Don Durrett | I Am Stacking 10oz Silver Bars and Investing in Quality Gold Producers Right Now

Professional mining stock investor Don Durrett of GoldStockData.com returns to the show to discuss the current gold market and share his thoughts on today’s junior gold sector.  Don has been investing in mining stocks since the early 1990’s.  He is the author of “How to Invest in Gold and Silver: A Complete Guide with a Focus on Mining Stocks” which conveys Don’s well-thought out and tried approach to mining stock investing.

0:05 Introduction

2:12 Commentary on gold, USD and general equities

7:58 Analysis of the junior gold sector

9:49 Where Don is putting his investment dollars right now

15:53 Junior gold stocks can be risky

16:39 Commentary on the recent gold mega-mergers

20:47 Investing advice for newer resource investors

TRANSCRIPT:

Bill: Don I’d like to get your thoughts, to start off with, on gold. Last time we spoke you had mentioned you follow the gold market closely, you mentioned that if gold breaks through that $1,375 mark, we could really begin to see fireworks in both gold and the gold stocks. We’re about 100 bucks below that right now where gold sits, what are your thoughts on the gold market and do you see any near-term catalysts for gold?

Don: Well the near term catalyst is really a couple things, one would be the S&P 500 which is in a 19 weeks in a row and I think a lot of people are nervous, I mean it’s trying to break out to a new high. I think we had traded above a new high on Friday in the S&P, but it didn’t hold. I don’t think the close was above a new high, and so 19 weeks, it pretty much went straight up for 19 weeks and we had one week we had a bit of a pause but other than that, it’s been trying to break out. That’s the catalyst for gold for the fear trades, so if we don’t get a new high and the S&P turns back down, depending on how weak it gets, we could see some movement into gold based on the fear trade.

I don’t know, it’s definitely going to be economic weakness that pushes gold higher. I don’t know when it’s gonna happen, how fast it’s going to happen, but those are kind of the triggers. The other thing is the dollar, the dollar has been very strong lately, say for the last month or two months, we traded it I think at 98, it actually had one close at 98 and now it’s back to 97.50 on the DXY. That’s creating a lot of headwinds for gold. Gold made a run up to $1,340 the first quarter and then it basically sold back off and now it’s down under $1,300, trying to get back over. I really think that this is the last battle.

You mentioned $1,370, $1,375 but I really, I agree. Seven, six months ago that’s the key number, so if we look at $1300 gold and you look at the HUI, the HUI today is at 152 and September 2011 it was at 625, so that’s three times return just to get back to a new high. So you can see that the miners are out of favor at 152, and the reason why they’re out of favor is that $1300 gold, they’re not making any money. So we really need to get up to, you know, 1370 to 1400 before the miners really kick into gear so we’re kind of fighting the battle right now. 1280, 1300, 1320 gold, that’s just not high enough to get anybody excited about the miners, so we’re just fighting the battle.

Bill: Do you think that the general equity, the S&P, could continue to trend higher into the 2020 elections?

Don: I do not, I really feel that it’s topping right now, I think the market’s overbought, I don’t think … for instance, GDP, first quarter it was at 3.2% but the deflator they used was .9% so the actual nominal was like 4.1 and then the deflator was .9, now who believes that inflation is .9? There’s no way it’s .9.

Bill: Yeah my food bill doesn’t agree with that.

Don: Yeah, I mean it’s at least 2% so if you put the real deflator in, you know, the actual GDP is around under 2%. Maybe closer to 1.5, there’s really no economic strength out there to push the stock market higher and to keep it there all the way through the election. This year in 2019 we’re going to see weakness in housing, we’re going to see weakness in autos, we’re gonna see weakness in consumer spending, nothing’s really … I really think that this is a manipulated market, I don’t think it’s as strong as it is, I don’t see it. This recovery started in June of 2009 so we’re at the 10 year mark and so that’s a long, long recovery, the business cycle is really long in the tooth. I don’t see it lasting two more years, I don’t see the stock market going to 28,000, 30,000 here. I would be shocked if it does that. I really feel that we are topping here and we’re gonna get a correction.

Now how long the correction lasts, we don’t know, I mean they drop rates down quickly, could that conceivably create some strength back in the economy? I really don’t think so, I think that we’re gonna start to see more weakness kind of pop up. It’s hard to predict when these cycles turn and how fast they turn, but the PMIs right now, the last couple numbers are shaky in my opinion, I mean they’re still both positive, the services were trending down but it’s positive. The manufacturing is trending down but it’s positive, the global trade numbers are pretty ugly. So I don’t know if we’re going to get to 1370 this year, I’m hoping we do, maybe we won’t, but right now as a gold and silver investor, we’re kind of fighting the battle, we’re kind of looking for opportunities and waiting for this thing to break out.

Bill: What is your analysis of the junior gold sector right now?

Don: Well like I just mentioned, sentiment is really, really bad. I mean HUI at 152, I mean, that’s the large miner index and that is just, you know, that’s a real ugly number. I mean anything under 200 is ugly, really. I mean, you want to be over 200 to have any sentiment at all, so anything under 200 the sentiment is just ugly, ugly, ugly. So right now, you don’t have a lot of people that want to put their money in the miners, but the other side of the coin is the leverage is huge, I mean if you do get in now, yeah you could be catching a falling knife, but I mean how much further can gold really fall?

I mean in theory you could have a stock market crash and gold can under 1200, I mean that sure is possible, but we are kind of balancing on the bottom here and to me it feels like the gold market is bottoming, the dollar is topping and if that’s true then things could turn for the miners, and they could do really well. I mean, you could be really catching. For instance, the HUI, I mean it has a really, really long way to run to get to a new high. Once it starts running, I mean conceivably it could run all the way back up, the numbers to look for, for me, is 1325, 1330, those are the numbers that need to hold, so we can make a run at 1370.

I mean down here under 1300, we’re not gonna make a run at 1370 from here any time soon, so we gotta get- you have to do it in baby steps. We need to get over 1325, 1330, stay there for a couple weeks and then make a run at 1370.

Bill: So you don’t focus as much on the exploration stocks, you’re more into the companies that have a resource, the developers, and also the producers, specifically the mid-tier producers. With where we’re at now and expectation that gold is going to run up, where are you focusing your investment dollars right now?

Don: So where I’m focusing my money, so with silver under $15, it just got so cheap that I decided that I was going to go ahead and buy some silver, so I’m currently stacking 10 ounce bars, I’m gonna do that as long as silver’s under $16. I just think physical silver under 16 is just … under 15, under 14, anywhere in there is just really cheap. My long term target for silver is 150 or higher, so that’s a pretty good return if you’re buying it 15, 16 and it’s going to 150. So it’s hard not to buy physical silver at these prices so I just decide. It’s this feeling where at the end, I just don’t think we’re going to sub $15 silver much longer, this is kind of like the last chance so I decided to go ahead and do that.

The other thing I’m looking at is producers, I’m looking at producers that I don’t own that have five bagger potential. Three stocks I’m looking at right is Premier Gold, they have a big project in Ontario, it has a really big Capex, it’s like almost 900 million dollars for the Capex, it’s somewhat of a high risk stock, but they’re currently a producer in Mexico and mark capped at 275 million. The upside potential of a five bagger if they build their greenstone project. And the other two I’m looking at is Continental Gold and I just think Continental is really cheap, they’re gonna be a producer in 2020, so they’re a near term producer, marking up at 392 million in Colombia and I just like their potential to grow. They have a really big project down there. And the other I’m looking at is Yamana Gold, I’ve never bought it, it’s down to marked two billion. I have their future upside potential as a four bagger so they’re right underneath where I like to but it just looks really attractive to me.

Now as far as development stocks and exploration stocks, exploration stocks you just have to be really, really careful because they’re just very high risk, I mean the risk reward on exploration stocks is not good. You wanna make sure that you buy a company that has the goods, if you will. So going after an exploration stock that does not have a mine already, they’re just trying to find one or they have a few good drill results and you’re gonna chase drill results, that is just the ultimate speculation stock. I do that once in a while but I know how much risk that entails and I don’t do it until I have, and I talk about this in my book, I don’t that until I have everything else covered in my portfolio. I have the physical metal, I have the majors, I have the mid-tiers, I have a real good foundation and then I might go after first the development stocks and then the very last the exploration.

Bill: What’s your ratio on that? You invest up to, what is it? 1% of your portfolio you’ll put into a stock like that, remind me?

Don: Yeah. Yeah, so for an exploration stock I never go more than 1% of my cost basis in my portfolio and I usually go .5%.

Bill: Per company, per exploration company?

Don: That’s per company, yeah. So never more than 1% of your portfolio on an exploration, per company of course. And then even with your stronger mid-tiers, I never go over 3% and 3% is kind of the very upper, upper edge, I try to go to with really strong mid-tier 1% to 2%. Some people don’t agree with my philosophy because I spread it around, I’m only putting, you know, 1%, 2% in a strong company then I have to own a lot of stocks and I do own a lot of stocks, but what I do is I’ll do the ETFs, like you know, GDX, GDXJ, and I’ll do some of the major gold mutual funds with higher percentages to reduce my risk. I don’t feel that if you’re doing like, there’s a silver miner ETF called SIL which I think is a fantastic investment right now. It pretty much covers all of the silver miners so kind of exposure to the entire silver miners just by one ETF versus putting a whole bunch of money on one.

Most people, they prefer to have a large amount of money in one bucket, own like 10 stocks or 20 stocks in focus, and yeah, I mean Jim Rogers says that’s the best way to make money and it probably is but in gold and silver mining the risk is just too high in my opinion. You just never know what those individual stocks are gonna do, it’s hard to predict which ones are gonna perform the best. And also in gold and silver mining, I feel that you should never do everything for the long term, you really should be doing it for the next six months or the next 12 months, it’s not conducive to that. Gold and silver is more about catching the upside, this is kind of a once in a lifetime thing, you know, if gold goes to 2500, 3000 dollars you want to have a position. That’s a once in a lifetime thing where you make your 500%, 1000% return in a relatively quick amount of time.

Bill: And not only exploration stocks risky but sometimes even a mid-tier company can be risky. We saw recently that Guyana Goldfields they lost, I believe it was, like 1.7 million ounces of reserves to a miscalculation of their ore deposit.

Don: Oh absolutely. All the mid-tiers … Goldcorp just got taken out but now they’re having- now Newmont’s having trouble with their largest silver mine. If Goldcorp wouldn’t have gotten taken out, they probably would have dropped at least 10%, once they closed that mine, maybe more than 10%. And Goldcorp was a billion dollar company so yeah. None of these companies are absolute fail safes, if you will.

Bill: With that, the mega-mergers, you mentioned one of them, how has that affected the way you approach investment right now? Are you a little more cautious when you’re going after some of these late stage development plays because maybe the majors are gonna cast off and sell off some of their, what they would consider second-tier projects?

Don: I always see these consolidation mergers as net positive for investors because it reduces the number of companies that are available, so I think it pushes up the value of the entire sector. For instance, right now we’ve seen two majors get taken out in the last year, right? So Goldcorp we’ve taken out and Randgold get taken out. So two big, strong companies got taken out and so that reduces the number of, for instance, billion dollar companies, there’s less than 30 billion dollar gold producers in the world so when they start shrinking, there’s less to go around. And so it gives investors less choices, if you will, and so when this market does catch fire, you know, people only have so many choices so they’re going to bid them all up and everybody’s going to be winner is my expectation.

Another sector that’s consolidating and a lot of people aren’t taking notice of it is the silver producers. What’s happened over the last five years, ten years is that the silver producers keep buying gold mines and so they’re no longer pure silver miners. For instance, Hecla used to be a silver miner, now it’s a gold miner, that’s what happening. Coeur is another one, they used to be silver and now they’re primarily gold. Pan American they bought a gold miner and so you’re seeing more and more of these companies no longer. So there’s very less, if silver takes off and silver runs to 50, 75, 100 the companies that are still pure silver miners are going to explode because there are very few of them left. And I don’t think a lot of people have recognized that and these silver companies have not been getting recognized for that potential value, the leverage that they currently have.

For instance, the GSR ratio, today I just checked it, it’s at 86. 86, you know that’s near an all time high, so the silver miners have a 2:1 leverage over the gold miners because that ratio is gonna cut in half. Guaranteed it’s going to cut in half to 40. It did that last time in 2011, there’s no reason why it won’t again.

Bill: Yeah, no, that’s a good point. It’s kind of interesting, I was expecting you to say that you were buying silver 10 ounce bars, I’ve done that myself but yeah, with silver under 16 I remember that I was buying in the 20s years ago and I thought I was getting a good deal back then. So I totally understand your rationale for loading up on that now, but that did take me by surprise rather than mentioning silver miners first, but as you say now, silver miners are also a good deal.

Don: Well the reason why, see I’ve been doing this for a long time so my portfolio is pretty much finished, I mean, I own all the silver miners out there. So I don’t have any silver miners on my bio list, otherwise I would be probably be buying the silver miners instead of the physical silver. So last year I was accumulating Litecoin, I accumulated Litecoin for pretty much the whole year and now we’re seeing Bitcoin come to life and I was accumulating Bitcoin when it was sub 1000. So now last year I accumulated Litecoin the entire year, instead of buying miners, like I said my mining portfolio is pretty much finished, and now after I finished accumulating Litecoin I decided, “Okay, now what can I accumulate now”, so I started accumulating physical silver just ’cause it’s sub 16.

At the end of the summer I’m not sure what I’m gonna do next, I’ll have to wait and see what looks attractive at the end of the summer, but by the end of the summer it’d probably be physical silver.

Bill: Don, I have a lot of new investors, as I mentioned in the introduction, that get ahold of this podcast and listen. I’d like for you to speak to them for a moment, if you’re sitting down with a new investor, and there’s many of them listening to us right now, a new resource investor, what would be some of the key advice you’d want to give them?

Don: Oh, that’s a great question. So first of all, my new book’s out, it’s not my new book, I’ve updated my book. I haven’t updated it in three years so there’s probably going to be a link on your website, put a link to my book there.

Bill: I’ll put it in the show notes.

Don: And this is the seventh edition, so I haven’t updated it in three years so first of all, read that book. It’s going to show you a lot of, you know … it’s basically a guide on how to do it, it’s pretty in depth. There’s certain rules you need to follow, one I tell people, don’t chase drill results. You can do that once in a while if a stock is trending upward, if you see a stock, for instance, let’s say it’s trading under 20 million, market cap, say 5, 10, 20 and it doubles in value based on drill results, yeah you can jump in with, you know, and chase those drill results and see where it goes and double your money fairly quickly, but just recognize the risk. A lot of these stocks will pop up double, triple in value and they’ll crash back down. So if you’re gonna chase drill results, you’d stop losses.

Also, don’t invest in companies that don’t have the goods. You want to make sure that, what they call flagship companies. So a flagship company is a company that has 40 million ounces of silver or 2 million ounces of gold, so company doesn’t have a flagship property then your risk is really increased. Most of my losses have been companies that just didn’t have the goods, so that was the other one.

The other one we mentioned earlier about putting a lot of money in a single stock, I always say 3% max and if you do one stock at 3%, that should be the only one at 3%, don’t be doing 4 or 5% in a single stock, it’s just too much risk. 1%, there’s nothing wrong with doing 1% in these stocks that are gonna return really good.

I don’t have time to go over all the various things you need to look at, you know, the properties, people balance sheets, stuff like that, so you can check my Seeking Alpha articles, each article I usually mention the things that I look at in a particular stock and then you can do the book. You can come to my website, I don’t think I have a link to Seeking Alpha though, in my site goldstockdata.com But you can do a search on Seeking Alpha by my name, Don Durrett, and you’ll find- I usually post one article a month and it has all my tips in there.

Bill: Yeah, and I think you have like 2000 followers on Seeking Alpha, you’re quite popular.

Don: Yeah.

Bill: All right, the book is “How to Invest in Gold and Silver: A Complete Guide with a Focus on Mining Stocks”, we’ve talked about bullion, 10 ounce silver bars, and mining stocks. Don’s book covers it all, the first part of the books deals more with precious metals investing and the second half deals more with mining stock investing and if you’re newer to the sector you do want to pick that up. If you want to check out Don’s website and his paid service, you go to goldstockdata.com. Well Don, I appreciate you joining me again and I look forward to catching up with you again.

Don: Thanks Bill. We’ll do it again.