Jay Taylor Interview - October 28, 2009
Jay Taylor Envisions Scary Specter of ’30s-Style Depression
Jay Taylor, who publishes Gold, Energy & Technology Stocks and hosts his “Turning Hard
Times into Good Times” radio program each week, is hoping and praying for deflation to help the
U.S. heal its wounds and find its way back to prosperity. He has reasons to think the dollar might
bounce back, too. Nevertheless, Jay reminds The Gold Report readers about frightening parallels
to the 1930s and doesn’t dismiss the possibility of a hyperinflation that renders the U.S. dollar
about as valuable as toilet paper. Although bulls have been charging around Wall Street the past
few months, he expects fearsome bears to reemerge soon and feast on equities almost like they did
last year. If he’s right, he also foresees a “grand buying opportunity” and the potential for “huge
upside gains” for savvy investors in some gold mining stocks.
The Gold Report: The last time we spoke, in July, you expected a market downturn this fall. Is
that correction yet to come?
JT: I think we’re on the verge of that correction, but I’m not so sure it’s so much a correction as a
resumption of the secular bear market that started with the Lehman Brothers collapse last fall. We
saw the first leg down in the market, a bottoming out in equities, in March. Then a very strong
rally with the Dow going back up past 10,000. And now we’re most likely to see a major decline
in equity prices. We can only hope and pray that the March lows hold because if they don’t, we
could be looking at something very, very frightening on the downside.
TGR: So are you thinking we are not out of our recession?
JT: I don’t believe we’re out of the recession at all. Not if you use numbers that I think are more
valid—and those would be numbers from the likes of the independent economist, John Williams,
who’s been on my radio (http://www.modavox.com/voiceamerica/vepisode.aspx?aid=40708)
show. According to his ShadowStats, inflation is grossly understated and hence our GDP is
overstated, that, in fact, we’ve never come out of recession. If you just look around and see what’s
going on in the U.S. economy—except for Wall Street, which is really more of a gaming industry
than anything else—it’s hard to make the case that we’re back on a growth track.
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Jay Taylor Interview - October 28, 2009
We’ve been in trouble for a long time. I would argue that we’ve been in trouble since 2000 or even
before. Greenspan kept the illusion of prosperity going by digging us into debt and creating the
housing bubble. Before that we had the dot-com bubble, the telecom bubble. Every time there was
a crisis of one kind or another—the Asian crisis, the Mexican crisis, the Russian crisis the Y2K
perceived crisis—huge amounts of money were pumped into the system. That all fueled a stock
market bubble and malinvestment in companies that had no commercial viability.
If the banks were not borrowing money through the Fed, their reserves would be hugely negative.
Their net worth would be negative; they would be broke. They stopped reporting on a marked-tomarket basis, so we’re not seeing all of the junk in these banks’ portfolios now. That doesn’t mean
it’s gone away. So sooner or later, Pinocchio’s nose gets longer and longer and you can’t hide it
anymore. I don’t see how you can make a strong case for growth and a continuation of an equity
market boom.
There’s just no rational reason to be optimistic about the U.S. economy and I think that holds true
to a certain extent with the European economy too. I just came back from Singapore and I can tell
you, there’s a different attitude in Hong Kong and Singapore, where there’s lots of action, lots of
economic growth and activity.
TGR: How can we be in recession and have inflation at the same time?
JT: We certainly experienced that in the 1970s. In fact, John Williams suggests we’re going to
have a hyperinflationary depression. In other words, prices will rise like mad, but unemployment
will be extremely high. How could that be? Because the United States doesn’t produce anything
and we have to import everything. Now if you buy the idea of a continued weak dollar, you could
see prices going up, up and up. Most people say a good part of the oil story, for example—oil’s
rise from $35 or so to $80—is the weak dollar. It’s counter intuitive, because in the past we’ve
always thought prices should fall in an economic downturn. Normally that’s the case. But we have
some major shifts going on in the global economy right now because the dollar is losing its value,
and that’s inflationary.
Another side of me says I’m not sure that that’s going to continue and that the dollar could bounce
back, but that’s another story.
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Jay Taylor Interview - October 28, 2009
TGR: If the dollar continues to lose value and prices rise because we’re importing, wouldn’t the
law of free markets say we’ll start producing things in the U.S. and begin to export?
JT: In time that would happen, but we’re seeing more government intervention all of the time and
in some ways capital controls are already secretly being employed. We could well see more and
more trade controls put into place. But you’re right. If prices go up in terms of our currency,
assuming that the cost doesn’t go up faster, we could start producing things.
By the way, that’s what I think we’ve seen in the last year with the gold mining industry. The
price of the metal has risen more than the costs since the Lehman Brothers collapse. That said, it’s
a lot easier to mine—a lot less regulation, a lot less political interference—in some parts of the
world than in the United States. So it’s harder to provide that supply to our industry in the U.S.
and it’s harder for companies to produce those metals in the U.S. than it might be in other
jurisdictions. There are all kinds of nuances in different economies that don’t allow free markets to
work.
TGR: You mentioned that part of you believes the dollar might bounce back. What’s your
reasoning there?
JT: Just from a contrarian point of view, when up to 94% of everybody in the market thinks it’s
heading one way, usually you’re getting a little heavy in that direction. Robert Prechter talked
about that on my radio show. http://www.modavox.com/voiceamerica/vepisode.aspx?aid=41893
By the way, he is very bullish on the dollar and I think for some of the same reasons that I am. For
one thing, as I said at the outset, I think we’re going to see another equity market decline. People
are getting rid of dollars, trading their dollars for stuff again, and investing more recklessly again.
But I don’t see the justification for the price-earnings ratios we’re seeing in equities. I think we’re
going to see another decline in the equity market and in the commodities market as a result, much
the same as we saw last fall. If you think back what happened then, the dollar got stronger as the
price of commodities weakened, as the equities market weakened. When you borrow dollars and
spend them on a stock or a house or a business overseas or what-have-you, you’re basically taking
a short position on the currency. When you unwind that trade and go back in the other direction,
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Jay Taylor Interview - October 28, 2009
you’re covering your short position. You’re buying dollars off the market to repay your loans.
That’s what happened last fall and it could happen again.
TGR: That’s not a very pretty picture.
JT: No. That’s a very scary reason for the dollar to rise. A better reason would be vibrant growth
in the U.S. economy and producing things efficiently. But I think it’s this unwinding of the dollar
short trade that could really cause the dollar to get stronger.
TGR: Wouldn’t we see a corresponding decrease in the price of gold and oil if the dollar gets
stronger?
JT: I don’t know about a corresponding decrease. If you go back to last fall again, the price of
gold did come down in nominal terms, meaning that the value of the dollar went up versus gold.
However, the value of the dollar went up an awful lot more versus oil and everything else.
If you look at the relationship between gold and oil from the Lehman Brothers collapse until oil hit
its bottom, at one point an ounce of gold would have bought six times more oil than it bought right
before the collapse. The point I’m making is that these things don’t necessarily go down in the
same proportion.
So I believe that this kind of event would be extremely bullish for gold mining companies and for
gold itself in terms of its purchasing power. The question is whether paper gains even more than
gold. Again, harkening back to my discussion with Robert Prechter, he thinks that paper will be a
better investment than gold. But he is also quick to say that gold will buy more than almost
everything else.
TGR: What do you foresee in terms of inflation and its effect on gold mining costs?
JT: If we get this pullback in the equity markets, we’ll also possibly see a decline in the price of
gold in nominal terms. But I think we’re going to see a bigger decline in the cost of the inputs of
producing gold. Energy can be a very, very big cost factor in certain mining projects. Materials
costs went down dramatically last year, as well as energy costs, and labor became much more
plentiful when the base metal mines shut down after the copper and zinc and other base metal
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Jay Taylor Interview - October 28, 2009
prices went down. So gold mining costs have come down. They’ve come up some since the
bottom, but of course the price of gold has come up a lot more too since then.
So if the inflationists are right, if we’re going to see hyperinflation as John Williams thinks and
some of the other people on my radio show http://www.modavox.com/voiceamerica/vepisode.aspx?aid=40708
have suggested, then gold mining is not the greatest place to be, honestly. But throughout history,
the best place to be in a serious deflationary depression is in gold mining. That was true in the
1930s. Bob Hoy, an analyst out of Vancouver who’s also been on my show
http://www.modavox.com/voiceamerica/vepisode.aspx?aid=40526
in the past, has provided great insights into
this. He’s looked into the last six major credit expansion/contraction events, going back 300 years.
The first four of those were U.K. centric. This one is U.S. centric and, of course, the 1930s was,
too, because the United States has had the world’s reserve currency since then.
In each of those environments we’ve seen the real price of gold surge—the real price meaning the
price of gold relative to other commodities, relative to other costs. I’ve done some numbercrunching and if you had only 15% of your portfolio on Homestake Mining in the 1930s, you
could have had the rest of it in the Dow (which at one point lost nearly 90% of its value) and
basically avoided losing money in the stock market. Homestake was one of the premier gold
mining companies from the 19th century until its 2002 merger with Barrick Gold Corporation
(NYSE:ABX). So I’m extremely bullish about gold mining given my still deflationary views.
So the good news is that if the economics improve for gold mining, as I suggest they will in a
deflationary environment, we will start to produce real wealth again. We’ll have real money that
has real, intrinsic value. When we do that, those gold miners will make lots of profits. Assuming
the government doesn’t tax all those profits away, we can rebuild this country on the basis of real
money again. That’s an optimistic tone from someone who believes deflation is a possibility. But
people who think we can keep going along as we have been with fiat money, living beyond our
means and thinking we can get rich by printing money and not working hard, must be smoking
something funny. Wouldn’t it be nice if we could just put on our rose-colored glasses and see the
world that way.
But there are lots of good mining companies out there, good companies that are starting to produce
gold in many cases, others that are developing viable projects. We’ve had a bull market in gold for
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Jay Taylor Interview - October 28, 2009
a number of years now, a long enough period of time to allow a lot of money to be put into the
ground in exploration and proving out deposits. So I think we’re on the verge of seeing a lot of
new companies emerge as producers. They will be household names in this bull market in gold—
which I will continue for quite a few years yet.
TGR: Can you share with us some of the companies that you think are particularly good?
JT: One of my favorites is Apollo Gold Corporation (NYSE/AMEX:AGT; TSX:APG) operating
in Ontario. It has a project and is producing at the rate of around 125,000 ounces of gold a year
now. The costs are below $400. What’s really exciting is that Apollo has staked out a lot more
ground in that same area, which suggests they can increase their resource and reserves by many,
many fold over the years. That’s a stock that’s selling at around 50 cents or thereabouts. I think it
has huge upside potential.
TGR: Any other favorites?
JT: There are quite a few of these emerging companies. Another gold producer I like an awful lot
is Hawthorne Gold Corp. (TSX-V: HGC). Always, you know, you go with the people.
Hawthorne’s management team is headed up by two individuals who were involved with the
development of Eldorado Gold Corporation (NYSE:EGO; TSX-ELD) and Bema Gold
Corporation, two well known and successful gold mining companies. (Kinross Gold Corporation
[NYSE:KGC; TSK:K] acquired Bema in 2007.) I think they’re going to have their third success
story in Hawthorne.
They should be producing gold on a small scale at Table Mountain in British Columbia, where
they have a fully permitted mine and mill. They also are finding some lower grade open pit gold,
with pockets of very high grade, which they probably can combine with very high grade
underground material from Table Mountain along with the resource from the Taurus deposit,
which is next door, to feed the mill. So Hawthorne is another favorite, another penny stock that
could evolve into a big growth story.
TGR: Any others?
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Jay Taylor Interview - October 28, 2009
JT: San Gold Corporation (TSX-V:SGR) is another favorite of mine. Stock’s come off its highs
here. We could see some more weakness in all gold shares in the near term, but that’s going to
pave a fantastic buying opportunity. San Gold is producing in Manitoba from the Rice Lake
property. Right next to it they’ve got the Hinge deposit and assays from parallel zones there are
looking like extremely high grade material. They should be feeding in this higher grade material,
blending it with the lower grade deposit from Rice Lake. Underground in the Rice Lake Mine
they’ve recently come up with some very high grades, too, so that’s the story I think is going to be
very, very much in the market. People are going to start paying more and more attention to San
Gold.
Another one I like enormously is Allied Nevada Gold Corp. (NYSE-A/TSX:ANV). It has a large
scale open pit resource, but huge underground potential. Many, many millions of ounces of gold
and huge exploration potential. There’s a metallurgical issue in terms of how much silver is in that
property, but if they’re able to extract more than 10%or 20% silver recoveries, their costs go way
down and this becomes hugely profitable. But enormously prospective, huge exploration potential.
Another company that should be producing north of 100,000 ounces a year. So those are some
ideas.
TGR: Great list. Any more?
JT: Romarco Minerals Inc. (TSX-V:R ), which is based in South Carolina, has just come out with
a new resource. I think they’re above 4 million ounces among the various categories of resources.
Romarco’s open pit deposit in the Haile Gold Mine is probably at least a couple of years away
from production, but it’s a world-class deposit. The company’s stock has risen very dramatically,
and I think it has a long way to go on the upside.
If we see a general equity market pullback, I think you’re going to have a grand buying
opportunity with these companies. I’m watching them very carefully, watching the fundamentals.
Companies like this—developing viable deposits in the ground—are in a position to provide huge
upside gains for savvy investors.
TGR: Terrific.
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Jay Taylor Interview - October 28, 2009
JT: AuEx Ventures, Inc. (TSX:XAU) in Nevada is another one I like a lot. AuEx is what you call
a prospect or a project generator. It has some really smart geologists, has staked some highly
prospective claims, did some initial work on those claims, and now has other companies spending
their money to drill in and gain a percentage of the deposits and of the joint venture projects.
AuEx is on to at least one, possibly two, very major discoveries in Nevada and also has a host of
other properties, mostly in Nevada, with good longer-term prospects.
In a way, AuEx is sort of the lowest-risk way for individuals to play the gold shares. The risks are
lower because AuEx is not spending huge amounts to explore and develop, so they don’t have to
dilute shareholders’ interests by going out to raise huge amounts of capital. I like the management,
too. It’s an extremely strong management team there, headed by Ron Parratt.
TGR: Are you scoping any silver plays in particular?
JT: I’m not as bullish on silver generally speaking. I just think it’s harder for silver companies to
make money, in part because silver has not kept up with gold. If we go into an inflationary
environment and this deflationary notion is wrong, then you could see silver outperforming gold.
In that case, there is one company on my list that I like quite a bit. It’s Great Panther Resources
(TSX:GPR) and it’s in production in an old historical mine in Mexico—the Guanajuato Mine,
which has huge amounts of silver left to be mined. I visited the property, was in the mine, saw the
community a couple of years back. Bob Archer, who heads up Great Panther, is doing a
remarkable job of cutting costs and lowering the cost of production. If you’re going to buy a silver
stock, that one is worth a serious look.
TGR: Any last thoughts you’d like to share with our readers?
JT: Just that I think we’re approaching some very difficult times in the equity markets now. I
could be wrong, but I just sense that we could have a severe pullback. The bear market for stocks
began last fall and it is not over. Maybe you can make a case using government numbers that
we’re technically out of the recession, but I don’t buy it. In reality, I think we’re heading probably
deeper into a recession, unfortunately. I wish that weren’t the case.
I really look back at the 1930s. The first leg down in 1929, when the equity market was the one
getting all the media attention. After a big wave up, everybody thought it was all over, the worst
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Jay Taylor Interview - October 28, 2009
was past. People got suckered back into the stock market and there was lots of optimism, just as
we’re seeing now in this equity market. Then the big one came. Why did it come? Because there
was no growth in the economy. There was nothing to support the equity prices and there was lots
and lots of debt that could not be repaid. I see a replay of that in many ways.
There is increasing tension among trading partners now, but a lot of it is more subtle through this
beggar-thy-neighbor currency devaluation. Countries cheapen their currency, hoping to be able to
export more and get an advantage over their trading partners. When everybody starts playing that
game, you have a real problem and prices keep falling.
I think today’s parallels with the 1930s are much closer than people recognize and that’s partly by
design. Policymakers don’t want people to think in those terms because if they do, it becomes a
self-fulfilling prophecy. If people think we’re heading into a deflationary depression, why would
they buy anything today? They want people buying things. But consumers can’t buy because
they’re broke. The government can buy because it can print money, but how long can that
continue if the rest of the world doesn’t want your money anymore?
These are questions that are in my mind. But I do think we have some very turbulent times in store
and this debt is really strangling the American economy. I remain tipped toward the deflationary
side, but I want to be nimble and ready to change my thinking. For that reason, I put out my
Inflation/Deflation Watch (IDW) and look at it every day to try to get a sense of it. We shall see.
DISCLOSURE:
I personally and/or my family own the following companies mentioned in this interview:
I personally and/or my family am paid by the following companies mentioned in this interview:
As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay
Taylor’s interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. He
began publishing North American Gold Mining Stocks in 1981. To better understand the potential
of the mining stocks he researched, Jay added a BA in geology to his CV in 1988. He already had
a master’s in finance. A native of Ohio, he migrated to Wall Street in 1973, working first at
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Jay Taylor Interview - October 28, 2009
Barclay’s Bank International. He was with the ING Barings mining and metals group when, in
1997, he decided to pursue his avocation as a new full-time career—including publication of his
weekly Gold, Energy & Technology Stocks newsletter. This year, he debuted a new radio
program, "Turning Hard Times Into Good Times.”
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