[Editor’s note: For part I of this article, please click here.]
A foremost authority on the precious metals markets and a leading expert on commodities markets, CPM Group founder and Managing Director Jeffrey Christian brings some holiday cheer to The Gold Report readers. In this exclusive interview, he debunks doomsayers who await the dollar’s demise, anticipates what may well be a more powerful recovery from recession than most pundits do and foresees bright days for gold, silver, PGMs and specialty metals.
TGR: What brought silver down so much? It got up to $21; now we’re at $9 and change.
JC: The massive amount of leveraged investment in these things has brought all of these metals down. Everybody keeps talking about de-leveraging, but if you ask them to explain it, they can’t. But let me try to explain what I mean when I say leveraged investment. You had hundreds of billions of dollars of institutional money invested in gold and silver forwards, gold and silver over-the-counter options, and gold and silver indexed notes—all written by banks and all with major leverage factors. Some were 10:1; some of them were actually 30:1 or 40:1. As the financial crisis occurred, institutional investors had their credit lines pulled back. Consequently, they had to reduce the amount of investments that they’d borrowed money to make. So a hedge fund that has $10 billion under management and a leverage factor of 20 might have $200 billion of leveraged trades. Then suddenly you don’t have the money to support $200 billion worth of leveraged trades. You have to liquidate most of them because you really only have $10 billion—which is going down in value fast. So there’s been this massive sale of leveraged products. It’s like running for the exit in a theater when somebody yells fire. It’s a very small door, a very illiquid market, and all of a sudden there’s no provision of credit. Everybody’s trying to get rid of their leveraged exposure all at once and these prices have just plunged down. That’s really what it’s been.
TGR: But silver has lost nearly half, while gold is down less.
JC: Silver prices are always more volatile than gold prices. That’s just a fact of life. It has to do with the fact that the silver market is about one-twelfth the size in dollar terms. The other thing is that gold is money and silver is like money. Silver has this schizophrenic personality. It is an industrial commodity, but it’s also a financial asset and you do see more people investing in gold than in silver worldwide right now. As the prices plunged, you have seen an unprecedented volume of physical gold and silver being purchased by investors around the world. So you have this dichotomy, where the price is being hammered down by de-leveraging in the paper market, while people—in some cases the same people—are taking what’s left of their chips and putting them into physical gold. One of the things I think you will see going forward over the next many years is a lot of institutional investors, including sovereign wealth funds and government funds, wanting exposure to gold and silver but not on a leveraged basis where they’re really owning IOUs issued by major banks. They are wanting the physical material.
TGR: Does that hold true for retail investors too? So rather than buying ETFs or Central Fund of Canada (AMEX:CEF, Stock Forum), should they be buying actual physical?
JC: It really depends on the investor and their perspective. The high net worth individuals we deal with own some physical gold and silver and maybe platinum group metals that they actually store in their own vaults. They own other material that’s being held for them in depositories in various parts of the world. They also own some ETFs, some options, some mining companies and some exploration companies. So it’s really a diversified portfolio.
Except for these high net worth individuals, we don’t deal with retail investors directly as customers at CPM Group. We talk to them, though, and we do deal with people who supply the retail market. A lot of people are moving into the physical material. Demand in the ETFs also has been strong over the last few months and some of that demand comes from people who can’t get their orders filled for one-ounce coins or 100-ounce silver bars. They’re buying ETF shares instead because they’re the next best thing.
TGR: Does that carry implied leverage?
JC: The ETFs do not. The ETFs are ounce-for-ounce and it’s held in an allocated account. If I’m an investor and want to own a 100-ounce bar, I can’t find one in silver. Northwest Territorial Mint will sell me one if I want to wait 16 weeks for delivery. Silver Recycling Company (TSX: V.TSR, Stock Forum) is also selling them and they have it for relatively prompt delivery, but that’s a very new development just in the last few weeks, in response to this market. If I’m an investor and I want to buy 100 ounces of silver and can’t find Maple Leafs or Eagles and I can’t find a 100-ounce silver bar, I can buy a share of an ETF and have it stored for me on an allocated basis through the ETF mechanism.
TGR: Suppose the economy actually does start to turn around, as you’re projecting maybe in the second half of 2009, and you have all this money on the sidelines, which you indicated might flow back into the marketplace rapidly. Does that mean gold will rise through the recovery and then go back down?
JC: Because gold is money and an alternative asset, gold and silver probably will rise in the first half of 2009 in response to the economic distress that we expect at that time. And then as the economy recovers—let’s be hopeful and say it starts in the second half of 2009—you actually might see gold and silver come off some. Platinum group metals, which we’ve only mentioned in passing, are the other way around. They’re really industrial metals, heavily tied to auto sales and so probably will remain weak until auto sales recover. But when that happens, expect platinum group metal prices to rise sharply.
TGR: You mentioned Silver Recycling starting to sell physical silver. What else can you tell us about this company?
JC: For purposes of full disclosure, I personally own some stock in Silver Recycling and they are a CPM Group client. We are financial advisers to them. I can talk about who they are and what their ideas are, what their plans are. I like the company a lot because they’re basically a consolidation play to create a publicly traded company in refining silver from scrap. They’ve identified three initial targets of small privately owned silver recyclers in the United States and are working with them. They have agreements with all three to acquire them and bundle them together, consolidate them and benefit from the economies of scale. And then there are other companies they can target later. It’s a very interesting operation. If you compare them to a silver mining company, they have the capacity to produce silver from scrap without any of the capital costs, country risks and operational risks that are common with a mine. So lower costs, less capital, fewer risks, still producing silver.
TGR: What sort of volume are we talking about?
JC: The first company they have an agreement with has 5 million ounces of production a year. The others have somewhat less. I don’t know the numbers off the top of my head, but I believe that the three companies combined would be producing something in excess of 10 million ounces a year.
TGR: Using that as rough estimate, what publicly traded silver producers come up with 10 million ounces a year?
JC: I think Coeur d’Alene Mines Corp.(NYSE:CDE, Stock Forum) is slightly less than that this year, but maybe more than that next year. Apex Silver Mines (AMEX:SIL, Stock Forum) and Pan American Silver Mines (TSX:T.PAA, Stock Forum) probably produce more than that. Silver Standard Resources (TSX: T.SSO, Stock Forum), which is moving toward opening its Pirquitas mine, will produce more than that when they’re up. There are probably a few other companies—Hecla Mining Company (NYSE:HL, Stock Forum), maybe—that I’m going to anger people for forgetting. And then there are some larger diversified mining companies that produce much more than that. Penoles (MX:PE&OLES) is a good example. A lot of people think of Peñoles as a silver mining company and it does produce an enormous amount of silver, but it also produces lead, zinc, copper and gold. Also KGHM and BHP, but they’re not silver companies per say, either.
TGR: What other companies, either in silver or gold, would you recommend our readers take a look at?
JC: Well, we’re really commodities analysts. I’m proud to say I am not an equity analyst. I don’t sit there and tell people which equities to buy on any given day. I won’t tell anybody what to do with their equity investments, but I’ll tell you what I do with mine. I have a diversified portfolio.
Let’s look at the gold market. I have physical gold. I sometimes have futures and options in gold. In the equity side, I have AngloGold Ashanti Ltd (NYSE: AU, Stock Forum) shares. I have Goldcorp (TSX: T.G, Stock Forum) right now. I don’t have Barrick Gold Corp (NYSE:ABX, Stock Forum) right now. I have in the past. I like Barrick a lot. And I have some smaller exploration and development companies in my portfolio. I tend to look for really well managed large companies that are cash flow generators, like Goldcorp, and I also look for exploration and development companies that have the capacity to bring production on stream within a couple of years, they have attractive mines, and management that I find good. So that’s it in gold.
TGR: What are some of these other companies?
JC: It’s not an exploration company along the lines of that, but one name I’ll throw out is Tanzanian Royalty (TSX: T.TNX, Stock Forum), Jim Sinclair’s company. It’s been hammered down along with everything else lately, but I still like it a lot.
TGR: And switching to silver?
JC: I like Silver Standard. I like Silver Standard’s management a lot. I think this Pirquitas mine that’s coming on stream will be a company maker. I also like Apex Silver Mines; I’ve been involved with Apex since before it actually was officially organized as a company. I think that’s good. Pan American is a very interesting growth story. Coeur d’Alene has been hammered in this market, but it has some very interesting properties, so it could do well. And Hecla is probably a tremendous turnaround story. Management over the last several years has done a remarkably good job in rebuilding Hecla Mining.
TGR: Gosh, they’ve been beaten up, too.
JC: Yeah, everybody’s beaten up. I spend a lot of time these days talking to clients about the difference between value and price. Six months ago we were talking about the fact that the price was over the value of a lot of mining assets and now we’re talking about the fact that the prices are woefully under the value of a lot of these companies. A company like Great Panther Resources (TSX: V.GPR, Stock Forum) is a pretty interesting story. Fortuna Silver Mines (TSX: V.FVI, Stock Forum) I like a lot. Endeavour Silver Corp (TSX: T.EDR, Stock Forum) is a good company, an emerging company. I’m afraid to leave out people. I own some Silvercorp Metals (TSX: T.SVM, Stock Forum), a very interesting company with lead and silver mines in China. What I do is I look at companies from a management perspective and a property perspective. First thing is I’ve got to be comfortable with management.
TGR: What about platinum group metals?
JC: I thought platinum was overvalued years ago and it just kept rising and rising, but now it’s clearly undervalued. The cost of producing platinum or palladium at most mines in the world is higher than the current prices. About 50% of platinum in the world goes into auto catalysts, 60% of palladium and 80% of rhodium. With the auto industry and the auto market on their back in North America and Europe, these markets have spiraled down. A lot of investors who poured into the platinum markets partly based on the auto story are now pouring out. I think platinum group metals prices will rise sharply once the auto industry turns around.
And, the auto industry will turn around. Not necessarily because of the situation in the United States, but if you look at the BRICs, for example, you have a tremendous growth in auto sales and it’s fallen. In China it’s gone from 15% per year down to about 8% per year, but that’s a cyclical thing. It will turn itself around and people will start buying more. An interesting thing about platinum is that you don’t have the share market similar to what you have in gold and silver. In North America you have North American Palladium Mines (TSX: T.PDL, Stock Forum) and you have Stillwater Mining Company (NYSE: SWC, Stock Forum). Both are having problems right now.
TGR: With costs exceeding current prices, the issue on the production side is clear, but what’s the problem on the exploration side?
JC: They can’t get financing. And insofar as some of these companies are exploring in South Africa, problems related to electricity and electricity allocations predate the bank panic. South Africa basically has not really invested in electricity-generating capacity for a decade. Those power shortages and outages are going to take many years to solve. They’re saying they’ll pay attention to existing mining companies, existing corporations, existing consumers of electricity. When you’re building a mine, you have to go to Eskom, the state electrical utility. Unless you’re already in the construction phase and have your electricity allocation, they’re just going to say they don’t know when they will be able to supply you electricity. That’s going to delay exploration and development. On top of that, the financial freeze will delay a lot of new capacity coming on stream. That will make the platinum group metals that much tighter.
TGR: As we come out of this recession, many people say certain sectors will emerge faster than others. You talked about how gold’s going to have a nice run up while we’re in recession. What commodities should we expect to come out of the recession first?
JC: I think gold and silver come out first. We’re looking at some specialty metals like ferroalloys—vanadium and molybdenum—because those markets are much tighter. The prices have been beaten up, as have the prices of larger metals like aluminum and copper. But if you look at molybdenum, for example, a lot of its uses are in transmission pipelines for gas and oil, offshore platforms for gas and oil production, and drilling pipe and production pipe for oil and gas. Even with lower oil and gas prices, these areas are going to be very strong over the next five, 10, 20 years. So we think you’ll see a relatively fast turnaround for a lot of these specialty metals, things that are harder to come by, but generally speaking are indispensable in critical economic applications. I think steel will also do very well because I expect the new government in the United States to undertake a major new program to rebuild all of these bridges that are about to fall down. I think you’ll see steel do very well from that perspective.
For additional comments on Silver Recycling Company (TSX: V.TSR), Coeur d’Alene Mines Corp.(NYSE:CDE), Apex Silver Mines (AMEX:SIL), Pan American Silver Mines (Nasdaq: PAAS) (TSX:T.PAA), Standard Resources (TSX: T.SSO) (Nasdaq: SSRI), Hecla Mining Company (NYSE:HL), Penoles (MX:PE&OLES), AngloGold Ashanti Ltd (NYSE:AU), Goldcorp (NYSE:GG) (TSX:T.G), Barrick Gold Corp (NYSE:ABX), Great Panther Resources (TSX: V.GPR), Fortuna Silver Mines (TSX:V.FVI), Endeavour Silver Corp (TSX: T.EDR) (AMEX:EXK) (FSE:EJD), Silvercorp Metals (TSX: T.SVM), North American Palladium Mines (TSX:T.PDL) (AMEX:PAL) and Stillwater Mining Company (NYSE:SWC) from newsletter writers, money managers, and analysts, click on the respective links or visit The Gold Report.
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A graduate of the Missouri School of Journalism (University of Missouri, BJ, 1977), Jeffrey M. Christian chose his course of study because he was interested in chronicling developments in places such as Africa, Asia, Latin America and Central and Eastern Europe (well before they emerged as significant world economies). In 1980, Jeff left his job as an editor at Metals Week, an industry publication—having decided that metals markets he wrote about appealed to him more than journalism did. A year before Goldman Sachs acquired it, J. Aron and Company brought him on board and he soon managed the Commodities Research Group’s precious metals and statistical work there. In 1986, he engineered a leveraged buyout of this group—of which he was then VP—to create CPM Group, which he has led to become a world-class research, consulting, investment banking and asset management company that focuses on the fundamental analysis of global commodities markets. Jeff continues to write extensively.
Since the late 1970s, he has authored many pieces on precious metals markets, commodities and world financial and economic conditions. In 1980, he wrote World Guide to Battery-Powered Road Transportation: Comparative Technical and Performance Specifications. Now out of print, it remains a great index of many of the earliest electric cars. In 1981 he wrote one of the first market reports on the platinum metals group. Fast-forward to the 21st century, he and his staff of analysts write six major reports per year for publication and 12 monthly reports plus several more weekly reports and special reports. He published Commodities Rising in 2006. Jeff has pioneered application of economic analysis and econometric studies to gold, silver, copper, and platinum group metals markets, as well as efforts to improve and extend the quality of precious metals and commodities market statistics and research overall. As passionate about his work today as he was 22 years ago, he loves the fact that it gives him a tremendous network of contacts at high levels and a tremendous amount of discretion as to the work CPM Group undertakes. CPM counts among its clients many of the world’s largest mining companies, industrial users of precious metals, central banks, government agencies and financial institutions.