Mexican Land And Canadian Gold John Dobosz, 09.02.06, 3:00 PM ET

One of the popular contributors to discussions and pied pipers at online investing community ValueForum is 52-year-old Andrew Swann, better known among his investing buddies by his handle, "swannmex." A former petroleum landman in East Texas, Swann and his artist wife of 25 years live in the small town of El Cortijo, Mexico, about eight miles outside of San Miguel de Allende in the state of Guanajuato. They have lived in Mexico for the past 18 years and recently bought some land in the lake district of Chile, where they hope to begin spending more time. Swann is an avid clay court tennis player and also loves to fish.

Swann graduated from the University of New Mexico in Albuquerque in 1976, majoring in history with a minor in economics, and says hes remained a student of history and economics all of his adult life. Since moving to Mexico, he's been involved in property development, but five years ago he became a full-time investor. "The most important thing in my investing has been the world of information available to private investors on the Internet," he says. "ValueForum and similar sites that specialize in particular sectors offer the individual investor incredible amounts of information; all you have to have is the desire to do the due diligence. The tools and information are there."

We recently exchanged e-mails with Swann and asked him about his approach to investing and his views on current opportunities in the market.

Forbes: Describe your approach to investing. Do you rely more on fundamental or technical analysis? Are you a "top-down" or "bottom-up" guy?

Swann: I am a very focused investor and on Jan. 1, 2003, moved my portfolio 100% into hard assets, 50% oil and gas and 50% precious metals. I rely 99% on fundamental analysis. I find companies in the sector I am interested in and look for value with a good growth profile and just buy and hold, for the most part.

The most important thing is identifying what sector is in a long-term secular bull market. At the end of 2000 it became very evident that "paper assets" had peaked and that after a 20-year bear market, "hard assets" were very unloved and very, very undervalued. A big key for me was figuring out a way to get leverage to the rising hard-asset prices, but leverage with a long fuse. After a lot of research, I started accumulating warrants on junior Canadian mining stocks in 2001. That has been a very rewarding investment.

Right now there are several Canadian mining stocks with great growth profiles that are incredible values. My top holding is Yamana Gold. I have been a shareholder since the company was created in 2003. When Chapada, their giant copper/gold mine in Brazil, comes on line this fall, their cash flow will kick into high gear. By 2008 they should be producing over 1 million ounces of gold with a negative cash cost, using copper as a credit. I think the stock price could easily double in the next 12 months even if gold goes nowhere.

In the gold sector, I have just stuck with the stocks I see having good value. After the dust settled, I started accumulating more shares among the beaten-down junior Canadian gold stocks. My current favorites, in addition to Yamana, for investors with patience are Jaguar Mining and Glencairn. Both of these stocks have great production growth profiles and good exploration potential. Glencairn has a new CEO in Peter Tagliamonte, and he has a good reputation and excellent track record. The key with gold stocks is patience and the ability to withstand the volatility. Not many investors have that combination.

Metals--both precious and industrial--bounced in June and mostly held their gains since then, although steel seems to have been having a tough time all summer. What's your current outlook in the metals arena--both the commodities and the companies that mine and refine them?

I believe all hard assets are still in long-term secular bull markets. I believe Don Coxe's "triple waterfall theory." These commodities that were in 20-year secular bear markets have a long way to go in their new secular bull markets. Over time the U.S. dollar will be in a controlled devaluation, and the flip side of that is that over time hard asset prices--gold, oil and gas--will all go much higher in U.S. dollar terms. This will all play out over several years. Short term, anything can happen, as we saw in May. The corrections can be very violent, but with patience and an understanding of the big trend, there is a lot of money to be made.

I am a student of the Austrian school of economics. They believe inflation is a monetary phenomenon. Greenspan left interest rates too low for too long, and the excess liquidity creates rolling bubbles. First the Nasdaq, then housing. Now that housing is rolling over, my guess is that the next real bubble will be precious metals as people look for ways to protect their paper gains from all the years of excess liquidity creation. The best opportunities are in gold. Country risk is always a factor, and all my new buying is in companies in Canada that have growing gold reserves.

I am currently adding to Northern Star Mining, San Gold and Metanor Resources, along with Century Mining. All are just at the sweet spot in the cycle and coming into production at just the right time. Another more speculative play I like a lot is Gold-Ore Resources,which has an operating gold mine in Sweden with an expanding resource. When buying junior mining stocks, it always makes sense to buy a basket of at least five to spread the risk.

If you have even a passing belief in the presence of stock market cycles, you have to be a little worried right now. The midterm election year is notoriously bad, and so is the month of September. Add to that geopolitical tension and an inverted yield curve. Do you always try to stay fully invested in something, or are there times you prefer to load up on cash? Is now one of those times?

It is almost impossible to time the markets. My idea has been--and is--just to identify what is in a secular bull market and do tons and tons of research and buy and hold. I stay 95% invested at all times: 50% in oil and gas. This money is in Canadian royalty trusts like Penn West, ARC Energy Trust and Peyto. These provide monthly income tied to oil and gas production in Canada. They give me the security of hard assets in Canada and protection from inflation.

About 75% of oil production in the world is in politically unstable countries. Long-life reserves in Canada are just a no-brainer at this point if you have a long-term outlook. Having that steady income form quality trusts allows me to sleep well while generating gains from the more speculative world of junior gold stocks.

A lot of sound and fury is coming from the housing sector. Any thoughts on how the slowdown in residential real estate will ultimately unfold, and how do you profit from that view as an investor in stocks?

I believe that all bubbles eventually pop, and the "soft landing" is next to impossible to achieve, especially with so much debt in the system. The Fed is truly between a rock and a hard place. In the end, they will opt for inflation and hope it can be managed, just like they hope the dollar's decline and gold's rise can be managed. It all works out OK if it is kept orderly.

My guess is that the next move by the Fed will be a rate cut late this year or early in 2007. At that point, the dollar will weaken further, and gold will get another boost. The gold stocks I am accumulating now will all be in a good position to benefit as the gold price rises in 2007. All this plays out over the next two to three years. I have patience.

Any other areas of the market that you regard as especially rife with opportunity or peril?

I would stay away from any long- dated bonds. I think short rates will come down as the Fed does all it can to keep the debt bubble from deflating. However, long rates are very likely to go up as the inflation created by all the excess liquidity becomes more apparent.


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