With industrial demand almost exclusively driving the price
of silver for years, investing in the white metal used to be
simpler. Now investment demand is competing with practical demand
to push silver prices ever higher. Investor interest in silver
from large U.S. funds could result in as many as 60 new silver
plays entering the market this year. These are heady days for
silver with a lot of upside in the cards-if played right. Find
out how in this
Andrew Thomson, president and CEO of
Soltoro Ltd. (TSX.V:SOL)
, a Toronto-based silver explorer with projects in Mexico,
regularly receives calls from U.S. investors looking to buy a
chunk of his silver play. One such investor with a net worth
approaching $150 million recently asked Thomson if he could buy a
block of 500,000 Soltoro shares. Thomson told him yes but that he
would have to get them on the open market.
Times are good for silver juniors.
Thomson estimates there could be another 60 silver companies
trading on North American bourses by the end of 2011 and says
that's due to cash-rich U.S. funds seeking northern exposure.
"U.S. players are starting to look at value propositions. They
just want to be in silver, and they don't want the physical
metal; they want equity because they want to be able to trade
it," Thomson says. "It's similar to what happened a few years ago
when Chinese, Korean and Vietnamese investors came [to Canada]
looking for hard assets. In this case, it's the U.S. funds that
are starting to look at our natural resources. It's kind of
ironic that it takes a strong Canadian dollar for them to start
investing in our economy."
But not all big U.S. funds are making the pilgrimage north or,
if they are, the journey is often short-lived. On March 15,
Barron's blogger Murray Coleman reported that U.S. hedge fund
managers were buying silver. A week later, however, he told
readers "hedge funds in the past week were unloading positions in
gold, silver, copper, platinum and palladium."
"There's a lot of confusion out there. There are funds that
are dumping silver and there are funds that are buying silver.
The funds tend to react to the news, and then become the news
themselves when they dump large positions. If you watch those big
funds' positions, all you're going to really see is a bobbing
cork. I think net their positions are accumulative," says James
West, editor of the
David Keating, managing director of equity capital research
with Mackie Research Capital, a sizeable Bay Street player in
junior mining financings, says the 60 companies figure is likely
on the high side but that Thomson's number is in the
"Sixty sounds like a big number but it doesn't strike me as
outrageous," says Keating. "There's certainly lots of demand in
the market for silver stories."
Keating notes he's getting more calls about silver and is
currently looking to finance as many as five silver plays.
"You've got U.S. funds and international funds looking at getting
direct toeholds in some of these plays and they are prepared to
put up the $5, $10 or even $15 million to get the exploration
going. We've definitely seen that in the silver names and in the
gold names," he explains.
Keating explains that when you get sustained upward price
movement in the underlying commodities, a lot of assets that
wouldn't have earned a second look at lower prices suddenly
become attractive at higher prices. He adds, "Companies these
days are able to raise capital, so exploration budgets are going
up and you're getting more and more exploration and development.
And some of the assets that aren't getting attention can be spun
off into cleaner, pure plays."
West, until recently, owned a stake in a precious metals mine
in Peru and is connected to junior mining plays all over the
world, especially those in Latin and South America. He often gets
calls from the "who's who" of Toronto merchant banks and
brokerages seeking exploration-worthy assets for capital pool
companies (CPCs) or corporate shells.
Brokerages source assets from people like West and-after
filing a prospectus and raising seed capital-CPCs buy the assets
via a "qualifying transaction," which is needed to get a listing
on the TSX Venture Exchange. It's often a well-rehearsed dance
between brokers and companies.
"If you look at any of the CEOs on the TSX Venture Exchange
who have a track record of value creation in public companies,
generally, you'll find them aligned with one or two brokers with
whom they do all their business. Usually these groups make money
together and they tend to move forward under that arrangement
until something goes sideways on a deal, somebody retires,
somebody gets sued by their wife. . .whatever," West
When it comes to silver exploration plays, West says, it's a
seller's market. "The (property) vendors are demanding a higher
price and are willing to sit with their asset on the sidelines,
confident that the price is only going to go up. And with every
uptick in the silver price, people are willing to pay higher
prices for these silver assets," he says.
Leading the Charge
In early March, newly listed silver junior
Argentum Silver Corporation
optioned Soltoro's Coyote and Victoria silver-gold properties in
a past-producing silver district near Jalisco, Mexico. Argentum
paid CAD$255,000 in cash and 5 million shares. Soltoro kept a 3%
net smelter royalty on any future production from either Coyote
"Effectively, there is an area play starting in Jalisco that's
been going on for about two years that includes
Endeavour Silver Corp.
Timmins Gold Corp.
Silver Predator Corp.
Southern Silver Exploration
Corp. (TSX.V.SSV; Fkft:SEG)
, Soltoro and Argentum Silver," Thomson says. "It's not only for
silver, but silver is leading the charge."
Indeed. Two years ago, on March 24, 2009, silver closed at
$13.44/oz. And two years later, the white metal finished the day
at $37.42/oz. on the NYMEX-a gain of 178%.
West believes we will see $40/oz. silver by the end Q211 and
that the white metal could hit $50/oz. by year-end based on not
only the typical industrial and investment demand drivers, but
also what he refers to as "smart money" entering the space.
By "smart money," West means the cash behind the big players
like Toronto-based Sprott Asset Management. Eric Sprott, the
firm's bearish leader and chief investment officer, is staking
his reputation on precious metals. He's telling anyone willing to
listen that gold will see strong resistance above $2,000/oz. and
that, during this current bull market in precious metals, the
silver:gold ratio-or the number of silver ounces it takes to buy
1 ounce of gold-will return to its historical norm of less than
20:1, perhaps even as low as 10: 1.
Others aren't quite so bullish.
Riding the Ratio
"[Eric Sprott] is indicating that silver will go to $2,000/oz.
I'm not in that camp, but there is a squeeze going on. There's a
lot of new equity traded funds and funds getting into the silver
space that are drying up [silver] production, in terms of the
delivery of actual physical silver, and that's what's driving the
price up. It's a bit of a manipulation from the perspective that
it's the investors who are stepping into [the silver space] and
squeezing the supply for the end users. I think that's very real
and that's why the [silver:gold] ratio is changing," Thomson
The last time the silver:gold ratio closed the gap that much
was in 1980 when brothers William and Nelson Hunt attempted to
corner the silver market. The ratio peaked at 17:1 before the
silver price collapsed on the ill-fated Silver Thursday, which
occurred in late March, 31 years ago.
In 2003, when the current bull market in precious metals
really started rolling, the silver:gold ratio was roughly 83:1.
With silver now approaching $40/oz., the gap has closed to about
38:1 and is steadily narrowing.
"When you've got guys like Eric Sprott and Frank Holmes [CEO
and CIO of U.S. Global Investors]-guys that are really recognized
as 'thought leaders' in the space-predicting much higher silver
prices, that in itself becomes a fundamental driver for the
price," West says.
Sprott put his money where his mouth was and further boosted
silver demand by launching the
Sprott Physical Silver Trust
in November 2010 at $10 per unit. It closed at $17.38 on March 24
with a market cap of $869 million. The trust trades at a premium
to net asset value (
) and its silver bullion is tucked away safely in a Canadian
vault, a task that took longer than expected. In November, the
trust had contracted to purchase 22,298,525 ounces (22.3 Moz.) of
silver bullion but by the end of 2010 had taken possession of
roughly 21 Moz. The remaining 1.4 Moz. or so did not arrive until
well into 2011. The delivery delay clearly demonstrated the
tightness in the physical silver market.
"Frankly, we are concerned about the illiquidity in the
physical silver market. We believe the delays involved in the
delivery of physical silver to the trust highlight the disconnect
that exists between the paper and physical markets for silver,"
Sprott said in a January press release.
Sprott's main competition, the
iShares Silver Trust (
, has been trading in unprecedented volumes. On March 24, 27
million shares changed hands for a close at $36.12. The $13.2
billion trust is up 121% year-over-year (YOY) from its March 24
close of $16.29.
The Sprott Physical Silver Trust is just one prong in Sprott's
multipronged approach to precious metals investing. Sources close
to the situation say he's buying equity in just about every
silver play coming to market and can't write the checks fast
enough. They estimate Sprott's total bet on silver, including the
trust, approaches $1 billion.
David Morgan, editor of the
, a silver-focused newsletter, provided Sprott with some names to
help him source his silver bullion. Morgan was in the market when
silver's last bull market ended in 1980. He knows what it's like
when the music stops, and he recommends caution.
"The problem with the gold-silver cycle is that it's such an
emotional market because the people who are in it-the gold and
silver bugs-have an attachment to [gold and silver] being money.
All markets that have a bull market go from undervalued, to fair
valued to overvalued; and nothing gets to the extreme
overvaluation level, at least in the last bull market, that gold
and silver do. What happens at the top of the market-and we're
far from that now, mind you-is that anything with silver in the
name of it will go sky high regardless of its merit," says
Thomson agrees but says good assets are good assets in bull
and bear markets.
"I think it's like anything. The museum-quality assets are
going to rise to the top, and the stuff that's smoke and mirrors
will always be smoke and mirrors. And, at some point when the
market falls apart, the quality will persist and the crap will
fall by the wayside," Thomson says.
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