Someone who’s been speaking at the Hard Assets Conference for a number of years is Jay Taylor. So we caught up with him at the Marriott Marquis in New York City to find out what he’d been talking about and to get some tips for our readers.
With gold prices being substantially down from their recent highs after ten straight years of increases, he thinks it’s only natural for prices to pull back. Moreover, he believes the price is still high in real terms.
Real Gold Price
“Although most people are focused on the nominal price of gold in terms of US dollars, what I like to look at is the real price of gold,” explains Jay. “I look at what an ounce of gold will buy, how gold is performing relative to a basket of commodities. For example, I look at the Rogers Raw Materials Fund and in that regard gold has been on a very dramatic rise since the Lehman Brothers decline. You can go back and track the nominal price of gold’s rise since 2002 or so, but its real rise in price took off dramatically after Lehman Brothers.
“For example, in July of 2008, an ounce of gold would have purchased only 17% of the Rogers Raw Materials Fund, which is a fund that includes a lot of energy, base metals, food items as well as clothing items. By March of 2009, just eight months later, it would have purchased 44% of the Rogers Raw Materials Fund and since then gold actually rose to 48% with the problems in Europe, although it’s come back now to about 44%.”
His point is that an ounce of gold has become much more precious relative to a basket of currencies and one result of that is the profit margins of mining companies have risen dramatically since Lehman Brothers went down. Of the seven large gold producers he follows, earnings in 2008 were something like $8 and in 2011 went up to $22. As a result, he reckons it’s a very bullish time for the gold mining sector although this hasn’t been reflected by rising share prices. This has led people to believe that the gold price rise is not sustainable.
“I don’t agree with that because I think the global economy is in big trouble and the global banking system is in big trouble,” responds Jay. “The very fact that gold bullion is rising relative to other commodities suggests that those problems are not yet fixed. People are opting for gold as a monetary asset rather than the US dollar and other currencies. Until the excess amount of debt is wrung out of the system, I believe that we will continue to see strong real prices in gold, whether or not gold is up in nominal terms as measured by the dollar. We have total debt to GDP in the United States as something like 360% for the private and government sectors. The norm had been somewhere between 175 and 125% so until we get down to more normal levels and until European problems are solved, I will remain very bullish in terms of the real price of gold if not the nominal price.”
He is very bearish on the equity markets in general and so feels gold exploration companies that don’t have cash flow to grow organically will suffer a lot of dilution through having to raise money in the equity markets. As a result, his focus is on a growing number of smaller gold producers that are starting to emerge after a long period of rising gold prices dating back to 2002. He believes they have a lot of growth potential and can grow organically through using their cash flow from production to further explore and develop their companies.
Jay says: “I’m partial right now, given the current market situation, to gold mining companies that are in production or gold mining companies that are what we call project generators. They’re companies that get other people to spend money to drill their projects in exchange for a percentage of that project or joint venture. The reason I’m partial to them is because I am bullish on the nominal price of gold, the real price of gold.”
Particular favourites for 2012 are:
· Sandstorm Gold (TSX-V: SSL) Because the company has cash flow that’s starting to rise very dramatically, he doesn’t expect it to need to raise capital. It’s also a royalty company, very much like the Silver Wheaton story, and production is starting to rise very dramatically. He doesn’t believe it has the same risks as normal mining companies in terms of sustaining capital because it provides the initial capital to get started into production and then is guaranteed that all gold production is purchased for the life of the mine at the cost of production plus a percentage set when the feasibility study was done.
· San Gold (TSE:SGR) is another favourite that has growing production, increasing profitability and huge upside potential in terms of organic growth.
· Petaquilla (TSX: PTQ) is another very low price company with production from Panama and will be expanding its gold production in Spain and Portugal.
Anyone wanting to get more of Jay’s views and follow what he’s doing can access his website (www.jaytaylormedia.com). Here they can hook up to his weekly two-hour web radio show that features speakers such as Marc Faber, Eric Sprott and Frank Holmes. They talk about the global economy, politics, who’s really running America and other nations of this world, not necessarily the people who are elected. They also look at and talk with prospective growth companies. So the radio show is a mixture of theoretical information, interesting political commentary and some information on how people can profit from what’s happening. Jay also writes a newsletter that can be accessed from the website. There are also separate newsletters from two colleagues — Chen Lin, who is a brilliant stock picker who turned $5,400 into $1.8 million between 2003 and now through investing, and Roger Wiegand who focuses on commodity trading.
Jay does, however, warn that investors need to stay focused: “I just think that people need to be very cognisant of the fact that the global monetary system is in big trouble and we’re not out of the woods yet. There are some encouraging things taking place in the United States such as the oil and gas technology that may provide low cost energy. But I think we’ve got a long way to go yet before the global monetary system is resolved and that won’t happen until we get debt to GDP levels back in line.”