Over the last several months I have spent a significant amount of effort exploring the fundamentals of gold and silver and the respective mining sector. This was the first stage in a broader effort to prepare for an acceleration in inflation, the beginnings of which I believe is about 2 years away.
God has lead me to focus on silver over gold and silver miners over bullion. (Owning miners that produce both is fine, but my emphasis will remain on silver.) My research has uncovered several fundamental insights that support this.
- The fundamental demand for silver is strong across multiple industries, while the negative drag from the transition to digital photography is now mostly behind us.
- India is poised to overtake China as the most populous nation in the world within a decade and is in the early stages of what looks to be an exceptional, multi-decade economic expansion. The nation already accounts for 65% of the world's annual silverware demand and 32% of the world's annual silver jewelry demand. India's silver jewelry demand is already more than twice that of China. India's economic expansion will be a fundamental positive for silver.
- To the extent that the global economy faces economic weakness along with higher inflation, the lower price of silver will make it a more cost effective solution than gold for physical buyers of jewelry, coins, and bullion. I am not expecting this longer term, but near term economic weakness in China would also reduce demand for copper, lead, and zinc. 49% of silver production is a by-product of copper (17%) and lead & zinc (32%) production. Cutbacks in the mine production of copper, lead, and zinc would lead to a decrease in the supply of silver.
I expect these and other factors to push the gold to silver ratio lower over the coming years. The following chart shows the history of this ratio over the last 50 years:
Notice that this ratio has been generally trading between 50 and 80 over the last two decades during a period of relatively low inflation. The last time the U.S. experienced severe inflation, during the 1970's and early 1980's, this ratio generally ranged between 20 to 50. I expect to see this ratio come back down into the 20 to 50 range again in the years ahead as severe inflation once again shows up. This will provide primary silver miners with a strong relative tailwind against their primary gold peers.
The Benefits of Silver Mining
I enjoy researching and investing in silver miners and this is a strong force behind my decision to launch a dedicated portfolio service. I especially like to see the benefits it brings to economically depressed, rural communities around the world. Those of us who spend countless hours on the websites of mining companies, cannot help but notice the joy of these local workers as they develop the God-given resources nearby their homes. God has called man to be stewards of the earth and not worship it. Such stewardship unlocks many blessings for His creation. Nowhere have I seen this demonstrated more than with what Fortescue Metals has done for the aboriginal community of Western Australia.
The Silver Miners Portfolio now has a webpage that details many of the specifics about the service. I want to highlight that my objective for the Portfolio is free cash flow built upon a foundation of leveraged exposure to silver. I am focused on selecting undervalued companies that can generate strong free cash flow at any silver price. Resource size is meaningless if the silver cannot be extracted in a fashion that creates shareholder value.
I would not be surprised to see a negative shock to metals prices within the next two years as the global economy experiences a deflationary crisis prior to a transition to a longer term inflationary phase. Because of this, I am especially focused on companies with near term catalysts that I think will drive their share prices higher, without being dependent on higher silver prices.
The Silver Miners Portfolio is an ideal solution for individuals, with a total portfolio of at least $200,000, and institutions looking to gain actively managed exposure to this often overlooked, mining sub-industry. Silver miners can be very volatile so access to the portfolio for individuals is restricted to a small portion of their overall investments. This varies for each individual depending upon their financial objectives and risk tolerance.
Interested investors can contact me here to get started.
Joshua S. Hall, ChFC
The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, a Registered Investment Adviser in the U.S.A. The information presented in The True Vine Letter is provided for educational purposes only and not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. The True Vine Letter is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may read this letter. You should independently evaluate specific investments and consult a professional before making any investment decisions.
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