Gold Investments Today: An interview with Donald J. Hoppe
Donald J. Hoppe is one of the widest acclaimed authorities on all types of gold investments in the world today. He is author of the definitive and prophetic works HOW TO INVEST IN GOLD STOCKS AND AVOID THE PITFALLS and HOW TO INVEST IN GOLD COINS, which have reached large readerships throughout the world. Mr. Hoppe is actively involved in a plethora of business activities which include his presidencies of Investment Services Inc., and the Numismatic Investment Service, directorships in First Coinvestors Inc. and Aureus Ltd., and a governorship in Rare Gold Management, Inc. He also serves on the Editorial Advisory Board of INVESTING PROFESSIONAL magazine and as a private consultant to a Swiss bank. He has also written articles on a diverse set of topics for magazines such as AIR PROGRESS, MECHANICS ILLUSTRATED, and INVESTING PROFESSIONAL. He contributes to financial newsletters and lectures at financial seminars. Through the years his financial advice has meant millions of dollars in profits and an incalculable sense of well being to those who have heeded it.
REASON: In the past you have been quite negative about the prospects of U.S. citizens getting back their right to own and trade in gold bullion. Have recent developments altered your opinion on the repeal of the Gold Reserve Act?
HOPPE: Yes, they have. Developments such as the reduction of the Interest Equalization Tax to zero, and especially the Treasury's liberalization of the gold coin regulations, definitely point to a change of policy on the part of the administration. I can envision this repeal by the end of 1974 if the price of gold reaches $200 an ounce. The whole thing is not a question of time, but rather a question of the price of gold, more than anything else.
REASON: Why do you consider that the pivotal factor?
HOPPE: Well, when convertibility can be safely restored to our currency—in other words, when the price of gold reaches a level where we can safely restore convertibility without jeopardizing our gold reserves—then it becomes practical to allow free gold trading in the U.S. For example, if we restore convertibility at $200 per ounce, we will have five times as much gold to sell as we did at $42 per ounce.
REASON: The American public is showing a growing awareness of gold investments. Do you view the recent Merrill Lynch study, which suggested "an exciting future for gold," as a harbinger of an even greater enthusiasm for gold investments on the part of the American public?
HOPPE: When the big brokerage houses begin recommending the gold stocks, the stocks will become respectable. You know you can't sell any stock without sponsorship and, if this sponsorship comes from the big brokerage houses, then sure the golds will become respectable. Of course, this isn't the first time that gold stocks have been respectable. They were very well thought of in the thirties, for instance, when Homestake went from $56 up to $544. This is merely a case of history repeating itself.
REASON: With some observers claiming that the big bull market in gold has only just begun, especially if there are only a few, if any, investment alternatives, can you envision a scramble if investors try to get into the golds at any cost and turn the whole thing into simply a "numbers game," with the public willing and desperate to buy anything that starts with a "G"?
HOPPE: Yes, there is always that possibility. The gold stocks are now becoming the glamour stocks of the seventies as electronics and space issues were in the sixties. However, I don't see the golds selling at a hundred or more times earnings as the aerospace issues did. I do think it is very possible that they could sell at 20 times earnings. Of course, any time you have glamour stocks, you can have very volatile markets with strong price crises; you can have volatile setbacks as well. And the glamour stocks of the past have shown that they can go up a lot further and continue a lot longer than seems reasonable.
REASON: Whenever anyone thinks of the public and the market, mutual funds come to mind. However, almost across the board, the mutual fund industry has been taking a hellish beating. A notable exception would be International Investors, which posted about a 60 percent gain last year with roughly 90 percent of its assets in gold shares. When the word is really out on gold, can you see this and similar funds (several are currently being launched) becoming really popular with the public on a broad scale, or do you think the public is becoming permanently soured on the fund concept?
HOPPE: I don't think the public is soured on the fund concept at all. I also think anything that is new and has glamour about it can be sold to the public and the public will furnish a ready market for gold-oriented funds if they could be sold on that basis. The whole thing depends on how much gold is in the news and how long this gold market continues. Many of the traditional funds are beginning to improve their portfolio performance by buying gold shares. Of course, this becomes a danger because the more the funds get into gold shares the less liquid they become. That is what we're seeing now with old glamour stocks such as the IBM's and Xerox's. When a fund has to get out of one of these, there is no ready market; they can only sell to some other fund. I can foresee a time coming when the funds, for example, will have an enormous position, say in Free State Geduld or President Steyn or some other mining company and when the fund wants to sell 100,000 or 200,000 shares, who do they sell it to? They can't sell it directly to the public without depressing the market.
REASON: Won't this whole problem be compounded by the fact that most mining companies are very thinly capitalized?
HOPPE: That's true, except I think what's going to happen is that as the prices are bid up, you are going to see numerous stock splits and stock dividends so that capitalizations will not remain as thin as they are now.
REASON: Many investors in gold shares are concerned that public envy will force the government to do something about the "windfall" profits of the "un-American" gold speculators. How do you feel about this possibility?
HOPPE: Although I can see this as a legitimate investor concern, I don't think it's probable. It was not done in the thirties when investors made enormous profits in the golds and were not taxed on that basis. If anything, there could be a tax on the profits of the mining companies themselves. On the other hand, I think it would be in the best interest of all governments, especially the U.S. government, to promote the production of gold for our monetary reserves. I said a long time ago that when this crisis came, the government would shift its position from restricting to encouraging the production of gold, and I think that we're seeing that happen today.
REASON: There are also those people who are worried about actual confiscation of gold shares, particularly South African shares held in the form of American Depository Receipts (ADR's). What advice do you have for them?
HOPPE: This is always a possibility, since we simply don't know what idiocy the government can think up next. But, it looks to me like the present thinking is to encourage investment in foreign shares, as evidenced by the reduction of the Interest Equalization Tax to zero. I really don't think they have any plan for confiscating these shares, although other countries have tried it at other times. If you are worried about confiscation, the way to get around it is to have your ADR's transferred to International Depository Receipts (IDR's) by the Morgan Guaranty Trust or whoever is the custodian for your ADR's. The IDR is a bearer certificate that can be negotiated anywhere in the world. It's not made out to you personally, but rather, it is a certificate that can be readily negotiated in any currency at any time and any place. For some reason, the banks are reluctant to give out advice or to make public the fact you can change ADR's into IDR's. If you're interested in this change, contact the registrar of your ADR certificates.
REASON: With recent and massive increases in the price of petroleum, there is a great deal of speculation as to what the Arabs will be doing with their new-found liquidity. With the growing paucity of alternative investments and currencies, can you see the OPEC (Organization of Petroleum Exporting Countries) nations making a real run for the bullion vaults in the near future?
HOPPE: I think what the Arabs want is a convertible currency. As the Oil Minister of either Kuwait or Dubai said recently, "We have been selling our oil for currency of doubtful and changing value," and until the West got together and decided what the value of their currencies would be, he didn't see the sense of selling us any more oil. I think that's an understandable position. Let me add that the Arabs are going to ask for, and eventually will not sell oil without receiving, either a convertible currency, convertible currencies, or else gold. Whether it is a convertible dollar or a new convertible Eurocurrency, I don't know, but they will demand, and will have to get some form of convertible currency which has a fixed, measurable value that they can trust.
REASON: Some market traders have been looking for a "Petroleum Rally" when the oil embargo is lifted. What are your feelings on this probability, and on the general state of the market itself?
HOPPE: The market is currently poised for some sort of rally and certainly the lifting of the embargo could trigger it. But a rally is a rally and not a bull market. I think some fundamental changes will have to be made before the foundation for a new bull market can begin and we're nowhere near this point now. On a cyclical basis, we possibly could have a new bull market beginning in late 1974 or early 1975, but it is too early for this to be more than a rally. To have a sustainable bull market and a new wave of prosperity, we must have a fundamental solution to the international monetary problem. Now this solution may not last for more than a year or two, but at any rate, they will have something that everybody believes is a workable solution. For example, when the two-tier market system for gold was adopted, in 1968, this was thought to be a workable solution to the degree that it created a bull market that lasted over a year. Now perhaps, we will be getting another interim solution that could be compared to the two-tier market, which was not really a solution at all. But it was psychologically sufficient to lay the foundation for a new bull market in the stocks. The officials at the Treasury and the International Monetary Fund are enormously creative in coming up with stop-gap measures to postpone solving these problems. Of course, this just makes the ultimate solution all the more difficult, but nevertheless, they may come up with something. Yes, very definitely, lifting the oil embargo would be a temporary short term stimulant for the stock market and a temporary short term depressant for gold shares and probably London gold.
REASON: How do you feel about the way the price of gold has been behaving recently?
HOPPE: If you look at the chart of the London gold price, you see that it is going exponential. Where it will all end, I don't know; I would say a minimum of $180 to $200 per ounce, just based on the chart as we see it today. The whole situation is very complex because we are trying to determine the future of literally dozens of world currencies, which will all have their effect on the price of gold. In order to see the top in the price of gold, we will have to see a bottom in the value of the currencies, specifically the dollar, and I don't see any bottom to the dollar at the moment. I don't know of any sound, solid evidence to forecast that the dollar is going to stabilize at any particular level. In other words, as long as we have our present economic and political philosophies of managed money, I don't think there is any limit to the depreciation of currencies. Until we change our whole economic and political philosophy, I think we will have continuous inflation.
REASON: Since Homestake is the most important gold mining property in America today, I'm sure our readers would appreciate some of your observations on the investment potential of this company.
HOPPE: I've been a bull on Homestake in the past and I still think it has a bright future. The company also has an interest in lead and zinc production, in addition to being the largest gold producer in North America. I like the management of Homestake and think the real future will be if they can get additional gold properties. The Lead, North Dakota, mine is still a viable property. They have recently opened up the mine down to the 8,000 foot level and there appears to be ample ore reserves for operations well into the future. The only drawback with Homestake is that only about 40 percent of its current income is being produced by gold. Of course, as the price of gold goes up, this proportion will undoubtedly increase.
REASON: Homestake is known for its volatility, so could you give us some guidelines for properly buying the stock?
HOPPE: As to where to buy Homestake, I think we have to go on an earnings basis. Homestake just announced their earnings for the past year at about $3.70 per share, which means the stock is currently selling for more than 1973 earnings. I think there is a fair chance we'll see 1974 earnings in the neighborhood of seven dollars or more. At 20 times earnings that would bring the stock up to a price of $140 or more. Whether you could sustain the 20 times earnings valuation for Homestake, I can't say, but I do think with the fund and public interest in the golds the way it is, that a 20 times earnings figure could stay for quite a few years. I want to mention here that during the great boom in Homestake shares in the thirties, the PE ratio on Homestake never rose above 10, but you see, times do change.
REASON: How do you feel about the major Canadian mines such as Campbell Red Lake, Dome, and Giant Yellowknife at this time?
HOPPE: In the Canadians, I think the situation is analogous to what we have with Homestake. We have to judge the merit of those stocks based on their earnings and the multiple people will attach to their earnings. Campbell Red Lake is selling around 20 times earnings at present and Dome is around 40 times last years earnings and about 20 times potential 1974 earnings. If you assume that Dome made better than $6 per share in 1973 and it is now selling for $180, that's a multiple of 30 based on 1973 earnings. We can anticipate that 1974 earnings will be $12 per share, and in that case, it is only selling at a nominal 20 times earnings. At this point, I would be inclined to buy Campbell Red Lake and Dome as trading stocks and to pick these, whether for investment or trading, on the reactions rather than the bulges because I think they are generously discounted at 20 or 30 times earnings. However, we don't know to what multiple the public will eventually drive them. But there is a scarcity factor with gold mines, so who knows—maybe we could see Homestake, Dome, and Campbell Red Lake selling at 50 times earnings.
REASON: Some of the South African mining finance houses have not been performing as well as some investors expected, or would have hoped since this past September. How do you feel about the whole question of mining houses in a gold portfolio?
HOPPE: Not all the mining houses have performed badly; Goldfields of South Africa, Centrust, and Johannesburg Consolidated are among those that have performed very well. The criteria I think you have to observe in buying a mining finance house is the percentage of gold in their earnings and assets. Obviously those with very small percentages of their assets in gold have not profited from the gold boom. But there are some houses that have anywhere from 45 percent to 80 percent of their assets and earnings in gold. Part of the reason the houses did not participate to some extent in the gold boom and were tardy in their upward moves was because there were some forced liquidations of these stocks by the London brokerage and banking communities. The London financial community was in a lot of trouble last fall and was selling these shares off for liquidity. Last fall, I did recommend buying the mining finance houses because I knew they had been depressed to absurdly low prices, and since then, they have come back rather smartly. But if you want to play a finance house, get one that has at least 40 percent or more of its assets in gold.
REASON: For those people who have been in gold stocks for a time and who have experienced large capital gains, would you recommend taking a portion of their profits and working them back into mines that are in the process of acquiring longer lives and perhaps have yet to experience large premium runs?
HOPPE: Possibly a portion, but certainly not all because I still think that the basic holdings in the portfolio should remain the long-life and higher quality mines. This is a case where you must differentiate between speculation and investment. For investment purposes, long-life mines such as Kloof Vaal Reefs, West Driefontein, and Western Deep Levels, should be the basis of your portfolio because they will survive no matter what happens to the price of gold. For example, a retreat of the price of gold back to the $100 level would still allow a West Driefontein and a Western Deep to keep operating but would have serious effects on, say, East Rand Proprietary. Since we don't know ultimate outcomes for sure, safety should be the ultimate criterion. On the other hand, according to my calculations some of the highest leveraged mines are East Eriefontein, Hartebeestfontein, Ellsburg, and possibly South Vaal and Randfontein, which I have had in my high quality stocks listing, so the leverage is not always in the low quality issues.
REASON: To what degree do you weigh potential or actual income from uranium as a by-product of gold mining when you evaluate a property such as Vaal Reefs?
HOPPE: I disregard the value of the uranium entirely. In the past decade or so uranium has been a bear market with the actual consumption of uranium below expectations. I'm not that knowledgeable about what the future will bring as far as the uses of uranium, but it wouldn't surprise me a bit to see it by-passed in favor of some more radical form of energy. Earnings from uranium don't particularly impress me; they are nice if you have them, but the mine certainly should be capable of surviving without them.
REASON: In addition to gold, platinum and shares in platinum companies will occasionally be touted as an effective monetary hedge. Do you feel there is any place for a platinum commitment in an essentially all gold portfolio?
HOPPE: Platinum, like silver, is strictly an industrial commodity and, unlike silver, is one of the precious metals that is currently in oversupply. Even discounting its use in auto emission controls, there is still an oversupply. I'll grant you that in a severe inflationary situation almost anything you can get your hands on is a hedge (say copper and zinc) but I don't think the platinum market is liquid enough, and I would confine my actual metal holdings to gold coins and perhaps some bullion if it is allowed, and let the platinum investments go by.
REASON: I understand you are negative about silver for investment purposes. Could you please explain why?
HOPPE: I'll grant you that silver is probably an inflationary hedge in the fact that it is the poor man's gold and someone can establish a position in the metal with just a couple of dollars. However, I feel there are two important things going against silver; first, silver is an industrial commodity and in the case of a slowdown or depression in the economy, its price will drop. Second, if and when the public is allowed to own gold bullion, there will be a lot of switching out of silver into gold. I don't like the way the silver market is behaving at this time and personally regard the whole thing as too speculative.
REASON: Your predictive abilities in the past have almost verged on the uncanny. I'm sure our readers would appreciate your thoughts on what type of economy we are going to see in the next several quarters, and where you think the price of gold is heading?
HOPPE: I predicted in the early part of 1973 that there would be a recession starting in the first part of 1974. This was before the oil crisis became apparent which of course will make this recession even more severe. I also predicted a recovery in the final quarter of 1974 or the first quarter of 1975. As far as the price of gold is concerned I'm looking for a possible $200 by the end of the year with a minimum of $160. For the long term we don't know where the bottom of the dollar is, so we don't know where the tip of the gold price is—although we might see $300 gold by 1976. I think we are in a long term bullish trend in gold and I see no sign that the bearish trend on the dollar is ending, so I would suggest that you stay with the major trend.
REASON: I understand you are thinking about writing a third book. Would you give us a preview?
HOPPE: I'm thinking about writing a book on the general theme of money, gold, and freedom because I feel that sound money is essential to political freedom. I think there is a very direct relationship between money, gold, and freedom, and I would like to put that in historic perspective and comment as to what I think ought to be done to prevent a loss of freedom from occurring in Western civilization. I don't think even today people realize what a threat it is to our whole way of life, to Western Civilization, to capitalism, to human dignity, and freedom to have lost control of our monetary system. Unless we restore sound money, the free market economy cannot survive and I would like to be very forceful in pointing that out.