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"Mexico Mike" Kachanovsky: Gold and Silver Producers Due for Big Upside

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Sep 28 2011 4:03PM

Source: Brian Sylvester of The Gold Report  (9/28/11)

Mike KachanovskyMike Kachanovsky, known as "Mexico Mike," doesn't follow the so-called smart money. Founder of the website, Mexico Mike believes mainstream commentators are leading investors astray by insisting that it is too late to get into mining stocks and precious metals. In this exclusive interview with The Gold Report, Mexico Mike explains why everyone needs to have some exposure to precious metals.

The Gold Report: Gold juniors fared worse than most equities in the economic collapse of 2008. Now economic fears are gripping the market once again. The S&P 500 has been trending down since mid-June. Many fear a double-dip recession—if not worse. Why do you still believe in junior precious metal equities given the current market conditions?

Mike Kachanovsky: We are in a double-dip recession. A lot of market commentators still feel that we can avoid that, but I think we're right in the middle of it. I am still bullish on the junior mining stocks for the reason that, unlike most other business models, mining companies have stronger fundamentals down the road. Most of these juniors that have commenced production are making money now and their outlook is to make even more money going forward. I like the junior resource stocks and I tend to shun the more conventional sectors for investors.

TGR: Investors exited precious metal juniors en masse in early August when U.S. politicians couldn't reach a deal on the debt ceiling. Gold then spiked, but has since trended lower. Do you believe traders are looking for the gold price to find a bottom before they return to the market?

MK: I think that's a good statement. The typical investors that I talk to believe that precious metals and gold are too high, that they missed the run, and they're expecting a lot lower price levels before they consider buying in. That's very bullish. That's a contrarian indicator.

Most of the time that sort of analysis has been flawed and the people who were holding off on buying and hoping for lower levels to buy at were left behind. I don't think it is any different this time around. I think the gold price will go above $2,000/ounce (oz.) and silver will move above $50/oz. before the end of this year.

The fact that so many investors are standing on the sidelines suggests that there is less downside ahead and that a lot of the buying power will start chasing the metals higher once we get some sort of a recovery and a sustained rally.

TGR: Any idea of the timeframe of when that might happen?

MK: The biggest mistake that any amateur analyst can make is to try and pin a time on when a correction is coming or when a new high is coming. It is such a volatile sector. I think the more rational approach is just to buy the dip. It is a volatile commodity. There are triple-digit moves happening on a regular basis in gold. When I see that gold has been hammered for three or four days in a row and it is at a low, I'll pick up the phone and buy more. In fact, I did just that on Friday and bought more gold and more silver.

TGR: Was that bullion or equities?

MK: I buy and sell equities and I buy bullion and accumulate it. I have actually never sold an ounce of gold or silver, but I've been a buyer steadily for the last eight years in both metals.

TGR: The gold price is trading primarily on fear right now. We can see daily swings of $20–$80/oz. When do you think the hyperinflation trade will kick in?

MK: All the major currencies in the world are in a race to the bottom. The events of hyperinflation in the last hundred years usually involved one weak currency, while most other nations were showing strength. In those cases, it was very easy for inflation to manifest itself in places like Germany's Weimar Republic and Zimbabwe. We are not seeing that because it is affecting almost every nation worldwide. However, because gold, and to a lesser extent silver, are rising so strongly in this environment, that indicates that it is already underway. Gold is the asset of last resort that people are turning to. When you start having a lot of people in a lot of countries around the world all acting at the same time, that is when I think we start having to be concerned that a hyperinflation environment is starting to kick in.

TGR: The London Bullion Market Association (LBMA) said almost 11 billion ounces of gold traded in the first quarter of 2011, which is far more gold than has ever been produced from all mining combined on the planet. Does that make you somewhat wary about some of the gold derivatives being offered out there?

MK: That statistic is probably the most important fact that all investors that are even considering precious metals should consider. The LBMA is just one market. You also have gold trading on the Comex. You have Over the Counter trades between private counterparties. Shanghai just opened a bullion market. Collectively, the amount of gold that trades in any given day is a multiple of the real gold that is out there.

As a trading vehicle, there are all kinds of exchange-traded funds and paper products, but if you want leverage to actual bullion, there is no substitute for buying the real thing and having it in your control and custody. There are all these paper and derivative products that are leveraged to it. I think that is unstable and a lot of people are going to be left holding a toxic asset at the end of the day instead of the security that they thought they were getting leverage to by putting money into bullion.

TGR: You have said that you are buying equities as a way to get some leverage on the price for gold and silver. Are you sticking to precious metal producers or near-term producers with money in the bank as a way to mitigate risk in the current market?

MK: To get full leverage to the sector, you need to have diversity across the spectrum. My current strategy is to lean toward the companies that are currently in production. Both gold and silver have risen substantially. The companies that have the real leverage to that, the producers, are the ones that are going to benefit the most at this stage in the bull market. They are the ones that have the rising earnings and the stronger fundamentals for investors to focus on.

On the other hand, I like emerging stocks. They are trading at a very tight discount range relative to their historic multiples. Companies that have viable deposits that are funded and able to emerge as producing mines in the next year represent a compelling story. I still like exploration because the greatest gains that you can get in this sector come from buying a low-priced exploration story that hits on a big new discovery.

But that is also the riskiest part of the market. Investors need to be very selective and careful in choosing good projects, good management and companies with the money to continue with their exploration work.

The fear that we are seeing in the market right now is very short term and cyclical. An exploration story may take years to develop. I don't think investors should stay away from the explorers. They just need to be selective because during those bearish times it is difficult for companies to raise money and their stocks are probably going to be out of favor. Investors should find the companies that they can be comfortable holding and wait until they find new mineral discoveries and get rewarded with a higher share price.

TGR: Any final bits of investing wisdom for our readers?

MK: There are a lot of big changes going on in the world. I think "buy and hold" no longer works. The torch for economic leadership is in the process of passing from the developed Western nations to emerging countries and the Asian nations. It's a period of turmoil and change.

Based on the major stock indexes, investors haven't made any money in the past 10 years—in fact, they probably lost money. Many of the different asset classes are losing money. The one exception is bonds and fixed income, but I believe that's a bubble that's subject to popping. It's too late to buy those. The one exception to this is precious metals. They have outperformed every other asset class and it is the only legitimate candidate to be a buy-and-hold investor in.

I find it very ironic that the majority of the commentary in the mainstream is steering people away from the metals and suggesting perhaps that it's a bubble or that it's the wrong time to be a buyer. I have always approached the market as a contrarian. I feel most comfortable putting my money at risk where most other investors are not feeling bullish. I think there is a really good trend there and I am going to continue buying the mining stocks that have strong fundamentals with full leverage to the metals and ignoring what the majority of the so-called smart money has to say.

The mainstream commentary that has had anything to say about the precious metals sector over the last 10 years has been largely discredited. I would be very leery as in investor right now in participating in fixed income or bonds or buying the broader markets. But I do think everyone needs to have some exposure to precious metals and to be a long-term passive investor in these sectors. That's probably the way to have some sort of stability in this macro environment of dramatic change and volatility.

TGR: Thanks, Mike.

Mike Kachanovsky, known as "Mexico Mike," is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column in Investor's Digest of Canada. Kachanovsky is a founder of the website, which serves as an online community for the discussion of all topics relating to junior mining stocks.

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