Things are looking bad for precious metals, but all is not lost...
IT LOOKS bad for precious metals. Gold prices have fallen hard. Explorers are hurting for money. Slim treasuries mean fewer drill programs. Scarce discovery news could lead to fewer listings on the Toronto Stock Exchange. But all is not lost. In this interview with The Gold Report, Rick Mills, owner and host of Ahead of the Herd, points to the fundamentals of silver.
The Gold Report: Precious metal bullion and equities are taking a hit right now in the market. Why do you feel silver is an interesting investment today?
Rick Mills: There is a disconnect this year between silver and gold. They usually trade in lockstep, and their market prices are doing that.
As of April 2, more than 140 tons of gold has flowed out of various exchange traded funds (ETFs) this year, while silver ETFs have added more than 20 million ounces (20 Moz). Maybe that is because silver is more affordable than gold or because silver also has industrial uses.
TGR: But the ETFs do not reflect a price disparity between gold and silver.
Rick Mills: It is hard to figure out. In Q1/13, US mint silver coin sales reached an all-time high of 13.2 Moz. Annualized, that is 52.8 Moz silver sold in 2013, another record. The $10 billion spent to buy those ounces would be a record as well. Investors are buying 56 times more silver ounces than gold ounces.
TGR: Why is that?
Rick Mills: Silver is called poor man's gold. Both are monetary metals, silver for even longer than gold. And silver just might outperform gold in the future. The S&P/TSX Venture Composite Index is trading similarly to the early 2000s when silver was below $10/ounce.
TGR: The appetite for silver bullion is voracious.
Rick Mills: The monetary climate is dominated by quantitative easing. There has probably never been a bigger need for non-fiat money, yet the most popular safe havens are the US Dollar and Treasury bonds. German bunds are popular. It is hard to understand government controlled paper assets being more popular than real hard money.
TGR: Some of the loudest voices in this space have been talking about silver and platinum more than gold, which is interesting.
Rick Mills: Given the demand from more cars being on the road around the world and the fact that almost as much jewelry is made from platinum as is used as autocatalysts, as well as the precarious supply source in South Africa, I can see platinum being an extremely timely investment, but nothing will be as good as gold and silver.
TGR: In addition to buying bullion, investors can participate in the equities through the mining companies.
Rick Mills: An investor has to be pretty careful with the equities. A lot of people are claiming we are at the bottom. Yes, there are companies with good management teams on sale, but if this is the bottom, what would start the general junior market upward climb?
In my opinion, we will need a huge discovery, but with no initial public offerings (IPO) this year and with the financing well bone dry, where will the upside come from? We are approaching the summer doldrums. Traditionally, the juniors shine in late August through March. How can that happen this year? No money means no drill programs. No discoveries means no returning interest in the sector. For most of these companies, 2013 is a write-off.
If you see a company doing a financing, it usually is for less than $500,000, what I call survival financings. Investors need to be very smart and very cautious. A company doing survival financing will use the money to keep the lights on, keep its listing current and pay salaries, but not do much on its properties.
We just had the Prospectors and Developers Association of Canada conference, where everybody tried to get everything arranged: money, financing, deals, But Q1/13 is over; companies must file their quarterly reports. They have to have a year's worth of General and Administrative (G&A) expenses in the treasury to stay on the TSX or risk becoming insolvent. Hundreds of these mining companies do not. Depending on what the auditors say, that might deliver even more bad news this summer and fall when the TSX may very well be delisting or suspending 20 or 30 companies a week.
If you believe precious metals, particularly silver, are a good investment, you have to become a stock picker. You have to cut through the noise and understand what is important. Right now, that is money in the bank or cash flow from operations.
TGR: With so many companies in dire straits, why would an investor buy any stock in the sector right now?
Rick Mills: We can start with the context of silver production in the US. The US has several historic primary silver districts. Most of them were shut down in the bear markets of the 1980s and 1990s. Today, most silver production in the US is a byproduct of copper and gold mining, both of which, in the US, are in decline.
Primary silver deposits are extremely rare; less than a third of the silver mined globally comes from primary silver mines. The average yield of the top primary silver miners dropped 34% between 2005 and 2011. It was even worse in 2012. Silver grades are actually declining. For proof, just compare the average ore grade for the year of production to the prior year's reserve average ore grade. Most silver mines today are producing their best stuff, yet over the last seven years, ore grades have dropped more than 40%.
There are real supply issues and people are snapping up silver as if it will run out tomorrow. Take the US Silver Eagle. In Q1/13, its sales equaled 42% of total 2012 sales. And in 2012, US mint silver coin sales surpassed the amount of physical silver mined in the US.
TGR: We have not seen a lot of new silver production in the US.
Rick Mills: Not much production and very few silver discoveries.
As a group, silver stocks have not experienced a sustained breakout to new highs since 2007, yet people are buying physical silver.
If you look at a 40-year correlation chart between silver and global national debt, the arrows point from the bottom left straight to the top right on the chart. I have no doubt debt will continue to climb.
TGR: Rick, thank you for helping our readers understand the silver space a little better.