As looming inflation, currency wars and a possible run on gold
threaten to derail markets, Leonard Melman, author of
The Melman Report,
is setting his sights on the midtier and near-term producers that
he wants to scoop up when the blood is in the streets. In this
Melman explains why gold, silver and the companies bringing them
out of the ground could do very well in the second half of
The Gold Report:
You recently told a crowd of investors at Prospectors &
Developer Association of Canada [PDAC] that precious metals are the
best place to invest in an inflationary period. Why is that?
When prices are going up, you wouldn't want to be in housing stocks
or auto financing, but you would certainly want to be in precious
metals. You also might want to short the bond market. That is why
you have to be aware of the direction of inflation. It is important
to the concept of precious metals pricing. If you've been around
for a few years, as I've been lucky enough to be, then you can
easily recall a time when high inflation was the absolute key
ingredient in massive previous bull markets. That is why I
thoroughly look at what has led to past inflation and
hyperinflation. I use four examples: the Roman Empire, the French
Revolution in the late 1700s, the German hyperinflation in the
1920s and the recent catastrophe of hyperinflation in Zimbabwe. I
examine whether America and other countries in the world are
perhaps following the same paths that led to those previous
Do you think investors are going to see hyperinflation in the
Not immediately. It's like a doctor looking at a patient who is
showing all the early signs of cancer, but the actual tumor hasn't
yet developed. It would be unwise to ignore those developing
symptoms. That's where I think we are. We don't have hyperinflation
yet, but many of the pathways that led to previous hyperinflations
are present, and I think it would be very foolish to ignore
In a recent edition of
The Melman Report,
you quoted Patrick Armstrong, head of investment selection at
Armstrong Investment Managers, as saying, "We think a currency war
will be the biggest story of 2013." How is that likely to affect
precious metals equities?
There has been a lot of coverage about currency wars recently. So
far the main participants have been countries like Japan and the
European community, which are very concerned that strength in their
currencies is going to limit their ability to export goods at a
profitable rate. Japan has recently done everything it can to lower
the value of its currency and the euro is now entering a new period
of weakness. So far, the one currency that hasn't played this game
is the U.S. dollar. The other currencies look weak compared to the
U.S. dollar. When the U.S. dollar looks strong, usually gold and
silver perform poorly, which we are seeing now. As the year
progresses, the dollars' immunity will soften, which should spill
over into higher precious metals prices.
Gold has fallen below the $1,600 per ounce [$1,600/oz] support
level. What is your macro picture for gold?
I'm not one to ignore charting. I'm a member of the Canadian
Society of Technical Analysts. I can't ignore the weakness that
gold is showing. However, I believe powerful forces, such as
inflation and currency devaluation, are going to appear stronger in
the future. That should lead to higher gold prices over the second
half of the year.
Another factor is that countries are now repatriating their gold
holdings. Germany just announced it is going to be bringing back
much of the gold now held in foreign storage, particularly in
France and in America. Venezuela just repatriated all its foreign
gold holdings and Switzerland is now moving forward with a
referendum on whether it should reform or repatriate all its gold
holdings held in foreign lands. A lot of underlying pressures will
be positive for gold and silver ultimately.
Do you believe that the timeframe for Germany's repatriation of its
gold has a lot to do with the fact that its gold may not actually
be where it's supposed to be?
Of course, that's one of the most important questions this is
addressing. I find it very interesting that there has not been an
audit of the United States government-controlled physical gold
holdings in facilities such as Fort Knox or Federal Reserve vaults
in more than 33 years. Can you imagine a private company getting
away without allowing an audit of its books for that length of
time? That is what the government has done.
If the gold isn't really there, a sudden buying surge could
occur as guarantors scramble to fulfill the demands.
Do you see gold continuing to trend lower through 2013?
I'm looking for the long-term bullish forces to exert themselves
during the second half of the year, particularly in the last
quarter. There is a great deal of gloom and doom for metals at the
moment. The gold share indexes, like the Philadelphia Gold and
Silver Index (
), the Amex Gold BUGS Index (HUI) and the Market Vectors Gold
Miners ETF (
), are all in virtual freefall. But wasn't it Baron Nathan
Rothschild who once said, "Buy when there's blood in the streets?"
Usually isn't that what happens? A selling climax terrifies
everyone and then, all of a sudden, with surprising swiftness,
prices begin to recover and head higher.
We may be in the process of that now because the selling is
absolutely pervasive. Such a selling climax could easily be
followed by stronger markets in the second half of the year.
Silver is falling too, though slower than gold. What's your outlook
I would dispute that statement. Silver peaked in the summer of 2012
at $37.50/oz and it's trading at $28.50/oz this morning. That's a
$9/oz difference, a 20+% decline. In the same time, gold has fallen
from $1,800/oz to about $1,580/oz. That's $220/oz, which is only
about 12%, so silver is making a much greater percentage move to
I recently completed a chart analysis comparing the five-year
charts of gold and silver and the timing of the moves is virtually
precise. When gold makes a bottom, silver makes a bottom. When gold
makes a relative high, silver makes a relative high. But in
virtually every case, silver's move is exaggerated on a percentage
basis. The reason is that it takes less money to move silver than
it does to move gold and therefore you get bigger percentage
The same thing will hold true in the next bull market wave-gold
will rally. Silver will rally in a greater percentage. Also
remember, silver is an industrial metal and the beneficiary of many
new scientific advances, which are increasing the demand for
Where are you seeing value in the junior mining equity space right
now? What types of companies will be able to ride this out?
Several companies have entered production over the last year and
once they have cash flow coming in, they can use it to develop
their projects or build up their cash balances, thereby eliminating
the need to look for financing. Those companies are in the best
shape. Also, during the last couple of years several companies have
adopted the royalty model, helping other companies get their
projects into production and in return receiving royalties. Outside
revenue options have been key for company survival.
One of the symptoms of the problems facing many juniors is a
lack of cash and this shows up in the number of equity offerings in
relatively small amounts, $200,000-400,000, rather than several
million dollars. When I see those, I suspect that the biggest
problem is just keeping the doors open. Those companies are in a
difficult position and unless we get a rally quickly they may be in
When you last talked with
The Gold Report,
you discussed Orko Silver Corp. (OKOFF.PK), which has since had
several takeover bids with Coeur d'Alene Mines Corp. (
) looking like the successful acquirer. What are the takeaways from
those competing bids?
Orko is a company I've been familiar with for some years and I have
a very sound working relationship with Ben Whiting, the chief
geologist. Orko's strength came from the depth of its exploration
and development, which took place over about a 7-10 year period,
where it proved very sizable reserves, making it attractive to
companies like First Majestic Silver Corp. (
) and Coeur d'Alene.
Despite the difficult share price environment, companies believe
Orko could develop into a very profitable mining venture and that
is why it was so attractive.
It's been a very profitable venture for Orko's shareholders as
the price bottomed earlier in the year at just above $1/share and
now they are getting $2.70 equivalent value for their shares.
That's not a bad deal at all.
Are there any silver companies you would like to talk about?
Well, one of the companies worth a look is El Tigre Silver Corp.
(EGRTF.PK). El Tigre is a combination of many things. First, it has
the potential for early cash flow because one of the values of its
property is an immense tailings pile. It was left behind from
mining operations that went on from 1905 to 1935. The operations
handled ore, which was rated at as much as 40 ounces per ton [40
oz/ton], so when the miners of that era came across tailings that
were only 3-4% silver, they deemed them completely not worth
looking at. As much as 800,000 tons piled up through the years and
El Tigre is planning to bring those into production.
[For more of Leonard's silver picks,
The last time I talked to Stuart Ross, El Tigre's president and
CEO, the company was already assembling equipment and expertise to
bring those into production at the earliest possible time. It's
looking at actual revenue production before the end of 2013. In the
meantime the company has two goals for exploration on the property.
One is exploring for gold, which it believes could be quite
substantial, but it is also searching areas close to where the 40
oz/ton silver had been located during the first mining event in the
hope of hitting some of those bonanza grades. There is both the
productive end to it and a good potential exploration end. On a
risk/reward basis El Tigre is a stock that people should take a
Will the production be enough to continue to finance El Tigre's
I believe it will. We're talking about 800,000 tons of tailings. If
the company is recovering 2.5 oz/ton from 800,000 tons, we're
talking about 2 Moz silver. Even at today's market value, that's
gross revenue of between $55 million [$55M] and $60M. With lower
costs, even if El Tigre had to crush the ore, you can see that
there is potential for very substantial net cash flow.
By the way, there's also another important point about the
tailings. There is as yet an undetermined amount of tailings, which
were used as underground fill during the early mining operations.
Some of those tailings could be of a much higher grade than just 3
oz/ton. The company also has discovered some areas of 7 oz/ton and
8 oz/ton. So, the potential for revenue could be more than is just
evident by the 800,000 tons in the big pile.
Thank you, Leonard, for your insights.
This interview was conducted by Brian Sylvester of
The Gold Report
and can be read in its entirety
, publisher of
The Melman Report
, has been writing about precious and base metals for more than
two decades as monthly columnist for California-based ICMJ's
Prospecting and Mining Journal
Vancouver's Resource World Magazine.
He focuses on how political and financial considerations impact
the world of mining and the prices of the metals.
1) Brian Sylvester conducted this interview for
The Gold Report
and provides services to
The Gold Report
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