Tim Wood of Mineweb interviews Paul van Eeden October 29, 2003 Mineweb: Paul, thanks for taking time to chat to us. You timed the dollar’s weakness accurately and predicted corresponding strength in gold long before the crowd. How did you do it?
Paul van Eeden: I realized in 1997 that the gold price was insensitive to physical supply and demand parameters such as those typically used to analyze commodities. Instead, believe it or not, gold was acting like a currency, and the gold price was responding to changes in money supply and exchange rates. This is, of course, what one would expect, since gold is money. I focused my research on gold as a monetary instrument and found that not only does the trading history make perfect sense, but the models I created have quite good predictive potential, as you mentioned. These models allowed me to predict the rise in the gold price and the decline in the dollar, both of which have a long way to go.
Mineweb: Just before this past summer you released a fascinating perspective on the long-term relationship between gold and the dollar. You forecast gold to double quite soon and possibly triple within five years. Are you sticking with that?
Paul van Eeden: Absolutely. I expect the gold price to increase beyond $1,000 an ounce and because markets have a tendency to overshoot on the upside, I would not be surprised to see gold much higher even than that. As an investor, or more accurately, a speculator, when the price of something exceeds its intrinsic value, I look for something else to buy. Therefore I am monitoring the gold price very carefully. Once the gold price exceeds my target I will shift into other sectors, irrespective of the fact that I think the gold price will exceed that target.
Another important point, on the topic of the gold price: even though I am forecasting gold in excess of one thousand US dollars an ounce, about two and a half times its current price, that does not imply that I think the gold price will double in other currencies as well. In fact, it may well not. I do expect, however, that the gold price in almost all currencies will, over the long term, increase in proportion to the inflation rate of those currencies and by inflation rate I don’t mean an increase in some or other index, I am referring to the increase in money, as measured, in the US for example, by M3.
Mineweb: What is going to derail your bullish outlook for gold?
Paul van Eeden: In the short term, a rebound in the US economy, which, by the way, I think is highly unlikely, could keep the dollar from collapsing. Since my gold price forecast is predicated on a weakening dollar, my bullish outlook for gold can be tempered by an event, or events, that would lead to a strengthening of the dollar, or even just stabilization of the dollar. But I must tell you, I think the probability of an economic rebound is minimal, and the probability that the dollar will not collapse is almost nonexistent. At least that’s my story, and I’m sticking to it.
Mineweb: International Speculator has the libertarian foundation common to most gold bugs, yet you’ve suffered disapprobation from compatriots for not talking up the conspiracy thesis. What persuades you that there is no conspiracy to suppress the price of gold?
Paul van Eeden: I don’t know that I quite agree with your statement that most gold bugs are libertarians, especially not the conspiracy crowd. They appear more like political conservatives to me. Libertarians hold dear the concept of personal liberty, a concept I find lacking in most of modern society, gold bugs and conspiracy theorists included. The reason I don’t subscribe to conspiracy theories is simply that I see insufficient evidence and no need for it. Before y’all send me reams of literature, rest assured, I have already reviewed most of it.
If I look at the trading history of gold, it can be explained by simple macro-economic principles and events related to the fact that gold is money. Since I see very little in gold’s trading pattern that cannot be explained without resorting to a conspiracy, I see no point in invoking a conspiracy theory. Furthermore, the data being used to support the conspiracy theories are very circumstantial and loosely cobbled together. If there is no need for a conspiracy theory to understand the gold price, and if the evidence for a conspiracy is weak, why, in the world, would I waste my time trying to understand what someone else dreamed up because they don’t understand what is happening?
Now, I am not saying that Central Banks do not have an agenda, we all have agendas. I am not saying that Central Banks and other Government Agencies don’t from time to time take a look at the gold market, I am sure they do. After all, Central Banks were, until only a few decades ago, the largest owners of physical gold in the world, so it’s only natural to expect them to have an interest in gold. This is a topic that we could talk about for days, but I’ll leave you with this: if there is a conspiracy against gold then it’s a pretty pathetic one, since it has been unable to influence the gold price by more than a few percentage points, if at all.
Furthermore, conspiracies have never been able to have a long-lasting impact on markets, and if there is a current conspiracy, which has not impacted the gold price thus far, why would I care?
Mineweb: Bulls are struggling to carry gold above $380/oz on a sustained basis – does this concern you? Are you still buying gold at these levels?
Paul van Eeden: No, it doesn’t worry me. In fact, just today the gold price closed at $388. It’s merely a matter of time, not much mind you, before gold breaks decisively through $400 an ounce, and then $500 an ounce, and then $600 an ounce… I am not buying gold at these levels because I am essentially already fully invested. As I take profits from maturing investment ideas, I reinvest the proceeds, mainly, in other gold related investments. So in that sense, yes, I am still buying gold at these levels. As I mentioned a little while ago, I will stay in the gold sector until the gold price exceeds my target, which, at the moment, is about $800 an ounce and rising.
Mineweb: Let’s turn to political economy for a moment. International Speculator can be perceived to be monomaniacally critical of government. When you frame that with the fact that you and Doug Casey live in and enjoy the United States, aren’t you skirting hypocrisy?
Paul van Eeden: Good question. No. The United States was found, and built, on the principles of liberty. That’s what the Constitution and the Bill of Rights are all about. Unfortunately these principles are no longer held dear by the majority of people, who have slowly become accustomed to sacrificing liberty for pseudo security – a bad trade.
We are both libertarians and we both believe that we should question anyone and anything that infringe on liberty. It’s a matter of principle. Governments across the globe should never become immune to scrutiny and individuals should never lose the ability to question authority, especially authority that is unilaterally imposed, as are most government programs and, in fact, for most part, government itself. We are not just critical of the US government, we are critical of the entire political structure as it currently exists, including every government in the world.
We, and Doug in particular, although I shouldn’t be speaking for him, like to remind people what the Founding Fathers believed in, which is what we believe in. If there was a place on this earth where we could live in a laissez faire society that abides by the two fundamental principles common to most law, and most religions as well, that you do all you say you will do (contract law) and you don’t infringe on the property of others (tort law), I would be there in a flash, and I bet Doug would be there too.
Mineweb: The positive economic reports – are they the green shoots of a recovery or the last leaves to fall off the tree?
Paul van Eeden: The latter.
Mineweb: You must be thinking ahead to an exit strategy, as every investor should. Can you divulge your approach to identifying the end of the gold bull and the specific warning signs you’re looking for?
Paul van Eeden: I already divulged my exit strategy. When the gold price exceeds my theoretical price I’m out. Although it’s not as simple as just that since the theoretical price I am referring to is for gold in US dollars only. I am currently working on models that will give me the correct theoretical price for gold in other currencies as well. So when gold reaches its target in terms of US dollars, I may end up switching to currency trading.
The warning signs will be everywhere: overvalued gold stocks; Time Magazine telling us what a wonderful investment gold is; new gold mutual funds popping up; widespread ownership of physical gold, in the form of coins, certificates and exchange traded funds; etc. One could argue that some of those warning signs exist in the current market, and they do. But we are in the beginning of a secular bull market in gold, not a cyclical bull market. This is akin to 1973, about, not 1993.
The best tools to use for asset allocation are not gut feelings, or amorphous signs such as those I just mentioned, which are what most people rely on; the best tools are based on sound logic and good data. In stocks, as an example, you want to look at fundamental value in relation to market capitalization. If one sector is overvalued and another is undervalued, switch. You won’t get the timing exactly right, that’s impossible, but you’ll do much better buying undervalued stocks and selling overvalued stocks than your neighbor who does the opposite.
After all, the idea is to buy low and sell high, right? The same can be said of other assets, such as gold, or commodities, or currencies; it’s just the metrics that change – the principle is the same.
Mineweb: You have made some fantastic stock picks in your time. Tell us in general terms what you’re looking for before you recommend a stock.
Paul van Eeden: You make it sound as if my time is up! I hope I’m not a has-been already, in which case it would probably be more correct to refer to me as a has-never-been. I prefer to think of myself as a busy-trying-to-become-a-been.
What I look for is value, in all investment decisions, whether we are talking about asset classes or individual stocks, i.e. companies. Value comes in different forms, it could be tangible assets, such as book value to price, relative value, such as gold versus the dollar, or an intangible, such as a brilliant, dynamic management team in a small exploration company. In essence I look for high quality assets that can be purchased for a reasonable price.
As you know, our newsletter is primarily concerned with high risk, high reward speculations. But the principles of value apply to speculating just as much as they apply to regular investing. One concept that most investors, and almost all speculators, often lose sight of is probability. Most people look at the amount of money they can make as the reward and the amount of money they invest, and hence could lose, as the risk. They neglect to think about the probability of making money versus the probability of losing money.
Mineweb: You’re especially skilled at finding exploration stocks that deliver. What should investors considering when playing the junior sector – positives and negatives.
Paul van Eeden: Exploration is a particularly tricky investment arena. The probability of success is very low and, therefore, the probability of failure is very high. Investors should focus first and foremost on the people that run these junior exploration companies. That is probably 99% of the equation, right there. Every now and then a blind squirrel may bump into an acorn and, assuming he can still smell, may survive another week. The other 1% is being able to distinguish when a property has real merit as opposed to being an enrichment scheme for the underlying promoters.
Mineweb: What trends do you see developing for the mid-tier and senior gold producers that command “real money” attention.
Paul van Eeden: Most of these stocks are already quite expensive in relation to the gold price, which means that you are paying now for the benefit of future increases in the gold price. If I am right about the gold market you would want to restrict your investments in the mid-tier and senior sectors to those stocks that have primarily US based production, US dollar-based cost structures, and high-quality assets. Gold projects that are not inversely correlated to the US dollar will not fare as well as those that are.
Another trend, and this is where I am putting my money, is that since 1997 the mining industry, and particularly the gold mining industry, has not spent enough money on grass roots exploration to ensure a steady supply of projects in their development pipeline. Mining is a depleting business: the more you mine, the less business you have left.
Exploration is the life-blood of mining, it’s what keeps the industry from self-liquidating, and right now there is a dire need for new projects. That means there is a large, and growing, demand for good exploration projects and capable exploration teams. We have done very well over the past few years in this sector and I suspect we are going to continue to do well for several more years to come. But as the gold price increases, and the promoters come out of the woodwork, it’s going to become a more treacherous place.
Mineweb: Thanks for your time.
The above interview was published on Mineweb (
www.mineweb.com) on October 29, 2003.
Paul van Eeden
Disclaimer This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection. |
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