Gold and Brexit

(Jubilee Gold Exploration Part—II)

Gold is soaring. It should—and a lot—but in my view not for the reason it is.

Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost—one must minimize its use. Moreover, insuring against Brexit might be equivalent to ironically insuring against a good event.

The market believes (based on its statist views, in which those running our institutions are omniscient, when they actually are quite naive, incompetent, and incapable of understanding the concept of complexity) that Brexit will lead to wealth-destruction.

Austrian Economics knows (“knows” because Austrian Economics is the only real economics) that Brexit will actually aid wealth-creation, by reducing the impact of European bureaucracy on the UK.

Brexit will also enable more control over migration into the UK. While in an ideal world, I would want free movement of people, migration of people who refuse to assimilate will irrevocably harm Europe. I recently spent a fair bit of time in Sweden, including visiting no-go areas of Malmo. Media headlines don’t bother me, and I don’t see migrants as security risks. My problem is that they import exactly the same social values and a culture of irrationality that they left behind. They end up voting in ways that replicates socialism and its associated tyranny on their adopted home. And a 15-minute talk with a guy on the street should tell you in clear terms that “reason” is not an antidote to “irrationality.”

Apart from a possible short-term chaos, Brexit will be very good for the UK and the world economy.

Why do I think Brexit is good? Over the last 400 years, societies and economies around the world have become increasingly very complex. This has created huge pressure on the state to decentralize. Quite to the contrary, driven by democracy, we have seen huge increase in centralization around the world, as has been the case with EU. The state as it stands is completely unsustainable and I see pressures everywhere that will lead to big entities breaking into smaller ones. Even more critical is the situation in what are called emerging markets, where almost nothing works and governments are merely bribe collection agencies.

Gold has one—and only one—thing that imparts it value in the long-term: when the economy becomes negative yielding. Naive governments around the world are repressing businesses. Democracy—tyranny of the unqualified masses—means that they vote for exactly more of what created the problems. This situation will not change until this totally anti-meritocratic system of running societies—democracy—has come to an end. And as you know it is hard to imagine that democracy will come to an end any time soon.

This pain of negative-yields and social chaos will be very long lasting and hence very good for gold.

So, gold must go up, but Brexit is not one of the reasons why it should. This tells me that in the short term there will likely be a correction in gold price, hence an opportunity to trade. The market must take the price up for the right reasons, before one can be confident about the resilience of the price increase.

Now, on stocks... In my last musings, I wrote about a huge value—perhaps 1,000% upside—that I saw in Jubilee Gold Exploration (JUB; now $0.58). On minuscule volume, it has already gone up about 50%.

I got a lot of calls and emails from junior mining companies and readers about JUB, so let me address those as notes here:

→ JUB has a very, very, very tight share structure. Insiders own ~90% of the shares. My reason to write about JUB was to show that you can find and quietly accumulate shares in a company with huge value.

→ Should JUB stay a public company with so much insider ownership? This is something that the management has to decide. My view is that they should either sell some of their ownership into the market, raise some cash to bring in new investors, or take the company private. Given the tight share structure and massive upside, if they manage the share-structure properly, it will do wonders for the share price of JUB.

→ JUB does not have a website. I do not like companies that spend too much money on promotion and IR, but it is hard imagine a company without a website today. Indeed, if JUB wants to stay public, it should at least package information in a more investor-friendly way. The management owes this to the minority shareholders.

→ What do I think about their stock options plan? They can issue as much as 20% of the shares outstanding as stock options to insiders. The options are valid for 10 years from the date of issue. Yes, I find this too “liberal,” but there is not much I can do, as long as the company stays within the law. As I always say, do not expect the law to come to your aid anyway. But I do hope the management reduce the option plan to 10%, with 5 year validity.

→ What do I think about the management? I have never met or talked with the management. I have had a couple of emails with them recently. Based on what I have been told by people who I know and trust, Jeffrey Becker, CEO, is very astute financially, and a long-term thinker, exactly the qualities you want from a leader.

→ What about rights of minority shareholders? Based on my enquiries on regulations, minority shareholders given the high insider ownership in JUB have virtually no say. One has to perhaps solely rely in the sense of fairness of the management.

→ How did I do my calculation on the valuation of JUB’s royalty ownership on Springpole? JUB owns 3% royalty on ~61% of the in-pit resources of Springpole. 1% of royalty can be neutralized if JUB is paid $1 million in cash at the start of production. So, effectively JUB owns 2% royalty on 61% of in-pit resources, plus $1 million.

Moving on…

Reservoir Minerals (RMC; $8.32) is suffering today, as the market feels paranoid about the merger with Nevsun. For me, this will be another opportunity to buy RMC. Let’s look at the logic of the situation... If the merger goes ahead, all is good at least from the perception of the current share price. If it does not go ahead, I hope that those who vote against have a better deal in mind—if they don’t, what they want won’t happen either. Head I win, Tail I win.

Also, look at a merger between Paramount Gold Nevada (NYSE:PZG) and Calico Resources (CKB; $0.115). I will leave you to do the numbers, but there is an arbitrage upside in owning CKB.

Warm regards,

Jayant Bhandari

www.jayantbhandari.com

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