TGR: With gold equity prices slumping badly, have you had to adjust your price-to-ounces-in-the-ground valuations or make other changes to your model to reflect what is happening in the market?

MF: The valuations are all over the place and they are cyclical. In 2009, the value-per-ounce-in-the-ground values went for about $20/oz average. In 2010, they went to $90/oz and are now at about $40/oz. It looks as if the cycle now is one to two years, and we are on one of the lows.

But as an analyst you have to look at what that value might be in a one-to-two-year horizon. Therefore, I do not adjust my models for swings in sentiment. Although we are on a low valuation right now, good valuations are out there. We are using a range of $50–70/oz for target prices on small companies.

TGR: Michael, can you give our readers a reason or two to stay positive about the gold market?

MF: All is not lost in the gold sector. First of all, the gold sector is cyclical. We have been on a down cycle for about 20 months. Although that has been pretty depressing, history shows us that 20 months is about as long as a typical down cycle lasts.

Second, institutions and money managers have been selling their gold juniors. Typically, when the institutions are long juniors, it is time to head for the hills or sell them and vice versa. They tend to be contrary indicators at extremes. Institutions are overly negative on juniors right now. So now I would not head for the hills. I would accumulate. Valuations are cheap. I expect the mid-junior/midtier producers to be the first to move, followed by some of the junior explorers.