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The Gold Report: We spoke earlier this year after equities had a wild ride in 2009. You made the comment that you didn't see many undervalued junior resource companies. When we spoke again in April, you said many of these juniors were at an all-time high. What's your feeling about the junior sector now that we're in October?
Mickey Fulp: Good companies have gone even higher in value right now. The entire junior gold sector is overvalued. You need to look for specific undervalued companies within that sector.
TGR: Are there many undervalued companies at this point in time?
MF: Investors have to cherry pick them. There are not a lot of them, so due diligence is imperative. There are some new issues coming out that offer value.
TGR: If the junior market is overvalued overall does that mean the entire peer group is overvalued?
MF: Yes, I think in the gold sector particularly. I define peer groups both by commodity and stage of the project. For instance, let's take gold. Advanced gold explorers would be a peer group. Those generally have National Instrument 43-101 resources, which gives me an opportunity to calculate the market cap per ounce of gold in the ground. That's one way to define undervalued companies with respect to their peers.
TGR: How long does it typically take for a relatively new company to get some traction?
MF: That really depends on their investor relations, marketing and business development plans. Some companies emphasize these and others don't. These are important parts of the equation, in addition to fundamental criteria, such as share structure, people and projects. Some companies come right out of the gate with well-known management and they go flying off the chart. Other companies, with perhaps lesser-known management with not much of a track record behind them, may not fare so well initially. Newsletter writers certainly can play a major role in a company's initial acceptance by the market.
TGR: Do you think these companies should get their story out there or is there value to keeping it under wraps until they progress a project?
MF: I think you always need to get your story out. I certainly advise the companies I follow to do that—I am an economic geologist but I've been in the business end of this industry for nearly 20 years. So, whether they want to hear it or not, I usually put in my two cents about how I think they should manage their company, how they should market it, and how they should develop it.
TGR: There's a lot of speculation right now from some newsletter writers and analysts calling for another market pullback. As an "economic geologist," do you forecast a pullback? If so, will it also impact the precious metal equities?
MF: The world economic situation is a house of cards. It has been since a year before the financial crisis really came down upon us.
I dabble in macroeconomics and probably know enough to be dangerous. Certainly, the markets are shaky. They are very subject to volatility and mini-panics. Do I personally see much difference from the months after the financial crisis? No, I don't really think so. The stock market had a "September to Remember." We would expect a coming pullback from that, or a healthy correction.
October is oftentimes a bearish month. I look at the markets as still very risky but probably no more than at any time since a year before the financial crisis when the first bad subprime news started to hit the market.
TGR: Is there an inherent risk because you view the gold sector as overvalued?
MF: Certainly. With gold prices reaching record levels, equities and especially the junior explorers will tend to run up faster than even the price of gold. That's risk, and that's why careful due diligence of junior gold explorers is so important in order to pick undervalued companies with respect to their peers. If there is a pullback, the companies that are undervalued now should benefit at the expense of those that currently are overvalued.
TGR: I was recently at a conference where the big theme was the expectation that the markets were going to pullback and that the fiat currencies could potentially dissolve. Their recommendation was that investors should be holding physical gold as part of their portfolio. Do you agree with this advice?
MF: Always have and always will.
TGR: The traditional wisdom is to hold about 10% of your portfolio in physical gold. Should investors hold more than 10%, given today's volatile environment?
MF: I don't know that the environment seems more volatile to me than it has been for the last three years. I certainly own physical gold. Austrian economists generally tell you 10%. I always like to have at least 10%, but that varies with my net worth. I bought physical gold in the summer during what is historically known as the trough in gold prices in July and August. However, I'm not personally buying gold at $1,330 an ounce.
TGR: How about silver?
MF: The gold:silver ratio, which I watch quite closely, is starting to get close to pre-financial crisis levels. Silver is always more volatile than gold on these big run-ups and the big downticks. Silver is a bipolar metal. During times of financial distress, gold will usually do better than silver. During times of economic robustness, silver will generally do better than gold.
The "doom and gloomers" are saying the economy is going into a double-dip recession and the fiat currencies are going to hell in a hand basket. But relatively, silver has had a bigger run-up than gold.
TGR: A double-dip recession and trouble with fiat currencies should signal a time to make gold purchases, given your logic.
MF: Not necessarily; that depends on your trading philosophy. As a contrarian, I was buying silver when the gold:silver ratio was at 80 during the depths of the financial crisis. Why? Because silver was undervalued with respect to gold.
The gold:silver ratio would point that out, too. If we are in a time of economic duress, gold should be performing better than silver and it isn't. That would be an argument that there is underlying industrial demand for silver right now.
TGR: Interesting. Is there anything else that you'd like to share with our readers relative to precious metals?
MF: The junior resource sector is always volatile. If investors truly believe that the economy is coming into a double-dip recession, that fiat currencies are going to take us down and that we're arguably in a deflationary stage, I would suggest they go to the real money—gold—to preserve their purchasing power. However, I continue to speculate in the junior resource sector. I don't see any more problems now than we've had for the last two or three years. Readers should also realize that I'm talking my own book here and they must do their own research and due diligence to make smart speculations.
TGR: You're finding undervalued gems even in an overvalued sector, that's nice. Thanks, Mickey.
Michael S. "Mickey" Fulp is author of
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