- Silver supply and demand have been roughly in equilibrium, in my opinion, over the past decade or so.
- Silver manifests itself as a precious metal in times of crisis or uncertainty.
- My outlook for silver for the next two or three years is somewhere between $50 and $100/oz.
Sean Rakhimov: Upward Trend a Silver Investor's Friend
An upward trend is afoot in the silver space, says Sean Rakhimov, editor of SilversStrategies.com. Rakhimov believes that at $26/ounce the reversal of the downward trend in silver will be confirmed and silver investors should set their sights on the next resistance level-$32/ounce. And if that threshold is breached, silver will test $50/ounce and more. In this interview with The Gold Report, Rakhimov talks about a few silver miners that are well positioned to ride this trend perhaps several multiples higher.
The Gold Report: The Washington D.C.-based Silver Institute reports that net silver demand has exceeded net silver supply each year since 2004, with a supply deficit of 113 million ounces [113 Moz] reported in 2013. Why hasn't that trend translated into dramatically higher silver prices?
Sean Rakhimov: First, I don't put much faith in these numbers. For instance, CPM Group has somewhat different numbers. Either way, silver supply and demand have been roughly in equilibrium, in my opinion, over the past decade or so. Second, silver manifests itself as a precious metal in times of crisis or uncertainty. When it's business as usual, silver acts more like a base metal and trades more on supply and demand numbers. Silver prices will respond during a crisis as its perception changes from an industrial to precious metal. That's when you will see more of what we saw in 2011 when in the space of about six months silver went up three times. Another period like that is coming.
TGR: In early June we started to see stronger precious metals prices and that has carried through. Is this a trend?
SR: It is the beginning of a trend. Precious metals characteristically start going up after a prolonged decline, yet early in the reversal they rarely inspire any confidence because the last dozen or so similar moves fizzled after a 10-20% move. This could be one of those. Silver is at $21 per ounce [$21/oz] now, maybe next week it will test $18/oz again. It's anybody's guess but I believe that toward the end of the year we'll probably see higher numbers-maybe substantially higher.
TGR: Is there a telltale sign that shows investors that this upturn is real?
SR: There isn't one that I use. It's more of a gut feeling.
TGR: The existing silver fix mechanism expires on Aug. 14, 2014, and methods to replace it are currently being reviewed by the London Bullion Market Authority. Is a new silver fix system likely to yield stronger silver prices?
SR: It's likely. This new replacement for the silver fix would, at least for the next year or two, have less tinkering with it than had historically been going on with the fix. On that basis, the price should become more volatile. On balance it's probably going to be positive for the silver price.
TGR: What are your thoughts on the silver space?
SR: In this semi-stealthy firming up of silver instruments and investments, there is not much fanfare. Silver is certainly out of favor at the moment, which leads me to remember that it's always darkest before the dawn. And I believe that this is going to reverse itself in short order.
Lately I've been thinking about some passages from the thinly disguised biography of Jesse Livermore, Reminiscences of a Stock Operator by Edwin Lefèvre He wrote, "There's a lot of early bulls in a bull market." I've been an early bull in a bull market for precious metals going back to the early 2000s. Many people exit along the way but Livermore's idea was that investors have to stick with it for the entire cycle. That's what I've been telling myself. Of course, convictions are tested along the way, such as during the last couple of years.
Silver is a little like water in that if you tell people you should invest in water, the first thing people do is look at you like something is wrong with you! Yet fresh drinkable water is a scarce resource. Silver is so familiar that it lulls people into this idea that it's not important. Unsophisticated people align it with gold, yet the fundamentals for the two metals could not be more different.
TGR: What makes silver special?
SR: If there is one adjective to describe silver, it's "indispensable." There are no adequate replacements. It is an extremely versatile metal, perhaps the most versatile in the periodic table. Silver can do a lot of good, too. For instance, it is being used more and more in medical implements that come in contact with the human body because silver kills bacteria in single-cell organisms. Silver is also used in the food industry to preserve and process foods like meat and dairy products.
But long before silver was improving our health and food safety, it was the world's currency. The word for silver is synonymous with money in 52 languages.
TGR: In April 2011 silver almost reached $50/oz before undergoing a dramatic correction. Investors' knees would surely start to wobble if we saw those prices again. How would you play those kinds of price gains?
SR: It all depends on the character of the move. Investors have to look at the volume, speed and market sentiment in order to determine the direction at that point.
TGR: What does the next leg up in the silver price look like?
SR: My outlook for silver for the next two or three years is somewhere between $50 and $100/oz. It could be shorter; it could be longer, but that's not critical. I'm going to stay with it for the cycle; it could be another 10 years to the end of the cycle. I do not expect this next leg to be final but I expect it to be a substantial run comparable to 2010-2011 when silver went from roughly $10 to $49.50/oz. The next move could go from about $20 to roughly $100/oz, but that will take time. Am I going to take money off the table along the way? Maybe in some stocks that got ahead of themselves or that are not responding to the price move. But I would not touch any of my physical silver.
TGR: What are the next three key resistance levels for silver?
SR: I think $26/oz will confirm that the trend has reversed. If we exceed $26/oz on good volume and strength, then we're off to the races. From there, the next resistance level would be $30-32/oz. If we reach beyond that level, it becomes $50/oz. And if we take $50/oz convincingly, then there's a good chance that this move is going to have some serious legs.
TGR: The Performance Report on SilverStrategies.com monitors 27 silver equities. Since early June, 26 of them are up, some more than 40%. June is typically a soft month for precious metals equities. What's supporting those bids?
SR: One thing is a possible top in the mainstream market. Another is that precious metals are up roughly 15% in the last month or so and stocks usually have an exaggerated move versus the metal price. And most of these stocks are coming off depressed levels. There was something of a vacuum so stocks tend to jump even on low volumes. Most of the sellers who wanted to sell did. On the flip side, it doesn't take a lot of money to acquire a lot of stocks. Again, this behavior is typical for the beginning of a larger move.
SR: Avino Silver & Gold Mines Ltd. (NYSEMKT:ASM) [GV6:FSE] is producing around 1+ Moz silver equivalent a year. I have visited the operation and it looks good. The share price has reflected that, even in a poor environment for resource stocks. Avino recently acquired Bralorne Gold Mines Ltd, which owns a high-grade gold project in Canada. It is a bit of a departure from producing silver in Mexico. Can the company translate its success in Mexico to Canada? Time will tell.
The other reason I like Avino is that it's bringing the past-producing Avino silver mine back into production. That mine is in Mexico and is a stone's throw from its current operation. That should basically boost production to about 2.5 Moz annually.
TGR: What are some other silver equities with discoveries that could ultimately become company makers?
SR: The last discovery of that nature would be the Navidad deposit in Argentina that was discovered by IMA Exploration and ended up with Aquiline Resources. Pan American Silver Corp. (NASDAQ:PAAS) [PAA:TSX] later bought Aquiline but mothballed Navidad due to the political situation in Argentina.
In this cycle the best performers have not been the companies that made good discoveries but rather companies that have properly managed their resources and finances. Those companies have done well. Silver Wheaton Corp. (NYSE:SLW) is on that list. First Majestic Silver Corp. (NYSE:AG) [FR:TSX;FMV:FSE], Endeavour Silver Corp. (NYSE:EXK) [EDR:TSX;EJD:FSE], are on it, too. Most of those companies acquired their flagship mines. They were not discovery stories, though as part of good management most assets were expanded and their respective mine lives were extended through drilling success.
TGR: Let's go back to your list of the best performers in this cycle. Names like First Majestic and Endeavour.
SR: First Majestic is perhaps the best silver miner at this time. It is a classic mining story. It started with one mine, built it up and bought another one. And then built that up. Along the way the company made some discoveries or acquired other projects and built those up-that model seems to work well in the mining space. That's been the path for many of the major gold producers. Yamana Gold Inc. (NYSE:AUY) [YRI:TSX; YAU:LSE] used the same model to achieve similar success, albeit on a smaller scale. In the silver space that company is First Majestic. I expect it to get even bigger and better, much like Yamana. Bigger production means your bottom-line gets so much bigger so much faster in a rising metal price environment.
TGR: Is it a similar narrative for Endeavour?
SR: In a word, yes. All these companies acquired producing or past-producing mines and revived/improved/enhanced them over time.
Endeavour Silver is a company that quietly built-up its production profile toward 11 Moz of silver equivalent, albeit the latter part of growth came from gold. Still at that rate of production Endeavour should respond well to rising gold/silver prices.
TGR: If silver rises in excess of $50/oz, many boats will float. How do investors sort out the pretenders?
SR: You look back and see which companies were profitable at sub-$20/oz silver. If they are in the black, that's an indication of how they run their operations. In the short term it is not a given that the "best" company will be the best performer. But overall, that would be a good problem to have.
TGR: Parting thoughts?
SR: If silver were oil, people would have some definite ideas about why it is important. I don't think silver has that characteristic due to its recent history. That fools people into thinking that silver is not a good option, even when it is. Silver's stigma as gold's poor cousin may well morph into gold's "better" cousin over time due to its vastly superior industrial utility.
TGR: Thank you for talking with us today, Sean.
This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.
Sean Rakhimov's writing has appeared on such Internet portals as Le Metropole Café, 24hGold, 321gold, Kitco, Gold Seek, Gold Seiten and The Gold Report. He previously designed financial systems for the investment banking business, learning about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. He launched his website, SilverStrategies.com, in 2004 and has been focusing exclusively on the silver sector since 2001.
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