-- Posted Friday, 28 December 2012 Source: GoldSeek.com
Source: Brian Sylvester of The Gold Report
The past year was a very tough one for the junior gold mining sector. In this interview with The Gold Report, Brien Lundin, CEO of Jefferson Financial, says that the past year has, in fact, put many gold mining companies on the bargain basement shelf. He shares some advice on end-of-year portfolio repositions.
The Gold Report: Brien, in late October you and your company Jefferson Financial hosted the New Orleans Investment Conference. What were some of the commodity-related themes consistently making the rounds there?
Brien Lundin: The buzz was that the underlying fundamentals for precious metals would remain bullish regardless of who won the election. But if President Obama were re-elected, then all of the factors favoring gold and silver would become dramatically more bullish.
TGR: You wrote about that in the November edition of Gold Newsletter. Here's a quote from that edition of your newsletter: "The bottom line is that President Obama's re-election means that you need to buy gold and silver, and things that will retain their value as the dollar loses its value." Why were things different on Nov. 7 than they were the day before?
BL: Even before the election, the economic and fiscal situation for the United States was pretty dire. In my view the only hope of recovery and reform, without a major ongoing crisis and very significant inflation, would be if the Paul Ryan plan were to be put into effect immediately.
Instead, we now have the same administration that took the emergency one-year spending levels enacted to keep the economy from crashing during the 2008 credit crisis, and has now made those massive spending levels the new baseline going forward. The difference is that the Obama administration is now unrestrained by the prospect of another election, so the trajectory of government spending is actually being steepened.
TGR: In another passage of the same edition of Gold Newsletter you wrote: "The coming inflation will be similar to what we've experienced in recent years. Huge pools of loose money will continue to flow into commodities and financial assets." What makes you certain that we won't see another round of risk-off sentiment if things go as badly as you suggest they will?
BL: The risk-off episodes that seized the investment markets over the past few years are in reaction to potential fiscal crises in the U.S. and Europe. This headline risk sent investors running to the safety of cash, specifically to the U.S. dollar. This seems counterintuitive, but investors are looking for short-term safety.
When the perceived risk is one of long-term currency debasement, then gold is the preferred safe haven. My whole bull market thesis for gold is based on a developing consensus that neither Europe nor the U.S. is going to face collapse anytime soon. Rather each will be kept afloat on a sea of new money printing by both the Federal Reserve and the European Central Bank. In such an environment, gold and silver are going to absolutely take off.
TGR: Do you think that lack of practicality of gold hampers its status as a safe haven?
BL: Not today. Gold is very liquid. A lot of speculators use the exchange-traded funds (ETFs), which I recommend for trading the metals. But I don't recommend ETFs for core holdings.
In fact, one of the things that is keeping the market buoyed currently is the tremendous retail investor demand for the metals. That comes in the form of skyrocketing physical sales of coins and bullion, and in the ETFs. Metals holdings of the ETFs are at record levels. Coin demand is at near record levels. Yet we see the price moribund due to the whims of speculative demand.
TGR: It's interesting that you're pro ETFs, because most gold bulls aren't. Is this a new tack for you?
BL: Not really. You know a lot of the hard-core goldbugs are somewhat doubtful of whether the EFT gold is actually there. I recognize those concerns, so I don't recommend ETFs for core physical metals holdings, just for trading.
TGR: When should equities enter the mix for a retail investor?
BL: Simply put, right now. The junior resource stocks have been absolutely decimated over the past year. There are bargains galore right now if you have cash to buy them.
TGR: Are these bargains mostly market related or is this part of tax-loss selling season?
BL: I don't really distinguish between the two. We've had a lousy year for the equities. When we have had risk-on environments, they have not lasted long enough to where it filtered down to the highly speculative junior resource equities.
We also have an unusual situation this year where we have not only tax-loss selling but also tax-gain selling as investors take profits to avoid higher capital gains taxes next year. When you combine that with the junior stock market that has been depressed all year, some incredible bargains emerge. I'm pinpointing a number of them in Gold Newsletter right now.
TGR: It's the end of the year and some retail investors are wondering what to do with their portfolios and if they should make some changes. Is there a process that you go through at the end of the year?
BL: The end of the calendar year is a natural time to clean up a portfolio and rationalize things. But it is also the time of the year that you typically have tax-loss selling that creates a dampening effect on the markets and sometimes creates some pretty attractive bargains. This year, as I said, we've had some screaming bargains created.
I think what investors need to do, and we're doing it with our Gold Newsletter portfolio as well, is to look at the number of companies that you can adequately follow. If you're able to find some really attractive opportunities in this kind of an environment, you need to start switching into these faster horses in exchange for some of the slower horses in your stable. Just turn over the portfolio a bit, rearrange it and get prepared for the future.
It's especially important if you can find companies that are better positioned going forward than the ones you have in your portfolio and you can realize some tax losses going forward. There's no reason to play the psychological games of holding on to a loser just so you can get back what you paid for the stock. Be ready to break emotional ties, sell a company and put the money on a better bet going forward.
TGR: We'd be remiss if we didn't ask a gold bull like yourself to tell us what you think the coming year has in store for gold. Please give us your thoughts on that.
BL: It's going to be a very good year for precious metals and mining stock investors. Once we get through these end of year trading games and that fiscal cliff fiasco, the markets should settle down into an environment where everyone recognizes that massive money printing will continue for years to come. This is the fundamental story that's going to drive metals prices higher and in this environment the equities will begin to benefit once again.
There's also a very powerful technical picture developing. Both gold and silver are tracing out a cup-and-handle formation similar to the ones they formed during the 2008 credit crisis and the subsequent recovery from that crisis. After that, the metals rocketed higher out of those cup-and-handle bottoming formations. I fully expect a similar performance this time around, which would be a pretty exceptionally profitable situation for gold bulls.
TGR: Thanks, Brien, for your insights.