Source: Brian Sylvester of The Gold Report
Charles Oliver, lead portfolio manager with the Sprott Gold and Precious Minerals Fund, believes the only thing between investors and bigger investment returns on precious metals equities and bullion, especially silver, is time. In this interview with The Gold Report, Oliver discusses silver and gold demand drivers, as well as portfolio ideas that figure to get bigger with time as the trigger.
The Gold Report: "Sell in May and go away" is a common investing axiom but does it have any validity?
Charles Oliver: I recently went through some research on seasonality in the gold price. March has been negative in the gold space in six of the last eight years, April has proven negative four out of the last eight years, and May and June have both been negative five of the last eight years. However, we see a fairly dramatic turnaround in July where six of the last eight years have been positive. In August, another six of the previous eight years have been positive; September has been positive five of the last eight years. The "sell in May" adage could actually represent a great buying opportunity on the pullback.
TGR: What are some investment themes you expect to dominate through the rest of the year?
CO: It really comes down to printing money. The U.S. has reduced its money printing but it is still aggressively printing. Now we're hearing about the Europeans potentially getting into quantitative easing. The debasement of currencies is an ongoing theme.
The other key theme is the demand for physical gold. China has become the world's largest gold buyer, consuming about 40% of the world's mine production. India, which historically had been the world's largest gold consumer, has established some tariffs on gold imports, so there's been some pullback there.
It's noteworthy that over the last couple of decades the European central banks have been collectively selling gold. That stopped a couple of years ago. Some numbers from the Swiss Customs Authority show that Germany, France, Singapore, Thailand, even the United Kingdom, are fairly significant gold buyers. These are very positive events.
TGR: What about geopolitical events? Do you expect those to dramatically influence gold prices?
CO: Historically, wars and the risk of wars have been quite positive for the gold price yet recent events in the Ukraine haven't seen gold do anything. In fact, it's trading near the bottom end of its recent range. But should things escalate, I feel strongly that it will have a positive impact. I certainly hope that it doesn't come to that but the risk seems significant.
TGR: What is the investor pulse in the precious metals space?
CO: A year ago investors were selling a little, as they had been for some time. The selling had mostly stopped by the end of the 2013 and the people who didn't have long-term conviction had left. In early 2014 I was a bit surprised to see U.S. value investors streaming in because we had been through a period of net redemptions. When the Americans come into the market they can have quite a dramatic impact on prices. I'll call it sporadic because it has not been a consistent stream.
TGR: What happened to those bids?
CO: Generally speaking, American investors, portfolio managers and pension funds were saying at the end of 2013, "We've had some good returns in the general market but the market is looking somewhat expensive." They were looking for areas where there was good value. The gold price had been hammered over the last couple of years so they were starting to move some of their allocations into that space. We've also seen some private equity buying assets and taking them private. And some Asian interests dipping their toes in the water. People are starting to wake up and show some interest but they are still waiting for some sort of trigger in order to say that this is the time to jump in.
TGR: Any idea what that could be?
CO: I've spent a lot of time thinking about that question. I liken the 1974 to 1976 period to today. In 1974, the oil price was going up after the oil embargo and inflation was going up, too. It was peculiar because the gold price went from about $200 per ounce ($200/oz) to $100/oz over the next couple of years. Then in 1976 gold suddenly went from $100/oz to about $800/oz. I have spent a lot of time trying to determine the trigger for that event. Sometimes it is just time. When I look back at 2013, I see a lot of positive fundamentals—strong Chinese demand, huge amounts of money printing—yet the gold price went down. Sometimes it's just the way the markets time themselves.
TGR: Do investors need to revise their price expectations for precious metals equities? There is zero froth in this market.
CO: I think that's a good way of putting it. I'm continually trying to figure out where the market may go. Not too long ago I said that by the end of this decade gold should be approaching something like $5,000/oz, which would have a huge impact upon the markets and stock valuations. The market is valuing equities as if gold is going to stay at $1,200–1,300/oz forever. I believe that the market will be proven wrong over time.
TGR: Gold is trading at roughly 67 times silver. Does that make silver your preference?
CO: Yes. It was Eric Sprott who came up with the thesis and I fully embrace it. For over 1,000 years, the silver-gold price relationship was close to 16:1, so that implies that if gold is $1,600/oz, the silver price would be $100/oz. The last time that happened was 1980 when the gold price was roughly $800/oz and the silver price was around $50/oz. Over the next couple of years, I expect to see that 67:1 ratio migrate toward 16:1.
TGR: Yet the trend is moving in the opposite direction.
CO: In the short term sometimes these things happen. About 25% of the weighting in the Sprott Gold and Precious Minerals Fund (SPR300:TSX) is in silver equities, which is probably among the highest in the peer group for precious metals funds.
TGR: What's your investment thesis for silver versus gold?
CO: About two-thirds of mined silver is used in industry, whereas gold has virtually no industrial usage. Gold is considered a reserve currency whereas silver is not. About 150 years ago many countries had silver reserves backing their currencies. Today they don't but China has trillions of U.S. dollars that it is converting into hard assets. The Chinese are buying a lot of gold but if they ever decide to be a silver buyer we would see a huge shift in the price of silver. Look at every mined commodity out there today—copper, nickel, zinc, iron ore—China accounts for 40–50% of global consumption.
TGR: Is it all about margin for precious metals equities?
CO: A lot of these companies are producing gold at $1,000/oz or silver at $18/oz. Should silver go up to $30/oz, that $2/oz margin suddenly becomes $12/oz—a sixfold increase. Shifts in commodity prices could have huge impacts on the profitability of these companies.
TGR: In March you said that gold would reach $5,000/oz within a few years. That seems optimistic.
CO: It's based on the historical relationship between the Dow Jones Industrial Average and the gold price. Over the last 100 years there have been three times when it has cost 1 to 2 ounces gold to buy the Dow. The last time was 1980 when the gold price was $800/oz and the Dow was 800.
People roll their eyes when you forecast big numbers. In 2004 or 2005, I said gold would reach $1,000/oz. When it reached $1,000/oz, I moved to $2,000/oz and we almost got there. With the willingness of the market to continue to print money, I believe that we are going to get that 2 or 3 to 1 relationship with the Dow. With the Dow at 16,000, I think $5,000/oz is achievable. It's not really that the gold price is increasing, it's that paper currencies are depreciating in value.
TGR: Thank you for your time and commentary, Charles.
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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