Louis James: 'Gold is Trading Like a Commodity'

Precious Metals

Louis James of Casey Research on the gold market, this year’s best exploration results and why he’s keen on diversification despite being bullish on gold.

At the recent Sprott-Stansberry Vancouver Natural Resource Symposium, the Investing News Network had the chance to speak with Louis James, chief investment strategist at Casey Research. He gave his take on the gold market in general, his favorite gold stocks and why, despite the fact that he’s bullish on gold, he believes diversification is important.
To start off, James explained that while in the past he’s described gold as a “fear barometer,” recently the yellow metal “has decoupled from that — it should be the fear barometer, and ultimately I think it is, but so far this year it has been trading more like any other commodity.” Of course, those other commodities have been “in a slump, moving almost lockstep.”
He isn’t sure exactly what will push gold back to being a fear barometer, but said he suspects it will be “another shock of fear.” Until that happens, he encouraged investors to remember that “at the moment gold is trading like a commodity — so watch the commodities markets.”
As mentioned, James remains bullish on gold despite the fact that it’s been having some difficulties lately. He’s also excited about a number of gold stocks, and said the most exciting exploration results he’s seen this year came from Reservoir Minerals (TSXV:RMC). “It’s been talked about much here — I mean, 84 meters of 10 percent copper and 10 g/t gold. I’ve never seen a drill hole like that,” he said.
Looking at gold stocks more broadly, James highlighted, among other things, the benefits of the prospect generator model. “In the exploration field if you’re not a prospect generator using other people’s money to defray the risk, [then] you’re going to be roadkill. There’s just no way to raise money right now for grassroots projects, the market doesn’t care — you need other people’s money. So the prospect generator model has always made sense, and today we can see why it makes sense,” he commented.
Of course, his good outlook on gold doesn’t mean he’s putting all his eggs in one basket. Indeed, James emphasized that diversification remains important. In particular, he’s interested in the tech space, which he sees as similar to the junior mining sector in some ways. “It’s a … high-risk sector, but the dynamics are familiar to me and I like it,” he explained.

Interview transcript
INN: I’m Charlotte McLeod with the Investing News Network, and here today with me is Louis James, chief investment strategist at Casey Research. Thank you for joining me this morning.
LJ: You’re very welcome.
INN: In the past I’ve heard you describe gold as a “fear barometer” — people buy it when they are concerned about global markets. Today, with China and Greece and other things going on, how concerned should people be?
LJ: I have to say that gold is decoupled from that. It should be a “fear barometer,” and ultimately I think it is, but so far this year it has been trading more like any other commodity: pork bellies, coffee, copper, whatever. [All commodities] have been in a slump, moving almost lockstep, so I can’t say what will change that. The reality is what it is — I think it will change and we probably just need another shock of fear. We’re going to have it whether we want it or not, and then people will remember, “oh yeah, safe haven.” But right now … a significant thing for investors to remember is at the moment gold is trading like a commodity, and so watch the commodities markets.
INN: Switching over to stocks, when we spoke at PDAC back in March you mentioned that some companies were still making money at $1,200-an-ounce gold. We are now $100 less than that. Are you still seeing companies doing alright?
LJ: Absolutely, and it would actually be the same list. In January, I put out for our readers a list. It was come hell, high water or $1,000 gold. So that was really my criteria. I didn’t think it would go to $1,000; we’re still not there, I hope it doesn’t go there, but anything that I was actively going to recommend buying needed to be able to survive at that level. So, yes, those are still out there.
INN: In terms of exploration companies, what are the most exciting results you’ve seen this year?
LJ: We just had a phenomenal drill result from Reservoir Minerals that has been talked about much. I mean, 84 meters of 10 percent copper and 10 grams per tonne gold. I have never seen a drill hole like that — and okay, it is infill drilling, but that’s not a bad thing, it proves the confidence in the deposit. It is just an amazing discovery they have there in Serbia with a major company paying the bills. Knowledgable, capable, able to deal with the local politics and everything like that. So we get a carried interest in development of this truly world-class asset. I like it a lot.
INN: And I think today people are not only looking at good drill results, but also interesting company models. What is your favorite that you have seen?
LJ: It is interesting that you say that. The company that I just mentioned, they put out a phenomenal drill result and the stock went down that day. These things happen, so broadly, buy low, sell high. The quality that is available now, it’s not a business model, it is just a fact, and I think people who have the guts to buy low and sell high later, I think they will be fine.
In terms of business models, in the exploration field, if you are not a prospect generator using other people’s money to defray the risk, you’re going to be roadkill. There is no way to raise money right now on grassroots projects. The market doesn’t care. You need other people’s money, so the prospect generator model has always made sense and today we can see why it makes sense. Otherwise, as I just mentioned in my talk, the businesses that aren’t necessarily producers, but make their margin somewhere in the middle. So like your midstream energy companies that get paid for oil flowing through their pipes regardless of the price of oil, or companies like Dynacor (TSX:DNG) in Peru that get paid to process other people’s gold regardless of the gold price. Those are money-making businesses that make sense in this kind of market.
INN: And you went over this in your talk as well, but overall favorites in the gold space. I am thinking in terms of juniors.
LJ: Well those would be the people with the big, high-grade discoveries. People that we have mentioned before, companies like Pretium Resources (TSX:PVG,NYSE:PVG), the Brucejack discovery in BC. I like Continental Gold (TSX:CNL) and Dalradian Resources (TSX:DNA). Companies like that with big, high-grade discoveries.
INN: Finally, one theme in your talk was diversification — you mentioned you are starting to look at the tech space, and I’m wondering if you have any specific companies there you like or what you like about the space in general.
LJ: No specific companies — we actually have a tech letter under the Casey Research umbrella, and my colleagues have done an extraordinary job. It has been a good money maker for subscribers to that letter even as the resources have gone down. But what I like about it, particularly the startups and the early stages companies, is that it is kind of like mining juniors. If you make a big discovery, your stock can go way up, and if you get approved by the FDA for a new medicine, your stock can go way up. It’s a high-risk sector, but the dynamics are familiar to me, and I like it.
INN: Thank you very much for joining me today. That’s all from me.
LJ: Thank you for inviting me.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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