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Sprott Asset Gold headed to $2000 in two years

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Sprott Asset Management's Charles Oliver not only makes somebold predictions in this exclusive interview with The Gold Report, hebacks them up. "I expect gold to be at $2,000 roughly two years fromtoday. . .if I'm wrong I'll shave the hair off my head," Oliver says. Asan unwavering believer in the yellow metal, Oliver is well positionedas co-manager of several Sprott investment funds, some of which holdbullion. One of those—Sprott's Gold and Precious Minerals Fund—climbed114% in 2009, and claimed the 2010 Lipper Fund Award for Best Fund OverOne Year in the precious metals category. Oliver shares some of thesecrets of his success in this one-on-one interview.

TheGold Report: What's your view on the European bailout?

Charles Oliver: The big problem that's going on is that there'stoo much leverage, too much debt, and people spending beyond theirmeans. We had the financial crisis in 2008; the banks were bailed out bythe governments, and now we see that the governments are in troublebecause they've been spending too much and not living within theirmeans. I really don't like the idea of bailing out everybody who breaksthe rules. In the case of Greece, as part of the European Union, it wassupposed to have a deficit that was less than 3% of its GDP, as part ofthe rules for getting in. Its deficit is now north of 13%, and it lookslike it's going to get bailed out. One of the big problems with bailoutsis that other countries see that and say, "You know what? We can beirresponsible, we can keep on spending, and, if we get into trouble,somebody else is going to come and bail us out." I really have someconcern about the moral hazards that these bailouts have toward futurespending and the way the countries go about their business.

TGR:How would you solve the problem?

CO: You ultimatelyhave to cut back on your spending; you have to increase taxes. There isgoing to be pain and suffering. The Germans have been quite aggressivein telling the Greeks they don't want to bail them out. In Germany,people retire at the age of 65, and, in Greece, my understanding ispeople retire at 53. The German people really get incensed when theythink that they're going to bail out somebody so they can retire at theage of 53 while they're still working at 65.

TGR: Do youthink the euro will survive?

CO: I think the eurosurvives; I was very skeptical when it first came into being becauseit's very tough to have a whole different collection of countries livingunder one set of rules. Having said that, I think they've been verysuccessful over the last decade. Some principles were put in place forthe euro, like running a deficit that is less than 3% of GDP. Whenpeople drafted that rule, there was a reason, and the reason was that ifyou have a deficit below 3% of GDP, you are going to be able to payback your debts. Things like that make the euro a very good currency tohave. Also, when you look at Europe, there's a great opportunity totrade and do business. By having the euro, you really facilitate easiertransactions.

TGR: The bailout provides a stopgapsolution for the European Union. In the United States you have "greenshoots" economic data, and there's still economic growth coming fromChina and India. There are lots of positive signs that the globaleconomy is heading in the right direction. Nonetheless, we're seeingquite a bit of volatility in the markets. Why is this happening?

CO: There are positive signs, but if you dig behind the data,they're not nearly as positive as one might think. Again, if we look atthis European bailout, I think that the issues still exist. If you lookat Spain, it has a deficit of around 11% of GDP—Portugal, the U.K., allthese countries are running big deficits. I might add, too, that theUnited States, it is going to have a deficit of around $1.6 trillion on aGDP of $14 trillion, which means that the U.S. is also running a verylarge budget deficit. If you look at a lot of the green shoots data outof the U.S., some of the growth numbers have been funded by fiscalstimulus programs—government spending—and that is basically becausethey're running very large deficits.

If the U.S. was to livewithin its means, let's say with deficits of less than 3% of GDP, then Iwould say if you looked at what the GDP numbers are without thegovernment spending, they wouldn't look all that good.

Lookingat other countries around the world, such as China, I am a big long-termbeliever that China is going to have substantially higher growth thanthe U.S. and other advanced countries. Having said that, it looks likethey're sort of pulling back right now; their stock market is downaround 20%, so sort of entering a bear market. There are many risks whenyou look behind some of the finer details.

TGR: TheSprott Gold and Precious Metals Fund received the 2010 LipperFund Award for Best Fund Over One Year in the precious metalscategory; it was up 114% in 2009. Congratulations! With that in mind,what are your short- and longer-term projections for gold?

CO:My longer-term projection, which I have had for the last two years, isthat I expect gold to be at $2,000 roughly two years from today. On manyoccasions, on TV and such, I have stated that if I'm wrong I'll shavethe hair off my head; so, I firmly believe that. All the fundamentalspoint to a much higher gold price. The only question is, when?

In the short term, I am very optimistic. I'm hearing about new fiscalstimulus programs out of the U.S. I think there's a call for amini-stimulus program, which again means high deficits continuing intothe future, more printing of money, quantitative easing, and other suchthings. Everything looks really good for the gold price in the shortterm. The only thing I have to do is remember to contain my enthusiasmbecause sometimes these things don't happen the way you expect.

TGR: You said that gold would hit $2,000 about two years fromnow. Would you consider that gold mania? Would that be the bump the goldbugs have been looking for?

CO: No, it's not. I'm goingto try to avoid picking the top of the market and figuring where a peakwill be when it does hit a mania. Really, the $2,000 target price isbased on an inflation-adjusted number for the gold price. The increasein the money supply, relationships of hard assets versus financialassets; some of the targets for those things are actually well above$2,000. It's more likely, in my opinion, to be something substantiallyhigher, and I don't want to guess what that will be because it's a bitof a game. One thing I would expect is that it will probably surprise alot of us just how high it can go.

TGR: In a recentcommentary, you wrote: "Over the short term we're positive that thecurrent holdings will perform well should gold and the market continueto move sideways." That sounds like you're hedging your position on goldprices.

CO: In the short term, I think you always haveto be cautious because things may surprise you and the markets may notact rational. It's usually only over the long term that the truedirection gets shown. A lot of the things we talked about earlier makeme very concerned for the broad stock market. If we go back to 2008where there was a very severe correction in the stock markets, we sawthat the gold price and gold stocks were also impacted in the short termbecause when the panic buttons were hit everybody was selling anythingthey could. In a crisis gold usually goes up in value.

TGR:In Sprott's All Cap Fund, gold bullion ranks second to cash andshort-term investments. Do you see a day when bullion is the fund's topholding?

CO: In many respects, it is the top holding. Inthe All Cap Fund we can short up to 20% of the stocks in the portfolio,so when we sell the stocks, effectively our cash levels go up. Butthat's money that is required as money on those investments. In my mind,gold is already the largest position in the All Cap Fund. Having saidthat, that could change too.

TGR: If the gold price doesexplode, does bullion become a better investment than equities, goldequities in particular?

CO: One of the things that I'vebeen fairly consistent in saying to clients is that it's good to have acombination of both gold bullion and gold stocks. I look at gold bullionas being defensive in nature; it's really preservation of capital,preservation of wealth. It's the insurance against Armageddon in thesystems; whereas I look at gold stocks as the ability to get capitalappreciation in a bull market, like the one we're in. Having said that,you also have to recognize when you're at a peaking point for gold,which isn't always easy to recognize. There may come a point—and I thinkwe're far from it—when people are not willing to bid up the price ofgold stocks because they do not believe that the long-term price of goldis where the current gold price is; they don't believe the increase inearnings power will be long-term in nature.

TGR: Howclose are we to gold's "peaking point"?

CO: If you lookat some of the valuations. For example gold to copper looks like gold isfairly valued. If you look at it relative to stocks, it's far from thepeaks that we've seen in the past. In a mania, generally you'll see anumber of these ties broken, and probably some irrational exuberancelike what happened in the tech sector a few years ago. But that's quite along way out—maybe it's five years, maybe it's 10. But I don't thinkit's in the next couple.

TGR: Tell us about the topthree holdings in your Gold and Precious Metals Fund: Barrick Gold(NYSE:ABX), Colossus Minerals (CLSMF.PK), and Gold Fields Ltd. (NYSE:GFI).

CO: Two of them arefairly new. I had not owned Barrick for the last decade because I didnot like its hedgebook, as I thought it was quite detrimental to thestock price. If you look at Barrick over the last decade, it was a bigunderperformer relative to most gold stocks. When it covered its hedgelast year, I looked at the valuation of Barrick versus its peers, andcould very easily see that because of its decade of hedging, it wastrading at a multiple that was almost half of some of its peers. Thesediscrepancies won't last forever, and over the next few years I thinkyou will see Barrick actually outperform its peer group quitesubstantially. It's a new addition, but I think it's going to be a verygood one.

The second one you mentioned was Colossus Minerals.When I first came to Sprott, Colossus was one of the first two companiesthat I put into the Sprott Gold and Precious Metals Fund. It has aproject in Brazil that is one of, if not the highest, grade preciousmetals project on the planet. There are spectacular grades; you justwon't see anything like it. Just a little bit of ancient history, backin the 1980s—I think it was 1985, 1986—there was a huge gold rush to thearea. If you look at some of the old clips of 60 Minutes, youwill see some 60,000 artisanal workers digging for gold with theirshovels and carrying bags of dirt out of these pits. It was quite asight.

TGR: You're talking about the Serra Peladaproject?

CO: That is correct. When 60,000 people descendupon a property, it becomes very difficult to operate it as acommercial business. For the last 20 years, after the artisanal workersleft, nothing really happened with it. A couple of years ago themanagement team at Colossus was able to negotiate a deal with theartisanal workers to go in there and look at commercially mining theremaining gold. Colossus is getting permits; it got some additional landaround the area. I think it looks like a spectacular story. I thinkit's very cheap. There aren't any proper earnings and capital models outbecause Colossus is still putting together a resource, but I believethat if you sort of take the information that's out there, and applysome general rules of thumb, you will find that this is a very cheap andprofitable operation. I believe it won't be long before we see analystsputting those numbers out there.

TGR: Even with theownership stake from COOMIGASP (a local co-operative representing theinterests of artisanal miners)?

CO: Yes, COOMIGASP stillhas a small stake still in it. But having said that, I think it's goodto have a local partner in place. A local partner is good in terms ofbuilding and operating a mine.

TGR: And Gold Fields?

CO: If you go back to 2000 to 2002, we were actually buyinga significant amount of Gold Fields at my previous company, and we madequite a bit of money. Then the black empowerment rules came in and, to alarge extent, I exited South Africa. It was only last year that I addedsome Gold Fields back to the Sprott Gold and Precious Metals Fund. Itwas the valuation of Gold Fields on most metrics that makes it one ofthe cheapest majors out there. I think it is being unfairly punished forsome of the issues that have existed in South Africa; we have taken abig position in the last few months.

TGR: In your lastinterview with your fund's co-manager, Jamie Horvat, talked about thestrong balance sheets of Aurizon Mines Ltd. (AZK) and IAMGOLD Corp. (NYSE:IAG). Please give us an update on thosecompanies.

CO: Aurizon Mines still has a very strongbalance sheet, and it has actually about $114 million in cash, andanother $112 million in working capital. Aurizon continues to build apretty strong war chest and at some point we might see them take out acompany with all that cash or maybe they will start to pay a dividend.We continue to be a big shareholder. It hasn't really done much in thelast six months, but it's sound, it's safe, and it's in Canada. We likecompanies that operate in Canada. It's all good.

IAMGOLD isanother one of our big shareholdings at Sprott. A year and a half agoyou could have bought it for $6; now, it's in the high teens. It's been agreat performer for us; it has a strong balance sheet. IAMGOLD hasdeployed some of that money because it has been building its newestmine, Essakane, in Burkina Faso, West Africa, which will be commencingproduction this June. Having said that, IAMGOLD still has roughly $200million in cash and cash equivalents in bullion so they're very healthy,and we're looking forward to production from their newest mine.

TGR: What are some countries, or areas, that you're interestedin at the moment?

CO: As I mentioned, we do like Canada.We like Canada because of the safety of jurisdiction and it's a safeplace to operate. Having said that, I think you're starting to see thatyou're paying a bit of a premium for owning companies in Canada. One ofthe other areas that we like is Brazil. Brazil's a great place tooperate; you have companies like Yamana Gold Inc. (AUY) and Eldorado Gold Corp. (NYSE:EGO), which have been quite successfuldown there. One of the things—I think we've been talking about this forthe past several months —a lot of the juniors in Brazil trade at verylow valuations on ounces in the ground. I am talking about the companieswith significant ounces that might one day be a mine but are not now.

If you look at the valuations of a lot of these companies, you'refinding that companies may be trading at $25 to $50 an ounce, and thenif you go over to a place like West Africa, you find that a lot ofsimilar companies are trading at $50 to $100 an ounce or sometimes evenmore. Why am I saying West Africa? If you go back in geological time,you find that Brazil and West Africa were basically side by side, so alot of the geology is quite similar. I think this sort of valuationdiscrepancy in Brazil does not make an awful lot of sense because it is avery good jurisdiction to operate, just like many countries in WestAfrica.

We highlighted this in our December write-up, and weadded a number of Brazilian names, which we think look awfully cheap.Just to mention a few: Magellan Minerals Ltd. [TSX.V:MNM], BrazauroResources Corp. (BZOFF.PK),Verena Minerals Corp. [TSX.V:VML], and Amarillo Gold Corp. (AGCBF.PK).

TGR: Didn'tEldorado make an offer for Brazauro Resources?

CO: Well,we mentioned Brazauro in a writeup not too long ago, and lo and behold,about two weeks ago Eldorado came out with an offer that valuesBrazauro at $1.25 a share. Just about a month ago, we were buying someof their shares for
.50. We were already one of its largestshareholders, but we were adding to the position because we thought itwas a very cheap company. At some point, these cheap ounces will getrecognized. I wonder, in light of the Brazauro move, if this process isalready starting? I think it is, and we're quite well positioned with anumber of our Brazilian names.

TGR: You said that youliked Canada. What are some companies in Canada you like?

CO:We've been big supporters of Osisko Mining Corp. (OSKFF.PK) for quite some time andcontinue to love that story. They just made a bid for another company weown called Brett Resources Inc. (BBRRF.PK); we're very happy thatthey're taking them out. Osisko has a joint venture with a companycalled Clifton Star Resources Inc. (CFMSF.PK), which we have asmall position in, and we're continuing to follow that. There arecompanies like PC Gold Inc. (PCGLF.PK), which is looking at the oldPickle Crow mine, and hopefully coming out with a resource shortly.Premier Gold Mines Ltd. (PIRGF.PK), Ewan Downie's company, hasbeen doing a wonderful job of building assets and building ounces onthose assets. Detour Gold Corp. (DRGDF.PK)—they just came out with theirfeasibility study a couple of days ago. It looks like it might be one ofCanada's newest gold mines in the not too distant future.

TGR:The market has been anticipating that feasibility study for some time.What did it determine?

CO: There was a modification oftheir previous feasibility from last year, and there's a couple ofnuances. Detour is going to look at milling about 30% more tons annuallythan in the past study. They're also looking at a coarser grain size,which basically means it's going to be less energy intensive in terms ofthe milling process. Detour expects to continue to get good recoveries;they're looking at annual production being around 650,000 ounces withcosts being around $400–$450 an ounce. It's a big asset. One of thethings the market is wondering is whether or not something like Detour,or Osisko for that matter, will get taken out because they representvery attractive companies with good growth in their production.

TGR: Are there any thoughts you would like to leave us with?

CO: Just keep the faith. Governments around the worldcontinue to spend; they continue to print; they continue to quantitativeease. Until the governments take the necessary medicine, the story forgold is going to be very bright.

Bringing more than 21 yearsof experience in the investment industry, Charles Oliver joined Sprott AssetManagement (SAM) in January 2008 as an Investment Strategist withfocus on the Sprott Gold and Precious Minerals Fund. Prior to joiningSAM, Charles was at AGF Management Limited, where he led the team thatwas awarded the Canadian Investment Awards Best Precious Metals Fund in2004, 2006, 2007, and was a finalist for the best Canadian Small Capfund in 2007. At the 2007 Canadian Lipper Fund awards, the AGF PreciousMetals Fund was awarded the best 5-year return in the Precious Metalscategory, and the AGF Canadian Resources Fund was awarded the best10-year return in the Natural Resources category.