Who Killed the Gold Price?

The Gold Report: On April 15, the gold price plunged about 9%the biggest one-day loss ever for the yellow metal. Many gold investors got "murdered" that day. Has your personal investigation revealed any suspects?

Ian Gordon: I suspect it was akin to what happened in 1999. The then-governor of the Bank of England, Edward George, supposedly said that "any further rise in the gold price would take down one or more trading houses." He said the rising price of gold was curtailed through the work of the Federal Reserve and the Bank of England. It appears that a bullion bank was caught offside on the short side and they had to take the price of gold down quite dramatically to allow it to cover.

I think something similar happened in April. I think it was manipulated to the downside. Goldman, Sachs Co. encouraged its clients to short sell gold two days before this occurred.

TGR: Could it have just been an error?

IG: I always suspect the worst. There's so much manipulation in all the markets as I see it.

TGR: That one-day drop caught even long-time gold investors off guard and shook their confidence. Is being a precious metals investor at this point simply about having the resolve to stay the course, or should even the ardent investors make adjustments to their gold portfolios?

IG: I'm extremely bullish on gold. Bullishness in gold, according to the website Market Vane, is at 40%, the lowest it has been since 2001. Bullishness in the stock market is at 70%, which is almost the highest it has been since Market Vane began tracking it. I see a reversal occurring here, for the gold price to the upside and the stock market to the downside.

TGR: There's no way to sugar coat the disappointing performance of gold and silver in 2013. But has the current global economic backdrop provided some new and compelling reasons to own gold and precious metal equities?

IG: There are compelling reasons to be bullish on gold particularly, simply because there is a real worldwide crisis in fiat money. The unfolding crisis is similar to the 1930s, when the whole monetary system collapsed. We're envisioning something quite similar to that collapse is now occurring.

We can see that there's this huge move to gold, not only by countries like China and Russia and even the small "-stan" countries, but major investors are also taking up the physical metal because they can see this crisis unfolding.

TGR: Most of what I'm reading says that there just aren't a lot of bids in the market right now for precious metals. Investment demand has waned, with gold falling consistently lower since its high in 2011.

IG: Investment demand is huge. The output of American Eagle gold bullion coins by the U.S. Mint is at record highs. Demand by the small investors for gold and silver is at unprecedented levels. The amount of gold that's being imported through Hong Kong into China is at a record level.

TGR: Yet, at the same time, India, which is the world's biggest gold consumer, increased the royalty from 6% to 8% on gold imports.

IG: It has, but India is notorious for gold smuggling. Most people are going to look for a way to go around those taxes. I suspect that there will be the same amount of gold imported into India through Dubai, but most of it won't be declared.

TGR: You say you're seeing strong demand for the physical metal, but investors have been getting out of exchange-traded funds (ETFs) and equities in mass numbers.

IG: With regards to the gold ETFs, I suspect that many investors are cashing in their paper claims to take possession of the physical. Yes, gold stocks, particularly the juniors, have been slaughtered, But once bullishness returns to gold, bullishness will return to gold equities. When you get this overly bearishness in markets, it's usually indicative of a turn. I'm confident that we're going to see a turn to the upside. I also believe that the turn in the stock market to the downside is about to begin.

TGR: I get the sense that there's a prevailing sentiment that we haven't hit a bottom yet in the mining equity space and that there's another leg down before we see a move to the upside. Do you see that as well?

IG: That is always a possibility and it can't be ruled out, but the precious metals' fundamentals are as compelling today as they have ever been.

TGR: Could it be seasonality due to the summer?

IG: I don't think so and anyway I am a long-term investor and I am essentially not concerned by short-term price machinations. As I have said, the most compelling reason to own gold is the crippling debt crisis, which has brought about the probability of a catastrophic end to fiat currencies.

TGR: Sean Boyd, the chief executive of Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), recently told Bloomberg that gold could reach about $1,800/ounce ($1,800/oz) within a year. What's your medium-term outlook for gold and silver?

"When you get this overly bearishness in markets, it's usually indicative of a turn. I'm confident that we're going to see a turn to the upside."

IG: The market is going to have to go through a consolidation that could last for weeks. However, I'm much more bullish on gold than I am on silver because gold has traditionally been recognized as money sine qua non. Industrial demand is going to drop quite precipitously as the world goes into the depression stage of the cycle. Nevertheless, it is likely that silver will take on the role of poor man's gold.

My belief is we're going to see a decoupling between the paper markets and the physical markets. The demand for physical is going to grow dramatically. It's going to make the paper markets irrelevant.

I'm not sure if it's going to be a year as Sean says, but it's going to be extremely strong and the move will be very dramatic once it starts. The old highs of $1,900/oz will be surpassed by a long shot over the medium to long term.

TGR: Do you think silver will fall below the $20/oz level in the next six months to a year?

IG: We're as oversold as we were in 2008, although the price isn't as low as it was then. I see a consolidation in the price, but I don't forecast much lower prices occurring in either of the precious metals. Once this consolidation is over, I see a resumption of the bull market.

TGR: Amid the moribund news cycle for gold and silver, there have been some feel-good stories in the equities space.

IG: True. A company like Newmont Mining Corp. (NEM:NYSE) is a really good story because it has a 4% dividend. It's trading at a low book value.

Agnico-Eagle is well managed. It's been moving into the junior space in anticipation of a move up in the market. Agnico-Eagle has recently acquired interests in five junior mining companies because management is bullish on gold and the company can invest in promising junior companies at very cheap prices that have good potential to grow their assets.

TGR: Does Newmont have the cash flow to maintain a 4% dividend?

IG: Yes, I think it does. Investors are buying these companies at or close to a price low. When the gold price increases, Newmont's profitability will increase and it should be able to raise the dividend quite dramatically. The same thing happened in the 1930s. Even though the gold price was fixed at $20.67/oz, the dividends that companies like Homestake and Dome Mines were paying out were enormous10% dividends were being paid out, particularly after Roosevelt raised the price from $20.67 to $35/oz.

TGR: Is there any good news among the juniors?

IG: In the junior sphere, you can buy some companies for nearly $10/oz of gold in the ground.

One of the juniors that I've consistently talked about is Temex Resources Corp. (TME:TSX.V; TQ1:FSE), which has about 4 million ounces (4 Moz) of gold in the ground in Ontario, Canada.

TGR: What is Temex's cash position?

IG: The company has about $7 million ($7M) in cash. It did a financing prior to this horror story that we've gone through in the past year. I talked to the CEO, Ian Campbell, who said that Temex has sufficient cash to last another two years, even with the drilling that is ongoing.

TGR: Are you more bullish on the Whitney or the Juby project?

IG: I guess I'm more bullish on Juby, even though it's a lower grade project. Temex only owns 60% of the Whitney property; Goldcorp Inc. (G:TSX; GG:NYSE) owns 40%.

"The demand for physical commodities is going to grow dramatically. It's going to make the paper markets irrelevant."

The chances are that there's about 3 Moz at Juby. The gold definitely runs beyond where the company has drilled and I believe that overall Juby could turn into a major deposit. I am not belittling the Whitney property because that too could be a very large deposit, but Temex only owns 60% of Whitney.

Another old favorite is Barkerville Gold Mines Ltd. (BGM:TSX.V). The company's trading has been halted by the British Columbia Securities Commission (BCSC) as it answers some questions about its NI 43-101. . It has just published a new NI 43-101 resource of 4.98 Moz and a potential resource of 927 Moz. These are very good numbers. It will be interesting to see what value investors put to these numbers. I believe that there is significant potential for the company to grow this discovery quite substantially.

TGR: Are there any other gold equities that you're fond of at these low prices?

IG: I own about 10% of Alliance Mining Corp. (ALM:TSX.V). The company has a little bit of a cash problem, but it has some fantastic projects in the largest gold-silver producing area in Arizona. It also purchased some properties in Mexico that are almost contiguous to the Orisyvo mine. The company is well managed and has good relationships with the mining fraternity in Arizona. It's a good story with some very prospective properties.

TGR: What about some other companies?

IG: I own Freegold Ventures Ltd. (FVL:TSX) in Alaska, which has about 5 Moz and growing. It's close to the Kinross Gold Corp. (K:TSX; KGC:NYSE) Fort Knox mine. I like the management of Freegold. Investors should be looking at it simply because of the growth in the ground gold assets that the company owns, its proximity to the Fort Knox mine and a dedicated management team.

I'm extremely bullish on Terraco Gold Corp. (TEN:TSX.V). The company is one of the best managed juniors out there. Todd Hilditch, the CEO, does a fantastic job in acquiring royalties on the Barrick Gold Corp. (ABX:NYSE)/Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) Spring Valley property in Nevada. These royalties have been estimated to have a value of about $70M. Barrick doesn't have to tell us how much gold is being discovered there, but people are quoting it at 6 Moz and I think that it is based on that number that the value of the Terraco royalty has been estimated.

TGR: What about Terraco's Moonlight project?

IG: It's contiguous to the Barrick/Midway project. There's a good chance that the gold being discovered on the Barrick/Midway project is going to run onto the Terraco property.

TGR: Terraco is worth about $18M right now. Why wouldn't Barrick just buy Terraco versus obtaining the royalty?

IG: Some of these companies, like Agnico, are prepared to do that, but a lot of these seniors have made so many blunders that they're too frightened to do anything. Take, for example, Pascua Lama, the Barrick property on the border of Argentina and Chile. See how mismanaged that appears to have been, the capital expenditure that has already gone into it, and the bickering between the Chilean government and the company and great properties?

But you're right. Why wouldn't someone go after a company like Terraco, which has a nice royalty?

TGR: What about companies outside the Americas?

IG: I like Orex Minerals Inc. (REX:TSX.V), which has about 1 Moz gold in Sweden. However, it has mainly silver properties in Mexico. Orex was planning to spin out the silver properties into a separate company, but it hasn't done that yet because of the market.

TGR: Detour Gold Corp. (DGC:TSX) is not too far from Temex. It poured gold this year, but hasn't reached commercial production yet. It secured a credit facility and financing. Is it on track to go commercial in the second half of this year?

IG: I love the Abitibi greenstone belt and I love Detour's project. It's huge25 Moz. I'm sure it will get into production this year, but I don't own Detour.

I did own the company that basically found Detour, Pelangio Exploration Inc. (PX:TSX.V). Pelangio was an exceptionally good investment for my investors when I was a broker at Canaccord. I did a financing in Pelangio around 2001 at $0.11/share. When Detour took Pelangio over, it was valued at about $5/share.

TGR: Pelangio plans to produce 650,000 oz annually. Is that realistic?

IG: It never happens as smoothly as anticipated. I'm sure there will be hiccups, but eventually that kind of production rate can be achieved.

TGR: The silver producers continue to perform regardless of the commodity price performance or investor sentiment for the most part. What names are you following in that segment of the precious metals market?

IG: I'm more bullish on gold, Brian. However, I do follow a few companies that I don't have a stake in. I keep an eye on Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) because it took over an asset of a company that I financed called Continuum Resources Ltd. I like the management of Fortuna.

I watch Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) because I helped finance the company in its preproduction days when I was at Canaccord. The company is also extremely well managed. I love the growth profile that the company has achieved. It's really interesting and cheap. If you're looking for a silver play, it might be the one simply because it's so cheap. Its high is $13/share and it's at around $3.85/share, yet it's increasing production all the time.

TGR: You are often investing in financings. Do you ever buy equities in the open market?

IG: I do. For example, I bought Barkerville in the market. When it came out with its numbers last June, they were received with massive disbelief. The price of the stock didn't reflect the numbers. I went in the market and bought substantially to build my position because the price wasn't reflecting the asset.

I also bought Alliance Mining and Temex when the shares have been cheap.

TGR: How do you determine cheap?

IG: Relative to where it was formerly priced and the value I place on the company's assets. I started to buy gold and silver stocks in 2000 because they were cheap and no one wanted them. We are in the same position in the market today. We know the bullish consensus numbers for gold are at the same levels that they were in 2001. You can buy these things really cheap.

The only reason anybody wouldn't be buying them is because they don't believe that the price of gold is going to rise. I believe that the price is going to rise substantially because the chaos in the financial markets is going to be horrendous.

TGR: Thanks, Ian.

A globally renowned economic forecaster, author and speaker, Ian Gordon is founder and chairman of the Longwave Group, which comprises two companiesLongwave Analytics and Longwave Strategies. The former specializes in Gordon's ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratiev. With Longwave Strategies, Gordon assists select precious metal companies in financings. Educated in England, Gordon graduated from the Royal Military Academy, Sandhurst. After a few years serving as a platoon commander in a Scottish regiment, he moved to Canada in 1967 and entered the University of Manitoba's History Department. Taking that step has had a profound impact because, during this period, he began to study the historical trends that ultimately provided the foundation for his Longwave theory. Gordon has been publishing his Longwave Analyst website since 1998. Eric Sprott, chairman, CEO and portfolio manager at Sprott Asset Management, describes Gordon as "a rare breed in the investment-adviser arena." He notes that Gordon's forecasts "have taken on a life force of their own and if you care to listen, Gordon will tell you how it will all end."

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp Inc., Terraco Gold Corp., Detour Gold Corp. and Fortuna Silver Mines Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ian Gordon: I or my family own shares of the following companies mentioned in this interview: Alliance Mining Corp., Barkerville Gold Mines Ltd., Freegold Ventures Ltd., Orex Minerals Inc., Temex Resources Corp. and Terraco Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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