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1ST HOUR: THE EXPERTS

James Turk, GoldMoney

JIM PUPLAVA:  Welcome everyone, I’m here at the San Francisco Gold Show, this is my third year of attendance. And let me tell you what’s coming up on the program. We’re going to hear from the experts first. In this first hour, we’re going to be talking to James Turk, James Dines, and John Doody of the Gold Stock Analyst. In the second and third hours we’re going to be hearing from the company experts. Our first guest will be Ian Telfer from Goldcorp and Silver Wheaton; we’ll be talking to Yamana Gold’s Peter Marrone. We’ll also talk to some of the Juniors, as well as a uranium company this year where we’ll be hearing from David Miller of Strathmore Minerals.

And later on, we’ll be hearing from Frank Barbera who is joining me at the gold show. We’ll wrap-up everything in what has been, well, a different kind of show. You never know what to expect when you arrive at these shows. I have to say I was totally surprised, not only by the attendance but also by what the experts were saying. Quite honestly, I was completely surprised so you’ll have to listen in to what is coming.

If you’re following the gold market this year you know that we’re hovering close to $500 and my next guest is a gentleman who’s pegged and forecasted $500 dollar gold. Joining me on the program is James Turk, founder of GoldMoney.

Jim, I was surprised when I came. I think of the first time I came here in 2003, you couldn’t walk down the aisles. It was just packed with the individual investor, it was bumper to bumper. Last year it was busy. I’m looking around the room right now, it’s 2:30pm in the afternoon and it’s mainly the gold guys – the people running the companies. And here we are: dollars away from $500 gold. Does that surprise you?

JAMES TURK: Yeah, it is a bit surprising but it’s really very, very bullish. It shows that people don’t believe. And major bull markets begin when people don’t believe. If people were here screaming from the chandeliers with enthusiasm I would be a little bit worried, because it would show a lot of exuberance, perhaps the market’s overbought. But what I’m seeing here today is that gold’s got a lot left to it, and once we get to $500 it’s not going to be the hurdle or the ceiling that a lot of people are thinking about. I think it’s just going to hurdle right through $500 and head on higher than that. [2:47]

JIM: Do you think one of the reasons is that you’ve got a lot of technicians that look at gold and say, “boy! $500 gold, that’s it. It hits $500 and the central bankers are going to come in and play their game, start dumping, the commercials are short right now, so if it hits $500 it won’t stay there.” Do you think there’s a lot of that right now?

JAMES TURK: Yes, there is. Just like there was a lot of that when gold was at $325, and was never going to go through $325. And it’s the same thing when gold was in the $430s, it was never going to go through $432. You know, these targets are there, they are reasonable targets, and you may see some selling, but the reality is there are some very compelling reasons to own gold, not only from a short term point of view but also from a long term point of view. And ultimately $500 is going to be broken before we go much, much higher.

JIM: If we compare this gold bull market to the 70s, in the 70s the dollar went off gold, gold went from $35 in that first leg up to $200, and people were looking at that and saying, “Wow! where did this come from.” And then it went from $200 back down to $100, and then from $100 all the way up to $400. If we take a look at where gold has gone –we started this move in 2000-2001 – we’ve only gone from 250 to 500. That’s nothing as far as gold bull markets go. [4:09]

JAMES TURK: Particularly when you compare what gold has done compared to the other commodities which have far [out]-performed gold in the recent months or recent years. And the other thing to keep in mind is, while you talk about those 1970s numbers, let’s inflation adjust those today. Talking today, $500 an ounce in inflation-adjusted terms is probably like $100 in 1970s terms, if not even lower. So, gold is very, very cheap. [4:33]

JIM: The other thing too, I was talking to one of my other guests, if South African production is going to be down this year which I think is significant. I mean you’re talking about one of the largest gold producing countries in the world. Australian production is going to be down. So, at a time when the demand for gold is going up every single year – and that’s what I really think a lot of investors don’t understand – [yet] we keep having these deficits.

So, you’ve got countries that aren’t producing as much, you’ve got major mining companies that aren’t producing as much, you’ve got demand increasing. And certainly if you look at the monetary factors, money supply growth is at 13% in Europe, the last 3 months M3 is up almost at 10% a year, and [the statistic] is going to disappear in March when Bernanke takes over. Fundamentally, and monetarily, this tells me that prices are heading much higher. [5:32]

JAMES TURK: Yes, I agree completely. You make an interesting point about gold being demand driven, because you have to remember that gold is produced for accumulation. All other commodities are produced for consumption. At the end of the day, because the above ground stock of gold is essentially all the gold that has ever been mined throughout history, is the demand for that gold growing or is the demand for that gold declining? And over the past few years gold prices have been going up because the demand for that above ground stock of gold has been getting greater and greater. And that trend is going to continue for the reason that you pointed out: there are problems with the dollar, there are problems with the euro, there are problems with all of the national currencies out there. And the important point that people should be looking at is that gold is not just rising against the dollar, it’s rising against all of the major currencies of the world and the last one fell in to place just recently. We took out $570 Canadian dollars per ounce which was a 17 year high. We’re now at new 17,18 year highs against the Canadian dollar at current prices. That had been the strongest currency, but now gold is even moving higher in Canadian dollar terms. So this is very, very bullish. [6:36]

JIM: That reminds me because last year when I was talking to the experts, one expert said, “Nah, this is just a US phenomenon, it’s not a global phenomenon until gold starts taking out new highs in other currencies.” But that is something we’ve seen this year. Another thing that we’ve seen this year too, is that gold was sort of looked at as the anti-dollar commodity. So this year we’ve seen the dollar up 14 to 15%, but throughout it all gold was rising along with it. [7:04]

JAMES TURK: Yes, absolutely, which has confounded a lot of the mainstream thinking because for a long period of time people were thinking gold was going up when the dollar was going down. But now that the dollar has bounced a bit and gold is still continuing to rise. And the underlying message that we should take away from that is people around the world see problems with their own national currency and they’re moving into gold as a way of protecting themselves, looking for the safety and security that gold offers. [7:29]

JIM: Has it surprised you and do you think it’s not only just disbelief that if you take a look at the stock market there’s been horrendous losses for investors in this new Century: the NASDAQ losing almost 75% of its value, the S&P over 40%. Alright, we get a rally beginning in 2003, very good year for the stock market, very good year for the gold market by the way at the same time. 2004 was a very tough year for the stock market, I mean if you look at the gains they came in the last 6 weeks of the year. Here we are in 2005, the market’s have spent most of their time in negative territory all year round, or at least up to this point. Maybe they might end like up 4% or 5%, like last year. Who knows what will happen?

And yet here’s this metal that’s gone from $420 at the beginning of this year, and we’re approaching $500 –an historic benchmark – and the enthusiasm, as I look around this floor, it’s not a ghost town but it’s mainly people in the industry here. Why isn’t there more interest? The individual investor he’s not here. [8:40]

JAMES TURK: You know I’ve been following the markets now for almost 40 years, and you see it time and again in different markets all bull markets begin with a lack of enthusiasm. That’s why I look around here and say, “Gosh, I should be thinking something well over $500 for the immediate future, and that $500 is not going to be a significant hurdle, because there is no enthusiasm.” Like I say, if people were jumping up and down with joy then this might be a top, but this is not a sign of a top by any means. So, I think we’ve got a lot left.

I haven’t done my price forecasts for next year, but in the last 3 years we averaged about 13%, and if we close this year at $500 it will be another 13 to 14% on the year. I think 20% next year that would be $600 gold, but I think it’s going to be higher than that, just given the monetary problems we’re facing today in the States, and also the monetary problems other countries are facing around the world.

One point too, about the stock market. Keep in mind one thing about the stock market. If you look at it in terms of gold, the stocks have done even worse than one would otherwise think by looking at the Dow Jones Industrials and the S&P in terms of dollars, because gold has done so well this year, and the stock market itself has done relatively nothing. Basically, a chart of the Dow in terms of gold doesn’t look good at all, which means bad for stocks and good for gold. So, my basic point of view is what people should be doing is generally sitting in cash but cash gold, not dollar gold, while they wait for the Dow Jones and S&P to come back down to more normal levels: lower prices in terms of gold. [10:09]

JIM: Let’s talk about the monetary phenomenon. If you take a look at M3 in the United States, it’s up almost 10% annualized in the last 3 months, so they’re stepping it up. If you look at the European money supply since the beginning of the year it’s up nearly 13%. If you look at the money supply in China it’s up in the double digits. So, globally, we’ve got money supply figures growing at high single digits, and in many cases in double digits. That has got to be a fertile ground for the gold market. [10:45]

JAMES TURK: Absolutely. So, it’s no surprise that the Federal Reserve has announced just recently that they’re no longer going to report M3, which is truly a fantastic announcement. Basically, they’re saying they’re not going to report on what they create. As you know the Fed is there to create dollars. It would be the equivalent of General Motors saying they’re not going say how many cars they’re going to produce every year. I think what the Fed is doing is giving us a message that they know what is coming. They know that the structural imbalances in the system today are basically incurable. They know that the trade deficits, the growing Federal budget deficits mean that they’re going to have to create tremendous amounts of new dollars in the years ahead. And what I’m looking for over the next several years is what I’m already calling the Bernanke inflation. I think he’s going to try reflating the system, and you’re ultimately going to see a massive depreciation in the dollar, because of huge creation in dollars, even though they no longer report how many are out there circulating as currency. [11:39]

JIM: I want to bring up the idea of inflation and deflation. You’ve got a lot of prominent people that are talking about deflation. I don’t know where they get that, because if you see that chart that was run in Barron’s of the purchasing value of the dollar over the last 100 years, and especially the last 50 years, I don’t how you can call that a deflation. [12:07]

JAMES TURK: I know that chart and there’s a very simple answer to the inflation/deflation question of what’s it going to be? It’s a question of first determining how you’re going to measure that deflation or inflation. What currency? When you look at  prices of goods and services in terms of dollars you’re going to have inflation. In other words the dollar is going to purchase less and less. But if you look at the price of goods and services in terms of ounces of gold, or grams of gold, you’re going to have deflation, which basically means the purchasing power of gold is going to rise. I think that is the answer. So, if you calculate prices in terms of gold you’re going to get deflation – the value of the money goes up – if you calculate prices in terms of dollars you’re going to get inflation – the value of the dollar goes down. [12:46]

JIM: The one thing I see today if you look at the US and you contrast that to the debt-bubble and equity-bubbles in the 20s, is that our currency was backed by gold. So, when the stock market crash came, and they tried all kinds of different mixes, there was gold backing the currency. Today, there is absolutely nothing backing the currency. There is no limitation as was placed on the Fed back in the early 30s, and we did get deflation because that is what happens when you’re on a gold standard. [13:24]

JAMES TURK: Exactly. They had to deflate because people wanted gold which meant they had to contract this massive credit expansion that occurred in the 1920s. Now, what happened when Volcker came into the Federal Reserve to basically solve the monetary problems at that time of the double digit inflation we were getting in the 70s. He raised interest rates, and kept raising them to entice people out of tangible assets back into financial assets back into the dollar. So we got a 21% prime rate.

Now, Greenspan cannot do that today, nor can Bernanke, because 25 years ago we were the largest creditor nation, now we’re the largest debtor. We didn’t have the debt mountain we have today back in the late 1970s. We have the derivatives problems today you didn’t have 25-30 years ago. So, Greenspan’s been talking about raising interest rates to save the dollar, but the bottom line is that we still have negative real interest rates in this country. If you look at the Fed Funds rate and subtract the CPI away from that, interest rates are still negative. So the dollar is being debased even though interest rates have been raised. So, it doesn’t look good for the dollar looking forward, it looks very good for gold. [14:31]

JIM: Another aspect too is that I think there’s a lot of confusion in terms of definitions of inflation. If I’m a manufacturer and we were making widgets, if I can increase my production of widgets –where I can amortize my fixed costs over a larger number of units – I’m going to bring down the cost of my widgets down so I can lower their prices. Let’s say I’m making a lot of money manufacturing these widgets that attracts other businesses to come in so they start manufacturing widgets, and the price of those widgets come down. That, I hear over and over, people refer to as deflation. To me that is productivity. That is what happens to any kind of manufacturing market, where as more producers come on line and the more you produce, prices go down.

And what I think – and this is just a theory of mine – in the 80s and 90s, we transferred inflation from monetizing debt over to the financial system. So, governments instead of monetizing went to the bond markets and used savings to finance it. At the same time, you had this tremendous increase in manufacturing globally, and as that happened it brought down the cost of TV sets and DVD  players. So people were saying, “look, look we’ve got deflation here.” In the meantime, a starter home in Southern California costs three quarters of a million dollars. You’ve got houses in the suburbs now going for ¾ to a 1 ½ million dollars. I go to the store now and my groceries cost me more, energy costs me more. Yeah, I can buy a DVD player cheaper this year than I did 3 or 4 years ago, but I’m not buying a DVD player every week or a new computer, but I do need food. [16:22]

JAMES TURK: No, you’re absolutely right. And there’s lots of other things that you left off like medical expenses, property taxes, homeowner’s insurance, all of these things we pay year in and year out. They’re all going up, and that’s why I like to look at inflation/deflation in terms of the currency to explain whether the currency is gaining purchasing power rather than looking at specific prices. Because when you look at the dollar you can get a distortion in terms of what is truly happening to the purchasing power of the currency. And that’s why you’ve got to look at, in my mind, the price of goods and services, and even financial assets, in terms of ounces of gold as well. [16:57]

JIM: Looking forward, it seems to me I don’t care if you’re looking at energy, or gold, or copper, or uranium, I don’t think it has really quite dawned on people – I mean if you look at a graph of the CRB Index it’s obvious – that commodities are rising globally. And unlike any other industry it’s not something that we can flip on the light switch tomorrow, and we’re going to have a gazillion ounces of gold, or billions and billions of barrels of oil, or we’re going to have all these new uranium deposits. All this stuff takes time, and at the same time the world is getting to be a bigger place. There’s more people on the planet, there are countries like India and China that are industrializing. This to me is a long term trend, and I don’t think that has caught on with the public yet. [17:46]

JAMES TURK: You know you’re absolutely right. These markets have cycles. For example, in the 50s and 60s that was a cycle in which financial assets were favored over tangibles, until the late 1960s when financials became so overvalued, and tangibles so undervalued, that you had a switch. And that continued through the 70s, problems with the dollar continued through to the early 1980s when you had very high tangible prices, and very low financial asset prices. That cycle shifted again until 2000 when you had financials way overvalued compared to tangibles, and now we’re cycling back the other way.

Just like the last one lasted from 1968-1982, when you had the big tangible bull market, you’re only 4 or 5 years into this current one, and we probably have another 8-10 years left, and who knows where the price of gold and the price of commodities and the price of everything else tangible is going to be. It’s probably going to be by a factor of several times higher than it is today just for the simple reason that there are so many problems with the dollar, and we are on a path that is unsustainable because of these structural imbalances in the system. And that ultimately is going to mean people are going to want to own things, instead of just financial assets, and promises. [18:54]

JIM: This reminds me, Jim, of when I transitioned out of corporate life into the investment field. I got in the business in 1979 having spent 3 or 4 years in the corporate world with a Big Six accounting firm. When I got in this business – I became a certified financial planner – you went to the International Association of Financial Planner conventions like this, you saw the gold companies, the diamond companies, the energy companies. And we had this guy Volcker who was running the Fed, interest rates were going to 21%, and I can remember the first year,  probably almost up to 85 or 86, stocks were going up but if you watched Wall Street Week they were telling you all the reasons why stocks couldn’t go up any more. You know, the Dow hit 1000, and then it was working its way to 2000, then they were telling you why it was going back to 1500. And nobody believed it, people were still looking at gold and energy. I can remember going to a conference and somebody said, “well, I know the price of oil is down to $20, but we’re going right back to $40 and $100 oil.” That didn’t happen. But that is what investors were following. They were following that trend, and I look at the stock market rally we had in 2003, even today they’re still talking about the stuff that went on in the 90s, and ignoring a new bull market that is developing right underneath their noses. [20:19]

JAMES TURK: The reason why gold can’t go over $500 is the same type of logic why the Dow couldn’t go over 2000. People have it all wrong. That’s why when you look around at things like sentiment and levels of enthusiasm it’s sort of important to get a sense of what the market is saying, what the market is doing, what the market is thinking. That’s why my present view is we’re going to take out $500 and probably not look back. It just seems to be shaping up that way. It’s a very, very bullish near term outlook. [20:48]

JIM: Well, I can tell you just judging by what I see – I think sentiment is a very important gauge along with the charts, as well as the fundamentals – and looking at the dearth of investors I could probably do somersaults or bowl down this aisle. They’re just not here.

JAMES TURK: They’re still chasing the Cisco’s, and the Dell’s, and everything else of this world thinking there’s going to be another big stock market boom. If there is a stock market boom it’s going to be because the dollar isn’t worth anything. In nominal terms, the stock market might rise, but in real terms it won’t do as well as you will do by holding gold. [21:24]

JIM: It almost reminds me of Germany when you had the major German indexes of the 20s going to levels nobody even thought of. They thought it was real wealth, but the purchasing power in gold was declining.

JAMES TURK: Exactly. I make the comparison to what happened in Argentina a few years ago and this was very good in terms of explaining the inflation/deflation issue. What happened during the peso crisis is the quantity of pesos in circulation collapsed by about 30% in a six month period of time. Now normally, that would be a massive deflation because of a dramatic decline in the quantity of money, the quantity of pesos. But over that six months the price of things in pesos rose by 50%. How can you have a massive inflation when you had a huge 30% drop in the quantities of pesos circulating as currency? And the answer is very simple: the demand for money declined even more rapidly than the supply of money. And that’s what you’re going to see with the dollar. You’re going to see a massive decline in the demand for the dollar, and an increase in demand for gold and other hard assets. And as a consequence the price of gold is going to rise dramatically in dollar terms in the years ahead. [22:29]

JIM: Jim, if you were talking to a group of investors and we’ll call them skeptics, they’re sitting in the room and everything they hear, it’s “well yeah gold can go to $500 but it won’t stay there and this isn’t really a gold bull market.” Or you’ve got people talking about deflation. What would your advice be to the investor, right now? [22:51]

JAMES TURK: What I would do is I would have a plan. And in that plan I would be accumulating gold. It doesn’t have to be a large amount of gold, something within your means. You want it large enough so you can feel that money going into gold every month –month in and month out – but you don’t want to overdo it either. So, just stick to that plan. Regardless of what the price of gold is on the day of the month that you choose to buy it, just buy it, put it away and forget about it. And continue to do that for the next 2 to 3 years, and watch what is going on around you as you continue to accumulate gold, and watch that gold price go up. And it’s probably safe to say in 2 to 3 years you’re going to have an entirely different view as to how wise that gold investment is today, versus what you thought maybe at the time you made that gold investment. But if you have a plan and stick to it I think that is probably the best way to proceed, if you are a skeptic.  [23:40]

JIM: The one thing that we do see in the gold market, and especially with gold equities, the rise can come very quickly, suddenly and be almost parabolic when it occurs, but likewise on the down side. And one of the things I liked about what you said, and this has been our advice to our listeners, is if you’re accumulating bullion –whether it’s gold, silver – maybe gold has had a big run up and silver hasn’t, maybe switch to silver, buy some silver. And the same with your shares. that every month you have a purchase program, and quite honestly I love the corrective phases in these markets because it gives me another chance to buy at a cheaper price. But I’m a bargain shopper, a value investor, and if [only] investors would see that. As we used to teach people in the 80s dollar cost average into your mutual funds. [It’s] standard investment advice, and I would say it applies equally as well to the bullion and gold equity market. [24:37]

JAMES TURK: I agree 100%. I think dollar cost averaging is a very powerful concept. It gives you the opportunity to create a plan and stick to it, and over a period of time in 2, 3 or 5 years you’re going to be happy that you’ve done so.

JIM: And more importantly it takes you out of the emotional aspect of “Oh my goodness it fell, gold’s down 10 bucks today, I’d better not buy.” And then all of a sudden you make decisions emotionally instead of making decisions on a fundamental basis: “No, it’s cheaper today I’m going to buy more ounces this month or I’m going to buy more shares this month.” [25:15]

JAMES TURK: Warren Buffet, in one of his annual reports a few years ago, had a very good way of explaining that. He said imagine if you only ate hamburgers your entire life would you be happy if the price of hamburgers went up or went down. And clearly you want the price of hamburgers to go down. So he said how can you be happy if the prices of stocks go up. You really want the prices of stocks to go down so you can accumulate more of them, and ultimately let that value be realized. It’s the same kind of concept. You buy it through thick and thin, and forget about the daily papers, forget about what one Fed governor said this day, or one Fed governor said the next day and just look at the long term view. And keep in mind those cycles that I was talking about earlier. They last 10, 14, 15 years. And we’re very early into the tangible asset cycle. [25:57]

JIM: And Jim, finally as we close, why don’t you tell our listeners about GoldMoney, what is it, what’s its purpose and how they can find out more or participate?

JAMES TURK: GoldMoney is two things. It’s an online store to buy and sell gold and soon silver. I’ll give you a little bit of advance notice on that.

JIM: Did you hear that silver investors. That’s silver.

JAMES TURK: Coming soon. But it’s also a way to use gold as a form of currency for making payments on the internet. So it’s sort of like online banking but instead of your account being denominated in dollars and cents it’s denominated in gold grams and mils. You have 24/7 access to your account online through the internet, and it’s a very economical and convenient way to buy and own and hold and sell gold today. It’s one of the most convenient ways to do that.

We’re now storing approximately $70 million dollars (US) for our customers in 102 different countries worldwide. And from the American perspective the important thing is that the gold is actually stored for you in London –insured by Lloyds of London – so you get the geographical diversification of being able to buy and hold gold outside of the United States. Just in case there is another US confiscation of gold. We would not be affected by that because we are not a US company. [27:12]

JIM: So you’re kind of doing what Warren Buffett does with silver.

JAMES TURK: Absolutely.

JIM: And if they wanted to find out about GoldMoney, why don’t you give out your website?

JAMES TURK: It’s goldmoney.com.

JIM: Goldmoney.com. Jim Turk, I want to thank you for joining us on the Financial Sense Newshour. All the best to you, Sir.

JAMES TURK: Thank you very much Jim, it’s always a pleasure to speak with you.

JIM: And hopefully the next time we talk we’ll be talking about $600 gold.

JAMES TURK: And maybe $12 silver. [27:35]

James Dines, Editor: Dines Letter

JIM: Our next guest in Mr. Dines, editor of the Dines Letter, one of the longstanding newsletters in the industry.

Mr. Dines, this is my third year coming to the gold show and the one thing that has struck me this time around, on the way up here I thought with gold approaching close to $500 we’d see investors hanging from the chandeliers. Where are they?

JAMES DINES: My third book, Mass Psychology, studied the action of crowds and one of the points in the book was the remarkable invisibility of new bull markets. If you remember I turned very bullish on the internet stocks in 95. Nobody knew what the internet was, it was ignored in 96 and 97, by 98 they were still going up and they said, “well, it’s overpriced.” In 99 they said, “whoa, it’s way overpriced, forget it.” And they came in 2000, and that was the top, and that’s a normal progression, and what’s happening now is gold has done the same thing. It’s gone from $250 approximately up to $500, and the fact that there are no crowds here based on my mass psychology book, means that we are still very early in the bull market. [28:50]

JIM: And that’s something I think we need to point out to our listeners. Gold has gone from $250 so it’s got a double. Now, you were very active in the gold bull market in the 70s where you saw gold go from $35 to $200. It pulled back to $100, went to $400, then of course up and away.

JAMES DINES: to $850.

JIM: Yeah, so here we are it’s only gone from $250 to $500. The money supply, M3, has increased by 3 ½ trillion, and just in the last 3 or 4 years you’ve got greater [gold] demand. I just read in the mining company that the supplies are going down, the producers like South Africa will produce less gold. I can’t remember a time that the fundamentals for gold have been any better, can you? [29:38]

JAMES DINES: No, and I think what’s happening now is a low key flight from paper money. If you look at the price of gold this is an interesting point. One of the 64 ‘Dinesisms’ is Dines’ rule of gold relativity which says that gold is the hitching post of the monetary universe. People tend to think of gold as having a price. It does not. Gold is money and it commands a different number of pieces of paper in every country depending on how fast they are being produced. Right now the only currencies going up are the US dollar and gold and silver, and that is what’s happening. All this money that’s flowing into the oil countries, for example Venezuela, countries that are concerned about having their assets seized are moving in to what they perceive as safety.

And furthermore there’s another one of the ‘Dinesisms’ the Dines wolf pack theory – the dwopack theory is the acronym – which says that stocks in the same group governed by the same economics will run together. It sounds obvious but it wasn’t when I first wrote about it 40 years ago. And what you’re seeing now is the fact that gold is bullish, you immediately turn for confirmation to the other elements with 8 electrons in the outer ring, and that’s silver, platinum, palladium – I don’t follow Rhodium, Osmium or Meridium but they are probably also bullish. But the whole precious metals complex is moving up. You’ve now got platinum, almost up to a thousand dollars an ounce. It’s been in an uptrend. The bottom was reached in 1984 or 85, so you’re twenty years into a bull market that’s still invisible. And that again goes back to my first thesis that new bull markets are absolutely invisible to the majority, believe it or not. That’s why the average guy does not buy at bottoms. [31:27]

JIM: And so instead of attending this gold conference he’s probably off to a real estate conference and learning how to buy real estate with no money down.

JAMES DINES: Exactly. And real estate is already crumbling at the edges, and that’s how the public likes to buy: when it’s obvious, and it’s usually obviously a top. [31:44]

JIM: You know another area that you’re very bullish on and I am is something that I think is very important for this country, and the rest of the world, is the area of energy. And you’re very big on uranium, and nuclear power and the impact that that’s going to have. We have to figure out something to replace fossil fuels as we hit peak oil. Why don’t you talk for a moment about uranium, because that’s invisible to a lot of people?

JAMES DINES: Sure. When I first turned bullish on the internet at rock bottom, I said that was the greatest investment opportunity I had ever seen in my entire career. And as you know fortunes were made in the subsequent 3 or 4 years. I now believe uranium is the biggest and I think it’s bigger than the internet was possibly by an order of magnitude. I’ve never in my investing life seen anything like what’s going to happen to uranium. When I first got into it it was selling at $7.10 a pound, and I turned bullish on it at $8.00 within one dollar of the rock bottom low, and it has quadrupled. It is now selling at $34.25. And the uranium mining stocks are in screaming up trends.

And what is happening is a growing and dawning recognition that we are now into a multicentury event, and that is a massive switch from oil to uranium. There was a limited pool of oil. There were just so many dinosaurs that got melted down. And with the entry of India and China dipping their straws into the oil pool, so to speak, I felt that the pool would diminish much more quickly than those who were extrapolating very simply what had been the usage in the past. But the age of Europe is over. This is now a world market for automobiles. Only one percent of the people in China have a car and they all want one. And as the impact of  this demand for oil begins to be felt, we are going to have a very hurried reduction in the amount of oil available. I know there are all kinds of opinions on it and what have you, but the way I feel about it, the fact that oil recently hit $70 is a message from the market saying we are getting very low in the tank.

Matt Simmons’ book, as you know, Twilight in the Desert said that the oil available to the Saudis has peaked, and once it peaks in a field it declines very quickly. Just 2 weeks ago, Kuwait announced that they had reached a peak in their biggest oil field and put it on the front page of the Dines letter when I first saw it, and I was struck that it was only reported in 2 news sources in the world, and that was Google and Bloomberg. And it blew my mind that here is the second largest oil producer warning you that their oil has peaked, and it didn’t merit a single headline anywhere in the world, which means that the bear market is still very, very early, which means we are going to have much higher oil prices. I don’t think in the short term, we’re going to have a short term drop. I think in the next few years you’re going to see sky high oil prices.

Now, that’s just in terms of supply. Let’s look at the demand. First of all, the environmentalists, of which I am one, when I first turned bullish on uranium in 2001, they insisted that uranium was the worst substance on earth. It is a terrible poison, no question about it. On the other hand if it’s the choice of that and shivering in the dark, people are going to have to make a very grown up choice about it. And I’ve noted that James Lovelock, one of the founding members of the environmentalist movement, has come out pro-uranium because there are no emissions. And we are in a very serious condition because if the glacier – what do you call it? – on the West coast of Antarctica continues to melt and falls into the sea scientists say it’s going to raise the ocean level by 20 meters. Now, that’s a lot of meters and I think we’ll all be going in to the scuba diving business at that point. So there’s a very serious environmentalist shift, and I’ve made the radical prediction that the environmentalists will not only agree with me on uranium, they will lead the charge converting the world to uranium. And the Kyoto Protocol is a complete failure: the two biggest polluters, China and the United States, are not signatories. So voluntary lowering of the use of oil won’t work.

Furthermore, aside from the environmental impact on usage, you have the fear of terrorism. If they crash a plane into one of the Saudi terminals it could probably block 40% of the world’s oil for as much as several months, and if that happens you’ll see oil over $100/ barrel without a doubt. You’ll be paying 10 bucks a gallon at the gas [pump]. [36:40]

JIM: If you can get it.

JAMES DINES: If you can get it. That is the sword of Damocles hanging over the market as to what could happen. Or Venezuela or Iran could just say screw you, we’re not going to give you any oil for a year how do you like that? What are you going to do about it? And what would we do about it? And they’re quite able to do it. They’re flush with cash, they don’t care. They could live in the 10^th Century and live that way, they don’t care.

So, you’ve got a lot of very dangerous geopolitical situations going on, and when I first began to look at this stuff and began to project forward as I do in the Dines Letter, I said to myself, you know, uranium miners have had a 20 year crash, basically. There are very few uranium miners around. The amount of research and development is practically nil, or has been practically nil. The impact of a sudden surge of demand for uranium on a barren industry so to speak – with basically one blue chip which is Cameco, then a bunch of companies just barely surviving – is going to be unbelievable. It’d be like trying to squeeze an elephant through a garden hose.

And another thing, look at these nuclear plants, China is finally waking up to this new phrase, ‘energy security’ which I predict you’ll be hearing all over the world. Every nation in the world is saying we could get cut off from oil and our economy would stop. So they’re all beginning to look at energy security. They’re all beginning to order nuclear reactors. Bulgaria ordered one. But China ordered twenty by 2020, and what people don’t realize is that right now China gets only 4% of its energy from nuclear energy, but when they build these 20 they will simply be replacing the ones that are aged and will be decommissioned in the next 15 years. The net result is that China will still be getting 4% of their energy from nuclear.

So, my prediction again is a radical one but it’s based on solid fact. I think my prediction is China will not build 20 and not build 200, I think they’re going to be building thousands of them. Every time you see an announcement that they’re going to build a new nuclear plant you notice that there’s not a word about where they’re going to get the uranium from. They all assume they can buy it off the market as with any commodity. There’s actually a tremendous shortage. And when I realized that there was this huge demand and a shift to nuclear and impacting on an industry that was just struggling to get out of a depression I said to myself this is the most incendiary, bullish fireworks I’ve ever seen. And since then one of the recommendations I’ve had is Laramide, which is up 70,400% in the last 4 years. Is that good? [39:32]

JIM: Yeah, I think a lot of people would be happy with those returns.

JAMES DINES: If you put $10,000 in there 4 years ago you’d now have $7 million.

JIM: Incredible.

JAMES DINES: And that’s uranium. Now, again, going back to the first thing I said. If you recall, I said that bull markets are invisible. I challenge you to show me any new source except for this one here with you –and you typically publish far forward stuff, actually – to show anybody that’s even covered the topic of uranium mining. Now, just last week I saw something on CNBC, there was a panel on uranium. Of course, I was very interested, because if the public is starting to notice it that means we’re not far from a top, so I tuned into it and the only the thing they could talk about is nuclear reactors and which energy company to buy, which electrical utility. They don’t see uranium. They do not see it. And in fact, one of the guests said something about uranium that we also like uranium mining stocks, but the questioner didn’t think of asking which ones. It’s amazing to me. [40:36]

JIM: You’re going to build all of these plants and what’s going to power them?

Now here’s the thing about uranium. If we’re going to bring all these plants on – whether it’s India or China or Europe, and hopefully the United States will go in that direction – you and I know today if we were to go out and  poke a hole in the ground and we’ve got this uranium discovery. From the time we poke the hole in the ground to the time we want to get the permits, drill out the property...

JAMES DINES: 5 to 10 years.

JIM: 5 to 10 years. In the meantime look at the number of new plants that are going to be coming on stream, plus the ones that are already in existence. It’s amazing this stuff does not get discovered. And quite honestly I was taken aback coming to this gold show today, because I literally, from the previous two years, this is only my third show, I can remember walking into this room in 2003 and you couldn’t walk down the aisles, they were packed. I could roll bowling balls down the aisles today. So, to me, that’s got to be very, very positive from a public sentiment point of view for investing.

JAMES DINES: Sure, that’s what’s happening. The uranium is having a huge impact and it’s invisible to the public and I’ve done everything I could in the Dines Letter to write about it, as you know, you read my letter. I’m publicizing it, I’m on the air, I’m trying to tell people and they won’t hear it and this is what my book mass psychology talks about. They will not look at a new bull market. That’s one of the features that shows you’re early into it. [42:13]

JIM: Well, all I can say is for investors that are getting in right now – and the other thing not only are we early in this market, but when these markets trend they’re long lasting markets. You’re not going to solve, and provide all the worlds uranium, and go from deficits to surpluses in the next 2 or 3 years.

JAMES DINES: Oh no, that can’t happen.

JIM: No, so this is stuff that takes a long period of time.  But I also think another prerequisite for becoming successful is not only to get in this market – buy into it – but also have the financial stamina to hold on, because we do get pullbacks.

JAMES DINES: Well, we haven’t had any pullbacks in the uranium stocks, and I’m not looking for any in the price of uranium. If you look at the chart of the price of uranium in every issue of my letter there’s not been a single pull back. It’s been straight up, month after month after month. All the way from $8/pound to $34/pound. Incredible! And I’ll tell you something, that shows to me that there are people out there probably at nuclear facilities who are saying we had better have this stuff or the lights go out, and we will pay any price, because these prices are very small in relation to the price of a nuclear facility. The fuel is really small. If you had to pay $10/gallon for your car you could pay it, it would hurt, but you could survive. But that’s what’s happening to these nuclear facilities, and they are in there buying it. And they are scared silly, because all the way up they’ve been thinking in terms of a simplistic return to the mean gestalt, whereas in fact what’s happening now is the beginning of a major, major multicentury shift into uranium. [43:56]

JIM: And you know that’s rather significant too, because if you look at the price of energy which went from $20/barrel to $70/barrel, a few airlines like Southwest Airlines had the foresight to go into the market and hedge and lock in prices. But if you’re an energy producer –you’ve got a plant down here at San Onefre – and you’ve got multiple billions of dollars of investment, if you don’t have uranium what do you do?

JAMES DINES: The lights go out. They will.

JIM: And I think that’s something we’re not quite prepared for here.

JAMES DINES: They’re not. And what do I do about it. All I can do is stand up here and tell the truth. I’m not afraid to. But I know this: my subscribers have brought these uranium stocks and have been coming over to my booth all day thanking me. Some of them say they’ve never made so much money before in the market. And these uranium stocks have just gone bananas, and I think it’s just the beginning. [44:51]

JIM: You know certainly this Summer, with Katrina and Rita we saw how vulnerable the United States is on energy. You had two hurricanes that basically decimated the oil and natural gas production in the Gulf of Mexico. As you and I are speaking today it still hasn’t fully recovered, and we’re heading into Winter now.

JAMES DINES: Not only is that true but it’s also true that this parade of killer hurricanes is in itself an indication or evidence of global warming, and the people who deny it mystify me. I mean, if you look at a chart of the temperature of the planet over a period of time you’ll see it’s in an uptrend. Just last week they said that the measurement of the amount of global warming gases in our environment is the highest it’s been in history. And they know that because they’ve drilled ice cores deep into the Antarctic ice, and they bring up the snow which has trapped bubbles in it. So they know what the percentage of the various gases are. And they have scientific evidence. Those hurricanes are absolutely a sign of what’s going to be coming. We’re being warned. [46:00]

JIM: Anything else that if you were speaking to a group of investors, if you were to give them any advice, what would that be?

JAMES DINES: Well, there are a number of things going on at the same time. We’ve got a currency crisis number one, so you need to have some gold. Of course, I’m the original gold bug so I think everyone should always keep some, and also silver, platinum, palladium stocks. Then secondly I would get into the uranium arena quickly before the rest of the world jumps in. The demand is going to be frightening when people wake up, when these big institutions look at their portfolio and they see they don’t have a single uranium stock in there. The whole industry is probably worth about $20 billion right now –outside of Cameco – I think we’re going to see a stampede that will absolutely be the biggest in history. [46:54]

JIM: Is there anything else that you like that looks promising to you? Any longer term trend?

JAMES DINES: One trend that is very important to me is health foods, and I’ve been talking about that for decades. The importance of health foods is to me paramount and we’ve covered that in almost every issue of the Dines letter. We have health features.

One of the things we talk about is organic food, the importance of words ending in –cides, which is Latin for ‘kill’. So you have pesticides, fungicides, herbicides, all this garbage being put on our food is excused by saying they’re very small quantities. What bothers me is that nobody has funded or even thought about seeing whether or not these poisons accumulate in our bodies. And I’m especially suspicious of the halogenated hydrocarbons. And by that I mean the halogens Chlorine, Bromine, Fluorine, and Iodine and combined with hydrogen and carbon you get some of the most deadly poisons on the planet. For example, dioxin which is an herbicide and the soldiers who sprayed it in Vietnam and have been  plagued with cancers and all kinds of stuff for years. And it’s sprayed on our citrus fruits. I wouldn’t touch citrus fruits without rubber gloves.

And so the movement towards organic to me is a very profound, major new thread and the stock of choice I have presented is Whole Foods. Whole Foods has gone from about $1 to about $130 which is the biggest move for a grocery stock –I very seldom have a grocery stock on my supervised list because they are very slow moving and I’m interested in having something grow before I’m planted – but Whole Foods is in a wild uptrend and acting beautifully. I like the ethical culture of the company. Other chains are beginning to wake up and try to offer some health foods but they don’t have the culture and the ethics of Whole Foods. So, that is a very important trend. So, I guess you have uranium, the precious metals, and health foods are really where I’ve led my subscribers and we are making killings in the market.

JIM: Alright. And Mr. Dines, if somebody wanted to find out about the Dines Letter, why don’t you give out your website or tell them how they could do so?

JAMES DINES: Alright. The website is dinesletter.com, and basically there’s all kinds of information there that will describe it.

JIM: I want to thank you for joining us at this year’s San Francisco Gold Show. I look forward to talking to you once again. All the best.

JAMES DINES: Thank you. [49:52]

John Doody, Editor: Gold Stock Analyst

JIM: My next guest joining me at this year's San Francisco Gold Show, no stranger to the Gold Show, is John Doody, he’s editor of the Gold Stock Analyst.

John, I want to talk about some of the fundamentals of the gold market. As you and I are talking, we’ve got gold marching close to $500/oz, we’ve seen the breakout in the XAU, we’ve seen the large cap gold stocks and the intermediates doing very well,. Let’s talk about the juniors, what’s happened with them?

JOHN DOODY: Well, I think there’s a lack of belief in this market among the people who buy juniors. The juniors are not bought by the big funds that tend to buy the larger cap gold stocks. The juniors are bought for the lottery ticket effect of a big ten-bagger, and the retail guys are really not into this market yet. They think that the market’s peaked, because when it got in the $400 range they think that it peaked. And they’re not paying attention and are not understanding that the fundamentals are going to keep running this market: the twin deficits and the amount of paper that’s being created around the world is basically going to trash all currencies to some extent. But until the retail guy gets involved, nobody goes very deep down the stock list, and that’s in my opinion why nothing is happening at that end of the spectrum.

JIM: You know what makes this gold bull market so much different from the 70s is that in the 70s it was growth, you had a lot of surplus, we didn’t have the gold deficits that we have today. We’re still running a gold deficit, we’re still running a silver deficit, and I just don’t see, at least from what I’ve followed where all the major discoveries are. We’ve had a lot of dollars go into exploration but where are the Prudhoe Bay’s or the North Sea’s so to speak in the gold business?

JOHN DOODY: Yeah, there’s really only been one big discovery in the last 3 or 4 years, and that’s Barrick’s Laguna Norte which was already by a major, so that’s a 5 million oz deposit. But I think it takes a while for the money to filter down to be put to work. Remember, through the turn of the millennium there was no money going into exploration. And while there’s money out there now a lot of it is going to rehashing stories we heard in the 90s again.

Companies are now doing feasibility studies on properties, and it may be a longer pipeline between discovery and finally getting it to a deposit size that somebody can measure. And there are so many more issues involved now. Now you’ve got to be aware of the social climate for mining, and maybe that closes off some countries. We’ve known for years about a 10 million oz deposit in Colombia that Greystar, I think, owns it, and nobody has really pursued it because there are Colombian rebels there. And so that’s something that has been around but it’s not really on anybody’s radar screen. But that’s certainly a deposit that any major would be really interested in if Colombia could get its act together and become a viable mining country. But nobody wants to defend the Alamo while you’re trying to mine it at the same time. [53:05]

JIM: That’s something that also makes this market different. In addition to the supply deficits that we’re running, there is the social environment and the geopolitical ramifications today. You just mentioned going into Colombia, and the instability there. Also, there’s the environmental movement. You can’t just go into a country and start poking holes in the ground and then go into production. Some of these projects, and especially in North America, you’ve got six or seven or ten year delays in trying to bring a project online. What factor does that bring into the equation?

JOHN DOODY: I think it limits the number of places where people want to do the exploration if nobody wants to explore and not be able to exploit, and everybody wishes they could have a decent property in Nevada where you can do exploration and exploit. I mean look at Crystallex a 20 million oz global resource, 13 million oz proven and probable reserve, lots of money spent over the years, they’re ready to build a mine, money raised, but they can’t get a final last permit out of the Venezuelan government, that was originally promised in May. And here we are six months later and they’re are still not in hand. With Chavez you don’t know what’s going to happen. And I was glad to see Bolivar, who was in Venezuela, get taken out by Gold Fields with cash for $330 million in this last month. And that at least validates that someone with some standing – Gold Fields is one of the top 5 miners in the world – thinks you can do business in Venezuela. Venezuela is probably underexplored because people have been reluctant to get involved there not knowing  what the sanctity of deposit ownership is ultimately going to be.

But I’ll tell you, I was just in a country that I think is very underrepresented by global mining interests, and that was Brazil. I was down there for 8 days in the middle of the month, 5 of them on a mine tour with Yamana, and this is a country that’s geared for mining. It’s a mining culture. The guy who drove me in from the airport driving the taxi was a third-year mining student. The economics of mining are very unique in Brazil because the power is cheap, most of the electricity comes from hydroelectric; diesel is cheap, it’s subsidized by raising the price of gasoline, and they use the money to lower the price of fuel. It’s got a good work ethic, it’s not a mañana mentality, you don’t see guys sitting around and drinking beer on street corners, even though unemployment is over 10%. I guess that’s true everywhere in Europe too. It’s a culture that’s geared to mining, to exploiting the resources, but in a responsible way. At every mine of Yamana’s that we visited the management commented that there was very close supervision from the environmental people. There was supervision in a responsible way, they made sure that the company was doing everything right – of course, the company is – but they were just checking up, and it was easy to get permits as long as you did things right. They wanted mines built, and they wanted the jobs that came with it, and that’s a country that really doesn’t have a lot of mining in it. It has some base metal mining, CBRD is a big base metal miner. Kinross owns a big mine there, and Anglo owns a mine there but if you’re looking for a mining play in Brazil that’s Yamana. [56:30]

JIM: You bring up an  interesting thought about the gold industry. You said in Brazil they’ve got the energy infrastructure, it’s very mining friendly. Let’s talk about how the mining industry has changed in the last couple of years with energy. Mining is a very energy intensive business, so that’s changing some of the economics. We’ve got higher gold prices but the cost of steel is up, the cost of labor is up, the cost of medical care and insurance is up, the cost of energy [is up]. How is this changing what goes on in the business? 

JOHN DOODY: It makes everything more expensive to do business and it shrinks the margin. The rule of thumb is a dollar and a barrel of oil. A dollar change in the barrel of oil price is equivalent to a dollar change in the cash cost per oz. So, in some mines that is even more intensive. But there’s no question [about it]. I think Newmont is saying energy costs in total are 25% of their operating costs, and oil itself is 20% of their operating costs. So, it has a big role to play, and we’ve seen a margin shrinkage at least at the beginning of the year. That’s changed around a little bit as you saw, Jim, in the latest issue, where margins have slowly started to improve again in the gold business. But a lot of the big funds that are interested in owning perhaps a gold company or two, aren’t interested in buying into an industry that has shrinking margins. That’s a typical death knell for every other industry they’re involved in, and the funds aren’t necessarily believers in the sense that you and I might be. The funds are more interested in expanding profit margins.

I think with maybe the 3Q data that has come out in the last month where we saw margins expand again maybe that’ll be optimistic, and a couple of companies have had a big reduction in cash cost per oz: Barrick being one of them, but partly due to a new mine coming online. And maybe if Barrick is successful getting Placer, they can lower Placer’s cash cost per oz because Placer has been the least able to lower its own cash costs per oz over the last year. [58:37]

JIM: One thing that we’ve seen and we’ve talked about this at the beginning of the interview, you’ve got gold marching on $500 and it’s almost like that’s a magical number –these even numbers in the markets as you know technically – and there’s almost disbelief by everybody. I was watching CNBC the other day, you had the oil stocks going up, you had the metals stocks going up, and one of the commentators said, “well, you know, the market’s up but it’s the kind of leadership you don’t want to see.” It was the energy stocks and the gold stocks. So, once again there is this kind of throwback to the 90s – “well, you know, Google wasn’t up today so I guess this wasn’t a good market” – but the market’s changing.

JOHN DOODY: CNBC has a definite bias towards technology. Maybe it’s the nature of the guys who do the reporting. They’re younger and they grew up in a technology era whereas the metals stocks and commodity stocks have been around for a long time and they’re not so go-go. And so they have a sort of reluctance to report favorably on the metals stocks. And I think this $500 barrier is a real barrier. [For] people who advocate gold in one sense gold is the anti-dollar, so in one sense it’s an anti-US kind of vote. If you think gold is going up part of it is because you think the dollar is going down, and that’s almost a little unpatriotic. None of us are unpatriotic, we all think the country could be better if it was run on a sounder money policy. The stock market and the guys who work for CNBC all have big mortgages, they want to see a little inflation out there because that’ll help lower the burden of the mortgage payments they’ve got to pay on their McMansions they bought in New Jersey, and whatever. But it doesn’t really make any difference what they say, as long as we get our amount of sunlight. And we’re certainly getting a lot more sun on CNBC than we got a year ago. Frank Holmes of US Global, he’s on every week now and that kind of stuff is good for gold. [1:00:43]

JIM: Let’s go back to this $500 level. It’s very important psychologically, but I think one thing we’ve seen with gold this year is it’s been a good year for the dollar –the dollar has gone up – but it’s also been a good year for the gold bullion. So, you’ve got the dollar rising along with gold prices. So that speaks volumes in my mind.

JOHN DOODY: It does. And gold being up in other currencies is very good for gold. I mean it’s really a bull market in the last six months in all currencies, and that’s kind of a trashing of paper money I think. As well we have to realize some people think that there are 4 currencies out there: the dollar, the euro, the yen and gold. We have to realize that the gold market is so trivial compared to the size of the foreign exchange markets that it doesn’t take a big river of money coming to gold to move it. It takes a few drops falling off the big FOREX markets coming into gold that really makes gold move. And in fact, if all the money that could potentially go into gold, went into gold, maybe that’s something we wouldn’t even want to see. I’m not sure I want to see $3000 an ounce gold, because that must mean there’s really severe problems elsewhere in the economy: maybe I’m not going to be happy living. [1:01:57]

JIM: That’s another item that comes to mind too. Because when gold goes north of $500 on the charts, there’s a great breakout above that level to much, much higher levels. And I can’t help but think, John, when the guy on the street wakes up one day and he sees gold prices at $650 or $700, that’s telling him there’s something out there that’s not working.

JOHN DOODY: Yeah, and we’re going to see it, too. We had Pierre Lassonde –he’s the head of Newmont – just this week in Australia predicting $1000/oz gold in the next 5 to 7 years. Pierre’s been on record as being $525 by early next year, and I guess we’re going to see that now aren’t we? [1:02:35]

JIM: Sure looks like it. We’re closing in on $500. I want to move back before we get into what I call some of the paper money aspects of the gold market, and I’m talking about the money supply growth that we’re seeing globally. Let’s talk about junior investing. I know if I want to get a gold exposure if I’m a fund manager, I’m pretty safe going in and buying a Newmont, or a Barrick, or a Placer or Goldcorp, a lot of liquidity in the stock. Let’s talk about the juniors because you follow quite a few in your newsletter. What makes them different, and how does an investor approach them versus going out and buying a Barrick, where I know if the gold market takes a dip, which it does every year, I can trade out of it and protect my capital? In juniors, that’s a little bit harder to do.

JOHN DOODY: Yeah, the juniors tend to be one deposit companies. And the only way you can play them is with a basket. You’ve got to have 4,5,6,8. We have a top 10 but they also include some large companies too. If you just buy one stock and put all your money on that the chances are very high for disappointment. You’ve got to average out with a number of stocks and figure some are going to do well and some are going to do poorly. And that’s the same way you’d invest in any industry, or any stock group. And I think taking a balanced approach towards them makes a lot of sense. Buy some majors, and buy some smaller companies that have good projects, and ultimately you’re looking for them to get bought out by a major. There aren’t very many juniors that bring a project into full production, and that’s because the majors beat them to it. The majors can raise money better when the big spending times come, they are better at that than the juniors. [1:04:19]

JIM: And when you’re accumulating juniors, what are the things you would look for? You mention a lot of these are single deposit companies, but one of the things that strikes me about the juniors is all of a sudden like Bolivar Gold, it’s just kind of waddling out there in the market and then you turn on the TV one day and it’s been bought out.

JOHN DOODY: Well, in hindsight it’s always easy to pick’em. Gold Fields was already an 11% owner, so you knew that they had a big interest in the deposit, and Bolivar was waiting for one more final permit. They had a temporary operating permit at their site, they were in production but on a temporary operating permit. And when that final operating permit came in October, voila, here we are in November and there’s a bid on the table. So, I think the majors are risk adverse. The last thing they want to do is stub there toe on something because it’s happened and it’s happened recently. You had Meridian stub its toe on Esquel, where they couldn’t get permitted. They spent $300 million to buy a project that couldn’t get permitted finally because they didn’t do the right social programs in the country, to convince the local area of Esquel, that this could be a good project for bringing jobs. And I think Meridian will ultimately get that permitted, but it will probably have to be an underground mine and they may only mine half as many ounces as they would have as an open pit mine. [1:05:39]

JIM: Speaking of acquisitions as it applies to juniors, whether it’s a major going after one, or an intermediate company. Do you think the scale is coming down? A couple of years ago they would have all loved to have found somebody with a 5 million oz deposit, [it’s] maybe a 3 million oz deposit now. It seems like that scale’s coming back down as these companies get more realistic. And looking out on the horizon there just aren’t a lot of 3 and 5 million oz quality deposits that can easily be mined.

JOHN DOODY: Yeah, the number I hear a lot is 2 and 2. Two million oz in reserve, 200,000 oz a year in production, is something that is still of interest to a major. 50,000 oz a year mine is just too small, and while you can gang together a bunch of 50,000 oz a year production mines, the management issues are just too large. 200,000 ounces is a number that can support an in country management team that knows what it’s doing and can do a good job, and I think that is still going to remain the minimum. Everybody would like bigger but that is going to be the minimum. [1:06:43]

JIM: So, 2 and 2.

As we look at the future, it seems one of the things that not only if you take a look at the supply and demand side of the equation we’re running deficits, they’re not finding a lot of large deposits as readily. You don’t pick up the papers and see they are finding the equivalent of these big projects.

Let’s talk about the monetary situation because European money supply is growing at 13%, since the beginning of the year. In the last 3 months, M3 is growing at almost a 10% rate – some of the individual components much faster – and voila next March, when Ben Bernanke takes over M3 disappears. So, let’s talk about that for a moment.

JOHN DOODY: It’s a shoot the messenger theory. If M3 is no longer reported we can’t see how fast the money supply is going to be growing. And it’s not that it’s not going to be calculated, they’re just not going to report it anymore. So, it’s going to be some more of this thermometer breaking that’s already being done on the Consumer Price Index. And this will be just breaking the other thermometer looking at the money supply to see what kind of pipeline inflation we have ahead. It’s like XXX movies I guess, you know, we’re not sophisticated enough to know this kind of stuff, and they’re still going to go on – XXX movies and M3 – but they’re going to spare us having to know about it.  [1:08:11]

JIM: And then of course we’ll also have the core rate which will always remain the same, that too.

JOHN DOODY: doesn’t matter.

JIM: Low inflation. John, if you were to describe 3 or 4 key points that are going to drive this gold market in its second and third phase, what would they be?

JOHN DOODY: From a macroeconomic standpoint, well, number one, something I’ve written about extensively this year which I think is still generally underappreciated, particularly by the Canadians, is the end of the Homeland Investment Act. This is where foreign subsidiaries in 2005 are allowed to bring back the overseas profits at a very advantageous tax rate, a little under 6%,. Normally, overseas profits, if you bring them back into the country you get taxed again at the normal corporate tax rate of 35%. For this one year you can bring them back at a special tax rate – a special exemption of 5.85% it works out to be – and the money’s coming back. The New York Times just this month has reported that $200 billion is coming back, and it may well be more. We won’t know until the end of the year because the tax rate expires at the end of the year. What this has done is it’s brought new buying to support the dollar. The dollar I think would have gone lower. It would have not gone up as much this year if there hadn’t been this money. Because this is like exogenous money. This is like money that came out of nowhere. It wasn’t part of the ebb and flow of the daily trade. This was money that was stockpiled over the decades overseas and now it’s coming back and the companies are supposed to be using it to [create] jobs, but of course money is fungible, and they are using it to do anything they want to pay dividends, to buy back stock, or whatever. But in any case, it disappears this year.

The second factor I see coming is the interest rate differential. This has been a great year for currency funds to play the dollar. They borrowed cheaply overseas particularly in the euro or the yen, sold those currencies, bought dollars, and then purchased US Treasury securities here. The dollar carry trade, where they were basically taking advantage of the interest rate differential of 3, 4 or 5% depending what Treasury they were buying, and then they leverage it by a factor of 10-1, 15-1, or 20-1. This put in amazing dollar purchases, pressure to buy dollars to send the dollar higher through this whole year. Now that’s ending. We can see that the interest rate raising is going to end soon in the Federal Reserve, maybe not in the next meeting but in the first half of next year certainly the Fed will have ended its interest rate increases. And we’re getting talk now in the euro countries talking about raising their rates – whether that makes sense or not we don’t know but they’re concerned about inflation. And the Japanese have already gotten off their zero interest rate. So the interest rate advantage is going to be shrinking, the differential between US rates, and foreign rates, and that’ll lessen the dollar carry trade and lessen the currency traders borrowing abroad, selling those currencies to buy dollars, and then using those dollars to buy Treasuries. That trade is going to be short.

So those are the two big macro factors I see that really have nothing to do with the inflation we’re talking about, just having to do with issues that are short term in nature, that are going to be relieved from the dollar strength next year. [1:11:44]

JIM: And then on the fundamental side when we take a look at the industry itself are there any drivers that you see?

JOHN DOODY: Well, they all need more ounces and they’re telling us right now that the easy way to find more ounces is to buy them. And so from an investment standpoint if you can find companies that aren’t performing well [where] better management can help –and certainly Placer is a good example of that – you’re going to get takeovers. Placer was being talked about the last couple of years as someone that needs to be taken over and rationalized, and fixed. And to the extent that other smaller companies have good looking deposits they’re going to get acquired. [1:12:22]

JIM: And finally, John, as we close, tell us about your newsletter. It’s in my opinion one of the finest. I’m a paid-up subscriber.

JOHN DOODY: Thank you.

JIM: And talk about it.

JOHN DOODY: As you know, Jim, I’m a former professor of economics, and I got into gold investing personally in the 80s, basically being a cynic on government. I think government always tries to get 9 slices out of an 8 slice pizza. You can’t do it, and the only way you go do it is by debasing the money supply. One way or another you have to make everything go around further than what it’s physically able to do. And so part of what I bring to the newsletter is always this big macro overview, and what’s the overall picture going to look like for gold, and then as you look at gold itself what is the industry like.

And one thing that has always amazed me about this industry is gold is a price-taking industry. Whatever the price is in the market that is what we take. And the companies spend no time trying to distinguish their gold from anybody else’s gold. It’s not like Coke and Pepsi where they really make the same thing – carbonated beverages – but they spend billions trying to tell us that Coke is better than Pepsi or vice versa. Here we don’t do that. So we have everybody producing exactly the same thing and the question is their stock prices are all over the place. And they all have different amounts of reserves and production and whatever, and I’ve tried to develop a commonality: a way to evaluate these companies one versus the other. That’s why I do this market cap per oz calculation, where you take the number of shares outstanding, and you multiply that by the price of the shares and that gives you a market capitalization for the stock, and you divide that by its number of ounces of production, or its number of ounces of reserves. And you come up with a number that might be $100 per oz of reserve for one company, whereas another company might sell for $150 per oz or $200 per oz of reserve. Why that difference? And a company’s production might sell at $500 per oz and another company’s might sell at $2500 per oz. Why that difference? You can take all the data and aggregate it to get an average for the industry, and compare where we are right now compared to where we’ve been in the past at different gold prices. You could try to figure whether stocks in general are overvalued or undervalued.

And then if you take a micro look at the companies themselves, and this is what I do in my company reports, try to figure out whether this company really deserves to sell at a premium to the average market cap per oz of reserves or of production. Or does it really deserve to sell at a discount to it. And sometimes the discounts are warranted, maybe the political situation where it produces, maybe it has high cash costs, so you don’t want to pay so much for its production as in other companies. Sometimes I think the high prices per oz are not warranted. A company maybe has low cash costs because it’s all by-products which are used to lower its cash costs so maybe you’re really paying a gold premium for lead byproducts. So, I try to be as objective as possible and I only look at companies that have data so I don’t follow the exploration stories as you know. There are other guys who do a good job there, and I’m not a geologist. But when you look at the data then you find the differences and then you try and figure out why. Is it reasonable or is it not reasonable? If you look for undervalued stocks in any market, at any gold price, there are always going to be some stocks that are undervalued and I try to find those stocks. [1:14:47]

JIM: Well, you do a great job of it. John, I want to thank you for joining us on the Financial Sense Newshour. If our listeners would like to find out about your newsletter why don’t you give out your website and tell them how they could do so.

JOHN DOODY: Well, it’s very easy. Just go online, the url is www.goldstockanalyst.com, all one word. [1:16:11]

JIM: Alright. You do a great job, great newsletter and I highly recommend it to our listeners. Thanks for joining us.

JOHN DOODY: Thanks very much, Jim, always glad to talk to you and preach to your listeners.

2ND HOUR: THE COMPANIES

Ian Telfer, GoldCorp and Silver Wheaton

JIM: On the morning that we’re talking today gold hit $499 in London, and I can’t think of a more appropriate guest to have on our show –one of the phenomenal growth stories in the industry – joining me is Ian Telfer, he’s Director and President of Goldcorp, and a Director of Silver Wheaton.

Ian, this is my third Gold Show, here at San Francisco, and the first Gold Show I attended was in 2003, and you were heading up Wheaton River, and you were making some acquisitions at that time. In fact, you were making a series of acquisitions, and I can remember the talk on the floor and it was like, “what is he doing,” because there was still some pessimism in the industry. What did you see in 2003 that you went on this acquisition where others weren’t seeing?

IAN TELFER: Probably the biggest difference between what we were looking at, and what the others were, is that we absolutely believed the price of gold was going to go higher. And typically gold assets get sold based on today’s spot price. And so when someone’s selling a property they’re using today’s spot price. If there’s an auction everyone else is using today’s spot price. So, if you absolutely believe gold is going higher then you’re going to make a higher bid, and you will always win the auction, and that is what had happened to us. [1:25]

JIM: Well, certainly Wheaton was a phenomenal growth story. Now, you’re heading up Goldcorp and that’s turning into being a phenomenal growth story. From your perspective, on the day you and I are talking gold hit $499, where do you see gold in the next couple of years if you were to take out your crystal ball?

IAN TELFER: I see gold going higher. As people have started to notice in the past, gold would tend to go up when the US dollar was weakening. Lately, gold is going up when the US dollar is strengthening, and so that means of course in other currencies it’s continuing to go higher. And I think as the uncertainty in the economies continue people will start to look again at gold as the world currency, and of course it’s the only one you can’t print, and as that realization hits, gold will tend to go higher. [2:18]

JIM: One of the things that we’ve seen in the last couple of years, we’ve seen the money supply growth in the US now it’s kicking in, we’re seeing it play out in the inflation rates. European money supply is up 13%, M3 up at an annualized rate of 10% in the last 3 months. And of course they won’t even be tracking it next March. If we take a look at this, and we take a look at gold there are a lot of investors out there saying $499 and they’re getting a little worried it’s too high. But if you look at it in perspective then $500 gold today is, with the amount of money circulating in the world, really a small figure.

IAN TELFER: That’s right. And when you look at the historical relationship between gold and oil etc., gold looks very, very cheap if you’re looking at $60 oil. And so I think you’re right. All of this currency that’s being printed around the world as all these [countries] try to almost debase their own currencies to keep it lower than the US dollar, so they can continue economic growth I think gold will be the big beneficiary of all this extra paper. [3:23]

JIM: And we are starting to see inflation spill over into what I call main street. You can’t go to a grocery store, or pull into a gas station today, or even look at housing prices globally, and it’s obvious that there’s inflation out there. Do you think the investor eventually wakes up to the fact that maybe this paper stuff he has isn’t going to be worth as much? You know, for me, I don’t how you would go into the bond market today with interest rates this low and inflation rates this high.

IAN TELFER: No, I think you’re right. I think people will start to look upon the paper currencies as something to get nervous about, and I think gold will be the big beneficiary. I think hard assets will do well. People talk about the housing bubble, it may level out for a while but I think hard assets are going to look like pretty good investments 5 years from now. [4:12]

JIM: Jim Rogers wrote a book called Hot Commodities, and in that he had a chart by an analyst from Legg Mason, Barry Bannister, and it showed this cycled that has played out for 150 to 180 years, where you’ve got 18 year up-cycles in stocks as we did from 1982-2000, now from 2004 we’ve seen gold go up, we’ve seen oil, natural gas, lumber, copper, lead, zinc, you name it, it’s going up. These cycles tend to last for this 18 year period of time. Isn’t this pretty much also a reflection of supply and demand in the industry because what were we doing in the 90s, were we finding a lot of oil, were we finding a lot of gold? Companies spending a lot of money to develop new mines, you didn’t see a lot of that.

IAN TELFER: No, that’s right. And of course, all these things are price related. And when the price of the commodity is not responding then people tend not