Listening to Trader Tracks Editor Roger Wiegand talk about market conditions and precious metals is like listening to your favorite uncle tell stories at Thanksgiving. The difference is that Roger’s stories are a lot more likely to make you money. In this exclusive interview with The Gold Report, Roger offers up a few of his favorite gold and silver plays and some sage market advice.

The Gold Report: In a recent edition of Trader Tracks you quoted a former Nixon speechwriter who said, “Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves. Economics is a branch of anthropology and psychology. . .a moral discipline.” Do you believe that’s true?

Roger Wiegand: I definitely agree with that. I think there’s more psychology in economics than many people realize. You can see that with the current economic reports coming out of Washington and New York. It’s obvious to intelligent people who follow these things that there’s a lot of manipulation going on in economics, in the stock market and in politics. It is often effective if it’s very timely. There’s no question that psychology plays a major role in economics.

TGR: Further to the point, do you believe the American public is somewhat conditioned to believe that economics is a science and thus place too much faith in it?

RW: I think that could be true. I really believe that 80%–90% of the American public is regularly sold a bill of goods by the Wall Street media from New York and Washington. It just keeps coming day after day and, after awhile, it wears them out. I think the majority of Americans still believe a lot of this information. From my point of view, a good portion of it is just nonsense.

TGR: If you could speak directly to the public and tell them what you believe they should know, what would you tell them?

RW: Well, I would say that the U.S. president is not really the man in charge. The people who are in charge of world economics, world currencies, governments and corporations are a shadow political group that has a great deal of power. Presidents in the U.S. are just puppets. They’re selected for their ability to do what they’re told. Congress is basically just a tool for these corporations and outsiders to manipulate the rules to get what they want. I think that’s obvious when you look at what’s happened with all the offshoring of American jobs. The issue that’s got a lot of people disturbed right now is the open border between Mexico and the United States. That exists because corporations want cheap labor. And there are obviously a lot of people involved in the Mexican drug trade. There’s a sheriff in Arizona who said that even members of Congress are involved. Until the teeth are taken out of pharmaceutical economics, these things are going to continue.

Recently it’s become much worse because of what’s happened with the global banks and derivatives market. That’s what caused the Lehman Brothers collapse and took down the global economy. To make it worse, then–Treasury Secretary Henry (Hank) Paulson basically took government taxpayer money and gave it to the banks. He conjectured that, if we didn’t, the global financial system would implode. Quite frankly, I think it would’ve been better if we had taken our medicine and just moved on. But what’s happened now is that 90% of the toxic debt in those banks remains in those banks. They’ve taken it off balance sheets and put it into other corporations or partnerships (i.e., offshored it). They’re just holding the money given to them by the U.S. government earning bond interest. They’re not making loans to improve the economy.

TGR: Do you believe U.S. economic policy will ultimately lead to the demise of the USD?

RW: It’s hard to say. These things take years and they happen slowly. Our three- to five-year forecast for the U.S. dollar is 46 on the Dollar Index. One of our better analyst friends, whom you’ve interviewed before, pegs it at 40. We’re now at 82 or 82.5. Eighty is a magnetic number so to speak for the dollar. We expect it to stay there for two or three months, and then gradually drift lower. But is the dollar going to go away? I’m not so sure. It’s going to diminish in value in fits and spurts. Other currencies will replace the dollar to some extent; but, considering that the USD covers about 85% of all reserve currencies, I think it’s doubtful it will go away. They may try backing it by gold, silver or other precious metals; but it would take so much in precious metals to give it even a marginal backing that it’s difficult to imagine.

For people buying and selling shares in our business, the biggest thing to watch for is the bond markets. That’s the Achilles heel of the worldwide credit system. The stock market is big but it’s peanuts compared to bonds. Bonds are 70x larger than stocks. The bond market today is in very big trouble.

TGR: Could you explain that further?

RW: At this point, Fed Chairman Bernanke can’t find buyers for his bonds; so he’s got to print bonds and buy them back himself. Recently, the Fed had a bond auction. It was said that 30% of the offering went to indirect buyers (meaning Bernanke bought the stuff back himself). We’ve seen some other auctions where they’ve had to buy back as much as 60%. In our view, that’s the beginning of the end because the other American bond and bill buyers are backing away.

TGR: You put quite a smattering of different quotes in your newsletter and some are quite grim. You had a couple from accounts of when hyperinflation plagued Germany’s Weimar Republic in the 1920s. Why do you put quotes like that into Trader Tracks?

RW: I’ve been accused of scaring people. But I don’t really do that. I just want them to understand what kind of situation we’re facing. When I speak at conferences, I explain that, while things look pretty nasty right now—and they do look comparatively grim to Germany in the early 1920s and America in the 1930s—if you look at what’s available to us today in terms of trading and investing, I think we’ve got an opportunity that we won’t see again for many, many years. I’m speaking specifically about gold and silver and shorting these major stock markets. While some of these quotes are pretty upsetting—frightening even—it’s merely to get your attention so you’ll get off your duff and do something. A lot of people we talk to at conferences understand and agree, but they don’t do anything. That’s not going to work anymore.

TGR: What are some of those opportunities, Roger?

RW: I’ve got three favorites that I trade for myself. I trade gold spreads, silver spreads and soybean spreads. Last year, on those three kinds of trades, I made 95%. They don’t require a lot of time, which is good, because I’m very busy writing my letter and helping my readers. I’m one of the few newsletter writers who will answer emails from subscribers when they get into trouble on a trade or are looking for some ideas about an opportunity. Our newsletter subscription price is higher than others, but we like to think we give good value because many of our traders can make the subscription cost back on just one or two trades.

TGR: Probably upwards of 80% of the stocks you list in your newsletters are junior gold and silver plays. The majority are juniors. What makes you believe these are places that investors should put their money?

RW: Let’s look at history. From 1979 to 1981, the last time we had a major gold rally to $850, silver went up to $50. If you picked 20 good juniors, probably half would fail. Another 25% would make some money. But there’s probably three to five that would be tremendous homeruns, like 1,000% or 2,000%. Of course, none of us really knows when that big blowoff is coming. Also, we can’t know which ones are going to be the best. I’m constantly sifting through companies, trying to take out the ones that just sit there and don’t move. It may be a good company; but, if it’s not going to move what good is it?

TGR: Do you have a trading philosophy?

RW: We encourage people to trade on the calendar: ‘Sell in May and go away’ and on the September–October selling event, which is quite common. The precious metals stocks, the juniors in particular, have been tied to the big markets. Over the past few months, we can see a separation. We can see now that the HUI, XAU and GDX are all going on their merry ways—away from the inverse trade of the dollar and from some of the big, mainstream stock indexes. We’ve been waiting for this. To me, it indicates that there’s going to be a major divergence or breakout in gold, silver and the related stocks.

TGR: How high is that going to take gold this fall?

RW: This fall we’re looking at $1,325 as a minimum goal on the December futures, which expire after Thanksgiving. We’re in an uptrend at the moment, but I think you’ll see a little leveling off and some light selling in August. After that, you’ll see a rebound. Normally, on the calendar between the last week of August all the way to April or May, we see a big rally in gold and silver with some intermediate profit-taking corrections. The 10-year trend has been solidly up. There’s no question that we’re going to have a good fall season.

TGR: In the August 6th edition of Trader Tracks, your three second-tier choices among the seniors are silver companies. Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI), Silvercorp Metals Inc. (TSX:SVM; NYSE:SVM) and Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS). What are you seeing in silver that has you sending folks to these companies?

RW: First of all, we think they’re all high-quality companies. Next, silver is more volatile than gold because it’s a smaller market. However, I think silver is really coming into its own. We’ve been hanging around $18 on the futures silver price. We have touched as high as $21.50. Today, the September futures are $19.11. They’re off a bit but we think, before this fall is over, we could go to $20 (resistance). There’s harder resistance at $21.50. Once we breakthrough $21.50–$22, I think you’ll see a big push to $25, $26 and then $30. The question remains: Can we see $25–$26 this fall? I’m not sure, but there’s an excellent chance. Can we see $25–$26 by April 2011? I think we could. With silver moving quickly, these silver companies will move right along with it.

TGR: But those are majors. You may see an increase; but, on a percentage basis, it’s going to be smaller. A smaller silver producer that’s on your list is First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). Tell us about that one.

RW: First Majestic is kind of like a senior/junior. The stock price in Canadian dollars was $4.81 yesterday, and has been steadily increasing. The bottom was $1 right after the Lehman event in 2008. The trading channel is also steadily up. We see a bullish cup and handle on the chart. We also see an inverted head and shoulders, which is bullish. Lately there’s been a falloff in volume, but that’s typical this time of year. If silver goes to that top I mentioned, we see some prices on First Majestic going to probably $4.95, $5.52, $6.00, $6.47. They’re making a lot of money. They’ve got three silver mines.

TGR: Are there prospects for growth at the three existing operations?

RW: I think there are because they’re increasing production. They’re putting out more ounces. Their total silver production in the second quarter of 2009 went up 86%. They milled 404,000 tons, which was a 20% increase over a previous quarter. It’s a new record based on tonnage from all three mines. They have good management and the property is in a location we like. We’re very fussy about geographic locations. Many fellow analysts would select mines and mining companies in some areas that, quite frankly, would frighten me.

TGR: What jurisdictions do you prefer?

RW: The three or four spots we like are Northern Mexico, Northeastern Nevada, Canada and Alaska. In Canada, we like Québec, in particular—it’s probably the best place of all. And Alaska has more than enough good companies, both seniors and juniors, to work on.

TGR: Another company in Northern Mexico, and your newsletter, is Timmins Gold Corp. (TSX.V:TMM).

RW: Timmins is a great company. I’ve had probably three or four visits with Timmins management. CEO Bruce Bragagnolo was a Canadian Securities Commission mining lawyer for 20 years. He knows the mining business inside and out, takes things very carefully and thinks things through. Benefiting from the work he did before he got control of this mine, Bruce saw all the mistakes many of the miners made simply because he worked for them as an attorney. That experience is extremely valuable. They’ve got great production. They’ve got super financing. They had a big pop in their stock recently because their first quarter production showed about 11,000 ounces of gold. That is one of our best choices. We like Timmins very much.

TGR: Do you have a price target on Timmins?

RW: I can’t remember off the top of my head, but it just had a breakout based on the first 11 Koz. of gold production. They’ve got top-drawer managers and geologists and a steady plan to remain there and expand into more mines. I think you’ll see a double on that stock easily, perhaps even something higher than that. It’s a very high-quality operation.

TGR: A couple of other companies in Trader Tracks are Exeter Resource Corp. (NYSE.A:XRA; TSX:XRC; Fkft:EXB) and Extorre Gold Mines Ltd. (TSX:XG; Fkft:E1R; OTC:EXGMF), which were once the same company. You recommend them both.

RW: Well, first of all Exeter was the mother company. They split off Extorre because it made a lot of sense as far as management and things to do for the stock and stockholders. It’s proven to be a good thing. We know the managers; I’ve had visits and meals with them and asked their top guy, Yale Simpson, about capital. He said: “We never have problems with capital because we only work on the best projects we can find.” That’s true.

We like Extorre over Exeter simply because of the quality of the property and what they’re finding. They’re so excited about what they found that they’re adding more drills; and this month, they’re moving equipment and assay-lab people onsite for core evaluation because they’ve had some magnificent findings and they’re continuing to focus on those. That’s a great goal. Are they going to make a mine? Sure they will; but I think it will be sold to others who are going to take it over and run with it. That’s a fantastic opportunity—one of our best picks, in my opinion.

TGR: Do you have a target price on Extorre?

RW: Extorre could easily double from where they are today. I don’t want to say anything further.

TGR: What about Exeter?

RW: I can’t tell you as much about Exeter because I haven’t followed it since the companies divided. I focus more on Extorre, but we do still have that one in our newsletter. Where does the stock behavior go from this point? I think it’s going to go up. We’ll have to see what develops and how it goes. I might mention, at this point, that I’m a technical analyst. I’m self-taught. A year and a half ago when we were trading futures strictly on tech analysis, I had 18 wins in a row. I asked my broker how I was doing. He said: “You’re walking on water.” We had our comeuppance when the Lehman event arrived, but we traded our way out of it. 

TGR: There were lots of good buys at that point, if you had cash. I think Hecla Mining Co. (NYSE:HL) went under $2.

RW: They did. I was appalled when I saw that because they’re one of my favorite big companies. In 2006, we were suggesting and recommending stock call options on Hecla,Newmont Mining Corp. (NYSE:NEM), Goldcorp Inc. (NYSE:GG; TSX:G), Coeur d’Alene Mines Corp. (NYSE:CDE; TSX:CDM) and maybe a couple of other big ones. We had a good run. We were buying them and making anywhere between 100% and 300%, usually in 90–180 days. I was a happy camper. I thought, “This is easy!” But the minute you think that, you’re going to get smacked. Of course, the Lehman thing came and, when they crunched the gold market, it was the end of that opportunity for a while.

I believe you’re going to see this again. We’re starting to trend that way. It’s going to be easier, I think, to trade options in some of these senior companies because they have a lot of cash. We see them making a lot more money with rising metal prices this year and next. Hecla had a couple of problems that they resolved. When those problems surfaced, their stock went under $2. Considering what we knew about the company at the time, we told everybody to buy it. I had one of my top traders put his mother into it. She made $100,000 in two months. It’s a good stock. They’ve got the cash and the experience. Their Lucky Friday Silver Mine in Idaho is being expanded and they’re buying more property around the mine. They were getting down to 5,000 or 6,000 feet, which gets expensive. I think they’re back mostly at the 3,000-ft. level. They also bought the other half of the Greens Bay Mine from Rio Tinto Ltd. (LSE:RIO; NYSE:TP; ASX:RIO) in Alaska for $750 million. Now, Hecla owns it all.

TGR: What are some other companies that you’re following?

RW: We’ve got some smaller silver companies like Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR). I’ve spoken at one of their luncheons and have followed them closely because I believe in the stock. They’re in Northern Mexico. It seems that, in Mexico on the east side of the mountains away from the Pacific Ocean, there’s a long seam of property where silver and some of the other metals are prevalent. Juniors find a property in that area where there’s already been a lot of gold and silver removed. They buy that property, and then buy more next door. They do more exploration work and, more often than not, they’re successful. Endeavour and some of the other companies in that area are going to be great.

TGR: Do you have a target on Endeavour?

RW: The Endeavour stock has been lingering, I think, at about $3.50–$4.00. We expect it will probably be around $6 or $7 by spring next year, if not sooner.

TGR: Do you have some parting thoughts Roger?

RW: I don’t mean to terrify people with some of the things in my letter, but I’m a realist. I get so angry because of all the nonsense we see in the news and media. You have to be an original thinker. Most often when a bank, the media—or, particularly, governments—say something, just the opposite is true. What you do is focus on things that are proven moneymakers. Go there and control your risk. Like I said earlier, there is a chance that you’re not going to see this opportunity again for many years. Historically, commodity rallies go anywhere from 13–17 years. I think we’re probably seven, eight, nine years into this one. We’ve got at least five years left, maybe longer. You’re going to see some brand-new minted millionaires in the next three–five years in gold and silver junior stocks, the physical metals and in the related futures.

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. 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) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family 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: Exeter, Goldcorp, First Majestic and Timmins.
3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Source: Karen Roche of The Gold Report 6/02/10

http://www.theaureport.com/pub/na/6436

Weiss Research Natural Resources Analyst Sean Brodrick expects the bull market for precious metals to run for “quite some time,” with gold hitting $1,450 /oz. by year-end and silver at $25 not long after. In this exclusive interview with The Gold Report, Sean sees silver reasserting itself as a monetary, investment and industrial metal. South of the border, some of the Mexican miners have an “embarrassment of riches”—which have largely escaped the attention of Wall Street.

The Gold Report: You recently remarked that we’re “trillions of dollars in debt and we can’t seem to grow our way out of it,” adding that, “the only way to get out from under the debt is to print money or inflate out of it.” But you also cited an article with a long list of bullish indicators for the global economy, including positive indicators for the U.S. So if the economy is growing, why can’t we grow our way out of this debt?

Sean Brodrick: Much of the growth was predicated on debt. We borrowed about one-tenth of our GDP to boost things along and got some growth out of it. The problem, now reflected in the markets, is that investors and traders wonder if we’re going to keep borrowing to keep pushing the economy along. If not, we can expect contraction.

In Europe, of course, they’re now borrowing even more to bail out the bankers who loaned Greece too much. The market’s really wondering where that ends. The whole point of this exercise is to stimulate the economy enough to spur intrinsic growth instead of debt-fueled growth.

As in World War II, they should have borrowed more to really stimulate. Or they should have left some banks hanging and accepted everybody losing and going back to a lower level for a while. They should have gone one way or the other. Instead, they’ve gone into a no man’s land.

They can keep borrowing more and more, and I think we’ll see that because this is an election year. Politicians don’t want things to really turn down. We just have to remember that a lot of the growth we’re seeing is borrowed. It is borrowed through debt from the future. That bill will finally come due someday.

TGR: So the future growth you foresee in terms of the bullish indicators is still debt-driven.

SB: Exactly. They were hoping to use debt to fuel the economy enough to spur real economic growth. We haven’t seen that much of that yet. There are bullish indicators, but it’s a very weak recovery. The markets fear that things are really going to go down when we take away the blindfold, and they might be right. We’re caught between a rock and a hard place. Either keep borrowing and keep spending the money all over the place and keep the market moving along—or else sober up, stop the borrowing and the extra spending and understand that things will slow down.

TGR: As you indicated, no politician is going to want to stop the spending in an election year. So they’re going to continue to stimulate economic indicators with debt. Eventually, as you stated, they’ll to have to print money or inflate out of it.

SB: That seems likely. But on the other hand, the GOP has turned into the party of “no.” They don’t want to do anything; maybe they’ll say “no” to everything. I kind of wish I didn’t have to live through it, but it’s actually interesting. We are living this grand socioeconomic experiment. I don’t really like any of the choices we’re facing, but I think we will see more borrowing—if not to stimulate the economy, then to pay for bad choices Wall Street is making right now. Wall Street always gets bailed out; it just works out that way. And as we see more borrowing of one kind or another, we will see pressure on the paper currencies.

TGR: It’s already hitting the euro hard.

SB: The euro is under a great deal of pressure and, within a year, it might well not be in the same form it is today. The U.S. dollar looks strong right now, but that’s only because central banks around the world have decided they own too many euros. The fact that they’re getting rid of euros is the reason the euro’s been sliding so much. They are buying U.S. dollars just because they can always convert the dollars to something else. And of course, they’re buying—and have been buying—gold. So the U.S. dollar and gold are going up at the same time. The question is, what will they do maybe six months from now? Will they keep buying the USD? Will they keep buying more gold? The U.S. debt situation is actually quite remarkable for the way it’s being ignored, frankly; and I think we’ve hit peak gold.

TGR: That should be good for the gold price.

SB: Absolutely. The ore bodies being discovered now are smaller and lower-grade than in the past. We aren’t finding big, rich ore bodies anymore. The amount of gold we can produce in any one year is probably hitting a peak, so the price is just going to go higher. So I think gold will get more valuable for that reason, as well.

TGR: Does that also bode well for silver, particularly if you look at silver as a monetary metal?

SB: Again, absolutely. Silver is not only a monetary metal, it is an industrial metal. But it’s always a problem for any silver investor to gauge how much silver’s price reflects global economic conditions. Maybe there will be a global recovery. Things don’t have to get worse just because I see that possibility; the global economy could improve. If it does, we’ll see increased demand from multiple sectors of society—more demand for silver for all of its many industrial uses.

The economy is on an improving track globally now, but will a return to recession drive the price of silver down? It can do that. Also, if the global economy slows and we see less demand for industrial metals, remember that much of the world’s silver production is a byproduct of other industrial metals. If they shut down industrial metals mines, it pulls silver supply out of the market. That might cause a financial panic, which will send people looking for hard assets again. That would drive silver up. None of this means silver can’t go lower, but I think the trend will be up for silver and gold alike.

Either way, I think we’ll see silver reassert itself as a monetary metal, as well as an investment metal. More small investors, in particular, will start putting money into silver because, as gold gets more expensive, it becomes unaffordable for some people. It’s kind of an interesting situation for silver.

TGR: So the two primary demands are industrial, which depends on the global recovery; and monetary or physical silver, which will go up in tandem with gold. Do you know the percentage of physical silver held versus what’s used for industrial purposes?

SB: I don’t have that statistic in front of me. But people are buying bars and coins in addition to ETFs. If mint production doesn’t keep up with demand, it tends to feed into the price of silver. That’s the funny thing about precious metals—everybody wants more when it’s not available.

TGR: If everybody will want more, where would you peg the price of silver in two or three years?

SB: It has to get through $20, and I think we’ll see that fairly soon. I’m expecting the pullback in gold to work out over the next week or so, and then it should head higher again. My target for gold would be $1,450 by year-end. We could easily see silver at $25—if not by then, certainly next year. We haven’t hit the mania phase for either metal yet. Most people remain completely unaware of the gold and silver markets. If anything, people are actually selling to all these outfits that are in the scrap market now, urging people to bring in their old and broken jewelry. They aren’t taking a part of each paycheck and running to their local gold and silver dealer to purchase more every month. That’s not happening yet.

When the mania phase does come, I don’t want to put a price target on either gold or silver. I don’t know how high they can go, but whatever it is, it won’t stick. You want to buy before the mania.

TGR: And then?

SB: We’ll have to see what happens. Usually after a period of mania, you get some kind of blowoff. This could be years down the road, by the way; these things take time to unfold. I’m not expecting this to happen next year. We’re in a good bull market for both gold and silver. They’re both continuing quite nicely, so I expect higher prices for both for the next two or three years at least. Then we can finally get to the mania.

TGR: If the global economy is recovering, albeit slowly, from where will the fear that fuels the mania originate?

SB: That is a good question. I’m not really sure that most manias in investments are necessarily caused by fear. It could be greed. But we can have a nice bull market for quite some time. If the global economy continues to grow, perhaps slowly, it will increase industrial demand for silver. A lot of people worried about demand when they stopped using silver in photography, but now it’s used more and more for many other things. It’s an amazing metal in the way it conducts heat; it’s really far beyond the competition. Something like 300 tons are used every year just as chemical reagents for plastics and so forth. Silver’s also used now in solar power technology. They’re talking about using silver for catalytic converters. They don’t quite have that technology yet, but silver would be a great replacement because platinum and palladium are scarce.

TGR: That brings up an interesting possibility. Everyone gets all riled up about rare earths because China mines most of the world’s production. If silver can replace rare earths in such applications, would we see an exponential rise in the silver price?

SB: I’m not talking about silver replacing rare earths. It doesn’t mean they can’t find new substitutes for lithium for batteries, but I don’t know what would replace rare earths now. That’s the beauty of metallurgy, right? You can always find substitutes. They may not work as well, but once you get down into nanotechnology, that’s coming. That will probably be the next big industrial wave; we’ll see some really amazing things. That’s actually one of my hopes for the future.

TGR: What’s that?

SB: That we might be able to engineer our way out of the mess we’re in if we can get that technology to come fast enough.

TGR: Back to silver. Do you focus on Mexico?

SB: As natural resource analyst for Uncommon Wisdom Daily, I cover everything. But yes, I certainly cover silver in Mexico.

TGR: One of your articles talks about Mexico being relatively unexplored for various political and historical reasons, which leaves plenty of bonanza-grade deposits. Would you talk a bit about that?

SB: Sure. Blame it on the Mexican Revolution. They had some really serious troubles at the beginning of the 20th century. Many people who were investing in mines there got very nervous, so they up and left. They were able to invest in other places without the headaches. As a result, Mexico missed out on a whole phase of exploration and expansion that the U.S. went through. Now there are these really high-grade ore bodies there—many of which were mined before; that’s the amazing thing.

For example, I was recently at IMPACT Silver Corp. (TSX.V:IPT), which has maps of at least 1,800 narrow shafts that were put in the ground over the past 500 years just in one valley. That’s only three per year over 500 years, but it’s amazing when you remember that they were using extremely primitive technology. They basically mined the silver they could see. They pulled silver of 1,000 –1,500 grams per ton (gpt) from these narrow shafts, ignoring this huge block of rock all around them. They weren’t interested in it because it wasn’t visible silver, not their “high-grade” stuff; but it’s high grade to us—500 gpt, at least. Impact Silver’s saying, “We’ll take it. This is absolutely fine. This is a great grade to be working nowadays.”

Impact Silver’s is an interesting story. They are making money and they have almost an embarrassment of riches. There’s so much around them that they can mine. The question is what do they mine next? It’s not as if they have to look for stuff—they’re surrounded by it. They have an interesting approach. They are not going into debt. They are drilling to prove up ounces in one of their land packages, but they’re working in an area that’s easier to drill because of the geology. The main mines have what you might call “lumpy” deposits; they know where the silver is, but they aren’t in a hurry to prove up those ounces because it would be expensive. So while they will have a new resource report coming out later this year, they have so much more they won’t be reporting because that would require a lot of drilling that they’d rather not pay for just yet.

TGR: But even if it’s in lumpy deposits, it’s high-quality stuff.

SB: Any miner in the U.S. would be knocking themselves over to get it. The very high grades that have been mined out in the U.S. Charts show how the ore grades of all metals peaked in the 1920s to 1930s—incredibly rich grades of iron, copper, silver, gold and more. Why? We came to this new level in technology that made mining easier, especially at the deeper levels. So most of the high-grade stuff is gone now; it’s been used.

TGR: And in the meantime?

SB: Mexico’s become a very mining-friendly country. As long as a few decades ago, many smart Canadian miners went to Mexico and put together land packages of properties that had been abandoned. They’re finally getting to work on them and are finding some amazing grades. An average grade of 500 grams of silver per ton is a very rich mine. You don’t even have to drill much, you just go along the same path the previous miners followed. The ore you get is just really excellent.

TGR: Quite the bonanza.

SB: And it’s not just Impact Silver. Great Panther Silver Limited (TSX:GPR) is another one I’ve visited a couple of times. Very interesting story. It’s a smaller miner but it’s really ramping up production. Guanajuato is one of their projects and Topia is another one. Between the two, they produced about 2.2 million ounces last year, and should produce 2.6 million ounces this year. They’ve increased production in each of the last four years. They’ll probably hit production of about 3.8 million ounces of silver equivalent per year by 2012. Operating costs are around $6/oz. net of royalties. Great Panther is cash flow positive and has another project it’s fast-tracking toward production.

Guanajuato is just amazing. It’s an incredibly long strike—something like 4.7 kilometers. This huge ore body stretches on forever, and it’s really, really rich. They’ve pulled something like a billion ounces out of there.

TGR: All that, and they aren’t close to exhausting it?

SB: There’s a lot left, and remember the huge upgrades in technology. As they go deeper—deeper than was possible in the past—Great Panther comes to incredibly rich grades. There’s a lot of amazingly rich stuff left in Mexico that lay dormant for a long, long time. It’s now coming into play, and Mexico is a very mineral-rich country anyway. So that’s why I think the future for mining in Mexico is so bright.

TGR: One of your recent articles said that the Mexican silver miners are underpriced. With those amazing grades and amazing land packages, what’s causing them to be underpriced?

SB: Part of it is the fact that some are better at public relations than others. Not all of them are underpriced, but some just don’t get their message out well. If you do your research and check into them, you can find some really good bargains. Another factor is that they aren’t really being followed on Wall Street; so, to that extent, people don’t know about them either. They are being followed up in Canada, of course. As you might expect, only people who know the niche in the U.S. and tune in to what’s going on in Canada realize the great things going in Mexico. Right now, they’re a few steps removed. But their story will get out, especially as the world gets more focused on what’s happening with gold and silver. These companies will become much better known.

TGR: How about some examples of companies that aren’t well-known but are really well-positioned?

SB: Impact Silver is one. I think their approach is about the only thing that’s weighing on their price, plus the fact that they aren’t as well-known as they might be. Great Panther is another that has great upside potential simply because they’re in this old historical silver-rich zone and keep stepping out beyond what had been done so many years ago.

Another one would be First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). It is a better-known stock than some, but it still has tremendous upside—it’s well off its highs. It owns and operates three producing silver mines in Mexico with all-in costs of about $8.49/oz. That’s higher than some, but it is certainly very profitable. They produced 4.3 million ounces last year and should produce 6 million ounces this year. Their production schedule is just to keep going higher and higher and higher, and they have a pipeline of projects lined up. It should really be a great story going forward. They just picked up a new property that has some 33 million ounces of silver Measured and Indicated. Add that to some 184 million ounces already in their other resources, and you can see that is going to be a really, really good story.

I’ve also been to Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR) and seen their projects in Guanajuato and Guanaceví—they look great. I expect they’ll be acquiring either a private or a public company. I’m not hearing that from them; just seeing how they’re positioned, sitting on cash, looking around for this deal and that deal. What that would do to the share price depends on the structure of the deal, but it can’t hurt. Endeavour isn’t in the same league as First Majestic, at least not yet; but they have a good path outlined going forward and I think they’ll do extremely well. They had nice revenues last year, and in the first quarter of this year revenues increased something like 115% over the year prior. That’s not hard to do when the price of silver is soaring, of course; but the nice thing about each of these companies I’ve mentioned is they went through the low prices we had in silver and came out stronger. Each of them had to cut back, really tighten their belts. That made them much leaner and meaner. Their growth picture is really good now because they’ve already been through the bad times. So as the price of silver goes higher, they can have real growth in their earnings and their revenue. And they’re all ramping up their production. They have new land packages.

TGR: How about gold miners in Mexico?

SB: I’ve been to Timmins Gold Corp. (TSX.V:TMM) in Sonora. They have a nice open-pit heap-leach operation and are producing now. I believe their cash cost is about $412/oz. They are expanding their San Francisco vein. Timmins still has some things to work out. Maybe it’ll merge with one of the others in the area; maybe it will do some other acquisitions. Certainly it has other projects in Mexico that it can advance. While I like that particular project and the people running it, I don’t see the clear path that I see in some others. That’s the simple reason I haven’t recommended Timmins to my subscribers. I can see where each of the other companies I’ve talked about is going in terms of increasing their production.

TGR: Any other companies that you’d like to discuss?

SB: Not at this point, though I am looking, especially as we’re getting back to what I think is going to be a buying point. You can’t buy small caps the way you do larger-cap stocks because they just aren’t as liquid. In fact, they can be illiquid at times. You need a plan, not only for getting in but also for getting out. What if the company comes out with some bad news? People have to be very careful. They certainly shouldn’t buy anything just because I talk about it. Even things in my subscribers’ portfolios aren’t necessarily right for everyone’s portfolio.

TGR: Any other suggestions for potential investors?

SB: Yes. Be very careful where you put your money, especially in this kind of market—and very careful how you go in. I usually go in one slice at a time and take the same way out, so as not to move the stock too much. Another point—if you like something because it’s cheap and it gets expensive, don’t chase it. You might have another chance to buy it on the cheap again.

TGR: You mentioned your subscribers. Can you give our readers a quick overview of the publications you edit?

SB: Crisis Profit Hunter focuses on how to invest in anticipation of some emergency situations that I see coming along—protective investing but also making money. For instance, I think we’re heading toward an energy crisis. I also think we’re heading toward a food crisis. Other crises face us as a society. The Crisis Profit Hunter doesn’t focus exclusively on stocks that pay nice dividends, but looks at dividends; and we like natural resource stocks, especially in that portfolio.

Red-Hot Commodity ETFs is another subscription service. It basically tracks the large bull market in commodities using ETFs. Of course, there are also pullbacks, as we’ve seen lately, but you can play those with inverse ETFs. I have Red-Hot Canadian Small-Caps, too, and finally, Red-Hot Global Small-Caps—which probably is really the one I’m known for. That’s small-cap miners all around the world—Australia, Thailand, Chile and Mexico, as we’ve been discussing—also Canada, of course. Just looking for and investing in those companies that have a really bright future in both the small-cap and micro-cap space.

TGR: You have some wonderful freebies, as well.

SB: You can always find the free stuff at Uncommon Wisdom Daily. I write the Friday column there, and I have a video there every Tuesday. And you can go read the free blog that I write every day; if you click on the blogs tab, you’ll see my smiling face.

A natural resources analyst for Weiss Research, Inc., Sean Brodrick travels far and wide seeking out investment values in the sector, primarily among the small-cap and micro-cap players. He edits Weiss Research’s Crisis Profit Hunter, Red-Hot Canadian Small-Caps, Red-Hot Global Small-Caps and Red-Hot Commodity ETFs, as well as making regular contributions to Uncommon Wisdom Daily. He is also a contributing columnist to Dow Jones MarketWatch and a frequent commentator on one of Canada’s premiere financial websites, HoweStreet.com. Sean’s expertise has led to many financial talk show appearances, including CNBC Squawk Box, Fox Business, CNN, The Glenn Beck Program, Your World with Neil Cavuto and Bloomberg Market Line. Released early this year, his book The Ultimate Suburban Survivalist Guide to help people survive the ever-changing economic landscape, from stock market shakeups to oil and currency crises to natural disasters. A graduate of the University of Maine, Sean has more than 25 years experience as a professional journalist and financial analyst, including a stint as investment director of the Sovereign Society—the world’s leading publisher of offshore asset protection strategies and global investment opportunities. His favorite movie (interesting in light of his focus on Mexican miners in this interview) happens to be John Huston’s The Treasure of the Sierra Madre.

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) Gold Report Publisher Karen Roche personally and/or her family own the following shares of companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Great Panther Silver, Timmins and First Majestic.
3) Sean Brodrick: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: 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

The Gold Report: According to your analysis based on the Longwave Principle, we are in a period of the cycle when the economy dies, the stock market crashes and we enter depression. Could you provide readers who may not be familiar with the Longwave Principle a high-level description of this concept?

Ian Gordon: The basis of the Longwave Principle is the Kondratieff Cycle. Russian economist Nikolai Kondratieff developed his thesis on this in the 1920s. The cycle lasts approximately 50 to 60 years. I call it a lifetime cycle, because we live only one cycle in a meaningful way. For that reason, it is also very difficult for anyone to recognize where we are in the cycle because we haven’t lived it that period before.

For example, we are now in the depression stage, but no one really refers to it that way. I do believe we are in depression because the real number on U.S. unemployment is somewhere around 17%. That to me is a depression.

TGR: You call this period the Winter.

IG: I’ve broken the cycle into the four seasons, and others have done the same—with Spring being the birth and rebirth of the economy, Summer being the time when the economy reaches its fruition, Autumn being the feel-good period. Kondratieff called Autumn the plateau period because it’s when the economy levels out and it’s also the season—always—of massive speculation in stocks, bonds and real estate.

There are indications of each season changing, and you have to know where you are in a cycle to be able to predict where you’re going. At the Longwave Group, we’ve been able to demonstrate with a lot of comfort where we are in each of the seasons, when we change seasons and so on.

TGR: And the debt created in the previous period, Autumn, led to this depression stage?

IG: Debt is a major part of it. Speculation is also a contributing factor. We went into Autumn between 1980 and 1982 and similarly between 1920 and 1921. Four events anticipated each of those Autumns. One was a peak in interest rates, second was a peak in prices, third was a bear market in stocks and fourth was a recession.

And then you go into this massive speculation in stocks, bonds and real estate in the Autumn because once the Federal Reserve takes interest rates quite dramatically down from the peak, money floods into the banks. It’s also the season when you get the biggest build-up in debt. Any debt chart in the United States, for instance, shows that the debt really starts to take off at the beginning of Autumn.

When the big speculative bull market ends, it indicates that we’re going into Winter. And Winter is when all the huge debt that’s been built into the economy is wrung out, through either payback or—in most cases—bankruptcy. Creditors and debtors alike suffer very, very much during the Winter period. It causes a crisis in the banking system because banks are the biggest creditors. If you look at the last Winter after the 1929 stock market peak, 10,000 U.S. banks failed by 1933. In fact, when Roosevelt became president, he closed all banks for 10 days and sent in examiners. Banks deemed to be okay were allowed to reopen, and basically the doors stayed closed on the rest.

So, we’re now in the Winter. I’ve argued the real peak in the stock market occurred in 2000; that was certainly the speculative peak on the NASDAQ. At that time, too, consumer confidence peaked. Alan Greenspan decided he didn’t like Winter and to save the American economy from a depression, he cut interest rates from 6% to 1%, and pushed enormous amounts of money back into the banking system to try to refloat the economy. He did that to some extent, but in effect, he really built up the debt level to absolutely unmanageable proportions and particularly in the housing market, which resulted in this huge speculative phase in real estate.

That housing market bubble burst, and it has a lot further to go on the downside. The stock bear market that began after the NASDAQ peak—and it has never gotten anywhere close to that level since—began for the Dow in October 2007.

TGR: If we infer that each season lasts about 15 years, give or take five, we’re pretty much halfway through Winter now. Is that right?

IG: I don’t think we are. This is the first Kondratieff Winter in which the entire world has been subjected to a fiat system. It’s so much easier through the printing process to try to stave off the bad days. As I’ve said, Greenspan made it appear that Winter hadn’t started by printing all this money. And we did have a bear market. The Dow dropped—what?—35%, and the NASDAQ dropped almost 80% into 2002.

TGR: You indicated that the major thing that happens during Winter is debt gets taken out, either through bankruptcy or payback. Where does hyperinflation fit in that picture?

IG: I am very much a deflationist. Taking the debt out of the system is in itself a deflation process. You can see it in falling housing prices. As debt comes out of the housing and mortgage markets, it deflates prices. We’re going to see the same in stock prices. Wealth is being reduced considerably, and that is deflationary.

A lot of people who argue for inflation say that all the money being printed eventually has to go through the banks back into the economy. But it’s like being on a treadmill. You running as fast as the treadmill goes, but you don’t get anywhere. The Federal Reserve is printing copious amounts of money trying to re-start the economy. Unfortunately, the rate of debt being taken out of the system eventually will overwhelm their ability to do that.

TGR: Your Winter Warnings indicates that as we move through this collapse, China will become a scapegoat in terms of other governments implementing policies that will harm Chinese exports. If the Chinese GDP is growing and they’re already becoming less reliant on exports, could they have a milder Winter than Europe and the U.S.?

IG: I think perhaps the Chinese Winter will be the worst of all, and again we have a parallel. China is the U.S. of the ’20s. The U.S. came out of World War I as the world’s largest creditor nation, with a major significant growth in its industrial prowess—all of which China is today. At that time, the U.S. government was paying down debt, and it wasn’t that significant anyway. And now, the Chinese government doesn’t have much debt; either. But in the U.S., corporations and consumers of the “Roaring ’20s” built up huge amounts of debt. You see parallels in the housing market in the ’20s to what we see today in China. A lot of suburbs were developed because people had automobile or railway access to the suburbs. At the same time, we had a major development of skyscrapers in city centers, monstrous buildings carrying monstrous debt.

China is in that kind of process. What happens when you get so wealthy, you’re exporting so much, particularly to the United States, the Chinese government takes the U.S. dollars and credits the bank with renminbi. The bank has all this money on hand. So a local businessman goes to the bank and says, “I want to build a factory and build toys for Toys ‘R’ Us in the United States.” The banker says, “Fine.” He has all this money; he makes the loan; the borrower goes and builds his factory. Somewhere across town, someone else goes to another bank and does the same, and again and again with different borrowers and lenders. It’s the mal-investment that occurs when you have so much money floating in the system.

TGR: And then what?

IG: Eventually, the United States, the biggest importer of Chinese products, cannot continue buying at that level. Despite the pace of growth in China’s economy, it still takes probably at least 50 years, maybe more, to develop a middle class. Those are the people who have the wherewithal to spend. So, it’s going to take China a long, long time; it’s still very much an agrarian economy.

For these reasons, I think China’s banking system will go the way the U.S. banking system did in the ’30s, and the whole economy will go into a collapse. But out of it, she will rise as did the U.S. as the greatest economic, financial and political power. She will be the world leader.

TGR: You went into gold early on, back in 2000, but you’ve also said that cash is one of the best investments. What makes cash a good investment during the Winter period?

IG: Because it’s deflationary. The value of everything your cash can purchase is going down, so you can buy more. For instance, when we were renting a house in Phoenix, we were told you can buy 4,500-square-foot homes here for $150,000. You can’t even build them for that kind of money today. If you have $1 million in cash now, it might buy you one really nice home where I live in White Rock, BC, but in four or five years’ time, it might buy you five of them. We’re seeing that in all sorts of things; even automobiles are getting cheaper.

TGR: Why wouldn’t U.S. investors have all their money in gold? And when they need to pay bills, they convert it into cash? That’s assuming that gold ultimately will retain its value, whereas all fiat currencies are going to come down.

IG: I don’t know that all currencies are going to come down relative to each other. For years I said the Euro was a cobbled political currency that would never survive a Kondratieff Winter. And we’re starting to see that’s likely to happen. Everybody is trying to pick the winner. Right now they’re picking the U.S. dollar. Before they were picking the Euro. Except maybe the renminbi, all the currencies are vulnerable. Definitely the yen is very vulnerable because the ratio of debt to GDP in Japan is so massive already.

TGR: So if the currencies are all vulnerable, should we put all of our cash into gold and basically liquidate it for cash when we need it?

IG: One problem with that is we don’t know how the government will respond to those who own gold. It’s dangerous to put all of your eggs in one basket. You’d be trusting the politicians not to do what Roosevelt did in 1933. After he confiscated gold, Americans kind of got around it by investing in gold companies. They were very profitable, and all the money, all capital ultimately flowed to gold because it was the only thing people trusted. It was going to gold because that’s where people wanted to be.

That led to a major number of discoveries made, including, in Canada, all along the Abitibi Greenstone Belt and in British Columbia. They couldn’t have been made without money. By 1940, according to the U.S. Bureau of Mines; 9,000 gold mines were operating in the United States. Of course, those were the ones that people reported. People panning gold up in Alaska didn’t tell anybody that they were an operating mine. They were just hoarding the gold.

TGR: So, it’s a combination of owning gold and gold stocks. Or should we say precious metals—we’ll expand it out to silver. Should our portfolios consider other elements?

IG: As for silver, it didn’t really work as a monetary instrument in the early 1930s. Although at that time U.S. coinage from the dollar to the dime was minted in silver, so there was certainly hoarding of silver coinage during the last depression. During this depression silver may well take on a monetary role, since the price of gold might take that metal out of reach of many people. I think only the precious metals work—again because of the stock market debacle that I see occurring. We know that investing in precious metals worked in the ’30s. People were pushing their money into gold stocks because they wanted to be in gold in any shape or form.

TGR: Because you’re suggesting that all gold companies will increase in value during this timeframe, should the average investor be concerned about which specific gold companies to invest in?

IG: Certainly the producing companies will go up with the rising price of gold. Don’t forget in the early ’30s the gold price was fixed at $20.67 and it wasn’t raised to $35 until 1934. But even so, people were investing in the gold companies, both explorers and big producers such as Homestake.

Today, I tend to put my money into the juniors because that’s where I see the leverage to a rising gold price. But you’ve got to be very, very selective and very cautious. You have to evaluate management of these companies. In Canada, particularly in Vancouver where most of the junior precious metals companies are situated, we’re living with these people. It’s very tough in the United States, where you have to rely much more on what others tell you. Fortunately, a lot of very reputable newsletter writers and so on are trying to do a good job in their recommendations.

TGR: What’s your strategy for finding good junior prospects?

IG: I try to find companies that will make me 10 times my money in two years. I’m not going to say that happens every time, but it has happened fairly frequently. We’ve had a number of 10-baggers. A few of those that give you 10 times your money can make up for a fair number that are wrong.

TGR: Where do you hunt?

IG: I look at companies that others are ignoring or have lost interest in because people feel they haven’t accomplished much. I also look at companies where I really like the management—managers who are truly committed to their shareholders and not themselves. And through the years, when I invest in a company, I tend to stay in it if I can see a double in 10 months.

In 2002, I bought a company, Nevsun (TSX:NSU; NYSE.A: NSU), in a financing, at 60 cents. Within 18 months, it had gone to $9.50. I sold it at about $6.50 or $7, though, because I couldn’t see it doubling within 10 months. But I did get 10 times my money.

TGR: Could you share any examples that are interesting as we look into the future?

IG: I’ve basically been with Timmins Gold Corp. (TSX.V:TMM) since they were doing the seed financing. They’re just putting a mine into operation in Mexico, where they’re going to produce between 80,000 and 100,000 ounces at just over $400 an ounce. Right now they have only about 600,000 ounces there, so it’s a mine life of only about five years. However, the exploration potential there is quite significant, and I really can see that mine operating probably three times longer.

In addition, Timmins Gold also has some other excellent potential exploration properties in Mexico. So I like this company a lot; I like the management a lot. A very good Mexican contingent, including the president, gives them a lot of help strategically in the country.

TGR: Any others?

IG: There’s a little company, Golden Goliath Resources Ltd. (TSX.V:GNG), that’s been out of favor for a long time that I really like, and feel could do really well for investors. I did the IPO for this company in 2000. We had committed to raising $3.5 million at 50 cents based on a group of properties in the Uruachic Mining District in Chihuahua, Mexico. It was a real struggle for me. If you can believe, no one had an interest in gold stocks in 2000. Then Agnico-Eagle Mines (TSX:AEM) became an investor, and as a result we were actually able to raise the IPO from $3.5 million to $4.5 million. That was one of the things that I felt very proud about.

TGR: Are they making good progress on their properties now?

IG: The last two years they’ve been concentrating on a property called Los Bolas. With the help of Marc Legault, Agnico-Eagle’s chief exploration officer, who is also a director of Golden Goliath, they’re starting to put together a really good base, more silver than gold. According to an independent report, based on exploration to date that deposit could contain better than 100 million ounces of silver. The deposit is open at depth and in both directions and could grow substantially. And they have now discovered a new area with gold mineralization on Los Bolas, the Filo de Oro zone.

TGR: So Agnico-Eagle remains involved?

IG: Yes. Agnico Eagle holds about 10%. I like the fact that Agnico-Eagle is involved in a hands-on basis. They see it as a really important because Urihuacic is not that far from Penas Altos, the Agnico-Eagle mine that is either in production or shortly going into production. Golden Goliath’s biggest shareholder is Sprott Asset Management, which holds 18.4%.

TGR: Any more companies you could tell us about?

IG: I think Underworld Resources Ltd. (TSX.V:UW), in the Yukon not far from Dawson City, has 43-101 resource of a million-plus ounces already. I like the management. I think this company’s going to certainly grow its already significant gold discovery.

Another company I like is a smaller one, which may catch people by surprise because they won’t recognize it. That’s Lincoln Mining Corporation (TSX.V:LMG), which has properties in Nevada, California and Mexico. They are permitting for putting a small mine into production on one of their Nevada projects, where they have about a half-million ounces. The property in California is an old past-producing mine. They also have a great property in Mexico called La Bufa, which is surrounded by Gammon Gold Inc. (NYSE:GRS; TSX:GAM). In fact, Gammon has a property right in the middle of La Bufa, and then Gammon Gold staked all around Lincoln’s property.

Barkerville Gold Mines Ltd. (TSX.V:BGM) is an interesting story because it’s an old discovery, an historic little gold mining town in British Columbia. This company, which used to be called International Wayside, has 60 kilometers of land holdings close to Barkerville, and I think there were up to eight producing mines on its properties. Three of those mines were discovered—here we go again—in the 1930s, during the last Kondratieff Winter. It’s just going back into production, small-scale production, 50,000 ounces of gold a year. But it has tremendous upside exploration potential. That’s another pretty exciting one.

One more that I’d like to discuss—African Queen Mines (TSX.V:AQ). The company has a property in Mozambique, which is highly prospective. It has returned great metal values in chip samples along the 12 km belt. African Queen has also acquired the right to earn in on a Newmont property called Noyem, which is situated along the Ashanti Gold Belt in Ghana. There is already a gold resource on the property.

I think that it is important that your readers do their own due diligence on these companies. They are very speculative and may not be suitable investments for everyone. They should consult with their investment advisor before making any investment decision.

TGR: In 2008, we saw junior gold stocks, all gold stocks, go down. Fund managers were selling anything they could because they needed cash. You’re predicting another major financial collapse in the U.S. Why will it be different this time?

IG: I think the run to gold will become very extreme this time around, but in many cases these gold stocks today haven’t recovered from their highs of early 2008 anyway. If you look back on the past Winter, when the Dow lost 48% of its value between September and November of 1929, Homestake crashed. But in subsequent downs, Homestake went up. I feel that will happen again.

TGR: What would you do?

IG: Let me put it this way. I have almost 100% of my investment money in these kinds of stocks. I don’t really have much cash sitting in my investment accounts.

TGR: How long do you think the Winter is going to continue? And when do you guesstimate this next crash will hit? When was the next rally in the last Winter?

IG: The stock market recovered 50% of its losses in a rally into April of 1930. That’s very similar to the rally we went through from March 2009 to mid-January this year. Now, we’re on the downturn again in the market, and I am predicting that this one will take us down to somewhere about 5250 on the Dow either this year or early next year. And then we’ll get another rally. Hope springs eternal.

But then I think the whole stock market bottom will be reached in 2012. The only reason I am picking 2012 is I am a huge fan of a great cycles guy who died in 1955, called W. D. Gann.

TGR: Oh, yes.

IG: He did a lot on anniversaries and so on, and 2012 happens to be the 30th anniversary of the 1982 bottom, which was the beginning of the big speculative Autumn bull market. And it’s the 10-year anniversary of the first bottom, in 2002. The market peaked in 2000 and dropped in 2002. It’s also the 80th anniversary of the 1932 Winter bear market bottom, after the Dow had dropped 90% from its 1929 high.

That’s why I wrote a piece on my website called “This is It” in 2007, and one of the things that convinced me was when I saw those Bears Stearns funds sort of going bankrupt in July 2007. That was the 20-year anniversary of the ‘87 crash, the 100-year anniversary of a big market crash back in 1907, the 150th anniversary of a big 1857 crash. All these Gann kinds of numbers came in at the same time in 2007. That was so compelling that I was absolutely convinced that 2007 was the end. And that’s proved to be correct.

TGR: So you’re saying the market is going to be drop by half this year.

IG: Yep. I think we’re going to have a crash in stock prices this year. But I am staying long in my gold stocks.

TGR: Will this Winter end in 2012 then?

IG: No, it’s just the bear market bottom. Remember the bear market bottomed in 1932. But the Great Depression didn’t really end until World War II. The Winter continued even though the bear market had bottomed.

A globally renowned economic forecaster, author and speaker, Ian Gordon is founder of the Longwave Group, comprising two companies—Longwave Analytics and Longwave Strategies. The former specializes in Ian’s ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratieff. And with Longwave Strategies, Ian—who believes that the precious metals sector will continue to provide very secure investment options—assists select precious metal companies in financings. Eric Sprott, Chairman, CEO and Portfolio Manager at Sprott Asset Management, describes Ian as “a rare breed in the investment advisor arena.” He notes that Ian’s forecasts “have taken on a life force of their own and if you care to listen Ian will tell you how it will all end.”

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: Nevsun and Timmins Gold Corp. 3) Ian Gordon — I or my family own shares in all the companies I have mentioned in this interview. I and my family are not receiving any compensation from the companies.

The Gold Report: You have practiced technical analysis (TA) since the late 1970s. On a simple level, explain why TA is a reliable predictor of future stock price movement?

Clive Maund: Because the latest price of a stock is the summation or distillation of all fundamental information that is known about the company. In the earliest stages of a major uptrend, it is only the “smartest money”—that is to say those in possession of the best intelligence that are on to the improving fortunes of the company—and they may well be insiders. Technical analysis detects their buying at a time when the reason or reasons for it is not yet known. The average retail investor, who is at the bottom of the “food chain” will be the last to learn the good news, when it is broadcast by the mainstream financial media, usually as the stock is about to top out towards the end of a bull run.

TGR: How is the average investor to make money? From your answer, it seems the deck is stacked against the average investor?

CM: The average investor must learn to break the habit and the common mistake of going after stocks that have already made substantial gains and for which the news is already rosy, chasing popularity. The time to accumulate stocks is when they are oversold but have stabilized and the fortunes of the company are just starting to improve.

TGR: As a technical analyst, do you analyze and incorporate economic trends into your projections? In other words, do you rely on the output of TA for your stock trades or do you use the output as one factor of many in making predictive stock judgments?

CM: Properly used, technical analysis does not require the use of other inputs—such as the analysis of economic trends—to be effective. Having said that I do study the major forces driving the markets, such as debt levels and quantitative easing (otherwise known as manufacturing money), as these do give some additional clues with regard to timing.

TGR: You study debt levels and quantitative easing. What about unemployment and GDP, which are more widely discussed in the popular press?

CM: Unemployment and GDP are symptoms of the genuine health of the economy and thus of crucial importance. The term “jobless recovery” is an oxymoron and just spin. The key point to grasp is that the stock market has been rising not because of economic improvement but because it has been driven up by manufactured money and the resulting fear of inflation.

TGR: Many analysts/pundits are predicting another downturn for the markets and international economies—some argue inflation is pending and some believe deflation is imminent. What is your viewpoint on the direction of the markets and economies?

CM: This is a crucially important question. The lives and fortunes of billions of people depend on how the inflation/deflation issue plays out. The key point to understand is that the background dynamic is highly deflationary, but as politicians and business leaders do not want to face the grim consequences of deflation, which at best could result in their losing office and their positions of privilege and at worst could result in them losing their lives or being sent into exile, they can be relied upon to resist deflation tooth and nail.

Deflation “broke out of its cage” in 2008 and the result was a devastating collapse in the markets. They beat it back into its cage with a combination of bailouts, quantitative easing and monetization to prevent asset classes such as bonds from failing. The end result of this interference with, and obstruction of the natural corrective forces of the free market, is that debt has reached astronomic levels, arriving at the point where it is unserviceable.

This can result in one of two outcomes: 1) default and economic implosion, or 2) runaway inflation leading to hyperinflation. As the latter will buy more time for politicians and business leaders, this is the road that they can be expected to take. However, if deflationary forces overwhelm them, possibly due to calamities in other parts of the world, such as a collapse of the European Union or China imploding, we could see a depression in the U.S.

TGR: So the only outcomes for the U.S. is hyperinflation or depression? How does the average investor manage a portfolio with such divergent outcomes?

CM: As long as inflation has the upper hand, which the recent action of the Commercials (banks and institutions) in scaling back their short positions (as revealed by COT—Commitment of Traders-figures) demonstrates continues to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation. With regard to this major risk we use Technical Analysis to assist investors in identifying the onset of major bear market phases such as the 2008 meltdown as soon as possible, so that they can get out of harm’s way by either moving to cash or short-expiry Treasuries, or hedge positions that they continue to hold.

TGR: You are now engaged in private trading utilizing the Internet and online trading tools. Do you think the speed which with Internet trades can be made has changed stock market dynamics? Has it created a new breed of trading that is based on intraday market-trading trends rather than a company’s or economy’s fundamentals?

CM: The Internet has definitely increased the speed of reaction of individuals and the market to news announcements and to emerging trends, so that it is now almost instantaneous. Those closest to the market are, of course, able to front run market moves, and can “scalp” substantial profits by so doing.

TGR: In your online bio, you state: “We are set to witness the most exciting time in the energy and precious metals sectors since the mid-1970s” caused by gross excesses of the global fiat money system. Can you elaborate?

CM: Excesses in the fiat money system automatically lead to inflation as larger amounts of money chase the same or a finite quantity of goods and services. In an inflationary environment, money naturally gravitates to assets or commodities that are real and have intrinsic value, such as oil, gas and also uranium, and will hold that value by rising in price as the value of currencies is eroded by inflation.

TGR: Is this logic true for other sectors such as food or consumer staples? If so, what makes energy a better investment opportunity?

CM: Yes it is, but what makes energy a better investment is that it is finite and depleting and is perceived to be so, especially in a world of rising population and expanding demand. You have all heard about Peak Oil that, if true, must result in a continuing long-term uptrend in the price of oil.

TGR: What do you see for gold and silver prices for the next six months? If precious metals are being acquired more as currency and less for jewelry, do you see the typical seasonality for gold being eliminated this year or in future years?

CM: This is a difficult question to answer because if deflation breaks loose again, which could happen if there are sovereign defaults, the Chinese economy implodes or rates enter a determined uptrend, we could see another severe bear market emerge in a wide range of asset classes, including precious metals. On www.clivemaund.com, we play the trend and listen to the message of the market.

Currently, gold is in a downtrend that started early in December. However, this downtrend is showing a marked convergence—meaning that it could be what is known as a “falling wedge,” which is a bullish pattern. If it breaks out upside from this pattern, we will go long with a close stop because it could lead to a powerful advance. On the other hand if it drops below the strong support in the $1,000 –$1,030 area, the decline could accelerate to the downside.

The situation is complicated as silver recently broke down from a major uptrend and its rally from oversold since last weekend, which we expected, looks at this stage like nothing more than a pullback following a breakdown that will be followed by renewed decline.

Copper looks bearish, too, with a severe breakdown several weeks ago, also predicted on the site a few days before it began, followed by a sharp recovery back towards the underside of its downtrend where we would expect it to roll over and head south again. Our approach is pragmatic—we position ourselves for big gains but have close exit points to limit losses if market action proves our judgment to have been incorrect. Thus, if gold breaks above $1,100 over the short term we will probably go long with a close stop. But if gold rises up to its upper-trend channel, and at the same time silver and copper rise up close to the underside of their failed uptrends and all three start to roll over, then we will probably short all of them with close overhead stops.

TGR: What companies do you feel represent opportunities for growth?

CM: Broadly speaking, the precious metals sector is viewed as providing outstanding growth opportunities. We are likely to see the current bull market end with a spectacular parabolic blow-off move that certainly hasn’t happened yet. The complicating factor now is that we may see another deflationary scare similar to 2008 first, which would clearly be ruinous for anyone long the sector. This is why it is considered wise to wait to see if gold can break out upside from its current potential falling wedge pattern before going long. The uranium sector is similar, but we will want to see prices of uranium stocks start to advance away from clearly defined base areas before taking positions.

That said, I believe the chart for Timmins Gold Corp. (TSX.V:TMM) is a positive chart with a broad uptrend and rising 200-day moving average (MA). Nice bull hammer in Timmins last Friday, which has strong underlying support above its 200-day MA. If gold breaks out upside from its current wedge pattern Timmins should take off with it.

Kent Exploration Inc. (TSX.V:KEX) is in a broad uptrend with bullishly aligned moving averages. Bull hammer in Kent last Friday, when it looks like it may have hit a cyclical low. On an upside breakout by gold, it should run up to recent highs at about 24 cents and could carry on somewhat higher.

Evolving Gold (TSX.V:EVG, FSE:EV7) got slammed by a recent share issue and knocked down to a clear and strong support level at about 90 cents at the lows of last October into November. Although still somewhat overhung by this development, it looks like a buy here with a close closing stop beneath the support, say at about 87 cents.

Paramount Gold and Silver Corp. (NYSE/TSX:PZG) appears to have been consolidating since last May forming the handle of a large pan and handle pattern. Moving averages are in bullish alignment and volume pattern is positive, so it should take off on another upleg if gold breaks out upside.

The chart for Pediment Gold Corp. (PEZ:TSX; PEZGF:OTCBB; P5E:FSE) is a favorable picture with the overall trend up and bullishly aligned moving average. The volume pattern is positive and it is no longer overbought after its recent reaction. Should gold break out upside it is in a good position to stage a substantial rally from this point.

Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003 early in the sector bull market. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London and holds a Diploma in Technical Analysis from the UK Society of Technical Analysts. Clive now lives in southern Chile.

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 Gold Report or The Energy Report: Timmins Gold Corp., Kent Exploration Inc., Evolving Gold, Paramount Gold and Silver Corp., and Pediment Gold Corp.
3) Clive Maund – I personally and/or my family do not own any of the companies mentioned in this interview. Neither myself, nor my family receive any payments from any companies in this interview.

TGR: Why don’t we start Part II with some of your current top picks in from the MSG Model?

TW: Absolutely. Two of my standout companies are Capital Gold Corp. (TSX:CGC;OTCBB:CGLD; Frankfurt:CGU) and Fortuna Silver Mines Inc. (TSX.V:FVI), due to their impressive profitability. Capital Gold produced about 50,000 ounces in their year ending July 31 and reported over $10 million in fully taxed net profits. John Brownlie, who has been with the company since 2006, was just made President and COO in September. He is arguably one of the best operators amongst the juniors. He built the El Chanate mine in Sonora on time and on budget. It is now one of the lowest cost mines in the industry with a cash cost of just $330. Its reserves have grown from about 400,000 proven and probable (2P) ounces when the mine was built to more than 1.5 million 2P ounces today. They have just installed a new crusher module and built a second leach pad. They should produce about 70,000 ounces in calendar 2010. The residual leaching from the old pad could add another 20,000 ounces. They are unhedged and at current gold prices will generate cash flow of about $40 million. The stock is selling at less than five times calendar 2010 cash flow and less than eight times earnings.

Fortuna is another well-managed company. Their production and profitability profile is based on their Caylloma Mine in Peru, but they have a very exciting project—San Jose—in Oaxaca State. They have built an impressive resource and begun mine construction. San Jose will be mostly financed from their treasury and from cash flow from Caylloma. We were set to visit the property last June, but had to cancel due to the H1N1 flu outbreak. I am looking forward to seeing this project this spring.

TGR: In Part I, you mentioned adding Oro Gold Resources Ltd. (TSX-V:OGR) and Rochester Resources Ltd. (TSX-V:RCT) to the model. What stage are these companies in? Early Explorers, Advanced Explorers or Producing Explorers?

TW: I added Oro Gold to the Early Explorers category, and have Rochester in the Advanced Explorers category. If you look at the model itself, there are stated criteria that can move a company from one category to another. To some degree, though, a bit of it is subjective. For instance, I don’t move an Early Explorer up just based on the resource and having a 43-101 resource. Those are among the criteria, but if I see some stumbling blocks in the development or feel they aren’t making enough progress moving a project toward economic feasibility I won’t move them up. For example, if they still have a lot to do in the way of metallurgical testing, dealing with access and surface rights issues and water issues and other potential permitting problems, I may keep them in the Early category even if they have a bigger resource than some Advanced Explorers.

TGR: You say Rochester is an Advanced Explorer? Aren’t they producing?

TW: Rochester does have some production, but it’s very small so far. They have had issues with feeding their mill from narrow underground veins. They have just raised some capital and have a new mine plan and exploration program. I look for the company to move up to the Producing Explorers category as their story unfolds this year when they really ramp up production and start showing earnings or at least cash flow. So this was a bit of a selective placement on my part, but it allows me to move them up and alert my clients that they are executing. One of the exciting things at Rochester is that Eduardo Luna is now President and CEO. He was Goldcorp’s president of Mexican operations (Luismin) and is one of the most respected mining names in Mexico. He could have picked from many companies in Mexico to run. He chose Rochester and put his own money in the deal. I always like management with “skin in the game.” Eduardo’s goal is to grow production and resources at Mina Real, which is in Nayarit State, in the same way he built mines for Luismin.

TGR: Have you added anything else to the model lately?

TW: In addition to Oro Gold and Rochester Resources, I’ve recently added Silvermex Resources Ltd. (TSX-V: SMR) to the Advanced Explorers. Silvermex is a new management story. CEO Duane Nelson has just brought on Mike Callahan and Art Brown to help him manage the company. These are retired Hecla executives who could make this a very exciting story in 2010. Duane also added two new board members, Joe Ovsenek and Ken McNaughton. They both work for Silver Standard (TSX: SSO; Nasdaq: SSRI) and have been involved many significant discoveries and mine developments. This quality of people doesn’t get involved in a junior company unless they really see something they like.

Silvermex has an option on the San Marcial property, a near-surface deposit of over 20 million ounces of high- grade silver in Sinaloa State. They also just bought the old Rosario Mine from Aurcana Corporation. This is a mine that was operated by Grupo Mexico in the 1990s and was shut down due to labor issues and low metal prices. The infrastructure at Rosario will allow Silvermex to fast-track San Marcial into production. There is also a couple of years’ worth of production left behind by Grupo at Rosario that is very economical. There is significant exploration potential at the old mine, at San Marcial and within the district. Either of these projects on their own may not have been developable without a lot more exploration, but together they make a very powerful story and a near-term silver producer.

TGR: What’s the Oro Gold story?

TW: Oro Gold is managed by a group who worked for Placer Dome. They are very smart and have a project outside of Mazatlan called Trinidad. This is an old Eldorado Mine that is very difficult rock to drill, but I think the Oro Gold people are figuring out the deposit and it is going to be pretty big. The grades and widths are very impressive.

TGR: Would you give us updates on some of the other companies in your model?

TW: Sure. Great Panther Silver Limited (TSX:GPR) has done a lot of drilling at their Guanajuato Mines and they’re seeing some very good grades and widths. But it’s much deeper, so they’re going to have a lot of cap-ex to build new shafts and ramps to access the ore. This is a silver mine with gold credits, which I like. Meanwhile, they have continued to do a very good job at their Topia Mine-making improvements to lower cash costs and increasing resources there. But that is a poly-metallic mine and as we discussed in Part I, it’s challenging these days to get cash costs down on silver when you’re dealing with lead and zinc concentrates and having to send it to the smelter. But Topia’s grades are over 450gpt silver with 3% lead and 3% zinc, so they are able to deal with the processing costs. They have steadily increased production for the past four years; hopefully they will now start showing some significant profits as well.

I really like First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). They have done some things to come around the smelter issues at their three poly-metallic mines—and by the way, I have just moved First Majestic from the watch list to the Producing Explorers. On a recent trip I was able to spend some time with Keith Neumeyer, First Majestic’s president and CEO. They have three mines—all with silver-lead-zinc ore. They have made some significant improvements at all three of them to increase production. As I have said, removing the base metals can be uneconomical, so First Majestic has installed leach systems to remove the silver and pour silver dore bars onsite. The floatation cells are still in place, but the lead and zinc concentrates are not produced, unless they are economical. This allows them to increase both production and profitability. They have an excellent team in Mexico and have been building resources at all their mines. They recently purchased Normabec Mining who owns the old Real de Catorce Silver mine in San Luis Potosi State. I have visited this property and it has huge potential. Keith tells me they are going to slow down capital spending and focus on profits this year. They could generate $30 million in free cash flow.

Another one I’m looking to move up in the model this year is Timmins Gold Corp. (TSX.V:TMM). They just did their first pour at the San Francisco Gold Mine in Sonora. I’m going down to see the mine in operation in late January. I think they’re behind schedule and somewhat over budget, but $1100 gold pretty much solves those issues. Timmins also has some very interesting exploration properties through Mexico. So I look for this to be a very attractive growth story as they get San Francisco into production and have the cash flow to develop some of these other properties.

TGR: Any other companies come to mind that are exciting right now?

TW: I’ve been to Paramount Gold and Silver Corp. (NYSE-A, TSX:PZG)’s San Jose project a couple of times. I think they have a great team in Mexico. They’re well-funded now and have just begun to release the results from a large drilling program. It’s a very interesting area. It’s very near the Palmarejo Mine just brought online by Coeur d’Alene Mines (NYSE:CDE) and is the same type of deposit. As I mentioned in Part I, it’s challenging for junior companies to explore at depth in Mexico on these narrow epithermal vein systems. To really be economical, they need to find ore shoots called clavos or mantos in Mexico. These are places where the mineralization has pooled along the vein. These sometimes occur where the veins flex or shift, where multiple veins intersect or where multiple mineral producing events occur over time. When they find these, they can grow quickly into developable deposits that are much more economical to mine. Paramount has found three that they’re doing additional drilling on. If they can expand those clavos, or find more, they should have a very developable deposit. I issued a full report on them in April at $.,when they completed a financing with Albert Friedberg.

Animas Resources (TSX.V:ANI) is another. It’s an Early Explorer, so I’m watching the drill results. Its situation is similar to Paramount’s, but Animas is earlier in the process of trying to find the economic mineralization in the deeper veins at Santa Gertrudis. Results have been somewhat slow coming out on that property, but they’re very active now and have had a couple of drill rigs turning down there. If they’re successful and they prove up that some of the deep Nevada-style Carlin-type deposits are running down into Sonora, that deposit could get very big, very fast.

MAG Silver Corp. (TSX:MAG) (NYSE:MVG) is moving along very well—there is no question they will be moving into production—with Fresnillo, their joint venture partner, on their in Zacatecas project. It’s kind of a typical good news-bad news story for a junior company when they have a major as a partner. They are at the mercy of their partner regarding the timing and news flow. And as I mentioned in Part I, Fresnillo is showing no mercy dealing with MAG. They are well-funded at this point, and are doing exploration in some other areas. They’ve probably got one of the best teams in Mexico with Peter Megaw’s group (Minera Cascabel) advising on their exploration programs. They have a new property in northern Chihuahua that I have not visited yet. That project, called Cinco de Mayo, is showing some very good initial results. They don’t have a resource defined yet, but they are exploring for carbonate replacement deposits (CRDs), which can get very big.

Speaking of large CRD deposits, I recently visited Excellon Resources’ (TSX-:EXN) La Platosa mine. This is another deposit that was originally discovered by Minera Cascabel and is arguably the highest grade deposit in Mexico. The average grades at La Platosa run about 986 gpt silver with 9% lead and 10% zinc. Needless to say, at those grades the lead and zinc add some significant by-product credits to the silver and reduces their current cash costs to $3 per ounce. Unlike most companies, this is an “all in” cash cost that includes corporate G&A and exploration costs. They have a very active exploration program and are adding to the mine life while also exploring the district. They recently purchased Silver Eagle Mines and picked up a newly refurbished mill at Miguel Auza, about 200km away. They paid $5MM for Silver Eagle and got a $15MM mill and $24MM in Mexican tax losses. They are crushing the La Platosa ore and trucking it to Miguel Auza, which is producing about 200TPD. They are currently permitting an onsite mill and have all the equipment already at the mine. This mill will be capable of closer to 350TPD and cash costs will go even lower, probably to a negative number. New management is really focusing on getting corporate expenses in line. Excellon has a current market cap of about $150MM. When the new mill is built, I think they will be producing about 3MM ounces of silver at a $0 or negative “all in” cash cost. That means potentially $50MM to $60MM a year in cash flow and some huge profits. It has all the ingredients so I added EXN to the Model right after the visit.

TGR: Any other Early Explorers?

A couple of other companies in the Early Explorers category are making some very good progress. One is Riverside Resources Inc. (TSX-V:RRI), which has several assets in Mexico. They operate under a project generator model. They go out and find properties and then look for joint venture partners to put up most of the money for exploration. John-Mark Staude, the company’s President and CEO, is a very smart geologist who has worked in Mexico almost exclusively for the last 20 to 25 years. He’s got a very good team. They have a database of all the Mexican properties that are either in private hands or public hands that might be coming available. They are in a joint venture with Kinross Gold Corp. (K.TO; NYSE:KGC), which owns about 9% of the Riverside Resources. In certain areas of Mexico, mostly in Durango and Zacatecas, Kinross has the first right of refusal on all the projects Riverside brings in.

But Riverside Resources has several projects that are under joint venture with other companies, too—including Geologix Explorations Inc. (TSX-V: GIX) on its Libertad Gold Project in Sonora and Arcus Development Group Inc. (ADG: TSX-V) on its Chapalota property in Sinaloa—and they’re continually bringing in new properties. They have another property that I visited that I like very much called El Capitan, in Durango State. They’ve drilled about eight holes there and it looks very promising. I think they’re going to drill some additional holes, to outline a resource, so they can get more value for their shareholders by improving the project before they joint venture it out. They are already doing this with their Sugarloaf property in Arizona.

Another company making really good progress is Nayarit Gold Inc. (TSX-V:NYG). The company is run by a couple of ex- Gammon Gold Inc. (NYSE:GRS; TSX:GAM) people, so it’s very well managed. I’ve visited their Orion project in northern Nayarit, about two hours from Mazatlan, several times. The deposit is very interesting. Again, it’s one of these epithermal vein systems that can be very expensive for a junior to explore, but they have outlined one clavo on a very long vein system that now has a 43-101 resource of 432,000 ounces. It’s a combination silver and gold, maybe a little more silver-oriented. As I said, the key to these epithermal vein systems is finding that first clavo to really establish the project as developable. And in this case, the deposit is near the surface so it will be more economic to mine than many others. Their feasibility study should be out in the couple of weeks and I’m pretty sure that Nayarit will be moving up to the Advanced Explorers this year.

Another company that I’ve just added to the watch list and intend to visit soon is Corex Gold Corp. (TSX-V:CGE). They have a project on the Santana property in northern Sonora that’s not too far from Alamos Gold Inc. (TSX.AGI)’s Mulatos Mine. The results there so far are very interesting. If I like the project, you will likely see them in the Early Explorers later this year.

TGR: You mentioned that you also look at energy stocks, is there anything there you are following?

TW: My primary focus at this time is clearly Mexican silver and gold companies and energy has been relegated to only special situations that are still mining related. I think that the uranium market is very interesting, longer term. The supply/demand for uranium has only one way to go as the rest of the world is “warming up” to nuclear power. I really think that the U.S. is going to have to consider more nuclear energy if we seriously want to deal with carbon emissions and energy independence. We currently operate the world’s largest fleet of nuclear reactors, which produce 20% of our electricity. The U.S. currently consumes 56 million pounds of uranium annually, but only produces 4.5 million pounds. So without adding a single new reactor we are short about 50MM pounds of uranium a year. That is hardly energy independence-especially considering that we have one of the world’s largest resource bases of the metal. Most of our uranium currently comes from Russia, who has indicated that they will not be renewing contracts in 2013 as they wind down the dismantling of their nuclear weapons stockpile. This secondary source made up the bulk of the worldwide mining/consumption shortfall-which was about 70MM pounds in 2008. Both the Democrats and Republicans are exploring ways to work uranium mining into their separate versions of the new energy bill. It is not going to happen tomorrow, but I think that uranium mining will see resurgence in this country.

I had a chance to visit a property in New Mexico recently with Mickey Fulp. I have tremendous respect for Mickey and he covers a uranium company called Strathmore Minerals (TSX-V:STM). Strathmore has two major properties that have had significant exploration and the deposits are outlined, if not defined. This is not an exploration story, but a permitting and production story. Mickey and I toured their Roca Honda property outside of Grants, New Mexico. It is under joint venture with Sumitomo. The Japanese are very motivated to secure uranium resources and they have committed a minimum of $50MM to advance the project following a positive production decision. Roca Honda has over 33MM pound of very high grade ore and will likely get much larger when development and production commence. They have just submitted the permit which in and of itself is a milestone. These are some very smart and experienced uranium guys and seeing the extent of the permitting process was a real eye-opener. Grants has a long history of uranium mining and I believe this project will be permitted in the next two years.

Their second flagship project is called Gas Hills and is in Wyoming. This is also in the permitting stage but in is in a district that has seen over 100MM pounds of historic production. They already have 17MM pounds identified which can be mined in an open pit. The property includes several other areas of known mineralization and is 70 miles from the idle Sweetwater Mill owned by BHP Billiton. BHP is trying to sell the mill and if I am right about uranium mining in the U.S., it will be re-opened. The Gas Hills assets will be very valuable to whoever ends up with Sweetwater.

Strathmore has many other non-core assets that they are selling off to avoid share dilution as they move towards production. They just sold one property for $30MM, yet the entire market cap of Strathmore is only is only about $55MM. Selling this property will probably allow them to permit both Roca Honda and Gas Hills without selling additional equity.

Uranium stocks have been pretty strong recently despite the metal price dropping to $45. I think that anyone investing in uranium needs to be taking the long-term view and Strathmore is an excellent way to play it

TGR: Any other standouts in your MSG Model you want to talk about?

TW: Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E) has done an excellent job of advancing two projects in Mexico, San Antonio and La Colorada. They have been building resources at both projects through exploration, but they are also moving toward feasibility by dealing with surface rights and water issues.

SilverCrest Mines Inc. (TSX.V:SVL), likewise, has done a great job of building resources and developing their project with minimal dilution to shareholders. It’s now fully financed and has begun construction at Santa Elena. They are pouring concrete and have all the equipment standing by to build a heap leach mine. They should be pouring gold by June.

Another company whose project I like very much is Grayd Resource Corporation (TSX-V:GYD). Their La India project, in Sonora State, continues to grow and they have been adding some seasoned Mexican mine builders, including Ritch Hall to their management and advisory team. Ritch made me a lot of money in Metallica Resources and he is now Chairman of Grayd. He has brought in several of the guys who helped him build Metallica and they are doing everything right at Grayd. La India is another of my probable destinations during the first quarter of 2010.

TGR: Judging from several sites you’ve mentioned, 2010 is shaping up as another busy travel year for you and DD Tours.

TW: Indeed it is. Nothing is cast in stone yet, but these are interesting and exciting times in Mexico. At $1100 gold and $18 silver, a lot more projects are coming into play.

TGR: Via con Dios, Trey.

C.F. (Trey) Wasser III spent 20 years as a bond salesman and trader with Merrill Lynch, Kidder Peabody and Paine Webber, specializing in corporate cash management for many Fortune 100 companies and institutional money managers. He counts some of those same institutional money managers among his clients today, in his capacity as President and Director of Research for Pilot Point Partners LLC and President of Due Diligence Tours. It is via DD Tours that Trey takes analysts and fund managers on periodic site visits to junior miners’ properties in Mexico. An entrepreneur who is also active in the Dallas real estate development market, Trey formed III-D Capital LLC in 1993 to assist early-stage technology companies develop business plans and secure venture capital financing. That work evolved into a range of consulting assignments and finance activities for mining companies. He also serves as a pro-bono consultant for a number of regulatory agencies, including the Financial Industry Regulatory Authority (FINRA), which is the largest independent regulator for all securities firms doing business in the United States.

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 Gold Report: Capital Gold Corp., Fortuna Silver Mines Inc., Great Panther Silver Limited, First Majestic Silver Corp., Timmins Gold Corp., Animas Resources, MAG Silver Corp., Pediment Gold Corp. and SilverCrest Mines Inc.
3) Trey Wasser—I personally and/or my family own or am paid by the following companies mentioned in this interview: Capital Gold, Silvermex, Gold Resource, First Majestic and Excellon.

Trey Wasser: Identifying Stars in the Mexican Precious Metals Universe (Pt. I)

Source: Interviewed by Karen Roche, Publisher, The Gold Report 1/08/2010

http://www.theaureport.com/pub/na/3485


Trey Wasser, who designed the Mexican Gold & Silver Explorers Model to track junior explorers and producers as they define and develop precious metal assets and bring them into profitable production, took a breather from his frequent travels south of the border to spend some time with The Gold Report. Trey’s model-based index has enjoyed a 250% increase since inception in January 2007—including no loss in the 2008 crash—so he clearly has a keen eye for what it takes to make a winner. Better yet, he willingly shares insights on lots of his favorites in Part I of this exclusive interview. More to come on Monday, January 11.

The Gold Report: You’ve visited more than 75 projects in Mexico over the past couple of years. How did you come to focus on Mexico?

Trey Wasser: I love Mexico. I grew up in San Diego and have traveled there my whole life. I have watched the country grow up and now see some distinct parallels to the U.S. in the ’50s and ’60s, although Mexico—like many of the emerging markets—is evolving much faster due to globalization and technology. Mexico is now so tied to the U.S. and Canada through NAFTA that I believe most of the political and business risk has been removed. The country has a very bright future.

TGR: And you’ve managed to tie all of that in with your interest in gold and silver.

TW: The mining history in Mexico intrigues me. No one really knows how long ago the Incas and Aztecs first started mining gold and silver, but the Spaniards really cranked things up in the early 1600s. Every state in Mexico is mineralized and has some type of mining history. Yet Mexico has seen very little modern exploration due to property laws that did not change until mid ’80s. I expect that mining will be a major growth industry in Mexico for many years to come.

TGR: How did Pilot Point Partners and Due Diligence Tours evolve?

TW: Pilot Point Partners really evolved from a venture capital company I started in 1993 when I retired from the brokerage business, called III-D Capital. I consulted with several early-stage technology startups, helping them raise their first venture capital investment. By 1999, when the technology and internet business plans that I was seeing (and that were getting funded) had gotten way too speculative, I began to focus on natural resources, specifically mining and energy. I learned that there was very little independent research available in the junior mining sector and few U.S. investment banks involved in the space. I saw an opportunity to apply my research and consulting experience to junior mining companies operating in Mexico.

TGR: Where does Due Diligence Tours fit in that picture?

TW: Mark Twain once defined a gold mine as “a hole in the ground with a liar standing by it.” All the companies look good at the trade shows and on their websites. I thought that there couldn’t possibly be that many really good projects. It reminded me of the tech market of the late 1990s. I decided I needed to start visiting the properties.

Of course, many mining properties are very remote and it often means long rides on bad roads to reach them. Add the travel time to and from Mexico and you could spend four days to see a single project. Goldcorp (TSX:G) (NYSE:GG) had a great way to go about it. They’d arrange a tour of three or four of their Mexican mines and charter private aircraft to make the trip efficient, send out invitations and fill up the planes with analysts. I saw an opportunity to adapt that model and visit several different companies’ properties on a single trip. Hence, Due Diligence Tours.

I’ve developed a model that helps identify the better projects and tracks the progress of their development. The people who travel with me know I have vetted the projects and companies on the tours and that I can generate an initial analysis from the model for them prior to the trip. This format is why several analysts have traveled with me multiple times since our first trip in 2007.

Generally speaking, companies sponsor these trips to their sites to generate analyst coverage and investment interest in private placements, so I don’t typically travel with individual investors. However, I have had several inquiries and it looks like we may try to organize something later this year for individual investors.

TGR: Keep our readers posted on that.

TW: Of course.

TGR: Could you describe your model for following the companies?

TW: It’s a proprietary model that I developed to evaluate companies, their properties and the development of the projects. It is called Mexican Silver and Gold Explorers—MSG. It compares the companies and the deposits on several different quantitative and qualitative dimensions on a matrix. The model tracks exploration companies from the grassroots stages as they develop their assets and move into production.

TGR: How long have you been using this model and what does its track record look like?

TW: Since its launch in January 2007 it is up over 250%. Unlike many gold stocks and indexes, the MSG did not drop below its initial value in 2008. Of the 20 companies included in my model earlier this year, five companies have been bought out or have done a significant strategic transaction with a larger company and a sixth turned down a low-ball offer. Three other companies have fully funded their projects and are moving into production.

TGR: Let’s break those down into groups. Which three companies are moving into production?

TW: Timmins Gold Corp. (TSX.V:TMM), SilverCrest Mines Inc. (TSX.V:SVL) and Gold Resource Corp. (OTCBB:GORO, FSE:GIH)—which also formed a strategic alliance with Hochschild Mining (HOC: LSE) just over a year ago—have all fully funded their projects and are moving into production.

TGR: Which one turned down an offer?

TW: MAG Silver Corp. (TSX:MAG) (NYSE:MVG). Fresnillo plc (LSE:FRES) made a low-ball offer at the worst of the 2008 market correction. MAG management termed it a “take-under” and shareholders turned it down.

TGR: And finally, which five have been bought out or completed a significant strategic transaction?

TW: West Timmins Mining Inc. (TSX:WTM), Canplats Resources Corp. (TSX.V:CPQ), Orko Silver Corp. (TSX.V:OK), Gold Resource Corp. and Castle Gold Corporation (TSX.V:CSG).

TGR: Had you added these five companies to your model because you anticipated such transactions?

TW: No, they just measured up very well in the model. They were successfully growing their resource without significant dilution and were doing everything on the ground to move their projects toward production.

TGR: That suggests some of metrics you use to evaluate companies. What other criteria do you use to place a company into your MSG Model?

TW: Anticipated stock performance is the overriding criteria, because once a company is included in my model, it also becomes part of the MSG Index. In most cases, a stock being included (or dropped) from the model will be the result of a site visit. On the ground, I can usually get a pretty good feel for the project, the team in Mexico and their plans for development. The main thing I’m looking at with management is experience and the way they spend money. I look at how much money goes into the ground versus how much is used for promotion and corporate G&A. While that won’t necessarily exclude somebody, it’s a pretty good initial criteria. It generally will reflect on management’s ability to move a project forward without blowing out the capital structure of the company. The capital structure is very important in determining what the company has accomplished with equity they’ve already raised and their ability to raise additional capital. So I track the stock dilution for the past five years versus in the advancement of the project and growth of the stated resource

TGR: Can you elaborate on what criteria you use to confirm that a project is developable?

TW: Some properties are just very remote or have other issues that will impede the economic viability of the known resource. They might look good on paper as the company reports good drill results and puts together a huge resource. In Mexico, surface rights and mineral rights are separate. Having mineral rights does not guarantee access and use of the land for mining. Most of the surface rights were granted to local communities called “Ejidos” by the federal government after the Mexican revolution. Securing these surface rights and access is very important and has been an issue at several mine developments. Water rights are also a big issue in many parts of Mexico, especially in Sonora and Baja where no new water rights are being granted. Permitting, in general, is not a problem in Mexico, but it can be an issue with certain projects if they are too close to an urban area,, a water source or an archeological site.

Underground mining in Mexico can also be challenging. The veins are generally very narrow. They are notorious for pinching and swelling in both width and grade. Feeding a mill from a long narrow underground vein can be difficult and get very expensive. Building and operating a mill also adds significantly to the cap-ex of a project. Raising the capital to develop an underground deposit may be difficult for a junior company. I generally prefer to see juniors working on open pit projects that can be heap leached and developed at a lower cost, without significant dilution. I am not a geologist or a mining engineer, but I travel with a pretty elite bunch through Due Diligence Tours. We have some pretty frank discussions about the projects. The main issue is always whether the project is developable. Ownership is also an important issue. I try to evaluate whether the company is capable of financing and developing the project on their own or if they’ll need someone else to step in and develop the project through a sale or joint venture. Ownership of the project is very important. I like to see 100% ownership.

TGR: Why is that?

TW: If a company is already joint venturing the project to earn only 60% or 70%, it will be very difficult for them to find another partner or a buyer. Financing will be more difficult as well. If the joint venture is with a major company, there are often “claw-back” rights where the junior can be bought out of the project. This can mean that as a shareholder I am taking all the development risk and may not ever see the rewards of a fully developed project.

TGR: Does your model evaluate the ore bodies or do you rely on 43-101 reports?

TW: I read dozens of 43-101s and I encourage any investor to make these reports part of their due diligence on a junior mining company. They are important, but they aren’t enough to fully evaluate a deposit. As you may know, the 43-101 is a mineral resource classification scheme supervised by the Canadian Securities Administrators and developed to regulate how public companies disclose scientific and technical information about mineral projects. This came about in response to a scandal in the late 1990s. The idea was to make each report a fully independent evaluation, but in reality the companies still have a lot of input into the reports.

The problem is that there aren’t standardized calculations for modeling deposits, establishing cut-off grades and stating gold or silver equivalents from other metals. Much of the silver in Mexico is in poly-metallic ore, meaning it is mixed with lead and zinc. The companies like to convert the lead and zinc to “silver equivalent” ounces to state a bigger global resource. Converting lead and zinc to so-called “silver equivalent” ounces can be very deceiving. At current prices, 1% lead and 1% zinc would add about 3.5 ounces per ton to a silver resource in a “silver equivalent” calculation. But after typical recoveries, smelter charges and penalties, 1% lead and zinc aren’t really economical. So a typical “silver equivalent” resource in Mexico might overstate the recoverable silver by a very significant amount.

Companies also like to play with the gold/silver ratios and state “gold equivalent” or “silver equivalent” ounces. This can make it very difficult to understand the ore body and model cash flows. Recoveries of the two metals may vary significantly and may not be considered in the resource estimate. This makes it very hard to compare one company to another because everyone uses different math. I do a lot of work to break down all the rock values to come up with my own economic and developable resource numbers. The companies don’t always like it, but when their feasibility studies are published, my numbers are usually pretty close.

TGR: In addition to your model and index, you also have a watch list. Are the companies on your watch list part of the MSG Index or are you looking to see whether they’ll make it into the Universe?

TW: I use the watch list as a way to start to look at new companies or companies that come onto my radar screen and follow them for a while. They may be ones that I’m planning to visit before I decide to add them to the index and the model. For example, I added Oro Gold Resources Ltd. (TSX-V:OGR) and Rochester Resources Ltd. (TSX-V:RCT) to the watch list somewhere around October. Once I saw what they were doing, met with management and checked out the deposit, I upgraded them from the watch list to the model and the index.

Meanwhile, if I don’t like the way something is going at a company—maybe some problem with the deposit itself or the development of the project—I may drop it from the model to the watch list, which means I’m still covering it and watching progress, but it won’t be included in the index.

In the same way, I also keep an eye on the mid-tier Mexican producers such as Minefinders Corporation (TSX:MFL, NYSE.A:MFN) and Alamos Gold Inc. (TSX.AGI) and others. I don’t really follow them per se, because they’re already widely covered and for the most part, they don’t fall into my exploration model. I do use them in some other comparisons on valuations with the other smaller producers that are actually in the model.

TGR: Do you always add new companies at the Early Explorer level?

TW: No, I will add companies at any level as a new addition or an upgrade from the watch list. But it is the Early Explorers that add the real leverage to the overall MSG Index. Since January 2007, the Advanced and Producing Explorers are up 166% and 103% respectively. The Early Explorer category is up 770%.

TGR: Wow, that is impressive. To what do you attribute those returns for Early Explorers?

TW: Without question I attribute it to Due Diligence Tours and a lot of boot leather on the ground in Mexico.

Want more? Watch for Part II of The Gold Report’s interview, to be published on Monday, January 11. Trey will discuss more up and coming opportunities, including Great Panther Resources (TSX:GPR), First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF), Timmins Gold Corp. (TSX.V:TMM), Capital Gold Corp. (TSX:CGC;OTCBB:CGLD; Frankfurt:CGU), Fortuna Silver Mines Inc. (TSX.V:FVI), Animas Resources (TSX.V:ANI), MAG Silver Corp. (TSX:MAG) (NYSE:MVG), Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E), and SilverCrest Mines Inc. (TSX.V:SVL).

C.F. (Trey) Wasser III spent 20 years as a bond salesman and trader with Merrill Lynch, Kidder Peabody and Paine Webber, specializing in corporate cash management for many Fortune 100 companies and institutional money managers. He counts some of those same institutional money managers among his clients today, in his capacity as President and Director of Research for Pilot Point Partners LLC and President of Due Diligence Tours. It is via DD Tours that Trey takes analysts and fund managers on periodic site visits to junior miners’ properties in Mexico. An entrepreneur who is also active in the Dallas real estate development market, Trey formed III-D Capital LLC in 1993 to assist early-stage technology companies develop business plans and secure venture capital financing. That work evolved into a range of consulting assignments and finance activities for mining companies. He also serves as a pro-bono consultant for a number of regulatory agencies, including the Financial Industry Regulatory Authority (FINRA), which is the largest independent regulator for all securities firms doing business in the U.S.

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 Gold Report: Goldcorp, Timmins Gold, SilverCrest Mines, MAG Silver, Canplats Resources and Minefinders.
3) Trey Wasser—I personally and/or my family own or am paid by the following companies mentioned in this interview: Capital Gold, Silvermex, Gold Resource, First Majestic and Excellon.

Streetwise – The Gold Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. 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 Inc. 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 Inc. does not guarantee the accuracy or thoroughness of the information reported.

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

The Gold Report: Bob, when they announced Ben Bernanke as the Time magazine’s Person of the Year, I was thrilled, because I knew I was going to be speaking with you. I just have to ask, how do you see Ben’s place in the 2009 economy?

Bob Moriarty: Actually, it really scared the hell out of me. What it means is that I can no longer go to college football games.

TGR: Why is that?

BM: You know the president was awarded the Nobel Peace Prize.

TGR: Yes.

BM: We have three-and-a-half wars going and he was awarded the Nobel Peace Prize and then Time magazine came out and made Ben Bernanke the Man of the Year. Now that’s the equivalent of being awarded the Nobel Prize for Economics. Stalin was Man of the Year.

It means that Bernanke had the most influence on the world last year, which is quite interesting because it means I cannot go to a college football game anymore.

TGR: Okay. I’m still missing the link.

BM: If I go to a college football game, at half time they give out awards and they do special things. If I go to a college football game, I’m bound to be awarded the Heisman Trophy.

TGR: I hate when they give those out.

BM: Ben Bernanke has done more to destroy the economy of the world. If there was one organization that is responsible for the financial chaos that exists today, it would have to be the Federal Reserve. Ben Bernanke has destroyed the financial system of the world and they’re thinking he saved it by creating all this money. Well, wait a minute. That money has to go somewhere.

If you actually look at the numbers, the most accurate number that I’ve been given is a $23.7 trillion increase in U.S. liabilities. It’s not necessarily the government that spent that. We’re just on the hook for that kind of money in one year and that has to have an effect. Dubai has defaulted; Greece is not very far away from defaulting; Ireland is very close to defaulting; the U.K. is very close to defaulting; Japan is very close to defaulting; the United States is very close to defaulting; Spain is very close to defaulting. And the one thing that we know is they’re going to. So we can either have a deflationary collapse where everybody says, okay, well, remember those $10 trillion that we owed the rest of the world? We’re just not going to pay them. Or we can go into hyperinflation. Those are the only two alternatives and either is pretty bad.

Bernanke has guaranteed a collapse of the financial system. We’re in the center of the storm, the eye of the storm right now. The hundred or so people in the world who actually understand what’s going on are all going, “oh, shit.” And Ben Bernanke’s sitting there with a grin on the cover of Time magazine. Well, I can guarantee next year he isn’t going to be sitting on the cover of Time magazine with a grin. He’ll be sitting on the cover of Time magazine with a noose around his neck.

TGR: Do you think these relatively smart people—granted, you stick them in Washington and weird things happen—realize they’re in the eye of the storm, and they’re just trying to keep the panic down now and try to maneuver things behind the scenes or do you think they’re totally oblivious to what they’ve created?

BM: There’s a lot of total oblivion. These guys have all studied Keynesian economics. Keynesian economics simply doesn’t work. Anybody who actually understands economics knows that, but that’s what they were taught and because everybody around them was talking Keynesian economics, they think you can somehow buy your way out of failure.

Obama came up with this really wonderful quote early in December saying we’re going to spend our way out of the recession. My question is—if we spent our way into this recession, how the hell are you going to spend your way out of this recession? Spending is what got us into trouble in the first place. There was another article released last week saying that the number of Federal employees with salaries in the six figures is higher than it’s ever been. This is insane. We have 22% unemployment and we have hundreds of thousands of Federal employees earning over $100,000 a year. The 22% unemployment, those people who have no jobs are starting to get really, really pissed. And when they do, we got problems.

The gap between government employees and employees in general is higher than it’s ever been. The unemployment in the United States is higher than it’s ever been. So not only is the government employment increasing, unemployment’s increasing for everyone else. Who do they expect to pay the taxes? And the answer to that is the 47% of people who pay no taxes at all are listening to Pelosi say, “Hey, I’ve got a great idea. We’ll make the rich people pay for the health care.” And then a week later she had another really great idea. “Hey, we’ll make the rich people pay for Afghanistan.” Unfortunately, nobody listened to her definition of rich people. Did you catch that? Did you hear what she said? “Rich people are those who still have a job.”

It’s the end of empire. Democracy works until the voters learn to give themselves benefits. We have gone into never-never land. For Barack Obama to be awarded the Nobel Peace Prize after being in office for two weeks goes beyond absurd. The fascination with the sex life of Tiger Woods is all over the news and my question is who cares? Are they kidding? We’ve gone crazy.

TGR: So how are we going to be protecting ourselves investment wise? I’m going to ask a little bit about gold because you’re a big gold bug. Gold ran up to above $1,200 and now had quite a decent pullback. You point out correctly that who wouldn’t have expected a pullback when it’s up for 13 days straight.

BM: We have not seen the top in gold, but corrections are perfectly normal and they’re a good thing. Now why should you own gold? You should own gold for two reasons. One is it’s an insurance policy. The things that Bernanke and the Federal Reserve and Tim Geithner have done are going to destroy the world’s financial system in the end. I know that sounds really catastrophic, but it’s going to be catastrophic. The United States is $100 trillion in debt. No sane person can come to me and say, “Bob, there’s a way out of that.” They can’t, there is no way out of that. We’re going to default. I don’t care if we default next week or next month or next year or 10 years from now. We’re going to default and it’s going to be catastrophic.

Gold is an insurance policy. It’s like an insurance policy on your car or your home or yourself. It’s not something that you want to collect on, but for 5,000 years it has worked to protect people’s assets. Secondly, as an investment, the general stock market would absolutely terrify me right now. It’s so over bought and the P/E ratio has hit historic highs. It’s just screaming to take everybody’s money away when people wake up to what’s really going on. So gold shares, silver shares, energy shares, food shares are a good, safe place to be. It used to be widows and orphans would buy GM and they would buy General Electric and they would buy Ford and Chrysler. Widows and orphans should actually be buying Canadian juniors right now because they might preserve their wealth. They own FAO and Ford and GM and General Electric; they own companies that are walking zombies just waiting to die and be buried.

TGR: If the stock market does take another correction and even a massive one, could it take down even the Canadian juniors, too?

BM: I don’t believe that’s true. The Canadian juniors have already crashed. It happened last year and everybody had it absolutely wrong except Bob Hoye. Including me. I believed the Canadian juniors were going to be a safe place. But if you look at the ratio of the XAU over gold, the ratio is lower than it’s ever been in history and it’s been lower for a year. So Canadian juniors are not going to crash; Canadian juniors already have crashed.

The market is going to do whatever it has to do to surprise the biggest number of people and people are expecting a crash in the juniors if the market crashes. I don’t think so. You have to have some place of safety. Last year it was gold and this year I believe it will be gold shares. I think that this year—this is a good time to bring it—I think that 2010 will be an extraordinary year for gold shares.

TGR: Does that mean it would be an extraordinary year for all gold shares and once the mania starts happening, will all gold companies rise in value?

BM: Well, that’s what’s really funny. The biggest piece of crap companies out there are going to go up fifty fold. I would be very hesitant to recommend that people buy into piece of crap gold companies. But when the wind is high enough, even the turkeys fly.

TGR: Do you think in a market place where most people don’t understand mining to begin with, they’re going to be able to differentiate the crap gold companies, as you call them, from the valuable ones? Why not just buy a market basket of gold companies?

BM: That’s a really good move. There are some great funds out there—USAA Gold is a good fund. Frank Holmes does a good job with the U.S. Global Investors Funds; Eric Sprott does a good job with the Sprott Funds. There are some great gold funds out there and that removes the risk of having to make decisions. The reason I spend eight months a year traveling all over the world is I’m trying to give my readers the house advantage and we think we do. I’ve been doing this for eight years and we pick some pretty good stocks. That doesn’t mean they don’t go down. Some go up and some go down, but that just proves I’m honest.

TGR: If we look at 2010 and it’s going to be this extraordinary year as you’re predicting, will the markets be smart enough to recognize and reward better run companies?

BM: Strangely enough, the ones that’ll go up the most are the crap companies run by absolute crooks that are selling for a penny and a half right now. You’ve got to remember going from a penny and a half to three cents is 100% climb. Let me give you an example. I wrote about the International Tower Hill Mines Ltd. (NYSE/AMEX: THM; TSX-V:ITH) a year ago and International Tower Hill, I think, was US$1.04 and it’s like $7.32 now. There are hundreds of companies that have gone up more than that and Tower Hill has one of the best deposits in the United States and its run by one of the best guys in the industry. A stock going from $1.04 to $7.32 is no different than a stock going from two cents to 12 cents.

TGR: You’re traveling around finding the good deals for eight years, which bodes well in that market place where better projects will reward. But in the market place, everyone’s going to get rewarded because you happen to be in the right sector. What’s your strategy?

BM: I invest in the best people that I can find. I try to find the best companies and the best people because, while you’re waiting for the piece of crap company go from a penny and a half to 15 cents, it may go to a quarter of a cent. You don’t know. I buy companies that I like their story, I like their management, I like their location, etc.

TGR: What do you see for silver?

BM: Silver is a commodity right now. When the financial system collapses—and it’s going to collapse—and we go back to the gold standard, the metal that you need the most of is silver because of its value as money. In a gold system the money you need most will be silver. At that point it would go back to a historic ratio, somewhere between 15:1 and 25:1. Silver is an investment. It’s very dangerous because there are always cheerleaders. The cheerleaders are the guys waving the flags and the pom-poms and showing their butt to everybody saying silver is going to go to $100 an ounce if we get into a war because this is the most critical war metal. Well, we’re in three wars and silver has not gone to $100. The cheerleaders say we’re going to run out of silver. We’re not going to run out of silver. It’s a commodity. At some price, it extracts itself from the ground. At $16 to $18 an ounce, there’s plenty of silver and silver’s supply and demand is in equilibrium. But to move it up relative to everything else, you have to have increased demand and the increased demand is only going to come from using it for coins.

TGR: So the increases we’re seeing in gold now through 2010 probably will not reflect on silver?

BM: Actually, the ratio of silver to gold will go up as the economic situation gets worse because people recognize gold as being a safe haven and they don’t recognize silver being a safe haven to the same degree. We could go back to a ratio of 90:1 or 100:1, but the idea that silver is somehow a better investment than gold, these guys have been wrong for 10 years. I can’t understand why they keep arguing the same thing when all the facts show they’re wrong.

TGR: So someone who’s looking to the insurance policy or hedging or putting money on the sure bet that the economy and the financials are going to falter should really focus in on gold, not silver.

BM: Focus on gold, but you want to hedge your bets, too. One of the possibilities that always exists is that maybe I’m wrong.

TGR: How would you hedge your bets?

BM: I own physical gold and physical silver and I own silver mining companies and I own gold mining companies.

TGR: You mentioned that you like to invest in the best people and so I’ll assume you have certain companies that you feel have management that represents the best of the best. Can you share those with us?

BM: Sure. If you look at the website, we write about them all the time. Animas Resources (TSX.V:ANI) came out with drill results as we’re speaking and the drill results didn’t appear to be good. The stock got hammered. Somebody sent me the drill results and I looked at it and said, hey, somebody’s making a mistake because those are pretty good drill results. They’re in the district and they’ve got really substantial management. In general, I tend to like Mexico. I like Timmins Gold Corp. (TSX.V:TMM), I like Animas, I like Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E). There are so many great stories there.

Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK) has got some good deposits down there. Great Panther Resources (TSX:GPR) has got some good deposits. Candente Resource Corp. (DNT:TSX and BVL) has formed a new company called Candente Gold Corp. (CDG.TO). With Mexico you could pretty much throw a dart; I don’t think you could lose there. There are some great companies and there’s some great management down there.

TGR: Outside of Mexico are there any plays that you’re looking at that are interesting?

BM: I wrote about one called EurOmax Resources Limited (TSX-V:EOX) in Eastern Europe, Serbia and Bulgaria and Macedonia. They’ve got a surplus of good projects and the stock’s real cheap now. There are hundreds of companies. I’m not an expert. I go to a gold show and I see half the companies there are companies I’ve never even heard of before, but there are some real good guys in the industry who cover these and some good subscription services. Greg McCoach has got a good service and Brent Cook has a good service. Lawrence Roulston has a good service. There are some guys who can give good tips.

TGR: Are there any small caps outside of Mexico that you have a few thoughts on?

BM: Oh, dozens and dozens and dozens of them. For example, I happened to be on a trip with some of the people who were investors in Richfield Ventures Corp. (TSX-V: RVC) before they announced their recent results. Richfield is up in B.C. and there’s another company right next to them called Silver Quest Resources Ltd. (TSX-V:SQI) and, they had absolutely extraordinary results. You’ve got to give them credit for that.

I’m always hesitant to list companies that I like because there are hundreds of companies out there who have done extraordinarily well. We got cheaper in relative terms last September, October and November of 2008 than gold stocks had ever been in history. You could have thrown money at companies and made money.

My very favorite company right now is an energy stock. It’s not one that anyone can buy. It’s still private but it’s going to be a very big deal. It will be the Google of investing. It’s a company called Titan Oil Recovery Inc. It’s run by one of the smartest and best managers I know, Ken Gerbino. Basically the company treats past their prime oil fields with a patented bacterial process that essentially lowers the surface tension of the oil, making it easier for it to flow. Their tests on dozens of oil fields show increased oil production by over 100%. That’s giant. In the oil business, most oil gets left in the ground. You can never recover all of the oil in a field. This process is going to be worth many billions of dollars. It’s not a total solution to peak oil but it’s sure better than anything else I’ve ever seen or heard of.

TGR: Well, you could have picked almost any of the resource stocks back then.

BM: Yeah, yeah—exactly. You could pick the worst company in the business a year ago and made money. There were companies that were two cents then that are 60 cents now. But in relative terms, here’s one thing I would like to point out. We started our website in the summer of 2001 and, like Frank Giustra of Endeavour Financial Corporation (TSX:EDV), we chose to get back into the industry right at the bottom and we said it was the bottom. We were very supportive of companies and we said this is a tremendous opportunity to invest. Of course, nobody believed us because gold was $252 an ounce. Well, people, we’re not in Kansas anymore and gold is not $252 an ounce. It’s $1,120 and change right now. It was $1,200 and change a month ago. The risk is out of it. Okay. There are some extraordinary stories out there and they’re extraordinarily cheap. You should invest, one, because it’s a safe place to invest—it’s the only safe place to invest that I know of—and, two, because it’s so cheap that you should have extraordinary returns.

TGR: Thank you very much for your time, Bob.

Wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet almost nine years ago, and later added a second resource site, 321energy.com, which covers oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot with more than 820 missions in Vietnam. A Captain at age 22, he was one of the most highly decorated pilots in the war.

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 Gold Report: Animas Resources, Timmins Gold Corp., Pediment Gold, Great Panther Resources, EurOmax Resources and Richfield Ventures Corp.
3) Bob Moriarty: I personally and/or my family own the following companies mentioned in this interview: Canaco, Titan Oil Recovery and EurOmax. At 321gold.com, we receive money for advertising from the following companies: Animas, Pediment, Timmins, Endeavour Silver, Great Panther, Richfield Ventures and EurOmax.