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Robert Martin's Precious Mettle
 Do elephants wear slippers?
Robert Martin
e-mail: subman@gte.net
December 29, 2003
When I was 16 I had a dream.
I dreamed the answer to all of the world's problems. The next
morning, when I awoke, I remembered having the dream, but I couldn't
for the life of me recall the answer. Darn!
So I placed pencil and paper
on my nightstand in the hope that the dream might return.
It did. The very next night
I again dreamed the solution to all the world's ills. Next morning,
blearily I rolled over and noticed some words scrawled on the
paper. The pencil was on the floor. Reaching over, I squinted
at the writing and could make out just four words:
"Think in different terms"
Huh?
"Think in different terms"
That's all it said.
Now, 16 is an impressionable
age. The gray matter of the typical 16-year-old male is like
a dry sponge ready to soak up whatever philosophical drippings
happen to flow its way. The usual drippings address Life, Zits,
Girls, Sports, Food, Homework, Girls, Truth, Cars, Girls, and
Rock 'n Roll. Not necessarily in that order.
So this cryptic message from
beyond the veil of my consciousness lodged deep into my sponge-like
mind, and it resides there still.
Over the following years, when
facing some dilemma, I might consciously try to think about it
"in different terms" hoping for an ahaa! It turns out
to be not so easy. The ideas and emotions we use to define the
world are actually just defining us. So we tend to think in circles.
I came to the conclusion that thinking in different terms was
a lot like deciding to speak Swahili. Well, I can't speak Swahili.
End of story. Yet that four-word phrase remained lodged in my
soft tissues like a splinter under the skin. It nagged me then
and it nags me still.
So with your indulgence, let
me try to think in different terms about my favorite topic:
Gold.
Let's say that gold is NOT
in a bull market.
Let's also say that gold is
NOT in a bear market.
Now that's what I call thinking
in different terms.
Instead, let's say that gold
is in a used-to-be-butisn't-so-much-anymore-suppressed
market.
Let's see where that takes
us.
One of the core dilemmas facing
gold investors is whether we are witnessing the beginning of
a secular bull market or just a bear market bounce. After 20
years of well-documented decline in precious metals, is this
a true reversal point or a glorious head fake? This is an important
question. Nobody wants to miss out on the start of a new trend.
But nobody wants to be victim of a sucker's rally either. Which
is it?
Adding to our dilemma is the
contradictory advice coming from very, very smart people. On
one side are the Richard Russells who eloquently proclaim the
new secular bull market; while on the opposing side are the Robert
Prechters whose waves and socionomics forewarn of a still-unfolding
golden bear. Who should we believe?
By thinking in different terms,
I now conclude that they are both wrong. Here's why.
Throughout history there have been brief periods of true economic
freedom in which productive societies have flourished for a time.
The early Greeks and Romans come to mind, as do the Phoenicians,
the 15th century Italians, the early 19th century British and
late 19th century Americans. But these periods of localized economic
vigor are always subverted, as greed and governments invariably
step in to exploit the gains, destroying the conditions that
allowed the economies to flourish in the first place. Taxes and
regulations pile up, bad money chases out good, fraudulent promoters
displace honest artisans, and the society morphs into a phony
caricature of its original integrity. In the course of this process,
politicians pay lip service to the noble values that first engendered
its success. But this is pure hype, as noble words are bent to
baser purposes, and profits are gleaned from artifice, not honest
effort.
I argue that America is descending
into this sad phase. Our once-proud manufacturing base has been
NAFTA-ed into a "service economy;" quality technical
jobs are being out-sourced to India and Ireland; industrial icons
like GE and GM are now finance houses; the dollar has become
our principal export; market institutions of every stripe are
being investigated and fined; and moral rectitude has been displaced
by military certitude.
It wouldn't be so bad were
it not for the fact that America's economy, and thus the world's,
is built upon the premise that a fiat currency can provide a
stable international trading platform. It cannot; not so long
as that currency is unconstrained by the discipline of a strict
gold standard. So, ever since gold's last tether to the dollar
was severed by Nixon in 1971, global financial instability has
increased (as Ed' Bugos and others have chronicled). The litany
of national currency failures just in the past ten years bear
witness to this fact, whether in Mexico, Indonesia, Thailand,
Russia, Argentina, or Brazil. Wherever we look, bailouts abound.
Yet the appearance of
dollar-based prosperity is overwhelming. This has been achieved,
in part, through the suppression of gold's market-level price.
The sophistry of Keynes, the highjinks of the ESF, Robert Rubin's
clever strategy to countervail Gibson's Paradox, central bank
dishoarding, bullion bank lease programs, IMF directives, the
revelations of GATA, and now the Blanchard lawsuit against Barrick,
all argue in support of this claim. If true, then the price of
gold has indeed been suppressed, allowing the dollar to dominate.
I view gold like I view gravity.
It exists, and by its existence it exerts a force that is constant
and implacable. It is, in effect, a natural force, and the sustained
suppression of any natural force is a challenging (i.e. losing)
proposition.
Just as gravity grounds us
to the earth giving us controlled traction at the expense of
unlimited movement, gold grounds an economy by providing an honest
measure of value at the cost of unrestrained, cancerous growth.
So the suppression of gold
is like the suspension of gravity. At first we float free and
weightless, and our initial response is euphoria. But this wears
thin as we realize it's hard to do anything in weightlessness.
Without traction (or Velcro) we cannot exert leverage. We begin
to flail about. I contend that the dollar is flailing right now,
imparting a sense of euphoria as we take turns becoming millionaires
during our fifteen minutes of fame. But if we are all
to be millionaires, is any one of us actually richer? How long
can we defy the natural force of gold? At what cost can we continue
to pump out dollars? If gold is like gravity, won't we wear out
before it does?
By thinking in different terms
I conclude that gold cannot be in a bull market or a bear market
if it is in a suppressed market. For suppression is artificial.
Until gold is allowed to find its unsuppressed price, there can
be no meaningful measure of its "bullishness" or "bearishness."
It's like asking "How
thick is your foam mattress." Well that's easy to measure
with a ruler, except that a 5-ton elephant named Barrick has
been sleeping on the mattress for the past 10 years. So first
we have to get the elephant to wake up and get out of bed, which
Blanchard and Company appears to be doing as evidenced by Barrick's
recent 24-hour about-face on its official hedging policy. Then
we have to wait while the mattress recovers from the crushing
weight of its former occupant. I argue that gold is like the
mattress, and is only now beginning to rebound from the weight
imposed upon it. This may take some time. After all, it isn't
only Barrick that's snoozing on it. There are a host of manipulators
in bed with each other. So only after gold has fully recovered
from its suppression, can we take measure of its "natural"
value.
I need to pause here to
praise Don Doyle, CEO of Blanchard and Company. In a riveting
interview recently published by Jay Taylor, Mr. Doyle spells
out the Blanchard suit against Barrick and JP Morgan Chase. Like
GATA before him, I credit Mr. Doyle with the courage and conviction
to stand up against what he claims was chronic collusion between
Barrick and Morgan culminating in a virtually riskless, perpetual,
non-callable multi-million ounce short position which skewed
gold valuation for years. Is it a coincidence that once Barrick
began to reduce its 24-million ounce hedge in January of 2002,
the price of gold has been steadily rising? The interview is
mandatory reading for anyone who questions whether gold can be
manipulated or cares to see its suppression end. Taylor does
a fine job of drawing out the story. I conclude from that interview,
as well as the progress of the lawsuit and the recent announcements
by Barrick, that the elephant is fully awake and is putting on
its slippers.
Some of you will say
I am splitting hairs. Others will point out that markets have
been suppressed and manipulated down through history. Fair enough.
But by thinking in different terms I am trying to arrive at some
useful conclusions. And here they are:
1) Until the price of gold
has "sprung back" to what its price would have been
in the absence of suppression, then any rise we are witnessing
right now is not about a bull market, it's simply a return to
natural balance. So don't expect traditional market indices to
register predictably until gold nears its natural equilibrium
level.
2) Viewed this way, Richard Russell is premature in calling it
a bull market. It can be argued that the bull market will begin
as soon as gold has stabilized at its natural price. That is
splitting hairs, because I agree with Mr. Russell that gold is
headed higher for years to come. But it explains gold's rise
in face of a rising stock market. Gold is decompressing, and
this process is independent of the stock market. As for the argument
that gold is rising because the dollar is falling, by my reckoning,
it is the other way around. Gold's natural rebound would be sending
the dollar south even in the absence of the massive liquidity
being force-Fed (thank you Sir Alan) into the economy.
3) As for Bob Prechter, he is both technically and fundamentally
upside down on gold. All his charts, Elliott waves and overbought/oversold
indicators are meaningless in a suppressed market environment.
Socionomics is brilliant and can be useful, and Prechter's overarching
views hold merit. But applied to this specific issue, I conclude
they are of little use, except perhaps as a contra-indicator.
On the question of gold, Mr. Prechter might profit from 'thinking
in different terms,' himself.
So now let's apply this thinking
to investing.
If gold is currently rebounding
to its natural price point, what should that price point be?
I am neither an economist nor a market technician. So I turn
to the opinions of others, in this case the early estimates of
James Turk ($500), Frank Veneroso ($600) and the recent remarks
of Don Doyle ($750). Taking the average of the three I get $616.
Close enough. That's the point at which gold can be expected
to achieve equilibrium with today's dollar. $616 is also what
you would pay for a quality suit and pair of shoes, the ultimate
measure of an ounce of gold.
But people have been so brain-diddled
by years of Keynesian double-speak and outright lies, I figure
it will take extra time, and extra volatility, to get there.
And of course, there is always the possibility of some new Greenspan
antic, or fresh ESF intervention scheme, or presidential decree
getting sprung on the goldbug crowd. So I expect gold's recovery
process to be "lumpy" but inexorable.
What should one do? The answer is, Buy! The margin between
the current price and the natural price is roughly $200 per ounce.
Consider that a safety cushion, and buy as early and as much
as you can.
What should one buy? Physical gold and gold shares.
How should one buy them? Use Jim Sinclair's common sense advice
and buy along the lower trend line, during corrections. For security,
buy physical gold and shares of the major and mid-tier miners.
For leveraged profits (with added risk) buy the juniors.
I personally buy bullion
for security and juniors for leverage. But it has become
increasingly difficult to find quality leveraged juniors with
legs. So to help, I divide juniors into two categories:
1. Juniors with advanced-stage
properties and large floats (30 million shares or more)
2. Juniors with early-stage properties and small share floats
(5 million shares or less).
Because I am a mere mortal
and not a professional advisor, when I write under the Precious
Mettle byline I only make reference to stocks I personally
own as proof that I put my money where my mouth is.
So looking through my portfolio,
a good example of a Type 1 junior stock is Golden Phoenix
Minerals (GPXM). I have written about it extensively on 321
so I won't repeat myself here except to note that CEO Mike Fitzsimonds
recently achieved some important milestones in gold production,
joint venturing and company promotion, and has set loose his
top geologist, Steve Craig, to aggressively explore their premiere
property, Mineral Ridge. So GPXM is both an explorer and a producer,
which is the best of both worlds. You can read my past reports:
"A Tale of Two Mines; Get Real
to get Rich" and "A
Tale of Two Mines: Revisited" or
visit the company's website.
As for Type 2 juniors, my current
choice is Kimberly Gold Mines (KMGM). Kimberly is a quiet
company that has diligently assembled a sturdy portfolio of high-percentage
exploration targets in Idaho and Washington. I won't spend time
describing the properties, as that information is readily available
on their website.
Instead, I want to focus on its share structure, because that
is, in part, what puts Kimberly ahead of the crowd, and provides
a good portion of its upside potential.
Kimberly is led by Kevin Shiell,
a long time miner and proven leader who knows both the business
of mining and the mining districts Kimberly's properties are
located in. He is the bulldozer of the company, pushing it forward
on a daily basis. But it is the CFO, Ray De Motte, to whom I
turn my attention, because it is Ray's philosophy about company
structure and shareholder relations that bears exploring.
People are starting to recognize
the name De Motte. Ray came to the precious metals arena late
in life after stints in finance, accounting and international
business with Bechtel and McKesson Corporations. He brought with
him the financial discipline of those mature corporations, and
it has served him well.
The first thing that you note
when talking to Ray is his focus on the shareholder. This isn't
just a lip-service thing with Ray, it is ingrained in his way
of thinking. He constantly speaks from the shareholder's viewpoint,
and always makes time to return a shareholder's phone call or
answer a shareholder's email. Ray introduced himself to me after
I wrote a short piece on one of his companies, Sterling
Mining (SRLM) of which he is CEO, by taking the time to write
a lengthy note thanking me for my efforts. That is what I call
a hands-on CEO. He has a favorite expression he uses frequently,
"I always have time for my shareholders."
This obsession with his shareholders
is not a PR gimmick. It translates into a pragmatic and valuable
approach to the structuring of Kimberly's stock. Founding shares
have been kept to a minimum and the float is tightly limited.
The result is that Kimberly, like its bigger brother, Sterling
comes to the market like a coiled spring. While many junior gold
companies must start out life with tens-of-millions of shares
(often as a result of finance-related dilution), Kimberly hosts
less than 9 million shares outstanding, of which 5.8 million
are in company-related hands. That means that Kimberly enjoys
a float of about 3 million shares, and many of those are in the
strong hands of knowledgeable Silver Valley investors who understand
the game and are in for the long haul. The actual trading stock
is currently estimated to be 850,000 shares! As a result, Kimberly
is basing at $1.20, when its counterparts might be at 12 cents.
I call this the Ray De Motte
School of Share Structure, and you find it in every mining venture
he is involved with. For Ray, who is a big-vision guy, when it
comes to shares less is more. He knows that a tight share
structure imparts the best value to his shareholders, including
himself. And when it comes time to raise equity capital, Ray's
companies are well-positioned to leverage their share value for
top dollars at minimum dilution.
Ray's financial perspective
is reflected in Kimberly's mid-term objectives. De Motte and
Shiell have set an average target of $275/oz as their cost structure,
including everything: acquisition, overhead, debt service, production,
promotion, and expansion. Their strategic objective for Kimberly
is to prove-up 2 million ounces of resource with minimal share
dilution, and they are well on their way toward that goal. By
2005, Kimberly hopes to have expanded to several million ounces,
be armed with a sizable war chest, and still boast a float of
perhaps 4 million shares against total outstanding shares of
less than fifteen million. He and Kevin are also committed to
moving off the pink sheets in 2004 and putting their investor
relations program into high gear. And they intend to accomplish
all this while holding down expenses. In this regard, the close
relationship between Sterling Mining and Kimberly is beneficial
through the sharing of expertise.
De Motte speaks.
Here are a few "Rayisms" which reflect both his philosophy
and his enthusiasm:
"We create
quality gold products with tight share structures..."
"My job is to build super leverage for our shareholders..."
"I want Kimberly to be the Swiss Franc of the pennies, not
the Mexican peso"
"We have a mania for keeping costs down"
"The existing assets must be worth more than the share value"
All of this is music to my
ears as a shareholder. By basing at $1.20, Kimberly is positioned
for explosive growth during the next phase of gold's rise. Kimberly
is currently an exploration company, but it is staffed
by operator-types and its goal is production. Its tight
share structure makes it a triple-threat to succeed in the
coming years.
Conclusion
With the ending of suppression
and resultant rise of gold toward its honest market price, a
plethora of shiny-new gold explorers are sprouting like weeds
on the investment landscape. For those wishing to gain maximum
leverage to the rise of gold, it is more important than ever
to use judgement in selecting which juniors will live and which
will die.
My solution is to use these
two companies as templates when evaluating any new addition to
my junior portfolio:
Golden Phoenix for its multi-million ounce exploration
potential and rising production;
Kimberly Gold Mines for its cohesive share structure and
strong fundamentals.
Happy harvesting.
Robert Martin
e-mail: subman@gte.net
December 28, 2003
Disclaimer:
The
author's objective in writing this article is to make potential
investors aware of the possible rewards of investing in these
securities. Investors are recommended to obtain the advice of
a qualified investment advisor before entering into any transactions.
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321gold Inc
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