The past year has tested the worldview, and sometimes the sanity, of precious metals investors. But it has also given us another chance to load up at what might turn out to be dirt-cheap prices, says Carsten Ringler, managing director of German financial firm TASS Wertpapierhandelsbank GmbH. Here's an excerpt from a long conversation we had this week, in which he laid out the reasons for optimism about precious metals in generaland the junior silver miners in particular.
DollarCollapse: Good afternoon Carsten, it's great to finally speak with you. Let's begin with your general take on the major asset classes.
Carsten Ringler: It is nonsense to be in long-term government bonds at the moment. A 1% - 2% rise in interest rates would kill you in 10-year Treasuries. Gold and silver on the other hand are money, and as long as the [paper] money supply is increasing at today's rate, precious metals are the place to be. There might be another leg down, but it will be short and mild. I am confident that within in the next 2-3 years we'll see a breakout in precious meals that leads to a mania similar to the past few bubbles.
One way to understand how cheap precious metals are in paper money terms is to go to the Minneapolis Fed's website and use their inflation basket calculator. You can put in the price of a good on a date in the past, and the machine calculates the inflation-adjusted price from then to now. For gold, starting in 1980 when it was $850, today's inflation-adjusted price is $2,400. So when anyone says gold is too expensive because it has risen the past ten years, you can respond that according to the Minneapolis Fed $2,413 is where it would be if it had just kept up with inflation. For silver, start with the 1980 $49.45 high and you get an inflation-adjusted price of $139.
I also calculate ratios for more then 40 different interest rates, equity indices, real estate prices and other commodities. And those results are just as encouraging. For example, in 1980 you could buy the Dow Jones Industrial Average for 17.5 ounces of silver. Today you need 451 ounces. If the Dow remains stable at 14,000 and the Dow/Silver ratio returns to its all-time low of 17.5 ounces, silver would be $802. One ounce of gold would have bought the Dow back then and today you need more than eight. So either the Dow is overvalued to silver and gold, or silver and gold are undervalued compared to the Dow.
There are 1,226 billionaires in the world. If just a few of them shifted a few percent of their assets into gold and silver it would cause a massive run on those metals. This will be a shift that will be written about in history books. They'll ask how we could have been so stupid to trust fiat currencies. Gold and silver are not going up in value, currencies are losing purchasing power against them. Therefore holding precious metals will help to store wealth and give protection against rising inflation in the future.
Based on all of the above, my minimum price targets are $150 for silver and $4,000 for gold within the next five years.
DC: You recently launched a fund that invests in junior miners and strategic metals. Why this combination, and why now?
CR: The second biggest part of the fund's capital is allocated in mining companies with a focus on strategic metals like tungsten, cobalt and graphite that are used in a variety of electronic devices. Most of these metals aren't traded on futures markets and so aren't easy to manipulate. China is one of biggest suppliers, so I like companies with deposits in North America, especially in Canada where the product fabricators need new supply.
The other 60% of the fund is in precious metals miners, mostly silver, with 60% producers and 40% advanced developers. Right now the mining industry is weak for a variety of reasons. Production costs are rising faster than metal prices, and there are growing issues with nationalization risk, capex overruns and construction problems. The gold mining stock indexes, as a result, are falling like stones. If someone asks me whether they should buy bullion or stocks, I'm definitely a strong believer in bullion as the core of one's holdings. But if you pick ten interesting companies with nice production numbers and growth prospects and reasonable costs, there's also a good possibility that going forward they will outperform just about everything else. There are many bargains for counter-cyclical investors in these days.
DC: What are your favorite companies?
CR: Aurcana (AUN.V), our biggest position, offers extremely nice leverage to the silver price. They operate a mine in Mexico that produced 2.5 million silver equivalent ounces last year. They began commercial production at a mine in Texas in December, and when its mill is running at full capacity we'll see another 3.8 million ounces of silver each year. This could be a 6 million ounce producer in 2014 and with a small investment to optimize two mills it could easily be a 9-10 million ounce producer in 2015. It's fully funded and has a small $380 million market cap. Compared to other producers of similar scale like Endeavour Silver (EDR.T), it's really undervalued. It could be the next First Majestic (AG), getting organic growth from one mine while expanding others.
My second and third biggest positions are in Santa Cruz Silver (SCZ.V) and Avino Silver and Gold (ASM.V). Both have extremely good management. Santa Cruz is constructing its first of three mines in Mexico. They plan to be in commercial production in Q1 2013. Everything is commissioned and ready to go. It could be a 5 million ounce producer in 2016 if everything goes according to plan. I was one of the first institutional investors in this stock last summer when it was $0.86 a share. Since then it has risen as high as $2.50, but is still extremely cheap compared to better-established juniors like Fortuna Silver (FVI.T).
Avino is already producing between 50,000 and 60,000 ounces of silver equivalent per month, with nice grades and recoveries, and they're expanding their mill from 250 tpd to 1.250 tpd. It could be a 2 million ounce producer in 2014 and its market cap is only $44 million.
In this market even quality juniors are undervalued based on ounces in the ground. I hope to locate them before they're found by the rest of the investment community. There are no guarantees, but if you're a big believer in silver now is a great time to accumulate these stocks.
But we have to patient. We have to accumulate precious metals over time. I tell clients who buy physical precious metals through our company to be cautious with paper money receivables like life insurance. Just be your own central bank by owning gold and silver. In this kind of environment nothing is certain so you have to diversify in real assets. An abrupt loss of confidence in global currencies could come anytime in the next few years.