Silver Going Mainstream in 2011

Subject: Silver Going Mainstream in 2011 Sat Jan 15, 2011 10:26 pm

The Gold Report: Sean, it
seems that among commodities, silver is getting the biggest headlines.
The price of silver hit a 30-year high in late December. Silver was up
83% in 2010. And a high-profile lawsuit was launched by a significant
silver investor against JP Morgan for allegedly manipulating the silver
market. It seems that silver has, for the time being, wrested the
spotlight away from gold. What sort of things do you expect for silver
in 2011?

Sean Rakhimov: Well, the short answer is that I expect silver to
continue its run. In previous interviews with The Gold Report, I
discussed how small and volatile the silver market is, and how explosive
the moves can be. We’re in the middle of one of those explosive moves
now. A year ago, silver was going nowhere, having spent quite a bit of
time in the $14–$16 range. A lot of people were questioning if it was
for real, especially with gold reaching new all-time highs while silver
languished. Speaking of these 30-year highs, these are all nominal
numbers versus inflation-adjusted numbers. That should be kept in mind.
You have to keep it in perspective.

TGR: What is the all-time high in terms of inflation-adjusted numbers?

SR: I don’t have an exact number but it’s probably around $140. Then
again, inflation-adjusted numbers are an ambiguous notion because of the
way they print money these days. Is inflation at 3%? Or is it at 8%, or
15%? The current accepted all-time high for silver was around $50 in
1980 when the Hunt Brothers were trying to corner the silver market.

TGR: We’re going through a bit of a correction in the price of price in
the first week of 2011.What’s your view on what’s happening?

SR: This correction couldn’t come soon enough. David Morgan and I were
expecting a correction in the low $20s about three or four months ago
and it didn’t happen. But that’s the way bull markets work. They don’t
often act the way you anticipate; it’s very difficult to call the timing
on these moves. However, the correction is a very welcome development. I
think this correction is going to be a very treacherous one—maybe down
to about $25. It may be volatile; it may be steep; but it should be
short-lived. It’s very difficult to call these things in the silver
market, which is very small and in which individual players can actually
move the market in the direction they desire. But after this
correction, I expect silver to reach new highs in 2011.

TGR: Does that mean you’re selling silver now?

SR: No, it doesn’t mean that. You can play these moves if you are a
trader, but I’m not. I’m a long-term investor. I never sell silver. I
may trade some stocks, but that is not usually related to a current
sentiment; it’s more about the stock itself. But I do not sell silver as
a strategy. We’re in a bull market, and the way to play a bull market
is to get in and stay in.

TGR: On SilverStrategies.com, you recently published an article titled
Why Governments Will Buy Silver. If things progress as you suspect they
will, government-sponsored silver buying could add further momentum to
the bull market you just talked about. Could you discuss that premise
with us?

SR: Yes. I tried to make the case for why I think governments will come
into the silver market and be very prominent players, if not dominant
players, in a way that’s not too different from the situation in the
gold sector, where the Central Banks became net gold buyers.

In the gold sector, developing countries—the ones with the cash—have
been turning their paper assets into gold. I expect something similar
will happen in the silver sector for a couple of reasons. One reason for
this is monetary. Another is that some of these players could be priced
out of the gold market. And the other reason that I outlined in the
article is silver’s use as a strategic metal. It’s one of the most
versatile industrial metals out there.

I think governments will try to secure access to certain resources, and
silver will be on a list of commodities or metals that will be highly
sought after. For example, silver is very important in energy
production. It’s also very big in electronics. Governments may not care
about silver’s use in consumer electronics, but they are likely to care
about electronics for military use. If governments don’t have silver in
the quantities they need, that may pose some challenges to countries
without ready access to silver. Countries that don’t mine silver have to
buy it in the market and then wait for delivery. And the physical
silver market is especially tight right now.

TGR: How long will we have to wait before we see that happening?

SR: It is difficult to say, mainly because the playing field is changing
on a weekly basis. One day Greece is out of the woods. The next day
it’s not out of the woods. The day after, it’s falling over. There are
questions about the European Union; there are questions about the U.S.;
questions about currency depreciation. There are so many moving parts
it’s very difficult to say when a government would enter the silver
market.

That said, there is nothing indicating that it has not already happened.
For instance, the Chinese government is encouraging its citizens to
invest in silver. And a good number of governments mint coins in
countries without silver mines. That means they have to buy the silver
in the market, if they intend to continue their coin programs.

TGR: If governments come into the sector, and there are already silver
supply issues, what influence would that have on silver demand?

SR: That is actually the most intriguing part of my premise, because it
would send a message to the market. It would make silver so much more
visible and important. It would add to silver demand, and maybe cement
silver’s position as a strategic metal. But aside from the demand side
of the equation, it’s the sentiment. It’s the perception that
governments would ultimately send to the markets that I think would
generate waves of interest in silver.

TGR: You talked in vague terms about what silver will do in 2011.In
early January, the gold:silver ratio was 46.2:1.Where do you expect that
ratio to be by the end of 2011?

SR: This is where you probably can’t pin me down. I don’t like to make
specific predictions, mainly because it’s a bit of a loser’s game. I
mean, gold could reach $2,000 overnight if some war breaks out or some
currency fails. Precious metals are geopolitical assets.

What do I expect? I published an article at the end of October 2009 in
which I called for the next move in silver to register a high somewhere
between $30 and $50, and we have met the lower end of that range. I
still believe the next stop is likely to be that nominal $50 high. As
far as the gold/silver ratio is concerned, I believe silver will
continue to outperform gold. When I started looking at silver, the ratio
was around 82:1. Now it’s below 50:1. By the end of the cycle, I expect
it to be below 20; and there is a 50% chance that it will be below 10.
But I don’t expect this cycle to end in the next couple of years, so
that’s definitely not going to happen in 2011. If anything, 2011 is
going to be the year that will make silver mainstream. We should see
fireworks from both gold and silver, but in relation to each other, I
expect more on the silver side.

TGR: How long do you see this bull market running?

SR: It’s difficult to say. Commodity cycles usually run about 20 years.
Arguably, we’re about 10 years into this one, so in loose terms, we may
have another 10 years left. However, silver and gold are monetary
assets, and we’re looking at a currency crisis of epic proportions. We
may have to rebuild the entire financial system. Who knows how long that
would take or when it’s going to get underway? Is it going to be the
failure of the euro? Is it going to be the failure of the U.S. dollar?
Is it going to be something else? We don’t know.

What we do know is that gold and silver are money. Unlike other types of
money, the value of these metals is historically proven and universally
accepted. Gold and silver will play a prominent role in whatever new
financial system is established. And I maintain that in real terms,
these metals will go up in value.

TGR: Imagine you are out for drinks with some friends, and someone there
doesn’t believe in the safety and economic security of precious metals.
How do you convince that individual that investing in precious metals
is in his or her best interest?

SR: I actually do that on a regular basis. I usually tell the individual
that owning precious metals is no longer just an option. It has become a
necessity, if you want to protect yourself from the inevitable
financial crisis. The financial crisis may not be imminent, but it’s
inevitable. You should get into gold and silver, and between gold and
silver, silver is more affordable. It’s easier to buy a $30 silver coin
than a $1,400 gold coin.

TGR: What’s your silver investing strategy? Tell us about your silver portfolio.

SR: I buy physical silver. I actually bought some—not a lot—very
recently. I buy silver bullion whenever I have the funds, but not on the
scale that I used to given recent silver prices. But other than that,
my investments are largely in silver equities. I spend a lot of time
analyzing these.

TGR: When it comes to silver equities, there are several large, steady
silver producers like Silver Standard Resources Inc. (TSX:SSO;
NASDAQ:SSRI) or Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS) or
Coeur d’Alene Mines Corp. (TSX:CDM; NYSE:CDE). But there’s much more
leverage to be had with small-cap silver producers and explorers. How do
you pick those stocks? Do you follow people like Bob Quartermain? Do
you prefer specific jurisdictions? Is it about grade? Or do you rely on
other tangibles?

SR: All of the above. But people are the most important consideration
when picking these junior companies. You also have to look at the
assets. I penned an article a while ago titled The Coming Wave of
Resource Nationalizations where I made the case that hard assets—and
silver is definitely on that list—will be nationalized by governments
where those assets are located. It’s not specific to silver, but silver
is very prominent on that list. It’s one thing to nationalize timber
operations or coal, but it’s a different story when the asset is
basically money that is very liquid and universally accepted. The
geopolitical aspect is becoming increasingly important, and lately I
have been putting more emphasis on that. On the flip side, it’s not very
easy to do because silver deposits largely occur in the Americas. There
are some in Canada, but most are in Mexico and Peru. There are some in
Argentina. There are some in Russia and China, but that about sums it
up. There are not many other jurisdictions where you can find silver
assets that are investment grade.

TGR: What are some lesser-known silver names that you’re following?

SR: Right now, I’m not looking to invest in companies that are well
known, because they generally had huge runs and now there should be some
kind of correction. But the silver sector is so small that there’s a
lot of new interest and new money coming into it. I don’t expect a big
correction there. As for lesser known names, Mirasol Resources Ltd.
(TSX.V:MRZ) has been making some fantastic discoveries in Argentina.
That’s become a silver play. One that has been overlooked as a silver
company is US Gold Corp. (TSX:UXG, NYSE:UXG), believe it or not. A Rob
McEwen company, US Gold is mostly known for gold, but its main area of
interest, at least in the last couple of years, has been a silver
discovery in Mexico.

The thing about silver is that it rarely occurs as the dominant metal in
a deposit. It usually occurs along with gold or copper or lead and
zinc. Often you look for one metal and you find another. One interesting
story that had its coming-out party in 2010 was South American Silver
Corp. (TSX:SAC), now spearheaded by Greg Johnson of NovaGold Resources
Inc. (NYSE.A:NG; TSX:NG) fame. South American Silver couldn’t find
traction for a couple of years because their main silver assets are in
Bolivia, where it has a large but low-grade deposit. The geopolitical
risk was steering investors away. But Greg Johnson came in and turned
the story around. I don’t know how he changed the sentiment, but that
company is off to the races now.

TGR: You mentioned Mirasol. It has the Joaquin silver-gold project in
the Patagonia region of southern Argentina, which is a joint venture
with Coeur d’Alene. Drilling there has returned some pretty good
results. Do you want to talk about those?

SR: Coeur d’Alene is the operator of that project. That was what put
Mirasol on the map. I remember when Mirasol came to market at pennies.
It was $0.15 a few years ago. It’s now over $5. They have since made
another discovery called the Virginia Silver Project. Mirasol has been
drilling that and recently put out some very interesting drill results
that confirm it’s onto something serious there. It should be a
high-grade silver discovery.

TGR: And Mirasol owns Virginia outright.

SR: Yes, that one is wholly owned. That’s been carrying the share price
upward. Mirasol has a very tight share structure, and it’s one of the
very interesting companies in the silver space.

One thing to note is that precious metals investor Eric Sprott has
entered the silver space in a big way. He has helped to finance a
half-dozen companies in the last three to six months alone.

TGR: What do you make of Mr. Sprott’s increasing presence in the silver space?

SR: Eric Sprott has made an all-out bet on silver. He’s been buying
equities. He’s been buying physical silver. He’s been investing in
companies and doing a lot of work in the silver space. One company he
helped finance, and one that has received a lot of press recently, is
Silvermex Resources Ltd. (TSX.V:SMR). Silvermex is a very different
story from what it was a year or two ago, when it was an exploration
company. Since then, it merged with Genco Resources. Those who follow my
work know that I was on that story from the very early days. Genco had a
mine known as La Guitarra in south-central Mexico. The merger married a
mining asset with mining management. Genco ran into some problems, and
now La Guitarra is in good hands, spearheaded by Silvermex President
Mike Callahan. Silvermex, in my opinion, has the best board of any
silver junior. They are very competent people who have both production
and exploration experience. Silvermex now has financing in place, so I
expect some very interesting news coming from that company.

TGR: Tell us about La Guitarra.

SR: I was on the property about three years ago. That project has a lot
of potential; there are some big resources there. Now that La Guitarra
has the mining experience of Mike Callahan and his team behind it, I
think they will be looking to put that asset back in production and
start generating cash flow. Silvermex is on my list.

TGR: What about some other juniors that have caught your eye, Sean?

SR: Obviously, a bunch of companies have done extremely well in the
silver space over the last year. Probably one of the best performers is
First Majestic Silver Corp. (TSX:FR; NYSE:AG; FSE:FMV; OTCQX:FRMSF).
I’ve been pounding the table on that company for a few years, and it was
finally recognized by the market. It’s now listed on the New York Stock
Exchange and the stock is just below $13. It was at $4 less than a year
ago. People woke up when they saw First Majestic’s earnings, which I
had been discussing for a couple of years. Endeavour Silver Corp.
(NYSE:EXK; DBF:EJD; TSX:EDR) has also done very well, as has another
pick of mine—Bear Creek Mining Corp. (TSX.V:BCM). These are companies
that have matured and now have solid production and operating bases and
Bear Creek is well on its way to production. At current silver prices,
they are cranking out some good cash flow.

TGR: You talked briefly about South American Silver and touched on the
talk about President Evo Morales nationalizing some silver projects in
Bolivia. Certainly that’s helped keep investors at bay with Apogee
Minerals Ltd. (TSX:V:APE) and its Pulacayo-Paca silver project in
Bolivia. Apogee’s share price had been languishing for quite some time.

SR: Until recently.

TGR: Yes, until recently. What’s changed?

SR: I think South American Silver convinced the market that the
geopolitical risk in Bolivia is, at a minimum, manageable. The sentiment
toward Bolivia as an investment proposition has changed through their
efforts. I think Apogee has benefited from that. I have been to Pulacayo
and some other projects in Bolivia, so I know that story very well. I
was there before Evo Morales came to power. Apogee certainly has some
good silver assets, and Bolivia is an inexpensive place to do business.
As long as Bolivia remains a legitimate investment destination, I think
Apogee should do well.

TGR: Could you give us one more silver junior before we let you go?

SR: Esperanza Resources (TSX.V:EPZ) has been one of my favorite
companies for a long time. I’ve known the company since its very early
days, maybe six or seven years. They recently changed the name to
Esperanza Resources (from Esperanza Silver) to better reflect their
asset mix. It’s more of a gold company now because, like I said, you
look for one thing, you drill, and you find something else. In this
case, it was a pretty good trade. It was looking for silver and found
gold. Esperanza has two advanced projects. The San Luis project is in
Peru and is joint-ventured to Silver Standard. That is a very high-grade
deposit. It’s not large, but drilling has returned some spectacular
numbers there. Silver Standard is advancing San Luis and they were
talking about accelerating it toward production. Esperanza’s other
asset, the Cerro Jumil project, is in Mexico. Cerro Jumil has over 1
Moz. of gold now, and is looking very attractive as a takeover target.
Esperanza has done very well for its shareholders. I like the management
and have a very good relationship with them.

TGR: Sounds good. Do you have some parting thoughts on silver?

SR: In previous interviews with The Gold Report, we’ve discussed why
silver is important, its uses and some other things. And I provided some
potential price targets for the cycle and said we’re going to see a
silver price in the triple digits. I think we’re well on our way now.

This year, 2011, should be a very good year for silver. This current
correction may have to do with the amount of bullish commentary on
silver. Usually when there is overwhelming sentiment in one direction,
price action moves in the opposite direction. I actually think it’s a
welcome development, because silver is very overbought on a technical
basis, but not as an asset itself. So I think silver remains one of the
best investment options out there.

TGR: Thank you for talking with us today, Sean.

In a previous life, Sean Rakhimov designed financial systems to support
various areas of the investment banking business. He seized the
opportunity to learn about options trading, securities lending, payments
processing, clearing and settlement, fixed income securities and margin
transactions. He’s not only been putting that knowledge to work ever
since, but also sharing it with others, with writings published on such
Internet portals as Le Metropole Café, 24hGold, 321gold, Kitco, Gold
Seek, Gold Seiten and—of course—The Gold Report. Sean has been a
contributor to renowned silver guru and writer David Morgan’s newsletter
for many years and publishes and edits his own website,
SilverStrategies.com focused on silver and related investments since
2004.

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