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-- Posted Sunday, 18 April 2010 | | Source: GoldSeek.com
In this exclusive interview with The Gold Report, Wellington West Analyst Paolo Lostritto explains why he thinks Burkina Faso is a part of the world gold investors should keep their eyes on. He compares Burkina Faso to the Yukon in terms of the potential for large finds. Closer to home, Paolo says South Carolina is an area where gold production could begin in the next couple of years.
The Gold Report: Paolo, with the U.S. Fed saying that it's not ready to raise interest rates, and the Bank of Japan holding its interest rates steady at 0.1%, gold has reached the $1,150 level and some analysts are saying we're headed higher. What's your feeling on gold prices?
Paolo Lostritto: There's a fair value calculation that we use. We take total reserves globally and divide by what we think is total on surface. It's a guesstimate, not an exact science. The fair value we're at right now is about $1,200. That being said, this is with a backdrop of quantitative easing; governments keeping accommodative monetary policy in place in order to try and kick-start a stagnant economy. So it suggests to us, even though we're at the fair value number right now, that the fair value has a bias towards going higher going forward. Short term, the risks in terms of the actual gold price going lower are tied to this whole issue with Greece and whether or not that can be settled. In fact, if they cannot settle the debt issues over in Europe, that's in fact deflationary and this could be negative for gold in the short term. However, longer term we're very bullish.
TGR: We are seeing, because of those debt issues in Greece, some investors are moving out of the euro and other currencies, including the U.S. dollar, and going into gold. Are people going to continue to replace their investments in the euro and other currencies with investments in gold?
PL: That has been happening recently. You're seeing the euro gold price hit all-time highs in the last couple of days. What in fact is happening is you're seeing gold running in U.S. dollars while the U.S. dollar is strengthening. So that decoupling is a sign that you're seeing a flight out of the euro into both gold and the U.S. dollar. Also the Swiss franc has been very strong over the course of the last couple of days. There's definitely a flight out of the euro zone. The thing that people should be cognizant of is the reason why Greece is in the predicament it's in. It's because of the amount of debt that it has and its inability to service that debt. It's probably worth noting that maybe some of these safe havens (i.e., the U.S. dollar) may be facing the same issues going forward. That is part of the reason why gold is of particular interest during this cycle.
TGR: In addition to that impacting the demand for gold, we're seeing increased consumer demand for gold in India and China. Do you see that continuing to impact demand?
PL: The physical demand in India has actually been quite stagnant over the last year and a bit. That's a function of the jewelry market in India that is very price sensitive. Traditionally the Indians have been a large consumer of gold from a jewelry perspective and very price sensitive as a result. The reason why they've been price sensitive over the course of the last year or so has been best described by Pierre Lassonde. He was quoted as saying that the investment community right now is effectively setting the price at a level where the jewelry demand is not as aggressive. The reason for it is the jewelry market is a price taker, whereas the investment community is a price setter. That's part of the reason why you've seen India step back. However, on the other side of the coin, China seems to be growing in terms of investment demand. World gold counts recently suggested that the demand out of China is set to double over the course of the next decade, which has positive implications in terms of the supply/demand dynamic.
TGR: What's driving that increased demand in China?
PL: Well, it's real wealth creation. Overall in Asia, there is a view that precious metals are a great form of protecting your savings. So it's a cultural thing. In addition to that, it's a form of diversification of wealth. As people in China, and in Asia in general, improve their way of life, there's a natural migration of some of that wealth going to savings in different currencies but also in gold.
TGR: What about the effect of inflation? We keep hearing that word tossed around. What's your take on whether or not we're going to see inflation and how is that going to affect demand in price for gold?
PL: Inflation, as most people remember it in North America, was created during the 1970s when it was a labor inflation issue. Right now inflation in the U.S., Canada and Europe is not an issue but it can quickly become one. There's been a lot of money supply that's been created, but the velocity of money, or the multiplier effect, has been very low. The reason for that is just a function of all this money being created, just sitting on tier one balance sheets. It's not being levered up at all through the system. Where the inflation seems to be happening right now is in Asia and the commodities emerging nations are consuming. To some degree, inflation appears to be exported to western countries. However, if the multiplier or velocity starts to pick up, watch out.
TGR: With the attention that gold is getting again, do you see that affecting the other precious metals or even the base metals?
PL: It's always been said that silver is the poor man's gold. However, there's a larger industrial component to the silver market. So there is a relationship between silver and gold, but you have to be cognizant that the industrial demand component has to be there as well. We're starting to see the early signs that silver is catching up a bit and the gold/silver ratio is starting to return to levels that would be considered more traditional. As for base metals in an inflationary environment, base metals also act as a hedge against inflation. So there is some correlation between gold price movement and base metal movement. It is worth noting that there are very few primary silver mines out there and that most silver production is a byproduct from a base metal deposit.
TGR: Is it still difficult to get the product out of the Yukon at this point?
PL: Well, we have yet to see full-blown mining operations come onstream in the Yukon. There have been a few concepts out there and some historic production. We have yet to see modern confirmation that profitable production can be achieved, but it's moving in the right direction. The same with Burkina Faso. We've got Essakane—that should be commercial by August of this year.
TGR: Are there any geopolitical issues involved with Burkina Faso?
PL: Anytime you're dealing with West Africa, it has its challenges. However, in Africa, things seem to move a little bit slowly. In terms of taxation, in terms of rule of law, in terms of willingness to accept foreign investment and allow companies to come in and act responsibly and develop those assets within the country, we're seeing some good early signs. TGR: When you're looking at gold companies, are you looking primarily at companies that are involved in exploration or production?
PL: My background is engineering, so I like looking at companies from a production standpoint. However, that being said, our bread and butter here at Wellington is to focus on companies that have enough information that we can envision where they are going and grow with that company as they develop the asset and move toward production.
TGR: What are the criteria that you look at when you're trying to make a decision on investing in a particular company?
PL: First and foremost are the people. Then after that we start looking at the asset. The asset has to have scale and a certain level of quality that would attract capital from the institutional clients that we service.
TGR: How much of an impact does the geographical location of that company have on your decision?
PL: Quite a bit, actually. I've made it a focus to concentrate on companies mostly in North America, though I've taken a bit of a shine to West Africa as of late. The current global political environment is such that North America, especially Canada, is going to benefit from a relative risk performance perspective.
TGR: How would you compare the Yukon to the Burkina Faso area in terms of potential major finds?
PL: They both have the potential of yielding really large assets. Politically, I would give a slight edge to the Yukon because you're dealing with a first world nation that understands rule of law a little bit more maybe than West Africa. However, that being said, things can happen a lot cheaper in West Africa than they can in the Yukon, just from a logistics and infrastructure standpoint. There are challenges in both areas. Power is an issue in both areas, but it looks like the Yukon is trying to address that. In addition to that, the World Bank looks to be putting quite a few major power lines in West Africa that will help develop some of these remote assets.
TGR: In addition to your interest in the Yukon, are there other areas around North America that you find interesting in terms of gold?
PL: Definitely in South Carolina. The first gold recorded in North America was by Thomas Jefferson in West Virginia, I do believe. A lot of the gold mining that happened in the U.S. was originally in South Carolina. In fact, the location of the second U.S. Mint was in Charlotte. The reason why there are so many banking centers in Charlotte, it's the function of gold mines that were in and around that area. However, in the late 1800s there was a gold rush to Arizona and California because you were dealing with less overburden. Everybody forgot about all the gold that was in South Carolina.
TGR: In addition to gold, are you watching other precious metals? PL: We cover one silver company. It is located in Bolivia. So there's obvious political and headline risk associated with the company.
TGR: Paolo, thank you for your time.
Paolo Lostritto currently serves as Mining Analyst for Wellington West Mining. He has formerly worked with Scotia Capital and MGI Securities. He holds a B.A.Sc. in Geological and Mineral Engineering (Toronto), P.Eng.
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-- Posted Sunday, 18 April 2010 | Digg This Article | Source: GoldSeek.com
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