Excerpts from the question-and-answer session during the exclusive U.S. Global Investors webcast “Gold: Thriving or Surviving?”, originally broadcast on Aug. 1. The webcast features Frank Holmes, CEO and chief investment officer, and Paul Burton, editor and publisher of London-based World Gold Analyst. Replay of the webcast is available at www.usfunds.com/webcast/.

Q: One of our guests today, Paul, is asking if it’s better to invest in gold mining stocks or the bullion itself, in your opinion, and why?

Paul Burton: It’s such a relevant question at the moment because gold stocks traditionally have a leverage to the gold price. So if you bought an ounce of gold, you were buying it at the stock price, but you bought a gold share, then the gold price went up, you would traditionally see a much higher percentage rise in the value of your gold share…

If you’d asked me a month ago, I would have said probably buy gold rather than gold stocks because that leverage effect seems to have disappeared… In the last month we’re starting to see a turnaround again. I just ran some figures for July and if you look at the month as a whole, the gold price moved up almost 5 percent over the first three weeks and then caused a bit of a crash the end of last week. But from the beginning of the month to the end of the month, the gold price was up 3.2 percent. The TSX (Global Gold Index) over that same period was up 7.7 percent and the FTSE Gold Mines Index was up 8 percent…

I think the major producers are going to start to be revalued. … A couple months ago the emerging producers were right around $90 per ounce in the ground and majors were only at about $100 per ounce, whereas the intermediate producers were $180 per ounce in the ground. So I think the majors are being undervalued and one reason is because they haven’t been able to control the costs…

I’ve just been looking at these June quarter (2007) figures year on year ... costs were still up 19 percent. But from March (2007) quarter to June (2007) quarter there was only a 1 or 2 percent rise. … We’ll know a bit more in a few months’ time, but the majors might now have experienced the worst of their cost inflation, and that’s why I think this leverage has been restored.

Q. China is making major gains in gold production and it’s moving to become the world’s second-largest producer. How does an investor take advantage of that and in addition to that, what types of gold-mining companies are profiting or stand to profit in China?

Frank Holmes: You have to go back to the basic metrics – reserves per share, compare them, production valuations per share, compare them…

One of the companies that we own is Jiangxi Copper. It’s a big gold producer and it basically moves at the price of gold and the price of copper, so it’s been a favorite in our China fund and also the other resource funds we have. So I think that that’s how we have participated, but we like to see something proven in the ground…

I think that China still has some complexity to it. I hear mining companies lament regarding the complexity of getting a project, but I will highlight that our best success in this space has been Silvercorp (Metals Inc.) They have been able to execute, bring a company into production and we have made well over 10 times our money for our shareholders in Silvercorp.

Paul Burton: There’s none of the big guys there. They’ve put a toe into the water but they're letting the juniors do most of the work, so Gold Fields has an interest in Sino Gold. It has an equity interest, roughly 10 percent…Anglogold Ashanti is looking at Dynasty Gold. I think it is and they’re funding one of (Dynasty’s) projects…

The bigger guys are having a look-see, they're not committing themselves too much themselves. They're letting the juniors have a look, taking small positions, maybe doing some joint ventures. I think once the companies start to prove themselves then we’ll see them buying these companies. Given that they're mainly Canadian- or Australian-listed companies, it shouldn’t be a problem.

 

by Frank Holmes