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Gold Crybabies Are Born to Lose, Says Lawrence Roulston

Friday January 31, 2014 14:43

Source: Peter Byrne of The Gold Report  (1/29/14)

Lawrence Roulston Geologist, engineer, Midas-touch investor and financial newsletter publisher Lawrence Roulston has little patience for investors without the nerves to hold onto a good thing during tough times. Gold has been the main embodiment of value for thousands of years, Roulston points out, so why should tomorrow be different? In this interview with The Gold Report, Roulston has some tips on how to double down on gold investments and wipe away the tears.

The Gold Report: Let us be brutally frank, Lawrence. Is investing in gold dead as a reasonable investment strategy?

Lawrence Roulston: No, not at all. Gold is headed higher in the medium term and the long term. There will still be a lot of volatility at play during the short term, but gold will continue its uptrend of the last 13 years. It is highly speculative to bank on near-term appreciation in value. That approach can be incredibly frustrating when the price is volatile. But the long-term perspective is a different matter. Gold is always going to have an intrinsic value.

Think about the big selloff in paper gold last year. People were lining up to buy physical gold as investors were dumping exchange-traded funds and paper gold on the market. But central banks are still net buyers of gold. China is emerging as the biggest buyer at both the consumer and the central bank level. Gold has been the mainstay of financial systems for more than 5,000 years!

TGR: What is the current relationship between physical gold and paper gold?

LR: At one level, the pricing is identical because paper gold matches the physical gold pricing. But, these two forms of yellow metal ownership are held by very different groups of people. Paper gold, especially over the last few years, has been primarily held by North American short-term speculators. Physical gold is more of a long-term holding. Europeans who are concerned about the long-term viability of euro-denominated assets are holding on to physical gold as a store of wealth, as protection. China is now vying with India as the largest market for physical gold.

TGR: Can you quantitatively model long- and short-term gold cycles?

LR: Predicting the gold cycles is challenging because so many interrelated factors influence the movement of gold prices. To a very large extent, the short-term price moves are emotional—driven by news, by headlines, by rumors and gossip. But even when one takes a medium- or a longer-term perspective, there are still huge numbers of variables. It is very difficult to model gold. I consider taking ownership of bullion or the paper equivalent of bullion as more of a speculation than a surefire investment—unless one considers gold to be a long-term store of wealth.

Every time the gold price runs up and then falls off, people say, "It's over for gold. This is no longer a viable commodity. It's a relic of the past." Then gold takes off again. Gold prices will always run in short- and long-term cycles. And the long-term trend points upward.

TGR: Is gold a true hedge against inflation?

LR: The short-term downswing in the gold market is largely driven by the emergence of a low inflation environment in the near term. And the outlook for inflation remains low to modest. There is no hint of runaway inflation in America or Europe. In Japan, interestingly, the rate of inflation is notching up at the low end, but that is where the Japanese bankers actually want to see a bit of corrective inflation.

Of course, in two, three or four years, the global status quo for gold prices could change quite dramatically. But hedging against inflation is not the only reason for owning gold as a store of value. It is also appropriate to protect wealth against nonfinancial or non-currency related factors. For example, a large part of the boom in gold ownership in China is tied to investors searching for hard assets as they exit the overheated real estate market.

TGR: You recently made a presentation at the Mines and Money conference in London. What was your message?

LR: The take-home message is that the resource market is notoriously cyclical. It's a no-brainer to buy at the bottom of the cycle and sell at the top of the cycle. While we may not be exactly at the bottom, we are close enough that now is a good time to buy gold and gold equities. I noted that there are a significant number of buyers in the market who at this stage are quietly accumulating.

The higher-quality junior companies in the sector are starting to see a strong level of support at their current prices and many of them are notching higher. The professionals who are most familiar with the resource markets understand the cyclical nature of these markets and, more important, they know how to differentiate among the 2,000 publicly traded junior companies.

The risk is in failing to get into the market before it is too late to win big. If an investor waits for a clear signal that the market has bottomed, the good quality companies will already have moved up substantially. At that point, wannabe investors will be forced to pay high prices for the quality companies or, worse, to buy second-tier companies thinking they are getting a bargain.

TGR: How do you decide which junior precious metal firms to buy or hold or sell in the current environment?

LR: The most important thing is that a company has a quality asset. In this market, a junior needs to have a deposit, ideally an advanced-stage deposit. Investors are more risk averse now than normal. They want to see something tangible and real that they can put a hard value on. I am focused on companies that are drilling a reasonably large deposit with a good grade that can generate a decent return in the current metal price environment. Grade is very important; it will be some time before the huge low-grade deposits that were once all the rage will come back into vogue.

TGR: What about firms that have really good management and a lot of potential, but do not control a quality asset yet?

LR: We are in a hunter's market. Companies with good management and cash in hand are going to be making some very value accretive acquisitions in the very near term. Everybody wants to control at least one deposit. The focus now is on companies that are adding shareholder value aside from moves in the metal prices.

TGR: So some companies are crybabies?

LR: A lot of companies are claiming that it is difficult or impossible to raise money in the junior resource market. Not true at all. In fact, there is an enormous amount of money sitting on the sidelines evaluating companies and looking to make a move. That money almost to a penny is aimed at producing or near-term producing situations. A large part of it is private equity looking for near-term or current cash flow.

TGR: What is your take on the platinum space?

LR: Within the precious metal realm, platinum has very favorable economics, even better than gold. Platinum is primarily an industrial metal and its fundamentals are very positive. There are not a lot of platinum companies to choose from.

TGR: Any final thoughts about gold today?

LR: The message for the non-crybabies is that the resource market is notoriously cyclical and it makes a whole lot of sense to come in at the bottom of the cycle. Evidence is mounting that we are close enough to the bottom of the gold cycle and the resource market cycle that this is a good time to acquire shares in the best quality junior companies.

TGR: Have a good day, Lawrence.

LR: Thank you.

Lawrence Roulston is an expert in the identification and evaluation of exploration and development companies in the mining industry. He is a geologist, with engineering and business training, and more than 30 years of experience in the resource industry. He has generated an impressive track record forResource Opportunities, a subscriber-supported investment newsletter. Roulston has launched an investment fund, the Metallica Development Fund, to take advantage of severely oversold positions in high-quality resource companies. The focus of the fund is on companies with production and/or advanced-stage exploration and development projects—companies with potential for near-term recovery in value that also have potential for longer-term growth.

Email: jluther@streetwisereports.com

1) Peter Byrne conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Lawrence Roulston: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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