Experienced investors of the metals and mining space know all too well the unparalleled profits that can be achieved when they're able to successfully identify quality companies that realize their potential. Often times, however, investors are left paying for that "potential" than the actual prospects for success. A lot of that has to do with the lack of information, and in some cases misinformation and speculation, that clouds proper analysis and due diligence. Even from a broader perspective, a misunderstanding or false assumption of the market dynamics between precious metals and other economic forces could prove costly for investors.
For the past three decades, Jeffrey Christian of CPM Group has been focused on developing research and analysis to help companies and investors better understand these issues. As the founder and Managing Partner of CPM Group, his approach has been to focus on cutting through the bad information out there, and has incorporated that mentality in essentially every level from a financial management standpoint toward the commodities market.
In this interview with Equities.com, Christian shares his insight to the different dynamics of the current precious metals space from price levels to companies operating in the space. He also discusses how investors are currently adjusting their approach to gold and other precious metals based on the current economic landscape. Christian will be joining a roster of notable and influential speakers at the upcoming New York Metals and Minerals Investment Conference on May 13-14, 2013 at New York Marriott Marquis.
EQ: You’re the founder of CPM Group and one of the most highly regarded experts in the commodities and precious metals space. Can you talk about your background as well as provide a brief overview of what CPM Group does?
Christian: I started off studying political science and journalism. The political science I was involved in had to do with how communist countries and developing countries traded back in the 1970s. So a lot of my research was commodities oriented. I worked as a business journalist following the metals market and other industries, and then I went to J. Aron & Company, which was a commodities-trading company that had a fundamental research department. It’s very unusual for a trading company to have a fundamental research department. They specialized in gold, silver and platinum group metals. When I joined, they also did agricultural and a little bit of oil and other things too. The fundamental research department was very highly respected in gold and silver. I built up the platinum group metals, coming up with basic data because all of these markets are very secretive. There are not good data generally and widely available on supply and demand for gold, silver, and platinum group metals. In the absence of good data, people publish and circulate bad data and bad analysis.
J. Aron merged into Goldman Sachs, and in 1986, I wanted to get out of Goldman Sachs for a variety of reasons. So I effected a management buyout of the commodities research group at Goldman Sachs, and set up CPM Group. Since then, for 27 years now, we have basically been a commodities research consulting company. We do research and analysis across commodities. Our specialties are precious metals, base metals, specialty metals, but also oil and natural gas, and other commodities too. We advise companies on what we think the markets are going to be doing, supply and demand, and price trends from periods of one week to 10 years forward. We advise them on investment banking projects. We sometimes will manage hedging and materials management for clients, and we’ll arrange for clients to lease metal in for their manufacturing processes, and arrange to handle their scrap refining. We handle all sorts of things that relate to the financial management of commodities, including advising investors.
EQ: Looking at precious metals, for the last few years, the investment thesis has been that runaway inflation from the Fed’s stimulus programs would help to push prices higher. Have commodity investors moved away from that sentiment?
Christian: We’ve seen two broad sets of factors that cause investors to run into precious metals, especially from 2007 into 2011. One of the factors was the view that all of the monetary accommodation and money creation has to be hyperinflationary. The other was that the financial system was vibrating out of control, and that we had a real risk of imminent catastrophic failure of the international financial system.
Our take is that over the last 18 months, investors have in fact backed away from both of those theses. On the second front, we have gone through the wringer in 2011 with Europe burning and the European governments seemingly unable or unwilling to do what needed to be done. The U.S. also faced the debt crisis and credit downgrade for the first time in its history in early August 2011. So we went through the wringer in two years ago, but in September 2011, investors around the world woke up one day and realized that the world didn’t collapse. So they began to think that maybe what they really should be worried about isn’t imminent financial collapse, but rather what we have now: low growth, high unemployment, continuing inequalities and massive imbalances on a global basis financially, economically, and politically. Maybe this is their worst fear. In that kind of environment, they should continue to own gold and silver, but they don’t need to chase the price higher. They don’t have to wake up in the morning and say, “I need to buy gold today regardless of the price because tomorrow the euro, the dollar, the treasury or the ECB may collapse.”
Then on the monetary accommodation side, there are a lot of people who have said this has to be inflationary, and it is in a way, but it isn’t necessarily hyperinflationary. There are things that could happen between now and later that could pre-empt an inflationary impact of all of this money creation. So you have investors starting to realize this monetary accommodation may not lead to hyperinflation.
At CPM Group, we’ve done a lot of work over the last 18 months really talking to the management of mining companies and explaining the relationship between money supply as it relates to inflation, gold, silver, and the prices of gold and silver. We explain that it’s a much more complex situation, and that there are ways that things could develop that would not necessarily result in hyperinflation down the road when the money starts being lent and spent.
We’re seeing investors back away from the unbridled fears that were driving them to buy gold and silver regardless of price 18 months ago. It’s not that they’re sanguine on the world economy; it’s that they’re much more balanced in their view and realize they can be price sensitive.
EQ: As a result, gold and silver have not done very well thus far this year. What are your thoughts on the intermediate and long-term prospects for these markets?
Christian: We wouldn’t be surprised to see gold and silver prices trend lower for the next two or three years. Gold will probably stay above $1300 or $1400 on an intraday basis over the next few years. We think that as investors reorganize their thoughts about what they should be concerned about, they will continue to buy large amounts of gold. However, they will buy marginally less gold than they did a year ago, and will be more price-sensitive. We’ve already seen this since September 2011. When the price spikes down to $1530, investors load up on gold. When the price spikes up to $1750 or $1780, they pull back on their purchases. You’ll see that continue, so we’re looking for gold prices to trend modestly lower from where they are today over the next few years. Then, possibly in the long term, maybe 10 years from now, I wouldn’t be surprised to see gold prices much higher, maybe even at record levels.
In silver, it’s pretty much the same pattern, but it’s much more volatile. Silver prices tend to be more volatile because it’s a smaller, less liquid market. So we’re looking for silver prices possibly falling down into the $20 to $24 range over the next few years then possibly rising beyond 2015.
EQ: Base metals have also suffered due to the expected slowdown of the global economy. Is this an opportunity for long-term investors to load up for when demand rises again?
Christian: Our view on base metals is, overall, the prices will trend sideways over the next couple of years with a slight upward bias. Some metals like tin have already risen very high. Therefore, we think it will move mostly sideways. We think zinc may have a little more downside exposure right now than it does upside. Nickel and lead will be pretty much sideways. Copper and aluminum, however, may have some upside. Given where we think the global economy is going, we actually think that these things are probably good long-term investments.
EQ: Which particular markets have captured your attention right now?
Christian: We’re paying a lot of attention right now to platinum and palladium. These are heavily industrial metals, and are extremely rare. If you have several hundred gold mines, and more than 80 countries are mining gold around the world, you have maybe two dozen platinum mines, mostly in South Africa. There is some palladium and platinum produced in Zimbabwe, Russia, Canada, and the United States, but the bulk comes from South Africa. The South African mining industry is facing enormous problems that already have caused the supply from mine production in South Africa to fall over the last few years and is probably going to cause quite a contraction over the next two years.
Meanwhile, on the demand side, these metals are used in auto catalysts. While the auto industry is suffering in Europe, on a global basis, it’s actually hitting record sales last year and probably this year. A lot of those sales are in China, the United States, India, and countries that use palladium intensive catalyst. So we like platinum and palladium, and probably like palladium more than we like platinum, but we think they both are probably relatively attractive compared to other metals at this time.
EQ: You are a keynote speaker for the upcoming New York Metals and Minerals Investment Conference. Can you tell us about what you plan to speak about, and how these events benefit investors in this space?
Christian: These events are really good because you bring in hundreds of mining, exploration, and development companies and you give retail investors a place where they can look at these companies, speak with management, listen to presentations, pickup documentations to study at home, and basically learn more about them. It’s a really good place for people to see what mining companies are available, and determine which are attractive as short-term and long-term investments.
The events also have a range of other people, from newsletter writers to analysts like myself, giving presentations. It’s a very good place to sit down, spend two days and take a deep breath, listen to information and take it home to digest, and then put it into what your investment thesis is going to be going forward.
In terms of my presentation, the working title is, “Fact and Fiction in the Gold Market”. I started at J. Aron and Goldman Sachs in the research department, the purpose of which was predicated on the idea that there is a lot of bad information on gold and silver in the markets. If you can develop a better stream of market intelligence, and analysis, you can probably regularly beat the market. Over the 30 years that I’ve been running this company, our performance has proven that thesis to be true. So what I will be doing, in a very short time of about 40 minutes, is going through a variety of things that people believe about gold and then I’ll be talking about the actual reality or statistical reality behind those things.
EQ: Do you have any closing thoughts for readers looking to attend the conference?
Christian: A few years ago, someone was interviewing me at a major conference and they were asking about the junior mining sector. I told them that the junior mining sector is a place where enormous wealth has been created for hundreds of years, but the way I termed it is it’s a treacherous stream to swim in because you have to be able and willing to do your own homework to try to discern the good from the bad investments. It’s a very lucrative stream, but you have to be willing to study hard to do well. I think that’s really the way to look at the companies that you have before you. Do your homework to see which ones have real prospects to move forward, and which ones don’t.
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