'2012: Silver is going to outperform gold'

James West,the editor of The Midas Letter and portfolio advisor of the Midas Letter Opportunity Fund, isn't interested in timing the precious metals market—that's a good way to end up butchering perfectly good investments. He believes Silver price is going to be one-sixteenth of the Gold price so it's already undervalued by at least two-thirds. Gold and silver are both going to continue to appreciate. Also he agree with Sprott when he says that silver is going to outperform gold.

Companies Mentioned: B2GOLD CORP. - CONFEDERATION MINERALS LTD. - CORAZON GOLD CORP. - FOUNDATION RESOURCES INC. - HUNTER BAY MINERALS PLC - MEADOW BAY GOLD CORP. - NEWSTRIKE CAPITAL INC. - PRODIGY GOLD INC. - SCORPIO GOLD CORP. - VENTANA GOLD CORP.

The Gold Report: Since you launched the Midas Letter Opportunity Fund earlier this year, some might suggest The Midas Letter is beholden to companies held by funds and is not as objective as it once was.

James West: It's definitely not as objective as it was once. I'm very biased toward the companies I choose to cover because I am invested in them, my retail subscribers are invested in them and now my institutional clients are invested in them. But the caveat is that the companies are now beholden to me—not vice versa—because if they don't deliver on what they represent, I will ensure that the whole world knows about that.

TGR: You're developing a Midas brand. Earlier this year, you were forming the Midas Letter Gold Capitalization Fund, which will lend companies capital to bring gold and silver projects into production.

JW: We are continuing to develop infrastructure and partnerships with other entities that can provide the financing-engineering component. For this fund, the money is not really the hard part. There are a lot of funds that are going from company to company and saying, "We'll lend you some money in exchange for a portion of your offtake." Everybody's trying to capitalize on the commodity-stream model.

The difficulty is in identifying the companies to extend those loans to. Companies don't want to do deals in these conditions because the terms are too onerous. The guy with the money is able to drive a hard bargain because the market is weak.

The fund continues to evolve, but it's still a ways off yet. The state of the market is such that there is a lot of wait-and-see going on.

TGR: The royalty model has worked well for Royal Gold Inc. (RGLD:NASDAQ), Franco-Nevada Corp. (FNV:TSX) and Silver Wheaton Corp. (SLW:NYSE). Sandstorm Gold Ltd. (SSL:TSX.V) is now taking the same path. Will too many companies in that space kill the model? If these companies start competing too much, the margins could disappear.

JW: That is largely why the fund is essentially on hold. There are all these firms trying to throw money at various gold deals. Most of the companies are saying, "No, your financing is attractive, but you're looking to encumber our asset." They want a portion of the offtake, a warrant kicker, a negotiable conversion rate and they want to be the first creditor on the asset. The gold in the ground is not going anywhere. It's only growing in value. But companies are going to start running out of money soon and there will be bargain-basement prices in equity financings. That is going to make debt financings more attractive.

TGR: Most pundits think gold is headed lower before it heads higher. The markets would seem to agree. What's your outlook for gold?

JW: I have unrestrained bullishness for the future of the gold price. I look at the 10-year picture: Gold has increased every year by 21%, and 2011 is no exception. Let's take the well-known pundit Dennis Gartman, who said on CNBC this week that he has completely exited his gold positions because he thinks gold is going to $1,450 an ounce (oz). If you were to look at all of the times that he has gone on CNBC and said that. . .anytime I hear Dennis Gartman say it's time to sell, that's when I start buying gold again! When he says he's bullish on gold, he's trying to catch a falling knife. He has done that repeatedly in the five years that I've been tracking those statements. He must have very bloody hands and no fingers left because he is consistently wrong.

TGR: You share Eric Sprott's perspective on silver, which is to say there is roughly 16 times more silver in the ground than gold, thus the silver price will eventually reach one-sixteenth the price of gold. Sprott recently said that silver-producing companies should withhold a portion of their production rather than sell it for cash that just sits in banks and depreciates. What do you make of his statement?

JW: Every company that produces silver should hold it on the balance sheet as opposed to cash. It's the smart thing to do. If you subscribe to the ideas that the gold:silver price is going to be 16:1 and precious metals have nowhere to go but up because of the debasement of currencies in growing numbers of sovereign jurisdictions, it makes perfect sense.

TGR: Nonetheless, Silver companies measure their profits in dollars.

JW: If a company has silver on its balance sheet, then it should be able to count that as part of a liquid-asset holding denominated in dollars.

TGR: There's not an analyst on the Street that wouldn't significantly discount a company's silver holdings given that if it liquidated them all at once that would drive the silver price down.

JW: I agree that there are few analysts who would not penalize a company for that. However, some analysts, and I think they're the most credible analysts, would actually give the company a premium for such thinking. What that demonstrates to me is a flaw in the thinking of most analysts. It's a deficiency in generally accepted accounting practices. In the future, we'll look back to this point in history and say, "Boy, were we ever dumb back then." We should be valuing Gold as money. It should be valued at a premium to cash on the balance sheet, as should silver. Analysts should value those companies accordingly. It's not conventional wisdom. However, I believe that one day it will be and that it's a superior analytical perspective.

TGR: What's your outlook for silver?

JW: Its price is going to be one-sixteenth of the gold price so it's already undervalued by at least two-thirds. Gold and silver are both going to continue to appreciate. I agree with Sprott when he says that silver is going to outperform gold.

TGR: What companies in northern Ontario's Red Lake gold camp do you find interesting right now?

JW: Confederation Minerals Ltd. (CFM:TSX.V), Prodigy Gold Inc. (PDG:TSX.V) and, just outside of Red Lake, Foundation Resources Inc. (FDN:TSX.V). Foundation has recently become a top pick in that region because it has 860,000 ounces (oz) gold and an NI 43-101 valued at $5.80/oz in the ground based on its share price. It's just a spectacular opportunity.

TGR: Prodigy put out a new resource estimate on its Magino project Nov. 2 that said there's about 55% more gold there than previously thought. What are your thoughts on that project?

JW: We hold Prodigy in the fund and I continue to follow it. That new resource certainly demonstrates the deposit is growing. It's still open in multiple directions. The company is aggressively developing it. The market hasn't been kind to Prodigy, but Prodigy is absolutely one to hold because it's an excellent opportunity at a great price.

TGR: What stands out about Confederation?

JW: Confederation is really interesting. Its joint-venture partner on the Newman Todd project is Redstar Gold Corp. (RGC:TSX.V), which holds 30%. Think about this: The company that owns 30% is valued at $50 million (M), but the company that owns 70% is valued at $17M. Redstar's other projects are not really interesting projects. I've got to assume that its share-price valuation is based on Newman Todd. There's very little risk of this not becoming a mine. We're headed toward an era similar to 2008 where the prices are astronomically low. Fortunes are going to be made in the years ahead by the people who were smart enough to pick up these high-caliber deals at super low prices.

TGR: Let's head to Nevada. You follow a couple of companies there, including Scorpio Gold Corp. (SGN:TSX.V) and Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX). What's Scorpio's horoscope?

JW: Scorpio is going to be an absolute home run. Peter Hawley, who heads the company, has a great track record and is well regarded. If anyone can drive this thing forward, it's him. But really, all an investor needs to look at is the most recent intercepts: 24 meters (m) grading 5.9 grams per ton (g/t), 3m grading 15 g/t. It looks to be a major discovery—a winner.

TGR: What were your impressions of the recent drill results from Meadow Bay's Atlanta Gold Mine project where there was one intercept of roughly 20m of 3.5 grams gold equivalent?

JW: Meadow Bay is a fault-controlled system. Everywhere along the fault, which has been traced north to 5 kilometers (km), has 20–40m intercepts grading 1–3 g/t gold. That should take the company to more than 1 Moz in the near term. There are two giant porphyries, one of which was the 60m intercept grading just over 1 g/t gold and copper, as well as this new one. The potential for Meadow Bay with these two porphyries, as well as the fault-controlled system, which continues to be open to depth to the north and south, is very interesting. The potential is certainly multiple million ounces.