Gold: Part of Every
Portfolio (Streetwise: THE GOLD REPORT)
John Embry is of President of Sprott Asset
Management, in Toronto, and manager of the Sprott Gold and
Precious Minerals Fund. Mr. Embry, an industry expert in precious
metals, has researched the gold sector for over 30 years and
has accumulated industry experience as a portfolio management
specialist since 1963.
Q: Why do you think that at least a part of
an investor's portfolio should be in precious metals?
A: Basically, gold acts contrary to how financial
assets act. People have forgotten that gold can be an important
part of portfolios. It wasnít important in the 1980s and 1990s,
a period of disinflation, increasing productivity and great
profit growth in the United States. This underwrote a terrific
period in stocks and in bonds. In that environment we certainly
didnít need gold.
But what people donít remember, perhaps because
a lot of them were not around, was the decade of the 1970s
when conditions were materially different. Stocks and bonds
did poorly, and there was inflation and a huge budget deficit.
There were a lot of things wrong in the American system and
in that decade, gold went from $35/oz to $800/oz. Obviously,
anyone who realized what was going on bought gold early on
and made a lot of money. I would say that in the wake of the
tech bubble, conditions will be much more difficult in the
United States, and they begun to manifest themselves already.
This is the type of environment in which gold
thrives. The budget surplus has turned into an enormous deficit,
and there is a debt problem at all levelsĖ consumer, corporate
and government, and in the state government in particular.
As a result there is going to be an awful lot of money printed.
Because there is so much upside leverage in gold and gold
shares, if you put 10% of your assets in gold, you can offset
most of the problems that may be occurring in the rest of
your portfolio. So, I just think in the decade of 2000 to
2010, some exposure to gold would be a very correct thing
Gold is very inexpensive as a commodity right
now. And it is a monetary commodity. I believe, against most
currenciesĖ particularly against the U.S. dollar, which I
think is the most vulnerable Ė the price of gold is going
to rise. And it is going to rise a lot.
Q: In your fund you invest in small to
mid-cap companies. Is that where you believe the leverage
is going to be, as opposed to bigger companies?
A: I think the big boys will work; you
can make good money in the big stocks because they have lots
of ounces in their reserves. But the real leverage will come
in the smaller ones because they have growth capacity ó the
capacity to dramatically increase their reserve bases and
increase their production. They tend to be more cheaply valued
to begin with. If you can find the combination of a reasonably
valued mid-cap or small-cap company with an interesting ore
body that is in a growth phase, you are going to make an enormous
amount on your money. We did that in the recent period, and
it was interesting that very few people noticed what was going
on. There wasnít a significant inflow into gold funds. That
is still to come ó I believe in the next up-leg in the gold
market, the public will take notice.
Q: Can you tell us about some of the companies
youíre excited about?
A: Eldorado Gold Corp. (ELD.TO) has a producing
mine in Brazil, but more importantly, has a very large ore
body that they just completed a feasibility study on in Turkey
that will be coming into production in a reasonable timeframe.
And Minefinders Corp. (MFN) has been very successful. It has
a large ore body, roughly 4 million ounces equivalent of gold,
in their Dolores project, a gold/silver property in Mexico,
which is under a feasibility study so it is well advanced.
High River (HRG.TO) is basically developing and has producing
mines in Russia. This still has not been fully recognized
in the price and to date it has been a successful venture.
Q: Goldcorp (GG) is one of your holdings
A: Yes, Goldcorp has been one of the great
success stories of the gold cycle to date. They operate arguably
the richest mine in the world and they are accumulating enormous
amounts of cash and are very hopeful of finding greater amounts
of ore in their current mine. It doesnít have the same leverage
as the others because it is expensive in relation to its existing
reserves, so it is a good holding, but not something I would
be looking to for maximum leverage.
Q: Any other smaller companies youíre excited
A: One of the names that I am excited about
is Orvana Minerals Corp. (ORV.TO), which operates in Bolivia.
They are just bringing a mine into production, and it will
be a 70,000 ounce producer right at the start, with operating
costs of probably less than $100/ounce to take it out of the
ground. The greater appeal is that the ore body is open at
depth and the last hole that they drilled at depth is the
richest or richer than the existing ore body. There is a lot
of potential at depth and a lot of potential along strike
because the company, for the longest time, didnít have enough
money to explore. Now they will throw off a lot of cash flow.
They also have second ore body, so that if the gold price
rises into the $375 area, it represents another couple of
million ounces. It has everything that I am looking for ó
production coming on, as well as a great amount of potential
in the existing areas where production is going to be, and
a secondary ore body that will provide more leverage in the
event that the gold price goes higher.
One that isnít anywhere close to production
but is probably one of the most exciting plays in the world
is called Southwestern Resources (SWG.TO). The company is
earning a 90% interest in the Boca Project in southwest China
near Kunming, a city of about 4 million people. I just returned
from China where I actually observed the potential ore body.
The company, headquartered in Vancouver, is run by a couple
of really smart geologists who have been putting together
properties from all over the world for a number of years.
They generally use other peopleís money to explore. This one
was so exciting they are spending their own money because
they want to retain the maximum exposure possible. Chinese
operators already put in 133 tunnels, and these tunnels are
just crawling with gold. The Chinese have a small mining operation
going on and it confirms the richness of the ore. They have
been drilling into the mountain and at this point, just based
on what they have found already, they probably have 10 million
ounces. So this is just one of the potential home runs. The
price has moved up a lot - from $3 to $14, but the $14 reflects
what they have already found and it is open all over the place.
Again China tends to be discounted, because people are a little
concerned about China, but I donít think they should be. I
think since China got into the World Trade Organization, they
are taking in enormous amounts of foreign capital, and I donít
think they will start not respecting property rights. It is
cheap to operate over there, obviously. I think it is a really
NovaGold (NRI-TSX) has also been a great success.
They have the Donlin Creek project that they got from Placer.
Placer retained the back-in rights, but Nova Gold did a terrific
job exploring the property and getting a significant resource
base that they talk of in terms of 10 to 20 million ounces.
Placer had an existing back-in right when they turned the
property over to NovaGold and they have backed in for 70%
of the property by agreeing to spend $30 million to take it
to feasibility. NovaGold is not as interesting now as say,
a year ago, when they went from $1 to $5, but it is still
a solid story. There are a lot of ounces; even their 30% of
the ore body is significant.
Another company I like is a company called
QGX. It is priced around $1, which is a nice price. They have
a large land spread in Mongolia, and they also have an interest
in three advanced exploration prospects in the south Gobi
desert of Mongolia that are being actively explored by Ivanhoe
Mines Ltd. I think it is a very inexpensive exploration play
and we own a lot of that stock.
Q: What about some mid-tier companies?
A: Two mid-tiers that I like are IAMGOLD
Corporation (IAM) and Wheaton River (WRM.TO). And Glamis Gold
(GLG), if you go up the scale a bit. Cambior is also interesting
óthe stock is very under-priced. There is still an issue with
their hedging. We have a large position and I like it because
it is very cheap and I think that the hedges will be addressed.
When that happens I think that will unlock the value in the
Another interesting company is Central Fund
(CEF-AMEX). For the bullion players, it is a very clean way
to play it, a great way for individuals to buy gold and silver
bullion without all the hassles of storing it. Buying and
selling gold is difficult, and there is also the issue that
if you buy gold certificates you donít know if the gold that
is allegedly behind thema is really there. So you want a fund
where you know the gold is in the vault, with your name or
the fundís name on it. I think that what you will see in the
not-too-distant future is more vehicles of this type emerging
as the public begins to recognize that gold bullion is a good
thing to own. Right now, the Central Fund has the stage largely
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