The People Have Spoken and Precious Metals Will Soar:
Source: Zig Lambo and JT Long of
The Gold Report
The elections in Greece and France have shown that in
democratic societies the people are the ultimate deciders of how
well the best-laid economic plans will work out in the long run.
In this exclusive interview with
The Gold Report
Leonard Melman, veteran precious metals analyst and publisher of
The Melman Report,
talks about the implications of the recent European elections on
the prospects for the gold and silver markets. He also discusses
some of his favorite stock picks for taking advantage of the huge
rebound he sees in the metals markets later this year.
It seems that economists can plan and recommend, and politicians
can negotiate and maneuver, and pundits can analyze and predict
all they want, yet when the people don't want to play along, it
can all mean nothing. Of course, we're talking about the
elections in France and Greece. What's going on?
What's going on is that the monetary authorities in Europe have
decided that austerity is the only way out of the financial
dilemma, which I find kind of amusing, because it is their
Keynesian activities that created those policies in the first
place. Their decision now is that austerity, which is cutting
back government programs, is the only thing that will work. The
problem is that the public doesn't want their government benefits
cut back. So, the message from the French people was that Nicolas
Sarkozy, with his austerity, was no longer their friend and
François Hollande, with his promise to end austerity, is now the
new President. In Greece it's even more dramatic. Greece has been
a funny culture for about 40 years living in a dreamland,
thinking that nobody has to work and nobody has to pay taxes,
which is sort of their national sport.
Not paying taxes is a national sport?
It's a high art with the people in Greece. Yet they still expect
their government to give them early retirement, generous
unemployment benefits, etc. That has been supported for the last
40 years by massive government borrowing. And, that's the reality
after this election. The people voted out those politicians who,
at least on paper, wanted to cut back the size of government. Now
there could be a real crisis directly ahead of us.
Does that mean the Eurozone is going to blow up?
It's under the strongest threat since its creation 13 years ago.
Greece cannot pay its debts. Because of the recent election, the
monetary authorities who had been providing Greece with funds can
no longer be sure that their program is going to be approved by
the Greek government. If that's the case, they may suspend
further payments to Greece and Greece will officially begin to
default on its debt, which will be a likely cause for expulsion
from the Eurozone.
If that happens, all Greek monetary matters will be restored
to the previous currency unit, the drachma. Nobody has the
foggiest notion of what the drachma will be worth because it's a
totally artificial currency to begin with. We are seeing one
consequence that has showed up in the market the last couple of
days. Many people in Greece are getting scared and are converting
their funds primarily into euros and U.S. dollars.
That's one of the reasons why the dollar has become stronger
and precious metals have become weaker. It also raises the
specter of a true run on banks as people withdraw their euro
assets. Lying in the wings are Spain, Portugal, Italy, Ireland,
Iceland, etc. In fact, there are nine Eurozone countries that are
in recession. So, if the question is could the Eurozone blow up,
I think it is a genuine possibility that several nations could be
forced out, which would leave the Eurozone in a shambles.
With all of this bad news, the precious metals markets don't seem
to be responding positively. When will they be impacted by
For most Europeans, the U.S. remains the financial bastion of the
world. So, when Europeans look to convert assets from weakness
into strength, they usually look for U.S. government debt paper.
Buying that debt paper makes the U.S. dollar stronger and gold
and silver weaker in reflection. That will end when the U.S.
dollar weakness begins to show itself; then we should have much
more positive action in the metals.
In light of what's happened here recently, what are your
expectations now for gold and silver?
The number of people who are losing, or have lost, faith in
conventional politicians and economists to guide the world's
affairs is growing. As that continues, I believe more and more of
their assets will be turned into the precious metals as the haven
of last resort. The question is when. In my annual forecast I
said, and still believe, that this trend would accelerate
throughout the second half of the year, creating pressure for the
precious metals to rise dramatically. October, November,
December, I believe, will be great months for the precious
Is it going to take some great catalytic event for this to happen
or will it build slowly?
The French and Greek elections could have provided that catalyst
although they're talking about another election in Greece within
a month. But, this has shown there's a great difference between
what the politicians and economists want to do and what the
public will accept.
It's like a drug addict who vows to quit because he knows the
harm drugs are doing to him. Three or four days after quitting
he's in the agony of withdrawal and will do anything to get more
of the drugs. That's the case with several of the nations in
Europe. They know the damage that excessive borrowing has done
and now they're going to stop cold turkey. But, the people
relying on that government borrowing don't want to lose their
welfare, retirement or other government checks and they're
rioting in the streets. That rioting and disillusionment is in
its early stages and could get much worse. That's another reason
for precious metals to go much higher. The resolution to undergo
austerity is not going to be matched by the public's deeds.
So how high could gold and silver go?
The downside over the next two months could be about $1,400/ounce
(oz). During the latter part of the year, I have forecast a top
in gold of about $2,400/oz and a top in silver about $55/oz.
It seems like $55/oz is a little low on silver compared to
$2,400/oz gold. You're not a major silver bull?
I am. Let's say gold bottoms at $1,400/oz and then goes up to
$2,400/oz. That's a gain of about 65% or 70%. If gold gets down
to $1,400/oz, silver could hit $24-25/oz. If it goes to $55/oz
from $25/oz, that's a gain of about 120%. So, as the acceleration
develops, I expect silver to go faster than gold. It's been
weaker than gold, so it will take a little longer to advance.
But, I have always believed that in powerful metals bull markets,
silver outperforms gold on the upside, just as during declines it
falls faster than gold.
So, you aren't looking for $75/oz silver as some people are?
Not quite this year. But if this massive disillusion and even
distrust of public monetary authorities occurs, who knows what
numbers we could be looking at in 2013? But, $55/oz seemed about
right when I made the forecast in writing and I'll stick with
Going to mining stocks, which you cover in your
, the big question that most investors have is when are their
mining stocks going to take off and start behaving the way they
expect? What do you think?
A couple of numbers illustrate just how much mining stocks have
underperformed. In mid-2008, gold was about $900/oz and the
Philadelphia Gold and Silver Stock Index (
) was 205. Now with gold just under $1,600/oz, the XAU is 147.
So, while gold has almost doubled, the major mining shares have
dropped by an average of about 40%, and many of the junior shares
have fallen by more. So, it's been a dismal period, especially in
the last year.
The major difficulty during the past few years has been the
longer timelines in advancing exploratory projects to production,
due to the regulatory and environmental hurdles. When I started
writing about gold and trading shares as a stockbroker in the
mid-1970s, it wasn't unusual to advance a project from discovery
to production within two or three years. So, you only had to
raise sufficient capital to cover that period. Now projects can
take 8-15 years to get to production, if they succeed at all.
That results in greater capital requirements and a lot more share
dilution. That's having a negative impact in the junior sector.
The major mines seem to correspond much more closely to the price
of the metals themselves. But for the juniors, that long
regulatory process creates a major problem for share prices and
Let's revisit some of the stocks you talked about last April.
Great Panther Silver Ltd. (GPR:TSX;
continues to produce and have positive cash flow. Its share price
in the last year pretty well corresponds to the price of silver,
being leveraged in both directions. I like what Great Panther is
doing and have no problem suggesting to people that this is a
share of real interest.
We also talked about
Commerce Resources Corp. (CCE:TSX.V; D7H:FSE;
last year. Commerce has done excellent exploration work. It still
has the major tantalum project that has been its focus for many
years. But, it's also advancing rare earth projects in Québec and
other places. So, Commerce continues to do the things that in the
past have produced positive results. It's just simply faced with
a very adverse marketplace at the moment.
What do you mean by "adverse"?
The rare earths have been hot numbers and then cooled off. When
China first announced that it was going to reduce exports to the
West, rare earth shares in North America went crazy on the upside
and have come back almost as rapidly. So, it's a different
situation with them. They're more a hot play of the moment as
opposed to gold, which is much longer term.
But, it's not too late for rare earth to help Commerce's stock
Not at all, because rare earths blows hot, then cold. But, then
they could very easily blow hot again. The fundamental argument
for rare earths is excellent. They are absolutely essential for
modern technology, including defense weaponry systems. The
fundamental demand for them has nowhere to go but up and
questions have been raised about Chinese supply, among others.
So, I think the North American rare earth junior mining shares
could easily get hot again.
Will the fact that Commerce has both heavy and light rare earths
make a difference?
That's certainly a positive. The more markets you can attract,
the better the prospects become.
How about some of the other companies you talked about that you
think are pretty attractive at this point?
I just visited
El Tigre Silver Corp.'s (ELS:TSX.V; EGRTF:OTCQX;
project in Sonora State, Mexico. It's a fascinating story. The
previous operators from approximately 1900 to about 1935 mined
approximately 75 million ounces of silver. It was incredibly
high-grade material grading an average of 40 ounces per ton
(oz/t). They left behind tailings containing around 2.6 to 2.7
oz/t silver. At current prices, that's potentially very
profitable material. I believe there are about 1.2 million tons
of tailings plus other material that was used to backfill where
previous operators had mined.
The net result is that El Tigre is working to get those
tailings into production as fast as possible. It hopes to start
producing revenue in late 2012 or very early 2013. The project
area is entirely prospective. It has very large landholdings near
the tailings deposit with the prospect of very early revenues,
which will then finance continued exploration. There certainly is
the possibility of finding more 40 oz/t ore in the future. Plus,
it is also searching for gold and has some very good target areas
for that. So, I like the El Tigre story from that basis along
with the revenue coming in to finance exploration and
How is it going to reprocess these tailings?
It's going to build a Merrill-Crowe process facility adjacent to
the tailings. The material's already crushed so it can do the
basic recovery right near the project. That is a very good simple
What about SilverCrest?
SilverCrest Mines Inc. (SVL:TSX.V;
is another company I like that is in a similar situation. It has
a producing project in northern Mexico called the Santa Elena
mine, northeast of Hermosillo in Sonora State. It produced
134,000 oz silver and 9,000 oz gold in the first quarter of the
year, giving it significant revenues. It's using those funds to
develop additional resources around the mine, particularly to
advance a very prospective project called the La Joya, which is
in Durango State. So, again, it has revenues, financing and
significant exploration and development, rather than having to
raise borrowed capital or encounter heavy dilution.
How soon might it have results or a preliminary economic
assessment (PEA) on La Joya?
It's moving very rapidly but I have not yet heard of a PEA or a
bankable feasibility study. But, it is advancing its exploration
quite rapidly and it could be a very sizeable discovery. Those
are the kind of companies that I really think people should do
their own due diligence on and explore seriously because the
long-term prospects seem to be valid.
How about some others?
One of the companies I wrote about several years ago is
Barkerville Gold Mines Ltd. (BGM:TSX.V)
, which started production, but apparently encountered some sort
of difficulty and temporarily suspended it. It's near the town of
Barkerville, which is a great historic mining site in British
Columbia surrounded by active exploration and development, where
the prospects for future discoveries appear very solid. Now it's
just a question of getting back into production and kicking up
the cash flow once again.
What about anything in South America?
I was recently on a tour of
GMV Minerals Inc. (GMV:TSX.V)
in Guyana, which has great mining prospects and excellent
geology. GMV has a very prospective property, which it's already
drilled and it has a new program underway. Given the potential
for sizeable discoveries, it's a prospect with an excellent
risk/reward ratio. Unfortunately the shares have been beat up in
this dismal market and have fallen fairly rapidly, from about
$1/share last summer, and are $0.09 to $0.10/share now. So,
you're risking $0.09 or $0.10/share but with a very significant
upside if it makes an excellent discovery.
Just a little note about the geology of northern South
America. One of my noted geologist friends told me that the
region from Colombia, across Venezuela and the small three
countries of Guyana, Suriname and French Guiana, and all the way
across to Africa, is excellent elephant hunting territory. So,
GMV's in a good place and just has to overcome some problems.
Would you put
Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX)
in Ghana in that bucket?
I've recently talked to Abzu and it is exploring and developing
some very excellent projects in Ghana in areas where many of the
majors have opened mines. It appears to have great potential.
I've only had one telephone meeting with the president of the
company and I'm still in the learning process on Abzu. It has
what appear to be some very exciting prospects and Ghana has a
reputation for being one of the very best African nations for
How about companies in the U.S.?
I like good projects in the United States.
Bullfrog Gold Corp. (BFGC:OTCBB)
has two projects, one in Arizona and another in Nevada, that have
had a lengthy history of exploration and a mountain of material
to work with, so it's not starting exploration from scratch.
Besides the Bullfrog Hills project in Nevada, its Vulture
Mountain project in Arizona has metallurgical work showing gold
recovery of up to 90% and even 96% on finely ground material,
which is very high. Again, it's early stage but the potential
exists for some very excellent risk/reward ratio investing.
Any others in North America?
There is another company of significant interest called
GreenLight Resources Inc. (GR:TSX.V)
. Its projects are located in New Brunswick and Nova Scotia in
the Canadian Maritimes, which haven't had a lot of precious metal
mining. It's mainly been coal mining. Coincidentally, New
Brunswick was just named the number one jurisdiction in the
Fraser University survey of mining jurisdictions. The province
encourages mining very significantly. GreenLight has a host of
projects and it's already found joint venture partners for two of
them, enabling the company to bring in cash for other purposes
plus having other companies advance the projects on their own
dollar. Greenlight has properties that include graphite and rare
earths, which are certainly as hot as you can get, along with
magnesium, gold and silver. With a good inventory of projects,
joint venture partners and cash at its disposal, I think this is
definitely a company worth investigating.
Where do you think things are headed from here and what should
our readers be focusing on to avoid the pitfalls and make some
profits when this market turns around?
I like the juniors with production financing that are actively
building facilities to go into production, or those like
SilverCrest that have already achieved production. That enables
them to grow so much faster without serious dilution.
I still love gold and silver. Silver has the added bonus of
being an industrial as well as an investment metal. My big
picture tells me that the great force behind gold and silver in
the coming months and years is the growing fear factor. Once the
public perceives that international financial matters are really
getting out of control, they will start moving assets from
conventional investments into the precious metals.
There was an article in
in December 2010 where the author stated that, according to his
research, when inflation begins to accelerate toward
hyperinflation, the precious metals tend to rise 2,000% to
50,000% faster than the rate of deterioration of currency. That's
an enormous factor down the road and I think, historically, it
makes some sense. So, my big picture is that disillusionment with
international financial monetary authorities is growing and fear
will be rising. Once the image of the U.S. dollar as a pillar of
strength begins to diminish, which I expect in the second half of
this year, I think we will see real fireworks in the precious
What is the best investing advice you've ever received, that
you've either taken or wished you had taken? And, what's the best
advice that you have for people who are just starting out as
The best investment advice that I've received and want to pass on
is to look for the one play that, considering the risk involved,
has odds that are truly powerful in its favor and that will
provide outsize rewards. And, I'll tell you exactly which one I
like; the only question is the timing. Right now, interest rates
are the lowest they have ever been in history. The one interest
rate future that stands out in my mind is Federal Reserve funds
that are yielding virtually zero for the short term. Short-term
notes are quoted at about 99.87 vs. 100.00 face value. So,
they're yielding 0.13% with virtually no risk to the downside.
All you're risking is 13 basis points because interest rates
aren't likely to ever go below zero. The kicker is that those
contracts extend more than two years out. The spring of 2014
contracts are trading now at about 99.65. So, there's 35 points
potential downward action. Over the next two years, the pressure
to start raising interest rates is going to become severe. If
rates reach 3%, these contracts fall to 97.00, which would
provide about 265 points of potential profit. Anytime you can put
logic behind an investment and have a potential reward that's 9
or 10 times the potential risk, then I'm very interested. I think
the logic behind interest rates starting to rise within the next
two years is quite powerful.
Great advice. Thank you so much.
Leonard Melman will be sharing his Precious Metals forecast
for the for the 2nd half of 2012 during the World Resource
Investment Conference in Vancouver, which takes place on June
3-4, 2012. Click
for more information.
, 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
Resource World Magazine.
He focuses on how political and financial considerations
impact the world of mining and the prices of the metals.
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1) Zig Lambo of
The Gold Report
conducted this interview. He personally and/or his family owns
shares of the following companies mentioned in this interview:
2) JT Long of
The Gold Report
conducted this interview. She personally and/or her family owns
shares of the following companies mentioned in this interview:
3) The following companies mentioned in the interview are
The Gold Report:
Great Panther Silver Ltd., Commerce Resource Corp., SilverCrest
Mines Inc., Barkerville Gold Mines Ltd., GMV Minerals Inc., Abzu
Gold Ltd. and Bullfrog Gold Corp. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for
4) Leonard Melman: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: SilverCrest Mines Inc., El Tigre
Silver Corp., Great Panther Silver Ltd., GMV Minerals Inc. and
Greenlight Resources Inc. I was not paid by Streetwise Reports
for participating in this story.
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