Legends of Gold and Silver

Precious Metals Now "Cheapest in History"

Written by Jimmy Mengel
Posted September 30, 2013 at 9:26PM

Last week, a handful of my favorite precious metals legends sat down for a round table discussion about the future of gold, silver, platinum, palladium, and the economy as a whole...

They had some very keen insights for metals investors.

During the hour-long conversation, Marc Faber, Eric Sprott, Rick Rule, and John Embry discussed where all of these sectors are heading — and why they are still bullish.

They even revealed their personal asset allocations for their portfolios and a few of the companies they see really taking off with the next metals bull market. 

With that said, I'll turn it over to these investing heavyweights... 

Marc Faber on QE

“Dr. Doom” Marc Faber needs little introduction: As the founder of the Gloom, Boom and Doom report, Faber has been warning investors about stock market bubbles since the 1987 market crash. He correctly predicted that meltdown as well as the 2009 market bottom and the rise of QE Infinity. So when Faber sits down to discuss the market, we make it a point to listen.

Here's what Faber had to say about the Fed's recent decision not to taper their bond-buying program:

When the Fed began QE1 in November 2008, I said QE1 would continue until QE99. So I'm not so surprised by the "no tapering decision."

But basically the problem with this money printing has numerous unintended consequences and actually does not help the economy much. 

...

The impact of further asset purchases benefit maybe 1% of the population, the super-rich. I'm not complaining because I also own stocks, I own bonds and I own real estate, so my asset prices go up, but from a social point of view, it's most undesirable because it creates widening wealth inequality and dissatisfaction among the majority of voters. Then they'll go and vote for some populist leader who will then tax the well-to-do people more heavily.

Where is Dr. Doom putting his money? 

I recommend an asset allocation of about 25% in equities; 25% in fixed income, securities and cash; 25% in real estate; and 25% in precious metals — gold, silver. I think I have around 25% in gold whereby I don't value my gold. I have it and it's my insurance policy. I think it is more important to make sure that one day when the so-called shit hits the fan — and I think the Fed is well on its way to creating that situation — you have access to your gold, that it is not taken away. 

In the face of the Fed's continuing money printing, Faber also predicts a 20% market correction this year.

That led John Embry to interject with his analysis of historical market corrections... 

John Embry on Market Corrections

John Embry is the Chief Investment Strategist for Sprott Asset Management. He has studied the gold sector for over 30 years, and in his long decades of investing in precious metals, Embry has seen the ebbs and flows in the market.

While he's seen this movie before, he believes the sequel will be even bigger and better for metals investors:

For the first three years of the 1970s, the gold price rose almost sixfold, and there was great enthusiasm. Then from 1974 to 1976, it was virtually cut in half. And at that point, you could cut the pessimism with a knife it was so thick. Then, as you know, gold rose another eightfold from there. The price correction of the last two years has been even more counterintuitive than it was in the 1970s.

The sentiment arguably is even more negative, and I think the fundamentals are better than they were in the 1970s, so I think we're setting up for a major reversal.

The only thing we're debating here today is whether it's going to happen tomorrow, next week or several months from now. It's just a matter of short-term timing because everything is in place.

The fundamentals for precious metals have lined up for a perfect storm. The amount of global debt is simply massive, and the only way it can keep up is for governments to keep creating new money, which will eventually lead to currency debasement.

Embry is a bit shocked that more people haven't seen the writing on the wall:

I think now gold and silver shares are probably as cheap as they've ever been in history relative to where this could head. It's a great buying opportunity, but very few people have seemed to want to take advantage of it.

One of those few is Eric Sprott, who is calling silver the “investment of the decade” — and taking full advantage of the current conditions.

 

Eric Sprott on Silver

“If you believe in zero interest rates and you believe in printing money then you shouldn't be involved in precious metals. But if you take the view that both are insane financial policies, you know where your money should go,” Eric Sprott joked during the round table.

I'm pretty sure I know which side Outsider Club readers find themselves on.

Eric Sprott is the CEO of Sprott Asset management, has more than 40 years of investing experience and has had much success. He's currently worth upwards of $1.1 billion. He keeps 80% of his portfolio locked into precious metals, silver in particular.

His reasoning is twofold:

  1. The value of silver's industrial uses; and

  2. It will take very little investment demand to really move silver prices.

Why silver over gold? 

We have years where people are buying 50 times more silver than gold, and yet mine production is only 11:1 silver versus gold. By my calculation, we only have three ounces of silver available for investment purposes for every ounce of gold.

Every time I'm talking to metal dealers, my favorite question is: "What part of your business is silver, and what part is gold?" And almost everyone says, 50/50.

I guarantee you that cannot continue. 

Sprott also points directly to the manipulation in the paper gold and silver markets, which is why he strongly recommends holding the physical metal:

I totally subscribe to the manipulation of gold and silver and the shortages of gold and silver. I’ve written many articles asking whether the central banks have any gold left and what is going to happen to gold when they finally give up the ghost, which I believe is coming. That is why I think the opportunity in the equities is spectacular. Of course, also I’m a great believer in owning physical gold and silver with my particular emphasis on silver these days.

While Sprott is betting heavily on silver, his colleague Rick Rule has his eyes on two of the lesser discussed precious metals: platinum and palladium.

 

Rick Rule on Platinum and Palladium 

Rick Rule is a commodities titan, plain and simple. He is the Chairman of Sprott U.S. holdings and leads an entire team of earth science experts in determining not just the best investment angles for precious metals, but also agriculture, forestry, oil and gas, and water.

Plus, he knows that in order to sell high, you have to buy low: "My net worth is a consequence of having the courage to buy markets like 1992 and 1999-2000 very, very aggressively," he once remarked. 

While Rule agreed with the rest of the panel's assessment on gold and silver, he pointed out that the supply side of platinum and palladium is actually more attractive than the traditional precious metals...

Platinum and palladium benefit from everything we have already discussed, but it also has the added bonus of a squeezed supply side. While gold and silver tend to be mined and stored, platinum and palladium is used up in their industrial uses. It doesn't get stored, it gets used up.

Currently, worldwide stocks of finished platinum and palladium bullion are less than one year's platinum and palladium fabrication demand. The supply story gets more interesting because as a consequence of not having any stored bullion, the only supply is new mine supply and recycled supply.

With regards to supply, that new supply is very, very concentrated, with South Africa itself constituting for 75% of world platinum supply and 39% of world palladium supplies... and Russia supplying 13% of platinum supplies and 41% of palladium supplies.

...

What's necessary to know is that — the South African industry in particular — at these metals prices do not earn the cost of production. The consequence is that new mine supply, which is the most important source of supply, is declining. This isn't something that's going to occur in the future. It's something that is occurring right now.

Further, these costs are going up because workers' wages have to go up... but they can't, because the industry doesn't earn its cost of capital. Social take in the form of taxes, rents, and royalties have to go up, but they can't because the industry doesn't earn its cost of capital.

It is a simply fact that at this price point, platinum and palladium prices will fall. It is also a fact that it provides incredible utility to users. We anticipate the utilization of platinum and palladium will continue to grow even in the face of supply declines. There is only one way that dichotomy can be resolved, and that's in the form of price.

Rule's been bullish on platinum and palladium since the start of the year, and has seen a sea change in the way these forgotten metals are thought about in the West.

In the past year and a half, platinum and palladium have become categorized as precious metals not just as jewelry, but also from a purely investment-related angle. You can see evidence of this in the amount of platinum and palladium flooding into the ETF spaces. The five largest physical platinum ETFs added close to 42,000 ounces last week, bringing holdings to an all-time high of two million ounces. 

“This could exacerbate an already-troubled supply-demand imbalance,” according to Rule. 

Legends Don't Lie 

These guys know what they're talking about, and they put their money where their mouths are.

You don't become a billionaire by running with the crowd... and these contrarians have been raking it in for decades.

And if you are a contrarian (and I have a hunch you are), these are all great trades right now.

If you have an hour to spare, I highly suggest listening to the whole discussion. They weigh in on the possibility of government confiscation of gold and silver, they discuss the specter of hyperinflation, and they talk about the best ways to invest in physical metals — not the Ponzi scheme paper metals trades.

You can listen here.

Godspeed,
Jimmy Mengel

Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.

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