TGR: There is a common thought that when an investment idea becomes part of cocktail conversation, that investment has hit the top and it’s time to sell. There is significant buzz around gold now. Has gold reached the top?

LR: North American investors have a very short outlook—often days or weeks. Gold and silver go through short-term swings. If you buy gold today at $930 expecting to profit when it hits $950 next week, you may be disappointed. My belief is that gold will continue to notch higher, exactly as it has for the past eight years, spiking up and then giving back part of its gain before the next up leg.

Looking longer term, there is every reason in the world to believe the gold price will be higher. But, the gains may not come quickly enough to justify holding bullion. Back to my earlier comment: Gain the exposure to precious metals through owning companies that are adding value. The longer-term gains in bullion will come on top of what should be attractive returns from companies carrying out business plans.

TGR: Will there be any impact of Dubai shifting gold from London to Dubai?

LR: Not really. It’s part of the growing importance of gold to Middle East investors. It also shows the maturing of Dubai as a regional financial center and the growing wealth in that region.

TGR: Should we expect any impact with the authorization from the U.S. Congress for the IMF to sell gold?

LR: Central bank selling of gold has been an important part of the gold market for the past decade. Investor and consumer demand for gold exceeds the amount of gold mined each year. Central banks have made up the difference. The European banks have sold less than their quotas in each of the last three years. If handled properly, the IMF sales should not affect an orderly market.

With the central banks selling, and now the IMF, it will continue to put a damper on the market. Those commentators calling for $2,000 or $3,000 gold in the near term seem to forget that there is a lot of gold that can enter the market. Gold will certainly go higher, but not necessarily at the pace that some would hope for.

TGR: Earlier you stated that a more effective way to gain the currency and inflation hedge of precious metals is to own companies involved in the metals. I assume you are referring to mining companies. The senior producers have had a significant increase in stock valuations from their recent lows. Given this recovery, is there still room for gains?

LR: The seniors have outpaced the recovery in bullion from the lows earlier this year. Senior producers tend to trade at a premium to bullion, presently about two times net asset value. To explain that: If you valued a gold producer on an objective basis using the current gold price you would get some net asset value. The present share prices reflect a market value about twice that net asset value.

Investors pay that premium in order to get the optionally of owning a gold company compared to bullion—the gold company will increase in value faster than bullion. The seniors will continue to track the gold price. But, you are paying a premium. There is far greater value in the smaller companies. There is also greater risk, but potential for much larger gains.

TGR: Is the risk/reward for near term-producers now tilted in favor of investment in the smaller companies compared to seniors?

LR: Each investor has to assess his or her own tolerance for risk. In my opinion, the smaller companies—that is near-term producers, small producers and companies with defined gold deposits—clearly represent a very favorable risk/reward profile. But, you have to assess these companies carefully. There are big differences among the companies.

TGR: Given the potential upside of the recent producers/near-term producers, should individual investors look at exploration companies?

LR: Exploration covers a huge range—from companies that hope to one day find something of value to companies that have made important discoveries and are now quantifying the size and grade of their deposits. At this time, I would tend to stay closer to the latter type of companies.

There is still huge upside potential. Consider some numbers: a company that has the earliest stage of metal deposit, what we call an inferred resource, is valued in the order of $10 to $20 per ounce of gold in the ground. Once that deposit reaches production, it is valued in excess of $200 per ounce of gold in the ground. So, you can see the potential for ten-fold returns without taking on the discovery risk.

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