The exciting tech sector of yesterday will pale in comparison to the precious metals sector of tomorrow, say Chris Marchese, portfolio strategist with a hedge fund under Vishni Capital, and Jason Burack, independent investor and creator of Wall Street for Main Street. In an exclusive interview with The Gold Report, they share their analysis of one last solid-gold—and silver—investment frontier.
The Gold Report: Whatever form the Federal Reserve's economic stimulus takes, do you believe it will prove to be a boon to the junior resource sector, much like it was in late 2010?
Chris Marchese: It's going to be exponentially more this time around. With gold at $1,800/ounce (oz.), it is taking the reserve status away from the dollar. And with the announcement of Quantative Easing 3 (operations twist, etc.), we could see $2,500/oz. or $3,000/oz. gold very quickly.
Jason Burack: People who have courage and conviction and are willing to continue to average into their positions over the next 12–18 months will benefit. Established producers of gold and silver have humongous cash flow, and they'll add more juniors. They are going to want to add near-term producers. The juniors are where the majority of wealth is going to be created.
TGR: A few weeks ago, precious metals expert Eric Sprott said silver will be "the investment of this decade." Did that spur a change in your investment strategies?
CM: Artificially suppressing a commodity for a prolonged period, which in this case has been 30 years and counting, leads to shortages. So Sprott just reaffirmed what I was thinking, which is definitely a good boost of confidence.
JB: The Silver Institute projects industrial demand to grow by 35% by 2015. Investor demand now is really starting to rocket, especially in the developing countries. You are seeing tremendous amounts of investor demand in China and India, where normally they would have bought more gold. Sprott's been tracking the capital inflow of each dollar of gold relative to each dollar of silver invested and they are equal on a dollar for dollar amount for both metals in most cases; for some bullion dealers a lot more money is being invested into silver, and there is no way the gold:silver ratio is going to stay this much in favor of gold if this continues.
TGR: Are you more bullish on silver or gold junior equities?
JB: I like the companies that are hybrids.
CM: The hybrids are a good way to play it. The gold:silver ratio will go into the single digits. That will also help control byproduct cash costs for a lot of the hybrids.
JB: For the gold production companies right now, this is a perfect storm–type of scenario. The energy prices are staying in a relative trading range or they're trending downward, so their energy input costs are under control. The price of the gold they produce is going up, so their profit margins are expanding rapidly. Pretty much in every other sector of the economy, everyone's trying just to maintain profit margins and keep their heads above water. Maintaining current profit margins in this current macroeconomic environment is the goal of most companies; this is not the case for gold and silver producers. In the silver and gold sectors, there is a rapid expansion of the profit margins, which is super bullish.
TGR: Do you think that gold and silver hedge their production too forward, given that a number of analysts are looking at long-term gold prices of around $1,000/oz.?
CM: I think companies should do that if they don't believe in their product. As opposed to the 1960s and 1970s, it is not just the U.S. this time—it's the whole Western world. So I can understand some hedging because it doesn't seem to believe in its product that much. Junior miners can hedge to ensure that they'll have the funding to bring on more projects, that they'll have the necessary capital requirements. I have no problem with that, going one or two years out.
TGR: What are your parting thoughts on the precious metals sector as we head into the fall?
CM: I think it is going to be typical, another bullish run in the metals. This time I'm actually expecting the miners to play catch-up instead of lag bullion.
JB: Gold will touch $2,000/oz. probably, at least test $2,000/oz. by the end of the year, and then it will correct a little before blowing through $2,000/oz. For silver, we are going to see silver at least test $50/oz. in the next two to three months, and $50/oz. is a very tough resistance point for silver. It is the old nominal Hunt Brothers high. It might not pass through $50/oz. on the next try, but once it does, we'll see it make a run pretty quickly into the $66–$67/oz. range.
If people take a longer view, two to three years out, it is really not going to matter if the miners underperform bullion in the short term. I hear a lot of people complaining that "my mining stocks haven't done this or that." But if you hit a couple tenbaggers or 400% gains on say two to three stocks out of every 10–15 stocks you pick, and you are doubling your money every 18–24 months on some of these stocks, you can't complain if they are lagging for six, seven or eight months. I've been investing in this sector for quite a few years now, and it is just not something that you can worry about in the short term. It might definitely underperform in the short term, but the numbers are going to be so good. The profit margins are expanding. The fundamentals are there, and they're improving. All we are waiting for now is the psychological, fundamental paradigm shift when more fund managers, more mutual funds and more pension funds say, "Hey, these gold stocks are all raising their dividends. Profit margins are expanding rapidly, production and earnings are rising and we see increasing potential for both capital gains AND dividends from producers. We're going to buy and hold more of these. We're going to continue to add positions and accumulate these shares because this sector is going to outperform the rest of the market in a major way for the next few years at the very minimum." We are nowhere near the late stages of this secular, bull market for mining stocks, but we will be in a couple of years. This is going to make the tech bubble look faint once things are finally up and running, because many of the producers will actually have the earnings to justify much higher valuation multiples.
TGR: Thank you for your insights.
Jason Burack is an investor, entrepreneur, financial historian, Austrian School economist, and contrarian. Jason co-founded the startup financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. You can also find Jason's work at his blog website at http://www.jasonburack.com.
Chris Marchese is currently a portfolio strategist for the Vishni Fund LP of Vishni Capital and as a contributor to the Morgan Report. For anyone interested in learning more about the Vishni Fund, which is entirely focused in the precious metals industry, visit Vishnicapital.com or email him at marchese.chris@gmail.com.
The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
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-- Posted Friday, 9 September 2011 | Digg This Article | Source: GoldSeek.com
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