06/01/2016

My Thoughts on Hard Assets and an Outlook For SILVER & GOLD in 2016 & Beyond from CEO Keith Neumeyer

I am a firm believer in owning hard assets.  The overall economy and financial markets over the past 40 years have largely been driven by the expansion of debt.  This has created an illusion of prosperity.  Asset values in homes, farm land, stocks & bonds and other assets have all increased because of the staggering amount of debt used to purchase these assets.   We are now seeing the great unwind.  As the debt markets implode asset values will drop.  Currencies will depreciate and society will face significant hardship.  

I think it is imperative for everyone to position themselves for this new reality.  Investing in home efficiency and energy savings is an easy way to make money by saving money on your utility bills.  Making meals from scratch and growing your own food will save you money as well.  There are many ways to save money, but most will require personal effort.  If you type in "self sufficiency" on youtube.com or Google you will find almost endless ideas to save money and become more resilient.  Stocking up on goods such as food is a smart decision.  Buying a bulk supply of food now will be cheaper than waiting to buy it down the road.  Discretionary items such as scotch, wine, whisky and other spirits are worth stocking up on now because the price will only increase over time.  

As deflation worsens you will see the value of residential real estate drop.  It is remarkable how much housing prices have gone up in most cities.  I live in a rural area that has not experienced a massive housing price boom over the past decade.  That said, the price of farm land in my area has gone up immensely and the values do not correlate with the economics of farming.  I believe there will be an opportunity to buy farm land at prices that are significantly less than they are today.  US farmland has been dropping over the past two years.  The same will happen in Canada.  

As outlined in the December Newsletter blue chip stocks and bonds are beginning to break and the fallout will be monumental.  I cannot even imagine trying to manage pension money and only being allowed to buy specific types of stocks and bonds.  Most pensions use an actuarial rate of return of 7% in order to meet the future pension payment obligations for retired workers.  A 7% target rate of return is seriously overstated and any workers with a defined benefit plan should plan for reduced retirement payments in the not so distant future.  The same can be said with government pension promises.

I am often asked what do I invest in.  Besides investing in self sufficiency;  I invest in precious metals.  Precious metals, though volatile in price when measured in fiat currencies, have been a store of value for thousands of years.  This asset class offers the most opportunity right now.  There are four main ways to invest in bullion: 1) a mining company that extracts bullion, 2) an exploration company that searches for bullion, 3) physical bullion 4) a mineral bank.  Along with studying macro-economics and geopolitics I also specialised in the precious metals sector.  I understand this market intimately and therefore I have a comfort level in this sector that most people do not have.  If you choose to make investments in this space I encourage you to spend a lot of time doing research or deal with an advisor that understands this asset sector.

Producing Mining Companies: The problem I see with owning a producing miner is that there is operational risk, management risk and bullion price risk to name a few.  Precious metals prices are manipulated heavily.  This price manipulation has caused the value of mining shares to plummet over the last four years.  Many companies have gone bankrupt and many more will.  The key to investing in this space is to have a thorough understanding of who the management is, the financial position of the company and understand the resources that they own.  The location of the resources are very important because geopolitical risks can turn out to be tragic for investors.   There is a lot of opportunity for speculators, but patience is the key to owning mining shares.  As the price of bullion moves higher; the shares of mining companies move up in many more multiples.  For example, currently IAM Gold and Yamana Gold are both trading in the $2 to $3 range with gold in the $1085 USD range.  In 2011, when gold was in the $1800 USD range these companies were trading over $20 a share.  

Exploration Companies: The risk with exploration companies include the same risks that producing miners face, but they also face the risk of having little or no mineral assets in the ground.  Drilling for bullion is extremely expensive and current conditions are very difficult for companies in this space.  Banks are not keen on lending money to exploration companies as the risk is simply too high.  Speculators can make unimaginable amounts of money by investing in this type of company, but only a few exploration companies go on to become producers.  

Physical Bullion: Owning physical bullion is the safest and most conservative way to own precious metals.  Personally, I think everyone should have a portion of their savings in bullion.  You should take possession of the metal and hold on to it.  When I was an advisor I recommended a 10% to 30% weighting depending on the client's level of sophistication, risk tolerance, understanding of macro-economic conditions and time horizon.  The fact is central banks are creating currency units at an ever increasing rate.  The value of the US dollar has dropped 96% since 1913 when the Federal Reserve was created.  Inflation erodes the purchasing power of fiat currency.  Bullion is a long term store of value.  Food, land, art and other physical assets are stores of value, but many are not practical for storing longer term or from a transportability standpoint.

Mineral Bank: First Mining Finance is a company that I invest in for a number of reasons.  First off, the longer bullion prices remain suppressed the more assets First Mining Finance will acquire over the coming months and years.  Their mandate is to buy properties that have already been explored and have proven bullion resources.  The properties FF select are in safe jurisdictions.  With bullion prices as low as they are right now many companies are in financial distress and are willing to be taken over by First Mining Finance.  Historically, properties with significant gold reserves have sold for $48 per ounce in the ground equivalent.  First Mining Finance has been acquiring companies for $6 to $9 an ounce in the ground.  In 2011, when gold prices were at an all time high in nominal terms, companies were selling for over $100 an ounce in the ground.  I see tremendous opportunity to take advantage of the low bullion prices for as long as bullion stays suppressed.  The longer gold stays down the more assets First Mining Finance will be able to accumulate.  This is not an investment I am planning on trading or selling over the near term.   I'm holding it for the long run.  Currently they have over 8 million ounces of gold and have acquired this portfolio in less than a year.  Another major reason I own shares in this company is because of Keith Neumeyer.  He has a track record of starting companies and turning them into billion dollar companies.  He started First Quantum Minerals and First Majestic Silver.  Both companies were built from scratch during periods of low mineral prices (bear markets) and became major producers within the copper and silver spaces.  Keith gave an interview with the SGT Report  last week and it is worth your time if you would like to learn more.


No comments:

Post a Comment