Hard Asset Digest October 2019

Hard Asset Digest                                                                                                   October 2019

In this month’s issue, I’m bringing you my exclusive interview with Jeff Phillips, founder and president of Global Market Development. 

Over the last 25 years, Jeff’s firm has been instrumental in the financing and consulting of numerous highly successful resource companies. Investors who’ve followed his insights on precious metals, rare earths, uranium, and oil & gas have made some truly remarkable gains over the years.

Jeff has served as the principal financial backer of a number of precious metals resource companies including Animas Resources and Pediment Gold, both of which were later bought out by gold producers at substantial premiums. 

He was among the very first resource stock experts to recognize the immense potential value of consolidation in the silver market back when silver was trading below $5 per ounce. He proceeded to consult with and participate in the financing of Silver Standard, which went on to command a $1 billion market cap. 

Mr. Phillips was also among the first market experts to recognize the global stranglehold China was putting on rare earths metals back in 2009. He immediately proceeded to finance all three of America’s publicly-traded rare earths mining companies realizing it would pay off handsomely once the market caught up to what he already knew.

Those who followed his insights in this market niche witnessed exponential gains as China’s rare earths dominance eventually reached the mainstream financial news outlets. 

I’ve known Jeff for a long time, and I continue to be fascinated by his unique insights on life and investing. I hope you’ll enjoy the conversation. Before we get to that, there’s a few market dynamics worth taking a quick glance at.


The first thing is gold 

The market for the yellow metal continues to be driven primarily by daily geopolitical headlines as opposed to sound monetary-based market fundamentals. That means...there’s no telling where gold is headed from week to week. 

It’s true that gold has made a significant upward move from $1,300 per ounce in May to currently around $1,500 per ounce with at least some of that move being attributable to bullish market fundamentals. Yet, we can also count on a lot more whipsaw action as gold continues to be ping-ponged about from geopolitical headline to geopolitical headline. 

 

The devaluation of fiat currencies in the face of rising and unsustainable debt loads across all developed economies will be the true driver of the long-term bull market that’s beginning to take form now.

US government spending is so wildly out of control, and has been for more than a decade, that the federal debt will become unmanageable in the very near future. 

Not that long ago, economists didn’t really have to think in terms of “Trillions of Dollars.” Yet today, we’ve grown accustomed to the fact... however dire it may be...that our federal debt is ballooning at a rate of nearly $1.5 Trillion each and every year. It’s simply not sustainable. 

 

At this rate, it will only be a few years until America can no longer afford to service its federal debt — no matter where interest rates go. 

Add to that the fact that we’re seeing this exact pattern of excessive money printing combined with unsustainable debt accumulation emerge across all developed economies. 

The end result can be only one thing: A devaluation of all fiat currencies. 

This doomed race to the bottom will leave gold, along with silver, standing alone as the only real store of value.


The EU is nearing recession

The Eurozone continues to experiment with negative interest rates in an attempt to spur economic growth by encouraging bank lending and also by boosting exports. Yet, the bottom line is that banks simply cannot make money in a negative deposit rate environment. 

As much as banks may continue to try and sway lenders to do something more useful with their money than simply parking it with the European Central Bank, it’s doubtful such an ill-devised monetary policy can stave off recession. 

Thus far, growth has remained anemic, raising the specter of a recession hitting the Eurozone sometime next year. 


 

US/China Trade War: A trickle down effect across Europe’s largest economies

Germany, Europe’s largest economy, is suffering its worst manufacturing downturn in almost seven years as the US/China trade war spills over into european economies. 

 

It’ll be interesting to see if Germany resorts to injecting fiscal stimulus (aka, the printing of even more money!) to boost its sagging export-reliant economy. Growth forecasts for 2020 have already fallen below the key 1% threshold.

Britain, Europe’s second largest economy, remains mired in its self-induced Brexit maelstrom, which certainly isn’t helping things from an economic standpoint. 

In what looks to be a warning sign of impending stagnation, the British economy took its first step backward (in Q2) in more than 7 years. Amid all the turmoil, it seems increasingly doubtful Britain will be exiting the EU on October 31st, with or without a deal, as the Brexit cloud continues to darken.

New reports are also revealing weakness in Europe’s third largest economy, France. In fact, the export sectors of both France and Germany – which includes their high-profile automobile industries – are being hit hard by flagging demand from China.


The luster is coming off the Chinese economy

While growth in China held steady at 6.4% in Q1 this year, it proceeded to slip to 6.2% in Q2. Economic numbers over the last few months reveal that the worst may not yet be over for China with analysts projecting weakening third quarter data. 

 

A recent survey by China Beige Book reveals slowing growth and soaring debt levels for the world’s second largest economy.

 

Here at home, the trade war continues to stoke recession fears

US gross domestic product grew at a 2% annual pace from April to June, which was in-line with expectations. Yet, how long can that last? 

As the trade war marches on, the negative effects on US business investment, exports, manufacturing, and farming will only deepen. 

Not to mention the fact that any forthcoming resolution to the trade dispute may have just gotten all the more convoluted with the impeachment inquiry into President Trump.


Yield curve inversion: A precursor of things to come? 

An inverted yield curve is also sounding economic alarm bells across US markets, sending warning signs of a possible looming recession. 

In August, yields on 2-year and 10-year Treasury notes temporarily inverted — meaning investors were asking for more in return for short-term government bonds than for their longer-term counterparts. 

As a cautionary tale, it’s the first time the yield inversion has reared its ugly head since the Great Recession of 2008. 

Not only is this a sign investors have lost faith in the soundness of the US economy...it’s also, unfortunately, an extraordinarily reliable indicator of an impending recession. The US yield curve has inverted prior to the start of each recession over the last 50 years. 

 

To help calm fears of another full-blown financial meltdown, the Fed has been pumping hundreds of billions of dollars into the financial markets in an attempt to keep interest rates within their intended range. 

And yes, in case you were wondering, this is the first time the central bank has taken such measures since the global financial crisis of 2008.


 

It’s not all doom and gloom, at least not yet

One thing to keep in mind is that even when yield curves have correctly predicted the onset of a US recession, it has taken anywhere from 10 to 22 months for the economic slowdown to take shape. 

There’s still a number of economic bright spots in the US economy including stable industrial production, solid wage growth, and historically low unemployment. 

 

Of course, the proverbial fly in the ointment is the trade war between the world’s top two economies. 

If this rift persists over the coming few quarters as we march toward US elections, Americans may indeed find themselves facing the somber reality of a very painful global recession, during which owning gold and gold stocks will likely prove extraordinarily wise. 

I’ll be discussing this, along with many other market points, in my exclusive interview with Jeff Phillips — founder and president of Global Market Development. 

Yours In Profits,

Mike Fagan, editor
Hard Asset Digest
 


Interview with Jeff Phillips

Mike Fagan: Jeff, you and I go back a long way, and we’ve certainly navigated through a number of bull and bear market cycles. The last couple of bear markets for gold have been particularly brutal. 2016 was sort of a false start for gold. But now, with the yellow metal trading around $1,500 per ounce, it looks like we’ve finally entered a gold bull market with legs. How do you see the current gold market, and how is this different from what we saw in 2016?
 

Jeff Phillips: Great to see you, Mike. You know, late-2016 is really what I consider the most recent bottom of the gold market. We had a decent start to that year, and then it sort of trailed off due to consolidation. The 2016 bottom ended up holding, and that’s typically how exhaustion runs its course in the resource market; not just in gold, but for all commodities.

Right now in the precious metals space you have individual stories that are doing quite well, and most stocks are above their 52-week lows. But realistically, it’s not yet what I’d call a screaming bull market for gold. I do believe we’ll get there over the next two to three years. Of course, that doesn’t mean there won’t be significant pullbacks. We’ve had a nice run to above $1,500 an ounce, and that level has more or less held thus far. Over the next couple of years, I firmly believe we’ll see gold retesting the highs we saw in 2011 near $1,900 an ounce.  

MF: Turning to the majors, we’re seeing a lot of upward movement in the share prices of the top-tier gold producers with many up over 50% in just the last few months. Yet, the higher-risk junior sector has, thus far, been slower to react to a rising gold price. Is that typical for an emerging precious metals bull market, and what segment of the gold market are you looking to invest in right now?  

JP: Yes, that is quite routine for the start of an elongated gold bull market. You typically see the larger producers performing best, then the mid-tiers, and finally the juniors. The junior sector can be broken down into several categories starting with the highest risk, which is exploration, and then moving onto the development stories, which are companies that have NI 43-101 compliant resources.

I watch for the junior developers to announce ounces in the ground, then a pre-economic assessment (PEA),  followed by a pre-feasibility study (PFS), and finally a bankable feasibility study (BFS). Each of these in succession tends to derisk a project resulting in higher valuations. Developers typically carry less risk than pure explorers whose prospects rely almost entirely on drilling into something of value. So obviously there’s a lot of hit and miss there. 

While I do follow the junior explorers to some degree, I’m primarily focusing on the aforementioned junior developers; stories that have ounces in the ground that I see as having the potential to become economic mines at current commodity prices. Again, less risk than the pure explorers, yet still having the potential for near-term triple-digit gains.

MF: Jeff, for those who may not know your background, can you tell our readers a little bit about how you first got started in the precious metals sector, and what your firm is focused on now?

JP: Sure, Mike. I’ve been in the resource business for about 25 years…I think you and I got started at roughly the same time. Shortly after college, I put together a marketing firm in Santa Barbara and later ended up moving operations to San Diego where I began assisting a major banker in the financing and marketing of emerging natural resource companies. My main focus at that time was on marketing and investor relations stemming from my background in advertising.

Over the next several years, I learned the ins and outs of the resource business while gaining a ton of valuable contacts. This eventually led me to become what you might call a boutique resource banker. Today, as president of Global Market Development, my focus is primarily on the financing and consulting of resource companies and also introducing management to people that can provide funding in larger dollar terms. This is all designed to bring these companies along from the early development phase all the way to production or a buyout from a larger mining company.

MF: Jeff, I know you’re not one to boast, but would you mind going into some of your past stock-picking successes and how you’re applying the knowledge gained to the benefit of those who follow you today in the marketplace?

JP: Absolutely. I was involved very early on with Silver Standard, which at the time was focused on acquiring large, unproven silver deposits when silver was trading below $5 an ounce. I participated in their initial financing around a dollar per share. The stock eventually reached $40 per share with Silver Standard commanding somewhere around a billion-dollar market-cap. Some serious gains were made there!

I was also a very early participant in a company called Ultra Petroleum. I was involved in their initial financing at around $0.75 per share. It quickly rose to $10 and eventually went all the way to $200 per share on a pre-split basis.

Following those successes, I financed a company called Pennaco Energy. My partner and I were intimately involved with this company from the start, including recruiting management and assisting in putting together the initial land package. Pennaco was originally financed below a buck. We listed on the AMEX, and three years later it was bought out by Marathon Oil around $18 per share. We were very large shareholders, so I’d say this was one of my biggest early successes.

Following that, I took some time away from the resource sector to focus on real estate development, which is another passion of mine. You’ll recall, Mike, that the resource space in the late-nineties and early 2000’s was not the greatest place to be. I was coming off of those solid wins, so real estate was a natural place for me to invest. 

Then, in 2004, I got the itch to get back into the resource space and began investing in certain companies and financing and consulting with others. The market proved fruitful, and although I’ve had to weather some significant downturns as is the case for all resource stock investors, it’s what I love to do and where I plan to stay.

MF: And didn’t you also get involved in rare earths companies around that same time?

JP: Yes, I saw the early writing on the wall with rare earths metals and China’s control of them and thought…this is a story that’s eventually going to gain traction! That’s one of the things I enjoy doing most…getting involved in stories and the related investments before the mass media and markets catch on.

So, I began financing three of the main rare earths assets for literally pennies on the dollar. These went on to become three of the four US stock exchange listed companies in the rare earths arena. All three went on to do extraordinarily well with share prices going up significantly. This was all happening as rare earths and the Chinese situation hit the mainstream news outlets. Mike, the aim is always the same: Get in before the herd!

MF: Very true! Now, switching gears a bit, we’re beginning to see indicators of a slowing US economy, and the same can be said of the global economy at large. How do you see things shaping up over the next several business quarters, and do you believe a US recession is on the near-term horizon?

JP: You’ve got to remember, Mike, that no matter how great a market appears to be…all market expansions are followed by contractions. Recessions are inevitable. The problem right now is that everything is a bit distorted. We have a record amount of government debt around the world that’s actually trading at negative interest rates. That’s never happened before in the history of the world to my understanding, so you have things going on that are very hard to place timing on…because again, it’s distorted.

But absolutely, we’ve had a major bull market in stocks. We’ve had easy money for some time, and we’ve had a major expansion…so we’re going to have a major contraction. It may end up being one for the ages based on the amount of government debt that’s been taken on at very low interest rates. That debt becomes very difficult to refinance as interest rates move up, which they inevitably will.

MF: So in your opinion, how should US households prepare, and what are your thoughts about owning gold bullion as a hedge against this rising level of debt-driven uncertainty? 

JP: I would say the first thing for US households, and I always strive to follow this advice myself, is to enjoy your family and friends and work on improving your health. Once you get those priorities nailed down, then you can worry about the finances of the world and what’s going to happen next. I’m one of those people who believes you should enjoy each day and not worry too much about things that are out of your control. Of course, preparing financially is also an important component of ensuring you’re in a place where you can continue to lead a healthy and balanced life.

To me, the key is making sure you are never over-leveraged in any one area. Whether it’s real estate or the stock market or what have you…balance is the most important thing. You should have some of your money is cash, some in the market at varying risk levels, some in real estate…and your question on gold is an easy one: Owning physical gold is like having an insurance policy against global risk and uncertainty. Sort of like homeowners’ insurance; if your house burns down, you’re covered. With gold, if the whole global financial situation implodes, you can take some solace in knowing you’re holding a safe haven asset in gold. Gold has been a store of value for centuries and always will be.

MF: Jeff, I love your advice about health and family...as human beings, we can be so easily distracted by life’s challenges. It’s definitely important to reset and think about what’s truly important in life. Now, turning to energy, the global uranium market has yet to psychologically recover from the devastating aftermath of the Fukushima disaster. The net effect is that a uranium bull market is taking much longer to materialize than most experts anticipated. Any thoughts on the uranium market in general and US uranium explorers as a potential investment at depressed price levels?  

JP: From a global perspective, you need to understand that virtually all bull market cycles take longer than expected to materialize no matter what the so-called experts are touting. One of my favorite expressions that’s served me well is…the market can remain irrational far longer than I can remain solvent! Thus, you can be right and still get wiped out if your timing is off and you’re over-leveraged.

For example, you could bet everything on gold going to a few thousand dollars an ounce, which I’m certain is going to happen over time. But, if you run into a significant pullback and you’re hit with margin calls, you could still get financially destroyed while essentially being correct about gold’s trajectory. The caveat holds true that the market doesn’t care one bit about your personal timeframe. So, it’s good advice to never bet the farm.

Getting back to your question on uranium, there’s some interesting dynamics happening there. Most companies simply cannot profitably mine uranium at current prices. In essence, if you’re mining something that costs $40 to $50 a pound to extract, and you can only sell it for $25 a pound…well, it’s pretty easy to see how that doesn’t work.

So yes, uranium prices must move up. And like most things, it comes down to that all-encompassing question of timing. No matter the sector, I like investing in companies that have the wherewithal to be in the game when the game gets started. For uranium stocks, the game will begin in earnest when uranium prices move higher…substantially higher.

I’m looking at select US uranium companies that have pounds in the ground that can maintain their share-structure and their capital for that inevitable move higher. The bottom line is that the world needs uranium. China and India are building a large number of nuclear power plants; Japan will eventually come back online. Uranium is a clean energy. Prices will move up…it’s just a matter of timing!  

MF: Speaking of timing, metals and energy cycles are often very difficult to predict, and, as resource stock speculators, it’s not uncommon to own underperforming stocks. How do you go about the evaluation process of deciding when to hold, average down, or cut bait? 

JP: Naturally, this depends in large part on the individual. My financial situation and risk-tolerance may be different from someone else’s. But as an example, if an investor holds a small position in a resource stock where the primary focus is on drilling, and the company comes up dry and runs out of money, it’s probably a good idea to get out and take the tax loss...assuming the stock is still liquid. 

Conversely, if you own a very large position in a resource company, it is sometimes better to have a longer-term outlook. In my case, this often involves helping a company with later financing rounds and aiding them in the search for additional projects that have the potential to pan out over time. This requires a higher risk tolerance along with a lot of patience...so it’s definitely not for everyone! 

I’m presently in a number of gold stocks that I’ve been holding for several years wherein I’ve taken the opportunity to average down on those stocks. My strategy here is that I like the companies, the management teams, and the assets. I see those assets as having the potential to be put into production or bought out by a larger suitor. It’s a long-term strategy that I’m comfortable with. Of course, no one is right all of the time, so you have to be prepared to take some losses. If not, you shouldn’t be in the resource space...or the market at all for that matter!

MF: Jeff, I have a sneaking suspicion that the one question on everyone’s mind is, “What stocks are you buying right now?”   

JP: That’s a great question, Mike! And again, the proper mindset should always be to never bet it all on a single stock recommendation. That is and has always been a recipe for financial ruin. 

I’ll tell you about four companies I’ve been involved with for a number of years. A couple of these I’ve actually been involved with for 7 or 8 years, and I’ve continued to buy their stock. In some cases, investors can accumulate shares at lower prices than a lot of my purchases. Yet, I’m not concerned about my positions because all four of these companies hold tremendous assets and have the right people calling the shots. It’s also a great time to be entering the resource market in general. 

The first company is Midas Gold which trades on the Toronto Stock Exchange under the symbol MAX. It’s currently trading around C$0.60 per share. Midas is developing the Stibnite Gold Project in Idaho. This is a multi-million ounce deposit and is considered the 8th largest gold reserve in the United States. Barrick Gold owns 19% of the company, and they’re a great partner to have. I’ve consulted for Midas for a number of years, and I think it’s a solid speculation.

Another company I find very interesting is Almaden Minerals. It trades on the American Stock Exchange under the symbol AAU and is currently trading around US$0.70 a share. Almaden is advancing the Ixtaca Gold-Silver Project east of Mexico City in the state of Puebla. This is a large gold-silver system with over 1.9 million measured and indicated gold equivalent ounces. Almaden should have permits from the Mexican government by the end of this year. I think once that happens, it will trigger an event where some of the larger producers in Mexico will be looking at Ixtaca as an asset they'd like to own. So, Almaden Minerals is another excellent gold speculation.

I also like Revival Gold which trades on the Toronto Venture Exchange under the symbol RVG. It’s currently trading around C$0.55 per share. Revival was started a couple of years ago by a gentleman by the name of Hugh Agro. Hugh helped build Kinross Gold into one of the world’s bigger producers, taking it from a market cap of $1.7 billion to $17 billion. Revival is developing the 2 million ounce Beartrack-Arnett Gold Project, which also happens to be in Idaho. The company just hit 2.35 grams per tonne gold over 70 meters, including 4.55 g/t over 21 meters, in one of its holes. The size and grades are definitely there. The goal is to have 3 million gold ounces in all categories by early next year.

Last but not least, since we talked about uranium earlier, is a company by the name of Azarga Uranium. Their symbol is AZZ on the Toronto Stock Exchange; currently trading around C$0.17 per share. Azarga is advancing the Dewey Burdock project, located in South Dakota. It’s one of the best undeveloped ISR (in-situ mining) uranium projects in the entire United States. It has size; about 18 million pounds. It also has a very high grade by ISR standards; over 0.1% which is twice the grade of some of the other ISR uranium projects currently in production or licensed for production in the United States. This is a company that could do very well once the uranium price moves higher. 

Those are four development stage companies that I own. And yes, I own some of them higher than what they’re trading at today. So, I think all four represent excellent speculations at current price levels with underlying commodities that appear poised to appreciate in value over time. 

I know I’ve said this more than once today, but it bears repeating. Resource stock investing is one of the highest-risk segments of the stock market. Never bet the farm on a single stock, and always do your own due diligence. 

MF: Jeff, it’s been great catching up with you. Thank you for taking the time, and I look forward to our next conversation. 

JP: Always a pleasure, Mike. 

 

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MARKET SUMMARY

INDICES

Name Last Change
DOW 28015.10 1.20%
S&P 500 3145.91 0.91%
NASDAQ 8656.53 0.99%
TSX 16996.97 0.84%
TSX-V 537.82 0.00%

Resource Commodities

Name Last Change
Gold 1460.12 1.07%
Silver 16.58 2.17%
Copper 2.71 2.711
Platinum 901.00 0.67%
Oil 59.20 1.30%
Natural Gas 2.33 3.98%
Uranium 25.80 0.00%

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