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Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

Investing Opportunity of a Lifetime: Lessons from the Sprott Precious Metals Roundtable

What happens when you bring together four of the top minds in the precious metals investing space to share insights from the front lines of gold, silver, platinum and palladium investing? These excerpts from a Sprott Resources Roundtable featuring Gloom, Boom and Doom Report Publisher Marc Faber, Sprott Asset Management Chief Investment Strategist John Embry, Sprott Global Resource Investments Founder Rick Rule and Sprott Asset Management Founder Eric Sprott prove that great minds think big.

Sprott Resources: Marc Faber, help us understand the Federal Reserve’s recent announcement regarding tapering.

Marc Faber: When the Fed began Quantitative Easing 1 (QE1) in 2008, I said it would continue until QE99. So I’m not so surprised by the “no tapering decision.” But this money printing has numerous unintended consequences and actually does not help the economy much. Asset purchases benefit maybe 1% of the population, the super-rich. I’m not complaining because I own stock, bonds and real estate, but from a social point of view, it’s undesirable because it creates widening wealth inequality and dissatisfaction among the majority of voters. This could lead to more votes for a populist leader who will then tax the wealthy more heavily.

SR: You are based in Asia. China, India and Russia have been very big buyers of gold bullion. What is behind that trend?

MF: In the Far East, we have a tradition of owning physical gold, but what is new is the Chinese government encouraging citizens to own gold. I believe that in the face of political instability and a lack of faith in the U.S. dollar, Asians will continue to accumulate physical gold and silver.

SR: What is the component that you have in your own portfolio of precious metals? And to add onto that, would you comment on the fact that precious metals shares are vastly oversold and they are a complement to physical bullion holdings?

MF: I recommend an asset allocation of about 25% in equities; 25% in fixed income, securities and cash; 25% in real estate; and 25% in precious metals—gold, silver. I think I have around 25% in gold whereby I don’t value my gold. I have it and it’s my insurance policy. It is important that one day when the so-called shit hits the fan—and I think the Fed is well on its way to creating that situation—you have access to your gold, that it is not taken away.

SR: John Embry, you went through the market correction in 1975–1976. Would you share some perspective from that time?

John Embry: That’s a very good question because there’s a remarkable correlation with what is happening today. For the first three years of the 1970s, the gold price rose almost sixfold, and there was great enthusiasm. Then from 1974 to 1976, it was virtually cut in half. At that point, you could cut the pessimism with a knife it was so thick. Then, gold rose another eightfold from there. The price correction of the last two years has been even more counterintuitive than it was in the 1970s. The sentiment arguably is even more negative, yet the fundamentals are better than they were in the 1970s, so I think we’re setting up for a major reversal. The only thing we’re debating here today is whether it’s going to happen tomorrow, next week or several months from now. It’s just a matter of short-term timing because everything is in place.

SR: We have seen an incredible correction. During the upward trend we have seen during the past 10 years, we have had a number of corrections along the way, including some “puke” days. It looked like we had a bottoming at around $1,200 an ounce ($1,200/oz). We’ve corrected back to $1,300/oz, and now we seem to be heading upward. Can you help us put some perspective on that?

JE: We have had, from top to bottom, over a $700/oz correction in the past two years. That attests to the power of the central banks, the Bank for International Settlements (BIS), the bullion banks and their ability to control the paper market aggressively. I think that is coming to an end because it has driven the price down to remarkably undervalued levels. Talk of gold going to $1,000/oz and below is ridiculous. It’s not going to happen. I think this is a fabulous opportunity because it’s hugely undervalued and the fundamentals are compelling. We’re just on the verge.

SR: What happened to the gold shares in that period?

JE: Gold shares were similarly under pressure, but their subsequent gains were historic. After gold topped in 1980 and then started to re-rally, the gold shares exploded again. You’re talking in many cases, ten- or twentybaggers. So I wouldn’t get discouraged here for the simple reason that I think gold and silver shares are now as cheap as they’ve ever been in history relative to where they are going. So it’s a great buying opportunity, but very few people seem to be willing to take advantage of it.

SR: Rick Rule, what is happening in the platinum and palladium sector?

Rick Rule: Platinum and palladium benefit from all of the factors concerning precious metals. They have for many centuries fulfilled the same roles with regard to stores of value and mechanisms for transferring or storing wealth as gold and silver. Where they differ a bit is on the supply side. All of us know that a lot of the gold and silver that has been mined historically has been stored in vaults. So in the near term, supply considerations in gold and silver have to do with sellers’ intentions. I, like the prior speakers, believe that the holders’ intentions will turn very bullish, and it will be very good for gold and silver prices. But platinum and palladium supplies are different. They don’t get stored. They get used.

Currently, worldwide stocks of finished platinum and palladium bullion are less than one year’s platinum and palladium fabrication demand. The supply story gets more interesting because as a consequence of not having any stored bullion, the only supply is new mine supply and recycled supply. That new supply is very, very concentrated. South Africa constitutes 75% of world platinum supply and 39% of world palladium supplies. Russia supplies 13% of platinum supplies, 41% of palladium supplies. In many cases, current metal prices do not earn the cost of production. The consequence is that new mine supply, which is the most important source of supply, is declining. This isn’t something that’s going to occur in the future. It’s something that is occurring right now. Further, costs are going up because workers’ wages have to go up. Social take in the form of taxes, rents and royalties have to go up, but they can’t because the industry doesn’t earn its cost of capital. On the demand side, platinum and palladium provide incredible utility to users. We anticipate that the utilization of platinum and palladium will continue to grow even in the face of supply declines. There is only one way that dichotomy can be resolved, and that’s in the form of price.

It is also worth knowing that just in the last year and a half, platinum and palladium have begun to enjoy elevated status from an investment point of view. The physical inventory held by exchange-traded products (ETPs) like our own Sprott Physical Platinum and Palladium Trust have increased dramatically. This could exacerbate an already-troubled supply-demand imbalance.

SR: Eric Sprott, what is going on in the silver market?

Eric Sprott: Marc indicated that he was a 25% investor in precious metals; I am probably an 80% investor in precious metals. Silver COMEX inventories have held up even though the price has gone down. It’s sort of an interesting contrast with gold where there were huge redemptions in the ETFs. Those redemptions, in my mind, were created to solve the physical shortage. We had 700 tons of ETF liquidation. That would represent close to 50% of all mine supply annually, in other words, an increase in supply. But it was needed because we definitely have a shortage.

I continue to believe that silver will be the investment of the decade because 1) of its industrial uses and 2) it will take very little investment demand to really move things along.

We have years where people are buying 50 times more silver than gold, and yet mine production is only 11:1 silver versus gold. By my calculation, we only have 3 oz of silver available for investment purposes for every ounce of gold. Every time I’m talking to metal dealers, my favorite question is: What part of your business is silver, and what part is gold? And almost everyone says, 50/50. I guarantee you, that cannot continue.

What I really want to talk about is what I think is the investment opportunity of my lifetime. I happen to very firmly believe that within the next year, gold will be through $2,000/oz. I’ve chosen $2,400/oz as a target of where it will be in a year. That has amazing implications for gold equities. Back in 2000, I was beginning to aggressively buy mining stocks.  At the time, I thought if gold could ever get to $400/oz, maybe these companies whose costs then were $300/oz could earn $100/oz and we could make three or four times our money. With most producers averaging around $1,000/oz costs, if the gold price goes to $2,400/oz, you have $1,400/oz of margin. That is 14 times the opportunity in 2000.

I totally subscribe to the manipulation of gold and silver and the shortages of gold and silver. I’ve written many articles asking whether the central banks have any gold left and what is going to happen to gold when they finally give up the ghost, which I believe is coming. That is why I think the opportunity in the equities is spectacular. Of course, also I’m a great believer in owning physical gold and silver with my particular emphasis on silver these days.

 

Courtesy: Moderated by John Budden of Sprott Resources 

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