This interview was conducted by Publisher Karen Roche

With perhaps a short-term correction in store for gold, Resource Opportunities editor and publisher Lawrence Roulston is leaning toward base metals for more impressive gains in the coming months. And as he tells The Gold Report readers in this exclusive interview, the growth outlook for base metals doesn't rely solely on flourishing demand from developing nations. He also reminds us that "while most people focus on the day-to-day ups-and-downs in metal prices . . . the big money comes with owning a little company that proves up a big deposit."

The Gold Report:During our last interview in June, you said you didn't expect commodity prices to fall, and you were right. Many metals have hit all-time highs since then. Have they hit the top? If not, how much further do you think they'll go?

Lawrence Roulston: I'm not counting on higher metal prices in the near term. In the longer term, I believe they will go much higher. Copper, for example, rebounded from a low of $1.25 earlier this year to just under $3. That gain came with the U.S. and most of the Western world still in recession, or at best very modest growth. China and other developing countries are the drivers. These countries will continue to grow and in a year or two, the West will get back to growth too, which will push the prices higher. Current metal prices are still below the 2007 highs, and with a widespread recovery, they could surpass those levels.

TGR: The rates of new jobless claims and foreclosures are falling, we're getting reports of month-over-month positive economic news, the economy is showing signs of growth and the markets are reaching highs. Are we seeing real green shoots? Inasmuch as a major factor of the increasing gold price has been the falling value of the U.S. dollar, will these positive developments abate the dollar's decline and slow gold's climb?

LR: The story of the dollar is about rising government debt and about the amount of stimulus money that has been pumped into the economy, in the U.S. and around the world. The gold price has risen in dollar terms. It has also risen in terms of most other currencies. Many commentators, especially those in the U.S., tend to focus on the American economy, where debt and potential excess liquidity point to a further decline in the dollar. However, other areas face similar challenges.

Fundamentally, investors around the world have become cautious about paper investments and currencies. Governments, professional money managers and individual investors are all buying gold. Not a wholesale switch, but putting a little gold into a portfolio as an insurance policy. For several years, central banks were net sellers. They are now moving toward being net buyers. The Reserve Bank of India just bought 200 tons of gold from the International Monetary Fund. That was an important signal, but it only took gold to 6% of their reserves, up from 3.7%. We only see the value of the dollar measured against other currencies. No nation wants its currency to appreciate against the dollar, as that would make their exports more expensive. In essence, we will see all currencies declining in tandem relative to hard assets, like gold.

TGR: What would this concurrent decline in currencies mean for gold? Would that tend to drive it up?

LR: There's potential for a correction in the gold price after the big run-up that we've seen recently, but longer term I expect it to continue moving higher in U.S. dollar terms as well as in the terms of other currencies. The gold price has progressively moved higher, from $252 in the middle of 2001 to over $1,100 today. And I think we're going to continue to see that same kind of progression.

The price of gold correlates directly to the U.S. dollar's value because the price is measured in U.S. dollar terms. As the value of the dollar declines, by definition, the price of gold increases.

But more to the point and especially since the beginning of the financial crisis, as I say, a lot of investors have become very nervous about currencies and paper assets in general. So we're seeing a real increase in demand for gold. That may accelerate the upward movement in the real value of gold that we've seen since the middle of 2001.

TGR: When you pointed out India's 200-ton gold purchase, you noted it took gold to 6% of their reserves, up from 3.7%. Are we really seeing that much shift toward gold among investors that will drive the upward pricing mechanism versus the devaluing dollar?

LR: The devaluing dollar is an almost artificial mechanism; the real gain in value will come as investors around the world increase demand for gold. The Washington Accord brought together the holders of 80% of the world's official reserves, who agreed that they would not sell more than 500 tons a year. During the last couple of years, they've actually sold less than their quota. But still, because of the Washington Accord selling, central banks have been net sellers.

India's purchase, even coupled with speculation that China will increase its buying of gold, would not likely reverse that, because I think selling from the Washington Accord companies will continue to overwhelm smaller countries' buying. For example, Sri Lanka recently bought some gold, but it's inconsequential in relation to the bigger players' selling.

TGR: Do you suppose China's encouraging its people to buy gold will have an impact?

LR: Yes. Citizens throughout China have been significant buyers of gold over the past couple of years and probably will accelerate their buying. In the same way that India is the world's largest market for gold on a retail level and the bulk of that is as jewelry, the Chinese are buying much of their gold as jewelry.

But in reality it's much more than that. It's a long-term investment. India and China don't have IRA accounts, RSP accounts and other such long-term savings plans that we have in the western countries. Part of their rationale for buying a lot of jewelry is that it's a long-term investment. Increased buying in China has more than offset the massive decline in gold jewelry sales in the U.S. and western Europe in the last couple of years.

TGR: Arguing that underlying economic health doesn't justify current equity prices, some are calling for a pullback in the markets. Are you anticipating a major correction ahead, or will the market continue sideways?

LR: If you're referring to mainstream American stocks, we were supposed to have had that pullback by now. We've had a bit of a pullback, and maybe that's the extent of it. I don't think we'll see anything significant.

But I don't really follow the major markets. I focus more on the metals markets, which are much more global than the major American companies. I think it's very important to note that parts of the world are doing very well right now and those American companies that do business with the rest of the world are doing well while inward-looking companies may not be. In the near term that's probably going to be the way it goes. The U.S. is unlikely to enjoy a full recovery for another year or two, so companies that rely solely or primarily on the American markets may not do well for some time yet. However, much of the rest of the world is already doing well, with signs pointing to continuing recoveries.

Even there, though, you have to look closely. Some analysts say emerging markets are overvalued, but they are looking at trailing earnings. Earnings figures over the last year reflect the worst economic performance in decades. Analysts who look at projected earnings still see values in those markets. Clearly, the easy money has been made, but there are lots of opportunities for those who take the time to look.

TGR: In one of your recent newsletters, you also noted that while North America and Europe may still be in recession, from a world perspective we're looking at a positive economic environment. In that context, would you speak to an important story—that of the long-term shortage of metals that expanding economies need to grow?

LR: A few points here. First, even without increased demand, the mining industry would need to develop new mines each year just to maintain production. Each mine has a finite life, typically 15 or 20 years. Growth in demand over time adds new pressure to build new mines.

Secondly, as you know, much of the innovation in many industries comes from small, entrepreneurial companies. The mining industry is an extreme example of that, with the majority of new discoveries being made by the juniors. The metal deposits in the hands of the juniors now represent the future of the mining industry. There are huge gains to be had by shareholders in these little companies as projects evolve from discovery through to production or to a takeover by a larger company that will develop the deposit to production.

Most people focus on the day-to-day ups-and-downs in metal prices, but the big money comes with owning a little company that proves up a big deposit. With some due diligence, it is possible to develop a short list of the companies most likely to succeed. You don't need a gain in metal prices to make money from this approach. The inevitable gains in prices that will accrue over time add a bonus to what should already be a good rate of return.

TGR: Maybe a case of not being able to see the rising stars because the sunshine is so bright?

LR: I suppose so. There's so much focus on movements in the metal prices that investors in general are completely missing what I see as the biggest investment opportunity, which is focusing on the supply side of the metal story and looking at these companies that are developing metal deposits that will come into production in the near future. The gains in that space can be 10 times or more and that completely dwarfs the movement potential on the commodity price itself.

TGR: How do the precious metals compare to the base metals that an expanding economy needs?

LR: Even if they are not expanding, economies use base metals. U.S. metal production, for instance, is roughly where it was a couple of years back. Developing countries such as China are increasing their use of these metals over the previous year. The net effect of flat consumption in the West and growth in China and India has pushed up prices.

That said, the story for gold and silver is quite different from that of the base metals. The gold market is driven largely by investors seeking a hedge against currency devaluation. Silver roughly follows the gold market. The base metal markets are more a function of economic growth. However, as I said, the big profit potential for investors comes in looking at the supply side of the industry; the ongoing need for new deposits to be developed into mines. That applies to precious and base metals equally. The potential gains in value of a successful exploration/development story far outweigh the moves in metal prices.

TGR: To what extent are you and your newsletter looking at base metals?

LR: We've had a balance among precious metals, base metals and uranium all the way through, although now we're very definitely moving the emphasis more heavily toward base metals. Gold has had a big run, and our shift more in favor of gold and precious metals over the last year has worked out very, very well. Even though I see the longer term gold price being significantly higher, there's a possibility now of a bit of a pullback.

As for base metals, the copper price has more than doubled so far this year from its low and while major copper producers have had a nice run, we've seen very little reaction in the junior exploration / development companies. I think there are enormous opportunities in those little companies. We could be looking at multiples on the prices of some of these companies 12 months out as investor focus starts returning to the base metal sector.

TGR: Would you comment on some companies in that base metal juniors sector?

LR: The initial reaction is already starting to happen with those that have the most advanced projects. Capstone Mining Corp. (TSX: T.CS, Stock Forum), for example, a producer, has moved up with the copper price but I think it's still undervalued. Going down a step, a company in the soon-to-be producer status is Baja Mining (TSX: T.BAJ, Stock Forum), which was beginning development of a copper and cobalt mine in Mexico when the financial crisis hit and their debt financing got pulled out from under them. They have the equity component lined up now and they're getting close again to having debt financing. A company like that will be one of the early ones to respond when investors start coming back into the sector.

An example of a company still further down and the next to move would be Copper Fox Metals Inc. (TSX: V.CUU, Stock Forum), which has a big deposit outlined, but hasn't yet completed a feasibility study.

TGR: Before straying from the topic of equities, could you talk about some of the other companies you follow?

LR: I don't comment much on specific companies in a public forum because my subscribers pay for that, but I can say a few words about a few of them.

• Endeavour Financial Corporation (TSX: T.EDV, Stock Forum) is interesting; it's like a mutual fund-merchant bank combination run by some of the top people in the mining finance business. Their current focus is on building another big gold company by pulling together smaller companies. It's a good way to get exposure in this market for people who don't have the time or the knowledge to do their own due diligence.

• Northern Dynasty Minerals Ltd. (TSX: T.NDM, Stock Forum) controls what is likely the largest undeveloped metal deposit on the planet, a massive copper deposit with more than 80 million ounces of by-product gold. Anglo American plc is spending $1.4 billion to earn a half interest. The ultimate value is well beyond the current share price, but a project of this size takes a lot of time to bring to production.

• Another one with a lot of potential is Jinshan Gold Mines (TSX: T.JIN, Stock Forum), where the approach—to develop more gold mines and to consolidate small gold mines in China—shows a lot of potential.

• Kiska Metals Corp. (TSX: V.KSK, Stock Forum) has a number of high-quality gold and base metal exploration projects and a top-notch exploration team.

• Rare Element Resources Ltd. (TSX: V.RES, Stock Forum) has a gold project with big potential that Newmont Mining Corp. is spending money on to earn an interest, although most of the recent attention on this company has focused on its rare element project.

• Quaterra Resources Inc. (NYSE/AMEX: QMM, Stock Forum) has a top-notch exploration team looking at several uranium and base metal projects in the southwestern U.S. and Mexico. They just raised some money, so they are now in a position to carry out work and generate some news.

• Miranda Gold Corp. (TSX: V.MAD, Stock Forum) is a classic "prospect generator," acquiring interests in a number of exploration prospects and then bringing in joint-venture partners to carry out the exploration work. Although not well-understood by many investors, prospect generation is a great concept that reduces exploration risk to shareholders and provides exposure to a large number of potential discoveries.

• Animas Resources (TSX: V.ANI, Stock Forum) controls a past-producing gold district in Mexico and is exploring to build on the past results and test new targets.

TGR: When we talked with you in June, you'd indicated that considering uncertainties about the U.S. financial system, you consider gold of increasing importance as a currency/inflation hedge. In a recent conversation with the Gold Report, Louis James from the Casey organization agreed, saying that an investment in precious metals themselves is a hedge against inflation or currency fluctuations. But he also said that precious metal equities belong in the speculative part of an investor's portfolio. Do you agree with that?

LR: Absolutely—with the qualification that if you pick companies intelligently—companies with good management, good projects and a realistic business plan, and if you have a diversified portfolio of those companies—the overall risk on those companies is probably less than the speculative risk in the commodity directly.

That's because you have a number of companies that have potential to add value, and regardless of what happens to metal prices, if they're successful at carrying out their business plans, they can add value. Whereas, betting on the commodity price directly is pure speculation. Who knows what's going to happen with the gold price next week or next month?

DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Animas Resources (TSX-V:ANI), Miranda Gold Corp. (TSX-V:MAD), Rare Element Resources Ltd. (TSX-V:RES), Kiska Metals Corp. (TSX-V:KSK), Jinshan Gold Mines (TSX:JIN), Northern Dynasty Minerals Ltd. (NYSE.A:NAK, TSX:NDM)
3) Lawrence Roulston - I personally and/or my family own the following companies mentioned in this interview: Baja, Rare Element Resources and Animas. Neither myself, nor my family receive any payments from any companies in this interview or in Resource Opportunities.

Lawrence Roulston, a geologist with engineering and business training and more than 20 years of hands-on experience as an analyst and manager in the resource industry, founded the 100% subscriber supported Resource Opportunities newsletter—which provides objective commentary on the resource industry and emerging resource companies—in 1998. Having established an impressive track record, with a particular knack for picking emerging companies that delivered 10-fold or better returns, he launched GreenTech Opportunities in February 2009.

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