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Leanne Baker: Investing In Gold & Silver Mining Companies

How to identify the best prospects in this risky sector
Sunday, May 14, 2017, 2:44 PM

For precious metals investors looking to increase their exposure to this asset class beyond owning bullion or gold and silver ETFs, mining companies are a natural consideration. Their prices usually move much more dramatically in response to smaller price moves in the underlying metals they mine. In a bull market, it's very possible for the share prices of these companies to increase by hundreds of percents within a year or two.

But there are a lot of gold and silver mining companies out there, many of which are small operators. Risk abounds in this sector. And for the past half-decade, most of these companies have been absolute widow-makers for investors. How do we identify which companies are worth considering and which should be avoided? How (if at all) should the small investor go about gaining exposure to precious metals mining companies?

To address this, Dr. Leanne Baker, former mining analyst at Solomon Smith Barney and current director of Agnico Eagle Mines Ltd, joins the podcast this week: 

Start by focusing on the longstanding fund managers. A number of these investors have very good track records and do a great job of providing investor commentary on a week-to-week or month-or-month basis. Look at mutual funds like the Tocqueville Fund run by John Hathaway, or at Frank Holmes' fund down in San Antonio. That's where I think investors who don't want to do the nitty-gritty of looking at individual companies should start.

If you're interested in investing in individual companies, you have to start with the publicly available information. You can get pretty much everything you need from the reports that the companies put out. They have to report their reserves. They have to report their cost structure. They report the grades of their reserve bases. You can get into as much detail as you want looking at whether they are mining lower grades, higher grades, and on and on and on.

You want to focus on the free cash flow potential and on the balance sheet. 

What I have found with many individual investors is that it turns out to be more work than they are willing to do. The first thing is to realize what kind of an investor you are. If you're not someone who wants to stay on top of all that information, then perhaps you're better off with a good mutual fund because they hire people who do all that work for you.

When I was an analyst, I really felt like I needed to see all of the operations of the mining companies that I followed. At the time, I only followed the large producing companies. It was relatively easy to make judgments about the quality of the ore deposits. Did management seem to have a good handle on the cost structure, etc?

The focus should be on cash flow, just as you would for an oil company. You can get bogged down in all the details, but in the end what you really want to see is whether these companies can generate operating cash flow that is meaningful. Even beyond that, can they get to the point where they generate free cash flow, which is what they generate after they have paid for all the capital that it takes to bring these mines into existence? As a rule, there are not a lot of gold companies that get to the point where they can generate free cash flow, because you're always in a situation where you have to replace the reserves that you have mined.

Gold companies tend to have very short reserve lives compared to copper, nickel and other base metal companies where deposits can sometimes go on for 100 years, or certainly several decades. There aren't that many gold deposits that have that kind of extensive, long lives outside of South Africa. Most gold mines tend to have reserve lives of 10 years or less. Those are the companies that are always going to be scrambling to continue to replace and grow the reserve bases that they have.

Another important factor to consider is that the growth of many gold mining companies often comes by issuing debt in addition to going and getting equity from investors. That can be a death knell right out of the gate. In my mind, only the largest gold companies that have a reserve base that can support a debt structure should have debt. If you're looking at a small company, and if for any reason they have acquired debt, and in that I often include hedging strategies, that's a red flag. I'm not interested in gold companies that want to hedge their gold production, because the reason why you buy is because you are expecting that the price will go up over the life of the asset.

Click the play button below to listen to Chris' interview with Leanne Baker (46m:16s).

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and it is May 9, 2017. As you know, I have long advocated for physical gold and silver to be part of every investment portfolio. As you know, at our website Peak Prosperity we have Dave Fairtex’ precious metals daily market commentary and his weekly updates. Just a wonderful resource there for people who are interested in precious metals.

The reasons we advocate for precious metals are really too numerous to go into here, but they all have their headwaters in the fact that central banks are conducting the largest, most dangerous, and insane monetary experiments in all of human history, and everything flows from there.

Today, we are going to talk about another way to invest in gold and silver and that is through the mining shares. We have got a lot of interest in this at the site, so we are going to be talking today with a leading expert who is going to help us understand gold mining companies because she understands them inside and out.

We are talking today with Dr. Leanne Baker, PhD, is an independent director of Agnico Eagle Mines, Limited and is a consultant to and a board member of many metals and mining industry companies since 2002 and she has been the President and Chief Executive Officer of Sutter Gold Mining. That was from November 2011 to June 2013. Previously, Dr. Baker was employed by Salomon Smith Barney where she was one of the top ranked mining sector equity analyst in the United States. Dr. Baker is a graduate of the Colorado School of Mines holding both an MS and a PhD in mineral economics.

Leanne, thank you so much for joining us today and welcome to the program.

Leanne Baker, PhD: Thank you very much, Chris. It is a pleasure to be with you.

Chris Martenson: Let us start here from the outside in. Gold today is down again here on this particular day, May 9th of 2017. Gold and silver have both been getting hammered for a while in this last stretch of a number of weeks here. Why should people, in your mind, be holding or be interested in holding precious metals as part of their portfolio?

Leanne Baker, PhD: As you alluded to in the introduction, Chris, I have been focused on the precious metals market for a long time. I really got my experience on the equity side during a decade when there was seemingly zero interest in the metals as an investment. My first equity research piece was published in September of ’91. I just looked it up. I was laying out some bullish arguments then, but clearly it took a while for the reality of the market to catch up with the fundamentals that were slowly but steadily improving during that decade.

I have not only followed the companies, I have invested in gold. I think I bought my first gold coins in the mid 90s and have just gone from there. For all the reasons that you allude to in your many pieces, that many of the experts that I follow do such a good job expounding on various websites, gold is a key part of most investors portfolios; certainly, anyone who has a significant amount of money that they are trying to build for retirement and all of that. At this point, I think you can look at gold as a trade. I have never really done that. I do not do a lot of in-and-out trading just partly by the nature of my relationships with companies are long term, so the shares I hold are long term. I have found that I am not a very good short-term trader, so the investments that I make I try to time the buy point well, so that I do not feel too stressed out over the ins and outs of it.

As we look at the market today, gold has come down from the 2011 peak of $1,900. Now down in the low thousands and it looks to me like we are getting to a point, technically, where it either has to break a bit higher and start moving up again or we may have another leg lower. If we do have another leg lower, that would be an excellent entry point in my view for people who don’t have the positions that they would like for the long term or who want to make a trade.

Chris Martenson: Yeah. I am not a very interested or active trader in gold. Trying to get in and out, that has not ever been my personal focus. Of course, we do have our own precious metal commentary. It is about trying to find, if you are looking for times to get in, some times clearly are better than others. This moment feels like a pretty good time and particularly if someone has not made the move and started to develop a position in gold and silver.

It is always a good time to have your initial position, of course, but if you are going to leg in, this doesn’t feel like a terrible time. I want to get to that because I am thinking of that both from a technical standpoint, seeing where the market is, but the reason I am interesting in talking with you today is from the fundamental standpoint. I am just really excited to talk to you because what I see when I look into the market is trying to understand where the companies are and what it really costs them to develop their mines, ore qualities and yields and things like that, as well as, the all-in cost of production. That is where I would like to go because my view—it could be wrong—but my view is the same view I hold of the oil markets which is, you cannot stay at or below the marginal cost of new production for very long before you really begin to eat into your future supplies. Of course, that has an impact.

With that said, do you have any comments about the general structure of the markets today because it has been a little bizarre, to me, amongst others before we get into the fundamentals. We are seeing $250 billion a month flow in from the central banks. It is flowing into pretty much every asset class out there that you can find. Real estate, bonds, stocks, but not commodities. Do you have an opinion about why that might be? Is that something that you focus on?

Leanne Baker, PhD: I guess I don’t focus on it to the extent that I used to. The fact that oil looks like it could be entering a period of weakness here. Other commodities have been seeing weakness. That may be signaling that the central bank experiment is starting to waver in terms of success. What I have also realized for myself, after the whole 2007-2008—I don’t want to just say downturn, but devastation that we saw is that, it seems like it is becoming almost impossible to forecast timing or reasons why things are going to end and how they are going to end.

The way I think about it is just to try and be as prepared as you can for any contingency. If something happens quickly, are you prepared for that? If it takes 10 years longer than you think it might take, can you hold out until—you don’t want to put all your eggs in one basket. I have always found my tendency tends to be somewhat early in these things. Yeah, we know it is going to end. We don’t know when and we certainly don’t know how.

Chris Martenson: Absolutely, of course. I tend to be early in these things, as well, as you know, as somebody who follows my work. I would rather be early than late to many of these stories. Of course, I have the luxury of having gotten into gold pretty heavily back in 2001 and ’02 was my primary moments of purchasing. I have the luxury that is very different from somebody who may be started getting interested in it late, particularly somebody who got interested between 2010 and ’11 when we—it just struck me as odd that 2011, almost within a week of the Federal Reserve announcement QE3, the most extraordinary expansion of monetary policy ever was the exact moment when many of the commodities topped out. Very bizarre behavior, but there it is.

Let us start all the way from the outside. Let us imagine somebody has got a physical gold position. They are looking to gain some more exposure. They want to start getting involved in mining shares. How should they begin looking at this space?

Leanne Baker, PhD: From my standpoint, I would start probably by focusing on a few of the longstanding fund managers. A number of these investors have very good track records and do a great job of providing investor commentary on a week-to-week or month-or-month basis. Looking at mutual funds like the Tocqueville Fund. That is John Hathaway or Frank Holmes down in San Antonio. That’s where I think investors who do not want to do the nitty gritty of looking at individual companies to start.

If you are interested in the individual companies, then you have to start with the publically available information. You can get pretty much everything you need from the reports that companies put out. They have to report their reserves. They have to report their cost structure. They report the grades of their reserve bases and you can get into as much detail as you want looking at whether they are mining lower grades, higher grades, and on and on and on.

What I have found with many individual investors is that it turns out to be more work than they are probably willing to do. The first thing is to realize what kind of an investor you, are and if you are not someone who wants to stay on top of all that information, then perhaps you are better off with a good mutual fund because they hire people who do all that work for you.

When I was an analyst, I really felt like I needed to see all of the operations of the mining companies that I followed. At the time, I only followed the large producing companies. The Newmont, Barrick. At that time Agnico Eagle was one of the smaller companies. It has since evolved into one of the strong mid-tier companies that you would compare with the Newmont, Barrick, Goldcorp, some of the big ones. It was relatively easy to make judgments about the quality of the ore deposits. Did management seem to have a good handle on the cost structure, and all that kind of stuff. I do not know how much more detail you want me to get into.

I guess the focus, I would say, is that you need to focus on cash flow just as you would for an oil company. You can get bogged down in all the details, but in the end what you really want to see is whether these companies can generate operating cash flow that is meaningful. Even beyond that, can they get to the point where they generate free cash flow, which is what they generate after they have paid for all the capital that it takes to bring these mines into existence. As a rule, there are not a lot of gold companies that really get to the point where they can generate free cash flow, because you are always in a situation where you have to replace the reserves that you have mined.

Gold companies tend to have very short reserve lives compared to copper companies, or nickel companies, all the base metal companies. Those deposits can sometimes go on for 100 years, or certainly several decades. There really are not that many gold deposits that have that kind of extensive, long lives. There are some. Certainly, South Africa. We saw that. In Nevada we have seen that, but there are many more gold mines that tend to have reserve lives of 10 years or less. Those are the companies that are always going to be scrambling to continue to replace and grow the reserve bases that they have.

Chris Martenson: I do love the cash flow statements. It has been one of my major critiques of the shale business because the shale oil companies, to make a metaphor here or maybe an analogy, they have got a situation where they own some acreage. There is sweeter spots and less sweet spots, which would be the equivalent and lesser grade ores, yield percentages, and they will drill in. These wells will cost a lot of money, a lot of capital, and they will deplete principally within three years, 85% depletion.

If you are looking at that as, there is a three-year productive life for the well and then a tail. It is not hard to say that after a company has been operating in their core spot for three to five years, they ought to be generating positive free cash flows, particularly if they are not acquiring new property, lease acreage.

My critique was noticing that these companies, even after they had been operating, they were generating wildly negative free cash flows, meaning that whatever revenues they were getting from operations less what they had to plow back in in capital expenditures for new wells, was ending up in negative territory. They were covering the gap with financing activities. They were taking on more debt, issuing more equity, all of that. To me that is a mark of a company—if we were somebody wanted to very simply start scanning through, is that a good place to start? It is like saying, if a company has been in operation for a certain amount of time and they are still deeply in the negative free cash flow territory, is that a good place to begin drawing a line and saying, I am going to look elsewhere?

Leanne Baker, PhD: Absolutely. The other point and I think it speaks to the shale companies, as well, much of their growth came by issuing debt in addition to going and getting equity from investors. That can be a death knell right out of the gate. In my mind, only the largest gold companies that have a reserve base that can support a debt structure should have debt. If you are looking at a small company and if for any reason they have acquired debt, and in that I often include hedging strategies. When I was following the companies, gold prices, a good year was if gold could get over $300 an ounce and there was a great temptation for companies to hedge their gold production. I am not interested in gold companies that want to do that, because the reason why you buy is because you are expecting that the price will go up over the life of the asset.

I think you focus on the free cash flow potential and you focus on the balance sheet. That’s a great place to start.

Chris Martenson: Hedging strategies; I was a pretty active investor in gold shares from about 2005 through to about 2009, ’10, somewhere in that zone. Then I kind of lost my way for a while, because what I was noticing was that as the gold prices were going up, my share prices were not following. When I finally got sophisticated and dug in I discovered there was a lot of dilution going on. A lot of new equity issuance was happening and the cash flows were not being managed well. That is when I started to get my own education. I peeled back and I said, wait a minute. In many cases the companies that hedged their forward production, which meant they had capped their upside for the rising gold price, which was not why I was invested in them. I wanted some of that leverage to show up in the results and it wasn’t.

I think maybe this is not fair, but I thought it was a poorly managed industry for awhile, at least in the companies that I was looking at because they were just really playing a game of dilution that did not feel right to be as an investor, so I backed off.

A, was that a fair characterization of the time and if so, B, has there been a change in strategy in the industry?

Leanne Baker, PhD: I think it is absolutely a fair assessment. While I do think there are many companies that are well managed and there are a few companies that are brilliantly managed, the vast majority of the companies continue not to be well managed. It’s partly because the management teams can be very strong from a technical standpoint; they may be very good at finding good prospects, but getting the money to actually get the job done is always a challenge in this industry. In my mind, you can have the companies that provide the financing are the ones who dictate how the balance sheets end up looking. It often isn’t pretty.

What you also find is that when the price of the metals starts moving up, when you start getting a good run, then it is very easy for these companies to raise money in the market. That is the temptation that most of them will not forego. In retrospect, it usually turns out to be good. You need to take the money when it is available, but it’s a big risk for shareholders. If they have the money it is probably going to end up being spent and then you get a downturn in the price and a lot of them end up being in trouble.

We have seen a fair amount of weeding out since 2011. A number of companies have gone bankrupt. They have been acquired. It is what happens, but believe me, if we get the next big run up you are probably going to see a number of new companies and the same old thing. I guess the lure of gold, people are willing to throw their money in when they start getting bullish without asking a lot of questions. You need to be careful.

Chris Martenson: It seems to be that way in every cycle. The same thing happened in the shale business, of course. Yes, it seems to be a perennial concern to make sure that you are still tracking the fundamentals. To capsulate what you said here in some way, there are companies out there now that are well-run, that have managed the balance sheet well, that have good reserves and are managing good free cash flows at current levels. Is that correct?

Leanne Baker, PhD: Yeah.

Chris Martenson: If people sort of boiled it down and said, that is what I am going to look at here. I want to make sure they have not hedged all their future production. They have got good reserves and they have got positive free cash flow. Here at these levels, these will be the companies that are going to be well positioned when the next run comes.

Leanne Baker, PhD: Yes, yes. I would say for the most part, the largest companies have learned those hard lessons. Even the ones that had been big hedgers in the past or had made ill-fated large acquisitions at the wrong time, that the managements that are in place now are, for the most part, singing the same tune and trying to follow the same strategies. I do not want to recommend any companies, but I honestly believe that Agnico Eagle where I am on the board and fully admit that I am totally conflicted here; but the management team has done an excellent job of managing both the downturn and trying to position to take advantage of the next upturn. Just doing things in a smart way. I think they have provided a template for a number of other companies, even larger ones, who are following that template now.

Chris Martenson: Okay. That is fantastic information. I want to turn now to a broader trend here, which is one of the pieces that I cover a lot in Peak Prosperity is this idea of, humans have hit the limits in some way, shape, or form. When I am looking at the average reported ore grades; this would be expressed in some grams per ton or some other way which basically says, how much of the stuff we are going after is in a ton of this source rock that it is found in? When I am looking at this for silver and for gold, what I am noticing is over time is a pretty pronounced decline in the reported yields. Do I have accurate information? Let me start there.

Leanne Baker, PhD: Yeah. I would say that’s accurate information. Obviously, the earliest gold discoveries were high-grade. What they call lode mines. The California mother lode. The project I was involved in as CEO, those were high-grade operations. Then over time, technology changed. Open pit mining became feasible and more common in the early 1900s. Then in the 1980s the heat leaching technology became more widespread, and available, and tested and discoveries of areas like the Carlin Trend in Nevada just opened up that whole low-grade potential. It has been possible to get lower and lower grades and still make money by putting in the right kind of milling process or heat leaching process, what have you.

I would say there has also been, certainly in the 2000s, there has been a tendency that has been popular among many of the mid-tier and smaller companies to go after lower grade deposits. My view is that, it did not always turn out that well. A number of those companies are the ones that had to spend a lot of money trying to build projects and they just did not make it.

Those kinds of cycles; going after a higher grade, but smaller projects versus lower grade, but larger projects. They seem to run in cycles. I am always a proponent, again, of cash flow so I would rather have a company that does not produce as many ounces, but they are very profitable ounces than a company that is trying to become the next multimillion ounce producer.

Chris Martenson: Perhaps doing that right at the skinny edge of survival margins?

Leanne Baker, PhD: Yes, yes. You are vulnerable to very small declines in the price at that point, as well. In my mind, it just can be a dangerous way to go. The question is, is there more gold to be discovered that is high grade like we used to see many, many decade ago? The answer to that question is probably no. The fact is, there still is a lot of exploration potential around the world, but it can tend to be in newer, harsher environments or in countries where the political situation is not conducive to allowing companies to actually make a profit on their discoveries.

I think a lot of the easy-to-find gold in politically less risky countries has been found. There still will be people who are successful and that is the nature of the beast. You are hoping to either jump on the bandwagon with one of the early-stage companies or be involved with a major company that will benefit because they will know to make an astute acquisition at the right time.

Chris Martenson: I have seen a bunch of charts ticking around. I have not run the numbers myself, but that basically suggest that where we are at the current price for gold which is hovering around the $1,200 mark as we speak—it is a little north of that at about $1,215 at the moment. The all-in cost of production seems to be somewhere right around that number for the industry as a whole. Is that accurate?

Leanne Baker, PhD: I have not looked at the industry-wide numbers for awhile. That very well could be. The companies I am most involved in have a significantly lower—something in the $700, $800 range. All in sustaining cost which includes sustaining capital. I will inject a note of caution here that the industry seems to always be able to find some gold to produce just under or just over the current gold price. I know when gold prices fell down even as low as $250 back in the early 90s and again in the late 90s, companies were able to bring their cost structure down because it usually happens at a time when energy prices are also low. There are people now saying oil could fall to $30 and maybe even lower. If gold were to fall below $1,000 an ounce, my guess would be that it would be at the same time as energy prices were lower.

The other thing that you need to focus on is that, a number of these companies are producing gold in non-dollar countries. For example, in Canada. If the gold price goes down, the cost structure will be reflected in the currency, as well. There is kind of a natural hedge there for those companies that have that foreign currency exposure or non-dollar currency exposure. It kind of seems to balance out. Yeah, I think you can make the argument that because people are producing at $1,200 gold has to move above that, but it has turned out to be sort of a specious argument, in my experience. If gold goes to $1,900 you can bet you are going to find people producing gold for $1,800. They just will.

Chris Martenson: Yeah. You made the point about oil and of course, when I look at a very long-term chart of the price of gold and the price of oil, there seems to be a very good correlation there. Do you have a sense; is oil the dog and is gold the tail in this story? Why is that correlation so good?

Leanne Baker, PhD: I am not sure which is the tail wagging which dog. I am sure some cycles it is one, and some cycles it could be the other. My experience is that, that is the way it seems to work.

Chris Martenson: Some people hold the view that mining in general is very destructive. We have gotten the feedback before at this site that to buy gold shares is encouraging environmental destruction. My point is that all mining is environmentally destructive and I guess a counter argument, as well. Gold, to put Warren Buffett’s aphorism on the table, it is a rock you dig out of the ground and you put back in a hole in the ground. All of that. Where is gold mining in terms of its environmental impact? How has that progressed over time and how should we be looking at that now?

Leanne Baker, PhD: I guess anyone who focuses just on the fact that you have to dig a hole in the ground to get metals out; and this is true not just for gold, obviously, but for any natural resource. I think you just need to be honest in looking at your daily life and look at all the ways. You use copper if you turn on any kind of a motor or any kind of a light bulb. You use oil every time you get into your car. Had to mine many, many minerals just to build the car that you drive.

The reality is that, metals and other resources make our lives possible. The companies, in my opinion, do an excellent job of mitigating their impact on the environment in terms of how they do the processing, how they restore once the mine is depleted. At the same time, I just think the benefits—if you go to some of these countries where there has not been much in the way of development and see what a positive impact it can have on the lives of communities that otherwise would not have a way of supporting themselves, you might take a less hostile view.

Anyway, I am a proponent of mining. I have been involved in this industry now for well over 30 years. I am actually very proud of the record that it has in helping to support our way of life and leaving the world a better place.

Chris Martenson: As we look forward across supply, the supply of gold. This is something I have been tracking for a while. Obviously, mining adds a very small percentage each year to the total amount of gold that is above ground. The aboveground stocks are divided into monetary metals which are held by central banks, primarily, and then other classifications under that. Of course, there has been a very large flow of aboveground surface gold from the West to the East, if I can include India and China as part of the East in this story.

It always felt to me like those flows would have to someday either mitigate or the West would just have to say, we do not care about gold at this point in time, and all of that. The amount of interest from other countries in gold as we look across the world at this point in time, from your perspective, is there a hemorrhaging of gold from the West to the East? Have you detected yourself at the mining level interest from other countries from the East saying that they want to have access to the flows? How is this West to East thesis landing with you?

Leanne Baker, PhD: That has been part of my thesis ever since I started looking at the industry. The reports that I wrote in the 90s were talking about that very issue. We have seen it with the slow declines in central bank holdings among Western central banks. There is not a lot of mining of gold in countries like India. China is now the largest gold producer, but they still buy a lot of gold that flows in from outside.

There is a cultural affinity for gold in many of the countries of Asia and then the Indian Subcontinent as well as the Middle East. That has always been true, despite the fact that we occasionally hear stories about how that will change at some point. They will all become westernized. We have not seen that. They are much more saving nations than certainly we are now in the United States. The same is true for many other Western countries, as well. I think that is a trend that will continue.

When you really think about it, the numbers when I was looking at them, you look at all the gold that has ever been produced with a little bit of wastage there. Most of that gold is still available in some way, shape, or form aboveground. All the gold that is produced is still not enough to provide one ounce of gold per person living in the world. The people in that part of the world have more than their allocation based on the availability. I think an awful lot of people in the West really have no interest whatsoever.

Chris Martenson: Yeah. As a friend of mine, Grant Williams put it, nobody cares.

Leanne Baker, PhD: Nobody cares. That was just a great presentation he did.

Chris Martenson: It was really perfect. Nobody cares. Of course, nobody care until everybody cares and then it shifts. It has been a long time coming and it feels to me more than ever that the powers that be have really got their hands on the levers really firmly at this stage. It is astonishing to me that $250 billion a month is flowing into our financial markets and almost none of that is flowing through the paper markets into commodities at this stage, across the board.

I think it is just bizarre. Gold and silver, I would be absolutely livid, too, if I was somebody in the oil business looking at what is happening because it is clear that the financial markets that do control the physical pricing are very much in the hands of algorithms, big players, hot money, speculators, ya-da ya-da.

The question I have for you is, it has always been a little bit of a mystery to me and maybe you answered it by virtue of saying, the companies that control the financing for the mining industry. I remember hearing one CEO once of one silver company say, this is nuts. Our commodity that we produce, this silver that we produce, we have got eight banks that are short more than a half a year’s worth of production. It is the largest short position and paper position of any commodity out there. It feels manipulative. Let us band together and withhold some of our product, or something like that. That was the idea. Boy, that idea just disappeared into the ether. I assume, that is a bad idea if you need to raise more financing to be taking on those cast of characters. Have you run into that? Is there any grumbling in the board rooms about what seems to be the participants who are mainly controlling the price of the product just play with paper? They have nothing to do with it.

Leanne Baker, PhD: Yeah. The idea that was suggested of holding metal off, I am sure the lawyers in those companies were very adamant that you do not want to talk about that, because you will run afoul of antitrust regulations certainly in the U.S. However, there have been instances and you may remember Rob McEwen when he was heading up Goldcorp, they did hold gold off. I am on the board of McEwen Mining now and there was a time when the company held some of its liquidity in precious metals.

There are a few, I would say no more than a handful of CEOs who really appreciate that. Certainly, people know about it, but the managements for the most part are just more focused on their operations, their exploration than they are on—they know that once they sell the metal it is sort of outside their control. Most of them are just not that interested or have the time or are savvy enough to try and fight that battle. They have enough battles trying to make a profit doing what they are doing. Your point is very well-taken and there are several CEOs who do agree with you.

Chris Martenson: Again, I think the oil business could have a similar claim and so could grains and a variety of other places like that. The concentration of positions in silver is rather extreme compared to any other commodity I follow. It is really off the charts. For the CFTC under Chilton and Gensler to have said, “We looked at it, but maybe there is something going on but we do not have the resources to really go after that.” I am like, you know what? What do you mean you do not have the resources to look into that? I thought that was your job to have those resources? That is your market. Their choice how they want to run that, I guess.

Leanne Baker, PhD: We all know about the revolving door.

Chris Martenson: Yeah. It is throwing a 30 mile an hour wind, it is revolving so fast. Yes, we all understand. Yeah, we get that. In closing here, because we have run out of time. Your summary then of where we are at this particular stage of the cycle, if I could characterize it, would be that we are closer to the end of this languishing downturn cycle than we are to the beginning and when this turns around there will be some great opportunities in here. This would be a reasonable time for people to begin accumulating other positions if they were of a mind to do so. Is that fair?

Leanne Baker, PhD: Yeah. That is absolutely fair in terms of the metal. In terms of the shares, as I mentioned, if you really want to get involved in buying and selling the shares, now would be a good time to start doing your homework to figure out, which fund do I want to buy? Which companies do I want to buy when the price is right?

Chris Martenson: Fantastic. Thank you so much for your time today, Leanne. If people were interested in following your work, is there any way for them to do that?

Leanne Baker, PhD: I do not really publish the way I used to. I would say, anyone who wants to get a hold of me can get my information from you or Adam Taggart. We live out in the same neck of the woods here. I am happy to talk to anyone or have an email exchange.

Chris Martenson: Fantastic. There will also be an opportunity maybe in the comments sections under this podcast at the site at Peak Prosperity.

Leanne Baker, PhD: I can do that. Yeah.

Chris Martenson: Yeah. We will continue the conversation there. Leanne, thank you so much for your time today and it has been a real pleasure.

Leanne Baker, PhD: Thank you for having me. I really appreciate it and I love the work that you guys do.

Chris Martenson: Thank you.

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1 Comment

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 4611
some charts for reference

First, the chart where Chris bailed out of the mining shares.  This is the (relatively) well known HUI/Gold ratio - HUI being the gold miner index.  It is close to all time lows.  This either means the miners are really cheap relative to gold, or - it is about declining ore quality.

And here's a chart showing the percentage of paper silver at COMEX to annual silver production.  This doesn't take into account paper silver at LBMA.  Currently, even after the big recent drawdown, we're still at 114% of annual production, which is vastly greater than (for example) gold.

And here's the chart that shows how the commercials produce "paper silver" as the price rises.  During the most recent rally (Dec 2016-Mar 2017) they "produced" about 25% of global annual silver production in paper, which almost certainly capped the rally.  During the last three weeks, they've taken a huge amount of paper silver off the market - 7160 tons - and that has given us our low.

Commercials "produce" paper silver into the rallies, and "consume" paper silver into the declines.  And that's why I follow the COT report.  This is a money machine for them - and a harvesting mechanism for the silver mining companies, who can never quite benefit from rising prices to the extent they otherwise could have done.

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