With more than 20 years of experience in the investment industry, Sheldon Inwentash, chairman and CEO of both Pinetree Capital and Mega Uranium sheds some light on the future of gold and navigating the “murky and tricky” junior space.
The Gold Report: Sheldon, from a macro overview, where do you see the precious metals going? The U.S. government and all central bankers are jumping in at unprecedented levels. The Fed says it’s going to throw in everything it’s got to stimulate. Is it going to be enough and what will that mean for commodities? Or, if it doesn’t work, what does that mean?
Sheldon Inwentash: I look at what’s occurring now as just part of the continuum of how, from a macro basis, I viewed the unwinding of the Internet bubble in 2000 and my refocusing on the commodity sector.
When I originally looked back on ’01, it became obvious to me that gold would have a role, from a currency standpoint, but the big problem with gold historically is that the main holders are the central banks. Individuals as well, but individuals always held it because they felt if there was a cataclysmic event in the world it was the way they could survive. It was just a defensive mechanism. They didn't have a money-making objective.
But with central banks there was a core asset value that reflected upon how much money they could earn on the money they held, and the opportunity loss of holding gold was whatever the compounded minimum yearly yield was of Treasury Bills or preferred shares or bonds; maybe 4% or 6%. Gold had zero return, and it had cost of safekeeping.
So the historical argument was always that gold had no income value, so why own it? It really had no value in the financial system anymore. It was an archaic relic, which is how I heard people describe it.
My view was the opposite. I thought, gold’s been around and it’s a brand. Now what has happened is that the price of gold has been grinding up. It’s three times the price it was in ’02, but there’s less gold around, ostensibly because the rise in all the other commodities caused the margins of these big mining companies to shrink. People used to say you could mine gold for $150 or $200 or $250. Now for many companies it’s $500-$600, all in. It’s a very, very difficult business. So even though we’ve seen a rise in the nominal price of gold, we’re seeing less gold produced.
But what’s happened here is the bubble’s burst, the fat lady’s sung, the reality’s setting in and everything is pointing to a massive risk of deflation. Deflation is much more dangerous than inflation because it’s hard to get out of that hole, especially if you have debt, and it’s a very, very negative scenario.
So the system is responding to real problems and the real problems are very serious with the debt and so forth. To me, all this points to an absolutely explosive rise in the price of gold. The problem is that we’ve gone through a multi-trillion-dollar liquidation in the financial markets and a lot of that liquidation happened in gold and arguably a higher percentage than deserved happened in gold because it was liquid.
Look at the gold argument—gold has no liability against it, it’s a brand, it’s a currency, and it will appreciate in value if you believe in the whole supply-demand model and so therefore, will provide a real rate of return as well. So you’re getting downside protection and potential extraordinary upside participation.
TGR: If we’re looking at deflation, would gold necessarily have this explosive growth or will it just keep at its current level and everything else will deflate around it?
SI: When you have deflation, you have asset decline. If you’re holding bonds and you have deflation, there’s less and less business, more and more defaults, and the asset protection side is going to be hugely important. If you have everybody thinking, "I want to be protected, so I’m going to hold some gold," the demand will kick in and the price of gold will have to rise for that purpose alone. I also believe because of the desperate nature of what’s going on, for every action, you have a reaction. Without question, over time, nobody wants another depression, but there will be some inflation or hyperinflation that comes out of this and gold will also anticipate that. So gold, in my view, wins in both a positive and a negative scenario. I believe gold does well in both environments.
TGR: Are you suggesting that people should be trying to grab onto physical gold or do you think there are some paper alternatives that are valuable and won’t be wiled away with derivatives?
SI: I believe that everybody should own some physical gold. I think you do it for peace of mind.
I don’t get involved in ETFs, I don’t get involved in these hedges, futures, and all those. Those are good for traders. My particular business in gold is building gold companies and selling them. We were original financiers on a company called Gold Eagle, which was recently sold to Goldcorp (TSX: T.G, Stock Forum). We invested in every stage of the company’s development and growth from initial start-up, to discovery, to buy-out.
So I look at small companies, which I’m beginning to look at more, that have minable ounces in the ground, but they’ve been neglected. They’ve been neglected for a long time, they’re orphans, and there’s sort of a quasi call on gold and the majors who have really found no new mines on their own are going to be acquisitive. I looked at companies like Kinross that have done a phenomenal job of turning themselves around and acquiring assets and building their production profile. And there are only a few of them. Today we like Colossus Minerals Inc. (TSX: T.CSI, Stock Forum) —they already have defined ounces proven and very high grades. When looking at the junior space you need to do your due diligence because it’s a very murky and tricky field.
TGR: We saw a collapse of all equities in September-October, including senior gold stocks. We’re hearing we could be entering to a rally that could go on till May, which will take all stocks up. But then we've heard from some of our interviewees that they predict a breakdown in the Dow and S&P after the first quarter. Are you seeing that the gold stocks, assuming that we get this downturn, would be resilient to that, unlike last time?
SI: It’s a good point. When you go through a market decline, you’re going to sell the stocks that are easiest to sell and have the most liquidity. When you get into the fear cycle, everybody sells everything.
The big problem was the creation of ETFs. The ETFs are stocks, but are essentially calls on gold. So every time you have all this money come in to the ETFs, it has to go out and buy more gold. But then when the market falls, they sell the ETF and they have to sell the gold and that puts more pressure on the physical market.
What I think we’re seeing to a certain degree is a decoupling. I watch it very, very closely. I’m noticing that for whatever reason, the Dow fell and gold fell. Dow goes up, gold goes up. And I thought that’s a bit strange. It wasn’t the way it used to work, but has been happening in recent times. I think the decoupling is occurring now where the Dow has some rally days, and gold declines. This is the old relationship that seems to be returning. So, we certainly think gold can rally big time in a declining Dow situation.
What is also important is how gold trades in other currencies. I think there’s more of a waking up to gold having a role in the currency side. And if you have that and you look at the whole market of gold, which they used to say was less than the market cap of Microsoft, you’re really dealing with a situation where it won’t take a lot to just overwhelm the availability of it and it stands against that grain. The more it stands against the grain, the higher and higher it’s going to go.
TGR: Will silver resume its place as a monetary unit as opposed to industrial as gold increases?
SI: I think so. I think silver has a much higher beta. I think it’s been overdone. Not being an expert in the whole silver logistics, I think it’s overdone, and I think it will track well. Will it change the historical gold-silver ratio and come to a different number? Probably, but silver does have some very unique connectivity characteristics that in the evolving world of electronics are pretty compelling, so there is a real demand there.
Tune in tomorrow for part II of this article.
Sheldon Inwentash is Chairman and CEO of both Pinetree Capital (TSX: T.PNP), a Canadian investment company with a portfolio of investments primarily in the resource and energy sectors, and Mega Uranium (TSX: T.MGA), one of the fastest growing junior mining companies. Mr. Inwentash has more than 20 years of experience in the investment industry. A Chartered Accountant, he was an Ontario finalist for the 2007 Ernst & Young Entrepreneur of the Year Award. He founded Pinetree in 1992. T he fair value of Pinetree's investments surpassed $100 million for the first time in 2005, and in 2006, Pinetree ranked 5th out of 300 small-cap companies by Canadian Business Magazine for total 1-year return.