At the San Francisco Metals and Minerals Investment Conference, we talked to John Kaiser of Kaiser Research Online about what the market is doing now and what he expects the market will do in the near future. He gave us his predictions, along with the names of some companies he’s watching.

“We’re in a market right now where we cannot expect significant help on the upside from metal prices, which was the story of the past decade,” Mr. Kaiser said.

Our focus turned to gold as Mr. Kaiser discussed the challenges that gold investors face right now: “Gold is under siege right now – there is a push to get it down to $1000 an ounce. Why $1000? Well, it’s just a nice round number. They’re making a comparison with 1980 when gold ran to $850 then crashed back and stabilized at $400. They’re saying that it ran to $1900 so it should crash back to roughly half that price -- $900 to $1000. But the metaphor is wrong. [In the 1980’s] gold went from $35 to $850 and when it stabilized at $400, it was still a 400% real gain. And in the ensuing 30 years, over 2 billion ounces were added to the 3 billion ounce gold stock that existed and a lot of high hanging fruit that became low hanging because of the 400% real gain was harvested. Now we have had all-in costs escalate to [approximately] $1200 an ounce and there is no low hanging fruit created by gold's nominal 400% rise from $260. It is all high hanging fruit. So the idea that gold can go below its all-in cost and hang out there implies that the demand for gold is going to disappear.”

Mr. Kaiser then predicted what will happen to gold in the future: “Gold is not that important – it’s only $7 trillion value. We burn $4 trillion worth of oil annually and that has to be replaced because it is turned into energy and it makes our economy hum… But gold just sits there. Gold is just an insurance policy that people just hold and don’t want to cash in. So when the global economy grows, the demand for gold will rise and if they pressure it down to $1000, there will definitely be an escalation of demand. Central banks will probably step up their buying of gold. And then the big guys who pressured it down will reverse their outlook. The big companies will have suspended their losing operations and trimmed down. And then when we get an uptrend for gold that isn’t based on this apocalyptic end time narrative that we hear at conferences, then Wall Street can get on side with gold and they’ll get into the equities because that’s where the leverage is. It’s the profit margin that creates the cash flow. I’m hoping that gold does go down to $1000 in the next couple of months. Get it over with.”

Although this will have some short-term pain, Mr. Kaiser says it will be good for the market: “All these gold producers and near producers are going to be pressured to very low valuations and then they will be bought by a whole new group of shareholders that will load up. And [those shareholders] will have a low cost base. And when the gold price starts to trend up, then these stocks will go into an uptrend. And then [those companies can start] looking for new gold deposits to acquire, though they will have to be better quality than the ones they acquired during the past decade and shelved. That means new discoveries made by juniors.”

So, here’s the burning question that every investor wants to know: How can you make money in resources right now? Mr. Kaiser gave us his opinion: “if you are going to make money in the sector in the next year or so, you need to look for companies that have solid exploration teams in place, are generating projects, and hopefully have cash to drill them and create discoveries that count as discoveries at whatever metal prices we are stuck with. We’re going back to the whole theme of the 1980’s and 1990’s and taking a break from the last decade, which was all about resource feasibility demonstration, and going back to finding entirely new deposits that make stocks go up 5, 10, 20, 30 times in price, which usually doesn’t happen when you have a metal price uptrend.”

Mr. Kaiser continued with his advice, recommending that investors do a different kind of due diligence than they may have been used to in the past decade: “I see juniors with good management and, in a number of cases, good cash positions, often trading at a discount to their cash break-up [price]. I’m in the process of purging all of my bottom fish that I purchased a year ago, which was way too soon, and rethinking my spec value hunter recommendations and coming up with a set of 20 new ones for the new year and creating a bottom fish watch list. If you’re patient, and you pick your stocks right, you can make 5 to 10 times your money over the next 2 years. You just have to be patient and not let your head get messed up because your stock goes 50% lower than what you paid for it. It’s tough right now because of tax loss selling and the main macro trend is still negative for the sector. It’s tough to pick the exact bottom. Just pick a level that you’re comfortable at.”

Mr. Kaiser also provided investors with a signal he’s watching for at the bottom: “At the true bottom, there will be no liquidity. That’s the next thing that’s going to happen. Stocks will have low bid of 3 cents and then the offers will be 7 cents. The selling will have disappeared and the buyers will sit on the bid. That’s the next window that will come for this sector and we’ll see that after the tax loss washout at the end of this year. The bottom is here and it’s a question of how long the bottom is going to exist. But I’m going to start accumulating those keepers – the ones that will do really well for me 2 years from now. And with some good luck, these stocks could snap back very quickly but for a majority of these companies that do not have good management or good projects, they will be stranded in the abyss forever.”

Although there are many companies out there, not all of them are going to be viable, or will even survive the next couple of years. Mr. Kaiser outlined ones to be wary of: “Avoid companies that have negative working capital. There are about 500 companies that have negative working capital in the TSX-V. Where are they going to get the money? The management has to find money but the public isn’t going to give it to them and neither is the street. These companies that are underwater can’t get anything going. They can’t maintain the carrying costs of their projects. So [investors should] look for companies that are doing work.”

That’s what conferences are good for, asserts Mr. Kaiser, especially in bear markets: “At the show we’re at, there are only 60 companies here. They have money, they have a story, they have technically competent people. In markets like this, these conferences are far more valuable because only the real companies are here. In the bull market, there are 300 companies but all the pretend companies are mixed in with the real companies. This has been the plague that has driven away the retail audience and I would say that about 800 of the 1800 companies I track are doing real work. The others are just coat-tailers that option a useless target. They just go through the motions. But it’s tough for the public to tell. So I look for: Can management put together a model of what they want to do? Can they explain to me what they are trying to accomplish and give me enough information so I can estimate for myself?”

Last, Mr. Kaiser shared with us a sector within the resource market that he is looking at, along with 3 companies he is watching. “Diamonds are becoming topical again. You don’t see a diamond price quoted anywhere. People have no idea what the diamond price is. We know that diamond mines are depleting and the trillions of dollars of diamonds that have been mined in the past 100 years, there’s no market for them. There’s no overhang where every ounce of gold is someone else’s liability if it were converted into cash. The diamond sector has been in a tough spot for the past 3 or 4 years but they’ve started to make a comeback.”

He continued with his company picks: “Peregrine Diamonds (TSX: PGD) may have results as early as next week. So we see nice big diamonds in that. That will be a boost for that company. They have 100% because de Beers declined to exercise its option. North Arrow Minerals (TSX-V: NAR) is a former lithium company that has a number of projects, including kimberlite in Saskatchewan, that have high grade potential. The only drawback is the size of kimberlite is small – there’s not the tonnage there. But it’s very encouraging to see. Pangolin Diamonds (TSX-V: PAN), which is in Botswana, home of absolute monster deposits.”

Investors may not want to hear it but Mr. Kaiser believes the bear market isn’t over yet in general, but selective uptrends for individual resource juniors will start to develop in 2014. However, Mr. Kaiser has given investors some practical insight and a good signal that they should watch for when looking for the market bottom. And, he’s given investors some hope that there are opportunities still out there.

REFERENCES

John Kaiser’s website: http://www.kaiserbottomfish.com

San Francisco Metals and Minerals Investment Conference: http://www.metalsandmineralsevents.com/sf/