Source: Peter Byrne of The Gold Report (8/31/12)

China and India have always been crazy for gold and the yellow metal remains the choice store of value in those two countries, says Don Coxe, a strategic advisor to the BMO Financial Group. In an exclusive interview with The Gold Report, Coxe explains how demographic shifts are affecting the price of gold and delves into the logic of investing in gold as a long-term strategy. Coxe also draws an important lesson in economics from his reading of Lenin.



The Gold Report: What fundamentally attracts you to gold?

Don Coxe: There are many serious reasons why I like gold, but one very important reason has to do with the shift in the share of world gross domestic product away from the highly industrialized nations toward emerging economies in Asia. For thousands of years, people in China and in India have respected gold. The Western countries, on the other hand, were captivated some decades ago by economists who claimed that gold had become irrelevant as money. But the Chinese and Indian people hoard gold as a store of value and trade it as a treasured commodity.

TGR: Are the pricing mechanisms for gold shifting toward control by the East?

DC: Consider an art auction. If a bidder who 10 years ago only bought one painting suddenly buys 50 paintings, that bidder will greatly influence subsequent bids for the art. In China and India there are suddenly many more wealthy people than they've had for millennia. In a culture that values gold, newly rich middle class people will buy the yellow metal not only for personal adornment, but also as a form of savings that is safer than paper money.

"In a culture that values gold, newly rich middle class people will buy the yellow metal not only for personal adornment, but also as a form of savings that is safer than paper money."

On a trip to India a few years ago, I was fascinated to see poor peasant women wearing armbands of gold as they toiled in the fields. I asked my guide, "Is that actually gold on their arms?" And he said, "Oh, yes, that's gold." I said, "Well, aren't they at risk? I mean, these are really poor peasants, and here they are brandishing all of this gold!" He looked at me in horror and said, "No criminal would be so evil as to steal gold from a poor woman, because that's her dowry." There are some pretty powerful taboos in Hinduism, apparently.

Intrigued, I found out that under Indian law, when there's a Hindu marriage, whatever personal possessions, real estate and investments the woman has become the husband's except for her gold. That remains hers. So if you're marrying off your daughter, whom you love, you're going to make sure that she has some gold in her possession because if the husband turns out to be a wastrel, the dowry might save her from starvation.

As a result, the Indians are the biggest consumers of gold in the world. The Chinese are moving up fast, though. Plus, there are simply more rich people in the world. Hundreds of millions of people now have some form of savings. The best single investment anyone could have made, since the year 2000apart from buying Apple stockwas in gold. It has gone from $300/oz to $1,650/oz. It's gone up every year, including this year. So every year in this millennium the price of gold has gone up.

TGR: Let's talk about the Eurozone problems. How does the euro crisis affect the commodity space in general?

DC: Probably the only commodity that can benefit from the euro meltdown is gold, because the euro is the first currency ever to be backed by no government, no tax system, no army and no navy. It is backed only by a theory and a set of rules, and the people behind it have violated the theory and the rules. I doubt there is any intrinsic value behind the euro. But take the exact opposite extreme from the euro and go to something that's been a store of value for as long as there has been civilization, gold.

TGR: Do you think we're in a triple-dip recession in North America?

"The best single investment anyone could have made, since the year 2000apart from buying Apple stockwas in gold."

DC: I don't think so. We have zero interest rates. Every recession we've had has always been preceded by a situation of tightening monetary policy because there was just too much spending going on, the yield curve inverted and credit problems developed. In this case, we've been getting along with zero interest rates now for more than four years. What we have is lassitude, but I don't think there is going to be a recession.

That said, it's going to look like a recession a lot of the time becauseparticularly as a result of the presidential election campaignsthe Democrats who are against developing power plants, against the oil industry and against the mining industry are going to feel that they have more room to carry out their crusades. That could prove to be a negative for the economy. But in general, we're going to bump along. We're going to be better off than the Eurozone is for sure.

TGR: Do you have thoughts about why so much corporate cash is sitting idle and what might change that?

DC: One of the biggest arguments used against gold is that gold does not pay any interest. The monetarists said you might as well keep your money in a bank account. OK, so now that we are getting zero interest on short-term deposits, the single biggest argument against owning gold is gone. As an asset class, gold has gone up every year of this millennium, and it seems to me that investing in gold makes much more sense than holding on to a lot of idle cash.

TGR: Do you think that bullion or gold stocks are the best bet?

DC: Gold stocks are the best investments, but if you want to put your savings into bullion, the easiest way to do it is to buy the SPDR Gold Trust (GLD) listing on the stock exchange, which is backed by the World Gold Council. It's very convenient, and you can sell the bullion at any time, because it trades during the day. Bullion is a good substitute for having extra cash in hand, but as an investment, I believe you're better off owning stocks of the well-managed gold companies that do not have political risk. It takes a lot of research to pick out the best ones, but that's one of the things we do.

TGR: Are there any junior firms involved in these spaces that you would recommend to our investors?

DC: I'm not allowed by the Securities and Exchange Commission rules to be specific about individual stock, but I am bullish on the gold space in general.

TGR: A lot of the larger gold mining companies are moving into politically risky zones like the Democratic Republic of the Congo, Eritrea and Haiti, trying to replace their reserves.

DC: We don't invest in companies like that, and I don't recommend that anybody who doesn't have a very high-risk profile do so.

TGR: In terms of investing in junior mining companies, whether it's energy or gold, do you think that we're looking at a period of mergers and acquisitions coming up or are explorers going to be able to make it on their own for a while?

DC: Both will happen. There will undoubtedly be lots of mergers and acquisitions. We look at which of the juniors are most likely to be acquired. So far, we've had some pretty good success with doing just that. There will be more of them. But right now, it's pretty desperate for a lot of the juniors. There is no capital available. They can't float stock. Their shares are selling at discounts to net asset value on the exchanges. However, if we get to $2,000/oz gold again, which probably won't be too far off in the future, you'll be amazed at how much these little gold and mining stocks will suddenly go up. They come back fast.

TGR: China has its own precious and base metal resources and it has growing demand. Do you think in a global sense China is going to start looking more internally to satisfy its metal resource needs, or will it keep looking outward?

DC: After thousands of years living on their land mass, the Chinese understand the limits of their own natural resources. China will reach out to find commodity resources wherever it can in the world. The Nexen acquisition in Canada is a recent example.

TGR: That sounds like a kind of reverse imperialism.

DC: Speaking of which, I highly recommend that investors interested in natural resource commodities read one of the most important books of the 20th century, which is V.I. Lenin's "Imperialism: the Highest Stage of Capitalism," written in 1915. It analyzes World War I as being caused by cartels set up in the capitalist nations. It's a brilliant analysis of the way the world was divided up into empires prior to WWI.

"Bullion is a good substitute for having extra cash in hand, but as an investment, I believe you're better off owning stocks of the well-managed gold companies that do not have political risk."

It's also a textbook for the Politburo, because it sets out the Chinese strategy for economic domination, which is not to be reliant on the big capitalist corporations, but to go into the countries where those companies cannot operate.

For example, BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Rio Tinto (RIO:NYSE; RIO:ASX) tried to merge their Australian iron ore operations. That would have meant that two-thirds of all Chinese iron ore imports would have emanated from one organization, which is precisely what Lenin had predicted. The Chinese were horrified by this possibility. They found a way of getting a block on that merger. They are prepared to fight cartelization.

Imperialism is the final stage of capitalism, Lenin said. So the Chinese are saying, we're going to go out there and do capitalism better than ever during the final stage. We're going to places around the developing world where American companies can't go. When the Chinese dig copper out of the Congo, that copper competes with the copper being produced in Arizona by American companies. And it is cheaper.

TGR: You're one of the speakers at the upcoming Casey seminar, talking about navigating the politicized economy. Could you give us a preview of what you'll be focusing on in your presentation that relates to gold?

DC: I tell people as rule number one of investing in any commodity, do not invest in companies that produce what China produces or is likely to produce. Rule number two: Invest in companies that produce what China needs to buy. I've been saying that for 14 years, and it hasn't changed. China needs gold.

TGR: Good advice. Thank you very much.

Read Don Coxe's advice on investing in the energy sector.

If you can't attend the "Navigating the Politicized Economy Summit," you can still benefit from the information the 28 experts have to impart in the Audio Collection. Right now you can save $100 when you pre-order the 20+ hours of audio.

Donald Coxe has more than 39 years of institutional investment experience in Canada and the U.S. He is strategy advisor to BMO Financial Group with $500 billion under management. From his office in Chicago, Coxe heads up the Global Commodity Strategy Investment Management Teama collaboration of Coxe Advisors and Harris Investments to create and market commodity-oriented solutions for investors. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and to the Virtus Global Commodity Stock fund in the U.S. Coxe has consistently been named as a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and he was ranked number one in the 2007, 2008, and 2009 surveys.

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From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Interviews are edited for clarity. Don Coxe was not paid by Streetwise Reports for participating in this interview.