The Gold Report has again interviewed newsletter writer and commentator Lou Paquette, who launched the Emerging Growth Stocks website 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 is not counting out the U.S. dollar quite yet as the euro waivers. He also believes that there is no longer necessarily a seasonality regarding gold and gold stocks.

The Gold Report: The Olympics have just ended after about six years of preparation, was it worth it for Vancouver and was it worth it for Canada?

Louis Paquette: In terms of good will and sportsmanship—and pure fun—they were a success. Were they worth it in monetary terms? That depends on what you believe a benefit is. There's been a lot of debate and argument about this, but this is one point that I haven't seen brought up. That is, people are measuring the benefit—the cost and the benefit by the economic activity that is being generated, the free advertising and the increase in tourism now and later. But the problem is that much of the United States is going through a bear market in real estate right now, as we all know. It's called the housing crisis because housing prices are falling.

Vancouver is having the extreme opposite situation. We have a bubble in real estate prices here in Vancouver. In Windsor, Ontario, Canada's industrial heartland, it costs on average of 2.2 times a person's average annual salary to buy a home. Here in Vancouver it's over 10. It's five times less affordable to own a home in Vancouver. The biggest problems in Vancouver are homelessness and child poverty. Why? Because housing, whether it's rent or whether it's a mortgage, is sucking up everybody's income—all of their income.

So there's no money left for anything else. So when I hear the Premier of B.C. giddy as a schoolgirl bragging about how this has been a success, attracting attention to Vancouver, it's the last thing that we need. We don't need more people. We need less people. We need less demand for housing. So on that basis alone, I would say it's kind of a contradiction. I'm very much against the Olympics; but in the last week or two, myself and my family decided we're just going to enjoy it and it's been a ball. In terms of fun, it's been really great.

TGR: Real estate has been a good investment for Vancouver since 2004 based on the Olympics. Is that bubble going to continue to grow or will it pop within a couple of years?

LP: I'm absolutely sure it's going to pop for a number of reasons. Number one, in any post-Olympic year, real estate prices usually drop in the city it's held in. There's always speculation prior to the Olympics. We're going to see that.

Number two, we have a new harmonized sales tax that's kicking in July. So everybody is buying now prior to this I think, it's a 7% additional tax that's going to kick in. You're going to have a lack of buying after July. So you got two big, big things that are going to be negatives—plus the prices that are just sky high here. I think we're going to see a real sharp retracement in the housing prices here.

TGR: In your February newsletter, you noted that there are two forces driving the markets. One is the negative sentiment towards the euro driven by fears of the PIIGS's defaults. You pointed out that states such as California are fairing far worse potentially than Greece, Italy, Spain or Portugal. Why is this relevant boosting the dollar and depressing gold prices?

LP: For the obvious reason. For a while now, the euro has been the one that's weak. The attention has gone to Greece and people are thinking, well what's going to happen if this contagion spreads to Spain and other countries that are looking bad over there? We've just seen this shift after a whole year of the U.S. dollar falling. It got really overdone. It got to be a really crowded trade and now sentiment has shifted negative against the euro, which has allowed the U.S. dollar to recover.

Interesting note on a technical basis, the U.S. Dollar Index has now had a 50% retracement of the negative down move that took place in 2009. So who knows? Maybe we've seen enough of a rebound now of the U.S. dollar and the euro has come down enough that we're going to see a reversal now. Maybe the U.S. dollar will have a downturn now but, at the moment, all the attention—the negative attention—is towards the euro.

TGR: Well factoring into the U.S. dollar I'm sure, California's population is well over three times the population of Greece. It's the largest U.S. state and it's in serious trouble financially, many say much more than Greece. Are the eyes of the world investment/finance community just in the wrong place right now?

LP: I don't know if it's the wrong place because the euro has a really serious problem. The ratios—the debt per gross national product and the debt ratios—in many countries in Europe and England are terrible. I don't know if the investment community is looking at the wrong place. These things ebb and flow. For a while, the negative sentiment and the selling has been on the euro; and that'll continue until it gets to be too much, and then something will happen. Some news event will take place regarding the U.S. dollar, and then it will have a decline. That's just the nature of markets. They move back and forth.

TGR: When the U.S. dollar declines, are we expecting to see a focus back onto the euro, or would we start seeing focus on other currencies such as the yuan or rupee?

LP: I think the focus will go back on the U.S. dollar because it will have had a pretty darn good move up and the short sellers will probably swoop down on the dollar again. In terms of other currencies, we just keep hearing good things about the Canadian, Australian and Indian currencies. So I think the bears will circle the U.S. dollar again sometime later this year.

TGR: How do you think the Chinese yuan ETF factors into the equation right now?

LP: Well you can't pressure the Chinese to do anything. Telling them to let their yuan rise is almost counterproductive. They may not let it happen just because you want it to. They're going to do whatever they want no matter what.

TGR: As we move into this bear focus on the U.S. dollar, and we know there are issues with the euro, are we going to see a decoupling from the euro-goes-up-dollar-goes-down (or vice-versa) mindset, to euro-and-dollar-go-down, and Canadian, Australian dollars go up?

LP: That's what I think is going to happen.

TGR: How does an investor play that?

LP: It's kind of a race to the bottom with most of these currencies, even with Canada's. I hear the big, big investors saying, Canada's such a great place, and we're supposed to have a conservative government, yet they're going to have a huge massive deficit this year. Even the most favorable countries are now spending beyond their means and I guess the only way to play this is to have some gold in your portfolio.

Have some raw gold, have some bullion and have some shares of good mining companies. If you're really aggressive, talented and you know how to short and play the futures markets, then you can try and time these, the bigger declines. Sooner or later the U.S. dollar will top out again. If you're really comfortable with doing that you could do a short sell on the dollar with the futures markets but I'm not that comfortable doing that kind of thing. So I just hold gold.

TGR: Do you feel confident that the Canadian banking system is going to remain strong given what you've just said, or do you just see that waning a bit too?

LP: Well the corporations themselves have run themselves fairly well. But sadly with—it seems like anytime the population figures out it can vote someone in who spends more, that's when you run into trouble. It seems like every country is doing that. Perhaps China and India aren't, but here in the West that's happening. I'm not comfortable with the government, but the Canadian banking sector is still being run fairly prudently.

TGR: There's a growing belief of a double dip recession for the second half of 2010. You refer to Dan Arnold's work, The Great Bust Ahead, predicting the bust will begin in 2013. If there is a bust ahead, how should the typical investor play a busting market? Some feel the prudent strategy is to go long in cash/gold avoiding equities whose value will fall during a bust. Is this your opinion?

LP: I would stick with holding some gold equities of really good companies. If we do get a real meltdown in the currencies, it's going to impact the price of gold—and the companies should make terrific profits. But will they melt down, too, in a big meltdown? I really don't know, but I would just hold some. The one thing I would be confident in doing is saving a lot of cash. I would short stuff and own more cash. I would not buy luxury items and I would save cash.

TGR: In our last interview with you, we discussed the typical seasonality in gold, especially gold stocks, both of which have a fall and a spring rally followed by a typically quiet summer and whether or not that seasonality was breaking down in your opinion. At that time, you were uncertain if the climate had truly shifted for gold. A year later, do you think it has? Also, has the psyche for accumulation of the metal itself moved into the acquisition of promising junior or mid-tier gold mining company stocks?

LP: Let me answer the second question first. For the last year, the emphasis has moved toward the metal. The gold shares, I'm looking at a chart right now of appreciation of gold and gold shares, and the gold shares have gone sideways for the past two years and gold has gone up. So for the moment, there's better value in the gold producers, in the shares of the companies, and people have been buying the bullion price.

The first question, has seasonality broken down? I think the answer is yes, kind of. The last buy time for seasonality was last August. That did work. The price of gold started to take off after that. But now when it comes to the high point, gold peaked on December 3rd; it hit a parabolic high at that point—and looks like a cyclical high now—and it's not strong. It's supposed to be peaking around now, and we're $100 or so below the peak. I would say the seasonality is breaking down because the price is now being driven by investment demand as opposed to physical demand for jewelry. So the answer is yes. The seasonality is breaking down and you have to revert to other methods to pick your highs and lows now.

TGR: To what extent do you believe news and the news media can make a market? And has the gold market yet to be made?

LP: I think it has a lot to do with it. And I don't think we've seen the full extent of it yet. We haven't seen a media-driven parabolic rise yet. You don't see the average person lining up to buy gold coins at this point. I think that day is going to come, but I don't believe we've seen it yet.

TGR: What are you recommending for portfolio diversification with regard to gold stocks, ETFs and the physical metal?

LP: The leveraged two-times ETFs were really popular here in Canada, and I'm completely avoiding them. They experienced time decay. So zero for the leveraged ETFs. And the main focus is on junior mining companies, exploration situations and near producers with growing reserves. I'm not buying gold anymore. I used to buy it years ago in the beginning first few years of the bull market, but I just sit on that. That's 5%, 10% of one's portfolio in the metal, in the bullion, and for me a lot larger than that with the gold share (but I specialize in that). So I don't know what the good number is for the average investor, but I'd say maybe 5%–10% of the gold shares of selected junior mining companies.

TGR: In the last interview one of the companies you mentioned was Rainy River Resources (TSX.V:RR). Would you give our readers an update on this company?

LP: I'm just looking at the chart, and it's had a very nice big move from $2–$5 area. I've actually taken profits on that. I'm just using the charts at that point. I'm not really following the moves of the company. Instead I'm buying and accumulating a company that holds shares of Rainy River right now at a big discount.

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