Jay Taylor: The Death of the Dollar
Interview

The Gold Report: You recently wrote that these are not normal times. Perhaps the current macroeconomic picture is the new normal?

Jay Taylor: The new normal is being shaped. We haven't seen the final product yet. The new normal will be a world in which most Americans do not enjoy the standard of living that they have enjoyed in the past. I think this directly results from a situation in which the people who are able to create money out of nothing wrestle wealth away from those who create it. The miners, the manufacturers, the investors, the farmers—people who actually do things that are good for people—are not getting their fair share because the banking class attached to the politicians has control of the system. This is one of the reasons that I think we should go back to a gold standard. The new normal will be a decline in the general standard of living for most Americans. And I don't think we've seen the bottom of that yet.

TGR: Your Inflation/Deflation Watch (IDW) chart is up about 53% since you launched it on Jan. 31, 2005. However, you believe that the chart's current neutral direction suggests that the market is running on speculative money, not growth. Can you explain your rationale for that?

JT: By "neutral," I mean that it is just a momentum gauge. We actually saw a decline in the IDW, or a real deflation, for a few months after the Lehman Brothers crash in 2008. Huge amounts of money, trillions and trillions of dollars of stimulus pumped into the economy, have managed to get it back up to the positive 50%-plus you noted. Now, it seems that we could be topping out. What we've seen is a rise in commodity speculation and games played by Wall Street—not a substantial rise in the real economy globally.

TGR: Recently, companies like Apple, Morgan Stanley and AT&T have all posted really strong earnings. That sounds like growth to me.

JT: Look at the economic statistics. Look at the unemployment numbers. I'm not saying that that top 20% isn't going to do better. They are. Quite frankly, we have a fascist economic system and it's becoming more and more so because the people who are really calling the shots are getting stronger.

TGR: Do you worry about marginalizing yourself by labeling this system a fascist economy?

JT: Go to the definition of fascism: government and corporate entities in bed together. What about the bankers getting bailed out at the expense of the poor? Is that good for poor people? Is that good for middle-class people? You might think it is. That's the game. That's the propaganda that we've been fed. I don't buy it. The top banks, those that are "too big to fail," know full well that they can enter into the next risky business and always get bailed out.

TGR: You had a conversation with Ian McAvity, the author of the Deliberations on World Markets newsletter, who suggested that we are in a secular bear market that dates back to 2000. He believes the Dow Jones Industrial Average will ultimately fall below its March 2009 lows. What do you make of Mr. McAvity's projection?

JT: I think we are in a secular bear market. I'm not absolutely sure that we'll see the nominal lows of 2009. In fact, if you look at what the equity market has done via gold, you'll see that we are in a heck of a bear market right now in terms of the Dow Jones. In terms of purchasing power, there's going to continue to be a decline in the wealth of the Dow.

TGR: What will be the impact of all this on gold and silver? There's certainly been an unusually good run in July.

JT: I focus on the bigger picture. I look at the long-term secular moves. There have been 10 straight years of bull markets in silver and gold. I don't know how much longer it's got to run, but I think that it will keep running as long as the global economic picture remains unstable. The whole global system is in disarray right now. We have a system that's broken. That's why I don't care whether the economy goes into a hyperinflation or deflation—gold has to be the cornerstone of a portfolio to preserve wealth. Investors want to own real money. They want to own what the markets have determined to be money over centuries: gold and silver. Fiat currencies have always failed. The U.S. dollar will eventually fail. This is a perfect storm for gold and silver.

TGR: Your model portfolio recently consisted of about one-third speculative mining equities. Why do you dedicate such a large position to one of the riskiest sectors of the market?

JT: I don't think it is one of the riskiest sectors in this market. During the last 10 years, we've had triple-digit gains very frequently in those kinds of securities. Yes, we've had a soft patch in gold and silver stocks, which have not kept up with bullion markets. But they will. I remain very bullish on this sector because the majors need the juniors to replenish their resources and reserves. The large companies produce many millions of ounces of gold per year. They are not very good at replacing those ounces.

I caution my subscribers not to back up the truck and buy one or two of these stocks, but to spread out their portfolios and limit their allocation to about 5% of any one name. Taken as a basket, these types of companies will enhance returns very significantly, as they have over the last 8 to 10 years.

TGR: Another financial collapse could force some mining companies lacking adequate cash reserves to go out of business. You suggest searching for companies with plenty of cash, low burn rates and good management.

JT: I prefer companies that are project generators or prospect generators. Riverside Resources Inc. (TSX:RRI), Millrock Resources Inc. (TSX.V:MRO) and Yale Resources Ltd. (TSX:YLL) are very careful about how they spend their money. Yale uses its intellectual capital to find good prospects. Then it lets other companies take those risks and put money in the ground to pull out these deposits.

I like the new producers that are producing cash flow. Dynacor Gold Mines Inc. (TSX:DNG) is a new producer doing custom milling for companies in Peru. It is selling at about three times cash flow, but has lots of growth potential. It also has some exploration potential that looks extremely good.

Among the silver mining companies, Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU) in the Yukon is earning very nice profits with huge upside right out of the gate. It has exploration and production potential.

Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL) is also cash flow positive.

TGR: Great Panther is a company that would see immediate benefits from a rise in the silver price. It recently acquired new concessions near its existing mines in Mexico. Do you have any idea how long it might be before it starts drilling those?

JT: I'm not absolutely sure what the company's plans are right now. I do like the management though. They do a great job of executing and lowering costs. The big things there are underground mines and there are some limitations on how much ore can be pulled out. If the company is able to pull up some more ore in that vicinity, it could bode very well for longer term profits.

Another company that is ready to take off is San Gold Corporation (TSX.V:SGR). It's a long-term favorite of mine. It has a new management team that is really starting to execute its business plan of under-promising and outperforming.

It's taken awhile for the company to get the operational side of its business in place, but it is going to drill. The new chief executive, who was a top operating guy at Placer Dome Inc., said that it is the most aggressive drill program he's ever seen on a single project. The company can finance all this from cash flow, so it doesn't have to dilute shareholder interest any further.

Timmins Gold Corp. (TSX.V:TMM) is another new producer with good cash flow and the ability to grow; it has great exploration potential.

These are new gold producers that have the opportunity to grow organically.

TGR: Do you know anything about Merrex Gold Inc. (TSX.V:MXI)?

JT: Merrex is a good exploration company. I have a very high opinion of it. The management is outstanding. IAMGOLD Corp. (TSX:IMG; NYSE:IAG) owns about 14% of Merrex's stock. However, I like the fact that its management owns something like 15% of the stock, too.

Merrex has the Siribaya Gold Project in western Mali. Its latest NI 43-101 resource number is 315,000 oz. (315 Koz.). However, I could see that growing to 500 Koz. with a very extensive drill program; if that is the case, it could have upwards of 5 Moz. Moreover, we're looking at 3 g/t. I'd caution that this is really forward-looking. Nobody knows until the company drills it out. However, the possibility for a very high-grade, open-pit deposit is certainly what attracted IAMGOLD, which is earning 50% interest by spending $10 million to fund this exploration.

The stock has not done well since I put it in my newsletter. We recommended it at nearly $0.60 and it's down to $0.49—and there are more shares outstanding than there were before. I just think this is an excellent exploration program. IAMGOLD is very successful. This stock is certainly worth a couple of percentage points of a portfolio because it could come up really big. If the markets were to perceive that possibility of 500 Koz., it could lift share prices considerably.

TGR: Is Siribaya near any other noteworthy gold deposits?

JT: A couple of other properties nearby are in production: the Sadiola Gold Mines and the Loulo Gold Mine. Geologically, they are considered to be very similar to the Siribaya.

TGR: Another company you've discussed in your newsletter is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF). The guidance there for 2011 is between 85 Koz. and 100 Koz. Do you think that it's going to meet those expectations?

JT: I think it will. Last year was a bit of a disappointment. The share price has come down significantly. I recommended the stock at $1.56, and it's at something like $0.68 now. It's not one that I like to brag about. But fundamentally, the company is in a position to grow over the long term. It is a high-cost producer at around $875/oz.–$975/oz., but with gold selling at $1,600/oz., that still creates a pretty nice margin. The company is going into an underground mine with higher grades; that should help them bring their costs down as well.

Crocodile had its wettest rainy season in many decades last year, and that virtually halted its open-pit production. Mother Nature was the company's biggest enemy last year. It did try to stockpile ahead of time, but no one had any idea that it would be such a wet season.

If the company is able to produce 85 Koz. to 100 Koz. as expected this year, it will generate enough cash flow to possibly allow the company to start producing.

TGR: Are there any other names that you're excited about?

JT: Northern Gold Mining Inc. (TSX.V:NGM) has the potential to come up with a multimillion ounce, open-pittable deposit. The Garrison Project is in the Timmins Gold Camp, located along the Destor-Porcupine fault system. The Garrcon property within the Garrison claim area is a bulk-mineable target that would definitely appear to have open-pit, multimillion-ounce potential. Its Jonpol deposit is a high-grade underground target. The company has come up with a couple of very spectacular drill intercepts. It has enormous upside potential.

TGR: Vishal Gupta at Dundee Securities thinks the resources at Garrcon and Jonpol could go from about 1.1 Moz. to between 3 Moz. and 5 Moz. Do you agree?

JT: That would seem to be in the cards, but you never know until the truth machine tells you. I think that's very well within reason, however, and it could possibly be much bigger than that over the long term.

TGR: Any parting thoughts on a macro level?

JT: We are in a bull market of a lifetime for gold mining companies, caused by the macroeconomic situation, the loss of confidence in fiat money, the deleveraging that needs to take place in the credit markets and the need to go back to honest money rather than the fake stuff that we've been conned into using by the policymakers. Gold has gone from $250/oz. to $1,600/oz. within the last 10 years. This is probably the sixth major credit-deleveraging episode over the past 300 years, with the first four being U.K.-centric and the fifth being the U.S. in the 1930s. In deleveraging cycles, what an ounce of gold will buy rises dramatically. That's good news for gold mining profits.

Before Lehman Brothers' demise, an ounce of gold would have bought 17% of the Rogers International Raw Materials Fund, which is a fund that has all manner of commodities in it. By March 2009, an ounce of gold would have purchased 44% of the Rogers International Raw Materials Fund. Now it's around 40%. The real price of gold is up dramatically and that is not a fluke. That is the overriding theme that makes me extremely bullish—we are in a secular bull market of a lifetime for gold mining companies.

TGR: That sounds great, Jay.

A baby boomer born in Ohio, Jay Taylor was drawn to the world's financial capital in 1973, when he went to New York to work for Barclay's Bank International after earning his master's degree in finance and investments. As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay's interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. This led to his first investments in junior gold shares toward the end of the 1970s. Sometimes called "the buy and hold guy," he began publishing North American Gold Mining Stocks in 1981. He was involved in the first modern-times gold loan made in the U.S. (to Amax Minerals, a 250,000-ounce loan facility led by Citicorp). To better understand the potential of the mining stocks he researched, Jay added a BA in geology to his C.V. in 1988. Pursuing his interest in researching and writing about mining companies as a sideline, Jay maintained his full-time banking career for nearly 10 more years. In August 1997, he left his position in the ING Barings mining and metals group to pursue his avocation as a new full-time career—including publication of his weekly Gold, Energy & Tech Stocks newsletter.

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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: Great Panther Silver Ltd., Merrex Gold Inc., Timmins Gold Corp., Millrock Resources Inc., Crocodile Gold Corp. and Northern Gold Mining Inc.
3) Jay Taylor: I personally and/or my family own shares of the following companies mentioned in this interview: Riverside Resources, Millrock Resources Inc., Dynacor Gold Mines, Alexco Resources, San Gold Corp., Timmins Gold Corp., Crocodile Gold Corp. and Northern Gold Mining Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None.