Part II of an Interview with Marshall Auerback
By Kevin Michael Grace
Marshall Auerback is Director of and Corporate Spokesperson for Pinetree Capital Ltd, a Toronto-headquartered diversified investment, financial advisory and merchant banking firm focused on investing in early stage micro and small-cap resource companies. Pinetree, which has a market cap of $475 million, is invested primarily in Uranium and Coal, Oil & Gas, Precious Metals, Potash, Lithium and Rare Earths and Base Metals. Mr Auerback was previously an advisor to a number of fund management organizations, such as PIMCO, the world’s largest bond fund management group, RAB Capital and David W. Tice & Associates. He has a BA from Queen’s University and a law degree from Corpus Christi College, Oxford.
Q: Where do you see the prices of gold and silver going?
A: I’ve been on record as saying we could easily see $3,000 or $4,000 an ounce in gold. If we have this continued credit and monetary dysfunction for several years to come, and if we then have an inflationary blow-off–which is probably how this endgame finishes–that’s when you get your final push to the $3,000, maybe $4,000 level.
Q: Silver has had an extraordinary run this year. Do you think the gold-silver price ratio has been out of whack, and we can continue to expect better gains from silver?
A: It’s up 82%, while gold is up only about 29%. If you look at the historic relationship, the ratio got down to 20 to 1, while at its peak it was as high 80 to 1. You can probably expect a lot more outperformance with silver.
Q: Junior miners actually produce wealth; they don’t just push paper back and forth like the Wall Street companies that caused the 2008 crash. To what extent do you think this will protect their stocks in the coming economic shakeout?
A: You’re right; they do produce something, and it’s a finite product, as opposed to infinite paper. So there is real value in what they do. On the other hand, when there’s total dysfunction in the credit markets that obviously hurts them because they are all very capital-intensive companies. So they are all still dependent on a properly-functioning credit market.
In 2009, when the junior mining companies got completely bombed, people said this is crazy, they’ve got huge amounts of cash on their balance sheets, and they’ve got these great deposits. And I would say, yeah, but the cash is more apparent than real. It’s something they’re going to have to run down; and if they don’t secure additional capital funding, then clearly they won’t be able to produce the assets. They’re not going to be able to monetize, which is ultimately what you want them to do. I think the distinction you make is important but subject to the overriding proviso that we have a credit system that doesn`t completely fall apart, as it did in 2008.
Q: The number and the dollar values of private placements and bought-deals have exploded since the summer.
A: That’s a function of the fact that the capital markets have begun to normalize. That’s why I think this commodities cycle might be perpetuated a big longer than people think, because the way that it normally works is that you get higher prices, and then people start supplying a lot of capacity in response to those higher prices, and then you get a demand shock, and then of course you get overcapacity and then prices go down, capacity is cut back. But it didn’t happen that way this time. We were just starting to ramp up capacity when we had the Lehman shock. So we didn’t have so much of a demand shock as we had a supply shock, and now what’s happening is that demand is beginning to normalize and increase again, but because of this supply shock and this capital-market shock the capacity hasn’t yet come onstream. That’s not likely to happen for another year or two.
Q: It’s been said that gold and silver are no longer traditional commodities because they have become alternate currencies. What do you think?
A: I think there’s something to be said for that, but I don’t think we’re ever going to go back to a gold standard. I’ve now been in the investment business for 28 years, and this is first time I can recall that you really can’t make a compelling case for any paper currency. Maybe the Norwegian krone or the Canadian or Australian dollar. But Japan is mired in debt and has a serious deflationary problem; the US, we all know what their problems are; with the Eurozone, for the first time in history you have a currency union where the very existence of the currency is now perceived by some to be under threat. In that sort of environment gold is viewed as an insurance policy, and that is a vote of no-confidence in the official sector. I think that the notion of the omniscient and all-powerful central banking elite has gone by the wayside.
I don’t think gold’s rise is an inflation-deflation story yet. But if this massive stimulus continues and starts to generate production bottlenecks, higher-capacity utilization, fuller employment, etc, at that point you might see gold revert to its tradition of an inflation hedge.
Gold is viewed as an insurance policy, and that is a vote of no-confidence in the official sectorMarshall Auerback
Q: Where do you see base metals going?
A: I think we’re at a stage now where you have to be a little more selective. I know some people are very bullish on copper. I personally am a little more cautious, because I think what happened is that you’ve got a cartel-like structure in place which has helped to keep prices under control. We also like uranium; we think it has the best supply-demand characteristics.
Q: How important is China’s role in base metals?
A: It’s very important, and that’s another thing we’ll have to keep monitoring. We take a very simple view—you’ve got 2.5 billion in people in Asia, and they’re getting wealthier, and they will consume more. I think that’s the case for the structural bull market, and I don’t think you see that changing for the next several years. But you will have hiccups. China is now going through a serious inflationary problem that’s starting to get out of control. The official numbers are about 5.1% inflation, but everyone knows the real numbers are closer to 10% or 15%. If that continues, the Chinese authorities will ultimately respond by tightening credit conditions, and they will probably overtighten, because when you’ve got inflation firmly embedded in the system you’ve almost got to go to the other extreme. So that could create a short-term growth shock which would create some short-term issues in commodities. I don’t know whether this will happen in 2011 or 2012, but I do see it as a real risk from a tactical, as opposed to a strategic, standpoint.