Gold and rare earths juniors in the bargain basement - Lundin

Brien Lundin, chief executive of Jefferson Financial says he's slowly accumulating gold and rare earths sector juniors on the cheap that have big news in their forecasts. Gold Report interview.

TORONTO -

The Gold Report: You've compared the gold market to the weather because it's about that predictable. What does your experience tell you about navigating a market like this?

Brien Lundin: You have to be nimble and keep your eye on the big picture. Every asset class is searching for a trend. The U.S. economy is in transition. The equity markets are in transition. Everything is in limbo searching for the next trend line. There's just no telling whether that next direction is upward or downward.

In times like this, investors need to look beyond the day-to-day headlines. They need to keep the bigger picture in mind, focus on buying value on the dips and not getting too aggressive in any case.

TGR: You were recently at the Prospectors and Developers Association Conference in Toronto. What's the common refrain you're hearing from investors and what's your response?

BL: They're wondering when things are going to turn around. I wish I could provide them with the answer because I'm searching for that answer myself. We needed calmer markets, which we have now. We don't have the dancing-along-the-precipice type of markets that we had earlier this year when it seemed Europe could crater at any moment. Now we need to have some recognition that there is going to continue to be an easy-money environment as a backdrop and that there will continue to be monetary inflation to support the commodity markets and, most important, gold. Until we have fairly steady, non-crisis-driven markets with a consensus toward monetary easing, we won't see investors turn to the more speculative assets, such as mining shares.

TGR: Many gold investors believe that continued growth in the U.S. economy will eliminate the need for further quantitative easing (QE) by the U.S. Federal Reserve, which could suppress the gold price. You argue that there is already $1.5 trillion in the system that hasn't been deployed by the Federal Reserve. In February, you wrote, "This money officially doesn't exist. Until the nation's banks start withdrawing it to make loans and insert the funds into the economy, sustained U.S. economic growth, in other words, won't be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today's huge overhanging money supply accelerates and inflation truly kicks in." That sounds promising for precious metals prices, but are banks ready to start lending their hoards of cash?

BL: Simply put, they aren't yet. What I was talking about was a scenario of economic growth, one in which the banks would not only be able to start lending again but would also be eager to start lending to capture that greater margin by creating loans. Under that scenario of economic growth, bank lending would increase and there would be a shot of adrenaline hitting the market as reserves become currency.

The key is that so much debt and currency have already been created that gold wins in virtually any economic scenario, whether it's economic growth or a continued easy-money environment in a more sluggish economy. Under either scenario over the long term, gold is a winner precisely because there's already so much debt and currency.

TGR: Do you have any timeline for that scenario to take place?

BL: One of the important timelines is presented by the presidential election in the U.S. That is going to be a key inflection point for the markets. If the current administration is retained, there would be more easy-money policies. Those policies won't suddenly end if we see a Republican elected, however, because there's been so much debt created in the U.S. and Europe. There's no way to escape that burden through economic growth, austerity plans or tax hikes. We cannot manage that mountain of debt that's already been accumulated. The only way to address it is through monetary inflation, by making the debt less valuable by increasing the quantity of dollars and euros.

TGR: You can't do that with gold.

BL: That's why gold is gold. As J.P. Morgan is rumored to have said, "Gold is money. That's it."

TGR: Gold and silver equities have lagged the prices of their respective commodities since December 2010. What tangible move in the gold price is necessary to lift share prices to float the boat of all these junior companies? They're not even moving on good drill results right now.

BL: It's as much a matter of time as price. It's not just a matter of getting a $100/oz, $200/oz or a $300/oz rise in the gold price, which, of course, would move the juniors if it occurred in a steady fashion against the backdrop of normalcy in the markets and economy. That rise would need to occur over a period of time long enough so that investors would be comfortable in taking on risk. Juniors cannot thrive in an environment where investors are searching for safety.

TGR: As an approach to the moribund gold equities market, you recommend a stick-to-your-knitting strategy of continuing the "slow but steady accumulation of undervalued companies with news on the way." Are you expecting some positive news in the near future?

BL: There are a lot of bargains out there that aren't just grassroots exploration companies with an idea and not much more. These are companies that either have resources or are very likely to turn out very positive news in the near term.

TGR: The rare earth elements sector took a big hit in 2011, but you still see value in a few plays. Tell us why rare earths still remain on your radar?

BL: The economic fundamentals have not changed. These plays go in and out of fashion in the markets and there are bursts of buying here and there. A number of these plays are still much undervalued.

TGR: It's been a pleasure speaking with you.