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-- Posted Monday, 4 October 2010 | | Source: GoldSeek.com
Some people speak softly and suppress their opinions. Newsletter Writer Byron King is not one of those people. "We have to quit screwing around. We have to get back to basics, back to capital investments and making things—important things. Great countries mine metals and minerals," he says in this exclusive interview with The Gold Report.
The Gold Report: Byron, you are the editor of Agora Financial's large-cap newsletter Outstanding Investments and small-cap newsletter Energy and Scarcity Investor, both of which deal with resource sector investments and play the upstream extraction technology that goes into those sectors. But you also write for Whiskey and Gunpowder. Where does that fit into the mix?
Byron King: Whiskey and Gunpowder is a promotional newsletter that Agora Financial publishes. Most of its content has already appeared in Outstanding Investments or Energy and Scarcity Investor. They repurpose it for a larger audience for free.
It's good to mention Whiskey and Gunpowder because the idea is that readers would eventually take a look at Outstanding Investments, which is a lower-cost newsletter as opposed to Energy and Scarcity Investor, which is quite a bit more expensive. But in today's interview, we're going to give people some samples of the really good stuff.
TGR: Let's start with gold. The Hill, an online website covering politics, reports that Republican Congressman Ron Paul plans to introduce legislation that would force a mandatory annual audit of the American gold reserves at Fort Knox and the New York Federal Reserve bank. Paul said there is "a possibility that there might not actually be any gold at Fort Knox." What impact could that sort of audit have on the gold price?
BK: It's long overdue because, aside from taking the word of a few federal managers, nobody really knows what is inside Fort Knox. This is not lunatic conspiracy-theory thinking. This is prudent financial and asset management of an important component of the U.S. national monetary base.
We have this big granite vault in Kentucky, called Fort Knox. It's supposed to have the national gold reserve, which for the most part, was accumulated in the 1930s when President Franklin D. Roosevelt confiscated gold from the American people. That gold paid for the Second World War, the Cold War, Vietnam, and it paid for big government. Now the question is: What's in Fort Knox, and what is the quality of the gold?
TGR: But what impact would it have on the gold price?
BK: It could have two different impacts. If they open the doors to an independent third-party audit and it came back that everything is there and it's of a certain quality, then that would calm the markets. I actually think you could see the price of gold pull back a little bit. But, if a true and honest independent audit found that there's not as much gold as we thought or that—God forbid!—there's no gold, because it was all leased out by the Federal government, that would not be a good day for the U.S. dollar. And it would not be a good day for Federal fiscal managers.
TGR: We're talking about $350 billion in gold.
BK: It had better be there, because that's what they're telling the world. If it's not there, there's a problem. Bad news does not improve with age. I think that the gold reserve at Fort Knox is as important as our nuclear weapon stockpiles.
Audit the reserve. Give an honest assessment to the American people and move on.
TGR: Bangladesh recently bought $400 million in gold from the IMF. Should gold investors be concerned the IMF is liquidating its gold assets, or should they be heartened by the fact that a third world country like Bangladesh is bolstering its gold reserves?
BK: Some of both. I think it's a concern that the IMF, apparently, doesn't understand what gold is. It reveals that economic thinking at the highest levels of world monetary governance still treats gold as another commodity like hog bellies or orange juice futures. Within those high ethereal realms of international monetary management, people still don't understand that gold is money. I think it's good that Bangladesh has the funds to buy gold to put in its reserves. I think a generation from now, Bangladesh will erect a statue to whoever made that decision.
TGR: What's your investment thesis when it comes to gold?
BK: My standard investment thesis is that you should never put everything in one play. What I tell people is that, in a normal everyday portfolio, you should have about 10% of your portfolio in gold and silver—the physical stuff, the Real McCoy. That's before you start buying gold mining stocks or shares in a gold exchange traded fund (ETF). If 10% is not enough for you, then buy more. Buy more until you sleep well.
TGR: What's your personal asset mix?
BK: I don't brag about it because I don't think people should brag about what they own. Let's just say that I eat my own cooking. I own gold, I own silver. . .the Real McCoy. Just last week, I was out west visiting different sites when I stopped in Virginia City, Nevada and bought more silver ingots. When you walk into a store and they have beautiful silver ingots on sale, you should never walk out empty-handed.
TGR: Do you include precious metal equities as part of that mix?
BK: Oh, yes. Over and above the physical metal, I'm a great believer in gold miners—the big guys; then there are the smaller Canadian juniors. TGR: And you're a trained geologist. You know the difference between average drill core and something special.
BK: Yes, I got my geology degree at Harvard. My focus was actually hard rock geology with lots of mineralogy and petrology. I appreciate a good ore body when I see one.
TGR: Gold has climbed 17% this year and outperformed all kinds of things—equities, Treasuries and most industrial metals. What are your thoughts on silver as a commodity and as an investment?
BK: You do need to look at both sides of the coin on silver. Silver is a monetary metal. People have used silver as a monetary mechanism for 4,000 years, maybe more. As gold does well for world fiscal reasons, silver also gets dragged along. That's part one. Part two is—the world is still using a lot of silver. Think about how many new electronic applications there are. Then there are the medical applications. You've got companies like Johnson & Johnson putting small amounts of silver in Band-Aids. It's a small amount of silver, but the company makes a lot of Band-Aids. I don't think we have to worry too much about the industrial side of silver.
TGR: How high do you think it can get by the end of 2011? We're right around $22 right now.
BK: We're around $22 on the quoted markets, but go out and try to buy an ounce of physical silver for $22. You can't. You're going to pay $25–$26 per ounce for the physical pieces of silver.
How high can silver go? It's already at $25 in a practical sense. As more and more people begin to realize the utter hopelessness of the U.S. government's financial situation, I anticipate more people fleeing to silver. It's the poor man's gold. If you can't afford the $1,350 to buy a Gold Buffalo coin, maybe you can buy $500 or $600 worth of silver and put it in a safe deposit box.
TGR: What's do you see ahead for the future of U.S. mining?
BK: For environmental reasons, the last 30 or 40 years in the U.S. have not been kind to mining. Alaska's still a friendly jurisdiction; but, every time you turn around, environmental issues have hurt the mining industry. I think we're at a turning point. If the United States wants to be an important country in the future, we have to quit screwing around. We have to get back to basics. We have to get back to capital investments and making things, making important things. Great countries mine metals and minerals. The U.S. has a well-developed environmental industry, as well. I honestly think that it is possible to mine copper, lead, zinc, gold and silver and do it in a safe and environmentally responsible way.
TGR: Let's change gears for a moment and head into rare earth elements (REEs) because you recently wrote a lot about REEs in Energy and Scarcity Investor. You said: "Over the next year or so, rare earths could be one sector—a tiny sector to be sure that's immune to the economic illnesses we're seeing in much of the rest of the economy." What makes REEs immune to the broader economy's ills?
BK: It's actually the small size of the sector that works in its favor. It is a physically and economically small sector in the global economy. The entire world output of all rare earths could fit on maybe two large iron ore carrying vessels.
Rare earths are exotic elements in the periodic table and the word is seeping out into the broader investment space about how critical these elements are to future technological applications.
Look for examples in the Prius Hybrid. Every Prius battery has 33 pounds of an element called lanthanum, which makes the battery work. Or look at these windmills spinning away generating electricity. The permanent magnet inside a large, modern windmill uses about 550 pounds of an element called neodymium. Think about the thousands and thousands of windmills being erected. That adds up to a lot of neodymium.
TGR: There are really two types of rare earths, though, right?
BK: Yes, there are the heavy rare earth elements (HREEs) and the light rare earth elements (LREEs). You measure the lighter rare earths, like neodymium or lanthanum, in terms of tens of thousands of tons. There's a lot of that stuff, but it's still critical. It's not like the world has a massive surplus of it. Then you've got the heavy rare earths, things like europium or holmium—elements that are critical in electronic applications. You measure that stuff in kilograms, and it is far more valuable. But you use much less of it in the electronics.
On the supply side, China pretty much runs 95% of the global REE space and it has been lowering its REE exports steadily. China's more than happy to make the magnets and sell the magnets; but it's not exporting rare earths so you can make the magnets. The country wants to add as much value to the technological food chain as it possibly can—and do it in China because it creates jobs.
TGR: How did we let China get such a stronghold on the REE market?
BK: Because in the West, we pretty much let the REE industry go away. I mean the mine at Mountain Pass, California, has not mined ore since 2002. . .The West has a lot of catching up to do. If the United States wants to be a serious country in the 21st century, we have to do rare earths because I think rare earths are a barometer of a country's willingness to devote resources to the frontiers of technology.
TGR: This has been great Byron. Thanks so much for your time today.
BK: My pleasure.
*Look for Byron King's comments on the energy sector on The Energy Report to be published Oct. 5.*
Byron King writes for Agora Financial's Daily Reckoning and Whiskey and Gunpowder (a self-styled "independent investor's daily guide to gold, commodities, profits and freedom"). Byron edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University and also holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. Earlier in his career, Byron worked as a geologist for Gulf Oil in the exploration and production division. He served for many years in both the active and reserve components of the U.S. Navy. Byron also, at a different time, practiced law, focusing on bankruptcy and other contentious matters involving people and money. Byron has written extensively about peak oil and world energy developments. His expertise includes precious metals and alternative energy sources, such as solar, wind and geothermal. Byron has also advised the U.S. Department of Defense on national energy policy.
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-- Posted Monday, 4 October 2010 | Digg This Article | Source: GoldSeek.com
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