Outlook on gold and mining stocks
Kenneth J. Gerbino & Co. is a money management
firm based in Beverly Hills, California and has been investing in
precious metal mining stocks for 30 years. Their managed accounts
in precious metals investments were up over 100% in 2003. Additionally,
the Gerbino Gold Group LLC. is a private fund investing in precious
Some will remember Ken as the Founder and Chairman
of the American Economic Council, the lobbying group established
in 1979 and credited for the passage of the Gold Coin Act of 1984,
which brought the American Gold Eagle Coin into being.
The GoldEditor.com interviews opinion leaders in the
metals market, surveying the landscape for new trends – and
new companies – which our subscribers might find intriguing.
After meeting fund manager Ken Gerbino at a recent mining investment
conference, we arranged an interview to explore his views on the
Ken shared his views on the mining market in general
with us, along with some of his top picks in the sector. His exhaustive
research methodology, developed over the last 30 years, allowed
us to peek at how he values one of his favorite holdings - Northern
Orion Resources (NTO-AMEX, NNO-TSX). His industry experience and
his detailed number crunching gave us a fresh new look at the company.
GE: 2003 was a very good year for the mining sector,
what’s your outlook for 2004?
KG: Most commodities with gold and silver and the
base metals will go up in price in 2004. Long term global monetary
increases are now affecting commodity prices coupled with strong
demand, led by very robust demand from Asia. I think gold will trade
between $375 and $450 this year, which would be bullish for the
mining companies especially those that have a good growth profile.
After 2004 gold will trade higher.
A major upswing commodity price pendulum is starting
that could last for a decade. Past bull markets in metals were always
cyclical and short term. China and India have changed all this.
We are witnessing the beginning of a multi-decade demand driven
bull market in resources….and at the same time we are at the
tail-end of 10 years of one of the greatest money printing binges
the world has ever seen by almost all countries, especially the
These two mega-trends are now coinciding and the result
will be higher prices for natural resources. I would be very happy
with a gold price of $400 for the next 10 years, as there are always
opportunities in the mining sector. But the fundamentals favor a
GE: How will this play out in regards to gold?
KG: This is an historic
change in mankind’s progress. People are just starting to
grasp this. China is now the number one consumer in the world of
copper, steel, platinum, zinc, and iron. They produce more steel
than Japan and the United States combined. There are more cell phone
users in China than in the U.S. Over 200 million users now. I was
just in Beijing. China is booming. I saw 3 cops in 7 days in a city
of 18 million people. Communism is a joke. The army, unions, in
fact almost every organization owns businesses and has investment
pools. Capitalism is everywhere.
The U.S. and Europe consume 11 grams of gold per capita
annually…about a third of an ounce...and most of that is jewelry.
When China catches up on a per capita basis it will be equal to
5 times the global mine production of gold annually! Even a 10 %
demand increase over annual mine supply is huge in terms of the
gold market…this will be 50 times that…and these numbers
are mostly just for jewelry. This is what is coming. The Chinese
currency was wiped out in the late 40’s…so they know
the value of gold as a currency also. The investment demand from
China coupled with jewelry demand will change the gold equation
for decades to come. Now lets be very logical here. The mining companies
have to replace 84 million ounces of production from reserves each
year. That’s the equivalent of finding 17, five million ounce
deposits a year. This is impossible. I’ve seen maybe one five
million oz discovery in the last two years. So from a longer-term
supply viewpoint a squeeze is developing as well.
GE: Interesting. Tell us what specific criteria you
use to evaluate mining stocks?
KG: If it’s a developing story I always look
at the grade (richness) of the deposits and try to get a handle
on the dimensions of the mineralization before anything else. If
it’s a producer, I’m looking at two distinct parts to
the equation…the usual suspects…net asset values, net
present values, cash flow, mining costs per oz, but I am also looking
at the most important projects in their pipeline that have yet to
come on stream. Here is where the value proposition can change.
We do our own in-house version of a stripped down
scoping study (preliminary engineering report) on properties. We
pencil out 30 or so factors that we believe are crucial to the project’s
viability. Years ago we use to have 80 factors extrapolated out
15 years for all these companies and it was overwhelming and too
complex. I have now narrowed it down to the nuts and bolts. This
allows us a rough but very important advanced look ahead of Wall
Street by sometimes 12 months on the value of a deposit or discovery.
It allows us a jump on analysts that are waiting for resource calculations
and engineering reports from management. After 30 years of analyzing
mining stocks and making every mistake in the book, I feel this
is the best method.
The grade of the resource to me is the key variable
that must be there. Managements can look pretty good with higher-grade
deposits whether open pit or underground. Grade allows you to make
up for a lot of problems that usually occur in most mining operations.
Of course, good people are essential …a good mining operation
usually means the management are good problem solvers. Ideally,
we like companies already with production and with very large precious
and base metal resource projects (for gold a 3 million oz minimum
resource potential) in development. Here is where you get value
GE: You are known for not speculating on grass roots
exploration plays... why?
KG: Grassroots (early) exploration plays are probably
the highest risk investments around and should be avoided. Years
ago the ratio was something like only one out every three thousand
exploration companies ever produced an ounce of gold or silver.
Advanced exploration and development plays with at least some defined
resource are sometimes okay for high-risk takers, but one has to
be very careful here. The advanced projects at least have enough
drill results and preliminary engineering questions somewhat answered
to allow you to make an intelligent decision. I also tend to discount
early stage chip samples, float samples, anomalies, or channel sampling
from outcrops or trenching…all important data but still in
the very high speculative realm…probably 10,000 failed properties
all had some good showings on surface…it’s just not
enough. Until you have multiple drill results and the direction
of those holes and some handle on the lithology (rock formation)
and other geological data you really are still in a crapshoot.
GE: Long term, where do you see the price of gold
KG: Gold will do what everything else has done in
this world…go up in price...and for the same reasons; Printed
money. Paper and credit created out of thin air. Investment demand
for gold will have three phases. It looks to be a long bull market.
The first phase is happening now, the US dollar weakness. Gold correlates
to the dollar 56% of the time in opposite directions. The weak dollar
reflects two fundamentals regarding the U.S.: a debt ridden economy
and a paper money dependent nation...two fundamental economic tidal
waves that will not go away any time soon.
After this phase will be global inflation…that
will propel gold up most likely in terms of all currencies. The
third phase will be based on fear of a banking and credit collapse
and this could cause the largest move up. When people fear that
their monetary assets could actually desinigrate by default or bankruptcy
they will turn to gold for insurance.
Even a small percentage of the global investment or
savings community doing this would be very bullish for gold. Homestake
Mining going from $40 in 1926 to $544 in 1935 was because of fear
of debt defaults and banking collapses not inflation.
GE: Do you see any changes with the Central Banks
position on gold as a reserve asset?
KG: It’s hard to believe that these guys think
they can print wealth…and also think that interfering with
a free market in interest rates, and currency values is a viable
economic option. Sooner or later this will all fail. Some country
will break ranks eventually and revert to sound money and hence
validate gold as the only reserve asset. It will probably take another
generation to finally expose the many flaws of paper money and central
I am hoping the Chinese and Indians take the lead
here in the next decade. The non-monetary establishment is still
being hoodwinked by the financial and banking establishment. The
recent Argentina crisis was promoted to everyone as a debt crisis
when in actual fact it was a currency crisis…a printing press
crisis. None of the major newspapers in our country called it like
it really was. They either didn’t understand it or didn’t
want to rock the boat.
Someone needs to get an editorial board meeting with
the NY Times and get them to understand just two things…printing
paper money is bogus…and a gold standard is a lot simpler
and easier than people think. It’s like a ruler…a standard
of measurement…12 inches to the foot..every day…every
year….it never changes. The gold standard is also simple,
it’s a standard of value for a medium of exchange…money…and
the standard shouldn’t change either. If the NY Times “gets
it”, then the world changes.
GE: Will interest rates going up be negative for gold?
KG: Interest rates are very low and gold in my opinion
is undervalued…. so both can go up from here together for
sometime. In the late 70’s I remember rates going up dramatically
and gold exploding upwards also. Gold holders who own 5% or 10%
of their assets in gold as an asset class for diversification or
insurance will not sell gold because they can get 8% in a money
market. ...They may sell conventional stocks and bonds to get that
8% return but the typical gold holder globally would most likely
add to his/her position over time regardless of interest rates.
Don’t forget most gold above ground is on women’s bodies
or in jewelry cases…interest rate insensitive.
As far as central banks go…yes, they have been
selling off their gold reserves but they have more or less kept
their selling to about 300-500 tonnes per year for decades. European
central banks just signed a deal limiting sales to 500 tonnes a
year for 5 years. This was seen as a non-event in the market. Getting
back to interest rates… remember that interest rates will
go up when inflation goes up because interest rates must keep up
with inflation or the banks would become illiquid. So as rates go
up due to inflation so will gold, as it is an inflation hedge.
GE: Where do you stand on the Inflation-Deflation
KG: There has never been an economy or country ever
that has had a multi-year deflation with a paper money system. End
of argument. Paper money increases always brings on inflation….always.
Japan in the early 90’s had stock and real estate prices collapse
…that is not a deflation that’s investment sectors collapsing
……totally different animal. Inflation is a decrease
in the purchasing power of the currency not your net worth. The
whole deflation argument was started, as it always has been throughout
history, by those institutions that want to print more money to
bail out various big and powerful institutions that are failing.
To justify inflating, they scare people about deflation…a
slick strategy that still hoodwinks the non-financial establishment.
Printing money depreciates the currency and redistributes wealth
from the lower and middle class earners of a society to the big,
the bad and the ugly. Anyone interested in reading more about this
can go to my website at www.kengerbino.com and read my commentaries.
GE: Thanks for your time Ken and good luck.