Paul van Eeden: Finding Value Amidst Volatility
Source: Karen Roche of
The Gold Report
Cranberry Capital Inc. President Paul van Eeden still favors
the natural resources sector above all others because they are
"absolutely central to our standard of living, our quality of
life and the technological progress we've made." Despite the
dangers, frothiness of equities and absence of fundamentals to
support current valuations, he says, "there are always
opportunities in the market. . .you just have to recognize them."
Find out where Paul believes investors can find good value in the
current market in this exclusive interview with
The Gold Report.
The Gold Report:
Paul, in January 2008, you saw the impending crash and told
investors to sell everything. Three years later, what are your
feelings about the economy?
Paul van Eeden:
A lot has changed in three years and the recession was not as
deep or severe as I had expected. Many people have been adversely
affected, no doubt, although it could've been much worse.
I'm not an apologist for central bankers or the Federal
Reserve, and I don't believe in fiat money or that the Fed has a
role to play in our economy. But in the context that they exist,
and given Bernanke's job description, I think he did a good job
during the crisis. Of course, what we really need is for the
system to get flushed clean. But that would be far less
attractive to the majority of the population to hold much hope
for its occurrence. After all, a democracy is really nothing more
than mob rule; and in this case, the Fed saved the mob.
Many people believe all the Fed did was kick a larger depression
down the road.
I agree that it is merely postponing the inevitable, but that is
the Fed's job. It's nothing new-it's what central bankers do.
While central bankers are part of the banking system that debases
our currency and, therefore, is partly to blame for some of our
troubles, it certainly isn't solely to blame.
Part of the blame also lies with all of us-people who buy cars
and houses they can't afford or go on shopping sprees with credit
cards they cannot repay. Just because we have fiat money and
people manipulating it doesn't mean we have to live above our
means. It's very convenient to blame Bernanke for debasing our
currency, banks for making us offers that sound too good to
refuse and credit card companies for issuing cards to people who
aren't creditworthy. But does that mean we have to partake in
those activities? No. We have to take personal responsibility for
our actions. Only by taking responsibility for our actions can we
figure a way out of this. Stated another way, as long as we rely
on others to solve our problems and live above our means with the
expectation that somehow, someone will fix it for us later, we
will never get out of this mess. It will only get worse.
You mentioned that you don't think the situation will get much
worse. If it's not much worse, what are we postponing? The
Yes. The pain could've been worse, and I think we avoided that.
But what we really postponed is the recovery. The way I see it,
the central bank robs our future living standards in exchange for
a higher living standard today by debasing our currency and
reducing the value of our future savings and earning capacity. We
do the same thing as individuals by taking on too much debt. When
you borrow, all you're doing is spending today what you hope to
earn in the future. You're trading a higher lifestyle today for a
lower quality of life in the future.
So, if we avoided even greater downside against a more prolonged
recovery, on balance isn't that better than having to dig out of
an even greater depression?
No, because many problems creep in. The business cycle is like a
lifecycle; you can't change it. People make mistakes with their
money during periods of euphoria and optimism in the economy.
There's malinvestment, gambling, speculation and misallocation of
capital. In a depression or periods of conservatism, those
misallocations of capital are corrected because those who were
too speculative and perhaps took on too much debt go bankrupt.
Production assets transfer from irresponsible people to more
responsible people, who then build businesses back up, hire
employees and increase our living standards. That's what we need.
Keeping irresponsible people in business, forgiving their loans,
debasing the money supply and/or reducing interest rates so they
can make loan payments keeps the assets in the hands of
irresponsible people who will continue to manage those assets in
a sub-optimal fashion, until one day the party really comes to an
end for good. That's not how to build wealth.
Misallocation of capital, speculation and malinvestment wastes
both human and natural resources, including energy, on
nonproductive enterprises. By enabling nonproductive enterprises
and wasteful people to continue doing what they're doing, the
Fed, governments and policymakers are postponing our ability to
be more economically productive and thus are a hindrance to
improving our standard of living. It gets much worse when you
factor in the wasteful nature of government make-work programs
(i.e., projects, such as digging holes and filling them up again,
that have no useful purpose other than to make work).
Despite all that, the market has had an incredible rebound and
seems to be continuing upward.
The market's rebound, in my opinion, is neither here nor there.
We have to look at the structure of the economy to determine
whether the improvement we're seeing is sustainable. Take the
unemployment rate, for example. The authorities would have you
believe it is stabilizing and showing signs of improvement. But a
lot of those signs are statistical anomalies because they don't
account for people who've abandoned their job searches. So, in
reality, the labor situation hasn't improved-it's deteriorated.
If you look at the U.S. economy fundamentally, it isn't actually
getting better. We're just getting more used to the way it is. On
that basis, the rally in equity markets perhaps has more to do
with the decline in interest rates than fundamental improvements
in the economy. So, I'm still very nervous and continue to see a
lot of risk in both the equity markets and economy.
As an investor, how do you integrate that thinking into your
By being very scared. It's healthy to be scared when you're an
investor because it helps you avoid some of the mistakes you
might make otherwise. But being scared doesn't mean you can't be
an investor and deploy capital in these markets. Despite
tremendous rallies in both equity and commodity prices, every now
and then I come across a business that's selling for an
attractive price. In my investment business, that's what I'm
looking for-value at an attractive price. You can still find
instances of that in the market.
They're always there. I used to work for Rick Rule and one of the
first things he tried to teach me was that opportunities are like
commuter trains. If you miss one, there's another one coming
about five minutes behind it. Sometimes there are more
opportunities than at other times, but there are always
opportunities in the market.
So where do you find value?
If I can find a business with competent, trustworthy management
at a price I would've paid for it in any market-good or bad-I'll
buy it. That's where I'm focusing much more of my energy. My
decision is based on the business, what I think of it and what I
think it's worth-not on what the business is trading at relative
to another. I try to find those opportunities in mineral
exploration. They're there from time to time; you just have to
recognize them. But the natural resource industry is very risky
and, within it, mineral exploration is even more risky. I
specialize in very early stage exploration, which is one of the
riskiest areas of that business. It may sound a bit contradictory
to say I'm a value investor at heart while investing in this
high-risk area, but I think you can find good value there.
Can you share some of the companies that provide good value in
the current market?
Yes. Last September, I was asked to join the Board of
Miranda Gold Corp. (TSX.V:MAD)
. I've been a shareholder of Miranda on and off for the past
eight years or so, and I know the company very well. It has an
excellent management team and one of the best exploration teams
in the business. When I agreed to become a director, I also
bought shares in the company. I have confidence in Miranda's
management team; and if I'm going to be involved personally, I
will take the risks and rewards alongside my fellow shareholders.
I would not have agreed to become a director nor would I have
bought the stock if the company had not met all my investment
I look at a stock certificate as representing fractional
ownership in a business. So, if I find a business like Miranda,
of which I'm very happy to be a fractional owner at an acceptable
price, those are the investment opportunities I look for.
You've created a variety of models. Some are related to the fair
value of gold, some to inflation. Are you using any of those?
My gold and inflation models are very long-timescale
macroeconomic models that don't necessarily help pick stocks.
When I pick stocks, I look primarily at management. It doesn't
matter which business or industry-all businesses are about
people. Do I want to do business with these people? Do I trust
these individuals with my money? Things like that. Then I start
looking at what I'll be paying for the business, whether it has a
proper business plan it's capable of executing, etc. It's a
process. The more you go through the process of selecting
business investments, the more accustomed you get to it.
You specialize in the riskiest area of a high-risk sector.
Where's the appeal in taking such risks?
I've always liked the natural resources sector. The telephones
we're talking on right now are made of plastic, which is a
byproduct of the oil industry. Copper and other metals are inside
this plastic, which is only possible because of mining. My
computer's full of metal and I drive a car, which uses gasoline
and is made of metal and other natural resources. My clothes come
from the natural resources industry-cotton from farming, metal
belt buckle from mining.
What would life look like without natural resources and the
extractive industries that allow us to use those resources? We'd
have nothing-no buildings, cars, furniture, televisions or
telecommunications. So, natural resources and mining are
absolutely central to our standard of living and the
technological progress we've made.
This brings us back to understanding the underlying economic
structure. If an economy really needs these resources for daily
life, and the economy is not growing, how could we expect the
value of natural resource companies to increase?
Natural resource companies can increase in value for reasons
other than the economy. For example, if an exploration company
makes a discovery, it creates substantial and real wealth that
didn't exist before that discovery. So, it can grow and do well
regardless of the economic conditions.
If you impose over the economy the speculative cycle, which
just exacerbates the business cycle, you'll find natural resource
stocks are some of the most volatile stocks in the universe. If
you can learn to make that volatility work for you rather than
being its victim, you can do extraordinarily well in this sector.
That means you have to buy when other people are afraid to buy
and sell when other people are exuberant about buying, which
Everyone's buying now. Should we sell, or will we miss out on
more upside by selling too early?
You can look at investing from different elevations. From a very
high elevation, this is the time to sell commodities, gold,
stocks and bonds. The only thing that's likely undervalued right
now-and I'm probably going to get hate mail for this-is cash.
That paper money everyone's so afraid of is likely the oversold
commodity. But that's if you're sitting at 30,000 feet looking
down-a very, very high macro view.
And moving down the ladder?
As you come closer to the ground, you look for a business that
represents good value or an attractive opportunity within a
sector-be it long or short term. Last year, when equities and
commodities were rising, Bob Quartermain brought
Pretium Resources Inc. (
or "Pretivm" public at $6/share. The company owns two large gold
deposits in northern BC. The IPO wasn't inexpensive but if the
market held together, the stock was sure to do well because it
had huge resources to talk about, experienced management and a
market cap at the low end of where the large institutions want to
be. And we were in an environment where everybody and his dog
wanted more gold and gold exposure. So you could've bought PVG
for $6 at, or after, the IPO. It's now $10, and that's within
just a couple of months.
I'm not saying you should run out and buy PVG right now. I'm
saying you can sit at 30,000 feet and think you really should be
selling gold, or you can come down to ground level and determine,
in the context of overvalued gold and equity markets, that if
things stay where they are for the next six months, a particular
stock could do well.
Does that mean you are now invested in the market after selling
most of your investments in 2008?
I have made a few investments over the past 18 months, but it has
mostly been a very selective process. I am still very nervous
about equity markets and commodity prices, so I am not heavily
invested at all. What I look for are win-win opportunities, and
for that you need a healthy cash reserve.
What do mean by that?
I bought Miranda stock late last year at $0.50/share. If the
stock price increases, I make money-that's a win. But if the
stock price goes down, I will have an opportunity to buy more
shares in a business I like for less money. I will thus be able
to increase my fractional ownership in the business and reduce my
average cost basis at the same time-that's a win. As long as
nothing from left field comes along and blows a hole in the
company, it's a win-win situation.
This concept of looking for win-win situations is central to
how I invest. I would be nervous owning a stock if the price went
down, and then I sold it immediately. I don't wait for the price
to go down to figure out whether I should sell or not.
You've spent more than 15 years looking at the mineral
exploration sector. What do you recommend for new investors that
lack such experience and time to learn about management teams and
business plans? How do they find relatively undervalued companies
and good businesses in which to invest?
I suggest they meet Brent Cook. I have known Brent for almost as
long as I have been in the investment business. He and I used to
work together at Rick Rule's firm in Carlsbad. Over the years,
Brent has helped me make bundles; but perhaps more importantly,
he has saved me from making some really big mistakes. Brent is an
independent geologist with more than 30 years' experience in over
60 countries-and, not only is he a good geologist, he also
understands the investment business. His research and opinions
are top-notch and his
newsletter is the only one I read-and I
You went to the recent Cambridge House Resource Investment
Conference and presumably you'll be going to
in Toronto next month. What new trends in the exploration sector
appeal to you? And, on the other hand, what do you find
One trend I think is very good is that the standards and
practices that explorers and miners employ are getting much
better. For example, the attention they pay to community
relations and environmental concerns is really world class. The
whole industry has elevated itself. I think that trend is very
The discouraging trend is that the bureaucracy and bull that
explorers and miners have to deal with is literally adding years
to the approval process to get work done, as well as exorbitant
costs to the extractive industries. This additional time and
money is, in a very real way, reducing our standard of living by
raising the cost of the natural resources we use in everyday
It's a fine balance between nudging an industry to use best
practices and pushing them over the edge. There was a time when
extractive industries were abusive and deserved to get whipped.
It worked and their standards and practices have improved. But
now the pendulum has swung the other way and the extractive
industries are being unreasonably targeted by special interest
groups who don't really have any "interests" in these
Well, this was very good, Paul-but certainly not too good to be
true. Thank you very much.
Paul van Eeden is president of Cranberry Capital Inc., a
private Canadian holding company. He began his career in the
financial and resource sectors as a stockbroker with Rick
Rule's Global Resource Investments Ltd. in 1996 and has
actively financed mineral exploration companies and analyzed
markets ever since. Paul is well known for his work on the
interrelationship between the gold price, inflation and
currency markets. He also created a measure called the Actual
Money Supply (
) to monitor the real rate of inflation. AMS is crucial to
analyzing real (inflation-adjusted) price changes and
calculating the real return on investments.
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1) Karen Roche of
The Gold Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
3) Paul van Eeden: I personally and/or my family own shares of
the following companies mentioned in this interview: Miranda Gold
Corp. and Pretium Resources. I personally and/or my family am
paid by the following companies mentioned in this interview:
Miranda Gold for services as a director.
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