The Historian

An Interview with Thomas Kaplan

OR: Does the supply-demand equation for gold still augur higher prices?

Kaplan: Absolutely. On the supply side, starting with the gold-mining industry itself, I can see a crisis looming. Most miners are producing gold faster than they can replenish their reserves. This comes at a time when the quality of the reserve grades has halved over the last decade. Meanwhile, there haven’t been big new discoveries that can move the needle in years.

These industry dynamics are important. At a time when the central banks are high-fiving each other after finding cleverer and cleverer ways to destroy money and savers, I like the fact that gold is the only currency in the world that people can't print. Put another way, while the gold miners can’t even find this scarce currency, central bankers can’t resist any temptation to debase their limitless paper. As if to underscore the point, on the demand side the official sector has moved from being a copious seller of gold to a net buyer of it for the first time in decades -- and at just the moment when the Indians and Chinese are competing to be the largest consumers of a scarce brand that has even better brand recognition than Apple or Coca-Cola.

We really could get a perfect storm. I love buying bubbles early as much as the next person. Gold's the inevitable bubble. So now's the time to position oneself, sit back, and wait.

OR: With these positive factors already in place, aren’t you surprised gold isn’t higher?

Kaplan: Not really. My guess is that what we’ve seen over the last few years is a correction within a bull market. The first leg lasted for 12 years. That’s extraordinary. For 12 years gold ended each year higher, whether that year had been a period characterized by strong commodities or weak commodities, inflation fears or deflation fears, a strong dollar or a weak dollar, war or peace, prosperity or crisis. That is a bull market.

OR: So why is gold, to use your term, derided?

Kaplan: There are several reasons for that. You know Jim Grant’s brilliant line that “a ‘bubble’ is a bull market in which the user of the word ‘bubble’ has not fully participated.” While that certainly applied to gold when it was higher, the fact is that most people don’t take the time to understand gold. They view it as a relic, whereas paper, for which there is so little scarcity value, is supposedly understandable. It’s a fascinating disconnect. Yet it’s that cognitive dissonance that gives such an exceptional opportunity to those that make an effort to learn. I should add that many of the same people who thought I was crazy to start an energy company when oil was at $20 and, in their view, on its way down, said I was nuts to sell it when oil was at $120 and, in their view, on its way up. It’s not dissimilar with gold today. Many of the same people who loathe gold for retracing its steps back to $1,200 per ounce from its $1,900 highs hated it all the way up from $300 per ounce to $1,900. And at $2,900, they will find a way to justify why it wasn’t a buy today but it will be then.

OR: Even if you’re right, wouldn’t it be classic for gold to go lower before it rises to new highs?

Kaplan: Yes. I call that the BHP Scenario. Once upon a time, BHP shut down its North American copper assets as copper spiked down to $0.50 a pound. For all intents and purposes, that marked the end of the bear market. So another sentiment-driven spike down before gold resumes its long-term bull market would be par for the course. But that doesn’t mean it has to happen. We don’t need production to get crushed for gold to resume its uptrend.

OR: Do you have a short-term view on gold?

Kaplan: I’ll tell you what I have told NovaGold’s shareholders when asked that question: I don’t think about it. If I get the short-term right, it will be a function of luck.

OR: What do you think the trigger will be for gold to break out?

Kaplan: I don't think there will be a trigger. I think it will just go up a lot one day and that will be it.

OR: Won't people look back on all the money-printing going on now and ask: how is it that no one noticed?

Kaplan: Sadly, yes. To me, the right analogy is the frog in the pot of lukewarm water with the temperature rising to a boil. Not that I want to see that happen. The social implications could be severe. There’s no example in history where this experiment comes right without unintended consequences. I just don’t know what those consequences are, so I choose to play it safe with something whose fundamentals I can understand, and where my frame of reference professionally gives me a leg up to profit from the time when others will come around to my point of view.  This strategy goes hand-in-hand with my experience that -- other than luck -- making real money is chiefly a function of conviction and patience. If one feels right on the fundamentals, the key is to find or create a vehicle that will allow you to make a lot of money when the market comes around to your point of view -- and then just wait. Don't try to be too cute. Don't look at the screen. Spend extra time with your kids or grandkids. Read a book or two on Stoic philosophy. Watch anything with Gene Hackman. And then just wait. This kind of risk-reward scenario is playing out in great precious-metals mining assets.

OR: Seneca and The French Connection. I love it. Tell us about where you think gold is going.

Kaplan: As a secular trend, I see a great many similarities between the Dow in the 1980s and where we are today in gold. During the 1980s, if one bought the DJIA at 1,100, 1,200, or 1,300, it didn’t have a material impact on long-term returns. At any of those levels it was a great buy. I feel the same for gold. If one gets that one last leg down to complete the cycle, so much the better. But prices are headed much, much higher after this correction is over. I’ve been in this movie before.