Chris Mayer

Let’s start with a little quiz. See how many you get right:

Who holds the majority of U.S government debt?

a) China
b) Japan
c) USA

What percentage of products consumed in the U.S. are produced in the U.S.?

a) 25.3%
b) 58.6%
c) 88.5%

What percentage of products consumed in the U.S. are produced in China?

a) 78.6%
b) 23.8%
c) 2.7%

Richard Poulden posed these questions in his annual letter. I met Richard for lunch at the Blue Rain restaurant at the Ritz-Carlton in Dubai last week. He is an ace at turning nothing into something in the mining world. Richard built up Sirius Exploration, a potash concern, from a mere $3 million to a company worth over $460 million. Investors made over 800%. Today, he is trying to do it all over again as the founder and executive chairman of Wishbone Gold.

Richard is one of those entrepreneurial characters that one seems to find often in Dubai. My friend Peter Cooper, whom I like to call “our man in Dubai” and who edits ArabianMoney, made the introduction. All three of us sat at a table behind a glass wall situated behind the hotel’s 10-story waterfall and enjoyed excellent Thai food as we talked about the markets.

Poulden has a definite point of view on the markets, which is worth sharing. And that brings us back round to those questions.

The answer is c) in every case.

“China actually holds only around 7.5% of U.S. debt,” Richard writes, anticipating surprise that China isn’t the answer to the first question. “The vast majority is held by U.S. institutions and individuals.”

The second and third questions also may surprise you. Most of what the U.S. consumes the U.S. makes. And there is little dependence on China for anything. “The point here,” Richard says, “is that this shows you just how disconnected the U.S. economy actually is from the rest of the world.”

Richard is a gold and silver man. He is not one to trust the value of paper currencies. He is also aware of the debt issues of the U.S. Still, he believes the U.S. will be okay. “I know they don’t deserve it,” he says of the U.S., “but it is all going to come right. Never underestimate the underlying strength of the American economy.”

I would agree with this. The big reason why Richard thinks this way will be familiar to long-time readers. “Yes, the shale/hard rock oil and gas reserves under the U.S. are going to make them a net energy exporter in a couple of years,” he writes. “They can once again ignore world energy prices.”

Second, but related, is the comeback of American manufacturing. “Forget cheap labor,” says Richard, “in modern manufacturing, the cost of energy is almost always the key, and this will prove to be America’s salvation.”

Based on these things, Richard “can see how a U.S. recovery on the back of cheap energy, regardless of the debt, could happen.”

At lunch, we talked about China too. “If China is not already the world’s largest economy,” Richard says, “it is certainly the most influential.” China has accounted for most of global growth since 2002. Richard travels quite a bit to China. He acknowledges China has slowed down, but it is still growing quickly. He seems unconcerned about a crash in China and, instead, points to the phenomenal growth potential.

“China will be OK, and the rest of the world will benefit from this,” he says.

He has no such rosy view on Europe. The EU suffers from the same debt problems that plague so many developed markets. But Richard believes the economies of the EU are fundamentally broken. They require a restructuring “like turning around a failed company.” He doesn’t see that happening and so believes there will be no recovery in the EU.

“There’s that old joke that goes, ‘I want to die in my sleep like my grandfather… not screaming in terror like the passengers on his bus,’” Richard says. “Unfortunately, for those in Europe at least, if you are not screaming already, it is time to start.”

Richard is a keen observer of financial markets, but also an active participant as a builder of companies. We talked about the travails of the junior resource sector — all those little penny stocks that speculators love so much.

Like me, Richard has a dim view of the sector at large. Most management teams don’t own much stock and don’t particularly care whether theirs projects become real mines or not. They mostly want to just keep raising money and advance the project. In this way, they can continue to pay themselves.

There are always exceptions, however, and one can make a lot of money backing the right guys. Richard has a track record here, as I’ve mentioned, and a new company called Wishbone Gold. (Richard owns nearly 29% of the stock.) Right now times are really bad in the junior mining world. People seem fearful to do anything. All of these stocks have come way down. Here is a three-month chart of the GDXJ, for instance, which is made up of little gold mining stocks:

DRH_Chart1_02-26-13

It’s been brutal. For a broader perspective, consider that the GDXJ was $40 in May 2011. It is $16 today. As I noted at the time of its peak in the summer of 2011, the commodity bull market was on its last legs. It’s been a swift and nasty down draft for many natural resource stocks since.

No trend goes on forever, however. In this mix of dumped shares, there are some good projects trading at super-cheap prices. I said that I would expect mergers and acquisitions to cure this, as larger gold companies buy out these projects on the cheap.

Richard agreed, and, in fact, this is what his new company Wishbone aims to do. Wishbone Gold went public in July. As described on the company’s website, Wishbone will be a “consolidator of gold projects with commercial potential globally.” The site also adds that “Wishbone Gold has commenced this process through the acquisition of two highly prospective gold licenses in Queensland, Australia and continues to assess the prospectivity of a pipeline of opportunities.” (For more on Wishbone, check out the website here: http://www.wishbonegoldplc.com/)

Let me end with a question of my own. Of the following, which was the best place to put your money over the last 12 months?

a) NASDAQ
b) Wal-Mart
c) Bank of America

The answer is c) Bank of America, which was up 45%. The NASDAQ was up 7%, and Wal-Mart was up 19%. Certainly, Bank of America would’ve been a tough choice a year ago. Banks were unpopular and remain unpopular — as do gold stocks. But that’s where future outperformance comes from.

Investors in gold shares, take heart.

Sincerely,
Chris Mayer

Original article posted on Daily Resource Hunter

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents

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