Veteran gold guru J. Taylor says gold market still in the early innings.
J. Taylor has had an interest in gold for most of his professional life. In fact, his fascination with gold mining prompted him to study geology at Hunter College in New York City, supplementing his MBA in Finance & Investments. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. In 1997, he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital. J. Taylor is currently editor of J Taylor's Gold & Technology Stocks newsletter. StockHouse Publisher and Executive Editor Darin Diehl spoke with J. Taylor this week to get his views on the ongoing opportunity gold holds for investors.
StockHouse: Gold investors have experienced quite a wild ride recently. How would you characterize the current investment environment for gold?
J. Taylor: I believe we are still in the early stages of a long secular bull market in gold. Clearly, we're having more volatility now than we've had recently. We've had some pretty exciting movement in both directions. But I think gold is still very cheap. And I think in the U.S., if you were to find 1% of the population the least bit interested in believing in gold as an investment, I would be surprised if it were that high. Gold just isn't something that Americans think of as a worthy investment. Canadians are more attuned to the mining industry in general and the opportunities it presents whether it's gold, base metals or whatever. There's more sort of a natural inclination for Canadians to think more in terms of investment in gold and gold share investments, especially the mining share investments, than it is on the part of the Americans.
SH: But you believe that could change in the U.S. at some point?
JT: I expect it will change. But I believe the reason that most Americans don't think about gold as an investment is because they really don't understand what gold is. You'll hear most commentators talk about gold in the same vein as they do copper, or lead, or zinc. They'll think of it as a commodity. It's not a commodity, it's money. Gold is unique then when you have monetary problems. What we are just starting to see now, globally, are growing monetary problems with the U.S. dollar global monetary system. We are just starting to see some strain in that system that probably is going to threaten the existing monetary system at some point. And as a lack of confidence in the existing monetary system grows, I think the Americans will be the last ones to jump into gold. They'll get in near the top for the most part. Other people around the world understand more and are less confident in the United States dollar than Americans are. But that's why I am extremely bullish on gold.
SH: How would you characterize the difference in investing directly in gold bullion as opposed to investing in junior gold mining firms?
JT: Well, bullion is the safest way to invest and to protect your wealth. I think James Turk points out in an article in Barron's that it's not so much that gold is rising, or that commodities are rising, it's that the currency is declining in value because there's so much more of it. So how does the investor protect their wealth against the ravages of inflation, which is what we really have. Everything is costing more now. So how does one protect themselves? Well the first place to start is having a core of bullion, by buying gold coins, gold funds or ETFs. But the real upside should come from the shares. I personally like to structure the portfolio with some seniors. I like Goldcorp (TSX: T.G, BullBoards), I like Newmont (TSX: T.NMC, BullBoards). I have Agnico-Eagle (TSX: T.AEM, BullBoards). Those are three of my favourites that I have as sort of the core holding in the portfolio. Then I like to go out from there to the juniors. These small-cap companies, and most of them are Canadian companies, when they find a million ounces, or two or three or four million ounces of gold in the ground, they've really added a tremendous amount of intrinsic value in percentage terms relative to the market cap. So generally speaking, we should see these shares rise much more dramatically than the bullion. But of course there's more risk involved. There are all kinds of risk when you buy shares in a mining company. You have business risk, you have political risk, and you have environmental risk. We have a rule of thumb for our subscribers, and I strongly encourage this, that they not allocate more than 5% of their portfolio to any one company at the time of purchase. We do that to force some discipline on people so they don't get so enamored by a story that they back up a truck and put everything they've got into one or two stocks.
SH: Can you expand a bit on the market risks involved with investing in gold and gold stocks at this time?
JT: I believe that we could have a deflationary collapse that could really wreck havoc, especially on base metal companies and even on energy. But I worry about most that we could have an economic decline of great magnitude. I think we're due for a major deflationary collapse. The only question is when. What I see now is that inflation is live and well. So increasing the interest rates, certainly with the enormous amounts of debt especially in the U.S., I think could really throw the whole thing into reverse. The big question then is what happens to gold and gold shares in that case. Just recently we saw a real contraction in the equity prices for a couple of days. We saw a huge decline in copper and some of the other base metals. We saw a three or four day deflationary scare and that seems to have been abated once again. But we saw the shares come down quite a bit, we saw gold come down in nominal terms. So I think that if we had a deflationary event we could have a compression of prices across the board. If that happened, in my view, it would be a great buying opportunity because I expect that gold is going to perform better than almost anything else, if we have this real extreme deflationary collapse. And history would bear that out.
SH: What sort of allocation would you suggest investors employ for gold and gold stocks within their portfolio?
JT: More conservative people suggest five to 10% in your portfolio. I am more convinced that we're in a raging bull market in gold so I'm more aggressive than that. In our model portfolio, we have 18% in producing gold and silver companies, we have 30% in junior mining companies, and we have 4% in silver and gold bullion. So about 52% of our portfolio is in gold, gold and silver, bullion and shares.
SH: Do you have a last word of advice for gold investors.
JT: I would say that we are in a long-term bull market and not to try to trade in and out of this market, but to sit with it. The problem with trying to trade in and out is when you're in a secular bull market, a lot of the times the train pulls out of the station without you. As the gold price has run up to $600 and $700, we've had people constantly calling for a correction. And they jumped out and missed the move. And I think that, especially in the early years of a bull market, people don't believe that it's for real. Remember we've had 20 years of a bear market in gold. So it's hard for people to believe that things are different. So what I would say to people is that we are in a long-term bull market for gold. We are probably in the third inning of a nine inning game. And we've seen $700 gold pull back to $650. The second leg up is probably going to take us to well over $1,000. Then we're going to have a violent correction sometime, but then we're going to have a third leg up that's going to take us to some level that is probably close to parity with the Dow Jones Industrial. In other words, the Dow could come down to 6,000 and gold could go to $6,000 for example.
SH: Thanks for your time Jay.
JT: My pleasure.
AI
