Rick Mills: Cash In, Not Out on $1,500 Gold
Interview

The Gold Report: Last week, gold reached above $1,540/ounce (oz.) as fears escalated over Greece defaulting on its sovereign debt, most of which is owed to European banks. One telling figure is that the risk of default is so high that the interest rate on two-year Greek bonds is about 29%. Should we expect a continuing upward trend for gold throughout the rest of the year as Greece's debt story and the fears of contagion play out in Europe?

Rick Mills: Greece is going to be bailed out. The EU cannot let Greece default and there is no precedent for leaving; the legal complications would be horrendous. Greece defaulting would trigger a train of defaults—European lenders reduced their risk tied to Greece by 30% to $136.3B, but they still have almost $2T linked to Portugal, Ireland, Spain and Italy. Gold will hang out at the $1,500/oz. mark for a while and may be a little soft during the summer. But come fall, we're going to see gold continue its uptrend.

There are more than enough impetuses to keep gold prices from falling. Massive structural problems exist in the U.S. as well. The housing sector continues to be a problem and the fiscal deficit is large.

TGR: The Fed plans to stop buying bonds at the end of the month and interest rates are expected to go up, in turn strengthening the dollar. Could "safe haven" purchases of gold ease at that point?

RM: No, I don't believe that will be the case. In fact, I believe that the U.S. is going to have a third round of quantitative easing, or QE3. The U.S. has committed itself to doing anything that it can to prop up its economy and is going to continue monetizing its debt.

TGR: Where do you think gold's psychological floor is right now?

RM: For me, breaking the $1,000/oz. mark was extremely important. When India came in and bought the equivalent of 8% of a year's production at $1,045/oz., that put a solid floor under gold at $1,000/oz. Now as gold consolidates around the $1,500/oz. mark, I think that's going to be the new floor and the support for climbing even higher.

TGR: How do you think silver will react to gold? Will it continue to track gold much as it's done historically? Or will their paths begin to diverge?

RM: Silver is definitely going to track gold.

TGR: Do you think silver could get back to that $50/oz. high that it reached earlier this year?

RM: I see no reason why not. Historically, the gold:silver ratio has been 15:1 but since silver made its nominal high in 1984, the gold:silver ratio has held fairly steady at 45:1. With gold at $1,540/oz. and silver at $36/oz., the gold:silver ratio stands at roughly 43:1.

Silver will have to rise to $102/oz. to get back to the historical average with gold at $1,540/oz. The higher gold prices go, the more consumers will step down to silver. As the much cheaper precious metal, silver will win market share from gold buyers—especially if they think silver is undervalued compared to gold.

There was news that gold and silver bullion buying in India was up 222% over one month. The country spent $22B on bullion in 2010 and in one month in 2011 they spent $9B. There's also something going on in the Chinese market that most people don't realize—we're so worried about inflation in the Chinese market, but they actually want some inflation. China needs to have its currency strengthened against the U.S. dollar so they don't get branded a currency manipulator. What that does for silver buyers in China is that it gives them a little bit of an advantage over the U.S. dollar buyer's base. Last year, China's currency went up about 3.5%. This year it is expected to rise 5%. That's added leverage when it comes to the silver market. The manufacturing use of silver went up 16% in China and the demand is growing as well.

TGR: In an article posted on your website, Toby Connor of Gold Scents said, "Don't let the perma-bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it's going to be much, much worse than it was in '08." What are your thoughts on that statement?

RM: The U.S. and EU are going to do anything that they can to keep their economies afloat. Beyond credit creation and debt monetization, I think that means we'll see more investments in new infrastructure. Upgrading and maintaining power grids, railways, roads, bridges, sewers, water, airports and hospitals is another way of putting money into the consumer's pocket. Greece is not going to be allowed to default. I really don't see the worst case scenario happening here. I don't believe it's all gloom and doom. There are bright spots and I think they're going to grow.

TGR: Is there a situation where Greece could default, but still stay in the euro?

RM: I don't see how. If Greece defaults it would lead to an implosion of the EU. The only way out for many of the EU economies is to weaken the euro and this isn't something the stronger economies want.

TGR: If the only way out of it is to devalue the euro, the U.S. dollar could rise against the euro and that's generally bad for gold.

RM: Yes, if it happens from the coming bailouts. But in the meantime, European economic problems will continue, the U.S. economic recovery will continue to disappoint and doubts about China's short-term growth prospects and the ongoing fighting and tensions in Africa and the Middle East will provide support for gold at $1,500/oz. There is still a lot of demand for gold. Consumption in China was 700 tons last year. The Chinese government has been doing everything it can to encourage gold buying by its citizens, including expanding the number of banks allowed to import bullion.

The World Gold Council believes that annual demand for gold in India will increase to more than 1,200 tons by 2020. Everything I see is bullish for gold. Gold is integral to all Indian wedding ceremonies—purchases relating to Indian weddings typically account for 50% of annual jewelry demand.

With 50% of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, the World Gold Council estimates that wedding-related purchasing will drive approximately 500 tons of gold purchases a year.

The Reserve Bank of India has granted licenses to seven more banks to import bullion; this too has helped push up demand.

TGR: Some pundits are telling investors to sell their shares in junior gold companies and take profits if there are profits to be had, and then buy those same stocks once they bottom out. Do you agree?

RM: Investors in this game need to look at the best times to buy and sell. Historically, the best time to pick up junior resources is during the summer doldrums. A company goes to work all summer, there is very little news flow and no one around to pay attention anyway. It does a large drill program and news from the drilling comes out in the fall. That's traditionally when you want to be a seller. Then the cycle starts all over again in the late winter and early spring as companies put together work programs and a budget.

Right now, investors should be looking at the stories, looking at the management teams and slowly picking up promising stocks.

TGR: Are there juniors with some growth catalysts that you are watching this summer?

RM: Kootenay Gold Inc. (TSX.V:KTN) is a prospect generator and has numerous joint ventures, but I'm most excited about Kootenay's 100%-owned Promontorio silver project in Sonora, Mexico. It has two drills working and a third diamond drill has been recently mobilized to the site. Promontorio already has an indicated mineral resource of 5.22 million tons (Mts.) averaging 52.7 g/t silver, 0.86% lead and 0.96% zinc, containing 8.9 Moz. silver, 99.3 Mlb. lead and 110.8 Mlb. zinc. This is a company that has great management, great projects, a tight share count, money in the bank and is drilling a very decent size program.

TGR: James McDonald heads up Kootenay. He's had quite a bit of success before with Black Bull Resources Inc. (TSX.V:BBS), National Gold and White Knight. This is someone who's been down the path a few times and knows what he's doing.

RM: Exactly. Kootenay has a great management team, is fully cashed up and drilling 25,000m. I think Promontorio is only going to get bigger and better over the summer.

TGR: What are some of the other names on your list?

RM: Terraco Gold Corp. (TSX.V:TEN) is run by Todd Hilditch. He had some fantastic success with Salares Lithium Inc., which was sold to Talison Lithium Ltd. (TSX:TLH). The company has two properties that excite me. The Moonlight Project in Nevada is 100% owned. Gold and silver mineralization are known to be controlled by northerly-trending structures at Moonlight. The Black Ridge Fault Zone's eastern boundary controls the eastern margin of precious metals mineralization at Rochester and Spring Valley. Mapping at Moonlight indicates that this district-scale fault system continues northward through the Moonlight Project properties. The company has been quietly consolidating and increasing its land position over the last three years. Terraco is going to drill it this summer. Moonlight could get exciting very quickly.

TGR: Even more advanced is Terraco's Almaden Project in Idaho. It has just less than 1 Moz. measured, indicated and inferred there. Do you think that Terraco will spin that out and just focus on Moonlight?

RM: Almaden created a lot of unrealized value for Terraco shareholders. I don't believe the company is going to spin it out. No one had ever drilled the Almaden below 400 feet before. Terraco put together a drill program because it believes that underneath the existing resource are high-grade feeder zones and shoots. The first hole, Hole 1, ended in mineralization at 1,400 feet. Another hole went down 1,700 feet. Hole 4 is at 2,000 feet and we're awaiting assay results. This deposit already has 1 Moz. and it could be significantly larger.

TGR: Do they have enough cash to continue working on both projects?

RM: They have enough cash to get the results they need. And the right results could drive the share price higher.

TGR: What other companies are intriguing to you?

RM: I'm pretty high on a Robert (Bob) Archer play called Cangold Ltd. (TSX.V:CLD). Bob and his team are responsible for Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL). He delivers on his promises and is very experienced. Bob found the Ixhuatan advanced-stage project in Mexico and signed a letter of intent with Brigus Gold Corp. (TSX:BRD; NYSE.A:BRD). This project has 89,000m of drilling in 342 holes. It's over 4,000 hectares and host to the Campamento Gold-Silver Deposit. It's got an NI 43-101 compliant resource of more than 1 Moz. gold and 4.4 Moz. silver. There is a lot of blue-sky potential in this project. I believe Cangold is going to garner a lot of attention.

TGR: What do you think about VMS Ventures Inc. (TSX.V:VMS)?

RM: I like the team behind it a lot and I think they have some exceptional properties. VMS made a discovery at Reed Lake. The deposit is 2.55 Mt. at 4.5% copper in the indicated category with potential to grow. VMS joint ventured this with HudBay Minerals Inc. (TSX:HBM; NYSE:HBM). VMS has a carried-to-production interest; HudBay is the operator with 70%. It's a high-grade, near-surface copper deposit and HudBay has a smelter in Flin Flon, Canada. Permitting and prefeasibility are going to continue through 2011 and a construction decision could happen by year-end.

TGR: Is that a takeover target?

RM: I believe that in the future HudBay is going to have to look at taking VMS out. The interesting thing is that VMS has a joint venture with HudBay on Reed Lake and the four properties that surround it. But it also has an option agreement with HudBay on four properties next door. HudBay was drilling over there and made a huge discovery 1.8 km. northeast of the Reed Lake deposit—7.44% copper over 7.18m. HudBay is now drilling back toward the Reed Lake Mine. VMS is carried for $50M of expenditures on this option. So, what we've got here on the JV and optioned properties are very good backstops to what VMS is doing on its 100%-owned properties.

The North Shore Group, which heads up VMS, is experienced and made up of highly technical explorationists who have made several recent discoveries. It has $5M worth of drilling lined up on top of what HudBay is doing. It's a perfect example of lots of work over the summer and huge news flow coming out in the fall.

NioGold Mining Corp. (TSX.V:NOX; OTCPK:NOXGF) is another good example of what to look for. It has a very good share structure and money in the bank. It has a joint venture with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK) where Aurizon has to spend $20M to complete 200,000m of drilling during the next several years. ARZ has three drills working away right now.

NioGold is also working at Siscoe East with Alexandria Minerals Corp. (TSX.V:AZX) in a 50/50 joint venture. It is drilling between two of the highest grade mines ever in the Val d'Or camp, the Sullivan and the Siscoe.

A fifth rig is drilling right beside Osisko Mining Corp.'s (TSX:OSK) Canadian Malartic project They got some early very exciting results on this 100%-owned property and more assays are pending. NOX is a company with exciting properties, great management, money in the bank and large drill programs being conducted over the summer to give shareholders lots of news and increase interest in the company.

TGR: It certainly seems to fit your investment philosophy.

RM: Definitely. I look for a mine that's going to get bigger or a property with the propensity to give up discoveries. I'm looking for the strongest management teams that I can find.

TGR: You believe that gold and silver plays are ultimately going to hold their value over the long term?

RM: Absolutely and if you look at the companies we talked about today, they are the kind of companies that you can do due diligence on and feel confident that you have a management team dedicated to increasing shareholder value through the drill bit, or acquisitions, and put together a properly managed exploration and drill program. Investors want to pick these up during market weakness in the summer doldrums so positions can potentially be sold for a profit in the fall.

TGR: That seems like sound advice. Thanks, Rick.

RM: You are welcome.

Richard is host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Talison Lithium Ltd., Great Panther Silver, Ltd., Brigus Gold Corp., NioGold Mining Corp., Aurizon Mines Ltd. and Terraco Gold Corp.
3) Richard Mills: I personally and/or my family own shares of the following companies mentioned in this interview: None. The following companies mentioned in the interview are sponsors of aheadoftheherd.com: Kootenay Gold Inc., NioGold Mining Corp., Terraco Gold Corp., Cangold Limited and VMS Ventures Inc.