The Gold Report caught up with newsletter writer and commentator Lou Paquette, who launched the website Emerging Growth Stocks in 1995 to provide investors and speculators with a unique alternative to what he saw was a growing problem with corporate governance and conflict of interest on Wall Street. He believes that as people finally begin to realize that gold is the only asset we can count on any more, the bull market will "come out of its shell." He shares some of his favorite mining companies that are well-positioned to ride out these turbulent times.

The Gold Report: Lou, you have indicated that you think the bailout plan will be really good for people who own gold. Can you give us your overview of what’s happening and how it’s going to help those who hold gold?

Lou Paquette: You know, sometimes, it’s the simple answers that are the right answers, and it’s becoming obvious that the printing presses are going to get turned on and they’re not going to stop. They’re going to keep going 24 hours a day.

At the beginning of the gold market, it was the hard-core gold bugs that were getting bullish. And then it started to spread out to other investors who liked alternative investments, but now mainstream banks are recommending gold—banks that you never heard talk about gold before.

So, it’s really spreading out to the common person right now; everybody’s hearing that about the only thing we can count on anymore is gold as an asset. So, the bull market is just coming out of its shell.

TGR: The U.S. is not the only country printing money at this point; there are many countries that are doing rescue packages, also inflating their currencies. If every country in the world is inflating its currency, doesn’t that kind of neutralize it all?

LP: It sort of negates the argument, yes; it’s kind of like the race to the bottom. Who’s going to devalue their currency faster? In any case, though, the last man standing will be gold. You know, 500 years ago you could buy a decent suit with an ounce of gold. Guess what? Today you can buy a decent suit with an ounce of gold. But you cannot say that about every other currency.

They’re all racing to the bottom, but the same answer comes out which is, if you want to protect yourself from it, have some exposure in gold.

TGR: You mentioned in your Emerging Growth Stocks newsletter that you’re big on gold mining and exploration. So, should investors be looking at physical gold and mining exploration or are you really bullish on just the mining and exploration?

LP: All of the above. You want to spread it across everything. In the beginning of the bull market, the first thing I did was buy 1 oz. bars and Canadian Maple Leaf 1 oz. coins. So, the bullion is what I started with. I am not buying bullion anymore today. I have a nice position in that.

The first thing that moves the most—and where the leverage is—is in the stocks, because there’s profit leverage. For instance, a mining company that’s actually producing—let’s say the gold price is around $900—and then let’s say it doubles to $1,800. But the profitability of that mining company will triple or more. So, the bottom line will improve much more than just by holding the raw gold.

You see this with these swings with the equities as opposed to the metal price, and the rule of thumb that I had always gone by is. . .expect the gold stocks to move up from the beginning of a bull market to the end; expect them to move anywhere from three to five times more than the price of bullion itself.

Let’s back-test that. Let’s look at what happened. At the beginning of the bull market in the year 2000, gold had bottomed at around $250. Last March, it hit a $1,033. Roughly, it was up four times; it was up 300% in seven or eight years. If you want to measure the stock, compare the stock in 2000—the HUI index (the index of senior producing gold mining companies) was roughly around 50. That’s where it bottomed. Last March, it got up to just above 500. It went up 10 times in value, roughly 900%. That’s three times more than the bullion price percent.

So, sure enough, you back-test this and it works. So, yes, there’s a lot more leverage with the stocks, and that’s why that’s what I’m playing now.

The last thing to move is the exploration stocks. The producers will move right away; the senior producers, then the junior producers, and then the last thing to move is the juniors that don’t produce anything—the exploration puppies. But they have the biggest percentage move of all; they will move from 10 cents to a dollar or maybe $10 if they make a big, big discovery.

So that’s where the greatest leverage is, but the greatest risk as well. The answer is, own them all and have a nice cross-section.

TGR: Given the cost of capital in today’s environment, the projection is that many exploration companies just won’t survive. Is it time to look at exploration or do you wait and sort of let things fall by the wayside and maybe invest in six months or a year?

LP: That’s a good question. That’s a real consideration, and that’s what investors should be asking these companies—how much money have you got? What did you raise it at? At what price? And what’s your burn rate? How long is it going to last? I going to feature a junior that is about to start receiving a royalty from Yamana Gold in my next issue. So that even if it gets tough to finance as it did last fall—they will have revenue and be able to carry forward.

But to answer the question of timing—is this a good time? What I find is there is a strong seasonal element to the gold stocks, especially the juniors. What happens is they follow the seasonality of gold itself, which tends to bottom near the time when the Indian wedding season has not been on for a long time, and that’s August. In the summertime, they’re not having any weddings. In September, the buyers come back and they start to fill their inventories in advance of the Indian wedding season.

Now this hasn’t worked all that well the last year or two because we have had this economic tsunami, and gold was one thing you could sell last September or October and get something for it to cover your losses. So, the seasonality has been thrown off a little bit, but it looks like it's back on track.

So, the long answer to a short question is the timing. I would say most of these juniors have had a nice pop since November—the stronger ones, anyway. And we’re getting closer to a seasonal high; the seasonal high could be anywhere from February to May, at the latest. And we’re coming into that season; we’re approaching it.

Whenever gold hits the seasonal high, the stocks will follow. The next ideal time to buy will be in the summertime, when everybody’s on vacation and looking the other way and the gold buyers have gone away. And I’m guessing that August might be a really good time to reload—the juniors, at least.

TGR: Hasn’t the seasonal buying season gone out the window this year with the bailouts and all the economic news? That’s all you hear now. Wouldn’t the price of gold be more of a monetary issue now than a jewelry issue?

LP: Well, that’s a really good question, and we won’t know the answer until we move forward a couple of years and look back. You’re right, the economic considerations have kind of overridden the seasonality moves in the last year or two and that could continue. I am just saying I am not trying to predict the future, as much as that is a normal trend, and we can judge it when the time comes. In other words, if all these gold stocks are kind of weak in the summertime, then we can probably assume that seasonality may be working, and it might be an ideal time to buy. We have to play it by ear, to answer your question honestly.

TGR: So, for someone who has almost no, or only a very small amount, in gold in their portfolio, should they be looking to start buying now or wait until the August potential seasonal drop?

LP: I wouldn’t. I would not be without any gold at all, definitely not right now. You could ask that question a different way: ‘Am I going to sell out all my gold stocks here where I perceive the seasonal high?’ Absolutely not. I don’t want to worry too much about losing 10% to 20% because I want to catch the big move; and the big move is something like $2,600 for gold an ounce by 2014, according to some of the chart readers I’m talking to.

That’s the move I want to catch. You know, if I miss the little squiggly moves in-between, that’s okay because of what you mentioned, the fundamental economic considerations that could override these seasonal things.

So, if someone has no gold at all, sure I would start layering in a little bit now. I’d leave some money on the table, and wait until August for what might be a seasonal low point, and just sort of average in between now and then. That’s what I’d do.

TGR: Do you have some particular companies that you’re following that you think would be good investments?

LP: The senior that I like is Goldcorp (TSX:G) (NYSE:GG). They have that beautiful high-grade Red Lake deposit that they’re mining, they’re a low-cost producer and they’re in Canada. So, that’s kind of a no-brainer that you want to pick up in the low of the season.

Another, smaller producer might be San Gold Corporation (TSX.V:SGR). They’re located in Manitoba. Their production costs have been very high, actually; they’ve actually been almost mining at a loss. But, in the next month or two they’re going to start hitting their higher-grade stuff. Their production is going to go up, and their costs are going to go right down. So, I think San Gold is another one, and that has had some great moves. That’s moved from around 67 cents to a $1.67 since November, so I think this is something to track maybe and look at in the next seasonal low.

Another one, a smaller producer from there, would be Castle Gold Corporation (TSX.V:CSG). They’re going to double their production this year, trading well under a dollar; I think it’s about a 40-50 cent stock. And they have a really good manager running the company. Like I said, they have a growth production profile. So it's one smaller junior that may have a bigger percentage move once gold bull market emerges further.

TGR: Castle is currently producing?

LP: Yes, yes they are. It’s modest production; it was only about 25,000 ounces last year. They believe they’re going to double that this year, and possibly increase it in the future. But, you know, it’s a little penny stock with lots of leverage. So there are three that I like.

TGR: You're a fan of Rainy River Resources Ltd. (TSX.V:RR), too, correct?

LP: We were very lucky in that we picked that one a long time ago, maybe three to four years ago before gold had its real big move, so when it was still a penny stock. I met the president, Nelson Baker—his son invited me to come over and hear the story, and I had never heard of Rainy River before. Nelson just told me his method, his theory of where he thought the gold was, and it made sense to me. It was a good theory and we rode it up to something like 68 cents. And they just kept hitting nice long intersections. So, I have already been in and out of that one, and it’s something I might look at during the seasonal low to go back into.

TGR: I think you’re also following Energold Drilling Corp. (TSX.V:EGD)?

LP: Yes, Energold, as well, and that’s not another gold company; it just sounds like one. It’s a drilling company, a service company. They say the people who really made money in the Yukon Gold Rush were the people that serviced the miners up in the Yukon. And this drilling company was a $5 stock this past summer. It’s down to $1; they’ve made a lot of money. They earned 23 cents a share in their first nine months of the year. It’s trading at something like three times its earnings; so, a ridiculous valuation. Fred Davidson runs it as a very tight, very tight ship.

He also runs another profitable mining company, IMPACT Silver (TSX.V:IPT). So, he’s a really good manager, and what they’ve got is a bunch of small, easy-to-move, lightweight drills that can get up into the real hard-to-reach areas, and that’s what’s kind of giving them an advantage. That trades around a dollar, I guess.

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook