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PETALUMA, CA (The Gold Report) - The Gold Report: Robert, British Prime Minister David Cameron said that theEuropean debt crisis could "get a lot worse." What's your view onthe likely outcome? Robert Cohen: I think he's right. It has the potential to get worse before itgets better. Europeans are going to have to deal with some sort ofEurozone fracture. Greece could certainly exit the euro withinweeks rather than years. It has an election on June 17, and it willprobably be bankrupt by the end of June. TGR: Can the Eurozone survive without Greece? RC: It can survive, but other countries could leave or it could breakinto two parts, like a northern Eurozone and a southern Eurozone. TGR: Is the debt crisis in Europe a continuation of the 2008 marketmeltdown? RC: Absolutely. It's just another chapter of the global financialcrisis. There's been a buildup of global foreign exchange reserves.I think that's the root cause of a lot of the problems in theWestern world. The foreign exchange reserve buildup globally,probably generated out of China and Organization of PetroleumExporting Countries, circulated into the developed bond markets ofthe world. The whole notion of the Eurozone was poorly planned. It doesn'tgive individual central banks the ability to manage their balancesheets to debase their own currencies. Different countries withdifferent economies have the equivalent of one Fed. It's hard toget decisions made in Europe swiftly and effectively. It'sdysfunctional. TGR: How long before it spreads to North America-or does it? RC: We're all connected to the global economy. It can spread veryquickly depending on how interconnected the financial systems arewith one another. TGR: Was JPMorgan's $2 billion loss related? RC: I think that was just a rogue trader. However, it still has to beinvestigated. TGR: How is what's happening in Europe impacting your day-to-day fundmanagement? How do you manage against fear? RC: What's going on macroeconomically is causing dysfunction in thestock market, but not the underlying metals. I'm actually quitecomfortable with the gold price around $1,600/ounce (oz), oil at$95/barrel (bbl) and copper at $3.75/pound. Paper money is losing its purchasing power. What's happeningglobally is creating fear and contagion that's spreading into thestock market. We're at a unique place in history where the metalprices are robust and yet the stock prices are the cheapest I'veever seen them relative to the underlying commodity prices. It's abehavioral finance issue. Investors are cranking up the riskpremiums and their perception of risk. It's manifested in the stockprices across the board. We use quantitative models that statistically measure observationsof the stock market. You already know stocks are cheap. The modelconcludes when stocks are cheap, we should to buy more stocks andless bullion. We run a secondary model that actually brings inother effects, such as the U.S. monetary base. That model has a bitmore of a neutral stance between equities and bullion at present.While one of the models is indicating to put the pedal to the metalbecause equities are super cheap, the other model is saying to easeup slightly. I take a neutral stance between the results of thosetwo models. The other fund strategy is an all-equity fund. We keep it defensiveby owning a tight number of equities. Two-thirds of the fund is in20 names. The remainder is in another 20-30 names. It's a veryconcentrated portfolio. We've hunkered it down into our favoritestocks because you could be a genius stock picker and still miss ina market that is being ruled by fear. TGR: Was there any point in the last 18 months when you wished youcould have been invested in 100% bullion in your strategic goldclass? RC: It would have been doing a "George Costanza" of what our modelsare saying. The models would indicate to go to 100% bullion whenthe market is over-exuberant on stock valuations. Stocks haveundoubtedly been undervalued since 2007. Our models don't indicate if the market is going to get morefearful in the next chapter. We can't predict that. We just observeand allocate accordingly. TGR: Are precious metals equities still safe havens or is that statusall but gone? RC: Gold bullion and gold equities are two different asset classes.Gold is a monetary asset that works through time. If you wanted toprotect your purchasing power, you could have put an ounce of goldin your safety deposit box in 1971 or 16.5 bbl oil in your garage,and today, 41 years later, swapped them at the same ratio. Thattells me that gold keeps its purchasing power. Gold is an ideal wayto protect your purchasing power-not to mention that barrels of oilin the garage would have taken up a lot of space and been a firehazard. We are going through a period of the erosion of the purchasingpower of money. We've always gone through that-our parents,grandparents. One of the slides I use in my presentations is abunch of Vancouver kids in 1947 protesting a hike in the price ofchocolate bars from $0.05 to $0.08. You can look back on it todayat how laughable and cute that is, but it was a serious matter tothem. Monetary reflation is constantly chipping away at yourpurchasing power. Now, are precious metal equities safe havens? While equities arenever safe havens by definition, gold equities can provide thepotential for capital appreciation over the long term. However, thelast four years have witnessed a change in the stock marketfunctionality. The financial crises unfolding in Europe, fiscaldeficits, government debt piling up in the U.S. and global tradeimbalances have put a lot of fear into the equity markets. It'sgoing to bounce along the bottom here for some time. Oftenquantitative easing (QE) is a trigger to get the market functioningwell. In January 2009, after QE1, functionality returned to themarket. Then it sort of wore off again. Then QE2 put some morefunctionality into the market. QE2 has kind of worn off. Here weare, wondering what the governments are going to do next. We need the functionality back in the stock market. QE could help.The market is like a kid that can only ride a bike with trainingwheels on it. If the training wheels start breaking or you try totake them off, the kid can't ride the bike. We need new trainingwheels right now. TGR: Are you expecting QE3? RC: I am, which presents an opportunity in itself between now and thetime it comes. It's a good time to accumulate patiently. TGR: Are you following stories in West Africa? RC: We're following quite a number of stories in that region.Geologically, it hasn't been as well combed over as other parts ofthe world. Political risk isn't as bad as the worst places in theworld. It's not a bad risk-to-return ratio. You have to select yourcountries. There are obviously going to be problems in West Africa,usually infrastructure related-be it power, water or skilled labor.Even with those hurdles, there are some robust projects with decentinternal rates of return (IRRs), good payback and relatively fastpayback periods. West Africa is where the interesting up-and-comingcompanies are working. TGR: Can retail investors still make money when the markets go down andsideways as they have in 2012? If so, what strategies would yousuggest? RC: That's the million-dollar question. If markets are flat tooscillating, investors can make money with short-term trading, butI don't encourage that. Like Warren Buffett, I encourage investingin good-quality businesses because just picking the right projectsdoesn't guarantee that you'll make money. TGR: Thanks, Robert. A mining and mineral process engineer by training, Robert Cohen is vice president and portfolio manager for GCIC. His experiencein the mining industry is extensive and includes work as anengineer and a corporate development adviser for an internationalgold mining firm. Cohen completed his Bachelor of Applied Sciencesin mining and mineral process engineering at the University ofBritish Columbia in 1992. In 1998, he received his Master ofBusiness Administration and, in 2003, Cohen received his CFAdesignation. Article published courtesy of The Gold report - SUBSCRIBE to Mineweb.com's free daily newsletter now. I am an expert from cartonmakingmachines.com, while we provides the quality product, such as China Folder Gluer Machine , Cardboard Making Machine Manufacturer, Corrugated Box Making Machine,and more.
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