A Professional's Opinion of Precious Metals
By Matt Badiali
December 7, 2007
In 1985, Robert Quartermain took the worst job in the world.
Quartermain became the president of Silver Standard just as the metal was entering a 13-year period of decline. The mid-1980s were a rotten time for silver mining companies like Silver Standard. After the unbelievable bull market decade of the 1970s, silver prices collapsed from their highs around $50 an ounce in 1980 to $6 an ounce when Quartermain took over.
In December 1992, it was clear that silver was in a bear market. Pan American Silver's shares traded for 3 cents each, an all-time low. By March 1993, silver hit a bear market bottom of $3.55. Few companies could mine silver profitably.
Robert Quartermain had a solution: In order to keep the company alive, he turned Silver Standard into a silver hoarding company.
The "hoarding" business model is simple: Buy out projects that are too costly to mine profitably when the metal price is low and hold them until prices rise to make them viable. The business model works because metal prices are cyclical – prices go up, then down, then up again. The managers of gold and silver hoarders understand the cycle and have the patience to wait it out.
Silver Standard mastered that practice under Quartermain's leadership. The company bought up projects while the price of silver was low (less than a third of today's price) and held on to them. In the meantime, the company continued to drill and evaluate the projects. As the silver price rose, the value of the projects rose... by far more than the company spent holding them.
However, hoarding can be tricky. It requires three things: money, patience, and an unswerving belief that the price of whatever you are hoarding will rise. Quartermain had all three.
Quartermain's leadership pulled the company through. Today, Silver Standard's share price is 4,850% higher than the fall of 1992.
However, last year Quartermain abandoned the hoarding model. He built a brand new, state-of-the-art mine at its biggest deposit and declared that the company was transforming itself into a silver producer.
The leap to production requires a lot more money than hoarding, a completely different skill set, and an unswerving belief that the price of the commodity you are producing will not fall.
Last December, I met with Quartermain in his boardroom. Across the sleek, hardwood table, he outlined his vision of Silver Standard's future. He talked about new applications for silver metal. How silver doorknobs could reduce flu epidemics and silver surgical instruments could prevent post-operative infections.
He saw a grand future for silver, and he saw silver production as a lucrative venture for a long time to come.
The last five years of data support his argument. The silver price outperformed the gold price by 60%. Only recently has the silver price failed to keep up with gold. In fact, over the last 18 months, the price of gold has risen more than 2.5 times faster than that of silver. I see this situation as an opportunity for us to benefit from a correction back to the norm.
And let's face it... the trend of "paper assets down, real assets up" is overwhelmingly in our favor. Gold and silver are soaring against stocks and risky bonds. In addition, in times of uncertainty, gold and silver are safe places to store wealth.
In short, I think everyone should own silver - even if it's simply insurance in a bigger portfolio of stocks and bonds. These days, it has never been easier to invest in silver, either through a vehicle like the iShares Silver Trust (SLV), a bag of silver coins, or Quartermain's blue-chip company.
Good investing,
Matt Badiali
Editor's note: Matt Badiali is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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