Before a packed room of investors at a Toronto hotel in April, 2008, fund manager Charles Oliver made what was then a bold call.
"I told them that I believed that gold would reach $2,000 U.S. within the next four years, or I would shave my head," recalled Mr. Oliver. Gold was then trading at about $945 (U.S.) an ounce, but he was also expecting silver, then trading at over $18 an ounce, to hit $40 over the same period.
So far the metals universe has been unfolding as he predicted. The price of the yellow metal hit another record high on Tuesday when gold futures in New York shot up to $1,311.80 an ounce before settling at $1,308.70. And silver also hit a fresh, 30-year high before closing at $21.71 an ounce.
In an interview with The Globe and Mail, Mr. Oliver, who co-manages the Sprott Gold and Precious Minerals fund run by Sprott Inc. , shared his views of what lies ahead.
What has been driving the price of these metals?
Governments around the world seem to be printing money to pay for fiscal stimulus programs and continue to live beyond their means. We have seen devaluation by almost all currencies around the planet. And we now seem to be in a period where quantitative easing - the catch phrase for printing money - is becoming a very acceptable form of government process. As investors see the value of their currency or cash being devalued, they are moving their cash into gold, silver and hard assets that will retain their value. If you look at the timing of the recent move upwards, it corresponds quite strongly with recent announcements by the Federal Reserve Board on a further round of quantitative easing, or QE2 as they call it.
What is your outlook for gold versus silver?
I am more bullish on silver than gold. I think at a minimum that silver will stay at a 50:1 ratio with gold. But I think there is the potential for it [silver]to significantly outperform, and move to a lower ratio based on greater demand numbers that we are seeing for silver coins and silver bullion this year… I think you may also start to see some of the institutional investors going into silver bullion as well. I see [silver at] $40-plus relative to gold at $2,000.
Where is the action in gold and silver stocks now?
Over the last year, the mid caps were great performers. The last few months, we have seen a movement into the small-cap area after [those stocks]lagged behind quite dramatically for the last couple of years. A lot of them were undervalued. There were some great assets in the small-cap area, but when you don't have liquidity and access to capital, these stocks can tend to lag behind. To a large part, they are just playing catch up. [The small-cap rally]should last another six months but… it partially depends on the gold price over the next six months and is also a function of the stock market in general.
What is your outlook on the stock market now?
My view before was that we would probably have a pullback in the near term. But there are two things making me think that I was too pessimistic. [First] the Fed has announced QE2 - basically this is an expansion of the money supply and making access to capital very easy. In that environment, you will see the stock market generally do very well. In 2008 when everything was selling off and getting killed, that is how the Fed basically engineered the move up in the stock market… The other thing is the U.S. mid-term elections. Going all the way back to World War II, during the first 200 days after the mid-term election, stock markets have always been positive. I think there is a good chance that stock markets will rally.
What would you suggest to investors who are missing out on the party?
Investors should have a portion of their assets diversified into precious metals bullion and stocks. Gold bullion is for defence. It is to protect your wealth and is insurance against the worst case scenario. If you want to make capital gains during this gold bull market, then taking on some risk through ownership of stocks invested in precious metals makes an awful lot of sense. Generally speaking, gold stocks will increase three to four times that of the gold bullion price although there are periods when this does not always hold.
Mr. Oliver likes these three stocks:
Silver Standard Resources Inc. : The miner, which has 15 projects in seven countries and owns a silver producer in Argentina, is being piloted by a new chief executive officer hired from BHP Billiton. "They are going to produce seven million ounces by year-end and will be expanding," said Mr. Oliver. The stock looks pricey at about 12 times 2012 cash flow, but it has three properties in the process of development that could double or triple production, in addition to a giant gold deposit in British Columbia, he said. The stock closed Tuesday at $21.19.
Minera Andes Inc. : The miner and explorer, which is 33 per cent owned by its chief executive officer Rob McEwen, owns nearly half of the San Jose silver mine in Argentina in partnership with Hochschild Mining PLC. The San Jose property is a quarter of the size of the property owned by Andean Resources Ltd., which is being bought by Goldcorp. Inc. Minera also owns a copper project in Argentina. The stock closed Tuesday at $1.41.
Kinross Gold Corp. : The gold miner has just acquired Red Back Mining Inc., which gives it a foothold in Africa with mines in Mauritania and Ghana. "Over the next five years, it is targeting growth of almost double [its]current production of 2.5 million ounces," said Mr. Oliver, who believes the stock is cheap at current levels. The stock closed Tuesday at $19.65.