Prepare for the Pivot Point in the Gold Exploration Cycle: Quinton Hennigh

Source: Streetwise Reports Editors  (6/18/12)

http://www.theaureport.com/pub/na/13643

Historically, major gold exploration has occurred when the Dow was down and out. In this exclusive interview with The Gold Report, geologist and Exploration Insights writer Quinton Hennigh talks about the coming gold rush and what that could mean for existing companies.

The Gold Report: While the NYSE Arca Gold BUGS Index (HUI) is up a bit from its May low, it is still lagging the price of gold and not living up to expectations based on the role it has traditionally played as a safe haven for investors. Are we close to a turning point in that dynamic?

Quinton Hennigh: Many investors and speculators are deservedly frustrated and dejected by the recent performance of gold and, more specifically, the gold mining sector. For many of us in this business these ups and downs are the norm, however, I see the current down as a critical one. Something is going to happen. It could be a month, six months, a year or two years from now. We can't know. We may continue to see more pain in junior stocks until then, but a change is coming, and investors should take heed.

My views regarding the cycles in the world of gold mining crystallized during the time I had the privilege of working for Newmont Mining Corp. (NEM:NYSE) while Pierre Lassonde was president. His views on the Dow:gold ratio and what it says about megacycles in the economy and the gold mining sector (detailed in his book The Gold Book, The Complete Investment Guide to Precious Metals) made sense of what I was seeing in the markets and major mining companies' corporate strategies.

TGR: How do you define more vibrant times for gold miners?

QH: This is a bit subjective, but I see these as times when gold mines often made consistent money, the public felt comfortable investing in this sector and perhaps most important, exploration was well-funded, thus contributing to a plethora of great discoveries.

TGR: Why wouldn't gold mining and exploration proliferate as the price of gold rises and the Dow:gold ratio falls?

QH: At first glance, this pattern does appear counterintuitive. When the Dow is down, uncertainty and doubt rule as they do now. We are still climbing the "wall of worry" and that does not aid investment in possible future rewards.

Vibrant periods in the gold world appear to commence around peak gold prices and persist as gold slides downhill. Answers to this conundrum can actually be seen in the world around us right now. The gold mining world is presently experiencing ever increasing capital costs, unpredictable and almost universally high cost of production, and other uncertainties, such as increasing taxes and royalties in countries eager to take advantage of the rising gold price. It is not a comfortable time to invest in this sector.

TGR: So, when will that change?

QH: I do not profess to be an economist, nor do I know when this pivot point, the bottoming of the Dow:gold ratio, will happen or at what level. I simply see this pattern as rather compelling. In fact, it is so simple even a geologist can understand it.

TGR: How can investors capitalize on these trends?

QH: Mining and exploration trundle along during the "white" periods, but it is during the "yellow" times that things are really hopping. These are times when the "gold rush" mentality is alive; geologists are scouring new frontiers for fresh finds and big discoveries are made, one after another. During the period from 1980 through 1997, for example, there was a succession of world-class gold discoveries: Hemlo (15 million ounces (Moz)), Goldstrike (60 Moz), Pipeline (12 Moz), Yanacocha (35 Moz), Pierina (9 Moz) and Busang, the ultimate bubble top. These were discoveries that "made" companies.

Many investors scored huge returns on explorers that struck it big. Investments in majors also paid off. Believe it or not, Newmont was around $5/share in 1983 and hit around $55/share in 1996. Many other people made fortunes as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) moved to the forefront of major gold producers.

Looking back to the gold rush period from the 1930s through the 1950s, huge discoveries were made in the Witwatersrand of South Africa as well as numerous gold camps across the Canadian Shield. Again, these were discoveries that "made" companies. An investment in Homestake Mining in 1929 would have returned 600% by the late 1930s, the height of the Great Depression.

Looking still further back at the cycle that extended from the late 1800s through the early 1920s, gold rushes abounded in the western U.S., Australia, Canada, Africa and beyond. Great gold producers such as Homestake, Gold Fields Ltd. (GFI:NYSE) and Anglo American Plc (AAUK:NASDAQ) made investors fortunes during this boom.