-- Published: Monday, 8 September 2014 | Print | Disqus
Source: Kevin Michael Grace of The Gold Report
Gold and silver prices are being repressed by central banks, but Sprott Asset Management's Charles Oliver argues that demand pressure will cause this dam to burst sooner rather than later. As a result, he expects big increases in the prices of gold and especially silver, with a corresponding recovery of small- and mid-cap precious metal equities. In this interview with The Gold Report, Oliver discusses why the gold and silver market is poised to grow and prosper in the coming months.
The Gold Report: Gold continues to languish under $1,300 per ounce ($1,300/oz), even as full economic recoveries in the U.S. and the European Union (EU) have yet to occur, despite trillions in new debt and stimulus. Meanwhile, we have two wars in the Middle East that could escalate, as well as reports that Russian troops are in Ukraine. With all that in mind, do you think that gold's fundamentals are less important than they once were, or is the price of gold being held back by other factors?
Charles Oliver: Gold is just as valuable today as it was 100 years ago. There was an orchestrated takedown of gold in April 2013. It has since traded between $1,200/oz and $1,400/oz, and this flies in the face of the conditions you mentioned.
We're going to have to be patient. We have gone through a bottoming process. We've had similar conditions before. In 1974, after the oil embargo, U.S. inflation was increasing dramatically, yet gold fell from about $200/oz to about $100/oz in 1976. Then over the next four years gold subsequently rallied to over $800/oz. In this decade, gold has fallen from $1,921/oz to $1,180/oz, but the fundamentals remain intact, and gold will regain its reputation as a unique store of value.
TGR: You used the phrase "orchestrated takedown." Do you agree with the thesis advanced by the Gold Anti-Trust Action Committee (GATA) that gold and silver prices are manipulated downward by central banks?
CO: A decade ago I was on the sidelines. Then, after 2008, when the Federal Reserve gave us quantitative easing (QE) 1, 2 and 3 and increased its balance sheet by $4 trillion, effectively fixing the bond market and price, I became convinced that GATA was correct. All the price-fixing scandals we've seen are not isolated incidents. The gold market is a relatively small one. When 400 tons of gold rapidly came onto the market in April 2013, I was persuaded that this was definitely an orchestrated takedown.
TGR: Can this gold repression be maintained, or is it a dam about to burst?
CO: I like that metaphor. Eric Sprott did an analysis that suggested that a fair amount of the gold putatively held by the Federal Reserve may not actually be in its vaults. Footnotes in the Fed's records indicate possession of about 8,000 tons but also suggest that some of that might have been loaned out. We don't know how much, but supply-and-demand numbers suggest it could be a very significant amount. I believe that the gold exchange-trade funds (ETFs) were raided because gold could not be found where it was supposedly held, so it was taken from the ETFs instead.
Much of the gold sold out of Western vaults has found its way into Asia, China in particular. To run a trading platform requires a certain amount of physical bullion to meet delivery demands. If deliveries cannot be met, confidence in the system will fail, and paper trading will dry up. I must say I was quite surprised that after Germany asked for its gold back from the U.S. and it was informed that delivery would take seven years, the market did not suddenly unravel. Nevertheless, I believe the central banks are running out of bullets, and when they do, we could see a very significant rise in the gold price.
TGR: Is control of the gold bullion market shifting from London to Shanghai?
CO: The amount of trading in Shanghai is increasing, and I would imagine that the gold bullion repositories in London are diminishing. Over time, control of many components of the world economic system will shift to Asia as it becomes a more powerful entity on the global stage.
TGR: As mentioned earlier, central banks continue their attempts to force demand, yet economic recoveries remain elusive. How will this play out?
CO: QE was a dirty word five years ago, but today governments tout it as a triumph, even though the economies are still not that healthy, while record-low interest rates and record-high stimulus will continue. The U.S. is currently winding down QE, but the EU looks as if it may start up. I do believe that the U.S. may once again ramp up QE because its interest rate policy hasn't worked.
Countries are debasing their currencies, which leads to investors moving into hard assets, as confirmed by U.S. stock indexes reaching record levels. We saw this in the Weimar Republic in Germany, when stocks soared because they were inflation hedges. A collapse in confidence in paper money is not something I want to see. If that happens, all bets are off. In the meantime, currency debasement should lead to a recovery in the values of gold, silver and other precious metals.
TGR: Do you anticipate higher gold and silver prices following the historic return of market interest in September?
CO: I think there is a very real chance that gold might hit $1,500/oz by the end of the year.
TGR: It is has been reported that higher tariffs on gold buying in India have resulted in the substitution of silver for gold there. Do you think this will spur a higher silver price and that the current gold/silver ratio of 1:66 will fall as a result?
CO: We have seen in India an increase in silver purchases. That said, the gold purchase figures from India do not include smuggling, which soared in the 1990s and is rising again.
At Sprott, we believe very strongly that the next decade will see the gold/silver ratio move toward its historic rate of 1:16. The last time this happened was in 1980, when the gold price was $800/oz and the silver price was $50/oz. Under this scenario when the gold prices rise to $1,600/oz, I could expect silver to hit $100/oz. That would be a 500% increase in the silver price, versus a 30% increase in the gold price. I have taken a fairly significant weighting in the silver sector.
TGR: Gold equities outperformed bullion by a significant margin earlier this year. Can we expect more of this, or is the value of gold equities now constrained by the current gold price?
CO: The gold price bottomed out in December 2013, and as a result, gold equity valuations were destroyed. To some extent, the outperformance we've seen in 2014 is a return to more normal valuations, but a continuation of this trend will require higher bullion prices.
TGR: When the Sprott Gold & Precious Minerals Fund considers the companies it holds, which qualities are paramount?
CO: We look first to management. We want management teams with track records of performance, teams with share ownership of their companies. A deposit's geology is just as important. Without the geology there is no mine, there is no cash flow, there are no profits. We evaluate ore bodies by all the various parameters: quality, strip ratios, underground versus open pit, access to water and power, ease of permitting and local taxation regimes. Finally, we examine a company's valuation and how it compares to its peer groups. That includes dividends, cash flow, cash-flow growth and many other aspects.
TGR: When will mining begin, and how much gold will be produced annually?
CO: Commercial production is scheduled for mid-2015. The number of ounces per year will depend to a certain extent on whether they go underground or not, but first-year production is estimated at 126,000 oz (126 Koz), ramping up to about 300 Koz by year six or seven. Aurora has a 17-year mine life, and all-in sustaining costs will be lower than $700/oz.
TGR: This bear market in junior precious metals companies is now 3.5 years old. How long will it continue?
CO: As I said at the beginning, we could have $1,500/oz gold by Christmas. Should gold reach that price, interest in juniors will revive, and valuations will come up quite dramatically.
TGR: The gold and silver royalty/streaming sector has done quite well compared to the general market. Will this continue?
CO: This sector will continue to grow and prosper but is somewhat countercyclical. The best time for such companies is when the general market dries up, when companies cannot access capital and are forced to sell royalties or streams. And so the last two to three years have been very good for royalty streaming companies. Higher gold prices will result in higher profits for this sector, but I expect the mid- and small-cap mining companies will do better in relative terms.
TGR: Pierre Lassonde of the World Gold Council told The Gold Report in May he believes that the relatively small size of its market will compel silver streamers to move into gold contracts. Do you agree?
CO: I do. I have long thought that limiting a company to gold or silver is not completely logical, although I don't believe it's in the interest of gold and silver companies to move into base metals.
TGR: Charles, thank you for your time and your insights.
Charles Oliver joined Sprott Asset Management in 2008. He is lead portfolio manager of the Sprott Gold and Precious Minerals Fund. Previously, he was at AGF Management Limited, where his team was awarded the Canadian Investment Awards Best Precious Metals Fund in 2004, 2006 and 2007. His accolades also include Lipper Awards' best five-year return in the Precious Metals category (AGF Precious Metals Fund, 2007) and the Lipper Award for best one-year return in the Precious Metals category 2010.
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-- Published: Monday, 8 September 2014 | E-Mail | Print | Source: GoldSeek.com
