With industrial demand almost exclusively driving the price of silver for years, investing in the white metal used to be simpler. Now investment demand is competing with practical demand to push silver prices ever higher. Investor interest in silver from large U.S. funds could result in as many as 60 new silver plays entering the market this year. These are heady days for silver with a lot of upside in the cards—if played right. Find out how in this Gold Report exclusive.
Andrew Thomson, president and CEO of Soltoro Ltd. (TSX.V:SOL), a Toronto-based silver explorer with projects in Mexico, regularly receives calls from U.S. investors looking to buy a chunk of his silver play. One such investor with a net worth approaching $150 million recently asked Thomson if he could buy a block of 500,000 Soltoro shares. Thomson told him yes but that he would have to get them on the open market.
Times are good for silver juniors.
Thomson estimates there could be another 60 silver companies trading on North American bourses by the end of 2011 and says that’s due to cash-rich U.S. funds seeking northern exposure.
“U.S. players are starting to look at value propositions. They just want to be in silver, and they don’t want the physical metal; they want equity because they want to be able to trade it,” Thomson says. “It’s similar to what happened a few years ago when Chinese, Korean and Vietnamese investors came [to Canada] looking for hard assets. In this case, it’s the U.S. funds that are starting to look at our natural resources. It’s kind of ironic that it takes a strong Canadian dollar for them to start investing in our economy.”
But not all big U.S. funds are making the pilgrimage north or, if they are, the journey is often short-lived. On March 15, Barron’s blogger Murray Coleman reported that U.S. hedge fund managers were buying silver. A week later, however, he told readers “hedge funds in the past week were unloading positions in gold, silver, copper, platinum and palladium.”
“There’s a lot of confusion out there. There are funds that are dumping silver and there are funds that are buying silver. The funds tend to react to the news, and then become the news themselves when they dump large positions. If you watch those big funds’ positions, all you’re going to really see is a bobbing cork. I think net their positions are accumulative,” says James West, editor of the Midas Letter.
David Keating, managing director of equity capital research with Mackie Research Capital, a sizeable Bay Street player in junior mining financings, says the 60 companies figure is likely on the high side but that Thomson’s number is in the ballpark.
“Sixty sounds like a big number but it doesn’t strike me as outrageous,” says Keating. “There’s certainly lots of demand in the market for silver stories.”
Keating notes he’s getting more calls about silver and is currently looking to finance as many as five silver plays. “You’ve got U.S. funds and international funds looking at getting direct toeholds in some of these plays and they are prepared to put up the $5, $10 or even $15 million to get the exploration going. We’ve definitely seen that in the silver names and in the gold names,” he explains.
Keating explains that when you get sustained upward price movement in the underlying commodities, a lot of assets that wouldn’t have earned a second look at lower prices suddenly become attractive at higher prices. He adds, “Companies these days are able to raise capital, so exploration budgets are going up and you’re getting more and more exploration and development. And some of the assets that aren’t getting attention can be spun off into cleaner, pure plays.”
West, until recently, owned a stake in a precious metals mine in Peru and is connected to junior mining plays all over the world, especially those in Latin and South America. He often gets calls from the “who’s who” of Toronto merchant banks and brokerages seeking exploration-worthy assets for capital pool companies (CPCs) or corporate shells.
Brokerages source assets from people like West and—after filing a prospectus and raising seed capital—CPCs buy the assets via a “qualifying transaction,” which is needed to get a listing on the TSX Venture Exchange. It’s often a well-rehearsed dance between brokers and companies.
“If you look at any of the CEOs on the TSX Venture Exchange who have a track record of value creation in public companies, generally, you’ll find them aligned with one or two brokers with whom they do all their business. Usually these groups make money together and they tend to move forward under that arrangement until something goes sideways on a deal, somebody retires, somebody gets sued by their wife. . .whatever,” West explains.
When it comes to silver exploration plays, West says, it’s a seller’s market. “The (property) vendors are demanding a higher price and are willing to sit with their asset on the sidelines, confident that the price is only going to go up. And with every uptick in the silver price, people are willing to pay higher prices for these silver assets,” he says.
Leading the Charge
In early March, newly listed silver junior Argentum Silver Corporation (TSX.V:ASL) optioned Soltoro’s Coyote and Victoria silver-gold properties in a past-producing silver district near Jalisco, Mexico. Argentum paid CAD$255,000 in cash and 5 million shares. Soltoro kept a 3% net smelter royalty on any future production from either Coyote or Victoria.
“Effectively, there is an area play starting in Jalisco that’s been going on for about two years that includes Endeavour Silver Corp. (NYSE:EXK; TSX:EDR), Timmins Gold Corp. (TSX.V:TMM), Silver Predator Corp. (CNSX:SPD), Southern Silver Exploration Corp. (TSX.V.SSV; Fkft:SEG), Soltoro and Argentum Silver,” Thomson says. “It’s not only for silver, but silver is leading the charge.”
Indeed. Two years ago, on March 24, 2009, silver closed at $13.44/oz. And two years later, the white metal finished the day at $37.42/oz. on the NYMEX—a gain of 178%.
West believes we will see $40/oz. silver by the end Q211 and that the white metal could hit $50/oz. by year-end based on not only the typical industrial and investment demand drivers, but also what he refers to as “smart money” entering the space.
By “smart money,” West means the cash behind the big players like Toronto-based Sprott Asset Management. Eric Sprott, the firm’s bearish leader and chief investment officer, is staking his reputation on precious metals. He’s telling anyone willing to listen that gold will see strong resistance above $2,000/oz. and that, during this current bull market in precious metals, the silver:gold ratio—or the number of silver ounces it takes to buy 1 ounce of gold—will return to its historical norm of less than 20:1, perhaps even as low as 10: 1.
Others aren’t quite so bullish.
Riding the Ratio
“[Eric Sprott] is indicating that silver will go to $2,000/oz. I’m not in that camp, but there is a squeeze going on. There’s a lot of new equity traded funds and funds getting into the silver space that are drying up [silver] production, in terms of the delivery of actual physical silver, and that’s what’s driving the price up. It’s a bit of a manipulation from the perspective that it’s the investors who are stepping into [the silver space] and squeezing the supply for the end users. I think that’s very real and that’s why the [silver:gold] ratio is changing,” Thomson says.
The last time the silver:gold ratio closed the gap that much was in 1980 when brothers William and Nelson Hunt attempted to corner the silver market. The ratio peaked at 17:1 before the silver price collapsed on the ill-fated Silver Thursday, which occurred in late March, 31 years ago.
In 2003, when the current bull market in precious metals really started rolling, the silver:gold ratio was roughly 83:1. With silver now approaching $40/oz., the gap has closed to about 38:1 and is steadily narrowing.
“When you’ve got guys like Eric Sprott and Frank Holmes [CEO and CIO of U.S. Global Investors]—guys that are really recognized as ‘thought leaders’ in the space—predicting much higher silver prices, that in itself becomes a fundamental driver for the price,” West says.
Sprott put his money where his mouth was and further boosted silver demand by launching the Sprott Physical Silver Trust (NYSE.A:PSLV) in November 2010 at $10 per unit. It closed at $17.38 on March 24 with a market cap of $869 million. The trust trades at a premium to net asset value (NAV) and its silver bullion is tucked away safely in a Canadian vault, a task that took longer than expected. In November, the trust had contracted to purchase 22,298,525 ounces (22.3 Moz.) of silver bullion but by the end of 2010 had taken possession of roughly 21 Moz. The remaining 1.4 Moz. or so did not arrive until well into 2011. The delivery delay clearly demonstrated the tightness in the physical silver market.
“Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the trust highlight the disconnect that exists between the paper and physical markets for silver,” Sprott said in a January press release.
Sprott’s main competition, the iShares Silver Trust (ETF) (NYSE:SLV), has been trading in unprecedented volumes. On March 24, 27 million shares changed hands for a close at $36.12. The $13.2 billion trust is up 121% year-over-year (YOY) from its March 24 close of $16.29.
The Sprott Physical Silver Trust is just one prong in Sprott’s multipronged approach to precious metals investing. Sources close to the situation say he’s buying equity in just about every silver play coming to market and can’t write the checks fast enough. They estimate Sprott’s total bet on silver, including the trust, approaches $1 billion.
David Morgan, editor of the Morgan Report, a silver-focused newsletter, provided Sprott with some names to help him source his silver bullion. Morgan was in the market when silver’s last bull market ended in 1980. He knows what it’s like when the music stops, and he recommends caution.
“The problem with the gold-silver cycle is that it’s such an emotional market because the people who are in it—the gold and silver bugs—have an attachment to [gold and silver] being money. All markets that have a bull market go from undervalued, to fair valued to overvalued; and nothing gets to the extreme overvaluation level, at least in the last bull market, that gold and silver do. What happens at the top of the market—and we’re far from that now, mind you—is that anything with silver in the name of it will go sky high regardless of its merit,” says Morgan.
Thomson agrees but says good assets are good assets in bull and bear markets.
“I think it’s like anything. The museum-quality assets are going to rise to the top, and the stuff that’s smoke and mirrors will always be smoke and mirrors. And, at some point when the market falls apart, the quality will persist and the crap will fall by the wayside,” Thomson says.
As far as I can tell, we are left exactly where we were after that first essay. No altruism to be found. If you made a “sacrifice” it was, by direct virtue of your action, “worth it to you” (at the time of the action) or you would not have taken that action. It is really just that simple. (By the way, this does nothing the render the action more, or less noble, whichever the case may be in the eyes of an observer.) As a fellow anarchist buddy of mine puts it, “altruism is praxeologically impossible.” Agreed, still.
The basic argument is that the only way one would make a “sacrifice” is if one valued the results of one’s sacrifice to worth more than the costs of the sacrifice. More simply, altruism doesn’t exist because people only act if they believe they will profit. This is simply tautological reductionism based on Misesian rationality.
But this begs a question for Christians: If that which is considered altruistic is actually greed, then what is the spiritual value of giving?
Accepting the definitional impossibility of altruism, I would argue that giving still has spiritual value in that it still teaches sacrifice. Some people make sacrifices in order to afford nice cars; Christians make sacrifices in order to help others. And even if one truly does want to help another person, it doesn’t change the fact that there are opportunity costs, so there is always sacrifice in that sense as well.
Furthermore, there is virtue in in training one’s mind to value helping others over satisfying one’s personal desires. Even if helping others is inherently selfish, as the Austrian school of economics would define it, it is still virtuous to train one’s mind to desire to help others.
Thus, as a Christian who subscribes to Austrian economic analysis, I have little worries about the inherent spirituality of this tautological trick. Even if I am being self-interested by helping others, it doesn’t change the fact that a) I am helping others and b) doing so willingly. That’s what God demands of me, and that’s what I’m going to do.
In his book, ‘The Upside of Irrationality’, Dan Ariely claims to have identified a market failure in the online introductions market. He refers to a survey indicating that people participating in that market spent on average 5.2 hours per week searching profiles and 6.7 hours per week emailing potential partners for a payoff of 1.8 hours actually meeting them.
‘Talk about market failures. A ratio of 6:1 speaks for itself. Imagine driving six hours in order to spend one hour at the beach with a friend (or even worse, with someone you don’t know and are not sure you will like)’.
When I read that my first thought was that it would not be particularly uncommon in Australia for young people to drive three hours to spend an hour with a friend and then drive for another three hours back to where they came from.
I think the term market failure is thrown around too loosely. The situation described clearly involves high transactions costs, but that doesn’t mean the market has failed. The existence of high transactions costs in a market should not be viewed as a symptom of market failure unless we can point to some reason why the market cannot function efficiently.
In this instance the market seems to be working well because evidence relating to the existence of high transactions costs has induced some enterprising people to consider what innovations might be introduced to reduce those transactions costs. The fact that the innovators were a university professor and his associates suggests to me that university staff may be becoming more entrepreneurial.
I think Dan Ariely has done a good job of demonstrating the potential for behavioural economics to help entrepreneurs to design innovations that may reduce transactions costs. He considers survey and experimental evidence which suggests that the high transactions costs associated with online introductions stem from the attempt to reduce humans to a set of searchable attributes. The problem is that the searchable attributes convey little information about what it might be like to spend some time with particular individuals.
Ariely and his associates developed a virtual online dating site that enabled participants to engage anonymously in instant message conversation about various images e.g. movie clips and abstract art. They found that participants were about twice as likely to be interested in a real date after meeting in person following the virtual date than following a conventional online introduction. It seems that when we experience something with another person we gain much more information about compatibility than when we just look at searchable attributes. He has discussed his research here.
It is too soon to know whether Dan Ariely and his associates have prompted a market innovation that will help large numbers of people to live happier lives. However, I think Ariely has demonstrated that behavioural economics may be able to help markets work better. As he points out, there is potential for firms to do a better job of satisfying consumer demand by conveying to consumers what it might actually be like to have the experience of using their products. I think that means, among other things, that if retail stores didn’t exist already they would probably need to be invented to give consumers the opportunity to experience goods before they buy them.
Coming back to market failure, does the fact that some consumers buy goods cheaply online after visiting a retail outlet constitute a market failure? I don’t think so, even though such behaviour is evidence of positive spillovers associated with retailing. Manufacturers will work out before long that retailers provide them with a useful service by enabling consumers to experience their products in real life and think up some way to encourage ongoing provision of that service.
The Monster Employment Index for March was released today, and the index moved up 7 points to a value of 136, which is 8.8% higher than last March’s value.
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 380,000 new jobless claims last week, which would would be 2,000 less than the number released last week.
At 9:45 AM EDT, the Chicago PMI Index for March will be announced. The consensus index value is 70, which is 1.2 points lower than last month, but is still well above the break-even level at 50.
At 10:00 AM EDT, the Factory Orders report for February will be released. The consensus is that there was an increase of 0.5% in orders from the previous month.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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Investors can still find options with the right mix in the natural gas markets, according to Analyst Neal Dingmann of SunTrust Robinson Humphrey. Read why he recommends small and large—even international—companies in this exclusive interview with The Energy Report.
The Energy Report: Are you bullish on companies that have exposure to natural gas?
Neal Dingmann: To a degree, I am bullish. The market has changed in the last couple of years. When you’re talking natural gas, you have to distinguish between dry gas and what they call the “wet gas” or natural gas liquids (NGLs). There are a lot of good companies out there that have both. One might not be all that bullish in the near term on dry gas, which is currently around $4.37 per thousand cubic feet (Tcf). But if those same companies have exposures to liquids, they can still make a tremendous return. I like companies in regions that have exposure to the liquids but, at some point, I believe the natural gas comeback may be sooner than many think.
TER: Do you have a forecast for oil and gas (O&G) commodities?
ND: For natural gas, our estimates are $4.38 per million cubic feet (Mcf) this year and $5.05/Mcf next year. For oil, $97.06/bbl this year and $97.76/bbl next year; so, you could see a little bigger move in natural gas given where it is today.
TER: But do you believe that the margins are there for growth?
ND: Absolutely. As long as companies have liquids or oil exposure to any extent, I think margins can be extremely good.
TER: Why do the liquids have greater margins than the dry?
ND: Because most NGLs are priced as a percentage of oil. Propane, for instance, is probably the lowest at around 25%–30%, all the way up to some natural gasoline at about 90% of the price of oil. So, unlike dry gas, which is going to be at a relatively low price right now, ethane, propane, butane and natural gasoline are essentially priced off the price of a barrel of oil today, which is much higher, marginally speaking.
TER: Why do companies even look for dry gas now?
ND: Obviously, it’s tough for a public company to announce today that it’s going to do an acquisition for purely dry gas. Private companies can afford to buy and wait until prices come back; public companies can’t.
TER: So, public companies producing dry gas are doing it as a byproduct of some other commodity?
ND: That’s most of what we’re seeing today. The two key geographic areas with a fair number of associated liquids are the Marcellus Shale play in the East, or the Appalachian side, and the Eagle Ford Shale close to San Antonio.
TER: What should an investor look for today, in terms of a balance between oil and gas in a company?
ND: I like companies that are a little more than 50% when you combine the oil and liquids exposure. I believe dry gas should come back in one to three years. If a public company has enough oil/liquids exposure, it will have economic activity and drilling over the next two years to provide sufficient cash flows until gas comes back.
TER: What companies do you see with this balance?
ND: One of my top recommendations would be SandRidge Energy, Inc. (NYSE:SD), which is pretty unique with two primary oil plays—one in the Permian Basin and another in northwest Oklahoma. The company also has a very large conventional gas property in Texas, which could be a huge asset when prices come back. SandRidge is ramping-up production about 15%–20% this year and owns its drilling rigs. Because it is in the Permian and the Oklahoma area, service costs are much lower than in most unconventional areas. The company has some very high hedges, locked in with very economical prices, along with two solid oil plays and an incredibly large gas play.
Another is Magnum Hunter Resources Corp. (NYSE.A:MHR), which is in three of the hottest plays in the U.S.—the Marcellus around the Appalachian, the Eagle Ford in Texas and the Bakken in northern North Dakota. The company controls its own infrastructure, which is a key issue with a lot of small companies. The Marcellus acreage has a very high liquid content, but the company has several hundred-thousand-gas acres, which should do well when gas prices come back.
Magnum Hunter recently acquired NuLoch Resources Inc. (TSX.V:NLR), which has a very experienced team up in the Bakken. NuLoch has the potential to see production go from around 2,000 to 4,000 barrels per day (bpd) in a couple of years. That would be nearly all oil. The Eagle Ford has seen not only great liquid content from the wells, but also decreasing costs due to improved drilling practices. So, I expect not only the results to stay as high, or maybe go higher, but also anticipate the cost of those wells coming down, thus enhancing returns.
TER: Should investors be looking for data points or catalysts from the NuLoch projects?
ND: Absolutely, that acquisition hasn’t officially closed yet. NuLoch is a good, but small, company with limited financial resources but a solid operational team. When combined with a company like Magnum, which has a much larger budget, it could really see explosive results.
TER: What other companies should investors consider?
ND: Chesapeake Energy Corp. (NYSE:CHK). People talk about Chesapeake being one of the largest gas producers in the U.S. The company still has a lot of gas going forward. But this year, Chesapeake has focused on more liquids plays with leading positions in the Bakken. It also has big acreage in Niobrara, the Marcellus and Eagle Ford and tends to be one of the lowest-cost producers in all those plays.
Investors are becoming more and more convinced that Chesapeake will follow through with its 25/25 mandate, which means growing production by 25% while simultaneously reducing debt exposure by 25%. It’s a nice combination of a large company ramping-up production intelligently and, concurrently, decreasing its debt exposure on a percentage basis. There are other large companies out there that might be as good with similar production upside but, generally, when you have this production upside, you have a debt level that is continuing to expand on a percentage, or debt-to-cap basis. In the case of Chesapeake, we should see debt going down. Also, the company has been very good at putting its operational team expertise to use by finding these plays early, and then partnering with the right financial partner.
Another company is Swift Energy Company (NYSE:SFY). It was known mostly as a Gulf Coast company around the Lake Washington area. But it has more than 70,000 acres in Eagle Ford, which, as mentioned previously, is a very high liquid-concentrated area. Swift has a mandate and overall production should be up to about 25%–30% this year, sequentially—one of the highest in the industry. On top of that, Swift is able to keep its costs down with strong extended frack contracts with Weatherford International Ltd. (NYSE:WFT) on the wells. Also, the company has been in this play and around the Gulf Coast for some time and its acreage prices are a fraction of what some of the newer entrants have paid. Not only does Swift have the big advantage of having high growth, but also exceptionally low costs because it got in these plays early.
I think it is also important to highlight a small company, called Miller Energy Resources (NASDAQ:MILL). Until a year ago, this Tennessee company was predominantly a small gas company with a little bit of associated oil. Miller Petroleum then came to the Cook Inlet in Alaska and bought some very attractive assets out of bankruptcy for a very, very cheap price. The company has tremendous running room, given its thousands of acres up in Alaska, where production could double or potentially triple in the next several quarters. Miller owns its own infrastructure in Alaska, and the state offers tax credits that could amount to as much as 60%–65% of capital invested. What’s unique in Alaska is that oil prices have little to no differential to West Texas Intermediate (WTI) prices. So, with WTI at over $100/bbl, oil prices are extremely attractive. It’s a very unique small company with tremendous assets—oil, plus natural gas in Alaska.
TER: But MILL has really lagged and is considerably lower than its peer group. Is that because its market cap is so small that the bigger mutual funds are unable to buy it?
ND: I believe that’s a good bit of it. Its market cap is only about $200 million. Generally, for a lot of the mutual funds to get in, it has to have a minimum of a $500-million market cap. I believe that in the coming quarters, as we begin to see some production upside, you should start to see the stock price go in sync with that.
TER: What about international companies?
ND: We do have one that I think is very exceptional—TransAtlantic Petroleum Ltd. (TSX:TNP, NYSE:TAT), which has more than 1 million acres in Turkey. The commodity prices are very positive in that region. Gas is between $7 and $8, and oil is right around $100–$115. What’s interesting is that TransAtlantic owns all of its services—not just rigs but frack trucks, completion trucks and seismic equipment. With that, the company’s costs will stay well under what they would be if relying on foreign companies to provide those services. But clearly, it takes this company longer to set up operations because it still needs to bring in many services from the U.S.
TransAtlantic recently closed on a couple of large acquisitions. The company has two primary areas. One is Thrace Basin, northwest of Istanbul, which is predominantly natural gas. A number of wells are starting to be drilled and fracked there and it is taking off exponentially. Another area is southeast Turkey, almost on the Iraqi-Syrian border, where a fair amount of oil drilling is expected. Between the combination of Thrace and southeast Turkey, we believe production is somewhere around 5,000 bpd. We believe production could reach 10,000 bpd this year and 20,000 bpd next year. Compared to domestic companies, its production model could be one of the leaders.
TER: You forecast that TransAltantic could ramp-up production by more than 200% this year. Is that correct?
ND: Absolutely. Most people would probably agree that the reserves are in the ground on the massive acres the company holds. Obviously, the questions are always: Can the company get it out of the ground? And how soon can it get it out of the ground? We believe that because the services are all there and most of the processes are in place, we should now see the benefit of all that. You saw production begin this year somewhere around 4,000 bpd, and we could see an exit rate well north of 10,000 bpd.
TER: You mentioned that TransAtlantic has its own infrastructure. Does that all come under the heading of Viking International?
ND: It does. Viking International is a subsidiary of TransAtlantic, which is trading at about $2.87/share or about a $1 billion market cap. Some might argue that one-third or even more of that market cap is comprised of the book value of Viking International.
TER: Has the stock lagged thus far because it hasn’t begun the growth part of its production?
ND: That’s likely the reason. Usually, most mutual or hedge funds are able to come in and acquire a company like this at $1 billion. The plan would be to ramp-up that production to somewhere around 20,000–40,000 bpd. That would put it on the radar of a lot of the majors and some of these other large foreign players looking for a large oil or gas play. At that point, the company would probably sell to one of the large E&P companies, which would be very positive for shareholders.
TER: Could Turkey be considered a geopolitically risky area, and is there a risk discount trading in this stock currently?
ND: You’ve brought up a good point. With any company not primarily a domestic, there is always going to be some discount in the stock price for potential geopolitical risk. The objective for investors is to determine the appropriate discount. Today, due to potential turmoil in parts of the Middle East and other areas, there may be some over discounting of TransAtlantic’s stock price. When some of this other turmoil starts to die down again, you may start to see investors come back in a larger way.
TER: Thank you for your time.
Neal Dingmann has more than 12 years of equity research experience, most recently at Wunderlich Securities where he covered more than 30 companies in the exploration and production and oilfield services sectors. He previously held similar positions at Dahlman Rose, Pritchard Capital, RBC Capital Markets and Banc of America Securities, where he worked on the number one-ranked Oilfield Services research team. Last year, Neal was recognized by The Wall Street Journal as “Best on the Street” and as a “Home Run Hitter” by Institutional Investor magazine. He is a frequent guest on Bloomberg TV and has a large network of industry contacts. Neal received his MBA from the University of Minnesota and his BA degree in business from the University of Arkansas.
The Mortgage Bankers’ Association purchase index was released at 7:00 AM EDT, and there was a week to week decrease of 1.7% in the Purchase Index and a week to week decrease of 10.1% in the Refinance Index.
The Challenger Job-Cut Report will be released at 7:30 AM EDT, providing an estimate of the number of layoffs in February.
At 8:15 AM EDT, the ADP Employment Report will be released. Investors will be watching this number to get advance notice on the state of the job market in advance of the government’s report on Friday.
At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 3:00 PM EDT, the Farm Prices report for February will be released, giving investors and economists an indication of the direction of food prices in the coming months.
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As an investor, sometimes the best action you can take is no action. Jason Hamlin of the Gold Stock Bull newsletter didn’t start snapping up stocks on news of disaster in Japan and military attacks in Libya. In this exclusive interview with The Gold Report, Jason tells why he’s holding his ground, how macro issues spanning the globe could push precious metal prices and a few of his top stock picks.
The Gold Report: Jason, the gold price fell dramatically after the Japanese earthquake and subsequent tsunami. Were you buying in the dip, and if so, what were you buying?
Jason Hamlin: I wasn’t buying or selling mining shares on the news out of Japan, but did add to my physical stockpile on the dip. Not a really exciting strategy, but I already had a decent amount of exposure to equities. There was a lot of risk and uncertainty in the market after the news out of Japan, so I decided to wait and watch how things progressed. Equities have rallied pretty well, but I am not convinced that we’re out of the woods yet.
TGR: Did you panic at all when gold went down to $1,380/oz.?
JH: No, especially with the amount of physical buying in recent months. It seems like every dip has been met by an overwhelming demand for physical gold and silver. I feel that we have entered a new paradigm in which there will be shorter and shallower corrections than witnessed during the past decade.
TGR: There is definitely a lot of international upheaval. What impact do you think the enforcement of a no-fly zone over Libya will have on the gold price in the near term?
JH: I’d like to point out that the no-fly zone was used as a justification for missile strikes; it was a much more aggressive policy than the simple no-fly zone that was originally proposed. It was also done without congressional approval, which I view as a continued violation of the Constitution, which states that only Congress can declare war. I question the political and moral authority of the West to be doing this, especially considering that the U.S. is broke and must borrow $1.6 trillion per year to cover its budget shortfall.
Economically, the ease and swiftness with which the U.S. decided to do this, and with little debate, translates into more fear and uncertainty in the markets. It will prove bullish for precious metals and oil, both in terms of the fear trade and the inflationary impact. Investors are increasingly viewing gold and silver as a better safe-haven investment than dollars or bonds, which have served this function for mainstream investors in the past. I see this trend accelerating in the coming months and years as more investors lose faith in the U.S. dollar and the U.S. government’s ability to repay its exploding debt, which has topped 100% of the gross domestic product by some estimates.
TGR: We’re not at 200% yet!
JH: Not quite as bad as Japan, but the 90% to 100% range is typically where most economists say interest payments become such a burden that it becomes hard to get the fiscal house in order.
TGR: On Friday, Goldman Sachs set a three-month target price for gold of $1,480/oz. Are you comfortable with that number?
JH: I quit paying attention to anything Goldman Sachs had to say a long time ago, particularly when it comes to forecasting the gold price. They have consistently under-forecasted and underestimated the precious metals market by a wide margin. I essentially view Goldman Sachs and the big investment banks as financial terrorists who should be jailed, not respected institutions deserving of the slightest iota of creditability. The Securities and Exchange Commission and the Justice Department might not want to go after them, but it’s pretty clear to me that they disregarded their fiduciary duty and don’t have their clients’ best interests in mind. Taking their forecasts or analysis to be factual or relevant seems foolhardy.
Also, three months is really too short term to predict the price of gold with any degree of accuracy. However, I believe gold has a good chance of hitting $1,800/oz. by year-end. That’s been my target. Gold could then easily pass its official inflationary adjusted high of $2,300/oz. next year. The true inflation-adjusted high for gold is somewhat closer to $5,000/oz. if we’re not using the suppressed government statistics. I think there’s a good chance that gold will surpass that figure before the bull market is over.
TGR: You mean the consumer price index?
JH: Right. The CPI is pretty well understood to be fudged in order to show inflation as lower than it actually is. Anyone who does the grocery shopping for a household knows that inflation is running more than a couple percent annually.
TGR: Let’s talk about silver. Silver has closed the silver:gold ratio, or the number of silver ounces it takes to buy an ounce of gold, to 40:1. Historically, it’s been much closer than that, but this is as close as we have seen in recent memory. That raises the question: is silver closing the gap a little too quickly—and overheating?
JH: I believe silver is likely to continue outperforming gold for the remainder of this bull market. I think the ratio will most likely revert back to 15:1 at some point in the next few years. Supply and demand fundamentals dictate such a revision.
For example, 95% of the gold ever mined is still in existence, whereas about 95% of the silver ever mined has been destroyed or used in such small quantities that it can’t be economically recovered. The industrial uses of silver continue to increase, including high-tech electronics, solar and wind energy systems, batteries, medical and military applications, and even water purification. Silver truly is irreplaceable in many of today’s critical applications.
In the past several months, there have been signs of shortages. Overall, the physical demand is overwhelming the supply. Even absent a short squeeze, the fundamentals dictate a much higher price for silver both in absolute terms and in relation to the gold price.
There is also another perspective on that ratio. If it’s based on production of silver versus gold, the ratio would be closer to 10:1. Comparing overall demand to overall mine production, there is a shortfall of 100 to 200 Moz. of silver every year. There’s actually less silver bullion aboveground available for investment than there is gold bullion. As the hedge fund manager Eric Sprott said, “There is 75 times more dollars worth of gold to buy than silver.”
Despite these statistics, there is an increasing percentage of investor dollars flowing into silver, which is still 30% below its all-time nominal high, even though gold is about 70% above its 1980 price. The numbers just don’t add up.
I don’t think silver is closing the gap too quickly, but rather that the gold:silver ratio is likely to fall even lower over the next few years.
TGR: Okay. How far off is $40/oz. silver?
JH: Silver is approaching $40 rather quickly, but I prefer to steer clear of short-term predictions. That’s just a guessing game. However, I do think silver will likely pass $50 by year end.
TGR: That would be truly remarkable. Given the current market conditions, what sort of junior mining plays are you seeking these days?
JH: My focus is on junior miners that appear undervalued relative to their peers and under-appreciated by the market. I do a good deal of fundamental research and cross-analysis. I look for miners that are well financed, with high-grade drill results, open strike zones, and management that has a track record of moving projects from exploration into production. I like companies that have a clear plan, either for moving into production, entering into a joint venture or being acquired by a surrounding major within a few years.
TGR: Which companies fit that bill?
JH: The Yukon gold rush is on, and one of my favorite plays in that region is Golden Predator Corp. (TSX:GPD). The company has 3,000 square km under claim and three advanced projects moving toward an NI 43-101 resource estimate this year. Its Grew Creek and Clear Creek properties will have their resource estimates by year-end. Grew Creek drilled around 150 meters, just under 2 grams per ton (g/t) gold, and Crew Creek hit around 25 meters of 2–3 g/t gold. Brewery Creek will get an updated estimate with a target of 600,000 oz., which is twice its previous estimate. They just announced the expansion of the Bohemian Discovery with 33 meters of 3 g/t gold. If these initial drill results are any indication, the resource estimates are going to surprise even the most bullish investors of Golden Predator.
TGR: The company recently raised $22.7 million in a bought-deal private placement, so it has the cash to see those projects through going forward.
JH: Drillings and discoveries in the Yukon are still very early on the bell curve. Golden Predator is well financed and drilling aggressively as we speak. It has a great pipeline of future projects and a growing revenue stream from projects in Nevada, which is a bonus. Bill Sherriff is the chief executive, and Mike Burke recently joined as chief geologist (from the Yukon Geological Survey). I have confidence in the leadership at Golden Predator, and I am not alone. Sprott Asset Management decided to get a piece of the action and invested in the company last year.
I also like that Golden Predator has exposure to silver via 5 million shares of its spinout, Silver Predator Corp. (CNSX:SPD), and its ability to acquire another 11 million shares in that company.
I believe the stock is cheap at anything less than $1. It’s more of a speculative play than some of the other investments that I look at, but the stock could easily double by year end and has the potential to repeat the success that ATAC Resources Ltd. (TSX.V:ATC) has experienced in the area during the last year.
TGR: Golden Predator could hit the $5 mark?
JH: It’s at about 90 cents right now. If its drill results continue at this pace , it has the potential to reach $5 in the next few years. It could certainly mirror the performance of ATAC, which was trading at $6.80 recently. It is up about 400% during the past year on discoveries. Golden Predator has property all around where ATAC’s discoveries were made. I really think there’s blue sky potential with this company.
TGR: What are some other plays that you have positions in?
JH: I am interested in the junior silver miner Argentex Mining Corporation (TSX.V:ATX; OTCBB:AGXM), which is one of the most undervalued junior silver plays in the market. Its flagship 100%-owned property Pinguino in southern Argentina has a bonanza-grade discovery. It completed a resource estimate that is expected to be updated in the next few months with new drill results. There’s also a preliminary economic assessment coming down the line. The company is currently in the midst of a 17,000 meter drill program. It just added another drill rig last week and is expected to release drill results in the next few weeks.
TGR: What are you expecting from the preliminary economic assessment (PEA)?
JH: Based on the drill results we’ve seen already, I expect some pretty robust economics to encourage the company to move forward on this project. It has 50 veins identified to date, and the mineralization is open along strike and depth that they have tested. I would be surprised if the company didn’t continue to hit high-grade intersections and come up with a very strong PEA.
TGR: You provide your subscribers to Gold Stock Bull with a list of the top 10 most undervalued companies in a variety of sectors. Are there any junior mining stocks on your list right now?
JH: There is one that I am happy to talk about: South American Silver Corp. (TSX:SAC; OTCBB:SOHAF), which has the Malku Khota silver-indium project in Bolivia—it’s one of the largest undeveloped silver and indium resources in the world.
South American Silver has an experienced management team and is well funded. Similar to Argentex, it’s scheduled to release a PEA and resource update this month, with a pre-feasibility study later this year. As those studies and estimates come out, there’s a potential for the share price to move significantly higher.
TGR: I have talked to a number of people on Bay Street about South American. They seem to think this is one of the most highly undervalued companies there.
JH: Yes—particularly with the scale of this project. It could be a huge win if all the pieces fall into place. Given the incredible leverage that it has to the silver price, and the lower enterprise value per ounce, it’s very undervalued at the current price.
TGR: There is one note of caution, however, because it is in Bolivia. Compared to other companies operating in Bolivia, though, South American Silver seems to have come closer to solving the puzzle.
JH: That’s due to their management team and how well they’re working with the local government and the local people. They have a track record of successful project development in South American and Bolivia is an emerging resource-based economy demonstrating strong growth. I don’t think it’s a sure bet; there are certainly some geopolitical risks. However, South American certainly has shown an ability to mitigate that risk better than other companies.
TGR: There’s a lot going on politically and financially around the globe right now. There is unrest in the Middle East, and Japan is grappling with the aftermath of natural disasters, as well as staggering national debt. What advice do you give investors in light of those macro conditions?
JH: I believe that investors should have a good hedge against inflation, and that their portfolios should be diversified across various commodities. Investors should also have some of their assets out of dollars and out of the banking system entirely. I am growing increasingly concerned that another currency or financial crisis is coming down the line. It’s critical to balance where assets are placed and to have physical gold and silver in your possession. The financial landscape is deteriorating in the U.S., as well as many other countries.
TGR: Jason, thanks for the insights.
Jason Hamlin is the founder of Gold Stock Bull (www.goldstockbull.com) and publishes one of the most highly-rated investment newsletters available, focused on strategies for profiting on the bull markets in gold, silver, energy, rare earth metals and agriculture. Mr. Hamlin has a background analyzing charts and trends for the world’s largest market research company, is versed in fundamental and technical analysis and has consulted to Fortune 500 companies around the globe. Jason is a cycles investor, student of Austrian economics and speaks regularly at investment conferences throughout North America. The Gold Stock Bull newsletter is focused on finding junior mining companies that are undervalued relative to their peers. Click here to sign up or get more information.
This will make more sense once my next IMF
post is published, but I propose eliminating the corporate taxes.
I say this because as I was completing my tax return, I took a look at the handy revenue chart the IRS placed in the instruction booklet.
I saw two things that really intrigued me.
First, debt accounts for 40% of the federal budget’s funding.
Second, corporate taxes account for 4% of the federal budget’s funding.
Given that corporate taxation is as much a redistributive system as anything else
, it makes little sense to bear the administrative costs in light of little is actually contributed to the budget.
Income taxes account for 26% of the budget, and have a higher return on costs. I propose, then, that corporate taxes be eliminated, and that revenue is supplanted by closing loopholes, especially for low-income tax payers. If they are going to receive government benefits, the least they can do is pay for some of them.
Of course, this proposal will seem somewhat hypocritical in light of my next post. I simply want to note that no matter how you analyze it, corporate taxes are simply a waste. Not only are they costly to collect, relative to revenue, they are also costly to comply with which makes starting and running a business in America less appealing. Eliminating corporate taxes encourages business growth and eliminates government inefficiency. Naturally, this plan is doomed to fail.
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 9:00 AM EDT, the monthly S&P/Case-Shiller home price index report will be released. Given that most economists don’t expect the overall U.S. economy to improve until housing prices end their decline, the market will be watching this number closely.
At 10:00 AM EDT, the monthly report on Consumer Confidence for March will be released. The consensus index level is 64.0, which would be a 6.4 point decrease from February.
Also at 10:00 AM EDT, the State Street Investor Confidence Index will be released, which looks at changes in the amount of equities held in the portfolios of institutional investors.
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