Sprott's Charles Oliver Sees the Shine Returning to Metals

Has the gold price hit bottom? Charles Oliver, senior portfolio manager with Sprott Asset Management, believes that the fundamentals are in place for gold to vault from its downturnâ??possibly topping $2,000/oz in the next year. In this interview with The Gold Report, Oliver explains his outlook and talks about why he’s been adding small-cap miners to his portfolio.

The Gold Report: Charles, you believe that gold has bottomed and that the yellow metal will finish the year much higher than where it is now. You and others at Sprott have never wavered in your beliefs, even as others have exited the gold space en masse. Please tell our readers why you believe your faith is about to be rewarded.

Charles Oliver: We've seen some positive signs in the market this summer. It looks as if gold has been in the bottoming phase for some time. Valuations are incredibly cheap. There's been continued debasement of currencies, which has been a driver all along. There's talk of cutting back on quantitative easing, yet the government continues to print aggressive amounts of money.

During the recent downturn in the gold market, there was significant buying from places like Asia. The Chinese and its counterparts continue to buy gold and silver when the price comes off, as we saw this past spring, and also as stocks rise.

Fundamentally, everything looks very good for gold. The pullback in the gold price, from the high of $1,921/ounce ($1,921/oz) to $1,180/oz, is reminiscent of 1974 to 1976. During that time, there was a big pullback of almost 50% in the gold market followed by a rise from $100/oz in 1976 to $850/oz in 1980.

TGR: You're about to head out on a marketing tour and visit some potential projects. Do you believe those reasons we just discussed are saleable?

CO: Absolutely. One of the reasons I didn't do much marketing last year was that it was a terrible time to market. People didn't want to hear about gold because it was going down. It's tough to get people to buy when they're scared. Having said that, those times often present the best opportunities. I feel it's good to go out and get in front of our unit holders and tell them why they should hold on if they're having any doubts or, if they're not in doubt, to build a position.

TGR: Do you still believe gold will get beyond $2,000/oz in the foreseeable future?

CO: I firmly believe gold will be beyond $2,000. The only question is when. There have been some predictions within the Sprott organization that gold could go beyond $2,000 within the next 12 months. There are real reasons behind why that could happen. I don't know if it will. The timing is one of the toughest things to figure out.

Yet, the fall in the gold price in the face of massive quantitative easing did not make sense. It's only a matter of time.

TGR: You've been even more bullish on silver than gold in the past. Has that changed?

CO: It hasn't changed. Over the next five years, I expect the silver price will outperform the gold price. During the last 2,000 years, the silver/gold ratio was at 16:1 about 90% of the time. That means that if gold is $1,600/oz, which isn't far away, the silver price would likely be $100/oz. The current silver price would have to increase more than fourfold to get to that historic norm. The last time that it reached the norm was in 1980 when the silver price reached $50/oz and the gold price was $850/oz, or a ratio of 17:1.

TGR: Do you think we're going to get back there?

CO: It's going in that direction. Whether or not we get actually to 17:1â??whether or not we overshootâ??depends on many different things. However, the current level is closer to 60:1.

TGR: What's Sprott's position on the platinum group metals?

CO: We are bullish on platinum group metals. The fundamentals are favorable. The supply side is strong. Most of the supply of platinum and palladium is in South Africa, which is undergoing a lot of strikes, strife and challenges. There's been talk about shutdowns.

The demand side is also strong. One of the key uses for these metals is for catalytic converters in cars to reduce pollution. I was in Beijing recently and there was a huge amount of smog. The Chinese government has announced a plan to increase emission standards, which means each car sold will need more platinum or palladium.

On top of that, the growth of car ownership in China during the past 20 years is up about tenfold, from about 1 million cars a year to around 10 million cars a year, and is continuing to grow at an aggressive clip. The supply-demand side of the equation looks very positive.

TGR: You've made a living seeing opportunities where others see problems or too much risk. Which category do the labor issues in South Africa fall into?

CO: It's very hard to understand what's going to happen in South Africa. I don't currently have any investments in platinum/palladium miners in South Africa, but I have in the past. I am fearful of events that might unfold and what kind of impact they might have on the companies. I prefer to invest in the bullion or in a limited number of companies outside of South Africa.

TGR: Are there some new companies that Sprott is working with that our readers should know about?

CO: I'm always looking for new companies. In fact, during the next couple of weeks, I'm going to be meeting with many new companies. Until they're an existing position in the portfolio, I can't talk about which ones they are, unfortunately. That's the secret sauce!

TGR: Every mining stock portfolio has taken a few hits during the past couple of years. How would you respond when someone asks why you stay in the small-cap mining space?

CO: I've made my name on the long-term performance of small-cap mining. We make mistakes and learn from them. There are mining cycles. I try and adjust my weightings in certain sectors periodically when I believe one sector will be in favor or out of favor. Hopefully, next time I'll do a better job of recognizing when the big downturn is coming in small caps. However, when the Federal Reserve increased quantitative easing from $45 billion to $85 billion a month, I believed that it was time to start investing in small-cap names. Clearly the market has gone down since then. I don't think that was logical. Even if I were to go back in time, I'd react exactly the same way. We won't get it perfectly, but we try to outperform on a long-term basis.

TGR: What about someone who argues with you on the basis of the lack of liquidity?

CO: Liquidity is something you've got to manage. I hold about a third of my portfolio in large caps and a third in mid-caps on a full-cycle basis. I do that because I need to maintain liquidity. If an investor can be locked in for five to seven years, I would suggest a larger holding in small caps. If liquidity isn't an issue, small caps are the best place to be.

TGR: What can you leave us with to buoy our spirits?

CO: My father always used to tell me that after the bad times, the good times come. It has been very tough out there for the last couple of years. I know a lot of investors have given up and thrown in the towel. There's been a lot of blood in the streets. But the fundamentals all add up. It's not going to be much longer before we get back to those good times. Hang in there. Valuations are great and the fundamentals continue to be very positive.

TGR: Some colloquial wisdom from Charles Oliver. Thank you.

CO: My pleasure.

Charles Oliver joined Sprott Asset Management in 2008.