Mike Maroney Interviews CPM Group's Jeff Christian
Mike Maroney: Good Afternoon. It's Friday, January 17th and I have a very special treat today. I have Jeff Christian from CPM Group. He's the Founder of that company and the Managing Director. If you know anything about Jeff, you know he's one of the top commodity analyst's in the world. He came from Goldman's Sachs / J. Aron, back in the 90's. He has been providing some of the best fundamental information as far as the precious metals ever since.
We are very fortunate to have received three new reports. These are annual reports as far as the gold, silver, and the PGM Group are concerned, and Monex will now be receiving a monthly update each and every 30-days from CPM. So our customers and our prospects can stay abreast of the cutting edge information that is provided by CPM.
We're going to talk a little bit today about some of the key catalysts that Jeff spoke about yesterday in a presentation that he made to our account reps. Without any further a do, we're going to kick that off.
Mike Maroney: Jeff, how are you today?
Jeff Christian: Great.
Mike Maroney: Great to see you.
Jeff Christian: Great to be here.
Mike Maroney: I'm so excited to have you back with Monex again, it's absolutely fabulous. Welcome aboard.
Jeff Christian: We're thrilled to be back with you guys. We've always loved Monex. I've always seen you as one of the class acts in the industry and it's wonderful to be back.
Mike Maroney: It's great, because if you look back to as early as 2002, 2003, you would have been able to see CPM making an absolute recommendation that it was time to buy gold, buy silver, and get involved in precious metals. Unlike many of the cheerleaders that were talking about 3...4...5,000 dollar gold a couple of years ago, the CPM Group, which is very conservative and very astute as far as making quality calls, called for an area of exit, probably up in the 1700's in gold and in the 40's in the silver market. Obviously, what we want to try to get across is the precious metals are great trading vehicle, but there where will be times to buy and there will be times to sell, and of course there's probably always a time to own some, and that's right now, because it acts as an insurance policy against financial calamity. Let's start off with some key fundamental facts that exist in the precious metals market.
Jeff, I'm always amazed when I look at the statistics. Recently, we've seen an increase in mining supply in silver. I think, what we need to see to offset that situation is continued demand. Do you see the supply coming out of the mines in silver increasing like we've seen over the last 5 or 6 years or do you think we're peaking?
Jeff Christian: Well, supply from the mines is probably going to continue to increase. The rate of increase is slow and dramatically. If you look at the pipeline of new developments that were slated to come on stream between 2013-16, if you looked at that pipeline in January 2013 and you looked at it again in September, half of the mines that were under development or plans in January are gone now, as a consequence of the lower price and the inability of mining companies to get financing for these projects. So we will see a slow down in mine production growth, but there's a bigger thing that's there. That is that's there is a significant amount of silver that comes from secondary recovery: old jewelry, electronics, decorative items, statues, all kinds of stuff. That has fallen within 20% because of the lower price. So even though you've had a small increase in mine production, total supply has been falling.
Mike Maroney: Great. Can you tell us what's happening with supply and demand situation as far as silver is concerned, based on industrial demand, investor demand, in comparison to what's coming out of the mines?
Jeff Christian: Well, mine production has never been adequate to meet the combination of investment demand and fabrication demand; it's always taken that secondary supply. Mine production has been rising, as you said, for the last several years. Our expectations will continue to rise, but it's going to be a relatively slow growth. Fabrication demand has been rising pretty well. I mean, it has hit pockets because of economic recession and dire problems, but it continues to grow. We're seeing growth in solar panel use, and overall electronics use, and ethylene oxide catalysts, and biocides. So there are growing fabrication uses and some of those things gets used and it's gone for a long period of time before it gets recycled. So that's good.
Then you've got that investment demand. Investment demand has been a very interesting scenario over the course of 2013, because you've had investors buy large amounts of silver, probably close to 100 million ounces of silver last year, but other investors were selling some silver. So you had some short-term investors who were momentum traders or they were buying because the price was rising and now they're selling because the price is down. You had some investors selling, but the vast majority, or they were overruled by, more investors buying more silver. So you still have a very high level of investment demand for buying silver. As the price came down, due to those guys selling. Those other investors were stepping up to take advantage of the lower prices to buy and that's continuing in 2014.
Mike Maroney: So the astute investors are taking advantage of the fact that some of the momentum players have exited out and maybe they've come in and taken it off the investors hands, that we call the weaker hands. Would that be the case?
Jeff Christian: I'm not sure if it's weak and strong. It's a matter of short-term investors who are not necessarily focusing on long-term economic factors or the fundamentals of the market vs. longer-term investors who are focusing on where all the world is and all of the problems that are facing us economically and politically, as well as, the fundamentals of the silver market. So you've got those shorter-term investors, hot money sometimes, hedge funds, institutional investors who are saying, "Ok, I rode silver higher, it was great. It hit $49; it's down now. I'm just going to go out. The stock market is rising so I'll move there." They'll come back, if the stock market coughs up 15%, some of those investors will start buying silver. The other thing that will happen is we think silver prices have made their low, that they'll stabilize over the near term, and they could rise and possibly start rising a little bit strongly in the second half of this year. Now once the silver price starts rising, some of those other investors will come back. So what you're really finding are astute longer-term investors who say, "I'm not going to buy at $49, might sell, but I will buy it at $18 or $19 or $20 they're there". Any number of those investors will say, "Well, I'm not necessarily going to buy as long as the price is falling." "If the price stabilizes I might start nibbling." "If the price starts rising, I'll give 5% off the bottom." " If the price starts rising, then I'll start buying." It's funny because you know the price is around $20 right now. We think it could get up to $24 in the first quarter. People say, "Only $24."
Mike Maroney: 20% move.
Jeff Christian: I will take a 20% move in 3 months.
Mike Maroney: Exactly. Absolutely. Now, you do tremendous research and your research on cost to produce. When I looked at it I said, "Ok, it's increasing at approximately 10-10.5% per annum as far as the overall cost." I asked you if you think that will continue. You actually told me that it went down last year, a little bit. What do you see out on the horizon, as far as, will we see a steady increase or have we peaked at the number we currently sit at?
Jeff Christian: There's a variety of factors behind the cost of production. One is that as the price of silver rises, the mining companies will mine lower grades, they'll re-open old mines that weren't profitable at $5 or $10, but they are profitable at $15, $20, or $30. So then as the price falls they'll go back to mining higher grades and shut down some of those higher cost mines. So you can actually see the production price cost fall. That's one of the things you're seeing. Miners going back to higher grade mines and portions of their mines.
There's another set of costs, which are really the raw input costs. More than half the costs are labor and energy. Labor is very sticky. You give people raises, because you're in a bull market and then when the price comes down and it's very hard to go back to your workers, whether they're unionized or not and say, "You need to give back some of that raise." So labor costs are very sticky. They're hard to reduce at least in the short-term. Energy cost is totally out of your control. You're just going to have to deal with it. Energy costs, oil costs, and electricity and natural gas have all been rising. Then you have all those other things everything from dynamite, mining equipment, to structural steel and concrete, and drill bits and stuff like that. Those costs have actually fluctuated, but they're relatively a small part. So the mining companies have looked at the situation and they've said, "Ok we've peaked at $49 at April 2011, it's now 2014 and the price is $20, I have to start managing my costs better." A lot of mining companies have new management, not so much in silver but in gold, and in metals in general. This new management and the old management that is still in place has a new found respect for managing costs and for trying to focus on being profitable companies instead of measuring your success in terms of the number of ounces you produce, measure it terms of the number of dollars of profit you have and the dividends you give out, and things like that. Our view is that you will see some reduction in costs, but it's going to be a very hard pull, but we don't think you'll see the 10% per annum growth in cost that you saw over the bull market.
Mike Maroney: Now your cost to produce comes in somewhere between $10 to $11 dollars, somewhere in that range. I know the term "fair value" seems to be tossed about quite frequently. Our customers ask us about this all the time. What's the "fair value" for silver? I tell them, "Whatever somebody is willing to pay for it on that day is the "fair value?" Do you have an answer to that question? So if someone asks me that question, I could say, "Well, Jeffrey thinks it's this."
Jeff Christian: Well, my short answer is yours. The "fair value" is what I can get for my silver or what I have to pay for it. Then because I am, who I am, I do have a more complete answer, which can go on for days. I mean, there are different "fair values." You know, there's the replacement cost of mine output and that's probably about $10 or $11 dollars an ounce right now. You have to understand that 80% of mine production or 70% of mine production now comes from bi-products. It's a bi-product credit at a mine. The major product of which is copper, lead, zinc, or gold. So you can play with those costs and say that the costs are actually much lower. There are all kinds of fair values depending upon what you're looking at and it's very hard to say. At the end of the day, the "fair value" is what you can get for your metal. Mining costs have a long-term effect on what that "fair value" is. The price of any commodity can go below significantly below the average cost of production for a long period of time.
Mike Maroney: Obviously, we've spoken a little bit about silver and when you look at any given year you have a tendency to give a range. Obviously, you have a specific range in place for 2014. Can you share that with us?
Jeff Christian: We think, as I've said, that the low last June about $18.50 is probably the low for the cycle. That we've probably seen that low. We may go down and test it again. So maybe we're hedging ourselves and saying it could go to $18, or something like that. We think that $18.50 a very low level. Let me just say why, because whenever you see the price go below $20, a lot of people start buying a lot of silver, and $18.50 has held twice now. It held in June and it held late in 2013. So people are starting to see that as a base. On the high end, we think that the price could get to $24 in the first quarter, as I said. We could probably get up as high as $25 or $26 over the course of the year. Our view is that the price kind of moves sideways, between $20 and $22, for much of the first half and then starts rising in the second half of the year.
Mike Maroney: Now in the gold market, you talked a little bit about the fact that central banks were net sellers up until 2007 was it?
Jeff Christian: 2008
Mike Maroney: Ok, 2008 and now they become net buyers, do you see that continuing?
Jeff Christian: One of the things that we saw in 2013, was that central bankers pulled back from the volumes that they were net buyers, they were still net buyers, but much smaller amounts. Let me answer your question first and then I'll elaborate. We expect central banks to be net buyers of gold for the foreseeable future. We quantify that out 10 years, but we think that going forward central banks will year in, year out, be net buyers. It's a very chunky market, because you don't have a lot of participants. So it's hard to say if they're going to be buying. Our view is that they'll probably buy 10 million ounces a year, year in, year out on average. It's hard to say if it's going to be 8 million in one year or 12 million another year, because it's just a few participants that are in there, as opposed to the private market where you have millions of people buying and selling silver and gold. Now, what we saw in 2013 was that those central banks that had been buyers, they continued to be buyers in early 2013, but as the gold price fell, they pulled back from buying. They're doing the exact same thing that the private sector investors are doing. They're waiting to see how low gold will go before they start buying again. So if you talk to those central banks, they're still interested in adding gold to their reserves, but they're not going to buy in a down market. Just as I said with silver, they'll give up the first 5% or 10% on a rebound. The price starts rising and it get to $1300, we expect those central banks to start buying again.
Mike Maroney: So the central bankers are just like everybody else, as far as, standard buying motives exist for them just like they do individual investors.
Jeff Christian: The central banks that are buying, and that's China, Russia, Kazakhstan, the Philippines, Venezuela, India bought some gold from the IMF. Those central banks are like everyone else, they buy low and sell high. In the past, when you had central banks selling, those were Western, European central banks, and the Bank of Canada, and the Bank of Australia, primarily as sellers. Those guys took a much more mechanical view. It was very funny, because they would say, "We're not going to try to speculate on the price of gold. We've made a structural, theoretical, long-term decision to reduce the amount of gold we own. Having done that. We will sell that gold and we're not going to try to gain the market by buying; waiting for the price to spike up and when we see the price of gold spiking up we'll sell more and when the price spikes down we'll pull back." So they took a relatively mechanical approach in their selling. But that selling is over. Those guys who have sold silver or gold have sold the gold they want to sell. The only major central bank that might be a seller in the future is the Bank of Switzerland, because they still have about half of their monetary reserves in gold. So whenever the price of gold rises and the portion of their monetary reserves rises, that's in gold, they'll sell some gold to bring it back.
Mike Maroney: They re-balance.
Jeff Christian: Yeah, they're rebalancing, that's all their doing.
Mike Maroney: Now, silver you have a basic cost to produce formula, how about for gold?
Jeff Christian: Well, for gold, the cash costs about $700, that's relatively meaningless. The full end cost is probably closer to $1100 dollars. Again, we're starting to see it come down a little bit in 2013 as mining companies cut back. A lot of the cutbacks, I didn't say it earlier with silver, but it's true in silver too, the easy quick cutbacks that you can make fast is on exploration and development. Which is why you see that pipeline cut in half. So they're slashing their home office. One of the major mining companies slashed 1/3 of it's home office staff, they cut their exploration budget by more than half, they cut their development projects they put them on care and maintenance and deferred development until further notice. Then they're also working on their cash costs too. So we're seeing a little bit of decline in the annual average cost of gold mining in 2013. We expect to see a little bit further decline now, but you've got a floor there around $1100.
Mike Maroney: So we're pretty close, right now, to that floor, in essence.
Jeff Christian: Yes, that floor is the cost. It doesn't allow for a decent profit. Once you add the decent profit in, we're there.
Mike Maroney: Silver you have a range, how about for the gold market?
Jeff Christian: Again, we think that low of $1180 made last June is probably the low. Possibility it spikes down. We saw the price come down and test that in December and there were a lot of people saying, "Once it goes through that it's going to $1100 or $1000" and it didn't, it held there. So we've seen $1180 hold twice, we think that's probably a pretty good base. Again, just as with silver, when you see the price of gold go down below $1200 and trade in $1180 - $1200, you start seeing investors picking up their purchases. People see that as a good place to buy. So we wouldn't be surprised to see $1100 or $1180 tested again in the first quarter of the first half of this year, we think it will hold. On the high end, we wouldn't be surprised to see the price well over $1,300 by the end of the year.
Mike Maroney: I know a lot of people bought gold in 2006, 2007, 2008, and 2009, because they thought the entire financial markets were going to collapse, banks would close, paper currency would disappear, and obviously in your presentation last night you talked about..."that hasn't happened for 300 years." So you need to probably think it through before you use that as your key catalyst. What are some of the catalysts that you see that exist in the gold market that inevitably can take us higher?
Jeff Christian: If you look at the gold price and how it's constructed. It's really investment demand that drives the gold price. Investors, in turn, are driven by a host of factors--so inflation. Inflation is just not on the horizon. Deflation actually is good for gold prices too, because it scares the heck out of people. There's not a lot of good historic data, because when we had deflations in the past in the 1870's, 1880's, and 1890's, we had an extensively fixed gold price. You can see that there was a free market gold price, especially out East. You could see deflation caused people to buy gold too. Some people will buy gold for an inflation hedge, some was currency hedge, a portfolio diversifier, a safe haven-- because things could go wrong. What you're seeing right now, that some of those factors, like inflation, is not an issue. Currency markets are confounding a lot of people, because a lot of people were convinced that the dollar or the euro will collapse, and they haven't and probably won't. They're volatile in a sideways fashion and that's causing a lot of confusion. Confusion is good for gold, because there are any number of investors who will say, "I can't figure out if I like the dollar or I hate the dollar or I like the euro or I hate the euro, so I'm going to put my money in gold or silver." So that kind of uncertainty actually helps.
The stock market has been doing very well. As I said, we've got about 29.7 million ounces of investment demand for gold last year, down from about 40 million ounces in 2011 and 2012. The vast major of gold investors continue to buy gold and actually were buying as the price fell last year to pick up those bargains. Those other guys with shorter-term momentum traders have gotten out of the market and some of them moved into the stock market. We wouldn't be surprised to see the stock market have a serious down draft at some point in 2014. Our most likely scenario, September, October, there's a seasonality every major down draft in the stock market has occurred in September and October and this year, as in many of those prior years, it's a very important bi-election in the United States, as well as elections in a number of other countries where you have a significant amount of gold investment demand. So we wouldn't be surprised to see September, October. Let's say that our main scenario works out, stock market will be that much higher. You could see a 20 or 30% drop in the stock market. That could cause a lot of investors to move back to gold and silver.
Other people that pay more attention to the stock market or spend more of their time looking at the stock market think that we could see a 10 or 15% down draft in the first four months of this year. That also could be it. So we're looking at the stock market, which is a sugar high, let's be honest. Stock markets are rising, because companies are de-capitalizing and because people are pouring into it because the stock market is rising. That's a sugar high that's going to wear off at some point and it may be a 15% downdraft or a 30% downdraft and when that downdraft occurs it'll be good for gold and silver.
I'm also thinking about Bitcoins.
Mike Maroney: Are you buying them?
Jeff Christian: No, I'm not buying them. I think Bitcoins are a gigantic pyramid and a house of cards that will fall. When that happens I think you'll see some people move back to gold and silver.
Mike Maroney: No, it's interesting because a lot of our customers have called and said, "Bitcoin at $1260, rare cars, rare art everything tangible seems to be skyrocketing, yet gold had to go through its corrective phase." The thing that seems to confuse people the most is the fact that there's so much physical demand in China and why hasn't that affected the price in a more positive fashion?
Jeff Christian: Well, you have several things there. Let me say this, gold prices and silver prices came down while art and exotic cars rose. Gold and silver preceded those things, those things are playing catch-up with gold. It'd be interesting to index exotic cars at auctions to gold, to see if they're basically at the same place. If you index them both to $2,000 if the prices are basically at the same place now, where exotic cars, which were hammered in 2008, 2009, and 2010. I remember because I was talking to my wife about it and she said, "No." There were a lot of bargains in the exotic car market in 2008, 2009, and 2010. It would be interesting if they played catch up and they met gold on the way down at a similar place.
Bitcoins are not a tangible asset. Bitcoins are pet rocks, let's be honest. There's nothing tangible there.
Mike Maroney: It's an amazing market.
Jeff Christian: What was the third part?
Mike Maroney: China demand.
Jeff Christian: Chinese demand. Chinese demand is enormous. It has had an effect. It has driven up the price of gold and it's helped keep the price up. When the gold price was falling last year, we actually had a sell recommendation in gold in February. The reason we did that was, the price of gold started at 2013 at $1680 and you had a lot of demand in early January, as you did this year and there's seasonal reasons. One of the seasonal reasons is dealers stocking up for the Lunar New Year Holiday. During the Lunar New Year Holiday, which was the first two weeks of February last year; it's the period from January 31st - February 7th this year, in the first half of February, investment demand for gold was very low in China. The dealers said, "This is bad, people are not bullish on gold at $1680." So after the Lunar New Year, those sold some of their stocks, which pushed the price down to $1580. At $1580 there was no bounds. The price traded between $1580 - $1625, from the middle of February, until the middle of April. That was a gigantic sell signal. In fact, if you looked at all the short building on the Comex, most of the short building occurred before April 12th. It was because the Chinese saw $100 decline in the gold price to $1570 and they didn't buy. So when the price then fell from $1580 to $1380, they came in and bought. It went back up, It came back down and they didn't buy. Then they started buying again in August and September, they basically were out of the market in June and July. August, September they started buying again. They're kind of cautious right now. If Chinese physical demand was about 35 million ounces last year, we wouldn't be surprised to see a little bit of decline. Our contacts in the Chinese market think that it will continue to grow this year, but there's a lot of bargain hunting, waiting. So their expectation is the price, at some point that price will start rising, and the Chinese investors will say, "Now, I'm convinced the low has been made. I thought the low was made last April and I was wrong so I'm waiting. I've seen the gold price go up 5 or 10%, ok now I'm feeling comfortable that the low has been made and I think I'm going to start buying."
Mike Maroney: Your range for 2014 in the gold market is?
Jeff Christian: It's about $1180 on the low end and about $1380 on the high end.
Mike Maroney: Is there anything out on the horizon, that you could see happening, that would cause you to raise that up a little bit?
Jeff Christian: Well, there are a couple things that we're looking at. First off, let me amplify something I said earlier, the gold price is determined by investment demand and investment demand is based on investors' interpretations of economic reality. So you'll see economic reality happen and it won't have an effect on the gold price because investors are interpreting it as not being important. So we're looking for those things. It's always hard to say. We can through out things like the November elections, the possibility of a Bitcoin scandal, possibility of significant decline in the stock market, problems in Europe, in the European monetary system. The first three are a higher probability. The European crisis, we don't necessarily see anything on the immediate horizon, but a lot of time you don't see those things coming. The message for investors is... you should have some gold and silver as a long-term insurance policy against financial catastrophe, as a portfolio diversifier, and a safe haven against something less than total catastrophic failure economically, and then you should have some other gold and silver that you invest back and forth, as you do other investments to take advantages of cyclical opportunities. I think you have a lot of investors who actually follow that chain of thought. They're still buying that core, they're still holding that core, buying that long-term stuff and they're waiting for a sign, something to happen in the market or merely the increase in price in gold. As we've all seen in the financial market, you can have the same economic data release and it can drive the gold price of the stock market up or down.
Mike Maroney: It's all perception, right?
Jeff Christian: Depending on what investors want to read into it.
Mike Maroney: Well, I'll tell you what after 30 minutes with Jeff, you can see why we're absolutely excited about having him here at Monex. Billionaires call Jeff to ask his opinions and now you, the individual investor, have the opportunity to read his reports and get a monthly update. Please give us a call, so we can get you out one of these reports. We didn't get to talk about the PGMs today, but there's some exciting news taking place in both platinum and palladium you might want to read about. Now may be the best time, based on Jeff's ranges, to give us a call today. Jeff, thank you so much!
Jeff Christian: It's great to be here.
Mike Maroney: Thank you.