Germany and they would use the old marks.

TGR: And then other former European currencies might follow?

RW: They very well could. The survivors who still remain in the European Central Bank with the euro may, in fact, try to keep it together. But without the German credit, and with all the problems they’re going to face, I really don’t understand how it can keep going. The debt is just overwhelming. Basically, Italy, Portugal, Spain and Greece are pretty much broke; they have no hope of paying their debt. To my understanding, Spain’s debts are 24 times larger than Greece’s. That’s a pretty big mountain to climb. So yes, I suspect that what would happen is if Germany drops out and they go back to their own old currency, the rest of the countries will, too.

TGR: Despite the vote in the German parliament, do you project that Greece and potentially Spain and Portugal will ultimately default on their sovereign debts?

RW: I think they will. There’s no way Greece can pay anything back. They have nothing going for them. They have a tourism industry, but very little manufacturing. I saw a comment the other day that said Greece hadn’t balanced a budget since 1893 or 1898. How in the world they managed that is beyond me.

TGR: So, suppose Greece defaults. And then assume, with Spain and Portugal teetering on the edge, the euro then plummets dramatically unless they start to inflate their way out of it. At what point does everyone abandon the euro and move to safer currencies? Say the U.S. dollar?

RW: There are two big numbers to watch. First would be the euro at $1.20, and that’s dangerously close. Everybody considers $1.20 the line in the sand where big trouble will start; it’s a major, major support number. The other number would be when the euro is at parity with the U.S. dollar, which would be 20 points lower. Keep in mind that one point with the euro is $1,250 the same as the Swiss franc, in currency trading. So, those are the key numbers.

TGR: What happens if the euro goes below that $1.20?

RW: Everything starts coming apart. Keep in mind, too, the euro and the U.S. dollar are supposedly the two reserve currencies of the world, with the U.S. dollar being dominant at about 80% to 85% of all reserves. The euro has a much smaller position, but it is a pretty big deal. Not all of the European population lives in Euroland, of course, and the Swiss and the Brits (the UK) still use francs and sterling—but also remember that Europe has 850 million people in contrast to 330 million in the U.S.

The Swiss franc, incidentally, trades almost point-for-point with the euro because Eurolanders surround the Swiss. The Swiss don’t want a large disparity between the two currencies to mess up export/import, in comparing prices, and in a variety of domestic things.

TGR: Speaking of import/export, let’s turn for a few minutes to the other side of the world. Many people have pinned hopes on China as the savior that would lead us from the depths of recession back into the promised land of global growth. You’re commentaries have been suggesting China’s bubble is about to burst and dash these hopes. What signals do you see that lead to your conclusion?

RW: China’s GDP is in a race to the moon, running between 8% and 11%, which is beyond the pale. It’s just too far out. It’s growing too fast. A major sell-off in the SSE—the Shanghai Composite Index—was one warning sign. It did come back, but it told us that things are fraying a bit on the edges.

Then, in the first quarter of 2010, Hong Kong real estate went up 23%–23% in four months, and it’s even higher now. I spent 25 years in real estate, and I know that is not sustainable. You can’t have prices rising that quickly. They’ve got a bubble; there’s no question about it. Some of the prices they’re paying for properties are just staggering. The last time we saw that was in 1989 in Japan, and we know what happened in Japan in 1989. The market just crashed.

As you know, the Chinese government is a command-and-control operation. Actually, they’ve been doing a pretty good job, but it’s so large and they’re a fairly new at being capitalists (along with being communists). To cool down the real estate situation, they’ve been tightening credit; no longer offering financing for third homes, for instance. They’re requiring more money on down payments for first and second homes.

Another factor that is making it difficult for the Chinese economy is the fact that the United States has broken down to the extent that it has. American consumers are no longer using homes as ATMs for the purchase of Chinese products. Not so long ago, 25% of all exports leaving China went to the U.S. A good portion of that is gone now.

Many have said that organic growth within China could sustain its increasing GDP, because 100 Chinese cities each have populations of more than a million people. That’s true, but how high is high? Trees don’t grow to the sky.

I am not the only one anticipating problems in China, either. Earlier this month in a Bloomberg TV interview in Hong Kong, Gloom, Boom & Doom Report publisher Marc Faber said that it’s likely to crash sometime in the next nine to 12 months.

TGR: If China’s growth has in fact peaked—and is about to turn south—is anyone waiting in the wings to lead the world back toward global good health?

RW: Three countries that I can see that are the strongest as of this date are Canada, Germany and China.

TGR: Didn’t we just rule China out?

RW: Major market shifts can take longer than we expect. China is doing exceedingly well right now. They’ve got a tremendous amount of cash, which they’re trying to offload, the biggest portion being U.S. dollars and U.S. bonds. They’re desperately trying to get rid of that paper and trade for hard goods. That would be crude oil, oil-related service companies, stocks in good companies, properties, copper mines, gold mines, silver mines and base metal mines.

They’re shopping in Venezuela for oil and oil services. They’ve got three big new oil-related operations in Nigeria. They’ve been buying oil properties in Libya. They’ve made some deals in Peru and Chile, and they’re working on a couple more in Australia. The list goes on.

TGR: Okay. On to Germany and Canada.

RW: Germany’s got a big overload and we know what their problems are. We just reviewed that. As for Canada, the major thing is that they avoided getting involved in a lot of the risky trading and debt that their American counterparts did. Canada has five large banks; that’s pretty much it, and they were prevented by law and rule from engaging in that kind of trading in derivatives. It kept them out of trouble, and they’re in pretty good shape.

TGR: So Canada may be the knight on the white horse.

RW: That’s the way I view it, and that’s what we’ve been talking about in our letter. In our speeches in Canada at the shows and conferences, we’ve said numerous times that the Canadian economy is the best of all. The banks are in the best condition. The currency is very sound and rising. Canada’s primary negative is a manufacturing slowdown in Ontario and Quebec. This is minor, though, compared to the great things Canada has going for it in commodity-related markets and finance.

TGR: Moving south, we’re hearing and reading that the employment situation in the U.S. is improving, but you have a different view. In Trader Tracks, you’ve indicated a current jobless rate at 24% and forecast it rising to 35% within three years. What makes your outlook so grim?

RW: Why am I grim and at odds with the happy Pollyanna people in Washington? We have two different sets of numbers. Those numbers pretty much track mine at John Williams’ shadowstats.com—and he worked in the government and consequently worked on that data. I follow a simple rule of thumb: take the official unemployment number and multiply times two. That pretty much matches up with what John says. In other words, if Washington says that nationwide unemployment is at 9.9%, multiply times two and round it up to 20%. John’s report a week or so ago was about 22%.

TGR: Okay, it’s not the facts that are changing so much as the figures that go with the facts.

RW: That’s correct.

TGR: You’ve also said you expect major market mayhem before the end of July. Could you describe more specifically what you see, and tell us why?

RW: I am not alone in my forecast. Many others are saying the same thing. Stocks are up about 80% from March of 2009. It’s gotten very peaky. The markets have normal technical shifts. The Lehman meltdown in 2008 hit the market so hard that for 30 to 60 days, nothing seemed to behave normally on the trading cycles and calendar. I expected it to self-correct, but it has not. That period just fell off the trading calendar. Consequently, the old “sell in May and go away” shifted to July.

Our next short-term call is that the big funds will have pushed the market up, sold into strength, taken their profits and be out of the way by Memorial Day weekend. Then the selling begins. It will continue at a very heavy rate probably for one to two months. Six negative events are converging this month and next. First is housing. We can expect another three to five years of falling prices. Some Alt-A loans—not subprime but those based on slightly blemished credits—are going to fail and foreclose. One report said there will be two million of these.

Number two: commercial real estate has hit the wall. Vacancies are climbing. A few months ago, General Growth Properties, the owner of 158 malls, filed for bankruptcy for about $28 billion. That’s in a breakup in court right now. Good shopping centers in the U.S. are in trouble. I have never seen a big mall close, but some people have told me they have seen two of them. That’s a major event in my view. So, commercial real estate, REITs, and the life insurance companies that gave them all the money will take a big hit as related group.

TGR: A lot of shoes dropping here.

RW: We’re just at number three, the auto business. The only thing that propped it up was all the free cash from the government, “cash for clunkers” and some of the other programs. The spring auto sales that will be reported after Memorial Day won’t be good.

The next hit’s coming when the banks have to report about what’s happening with credit cards on their financial statements. Look for $40 billion in credit card debt to be written off in June and July. That’s not my forecast; I think it may have come from prominent banking analyst Meredith Whitney. That’s number four.

That brings us to number five. Remember the TARP plan, which bailed out the big New York banks? All these banks have done was to gather in cash from the taxpayers, rearrange the balance sheets—the deck chairs on the Titanic—and then march forward saying everything was super duper. And it’s not. I saw Meredith Whitney on a TV show a couple of weeks ago, saying that the bad loans they’re still holding are four times worse than what got them in trouble the last time. That does not bode well.

And finally, number six was the big surprise—what’s going on in Euroland.

TGR: Yikes. Harmonic convergence turned upside down.

RW: Yes. Arch Crawford—publisher of Crawford Perspectives and Wall Street’s best-known astrologer, according to Barron’s—has mentioned the date of July 26. He said it’s the worst day astrologically and technologically that he can see on charts in 10,000 years. I asked him at a conference how bad that was and he said, “It’s so bad I can’t imagine what could happen”—you know, World War III, Iran invasion, complete systemic economic crash, or whatever. I am not of the view that something like that will happen, although it could. We don’t know. I just think we’ll have a long, slow sink in the mud, and this is going to be a very hard recession-depression that will continue for another three to five years. So, it’s going to be tough, but keep in mind the fact that in the 1930s, as bad as it was, three out of four people still had a job—so 75% were employed.

TGR: A glimmer of hope. Let’s talk about some companies. Your latest Trader Tracks lists a number of companies in the news lately for one reason or another, and our readers would certainly appreciate your viewpoint on some of the developments they’ve read about. We saw a broad spectrum of companies represented in there—from rare earths to precious metals. Can you talk about some of the companies you’re following?

RW: Sure. I find Rare Element Resources Ltd. (TSX.V:RES) attractive because they’re safely located in the United States; they’ve got some rich deposits; in their reserves they have the basic rare elements the U.S. defense industry needs to operate. They must have those minerals. As you know, 90% of those kinds of minerals are located in China. The U.S. Department of Defense is probably a little uneasy about that. There really aren’t that many companies for that particular field, but we find that Rare Element is one of the top selections. And we also like them simply because of where they are, what they have, and what’s moving forward in their business plan.

TGR: It was clear in Trader Tracks that you were pretty stoked about Newmont Mining Corporation (NYSE:NEM) being involved with Bear Lodge in Wyoming, but within the last couple of weeks, Rare Element announced that Newmont won’t be exercising its option on a 65% interest in the gold and base metals at the Sundance Venture on that property. Also, all of Newmont’s 327 wholly owned claims outside the venture will transfer to Rare Element. What’s the significance of this development, in your view?

RW: I suspect the project turned out to be too small for Newmont. Some of these really big operators—Barrick Gold Corporation (NYSE:ABX; TSX:ABX), AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD), BHP Billiton Limited (NYSE:BHP; PKSHEETS:BHPLF), Rio Tinto (LSE:RIO; NYSE:RTP; AUS:RIO), Newmont, etc.—have to operate on such a scale that it’s difficult for them to find a project with the reserves necessary to really warrant the large investment they put in up front. They’d prefer to be involved with projects with sufficient reserves to pay out for 40 or 50 years. I’m not sure, but with the Rare Element project, I think Newmont was just looking for a bigger deal. You know, they go worldwide looking for bigger deals.

TGR: Turning to silver briefly . . . any juniors that you’ve got an eye on?

RW: We like First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). Its income keeps going straight up in a steady line and they keep finding more and more silver. It’s among the companies I call junior intermediates. They have done well; they’re good managers. It’s easy to cut through reserves pretty quickly, so one thing they have to do with these mines when they start to run and operate at higher volumes is to keep the reserves coming. First Majestic has done well, in that they keep adding to reserves. So, we like First Majestic.

TGR: How about in the gold arena?

RW: There’s Eastmain Resources Inc. (TSX:ER). We know the management; we know the geologists; we know what they’re doing. One thing I’d emphasize about Eastmain is that they’re in Quebec, and that’s probably one of the best mining-friendly locations anywhere in the world. They give them tax breaks. They have trained employees; they’ve got geologists. They have shipping; they’ve got rail. They have all the ingredients to run a good mine, and if you’ve got management as good as we see in Eastmain, expect their drilling program to be successful. We think they’re going to find some fine deposits, and considering the infrastructure in Quebec—water, power grid, roads and so on—things bode well for the stock.

TGR: In light of what you said about Quebec, any other companies there you’d like to mention?

RW: Clifton Star Resources Inc. (TSX.V:CFO) has done exceedingly well. We have been in and out of its stock several times, and it’s been very good to us—numbers in the neighborhood of 30% to 40%, 70%, maybe 140%. A big shareholder sold out recently, taking huge profits, but the stock is solid. They’ve got a fantastic partner; they’re exceedingly well capitalized; they’ve got $4 million to $5 million worth of ore mined, in a pile on the ground. It just has to be reprocessed. So, it’s a good opportunity; it’s a good company.

TGR: Any other comments on companies in good locations?

RW: Pediment Gold Corp. (TSX:PEZ; OTCBB:PEZGF; FSE:P5E) comes to mind, although at this point I have to say at this point I’m not up to snuff on Pediment’s news. We know the management, though, and I am going to meet with their president and geologist to get caught up on the latest things when we’re in Vancouver at the June 6-7 conference. Again, though, this is a company with smart management in a good location. They’re operating in a rather mountainous region, which makes it more expensive and difficult. But these are smart people. They know what they’re doing, and they’ve got the capital. We think they’re going to do quite well.

TGR: That’s the World Resource Investment Conference?

RW: Yes. In fact, I’m scheduled for a keynote speech on the second day, covering several topics—taxes, devaluation and the divergence between gold and silver and the shift of precious metal shares away from the general stock market. I’m also running a short workshop on my business, Trader Tracks. And finally, I’ll be delivering a speech that isn’t on the agenda, speaking on behalf of Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR), which is another one of the companies I follow.

TGR: Have a great time in Vancouver, Roger, and as always, thanks so much for your thought-provoking commentary.

Roger Wiegand—aka Traderrog—produces Trader Tracks to provide investors with short-term buy and sell recommendations and give them insights into political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. After 25 years in real estate, Roger has devoted intensive research time to the precious metals, currency, energy and financial market for more than 18 years now. His varied background—which also includes graphics, writing, editing, sales, marketing, commercial printing, consulting and trading—helps shape the view he shares. In addition to Trader Tracks, Roger pounds out a weekly “Rog’s Corner-After The Bell” column for Jay Taylor’s Gold, Energy & Tech Stocks newsletter. For other essays, visit websites such as Kitco and, of course, The Gold Report. Roger is a frequent speaker at The Cambridge House Resource Conferences, the latest in the string being the World Resource Investment Conference at Vancouver coming up June 6–7. Visit Roger and Jay’s website at webeatthestreet.com. Tel: 718-457-1426 Claudio Bassi, Manager cbassi@miningstocks.com.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Barbara Templeton and Karen Roche of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: First Majestic, Pediment, Eastmain and Rare Element.
3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com

Resource companies that discover and develop deposits come with enormous upside potential, but after decades’ worth of prospectors poking and prodding, drilling and digging all over the planet, lucrative finds prove few and far between. In this exclusive Gold Report interview, Resource Opportunities editor and publisher Lawrence Roulston—whose picks tend to pay off handsomely— finding large gains without taking on discovery risk. He also weighs in on China’s importance in the mining and metals space, and talks about some prospective properties in the emerging metals areas of Guyana and the Philippines.

The Gold Report: Lawrence, in the January issue of your newsletter, Resource Opportunities, you seem optimistically cautious or cautiously optimistic about a recovery in North America. This was striking because it’s contrary to what many of your peers have been saying about the dollar devaluing, increased unemployment and Federal deficit levels soaring higher and higher. They’re projecting inflation if not hyperinflation. What are you seeing that accounts for your differing viewpoint?

Lawrence Roulston: Largely I agree with the other gold newsletters with regard to comments on the current state of affairs in the United States. Where we differ is in the implications of the situation and what it might look like going forward. Although I think the worst is over, that’s not to belittle the challenges. The enormous budget deficit, the incredibly high levels of debt for the government and for consumers, are terrifying. Unemployment is at a very high level, but I think it’s stabilized and probably will come down. The economy has shown some pretty significant growth over the last quarter.

Certainly the situation remains very difficult, and it is not sustainable. But that doesn’t necessarily imply that the U.S. economy will stop growing or revert back into a recession. There is effectively a mechanism in place that is taking the pressure off and that mechanism is the value of the U.S. dollar. The dollar has lost about half of its value relative to the Euro over the last five years. If your portfolio and assets are valued in dollar terms and are the same as they were five years ago, you’ve actually lost half the value because the dollar is worth half of what it was.

As that process continues, it takes the pressure off and effectively serves as a self-balancing mechanism that will prevent a cataclysm. Certainly it does not prevent problems. Things measured in dollar terms will become more expensive. I think we’ll just see a continuation of inflation—not hyperinflation—and the U.S. economy muddling along.

TGR: Is the decline in the dollar against the Euro somehow a function of the increasing volume of the U.S. money supply, or more just a balancing between the values of the currencies?

LR: It’s the net effect of all of the factors. The amount of money put into circulation for bailout programs and stimulus packages and all the rest of it is frightening and will definitely lead to further devaluation in the dollar along the lines of what we’ve been seeing. In fact, that process probably will accelerate.

TGR: And that’s good for gold.

LR: Obviously, when people decide they like gold and want to invest in it, finding signs of inflation is very positive for the gold market. I think we’re going to see a long-term continuing uptrend in the gold market and I think we’re going to see increasing inflation. But I would disagree with the pace at which that’s going to happen. I think it’s probably going to look a lot like it has over the last five years, not suddenly going higher.

TGR: You’ve also discussed China fairly extensively in your newsletter. China’s exports have gone down as consumption has declined in the developed countries, but that excess capacity has been filled with internal consumption. There’s a lot of speculation on whether that internal consumption is sustainable. Do you think China needs the developed countries to resume strong growth to approach double-digit growth in its own economy?

LR: I think people lose track of the fact that China’s exports to the United States or to Western Europe have not stopped. China is still exporting a lot of materials to every part of the world. The United States is buying roughly as much now as a year ago. Even though it hasn’t been growing, the U.S. economy didn’t stop functioning. True, China’s exports dropped considerably and are beginning to recover now, but the internal growth has been astounding.

If you spend some time in the big cities in China—and remember China has 100 cities with more than a million people—you’ll see that every one of those cities is going through remarkable expansion: New offices and factories and houses and apartments and schools and every other element.

Last year China became the world’s largest market for automobiles and that fact, I think, surprises a lot of people too. It’s hard to visualize until you go there. The major cities are crowded with cars. Traffic is becoming a serious problem. Consumption there is very real and it’s spreading. Once some people accumulate the kind of wealth that they can display in the form of cars and big houses and so on, everybody else wants it. Right now about 300 million people in China are middle class, with more or less the same purchasing power as people in North America. But another billion people in China are seeing their neighbors becoming wealthy and want to get on board.

China’s economy is growing at 10% right now and the government is stepping in already to put in place measures to prevent the growth rate from going higher. So is China’s economic growth sustainable? I think the more germane question would be how they restrain growth as the Chinese people become more and more consumer-oriented.

TGR: Louis James, who is with the Casey Research, suggests that China’s double-digit growth was based on the government drawing from its reserves to stimulate the economy.

LR: There’s no question that last year the Chinese government stimulus was an important element in kick-starting growth and played an important part in the expansion of the consumer market. However, looking forward it’s very important to understand that the stimulus spending in China builds infrastructure—roads, rails, ports, highways all over the country. All of that infrastructure spending is putting the country in a stronger position to further increase its manufacturing and exporting capabilities.

So at the same time that the U.S. economy has received stimulus, it’s gone to stop General Motors and Chrysler from going bankrupt and to prop up failing banks, but there was very little, if any, concrete action in terms of adding anything sustainable to the economy that will provide benefits in the future. There is talk about expanding wind generation and other measures that might yield a benefit some day if they ever get implemented. But meanwhile, China worked very quickly to set up and accelerate infrastructure development projects. Those are going to pay off big time.

And putting the stimulus into perspective, China had something in the order of $400 billion of stimulus spending last year; in contrast, the U.S. package was in the multiple trillions.

As stimulus spending tapers off in China, I believe other elements of the economy will continue to expand. Internal consumption is kicking off in a big way and that has a huge multiplier effect. So I’m very confident from first-hand observations and from everything I read and see and hear from other people I talk to that this is a long-term process. As I said, the government is already implementing measures to slow down the pace of growth, so it’s not that they’re still pushing to make it happen.

TGR: Another interesting observation Louis made was that the Chinese government incurred no debt in its $400 billion infusion, whereas the U.S. government is 100% debt-driven. That leaves long-term implications in terms of paying down that debt.

LR: That’s another very important point, absolutely. Speaking of debt, too, another important point to bear in mind is how the residential real estate market works in China. Although there are concerns in Hong Kong, Shanghai and Beijing, for example, about home prices getting so high that a housing bubble forms, they are nowhere near that. The average house purchase in China involves 50% debt and 50% equity, so half of the value of those houses is in the form of equity. As you know, in the United States, many purchases were funded 100%—or nearly 100%—with debt.

TGR: How about India? How do you view developments there?

LR: From all indications, India—which has a billion people—is on the same path as China; several years behind but moving in the direction of catching up. Despite bureaucratic snarls, things are beginning to happen in India and the economy is moving forward. Certainly, there’s a lot of wealth there as well.

I was talking to somebody just recently who toured India specifically to explore whether the consumer-oriented society in India was about to take off. His conclusion is an emphatic yes, there are enough wealthy people that others in the country are striving to achieve that same level.

In terms of the metals markets, the implication of all of this in my mind is that, especially when these countries are at the development stage, each unit of GDP is much more intensive in its use of metals than mature economies such as those in the U.S. and Canada. In other words, achieving the same amount of economic activity in North America uses less metal than that amount of activity would in China, in particular, where the focus is on development of infrastructure.

Too many economists, commentators and newsletter writers based in the United States put blinders on, figuring that because the U.S. economy is slow, the rest of the world is slow. That’s just simply not the case. With regard to base metals, other parts of the world are far more important drivers in the base metal markets than the United States is. In fact, China is by far the largest consumer of metals of any country in the world. Will China continue to use metals? Absolutely. Will India catch up to that level? Absolutely. That’s how I see it.

TGR: In many cases, metals prices have gone up dramatically. Has growth in Asia already been priced in or is there more upside on the horizon?

LR: Let’s step back a moment. Over the last year North America and Europe have muddled along at zero growth or very slow growth. During that period, China grew at between 6% and 8% and yet the copper price went from a low of $1.25 to well over $3. I’m not betting on a higher copper price, but you can certainly see the potential when it more than doubled while the Western world was largely stagnant. With China now growing faster than last year and the Western world just beginning to get back onto a road to recovery, the upside potential in copper or any of the base metal markets is tremendous.

TGR: You see tremendous upside potential but won’t bet on higher copper prices?

LR: If a company makes sense at $3 copper, it’s going to look phenomenal at $4 or $5 or $6 copper. Those prices might come to pass, but they aren’t part of my planning or analysis. I feel the same way about gold. I do not use higher metal prices in evaluating companies. Gains will come and the value of the companies will increase as they advance exploration projects toward production. That’s always been the basis for our analysis.

Clearly we’ve benefited from higher prices, and to the extent that the metal prices rise in the future, we’ll see that same benefit. But just to keep things in perspective, over the last nine years the gold price has tripled while returns on companies in our newsletter have averaged 50% to 100% a year. Clearly the metal prices contributed, but a much larger component of the gains came through advancements by the companies themselves.

TGR: If we have another substantial leg down in the markets, or if capital markets seize up again, to what extent would some of the junior companies that you focus on end up on the short end of the stick because they won’t be able to get the money they need to develop their projects?

LR: I really don’t believe that’s going to happen. A more realistic scenario is for the American economy to just muddle along—slow growth, but slightly positive. As we discussed, at the same time the rest of the world, especially Asia, is taking on a life of its own. We didn’t talk about the mining industry in China, though. It has become very, very significant and a lot of the takeovers of juniors over the last couple of years have actually been by mid-sized Chinese companies. As long as there’s growth in China, these companies will want to expand and provide supplies for China. So, even if there are problems in the Western world, including credit problems, the Chinese mining companies will be looking to acquire new deposits and junior companies will become a more and more important element of that over time.

TGR: Are you describing a scenario in which China becomes the financial market for metals juniors?

LR: It’s very important to differentiate between the government and the hundreds of publicly traded companies based in China. In some cases they’re partly owned by the government, but in every way, they act as private enterprises. Those companies are definitely on the prowl. I see evidence of them in every part of the world—Africa, Canada, South America. They will become more and more active and a bigger factor in terms of junior takeovers.

TGR: So the strategy you’re pursuing could be really wonderful if the metals markets continue up. These Chinese miners competing with other capital should make stocks respond more positively.

LR: Absolutely. And getting new supplies of metals is critical. Going back to gold as an example, the gold mining industry pulls 80 million ounces of gold out of the ground every year. If they don’t replace it with 80 million ounces of reserves, the industry shrinks. In fact, over the last few years the rate of production has exceeded the rate of new reserves, so the gold mining industry overall has shrunk. Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) alone each need about 8 million ounces a year of new reserves just to stay level, and the same applies throughout the industry.

And to a somewhat lesser extent, it applies to base metals as well as precious metals. If the typical life of a mine is roughly 20 years, every decade 50% of all the metal mining capacity in the world has to be replaced just to stay level. Factoring in 2% to 3% average growth annually over the last few years, you can see an incredible need for new metals deposits to be discovered, developed and brought into production. That’s where my focus has been.

TGR: And it’s been quite successful. Do you have some examples of companies that you’ll share with us that fit your focus—companies that advance early-stage deposits from exploration through development?

LR: Most of our companies are looking at deposits that are further along, but a good example of the process in action is Underworld Resources Ltd. (TSX.V:UW). A year ago was trading at about 50 cents a share. They made the discovery in the Yukon—they’ve only just announced their initial resource estimate—and are now up to $1.65 a share. So we’ve had a triple on that one.

Kaminak Gold Corporation (TSX.V:KAM) will be drilling this spring on a project that looks very much like Underworld’s. So there’s another discovery potential. If you pick a company that makes a discovery, you get enormous upside potential, but it’s really challenging finding that one out of hundreds and hundreds that actually will make a discovery.

The much better model, in my opinion, is with development-stage companies, such as Sandspring Resources Ltd. (TSX.V:SSP), which only recently started trading. Sandspring has a deposit where a lot of historic work has been done, but the potential for the value added is tremendous. They’re going to drill it over the course of a year and, hopefully, increase the confidence level in the deposit and increase the size of their deposit. That’s one that I’m counting on for substantial returns as they advance that deposit through the development process.

TGR: Where is Sandspring’s project located?

LR: It’s in Guyana. Until Sandspring came along, the mining investment business paid very little attention to Guyana, but I think we’re going to see a lot more companies with interesting projects there. A lot of work had been done in Guyana a couple of decades ago and then it sort of fell out of favor. Now we’re going to start to see a lot of activity in Guyana, with Sandspring just being the first example of that.

LR: Silvermex Resources Ltd. (TSX.V:SMR) is using the same model, beginning work on a project that’s had previous work done on it, looking at it from a new geological perspective and bringing new ideas. Silvermex actually took it one step further. In addition to a deposit that’s interesting geologically, close by they bought a processing plant that another company had shut down. Silvermex put these two pieces together—a deposit that had some historic work and a nearby mill—which should give them a fast track to production.

There are a lot of situations around like that, where companies in years gone by did a lot of work and now a new generation of companies goes in to start from that basis, rather than just putting a drill hole where they hope a deposit might be.

TGR: What’s making these historic properties attractive again? Is it better technology that enables miners to extract more volume, or lower operating costs, or higher metals prices?

LR: In many of these situations where deposits were looked at in the past, it was an era of lower metal prices. At that time—a lot of this was in the ’60s, ’70s and the early part of the ’80s—picture a company that goes looking for a copper deposit, finds one and starts developing it. Meanwhile, the company’s geologists are finding other copper deposits all over the place, and as soon as they find something better, they drop everything and put the focus on developing the better one they found later. Fast-forward 20 or 30 years, and those better deposits are all mined out.

The properties that were cast off in decades gone by are now the best available in the world. The low hanging fruit has been picked. The mining industry has spent 50 years now going over every square inch of the surface of the earth, and the big deposits that were sticking out of the ground have been found, developed and mined out. Now we’re going back to what were effectively second-tier deposits in the first pass.

TGR: So instead of being cheaper thanks to technology or whatever, these deposits actually cost more to develop and more to mine than they did in the good old days.

LR: And that’s why we’ll never see metal prices back at the levels of previous decades.

TGR: Are there any other parts of the world making a name for themselves on the metals maps?

LR: Colombia has long been recognized as having a lot of geological potential. As the situation regarding personal safety—guerillas, kidnappings, etc—has improved, there’s been a real rush into Colombia. The Philippines has also become attractive. A change in government policy that was fairly recently implemented has resulted in a real pick-up in activity in the last few months. I think that’s going to really accelerate.

TGR: What kinds of deposits are you looking at in the Philippines?

LR: The most popular geological type is copper-gold porphyries, so huge deposits with a fairly low grade of copper and a low grade of gold, but together the grades are very attractive.

TGR: Do you have any companies there to tell us about?

LR: One striking example is Indophil Resources NL (ASE:IRN), which trades in Australia. I haven’t followed it specifically, but Indophil has a 37% interest in a project that’s just about to begin a feasibility study. A Chinese company has bid $500 million cash to take over Indophil to gain access to that 37% interest. Normally takeovers happen toward the end of the feasibility stage, so it’s really unusual to see a deal like this on the table when the study isn’t even under way. That gives an indication of the valuations that the mining industry will place on these types of deposits in an area like the Philippines.

TGR: Very interesting. And there’s China again. You talked a bit about gold and its role as a hedge against dollar devaluation and inflation. How do you feel about silver as an investment metal?

LR: Silver is very different than gold. Most of the silver that’s mined is used up in products of all kinds. There’s only a very small investor component in the silver market and the silver market is very small. Because it’s such a small market, as investors get excited about silver, the price can move up very sharply and very quickly, but it can fall just as fast.

I imagine silver will continue to spike up and down, but it won’t go back to the levels it saw briefly in 1979-1980. Those were unique circumstances and unlikely to be repeated. That’s not to say that I don’t like silver. I do. And I invest in silver companies, but not because I expect a sudden, large gain in the metal price.

TGR: You offer such interesting information and good insights. Thank you, Lawrence.

Lawrence Roulston, a geologist with engineering and business training and more than 20 years of hands-on experience as an analyst and manager in the resource industry, founded the 100% subscriber supported Resource Opportunities newsletter—which provides objective commentary on the resource industry and emerging resource companies—in 1998. Having established an impressive track record, with a particular knack for picking emerging companies that delivered 10-fold or better returns, he launched GreenTech Opportunities in February 2009.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Sandspring and Silvermex.
3) Lawrence Roulston —I personally and/or my family own shares of the following companies mentioned in this interview: Underworld, Kaminak, Silvermex and Sandspring.
Neither I personally nor my family nor any business associates are paid by any companies.

Stalemate on Monetary Policies is Good for Gold. With the CEO of Newmont Mining (CNBC Europe):

Uncertainty driving Investors into Gold:

Charts- Gold Set to Push Higher (CNBC Europe):

Gold Needs More Buyers (TheStreetTv):

“As of today, we are a fully unhedged gold producer,” Barrick Chief Executive Aaron Regent said at an investment conference in New York.

The elimination of hedges comes earlier than the company had planned. Barrick said in September that it would get rid of all its hedges within 12 months, but sped up the pace due to the continued rise in gold prices.

“Our positive view on the gold price led us to accelerate the elimination of these contracts ahead of the schedule we had established,” Regent said in a statement.

The full news piece is here

Click Here for Full Story