Gold and Silver Bull Market
Commodities / Gold and Silver 2010 Jun 03, 2010 - 02:58 AM GMTBy: The_Gold_Report
Weiss Research Natural Resources Analyst Sean Brodrick expects the bull market for precious metals to run for "quite some time," with gold hitting $1,450 /oz. by year-end and silver at $25 not long after. In this exclusive interview with The Gold Report, Sean sees silver reasserting itself as a monetary, investment and industrial metal. South of the border, some of the Mexican miners have an "embarrassment of riches"—which have largely escaped the attention of Wall Street.
The Gold Report: You recently remarked that we're "trillions of dollars in debt and we can't seem to grow our way out of it," adding that, "the only way to get out from under the debt is to print money or inflate out of it." But you also cited an article with a long list of bullish indicators for the global economy, including positive indicators for the U.S. So if the economy is growing, why can't we grow our way out of this debt?
Sean Brodrick: Much of the growth was predicated on debt. We borrowed about one-tenth of our GDP to boost things along and got some growth out of it. The problem, now reflected in the markets, is that investors and traders wonder if we're going to keep borrowing to keep pushing the economy along. If not, we can expect contraction.
In Europe, of course, they're now borrowing even more to bail out the bankers who loaned Greece too much. The market's really wondering where that ends. The whole point of this exercise is to stimulate the economy enough to spur intrinsic growth instead of debt-fueled growth.
As in World War II, they should have borrowed more to really stimulate. Or they should have left some banks hanging and accepted everybody losing and going back to a lower level for a while. They should have gone one way or the other. Instead, they've gone into a no man's land.
They can keep borrowing more and more, and I think we'll see that because this is an election year. Politicians don't want things to really turn down. We just have to remember that a lot of the growth we're seeing is borrowed. It is borrowed through debt from the future. That bill will finally come due someday.
TGR: So the future growth you foresee in terms of the bullish indicators is still debt-driven.
SB: Exactly. They were hoping to use debt to fuel the economy enough to spur real economic growth. We haven't seen that much of that yet. There are bullish indicators, but it's a very weak recovery. The markets fear that things are really going to go down when we take away the blindfold, and they might be right. We're caught between a rock and a hard place. Either keep borrowing and keep spending the money all over the place and keep the market moving along—or else sober up, stop the borrowing and the extra spending and understand that things will slow down.
TGR: As you indicated, no politician is going to want to stop the spending in an election year. So they're going to continue to stimulate economic indicators with debt. Eventually, as you stated, they'll to have to print money or inflate out of it.
SB: That seems likely. But on the other hand, the GOP has turned into the party of "no." They don't want to do anything; maybe they'll say "no" to everything. I kind of wish I didn't have to live through it, but it's actually interesting. We are living this grand socioeconomic experiment. I don't really like any of the choices we're facing, but I think we will see more borrowing—if not to stimulate the economy, then to pay for bad choices Wall Street is making right now. Wall Street always gets bailed out; it just works out that way. And as we see more borrowing of one kind or another, we will see pressure on the paper currencies.
TGR: It's already hitting the euro hard.
SB: The euro is under a great deal of pressure and, within a year, it might well not be in the same form it is today. The U.S. dollar looks strong right now, but that's only because central banks around the world have decided they own too many euros. The fact that they're getting rid of euros is the reason the euro's been sliding so much. They are buying U.S. dollars just because they can always convert the dollars to something else. And of course, they're buying—and have been buying—gold. So the U.S. dollar and gold are going up at the same time. The question is, what will they do maybe six months from now? Will they keep buying the USD? Will they keep buying more gold? The U.S. debt situation is actually quite remarkable for the way it's being ignored, frankly; and I think we've hit peak gold.
TGR: That should be good for the gold price.
SB: Absolutely. The ore bodies being discovered now are smaller and lower-grade than in the past. We aren't finding big, rich ore bodies anymore. The amount of gold we can produce in any one year is probably hitting a peak, so the price is just going to go higher. So I think gold will get more valuable for that reason, as well.
TGR: Does that also bode well for silver, particularly if you look at silver as a monetary metal?
SB: Again, absolutely. Silver is not only a monetary metal, it is an industrial metal. But it's always a problem for any silver investor to gauge how much silver's price reflects global economic conditions. Maybe there will be a global recovery. Things don't have to get worse just because I see that possibility; the global economy could improve. If it does, we'll see increased demand from multiple sectors of society—more demand for silver for all of its many industrial uses.
The economy is on an improving track globally now, but will a return to recession drive the price of silver down? It can do that. Also, if the global economy slows and we see less demand for industrial metals, remember that much of the world's silver production is a byproduct of other industrial metals. If they shut down industrial metals mines, it pulls silver supply out of the market. That might cause a financial panic, which will send people looking for hard assets again. That would drive silver up. None of this means silver can't go lower, but I think the trend will be up for silver and gold alike.
Either way, I think we'll see silver reassert itself as a monetary metal, as well as an investment metal. More small investors, in particular, will start putting money into silver because, as gold gets more expensive, it becomes unaffordable for some people. It's kind of an interesting situation for silver.
TGR: So the two primary demands are industrial, which depends on the global recovery; and monetary or physical silver, which will go up in tandem with gold. Do you know the percentage of physical silver held versus what's used for industrial purposes?
SB: I don't have that statistic in front of me. But people are buying bars and coins in addition to ETFs. If mint production doesn't keep up with demand, it tends to feed into the price of silver. That's the funny thing about precious metals—everybody wants more when it's not available.
TGR: If everybody will want more, where would you peg the price of silver in two or three years?
SB: It has to get through $20, and I think we'll see that fairly soon. I'm expecting the pullback in gold to work out over the next week or so, and then it should head higher again. My target for gold would be $1,450 by year-end. We could easily see silver at $25—if not by then, certainly next year. We haven't hit the mania phase for either metal yet. Most people remain completely unaware of the gold and silver markets. If anything, people are actually selling to all these outfits that are in the scrap market now, urging people to bring in their old and broken jewelry. They aren't taking a part of each paycheck and running to their local gold and silver dealer to purchase more every month. That's not happening yet.
When the mania phase does come, I don't want to put a price target on either gold or silver. I don't know how high they can go, but whatever it is, it won't stick. You want to buy before the mania.
TGR: And then?
SB: We'll have to see what happens. Usually after a period of mania, you get some kind of blowoff. This could be years down the road, by the way; these things take time to unfold. I'm not expecting this to happen next year. We're in a good bull market for both gold and silver. They're both continuing quite nicely, so I expect higher prices for both for the next two or three years at least. Then we can finally get to the mania.
TGR: If the global economy is recovering, albeit slowly, from where will the fear that fuels the mania originate?
SB: That is a good question. I'm not really sure that most manias in investments are necessarily caused by fear. It could be greed. But we can have a nice bull market for quite some time. If the global economy continues to grow, perhaps slowly, it will increase industrial demand for silver. A lot of people worried about demand when they stopped using silver in photography, but now it's used more and more for many other things. It's an amazing metal in the way it conducts heat; it's really far beyond the competition. Something like 300 tons are used every year just as chemical reagents for plastics and so forth. Silver's also used now in solar power technology. They're talking about using silver for catalytic converters. They don't quite have that technology yet, but silver would be a great replacement because platinum and palladium are scarce.
TGR: That brings up an interesting possibility. Everyone gets all riled up about rare earths because China mines most of the world's production. If silver can replace rare earths in such applications, would we see an exponential rise in the silver price?
SB: I'm not talking about silver replacing rare earths. It doesn't mean they can't find new substitutes for lithium for batteries, but I don't know what would replace rare earths now. That's the beauty of metallurgy, right? You can always find substitutes. They may not work as well, but once you get down into nanotechnology, that's coming. That will probably be the next big industrial wave; we'll see some really amazing things. That's actually one of my hopes for the future.
TGR: What's that?
SB: That we might be able to engineer our way out of the mess we're in if we can get that technology to come fast enough.
TGR: Back to silver. Do you focus on Mexico?
SB: As natural resource analyst for Uncommon Wisdom Daily, I cover everything. But yes, I certainly cover silver in Mexico.
TGR: One of your articles talks about Mexico being relatively unexplored for various political and historical reasons, which leaves plenty of bonanza-grade deposits. Would you talk a bit about that?
SB: Sure. Blame it on the Mexican Revolution. They had some really serious troubles at the beginning of the 20th century. Many people who were investing in mines there got very nervous, so they up and left. They were able to invest in other places without the headaches. As a result, Mexico missed out on a whole phase of exploration and expansion that the U.S. went through. Now there are these really high-grade ore bodies there—many of which were mined before; that's the amazing thing.
For example, I was recently at IMPACT Silver Corp. (TSX.V:IPT), which has maps of at least 1,800 narrow shafts that were put in the ground over the past 500 years just in one valley. That's only three per year over 500 years, but it's amazing when you remember that they were using extremely primitive technology. They basically mined the silver they could see. They pulled silver of 1,000 –1,500 grams per ton (gpt) from these narrow shafts, ignoring this huge block of rock all around them. They weren't interested in it because it wasn't visible silver, not their "high-grade" stuff; but it's high grade to us—500 gpt, at least. Impact Silver's saying, "We'll take it. This is absolutely fine. This is a great grade to be working nowadays."
Impact Silver's is an interesting story. They are making money and they have almost an embarrassment of riches. There's so much around them that they can mine. The question is what do they mine next? It's not as if they have to look for stuff—they're surrounded by it. They have an interesting approach. They are not going into debt. They are drilling to prove up ounces in one of their land packages, but they're working in an area that's easier to drill because of the geology. The main mines have what you might call "lumpy" deposits; they know where the silver is, but they aren't in a hurry to prove up those ounces because it would be expensive. So while they will have a new resource report coming out later this year, they have so much more they won't be reporting because that would require a lot of drilling that they'd rather not pay for just yet.
TGR: But even if it's in lumpy deposits, it's high-quality stuff.
SB: Any miner in the U.S. would be knocking themselves over to get it. The very high grades that have been mined out in the U.S. Charts show how the ore grades of all metals peaked in the 1920s to 1930s—incredibly rich grades of iron, copper, silver, gold and more. Why? We came to this new level in technology that made mining easier, especially at the deeper levels. So most of the high-grade stuff is gone now; it's been used.
TGR: And in the meantime?
SB: Mexico's become a very mining-friendly country. As long as a few decades ago, many smart Canadian miners went to Mexico and put together land packages of properties that had been abandoned. They're finally getting to work on them and are finding some amazing grades. An average grade of 500 grams of silver per ton is a very rich mine. You don't even have to drill much, you just go along the same path the previous miners followed. The ore you get is just really excellent.
TGR: Quite the bonanza.
SB: And it's not just Impact Silver. Great Panther Silver Limited (TSX:GPR) is another one I've visited a couple of times. Very interesting story. It's a smaller miner but it's really ramping up production. Guanajuato is one of their projects and Topia is another one. Between the two, they produced about 2.2 million ounces last year, and should produce 2.6 million ounces this year. They've increased production in each of the last four years. They'll probably hit production of about 3.8 million ounces of silver equivalent per year by 2012. Operating costs are around $6/oz. net of royalties. Great Panther is cash flow positive and has another project it's fast-tracking toward production.
Guanajuato is just amazing. It's an incredibly long strike—something like 4.7 kilometers. This huge ore body stretches on forever, and it's really, really rich. They've pulled something like a billion ounces out of there.
TGR: All that, and they aren't close to exhausting it?
SB: There's a lot left, and remember the huge upgrades in technology. As they go deeper—deeper than was possible in the past—Great Panther comes to incredibly rich grades. There's a lot of amazingly rich stuff left in Mexico that lay dormant for a long, long time. It's now coming into play, and Mexico is a very mineral-rich country anyway. So that's why I think the future for mining in Mexico is so bright.
TGR: One of your recent articles said that the Mexican silver miners are underpriced. With those amazing grades and amazing land packages, what's causing them to be underpriced?
SB: Part of it is the fact that some are better at public relations than others. Not all of them are underpriced, but some just don't get their message out well. If you do your research and check into them, you can find some really good bargains. Another factor is that they aren't really being followed on Wall Street; so, to that extent, people don't know about them either. They are being followed up in Canada, of course. As you might expect, only people who know the niche in the U.S. and tune in to what's going on in Canada realize the great things going in Mexico. Right now, they're a few steps removed. But their story will get out, especially as the world gets more focused on what's happening with gold and silver. These companies will become much better known.
TGR: How about some examples of companies that aren't well-known but are really well-positioned?
SB: Impact Silver is one. I think their approach is about the only thing that's weighing on their price, plus the fact that they aren't as well-known as they might be. Great Panther is another that has great upside potential simply because they're in this old historical silver-rich zone and keep stepping out beyond what had been done so many years ago.
Another one would be First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). It is a better-known stock than some, but it still has tremendous upside—it's well off its highs. It owns and operates three producing silver mines in Mexico with all-in costs of about $8.49/oz. That's higher than some, but it is certainly very profitable. They produced 4.3 million ounces last year and should produce 6 million ounces this year. Their production schedule is just to keep going higher and higher and higher, and they have a pipeline of projects lined up. It should really be a great story going forward. They just picked up a new property that has some 33 million ounces of silver Measured and Indicated. Add that to some 184 million ounces already in their other resources, and you can see that is going to be a really, really good story.
I've also been to Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR) and seen their projects in Guanajuato and Guanaceví—they look great. I expect they'll be acquiring either a private or a public company. I'm not hearing that from them; just seeing how they're positioned, sitting on cash, looking around for this deal and that deal. What that would do to the share price depends on the structure of the deal, but it can't hurt. Endeavour isn't in the same league as First Majestic, at least not yet; but they have a good path outlined going forward and I think they'll do extremely well. They had nice revenues last year, and in the first quarter of this year revenues increased something like 115% over the year prior. That's not hard to do when the price of silver is soaring, of course; but the nice thing about each of these companies I've mentioned is they went through the low prices we had in silver and came out stronger. Each of them had to cut back, really tighten their belts. That made them much leaner and meaner. Their growth picture is really good now because they've already been through the bad times. So as the price of silver goes higher, they can have real growth in their earnings and their revenue. And they're all ramping up their production. They have new land packages.
TGR: How about gold miners in Mexico?
SB: I've been to Timmins Gold Corp. (TSX.V:TMM) in Sonora. They have a nice open-pit heap-leach operation and are producing now. I believe their cash cost is about $412/oz. They are expanding their San Francisco vein. Timmins still has some things to work out. Maybe it'll merge with one of the others in the area; maybe it will do some other acquisitions. Certainly it has other projects in Mexico that it can advance. While I like that particular project and the people running it, I don't see the clear path that I see in some others. That's the simple reason I haven't recommended Timmins to my subscribers. I can see where each of the other companies I've talked about is going in terms of increasing their production.
TGR: Any other companies that you'd like to discuss?
SB: Not at this point, though I am looking, especially as we're getting back to what I think is going to be a buying point. You can't buy small caps the way you do larger-cap stocks because they just aren't as liquid. In fact, they can be illiquid at times. You need a plan, not only for getting in but also for getting out. What if the company comes out with some bad news? People have to be very careful. They certainly shouldn't buy anything just because I talk about it. Even things in my subscribers' portfolios aren't necessarily right for everyone's portfolio.
TGR: Any other suggestions for potential investors?
SB: Yes. Be very careful where you put your money, especially in this kind of market—and very careful how you go in. I usually go in one slice at a time and take the same way out, so as not to move the stock too much. Another point—if you like something because it's cheap and it gets expensive, don't chase it. You might have another chance to buy it on the cheap again.
TGR: You mentioned your subscribers. Can you give our readers a quick overview of the publications you edit?
SB: Crisis Profit Hunter focuses on how to invest in anticipation of some emergency situations that I see coming along—protective investing but also making money. For instance, I think we're heading toward an energy crisis. I also think we're heading toward a food crisis. Other crises face us as a society. The Crisis Profit Hunter doesn't focus exclusively on stocks that pay nice dividends, but looks at dividends; and we like natural resource stocks, especially in that portfolio.
Red-Hot Commodity ETFs is another subscription service. It basically tracks the large bull market in commodities using ETFs. Of course, there are also pullbacks, as we've seen lately, but you can play those with inverse ETFs. I have Red-Hot Canadian Small-Caps, too, and finally, Red-Hot Global Small-Caps—which probably is really the one I'm known for. That's small-cap miners all around the world—Australia, Thailand, Chile and Mexico, as we've been discussing—also Canada, of course. Just looking for and investing in those companies that have a really bright future in both the small-cap and micro-cap space.
TGR: You have some wonderful freebies, as well.
SB: You can always find the free stuff at Uncommon Wisdom Daily. I write the Friday column there, and I have a video there every Tuesday. And you can go read the free blog that I write every day; if you click on the blogs tab, you'll see my smiling face.
A natural resources analyst for Weiss Research, Inc., Sean Brodrick travels far and wide seeking out investment values in the sector, primarily among the small-cap and micro-cap players. He edits Weiss Research's Crisis Profit Hunter, Red-Hot Canadian Small-Caps, Red-Hot Global Small-Caps and Red-Hot Commodity ETFs, as well as making regular contributions to Uncommon Wisdom Daily. He is also a contributing columnist to Dow Jones MarketWatch and a frequent commentator on one of Canada's premiere financial websites, HoweStreet.com. Sean's expertise has led to many financial talk show appearances, including CNBC Squawk Box, Fox Business, CNN, The Glenn Beck Program, Your World with Neil Cavuto and Bloomberg Market Line. Released early this year, his book The Ultimate Suburban Survivalist Guide to help people survive the ever-changing economic landscape, from stock market shakeups to oil and currency crises to natural disasters. A graduate of the University of Maine, Sean has more than 25 years experience as a professional journalist and financial analyst, including a stint as investment director of the Sovereign Society—the world's leading publisher of offshore asset protection strategies and global investment opportunities. His favorite movie (interesting in light of his focus on Mexican miners in this interview) happens to be John Huston's The Treasure of the Sierra Madre.
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DISCLOSURE:
1) Gold Report Publisher Karen Roche personally and/or her family own the following shares of companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Great Panther Silver, Timmins and First Majestic.
3) Sean Brodrick: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: None.
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