Brien Lundin: Gold's (Almost) Free at Last
Source: Brian Sylvester of
The U.S. dollar may only look good because its fiat currency
brethren look bad, but declining confidence in paper money has
thrust gold toward a position it hasn't enjoyed for a century or
so- freedom from its seesaw relationship with the U.S. dollar. In
Editor and Publisher Brien Lundin-who also hosts the New
Orleans Investment Conference-says that mounting troubles in
Euroland threaten to end the traditional inverse correlation
between the price of gold and the value of the U.S. dollar. Of
course the dollar decoupling can only go so far. "Gold stands as
the one currency that governments cannot debase or debauch," Brien
says, but "the dollar is the only currency accepted by margin
The Gold Report:
You've said that it would be "foolish to think officials aren't
manipulating the gold market." Could you tell our readers why you
I've never been a big believer that the government manipulates the
gold price on a day-to-day basis. By and large you can't blame
everyday fluctuations on the secret hand of some government
bureaucrat. My feelings that they don't do this every day has
nothing to do with motivation, but rather government
inefficiencies. I don't think they
do it. However, they're certainly motivated to manipulate gold
prices in a broader sense. That's something they have done, and I
think they are doing it now.
The reasons I think it's foolish to believe that governments
aren't manipulating the gold market in some broader sense are: 1)
it suits their purposes; and 2) they've done it in the past. Gold
serves as the barometer not only of government mismanagement of the
currency but of investor and saver confidence in the currency. As
such, the gold price has been marching higher relentlessly, which
certainly can be interpreted as a decline in confidence in the
dollar and in government management of finances.
Both overtly and covertly, government manipulation of the gold
price dates back to 1933, when Roosevelt confiscated private gold
that U.S. citizens owned and proceeded to revalue it, raising the
official gold price from $20.67 an ounce to $35. That, in effect,
devalued the dollar; but, because they did it after confiscating
the gold, it's an example of overt manipulation.
After Bretton Woods, following World War II, in concert with
foreign governments the U.S. government routinely manipulated the
gold price, primarily with the establishment of the London Gold
Pool in the 1960s. They tried in vain to suppress the price, to
keep the exchange rate closer to the official rate of $35 an ounce.
As with all such manipulations of the market, that eventually
failed and the London Gold Pool collapsed.
After legalizing gold ownership again in 1974, the U.S.
government immediately cratered the price through Treasury sales of
gold, which resulted in tremendous gains for the U.S. Treasury and
tremendous losses for private investors. Throughout the 1970s,
those efforts continued through public Treasury auctions of gold,
which obviously were designed to suppress the gold price. Of
course, ultimately these efforts failed as well, because the gold
price broke free in 1979 and hit record levels.
After that, gold leasing through bullion banks was used to
depress the gold price for some time. That was the primary tool
throughout the 1990s.
Did that work?
As detailed in research by Frank Veneroso, which we first published
in the late 1990s, gold from central government vaults was loaned
to the market either through fabricators or miners using gold
hedges to protect the price they received for gold and thus their
profit margins. That's still being done to some extent for project
financing, although not nearly as much as in the 1990s and the
early 2000s. But bullion banks essentially hedged their positions
with gold miners and gold fabricators, borrowing gold from central
banks at very low interest rates and selling it into the market,
which would depress the price. Then they reinvested the proceeds
into more leveraged investments-at least T-bills, but often using
T-bills as collateral for even riskier investments. In that manner,
the official central bank gold holdings dropped from about 30,000
tons to less than 15,000 tons.
In effect, that's a large, accumulated gold short position.
Citizens of a lot of nations don't realize that much of the gold
they think sits in the vaults of their central banks is really a
pile of IOUs that can't be settled with gold. These IOUs would have
to be settled with cash at some level. That's a lit fuse, and it's
been out there for some time. It's a potential X-factor in the gold
market that could send prices higher much more quickly.
Any other examples of how government manipulation is manifesting
One of the ways is simply through manipulation of the futures and
options markets and gold derivatives.
Europe's problems also seem to be influencing the gold price. This
week, just after Moody's downgraded Greece's credit rating to junk
bond status there was a late-though small-rally in gold.
Right. As you know, gold and the U.S. dollar were on opposite sides
of a seesaw for some time; when one rose, the other one fell and
vice versa. I've been arguing that gold's real breakout would come
when gold could rise regardless of what happened to the U.S.
dollar. That actually happened with the early troubles with the
euro. Early this spring, when we saw the first signs of this, we
reported on them in
For brief periods, gold began to rise even when the dollar was
strong. It wasn't a very pronounced trend, but it was the first
sign that the inverse correlation between gold with the U.S. dollar
As troubles began to mount in Euroland, especially Greece's
sovereign debt troubles, gold began to trade completely
independently of the direction the dollar-in fact, both were acting
as safe havens. The real impact of these problems, particularly
among the PIIG nations, is that gold has regained its status as a
reserve currency, not only in the minds of central banks, but also
with individual investors and savers around the world.
Gold's been a currency for some 5,000 years of human experience,
but in the last century or so it lost much of its allure as a
reserve currency. Now, as the rest of the world's currencies lose
favor, gold is rising as a more favorable alternative. We still
have the dollar as a reserve currency, and probably right behind
the dollar we have gold.
However, while gold may be the "ultimate currency," the dollar
is the only currency accepted by margin clerks.
Is that what you meant in your June newsletter when you said the
fact that gold that cannot be created at will-as dollars and euros
are-is the most important factor in any secular bull market?
Exactly. And it is the factor that has come to the fore.
What range are you forecasting for the gold price through the rest
of this year and into next?
The rest of this year looks very interesting. Once gold passed
$1,000 again last fall, the breakout was so powerful and so similar
to two previous breakouts during this bull market that
began tracking the rally against them. Those breakouts occurred in
2005 and 2007, with a year of consolidation in between.
Our tracking made it appear that this rally would carry gold up
somewhere between previous rallies' gains-which were around 75% and
57%-taking it to between $1,350 and $1,500. When the rally faltered
in December and January, we thought the analogy might not hold, but
then gold really got back on track this spring. Projecting this
rally to the average length of those two previous rallies, we could
get up to $1,400 by the end of this year. Even by the early
Wow! And then do you see it going even higher than that in
Another period of consolidation is very likely, but that's just
looking at it from a technical standpoint, not in terms of
fundamentals. It's very possible that we could see gold around
$1,600 in 2011. But that's in current dollars. Based on the
official CPI, gold would have to reach around $2,300 in today's
dollars to equal its record price in 1980. However, the government
has changed the CPI. People don't realize that in the 1980s and
then again during the Clinton administration, the government
jiggered the CPI to minimize reported inflation. Economists can
argue whether these changes were justified, but the point is that
they changed the unit of measurement.
If you look at the gold price measured in previous versions of
the CPI, you're talking about far higher gold prices in current
dollars. John Williams of Shadow Stats has gone back and
recalculated what he calls the "Alternate CPI," which takes out the
government's changes to the index. As it turns out, when you use
the historical CPI that was actually in effect during the 1980s,
that $850 gold price record in 1980 is equal to $7,576 in 2010
Yikes! That's if we measured inflation by exactly the same
methodology the U.S. Department of Commerce used in 1980. But that
$850 level didn't hold for very long, did it?
Oh, no. It gained a few hundred dollars in the span of a month to
get to $850, and $850 actually just was a hyperbolic blow-off
price. Even so, the current gold price has a long way to go before
it even approaches such a blow-off stage.
One way you're taking advantage of this gold bull market is through
gold equities. Could you update us on some of the companies you
talked about when we interviewed you in March?
I know we talked about
Linear Gold Corp. (
last time around.
Oh, right. In your
in April edition, shortly after news of the upcoming merger with
Apollo Gold Corporation (NYSE.A:AGT; TSX:APG)
broke, you wrote that you weren't very excited about the deal at
first. You'd been very bullish on growth potential for Linear's
Goldfields project and feared that the deal with Apollo would
dilute that potential. When should investors expect to see the
market recognize the value from this merger?
Actually, they're starting to get some of that value recognized in
the restructuring of Apollo's debts, through the preliminary
transactions with Linear, and improved production at the Black Fox
Mine. Some input from Linear's management probably is helping
there, but I think Linear moved for the merger because they also
recognized some improvements coming along the way.
Both stocks are in limbo until the merger gets approved, which I
am confident will happen by the end of this month. Once it does, we
may see a bit of a relief rally in the stock, and then improvements
in gold production primarily over the next couple of quarters.
Having Wade Dawe at the tiller as president and CEO of the combined
entity should be of great comfort to shareholders. Wade has done an
outstanding job of managing Linear since its inception. For all of
those reasons, I'd say it's in a very good buying range now, headed
toward some appreciable gains in as we get into the fall.
I think we talked about
Treasury Metals Incorporated (
. The Goliath gold project, which it's developing, is a great
project and the company is drilling deeper to delineate richer
resources. It's in a wonderful area in northwestern Ontario with
great exploration potential. I expect the preliminary economic
assessment they're working on, which should come out shortly, to be
very revealing as to Goliath's development prospects.
Beyond that, Treasury Metals is looking to consolidate the
region around that mine and bring a number of resources together
for the first time in a gold district that has been both
underappreciated and underdeveloped compared to other gold
districts in Canada. I am very positive about Treasury Metals as a
longer-term play. In other words, I don't think it's a drill-hole
play, where you're looking for the next drill result to launch a
What will launch the stock higher?
It's going to be a slow but sure process. Barring any surprisingly
positive results from the preliminary economic assessment, I expect
this to be a longer-term building of a resource and a business as
they develop the Goliath Mine and consolidate the district.
The fabled Rick Rule-who we see on your speaker faculty for your
New Orleans Investment Conference
again this fall-says that he likes the prospect generators better
than those drill-hole plays you mentioned a moment ago, because he
favors "process over product." Do you keep any prospect generators
on your radar?
Lara Exploration Ltd. (TSX.V:LRA)
follows that model of finding projects and joint venturing out the
risky exploration phase of discovery. That doesn't always provide
the speculative excitement that some investors like in drill-hole
plays, but it's a way to build a business, and Lara has done a
wonderful job at that-good management and a very diversified
project portfolio, most of it in South America. In Brazil, for
instance, Lara has Curionópolis (iron oxide copper gold), Canabrava
(volcanogenic massive sulphide), Araguaia (nickel), São Lourenço
(tin) and Sergipe (potash). The company's range of projects in Peru
includes at least a half dozen that are at near the drill stage.
They also have a few projects elsewhere, in Columbia and China.
Speaking of China, the Ministry of Industry and Information
Technology reported that China-not only the world's second-largest
gold consumer but for the past three years the world's top gold
producer as well-produced nearly 100 tons of gold during the first
four months of 2010. Are you looking at any companies in particular
Inter-Citic Minerals Inc. (
keeps putting out positive news releases. They just keep finding
more gold. Their Dachang project is enormous. They've explored only
a fraction of it so far and I believe their drilling hit ratio
approaches 95%. One of the important things they've done on the
corporate front recently is bringing in major financing from a
local Chinese gold company. Combining this with their large
shareholding by another local-and powerful-Chinese group, it seems
that this project is very likely to make its way into
While working toward production, I think they're also looking at
ways to maintain the exploration upside for shareholders. Dachang
has evolved into a development project and they're getting all
those ducks in a row to bring that project forward to mine it. But
huge swaths of their property position, where they are finding very
similar mineralization, are underexplored. The company wants to
preserve that upside potential for investors as well as the steady
development potential of Dachang as a gold project. So while
Inter-Citic's had a good run in the share price, tremendous upside
potential remains. I couldn't be more positive about it.
Any other companies we've talked about before that you can give us
The management group makes me very positive about
Animas Resources (TSX.V:ANI)
. The geologists and the people in the front office consistently
work on behalf of the shareholder, and they're developing exciting
exploration models at Santa Gertrudis, their flagship project in
Mexico. That project is essentially a district in itself, where
they still have a very good chance of delineating a world-class
resource. They haven't done that as yet, but this management
group's relentless concern for shareholders will make Animas work
one way or another. They've recently acquired some other very
interesting projects in Nevada to diversify their portfolio, too.
As I see it, anyone who buys Animas at its current levels is very
likely to reap great rewards.
Any other players in the gold space you want to talk about?
Pediment Gold Corp. (TSX:PEZ; OTCBB:PEZGF)
has embarked on a very aggressive drill program at its San Antonio
gold project in Baja Sur, Mexico. They'd originally contemplated
11,000 meters this year, but then nearly quadrupled that figure-to
40,000 meters. They're going to simplify their story by just going
out and finding gold and building their resources. The company also
has a scoping study underway. The results should be available by
the end of September, giving us a first look at the economics of
mining San Antonio's 1.5 Moz. measured and indicated gold
Mentioning Mexico brings silver to mind. Do you like silver?
Silver is obviously much more volatile than gold, and as such tends
to act as a lever on both gold price gains and declines. As a
number of others, I like silver for that reason. I don't play the
silver/gold ratio as much as some people do. I just recognize that
gold is in a long-term secular uptrend. Along the way, to the
extent that it moves somewhat in synch with gold, silver will have
price swings with wiggles in the line that are much more pronounced
than gold's. Whenever those wiggles take silver down to a
significantly undervalued level, that's the time to buy. In fact,
silver's a great way to trade that secular bull market in gold.
Who do you like in the silver space?
Great Panther Silver Limited (
may be my very top overall silver recommendation. The key to that
company is its great management and its primary project, the
Guanajuato Mine. That mine has been exploited for close to 500
years, but previous production was halted and previous exploration
stopped at the water line. The big thing that's happening-the key
to Great Panther's potential-is the fact that they're now using
modern technology and exploration techniques to identify resource
where no end has been found yet.
Historically, close to 500 million ounces (Moz.) were produced
from that district, and they have the potential to expand
dramatically the resources that are known now by drilling in and
developing areas that were inaccessible for hundreds of years
previously. The company is generating profits and plans to
essentially double its production over the next couple of years.
Actually, the timeframe goes much longer than that. I think Great
Panther has huge potential in silver production.
Any other resources or companies you have an eye on?
Rare Element Resources Ltd. (RES:TSX.V)
is fortunate to be endowed with a world-class rare earth resource,
and it's also fortunate to have potential for a world-class gold
resource. It's interesting how that company's focus has oscillated
back and forth between those deposits over the years I've
recommended that company. We went through a rare earths boom about
a year ago, and Rare Element really surged higher to become one of
the market leaders. The bloom has come off that rose a bit, what
with some concerns about a double-dip recession, further economic
slowdowns in Europe and so forth.
What about the deal-or no deal-in May, whereby
Newmont Mining Corp. (NYSE:NEM; TSX:NMC)
stepped out of Rare Element's Sundance Project in Wyoming?
The renegotiation of their joint venture arrangement with Newmont
on Sundance, which is a gold property, hurt temporarily. The market
viewed that as a negative, as Newmont leaving. In my opinion, it's
more that Rare Element has regained control and is prepared to
explore the project for its gold potential aggressively for the
first time. It never had the financial resources to do that before,
and now it does. I'd say the company at the current levels is an
It seems that REE juniors in general are facing a tough row to hoe.
Maybe that means other opportunities there.
The rare earths story as a whole has calmed down. It's been a
market-wide phenomenon for the entire subsector, which no longer
has quite the allure it did when we thought we were in the midst of
an economic rebound. People just don't think that way anymore. It's
hurt all of them.
Avalon Rare Metals Inc. (TSX:AVL;OTCQX:AVARF)
, which was around $3 on January 1, is now about $2, and it's the
same sort of story with
Quest Rare Minerals Ltd. (TSX.V:QRM)
Tasman Metals Ltd. (TSX.V:TSM)
. While that change in sentiment hit the entire subsector, Rare
Element's reworking of the deal with Newmont gave the market an
excuse to look at it more closely and in a somewhat negative light.
In short, the rare earths story looks like a longer-term play right
Inferring that Rare Element's pendulum has moved toward the gold
side now brings me back to a final question about the precious
metal. What are your top go-to gauges for the gold market?
Six months ago I might have had an answer. Things have changed so
much that there aren't many reliable indicators any more. We
tracked the 300-day moving average for gold for a while; it was as
reliable as could be in identifying the underlying support for the
gold price trend. During corrections, gold always touched bounced
off of that 300-day moving average. Starting in the fall of 2008,
though, such indicators have broken down. Maybe we're starting to
get back into a more reliable market now, but I still don't think
you'll find a really reliable technical indicator for gold, what
with the metal decoupling from the dollar and reacting much more
directly to global economic headlines.
That said, I suppose one of my go-to gauges would be that I
generally look for anything suggesting that the sovereign debt
contagion is spreading. Any time governments move toward
quantitative easing or bailouts or massive spending-all of that is
really driving gold right now. People are looking at the amount of
debt and currency that's being created, and realizing that all of
the world's currencies are therefore suspect. Even the U.S. dollar
only looks good in comparison to the rest of its fiat currency
brethren. After all is said and done, gold stands as the one
currency that governments cannot debase or debauch.
Well put. Thank you, Brien.
With a career spanning three decades in the investment markets,
Brien Lundin serves as president and CEO of Jefferson Financial, a
highly regarded publisher of market analyses and producer of
investment-oriented events. Under the Jefferson Financial umbrella,
Brien publishes and edits
a cornerstone of precious metals advisories since 1971; he digs
into not only small caps of every type but also macroeconomics and
geopolitical issues that ultimately affect every resource investor.
Brien also hosts the
New Orleans Investment Conference
, the oldest and most respected investment event of its kind, which
each year attracts the brings the giants of investing, economics
and geopolitics. On the agenda for the 2010 conference-scheduled
for October 27-30-is another star-studded array of speakers that
includes a lot of names very well-known to the Gold Report crowd:
Mary Anne and Pamela Aden, Gary Alexander, Gene Arensberg, Dick
Armey, Andrew Barron, Thom Calandra, Doug Casey, David Coffin,
Brent Cook, Adrian Day, Marc Faber, Dennis Gartman, Steven
Hochberg, Frank Holmes, Charles Krauthammer, Stephen Leeb, Ian
McAvity, Robert Meier, Bill Murphy, Chris Powell, Robert Pretcher,
Lawrence Roulston, Rick Rule, Jeff Siegel, Mark Skousen, Eric
Sprott, Frank Trotter, David Walker and-of course-Brien
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