Kevin O'Leary's 'Cold, Hard, Truth' on Gold Investing

Tuesday May 08, 2011 2:45PM

Kevin O'Leary, Canada's equivalent to Donald Trump, is a believer in gold but not the companies that mine the metal. He looks for gold stocks to continue to head lower.

The venture capitalist and one of Canada's wealthiest individuals said that people often bring him the idea of switching out of physical gold and the SPDR Gold Trust and buying the miners. "They have had the living you know what pounded out of them and they are at the lowest valuation vis-à-vis the commodity itself. I say they are going to go lower," said the colorful entrepreneur and author of The Cold, Hard Truth.

O'Leary is the chairman of O'Leary Funds, a $1.5 billion mutual fund company and star of CBC's Dragons' Den and ABC's Shark Tank. He began his fortune with a software company in the basement of a small Toronto home. His mother provided the initial investment of $10,000 that he used to start software publisher SoftKey. The company later became The Learning Company and merged with Mattel in a deal worth nearly $4 billion.

The reason gold stocks are not performing in tandem with the price of gold comes down to "idiot management," said O'Leary. " There is no reason to own the miners. If your cost to actually mine an actual ounce keeps going up, why would I ever buy the stock?" said O'Leary, comfortably seated in his Toronto office. "I say they are mismanaged. If a manager can't control his costs, fire them."

O'Leary interviews most mining CEOs on The Lang & O'Leary Exchange, his other gig on the CBC network in Canada. "I show him his chart (mining CEO) and I show them the price of gold and they are ugly. You'd rather own gold, never own the miner."

He also said that there are too many juniors on the scene right now. "It's just a wasteland – it's just carnage out there," he noted. O'Leary explained that the same problems reappear with the juniors-- "they can't raise dough, and mine is delayed. After a while it is just the same drone, it is boring."

Gold is a Stabilizer

"I like gold because it is a stabilizer, it is an insurance policy," said O'Leary. He said that it is the only security he owns that doesn't pay a dividend. As part of his investing philosphy, O'Leary is insistent on only owning stocks that pay a dividend.

"I listen to all the gold pundits and they are always wrong. It is impossible to time the moves…I have owned gold for decades and I simply have 5% weighting." O'Leary explained when it becomes more than 5%, he sells into the strength, and conversely he buys into weakness.

O'Leary is also not buying into the gold hyperinflation story. "Gold is popular for a whole host of reasons. When everybody is saying you gotta own it, you should be selling it because when it corrects, it doesn't touch the sides on the way down. So I simply say 5% is good for me. And I'm disciplined about that."

O'Leary is also disciplined about not owning more than 5% of his portfolio in any one name, no matter how great the story is, he said. "Secondly, never, ever own more than 20% in any one sector, so if you love gold, you just can't get past 20% of your net worth in gold," he said.

The key to life is cash, said O'Leary. "The only friend you are going to have when you are old and crusty is not your dog, not your kids but cash in the bank that is still going to love you."

US & Global Reserve Currency

O'Leary said that in his lifetime, he would not be surprised to see the Chinese Yuan take over as the global reserve currency. "I can sense the cash moving out of North America…old and fat and slow growth; we are the Romans now," he said.

On the topic of money printing, O'Leary said quantitative easing in the U.S. is likely to happen. "I just look at just some fundamental issues, we needed to see 400,000 jobs a month, we are nowhere near that," he said.

O'Leary is also nervous about the housing situation in the U.S. and how it refuses to recover. "Until Americans feel that their core asset--their homes--are stabilized, they are not going to have the animal spirits and they will continue to have less buying power," he said. "I'm not calling for a collapse of the U.S. markets – in fact they are doing very well, but the core underlying growth of America is going to be sub-3% for a couple years and maybe longer."

By Daniela Cambone of Kitco News

<<Back to more Kitco exclusive news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y

Interactive Chart