Gissen & Berol: The Hidden Factors Affecting Gold
Source: Brian Sylvester of
Party politics in America are pushing up the gold price,
according to Encompass Fund Comanagers Malcolm Gissen and
Marshall Berol. And that's playing right into their hands as
commodities and other hard-assets plays in the Encompass Fund
continue to outperform the broad market. In this exclusive
The Gold Report,
Gissen and Berol discuss their long-term investment philosophies
and several of their fund's most promising positions.
The Gold Report:
Malcolm and Marshall, the GOP and the Obama administration are at
a stalemate over how to tackle America's $1.4 trillion deficit.
The problem has rating agency Standard & Poor's threatening
to lower America's top-notch credit rating unless a solution is
reached soon. A similar stalemate could happen again in a few
weeks when Congress votes on whether or not to raise America's
debt ceiling above $14.3 trillion to avoid defaulting on existing
loans. Is partisan politics in America threatening America's
long-term financial security and, ultimately, driving up the gold
Absolutely. We are concerned that such hostile environments in
state capitals and in Washington D.C. have made it very difficult
for Democrats and Republicans to work together for solutions that
benefit all of us. It seems everything is about getting elected
and re-elected instead of doing what's best for the country. We
believe this factor will continue to drive up the price of gold
and silver. The stalemate over the budget, both in various state
houses, and in Washington, has so polarized our country that we
believe it's having a detrimental impact on markets. All of this
plays well into hard assets because when people are worried about
their economies, inflation and their own lifestyles, they tend to
invest in hard assets. And this is something we've taken
advantage of with the Encompass Fund and our client accounts.
While Malcolm and I often agree on investment philosophies and
style, we have somewhat differing views on political issues. But
I certainly agree with him that party politics are negatively
affecting the people and country and that it's one of a number of
aspects driving up the gold price.
Gold recently climbed past $1,500/oz. Do you believe further
upward momentum could be curtailed by the inevitable "sell in May
and go away" sentiment?
It could be, but the emphasis would be on "could." If so, it
would be a short-term effect. We remain very positive about the
upward trends for gold and silver on a longer-term basis and
that's 6 months, 12 months and further out. There could be some
correction over the next few months and it could be related to
sell in May and go away, or it could be the summer doldrums. More
likely there would be some profit taking due to the fact that
gold is now over $1,500/oz.-a new all-time high and silver is
roughly $48/oz. and also approaching a new all-time high.
Our experience in managing the Encompass Fund and individual
client accounts over many, many years is that, when a concept or
theory becomes well known, it often doesn't continue to work.
Sell in May and go away is certainly in the forefront of people's
thinking this year and probably the last couple of years. It very
well could be that, because it is foremost in people's
consciousness, it's not going to happen.
We invest in a number of junior mining companies, including
precious metals juniors. The companies the Encompass Fund invests
in tend to be those making lots of progress. They're exploring,
drilling, moving toward production and enhancing their value.
There's a stream of good news that's coming out of these
companies and that moves the stock price regardless, almost, of
what's going on in the markets. As these companies make terrific
progress, the Encompass Fund believes they will be rewarded in
the marketplace. We don't invest more or less in gold companies
based on the time of the year; the Encompass Fund invests in
outstanding companies that we believe are making progress.
How much is your fund up so far this year?
The fund is up about 3% this year. Morningstar puts the Encompass
Fund in the World Stock Fund category and for one year, the
category was up 14.17%. As of March 31, 2011, the fund was up
51.5%. It's very unusual for a fund to outperform its category by
more than 1, 2 or 3 percentage points. So, to outperform by 36%
is very unusual. Over three years (to March 31), the Encompass
Fund has gained a 19.6%-per-year average annual return, compared
to about 1% for the World Stock Fund category.
And to what do you attribute that?
The fund is set up as a no-load mutual fund on a go-anywhere
basis. We can invest in companies of any size. We can invest
domestically or internationally, and we do; we can also invest in
any industry or sector. While we've focused on gold and resource
companies since we launched the fund in June 2006, we're not
solely a resource or gold fund. We have holdings in other
categories. We're stock investors-we don't use futures. It's the
focus on the resource companies that has enabled the Encompass
Fund to perform so well because the gold and silver stocks and
rare earth elements (
), copper, uranium, coal, gas and other commodities are doing
We have four people here who are involved in sourcing ideas,
doing research and monitoring the positions in the fund. All of
us have a minimum of 15 years' experience and a few of us have 25
years' experience. Over the last 10 years, we've formed
relationships with brokerage firms doing business around the
world. Those relationships not only provide us access to
outstanding analysts and their best ideas, but it also brings us
opportunities for private placements in companies on very
attractive terms. These are companies that have very high growth
potential; thus, we provide exposure to sectors and companies
that very few, if any, other American mutual funds provide.
Indeed. As Marshall said, your fund is heavily weighted toward
resource companies and particularly junior explorers seeking
economic concentrations of hard assets like gold, silver, oil and
gas or uranium. These small segments of the market are currently
outperforming the broader market, but how long do you think
that's going to continue?
We live in unusual economic times, and we believe the explosive
growth we're seeing in developing economies will likely continue
for the next 10-20 years. This growth requires enormous amounts
of resources whether they be energy, precious or other metals;
and as a result, we believe that resource companies should
perform very well over the longer term.
Historically, the small caps have outperformed the large caps.
We're investing for the long term and our experience has been
that the smaller companies-the mid-cap, small-cap or micro-cap
companies-are more likely to have that long-term growth than are
large companies. A large company is more stable but it's less
likely to have the kind of growth that we think can be obtained
with smaller companies. Some examples would be
Barrick Gold Corp. (TSX:ABX; NYSE:ABX)
Newmont Mining Corp. (
. Those are fine companies but they're not going to grow their
companies and, hence, the stock prices as quickly as many of the
companies we have in the Encompass Fund portfolio. Having said
that, we do have positions in some larger companies, such as
Freeport-McMoRan Copper & Gold Inc. (
, which we think is just an excellent copper and gold company.
It's the world's largest publicly owned copper producer and also
a large gold producer; very well managed. But we tend to lean
toward the small-cap and micro-cap companies.
Could you tell us about a few of those companies? Let's start
with some names in the gold and silver space.
A gold company that we have invested in for about three years is
Avion Gold Corp. (TSX:AVR; OTCQX:AVGCF)
. Initially, we invested at roughly $0.10 about three years ago.
Avion has since become a gold producer in West Africa and is now
trading at around $1.65.
Was that initial position part of a private placement?
Yes it was, and then we bought more in the open market and got
stock in warrants. In fact, we're exercising the warrants now
because they expire in a couple of weeks. The warrants were at
$0.65; so, we've had a very big gain. Avion's production was
about 51,000 ounces (Koz.) in 2009 and around 87 Koz. in 2010.
This year, it anticipates producing about 100 Koz. With gold at
$1,500/oz., that's $150M in cash flow. Avion has very good grade
in its mines in Mali. The company's doing further exploration and
getting very good results. In addition, it has and is exploring
properties in Burkina Faso, also in West Africa. The results look
promising and the company expects to complete an NI
43-101-compliant resource estimate during the second quarter of
Avion owns 80% of the Segala, Tabakoto and Dioulafoundou gold
deposits in Mali. Those are currently open-pit operations, but
Avion is going to head underground at some point, correct?
That's correct. And we believe, with the grade it's getting and
the exploration results, Avion should be expanding its resource.
The 43-101 will be important because it will provide verification
for what the company's doing. Many larger gold companies wait for
junior miners to produce a 43-101 report before they start
getting interested in the junior, in terms of a possible
One thing raising some eyebrows with Avion is its cash costs per
ounce. What are your thoughts on that?
Avion's cash costs have been a bit high. The company has focused
on reducing cash costs and expects that it will reduce them.
It's also a function of increased production. Avion has increased
production steadily and feels that it will continue increasing
production, which should bring down the cash costs. Cash costs
are certainly an important factor to look at; but regardless of
whether you're looking at $450-$500, or even $550/oz. cash costs,
with gold at $1,400-$1,500/oz., that's still a healthy margin for
Have you met with Avion management?
Yes. We should point out that we meet with the managers of almost
all the companies in which we invest. We try to get very close to
these companies, so we can call and talk to them on a regular
basis and get updated on any developments. A good number of the
CEOs of the companies in which Encompass invests call us
regularly. I should point out this is not insider information,
but we do like to keep abreast of the companies in which
Encompass is invested.
With a smaller company, we find that it's more valuable to have
met and sized up management.
It's also a matter of reducing the risk because, if you meet and
get a good sense of management, you go into that investment with
a greater feeling of security.
That's very true, and each of the four of us involved in
portfolio decisions has a good amount of experience in meeting
with companies. We feel it's very helpful in determining whether
or not to invest in a company, or whether to sell some or an
entire position in a company after we've invested. We also
believe in doing site visits to the projects of the various
companies in which we're invested or interested.. We find it's
very helpful to meet not just top management, but also the people
involved in exploring the project or running the mine.
What about some other silver and gold names that you like?
Another company that we like is
Extorre Gold Mines Ltd. (TSX:XG; NYSE.A:XG; Fkft:E1R;)
, which is a Canadian company that has some excellent projects in
Argentina. It was spun off from
Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB)
. What we like about Extorre is that its projects are near a lot
of infrastructure-and those projects are extremely high-grade.
The company recently announced some additional drill results from
its flagship project, Cerro Morro, and the grade was very
impressive. Also, the project should be easy to get into
production-maybe even by the end of 2012. Of course, we like the
management. Extorre's a very aggressive driller, which we also
like and the drilling results have been incredibly attractive.
Extorre has a lot going for it.
Cerro Morro is not far from
Goldcorp Inc.'s (TSX:G; NYSE:GG)
Cerro Negro gold-silver project in Argentina, which it bought
from Andean Resources for $3.5B last year. Does that increase the
odds of Extorre being a takeover target?
Extorre certainly could be a takeover target and its management
pointed that out when Andean was taken over by Goldcorp,
including what it paid. However, Extorre Cochairman Yale Simpson
recently said: "We are not selling; we have a lot further to go.
We have a great resource and want to continue drilling, and we
are not going to sell the company."
Most companies have managements that portend to continue
exploration-drilling, then on to an NI 43-101 report, then
prefeasibility and feasibility studies, developing a mine and
getting it into production. That happens, sometimes. But more
often, another company comes along with an offer that's too good
to refuse and the company either winds up selling the project or
the company. That was the case with Andean. Depending on whose
numbers you use, Andean was bought for $900-$1,100/oz. gold in
the ground-but Goldcorp recently reported a doubling of the
amount of reserves at that project.
We don't buy a company because we think it will be bought or
because its project is going to be bought. That's the icing on
the cake. The Encompass Fund isn't buying based on takeout
rumors-it's buying based on good, solid projects and good, solid
companies. If a buyout comes, and the Encompass Fund has had
several buyouts over the course of its life, that's great and
we're happy to get the additional premium that comes with the
Extorre is trading in the $9-$10 range. How much did you pay for
Several years ago, we bought Exeter; as a matter of fact, when we
started Encompass Fund in June 2006, we bought Exeter and added
to it over the succeeding years. Then in early 2009, Extorre was
spun out of Exeter on a 1-for-1 stock basis. On the suggested
tax-basis split of 80% of the original cost to Exeter and 20% of
cost to Extorre, Encompass' cost was roughly $0.40 per XG share.
Subsequently, we sold some Extorre when the Fund had a very
substantial gain-and sold more when it continued to go up. After
that, we bought additional shares because of the company's
continued excellent drilling results. Extorre is making excellent
progress. We continue to like it and buy it.
In addition to your success with gold and silver juniors, you've
also had success with rare earth plays. What are some REE plays
that you're excited about?
Encompass Fund initially invested in
Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF)
in September 2007 at $1.81 and has added to it since then.
Avalon's current price is about $9/share. Another company that is
involved with REEs, but with a very different business model, is
Dacha Strategic Metals Inc. (TSX.V:DSM; OTCQX:DCHAF)
. Dacha is an investment company that is focused on the
acquisition, storage and trading of strategic metals, primarily
REEs. We think Dacha is very attractive and underappreciated in
As your readers are aware, 95% of the current REE supply comes
from China, which has been enforcing export quotas. And the
prices of the metals are rising due to industrial countries'
increasing difficulty to source them. Dacha was set up a couple
of years ago with the proper licenses to buy REEs in China, store
them (primarily outside of China), and then sell and trade them
to various customers. It's been doing this successfully for a
couple of years now. Dacha's a low-priced stock-it currently has
a net asset value (
) around CAD$0.68/share-but it's trading at about CAD$0.46/share.
There are some concerns about whether the company can source the
material coming out of China, warehouse it and sell it. But
Dacha's been able to do that so far, and we think it will
continue doing so, which is why the Fund owns it.
Could one of the other reasons that Dacha's share price is
lagging its NAV be that its biggest customer base is in Japan? As
we all know, Japan suffered a major earthquake and tsunami and a
lot of its manufacturing has been affected.
It's possible. I can't comment on if it's selling as robustly as
it would like to, but it is selling. Some sales have been
reported over the last several months. The situation in Japan is
tragic and it's extremely unfortunate, but it's not going to
affect Japanese manufacturing on a long-term basis; it's a
shorter-term situation. Another aspect of Japan's earthquake and
tsunami is the aftereffect on uranium stocks. We have since added
to Encompass' positions in uranium stocks we already own and
initiated some positions in other uranium producers because those
stocks effectively went on sale.
Can you provide a few uranium names that you were able to get at
lower prices given the onset of the nuclear problems in
Yes, one of the larger holdings in the Encompass Fund portfolio
Uranium Energy Corp (NYSE.A:UEC)
. Before the Japanese disaster, it was selling at over $5/share
and very briefly dipped down to $3/share. We added to our
position at around $3.25-$3.40 per share. Another company that we
liked and wanted to have a position in but at a better price is
Ur-Energy Inc. (NYSE.A:URG; TSX:URE)
, which also went down 40%-45% in price. We initiated a position
in URG and have since added to it. Another company I will mention
Tournigan Energy Ltd. (TSX.V:TVC, FSE:TGP)
, which has a uranium project in Slovakia.
What do you think is the next milestone for gold? And will we
reach it in 2011?
The next milestone is further all-time highs. At the Encompass
Fund, we've invested in certain gold companies and added various
others for the last several years while people were saying things
like, "It's a bubble," "It's a top" or "It's not going higher."
We didn't believe that was the case, and we still don't think
that's the case regardless of whether pundits gave it a
$1,500/oz. price target. We're there and now they're talking
about $1,600, $1,800 or $2,000/oz gold. We'll likely get to those
amounts, we just don't know when. It is very difficult to put any
specific price on it. So, at this point, we'll continue to stay
tuned and invested. We're holding a larger amount of cash now
than we often do-around 30%. And we're looking for opportunities
to put that cash to work.
Thank you for talking with us today, gentlemen.
Malcolm Gissen founded
Gissen & Associates Inc.
, an investment advisory services firm, in 1985. He has been an
investment advisor since 1985 and has managed separate accounts
since 1999. Mr. Gissen's management experience has focused
primarily on investments in publicly traded companies. Mr.
Gissen has a BS degree from Case Western Reserve University and
a JD from the University of Wisconsin.
Marshall Berol has been engaged as an investment manager in
San Francisco, CA since 1982. Since 2000, he has been the chief
investment officer of Malcolm H. Gissen & Associates, Inc.
In addition, Mr. Berol has owned his own investment firm, BL/SH
Financial for more than 20 years. His investment management
experience has focused primarily on investments in publicly
traded companies. Mr. Berol did his undergraduate work at the
University of California (Berkeley) and received a JD from the
University of San Francisco School of Law.
Mr. Gissen and Mr. Berol cofounded
, a no-load mutual fund, in June 2006 and are the Fund's
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
sponsors of The Gold Report or
The Energy Report:
Avion, Extorre, Exeter, Goldcorp, Dacha, Uranium Energy Corp. and
3) Malcolm Gissen: I personally and/or my family own shares of
the following companies mentioned in this interview: Encompass
Fund, Freeport-McMoRan, Avion, Extorre, Exeter, Dacha and Uranium
Energy Corp. I personally and/or my family am paid by the
following companies mentioned in this interview: None.
4) Marshall Berol: I personally and/or my family own shares of
the following companies mentioned in this interview: Encompass
Fund, Freeport-McMoRan, Avion, Extorre, Exeter, Dacha, Uranium
Energy Corp. and Tournigan. I personally and/or my family am paid
by the following companies mentioned in this interview: None.
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