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Never mind
the correction in the price of silver, says Silver
Strategies Editor Sean Rakhimov; better things
are ahead. "It may be volatile; it may be steep; but it should be
short-lived," he says, adding that he expects silver to rise well above
its 2010 high at some point in 2011. Some of that price support could come
from governments entering the silver market. Find out all the reasons for
this and read about some of Sean's favorite silver plays in this exclusive
interview with The Gold Report.
The Gold Report: Sean, it seems that among
commodities, silver is getting the biggest headlines. The price of silver hit
a 30-year high in late December. Silver was up 83% in 2010. And a
high-profile lawsuit was launched by a significant silver investor against JP
Morgan for allegedly manipulating the silver market. It seems that silver
has, for the time being, wrested the spotlight away from gold. What sort of things
do you expect for silver in 2011?
Sean Rakhimov: Well, the
short answer is that I expect silver to continue its run. In previous
interviews with The Gold Report, I discussed how small and volatile
the silver market is, and how explosive the moves can be. We're in the middle
of one of those explosive moves now. A year ago, silver was going nowhere,
having spent quite a bit of time in the $14–$16 range. A lot of people
were questioning if it was for real, especially with gold reaching new all-time
highs while silver languished. Speaking of these 30-year highs, these are all
nominal numbers versus inflation-adjusted numbers. That should be kept in
mind. You have to keep it in perspective.
TGR: What is the all-time high in terms of
inflation-adjusted numbers?
SR: I don't have an exact number but it's probably
around $140. Then again, inflation-adjusted numbers are an ambiguous notion
because of the way they print money these days. Is inflation at 3%? Or is it
at 8%, or 15%? The current accepted all-time high for silver was around $50
in 1980 when the Hunt Brothers were trying to corner the silver market.
TGR: We're going through a bit of a correction in
the price of price in the first week of 2011.What's your view on what's
happening?
SR: This correction couldn't come soon enough.
David Morgan and I were expecting a correction in the low $20s about three or
four months ago and it didn't happen. But that's the way bull markets work.
They don't often act the way you anticipate; it's very difficult to call the
timing on these moves. However, the correction is a very welcome development.
I think this correction is going to be a very treacherous one—maybe
down to about $25. It may be volatile; it may be steep; but it should be
short-lived. It's very difficult to call these things in the silver market,
which is very small and in which individual players can actually move the
market in the direction they desire. But after this correction, I expect
silver to reach new highs in 2011.
TGR: Does that mean you're selling silver now?
SR: No, it doesn't mean that. You can play these
moves if you are a trader, but I'm not. I'm a long-term investor. I never
sell silver. I may trade some stocks, but that is not usually related to a
current sentiment; it's more about the stock itself. But I do not sell silver
as a strategy. We're in a bull market, and the way to play a bull market is
to get in and stay in.
TGR: On SilverStrategies.com, you recently
published an article titled Why
Governments Will Buy Silver. If things progress as you
suspect they will, government-sponsored silver buying could add further
momentum to the bull market you just talked about. Could you discuss that
premise with us?
SR: Yes. I tried to make the case for why I think
governments will come into the silver market and be very prominent players,
if not dominant players, in a way that's not too different from the situation
in the gold sector, where the Central Banks became net gold buyers.
In the gold sector, developing countries—the ones
with the cash—have been turning their paper assets into gold. I expect
something similar will happen in the silver sector for a couple of reasons.
One reason for this is monetary. Another is that some of these players could
be priced out of the gold market. And the other reason that I outlined in the
article is silver's use as a strategic metal. It's one of the most versatile
industrial metals out there.
I think governments will try to secure access to certain
resources, and silver will be on a list of commodities or metals that will be
highly sought after. For example, silver is very important in energy
production. It's also very big in electronics. Governments may not care about
silver's use in consumer electronics, but they are likely to care about
electronics for military use. If governments don't have silver in the
quantities they need, that may pose some challenges to countries without
ready access to silver. Countries that don't mine silver have to buy it in
the market and then wait for delivery. And the physical silver market is
especially tight right now.
TGR: How long will we have to wait before we see
that happening?
SR: It is difficult to say, mainly because the
playing field is changing on a weekly basis. One day Greece is out of the
woods. The next day it's not out of the woods. The day after, it's falling
over. There are questions about the European Union; there are questions about
the U.S.; questions about currency depreciation. There are so many moving
parts it's very difficult to say when a government would enter the silver
market.
That said, there is nothing
indicating that it has not already happened. For instance, the Chinese
government is encouraging its citizens to invest in silver. And a good number
of governments mint coins in countries without silver mines. That means they
have to buy the silver in the market, if they intend to continue their coin
programs.
TGR: If governments come into the sector, and there
are already silver supply issues, what influence would that have on silver
demand?
SR: That is actually the most intriguing part of my
premise, because it would send a message to the market. It would make silver
so much more visible and important. It would add to silver demand, and maybe
cement silver's position as a strategic metal. But aside from the demand side
of the equation, it's the sentiment. It's the perception that governments
would ultimately send to the markets that I think would generate waves of
interest in silver.
TGR: You talked in vague terms about what silver
will do in 2011.In early January, the gold:silver ratio was 46.2:1.Where do you expect that
ratio to be by the end of 2011?
SR: This is where you probably can't pin me down. I
don't like to make specific predictions, mainly because it's a bit of a
loser's game. I mean, gold could reach $2,000 overnight if some war breaks
out or some currency fails. Precious metals are geopolitical assets.
What do I expect? I published an article at the end of
October 2009 in which I called for the next move in silver to register a high
somewhere between $30 and $50, and we have met the lower end of that range. I
still believe the next stop is likely to be that nominal $50 high. As far as
the gold/silver ratio is concerned, I believe silver will continue to
outperform gold. When I started looking at silver, the ratio was around 82:1.
Now it's below 50:1. By the end of the cycle, I expect it to be below 20; and
there is a 50% chance that it will be below 10. But I don't expect this cycle
to end in the next couple of years, so that's definitely not going to happen
in 2011. If anything, 2011 is going to be the year that will make silver
mainstream. We should see fireworks from both gold and silver, but in
relation to each other, I expect more on the silver side.
TGR: How long do you see this bull market running?
SR: It's difficult to say. Commodity cycles usually
run about 20 years. Arguably, we're about 10 years into this one, so in loose
terms, we may have another 10 years left. However, silver and gold are
monetary assets, and we're looking at a currency crisis of epic proportions.
We may have to rebuild the entire financial system. Who knows how long that
would take or when it's going to get underway? Is it going to be the failure
of the euro? Is it going to be the failure of the U.S. dollar? Is it going to
be something else? We don't know.
What we do know is that gold and silver are money. Unlike
other types of money, the value of these metals is historically proven and
universally accepted. Gold and silver will play a prominent role in whatever
new financial system is established. And I maintain that in real terms, these
metals will go up in value.
TGR: Imagine you are out for drinks with some
friends, and someone there doesn't believe in the safety and economic
security of precious metals. How do you convince that individual that
investing in precious metals is in his or her best interest?
SR: I actually do that on a regular basis. I
usually tell the individual that owning precious metals is no longer just an
option. It has become a necessity, if you want to protect yourself from the
inevitable financial crisis. The financial crisis may not be imminent, but
it's inevitable. You should get into gold and silver, and between gold and
silver, silver is more affordable. It's easier to buy a $30 silver coin than
a $1,400 gold coin.
TGR: What's your silver investing strategy? Tell us
about your silver portfolio.
SR: I buy physical silver. I actually bought
some—not a lot—very recently. I buy silver bullion whenever I
have the funds, but not on the scale that I used to given recent silver
prices. But other than that, my investments are largely in silver equities. I
spend a lot of time analyzing these.
TGR: When it comes to silver equities, there are
several large, steady silver producers like Silver Standard Resources Inc.
(TSX:SSO; NASDAQ:SSRI) or Pan American Silver Corp.
(TSX:PAA; NASDAQ:PAAS) or Coeur d'Alene Mines Corp. (TSX:CDM; NYSE:CDE). But there's
much more leverage to be had with small-cap silver producers and explorers.
How do you pick those stocks? Do you follow people like Bob Quartermain? Do you prefer specific jurisdictions? Is it
about grade? Or do you rely on other tangibles?
SR: All of the above. But people are the most
important consideration when picking these junior companies. You also have to
look at the assets. I penned an article a while ago titled The
Coming Wave of Resource Nationalizations where I made
the case that hard assets—and silver is definitely on that
list—will be nationalized by governments where those assets are
located. It's not specific to silver, but silver is very prominent on that
list. It's one thing to nationalize timber
operations or coal, but it's a different story when the asset is basically
money that is very liquid and universally accepted. The geopolitical aspect
is becoming increasingly important, and lately I have been putting more
emphasis on that. On the flip side, it's not very easy to do because silver
deposits largely occur in the Americas. There are some in Canada, but most
are in Mexico and Peru. There are some in Argentina. There are some in Russia
and China, but that about sums it up. There are not many other jurisdictions
where you can find silver assets that are investment grade.
TGR: What are some lesser-known silver names that
you're following?
SR: Right now, I'm not looking to invest in
companies that are well known, because they generally had huge runs and now
there should be some kind of correction. But the silver sector is so small
that there's a lot of new interest and new money coming into it. I don't
expect a big correction there. As for lesser known names, Mirasol Resources Ltd. (TSX.V:MRZ) has been making some fantastic
discoveries in Argentina. That's become a silver play. One that has been
overlooked as a silver company is US Gold Corp. (TSX:UXG, NYSE:UXG), believe it or not. A Rob McEwen
company, US Gold is mostly known for gold, but its main area of interest, at
least in the last couple of years, has been a silver discovery in Mexico.
The thing about silver is that it rarely occurs as the
dominant metal in a deposit. It usually occurs along with gold or copper or
lead and zinc. Often you look for one metal and you find another. One
interesting story that had its coming-out party in 2010 was South American Silver Corp. (TSX:SAC), now spearheaded by Greg Johnson
of NovaGold Resources Inc. (NYSE.A:NG;
TSX:NG) fame. South American Silver couldn't find
traction for a couple of years because their main silver assets are in
Bolivia, where it has a large but low-grade deposit. The geopolitical risk
was steering investors away. But Greg Johnson came in and turned the story around.
I don't know how he changed the sentiment, but that company is off to the
races now.
TGR: You mentioned Mirasol.
It has the Joaquin silver-gold project in the Patagonia region of southern
Argentina, which is a joint venture with Coeur d'Alene. Drilling there has
returned some pretty good results. Do you want to talk about those?
SR: Coeur d'Alene is the operator of that project.
That was what put Mirasol on the map. I remember
when Mirasol came to market at pennies. It was $0.15
a few years ago. It's now over $5. They have since made another discovery
called the Virginia Silver Project. Mirasol has
been drilling that and recently put out some very interesting drill results
that confirm it's onto something serious there. It
should be a high-grade silver discovery.
TGR: And Mirasol owns
Virginia outright.
SR: Yes, that one is wholly owned. That's been
carrying the share price upward. Mirasol has a very
tight share structure, and it's one of the very interesting companies in the
silver space.
One thing to note is that precious metals investor Eric Sprott has entered the silver space in a big way. He has
helped to finance a half-dozen companies in the last
three to six months alone.
TGR: What do you make of Mr. Sprott's
increasing presence in the silver space?
SR: Eric Sprott has made
an all-out bet on silver. He's been buying equities. He's been buying
physical silver. He's been investing in companies and doing a lot of work in
the silver space. One company he helped finance, and one that has received a
lot of press recently, is Silvermex Resources Ltd. (TSX.V:SMR). Silvermex
is a very different story from what it was a year or two ago, when it was an
exploration company. Since then, it merged with Genco
Resources. Those who follow my work know that I was on that story from the
very early days. Genco had a mine known as La Guitarra in south-central Mexico. The merger married a
mining asset with mining management. Genco ran into
some problems, and now La Guitarra is in good
hands, spearheaded by Silvermex President Mike
Callahan. Silvermex, in my opinion, has the best
board of any silver junior. They are very competent people who have both
production and exploration experience. Silvermex
now has financing in place, so I expect some very interesting news coming
from that company.
TGR: Tell us about La Guitarra.
SR: I was on the property about three years ago.
That project has a lot of potential; there are some big resources there. Now
that La Guitarra has the mining experience of Mike
Callahan and his team behind it, I think they will be looking to put that
asset back in production and start generating cash flow. Silvermex
is on my list.
TGR: What about some other juniors that have caught
your eye, Sean?
SR: Obviously, a bunch of companies have done
extremely well in the silver space over the last year. Probably one of the
best performers is First Majestic Silver Corp. (TSX:FR; NYSE:AG; FSE:FMV; OTCQX:FRMSF). I've been
pounding the table on that company for a few years, and it was finally
recognized by the market. It's now listed on the New York Stock Exchange and
the stock is just below $13. It was at $4 less than a year ago. People woke
up when they saw First Majestic's earnings, which I had been discussing for a
couple of years. Endeavour
Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR) has also done
very well, as has another pick of mine—Bear Creek Mining Corp.
(TSX.V:BCM). These are companies that have matured and
now have solid production and operating bases and Bear Creek is well on its
way to production. At current silver prices, they are cranking out some good
cash flow.
TGR: You talked briefly about South American Silver
and touched on the talk about President Evo Morales
nationalizing some silver projects in Bolivia. Certainly that's helped keep
investors at bay with Apogee Minerals Ltd. (TSX:V:APE) and its Pulacayo-Paca
silver project in Bolivia. Apogee's share price had been languishing for
quite some time.
SR: Until recently.
TGR: Yes, until recently. What's changed?
SR: I think South American Silver convinced the
market that the geopolitical risk in Bolivia is, at a minimum, manageable.
The sentiment toward Bolivia as an investment proposition has changed through
their efforts. I think Apogee has benefited from that. I have been to Pulacayo and some other projects in Bolivia, so I know
that story very well. I was there before Evo
Morales came to power. Apogee certainly has some good silver assets, and
Bolivia is an inexpensive place to do business. As long as Bolivia remains a
legitimate investment destination, I think Apogee should do well.
TGR: Could you give us one more silver junior
before we let you go?
SR: Esperanza Resources (TSX.V:EPZ) has been one of my favorite
companies for a long time. I've known the company since its very early days,
maybe six or seven years. They recently changed the name to Esperanza
Resources (from Esperanza Silver) to better reflect their asset mix. It's
more of a gold company now because, like I said, you look for one thing, you
drill, and you find something else. In this case, it was a pretty good trade.
It was looking for silver and found gold. Esperanza has two advanced
projects. The San Luis project is in Peru and is joint-ventured to Silver
Standard. That is a very high-grade deposit. It's not large, but drilling has
returned some spectacular numbers there. Silver Standard is advancing San
Luis and they were talking about accelerating it toward production.
Esperanza's other asset, the Cerro Jumil project,
is in Mexico. Cerro Jumil has over 1 Moz. of gold
now, and is looking very attractive as a takeover target. Esperanza has done
very well for its shareholders. I like the management and have a very good
relationship with them.
TGR: Sounds good. Do you have some parting thoughts
on silver?
SR: In previous interviews with The Gold Report,
we've discussed why silver is important, its uses and some other things.
And I provided some potential price targets for the cycle and said we're
going to see a silver price in the triple digits. I think we're well on our
way now.
This year, 2011, should be a very good year for silver.
This current correction may have to do with the amount of bullish commentary
on silver. Usually when there is overwhelming sentiment in one direction,
price action moves in the opposite direction. I actually think it's a welcome
development, because silver is very overbought on a technical basis, but not
as an asset itself. So I think silver remains one of the best investment
options out there.
TGR: Thank you for talking with us today, Sean.
In a previous life, Sean Rakhimov
designed financial systems to support various areas of the investment banking
business. He seized the opportunity to learn about options trading,
securities lending, payments processing, clearing and settlement, fixed
income securities and margin transactions. He's not only been putting that
knowledge to work ever since, but also sharing it with others, with writings
published on such Internet portals as Le Metropole
Café, 24hGold, 321gold, Kitco, Gold Seek,
Gold Seiten and—of course—The Gold
Report. Sean has been a contributor to renowned silver guru and writer
David Morgan's newsletter for many years and publishes and edits his own
website, SilverStrategies.com focused on
silver and related investments since 2004.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or
his family own shares of the following companies mentioned in this interview:
None.
2) The following companies mentioned in the interview are
sponsors of The Gold Report:
Esperanza, NovaGold and Silvermex.
3) Sean Rakhimov: I personally
and/or my family own shares of the following companies mentioned in this
interview: None. I personally and/or my family am
paid by the following companies mentioned in this interview: None.
The Gold
Report
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