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Negative Rates, Access to Deal Flow and a First Time Ever for Doug Casey

Marin Katusa Marin Katusa, Katusa Research
0 Comments| November 1, 2019

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Doug is a legend in the business.

Like with most legends, comes the peanut gallery that try to bash what he has accomplished to have their dorky voices heard among the roar of a legend. Ask yourself this, these trolls who bash, what have they accomplished?

Doug has travelled to over 100 countries, lost and made more money than most can comprehend. And he’s experienced a life most can only read about or dream about.

Yet, what you will read here—is the actual relationship between Doug Casey and I. And is the first time something like this is being published – ever.

I manage most of Doug Casey’s and his wife Ancha’s resource portfolio…

Ancha is smarter than Doug. She was the one who requested many years ago I manage their funds. Doug didn’t think I would do it, but out of respect for the opportunity he helped create for me early on in my career, I took it on.

A small digression to my main missive today, Doug’s wife Ancha is Paul van Eeden’s older sister. Doug Casey was the one who got Paul his big break in the resource business. Many don’t know that after Paul (who is uber smart and an overall great guy) worked with Rick Rule for many years, he wrote Doug’s newsletter for a while. Then started his own letter.

Paul moved on, sold the letter to his good friend, the white bearded geo. And the white bearded geo got two ten baggers from me—and I’m still waiting for my first from him. I like you my favorite white bearded geo. But seriously, I’m still waiting….

It’s a small community, and most are connected via one degree of separation.

For the first time ever, I’ll pull back the curtain on the relationship between Doug and I and you can be a fly on the wall…

Doug and I are competitors in a way…

He is part of the ‘Empire’ newsletter group. I run a newsletter that the ‘Empire’ wishes they wrote and can’t have.

But ironically, Doug and I are closer than ever. Yes, I’ve made him and his wife big amounts of money by managing his money—but that’s not why. It’s because Doug respects my style of investing, research and outlook and we have a strong understanding of one another.

I’ll share a recent Q&A we had, that for the first time ever published in this format—where Doug Casey, like most of our conversation in real life-is asking the questions, and I will share my thoughts.

Doug Casey: Marin, good to hear your voice.

Marin Katusa: Doug, how we doing?

Doug Casey: Absolutely great. I got some questions for you. I was thinking today that since 2007, all of these governments; the Europeans, the Americans, the Chinese, the Japanese, and all these little countries, have been creating tens of trillions of new currency units. All of that money has flown into the stock market and the bond market, and real estate markets in big countries.

It hasn’t gone into commodities, yet. This is where the action is going to be. You agree?

Marin Katusa: By definition, look what just happened with the German bonds. They got more money at -0.46% than they did at -0.28%

Doug Casey: It’s completely insane! I thought it was metaphysically impossible to have negative interest rates.

Marin Katusa: Remember, you can take the square root of a negative number as long as you introduce imaginary variable, so anything is possible with financial alchemy, and that’s where we’re at. By definition, that is deflationary, when you get negative interest rates like that.

People don’t understand the negative consequences of deflation. It’s way worse than inflation. And you can’t deflate gold. I don’t care what you try to do. You cannot deflate gold. When you look at what’s going on globally, Canada, with all its vast wealth in resources, with the wise wisdom of our socialist government, got rid of all their gold. Our federal government has no gold.

So, that tells you that it’s probably a right time to start paying attention for those who have no exposure to gold. If you look historically, the sovereign wealth funds, the pension funds, they are at their lowest level of exposure to commodities in the last 75 years, and that is true for as far back as the data has been tracked.

You want to be where no one else is, because once it starts picking up – and we’re in the early, early innings.

It’s going to be volatile, so don’t overcommit. This is an ironman journey. You’re seeing what’s going on globally. You’re seeing the trade wars. You’re seeing what’s going on with sanctions. Negative interest rates globally.

You’ve got the baby boomers retiring. People are going to start figuring it out. Let’s take the oil patch, for example. I was one of the earliest guys, in fracking. Remember, I used to debate all the gurus in 2006 and 2007. I said “By 2020, America will be a net exporter of oil.” People laughed at me, including some major oil executives who were at our conferences at the time.

Doug Casey: And if you don’t know these things, you’re asking for trouble, investing in these markets.

Marin Katusa: We’ve both learned the hard way—with our own money. The education through actually doing has cost me a lot of money, throughout the years. Luckily, we’ve had incredible returns also because of the lessons we’ve learned.

And a passion of mine is teaching and I will enjoy sharing these lessons with people. “Be careful for this, because of these reasons…”

Doug Casey: A great example is your unique take on uranium, which has made both of us many millions.

Marin Katusa: I am probably the most hated guy in the uranium sector, yet probably top three largest financiers in the sector. Why?

Remember Doug, I wrote a whole chapter about uranium in my book, and have been talking about the current “Cut 2 Kill” strategy the Kazakhs are doing right now. And they are the smartest players in the room when it comes to Uranium, not the cowboys in Saskatchewan.

Ironically, Kazatomprom, the world’s largest producer of uranium quotes me in their investor presentation.

Yet, so many people said “Marin’s crazy! What’s he talking about? Uranium’s so low, it can’t go lower.” I said “Section 232 is probably going to be delayed. It’s already priced into the market. It’s not going to do much, and I think it’s overpromoted.”

More importantly, if I were the Kazakhs and the Russians, I think “Cut 2 Kill” is the best strategy for their long-term goals.

Imagine the power and knowledge of being the OPEC and Russia in a commodity, but you’re one company that controls over 40% of the worlds primary production of a commodity.

For the Kazakhs to take some near term pain for long term gain is no problem. Yet, the public market companies can’t fight that strategy. So they bitch and whine while the former Soviet states consolidate power across the globe in the commodity.

So, you can either figure this out and make a fortune over the next 5 years understanding the real framework of the market—or stick with a wrong narrative that makes you feel good.

Doug Casey: You mentioned the Russians, and that’s interesting. Because just as the Canadians sold all of their gold pretty much at the bottom, the British sold all of their gold pretty much at the bottom, too. Now, who is buying gold today? What governments are buying gold?

Marin Katusa: China, Russia, you and me.

Doug Casey: What I think is going to happen, and is going to light an additional fire under this bull market, is that since the Chinese and the Russians, when they trade – the Iranians, everybody, the Indians – everybody trades in U.S. dollars, but nobody wants to trade in U.S. dollars, because it’s the currency of their antagonist, and all of that money has to clear through New York.

What’s going to happen? And it’s going to drive gold to very high levels. I know that you’re not counting on higher gold prices, in order to make money on these stocks, but it’s going to happen. Because as the Chinese and the Russians buy gold, they’re going to have a gold-backed ruble, a gold-backed yuan. In order for that to happen, you’re going to need much higher gold prices than we have today.

Marin Katusa: I think the market hasn’t quite figured the implications of Trumps sanctions. Sanctions are way more powerful than bullets. Let’s get that straight right away. Take Trumps strategy on Iran. It’s so smart—but yet will have ripple effects in the next few years that nobody is talking about. For example, its not just sanctions against Iran. By definition, that means any company that does business with Iran—selling computers etc. can’t work or do business with or in the USA.

Well, going back to uranium—that’s a way bigger stimulus for the uranium market than section 232 would ever be. Why? Because the US imports over 95% of the uranium it consumes. And both Russia and Soviets sell a lot of uranium to the Iranians. So, either a choice has to be made; dump Iran, or dump America. Can’t have both. And if China acts as an intermediary—that means if you work with China—China gets slapped also in Trumps Iran sanctions. Will Putin dump Iran? No! So, this actually works in the benefit of both Russians and Kazakhs, because you will see a giant pop in the price of uranium if that happens.

We haven’t talked about this – I believe there are a lot of things working for the U.S. dollar in the near term. I know a lot of the gold bugs hate my view on the US dollar and this is going to be a contrarian view. But I’m going to be honest on what I think.

Let’s not forget I have a whole chapter in my New York Times Bestseller book, about the Petrodollar. Remember, America was exporting U.S. dollars to the middle east.

Doug Casey: It’s our major export… dollars.

Marin Katusa: Exactly. Well now, things are going different. We’re exporting oil. So, there’s this reversal of the petrodollar. Let’s call it the unwind of the petrodollar. So, the global market isn’t getting flooded like it was, relatively speaking, in the U.S. dollars anymore. Think of it as a major decline in availability of U.S. dollars or a shortage of U.S. dollars.

Secondly, all of the big debt from the IMF and going around the world, whether infrastructure, dams, nuclear plants, all these road plans, bridges, the wall, whatever you want – the big, big infrastructure projects globally, the big pipelines – the debt is based in U.S. dollars. So actually, in the near term, there’s going to be this kind of vacuum or a shortage of the U.S. dollar.

I think this is going to be the first time where I think in the near term, less than 12, 18, 24 months, that the U.S. dollar and gold are going to go up simultaneously. Because it used to always be inverted. Gold goes up, dollar goes down. That’s been the last 40-50 years. I think this is a unique market, because of what is going on globally with these negative interest rates.

What is the E.U. going to do? They’re screwed! You have that great line, “At least the U.S. dollar, you know who owes you. The E.U. is, who owes you?” So, it’s going to continue. And like you said, the E.U. – and I’ve done a lot of business in Europe – it’s going to become a museum for the Asians.

Doug Casey: That’s true. Talking about the U.S. dollar, U.S. interest rates are extremely low. Ten-year bonds are on the order of 2%. But that’s about 2% higher than what you can get in Europe, where it’s negative interest rates. It’s unbelievable that ten-year Greek bonds are also yielding 2%.

Marin Katusa: Now, do you want a Greek bond or a U.S. bond? Let’s be straight here, right? I like Greek food, my sister in law is Greek and she and her family are wonderful. But, Greek bond is garbage.

Doug Casey: Exactly correct. There are so many distortions and so much misallocation of capital around the world, that we’re heading for a real smashup. It’s why you want to be in gold and silver, and that’s why you want your money to be in someplace that’s not inflated, that’s not in a bubble.

Marin Katusa: And if you look at the risk that these European banks, whether it’s the Spanish banks, the German banks, they’re going to have to be bailed out by the government. That’s just the reality. Look at them. Look at their financials.

Doug Casey: They’re going to be creating more euros.

Marin Katusa: And that money is going to flee to safe havens, and in the near term, I do believe the U.S. dollar is going to be a safe haven. If you look at all of the big crashes, even in 2008, gold actually did go down initially.

Doug Casey: For a while.

Marin Katusa: Yup—all about liquidity.

Doug Casey: Because there was a market for it. You could sell it.

Marin Katusa: That’s right. It was liquid. The U.S. dollar has power. Then, gold started ripping. So, what I’m telling people now is make sure you’re cashed up in U.S dollars. Figure out the best players, who they are. What are the best projects? What are managements’ cost base?

In today’s market, I don’t need to take any expiration risk. The geos hate when I say that they’re a bunch of pretend scientists with a box of crayons, coloring on a map. Because that’s great in a bull market. But you can buy – for example, when we did Northern Dynasty – that project had over $800 million U.S. invested in it. It had a $25 share price and a $2 billion market cap.

We bought one of the biggest blocks in the company at a $45 million market cap, a 98% discount to the share price from 4 years earlier. That’s the situation we are in. I can go on a contrarian bent, that the management have blown themselves up because of the market, because of the financing costs, because of permitting delays. Mining is a tough, tough business, if you don’t know what you’re doing.

But if you know what you’re doing, that echo phase I talk about in my second book, you can truly make a fortune. And unless you have cash – dry powder, as I call it – ready to deploy—it’s a lost opportunity. A lot of people say “Marin, you were really lucky that you went to cash in late 2011.” Well, I stayed cash for a while there, Doug. And one of our other partners, thought that I should go heavy into gold in 2014. I said “No. It’s going to go lower.”

At the end of 2015, you and I bought out a bunch of our shareholders in the fund, because we believed that the psychology was the right time. You want to buy when there’s blood in the streets, and you want to sell when there’s euphoria in the streets. We are in the “echo” phase of the gold market. Other than gold bugs and a small minority of investors on the global scale—few care about gold and mining.

Think of it this way, Doug. If you take every single major gold producer, every major royalty company, mid-tiers, small companies, exploration companies – you take the whole world of gold companies that are involved in the production, exploration, development. You add them all up. Let’s call it Gold Global Market Cap. It’s still smaller than Exxon, which is now not even a major company, when you compare it to some of these tech giants.

Doug Casey: Exactly.

Marin Katusa: So, the gold market is so small on a global perspective, especially when you compare it to the bond market. Then, you look at these other industries, kind of like silver. It is a fraction of the gold market. So, there are so few major whales playing in this area. When that tidal wave of capital starts coming in, that’s why you see this explosion, so you structure the best deals. Because what are these big money – they’re not stupid. They’re just going to come in, hire the best analysts and engineers, and go “Okay, what are the best companies?”

Well, I’m more than happy to sell them our shares in a couple of years, at majorly elevated prices. It’s a simple business plan.

Doug Casey: These are the most volatile stocks in the world. You have to buy them when they’re cheap.

Marin Katusa: And lock in that Katusa Warrant.

Doug Casey: Yes. In real terms, they are at about the cheapest level in history, very close to it.

I’ve been in the markets, mostly in Vancouver, for roughly 40 years, and I’ve seen everybody that’s passed through this town. This is the epicenter of the resource business, mining in particular. I’ve seen the highbrows and the hipsters. I’ve seen the starlets and the phony tipsters. Geologists, mining engineers, stock analysts, newsletter writers, promoters, hustlers.

I’ve pretty well covered the territory, and I’ve learned a lot in that time.

It’s been a bear market in commodities, since that time. If you want to make money in the markets, you’ve got to buy when things are cheap, when things are quiet. Right now, nobody cares about any commodities, and that includes gold and silver – the precious metals. And especially, people don’t care about these little mining stocks.

In the years I’ve been in this market, I’ve seen about six or seven major bull runs, where these mining stocks, as a group, have gone about ten to one. Then, they melt down 95%. Some of these stocks, and I’ve personally owned them, have gone not just ten to one, but 50 to one, 100 to one, and it’s true, 1,000 to one. I think of Diamond Fields, in particular. I think of BRE-X, which was another one that did that.

I think we’re on the cusp of what may be the biggest bull market that we’ve had in resources, for 20 years.

Okay, so Marin, I trust you implicitly, because I’ve known you for so long. I know how you think and how you research. What are you doing now?

Marin Katusa: My framework has been very conservative. I don’t use $2,000 gold or $20 silver, or even $60 oil. You’ve seen many of the examples, when we put projects into production. What you call Casey’s Nine Ps, I have something called Katusa’s Keys.

Like you say, the technical aspect, the geological risks, those are real, and you have to understand those. But then, there’s the street risks. What are the NGOs around? What are the environmental risks? What’s the permitting risk? What’s the infrastructure risk? What’s the capital finance cost risks? More importantly, when you produce this material, where are you sending it to?

These are a lot of the questions that these geos – my wife’s a geologist; I met her in the field – is you have to really be vertically integrated to understand, even before you start a project. Where’s the end product going to go? And what type of deductions are you going to get from the smelter? These are all part of the framework.

I think personally, where our success in the fund that I’m the largest shareholder, you’re the second largest shareholder, – and we’ve had a really bad market. We have the top fund in the sector, in North America, and we’ve paid huge dividends – is by keeping this framework where we’re not chasing the deals—we use my theory of “the Way of the Alligator.”

When you structure these deals, I think first, we have to start with – I’ve raised the most money in the sector in the last decade, hands down and easily the most of anyone under 50. I’ve raised more money than Haywood and Sprott combined, the two biggest firms, together over the last 5 years for our sector. But I do these with what’s known as the Katusa warrant, the full five-year listed tradeable warrant.

And we can start with the benefits of private placements, because that’s, to me and you, if your taking this incredible risk investing in one of the riskiest sectors ever (which is resource exploration and development)—why not get paid twice as much when it works out via the Katusa Warrant.

Doug Casey: It’s very investor-friendly, actually, unlike the things that most brokerage firms do. The deals that you put together are for the benefit of your subscribers.

Marin Katusa: We’re the largest investors ourselves in the deals. I disclose our cost base and my subscribers get three business days before I do.

Doug Casey: That’s right, but you don’t charge a commission, either.

Marin Katusa: No. I don’t take any fees from any of the financings my subscribers partake in. I’m the largest investor at the same price, at the same time. You’re usually the second largest. The key with this, and I’m trying to warn everybody now, people have seen the success that I’ve had with these private placements, and it’s the number one thing that every publishing house is trying to do today. Ironically, I started the model back in 2006 when I used to work for your firm.

Well, first of all, they can’t even invest in these things. So, the “guru” doesn’t have skin in the game, why would you be listening to them in the first place? That’s the first rule. The second rule; these are marketing guys that are being forced to come up with a private placement, so you have some slick marketing guys come to a bunch of newsletter guys being forced to recommend a PP who are promoting the crap out of this, that are unblemished with success.

Doug Casey: And know nothing about the mining market.

Marin Katusa: So, be super careful about that. Be careful about who you follow. These publications are charging a lot of money for these private placements, and they don’t know what the hell they’re doing. You get the private placement angle free, as part of my service.

People ask why I do a newsletter. I compare it to publishing as a University Professor—it’s all about staying relevant and about deal flow—I have some of the best deal flow in the business and that is a huge advantage for me.

Doug Casey: Well, look. This is the time to be in this market. You can’t be in the mining market all the time, because the longest trend in history, actually, is commodities dropping. But occasionally, once or twice every decade, they hit a bottom, and then they explode upwards. My opinion is that now is one of those times. We’re at or very close to the bottom.

And I think we’re going into the biggest bull market for these things, in 20 years. In fact, these things are the only things that you should have your money in today. I mean, people are invested in all these tech stocks, which are bubbly. Buying trillion dollar market cap corporations like Amazon and Google and Facebook.

All I’ve got to say in that regard is, that was great ten years ago. But this is now. High tech, big wreck. Remember that phrase. It’s an old stock market phrase that everybody’s forgotten today.

Marin, where to next?

Marin Katusa: I’m off to Africa tomorrow for a day.

Doug Casey: You’re going to Africa for a day?

Marin Katusa: Don’t even get me started Dougie—I wanted to do a few other sites while I’m there, but I had to make it home for personal reasons. Then back to Africa 3 weeks later.

Doug Casey: You take care of yourself—You shouldn’t be doing these hours anymore—but I know you will because that’s how you are wired.

Marin Katusa: Say hi to Ancha for me Dougie. Gotta go.


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