Newsletter Reviews

Gold Producers in the Catbird Seat

SOURCE: [The Gold Report]

The Gold Report: Jay, in the June 20 issue of your newsletter, you made the case that gold has broken away from the downtrend that started in late 2011. Why is gold a better investment now?

Jay Taylor: At the time, I was convinced we were looking at a breakthrough in the junior gold index on the Toronto Stock Exchange (TSX). Now, it seems it may have been a false breakthrough.

The S&P/TSX Global Gold Index was as high as 450 back in September/October 2011, dropping to 270 by May 2012. Today, it is around 282. I see the junior gold index as a barometer of the industry as a whole. Although I was getting optimistic, I remain concerned about the possibilities of much lower levels in gold shares as a whole.

The companies that have to raise capital and put money in the ground are my greatest concern. I am less concerned about companies that are in production and generating cash flow from operations, many of which are doing extremely well.

TGR: In that newsletter, you wrote that the value of gold, "vis-à-vis. . .the Rogers Raw Materials Fund. . .had a rocket ship trajectory following the credit deflationary Lehman Brothers event and has remained on a gradual uptrend."

JT: I was referring to the real price of gold, not its nominal price. I am absolutely bullish on gold's real price. There is a distinct uptrend since Lehman Brothers in terms of what an ounce of gold will buy. That, not the dollar price, is what matters.

The recent record highs in the real gold price reflected the anxieties caused by the European crisis. To give you an idea, in July 2008 an ounce of gold would have purchased only 17% of the Rogers Raw Materials Fund. By March 2009, it had skyrocketed to 44%. After quantitative easing 1 and 2, commodities, stocks and gold all rose. Then gold fell back to 30% of the Rogers Raw Materials Fund until the first Greek crisis. It rose again to 44%, and then got worse as Europe seemed to be falling apart. Recently, it has come back a bit.

The anxiety about the world monetary system is driving gold prices. Forget about jewelry or about gold as a commodity. Gold is money, and that is driving its real purchasing power higher and higher.

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