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Ask The Expert - Steve St. Angelo - November 2015

Ask The Expert - Steve St. Angelo - November 2015
By Geoffrey Rutherford 3 years ago 3691 Views

Steve St. Angelo is an Independent researcher who started to invest in precious metals in 2002. Later on in 2008, he began researching areas of the gold and silver market that, curiously, the majority of the precious metal analyst community have left unexplored. These areas include how energy and the falling EROI – Energy Returned On Invested – stand to impact the mining industry, precious metals, paper assets, and the overall economy. His work can be seen on numerous online publications, but his website, SRSrocco Report, is highly regarded as one of the most invaluable publications of its kind in the sphere of precious metals and the economy.


Geoff: Hello, and welcome back to this month's "Ask the Expert" here on Sprott Money News. I'm your host, Geoff Rutherford. And on the line today, we have an independent researcher from a very well-known and respected website in the precious metal community. We have Steve St. Angelo from SRSrocco Report. Steve, thank you for joining us today, sir.

Steve: Yeah, Geoff. It's a pleasure being here.

Geoff: So, Steve, before we get started, I'd really like to take a moment and kind of understand where you're coming from, and likewise, the sort of genesis as to why you started doing what you're doing with the SRSrocco Report. So, when did you first become attracted to the precious metal sector, and what was the trigger event or revelation that brought you here?

Steve: I think I started investing in silver. I bought my first 100-ounce bar back in 2002, and I did that due to research by several analysts like Ted Butler was one, and he was talking about the upcoming shortage of silver due to, let's say, increasing industrial demand, and then a price panic, and then, of course, we would see institutions come in and try to horde silver. And it happened in rhodium. I think rhodium was $10,000 at one point.

So that's when I started, but as time moved on, I started looking at energy, and I realized that at some point, the world is going to peak in cheap energy production, and expensive energy isn't really viable unless you have the markets being propped up by the Federal Reserve and a lot of debt. So then I wanted to know, okay, how is energy going to impact the precious metals, the economy, and the mining industry? And that was my focus about 2008, so I started writing articles. And in 2012, I began my website.

And so, now I'm more focused on how this energy system situation going forward is going to unravel, especially the U.S. shale oil energy that's in severe trouble. We're already down about 400,000 barrels a day in U.S. shale production, and I think it's going to fall considerably going forward. So the U.S. is never going to become energy independent. It would be nice if we could, but it just won't. So that's why I focused on the precious metals, because there's just way too many paper assets out there that derive their value from burning growing energy supply, where precious metals are a store of, let's say, economic energy. This is the most important fundamental precious metal investors and investors at large need to understand.

Geoff: So, Steve, the first question is along the lines of the paper bullion market. So the question is do you think that implosion of the banker's paper bullion markets will more likely come in the gold market, the silver market, or will it be more or less simultaneous? What are thoughts on that, Steve?

Steve: Geoff, I actually think it's going to be probably more or less simultaneously, because the price of silver spiked in 2011 at 49 and then the price of gold not too much longer, in September, the same year. If you look at their charts, they're almost identical, really. And then the amount of paper gold and silver out there is just astronomical, even though gold economics is more highly-leveraged than silver, I think once the panic in the gold or silver market occur, it's going to make its way very quickly into the other market, so I think it's going to be more or less simultaneously.

Geoff: Excellent, Steve. So moving on to a question about pricing, the question is Is it possible to estimate rational fair-market prices for gold and silver today? If so, at what prices would you peg gold and silver today?

Steve: You know, that's a tough question, because that gets to the basics of my analysis, and it's based upon, in the past, especially, let's say, from the 1971 to 1980 period, people said that the reason why the price of silver skyrocketed was due to Hunt Brother buying. Well, why did gold go up to 850? And then why did the price of oil go from like $1.80 in 1971 to $35 in 1980? Who was buying all the oil? Well, you see, in that timeframe, gold went up 15 times its value, silver went up 16 times its value, oil went up 16 times its value. So these precious metals were a hedge against inflation, and the inflation was energy, because energy runs the market.

Well, if we fast-forward to today, we saw skyrocketing oil prices, and thus we had skyrocketing silver and gold prices. Now that we've had this decline in the price of oil from over $100 a few years ago now down to the 40s, this impacts the cost to produce gold and silver. So that's the way I believe the algorithms and the market is trading gold and silver, but that's not its true value. Its true value is the store of value compared to most assets. And most financial assets are IOUs that are based upon burning energy in the future, but you cannot put a fair-market value for gold and silver when 95 to 98% of the world's funds have been siphoned or funneled over the past two, three decades into financial assets, whether they're derivatives, retirement accounts, treasuries. These are not real assets. These are paper IOUs to be paid in the future. And they can only be paid in the future if you have, not only energy supply, but you must have a growing energy supply.

And I believe we are going to start seeing, especially this year, a peak and decline of U.S. and global oil production which will put severe pressure on most financial assets going forward. Then we will start to see some of that 95, 98% of funds moving into the gold and silver as real stores of value. That's when their values will be more rational. But right now, they're not rational because most people are invested in IOUs.

Geoff: So, Steve, let's take a look at the banking industry and likewise, what role they play in these IOUs that you're speaking of. So the question is can the bankers themselves survive the next crash, for which we all know is coming?

Steve: Well, we know from the past example in 2008, the U.S. investment banking system went belly-up. I mean, Lehman Brothers, they just evaporated, and it was around since the Civil War. So, what was remaining was absorbed into the commercial banking industry, which was propped up by the Federal Reserve. So, what you have now is a commercial banking industry that's just being propped up with liquidity and leverage. Now, how this unfolds, it's hard to determine, but I would say a good portion of the banks probably won't make it, but some banks will have to. There will have to remain in some form of a banking kind of system.

But I think we're going to see massive failures of banks during this next crash, but it's hard to determine which ones are allowed to fall and which ones are going to continue using as the system, even if we start seeing gold as a currency or backing, they still may use some of these banks to have trade and to have business activity, so it's going to be interesting, but I think we're going to see large bank failures going forward.

Geoff: So sticking with the idea of banks, so Steve, what frightens you more: the steadily evolving war on cash or the likelihood that the bankers will instigate some major real war?

Steve: Geoff, those are two good considerations, and I think, the war on cash, I'm less concerned about because there are 88 million Americans without checking or savings accounts. And then there's the illicit drug trade that comes into the U.S. It's hundreds of billions, maybe a half a trillion dollars, and that's all funded by $100 bills, by actual currency. Couldn't survive using a debit card, just wouldn't work. So the thing is, even though it's illegal, I think it's kind of allowed for certain reasons. So to me, the poor not being able to have a checkings account, saving account, I don't think we'll go to a true 100% cashless society, so that's not a big concern for me.

What is could a likelihood of real war, and let me just preface that. We've had several world wars, and we've had several regional wars and depressions in the last hundred years, and we all survived that. If we had another war, it would be devastating, because there will be a lot of people who will be killed. And then my biggest concern, if it moves into nuclear. But if we do not have any nuclear weapons used, and we do have some kind of crisis war, even though that's horrible, what's even worse is the threat of the peak and decline of U.S. and global energy reduction. Because here we have all this infrastructure, Geoff, that we have designed and built, and it runs on a certain amount of energy. Well, what happens if you have half that amount of energy? It becomes increasingly difficult to maintain and run this very widespread mobile system in the United States. That, to me, is the biggest threat, and it's also the reason why I believe precious metals are probably the safest assets to own going forward.

Geoff: So Steve, as of lately, we can see that India has been the topic of much discussion within the precious metals space, particularly because of their overwhelming demand, but likewise their gold monetization scheme that was implemented recently. So looking at India, India is now a major player in silver as well as gold demand. What accounts for the sudden surge?

Steve: I think it goes to the Indian people, the culture of why they purchase gold and silver. They purchase it as a store of value, and it's gone back for generations. Unfortunately, the West has been, I would actually call it hoodwinked. They've been hoodwinked into believing financial assets are wealth. And so, that's kind of what's been a brainwashing, especially Wall Street makes a lot of money on those kinds of commissions. Thieves continue to run a financial-based assets system. And what is interesting and was thought that Indian silver imports would fall in 2015 due to lowering of import tariffs on gold this year. However, it was the exact opposite.

I think, according to ETF Securities, we're going to see silver imports in India reach almost 9,000 plus metric tons, up 43% this year. So they didn't switch to buying more gold. They are buying more gold, but they're buying a lot more silver, and I think that they see these lower prices, it’s not sustainable. And so, I just saw this on Zero Hedge, the Indians refused to give their gold to the government. I think only 30 kilograms have taken part in the first week of this gold monetization scheme. So, you might see this take place more in western countries like the United States, but India is they’re more, their culture, even it might be gold jewelry and they wear it, it is a dowry. It is their wealth. So I don't see that changing. I just see it getting worse or demand increasing going forward, as well as Asia.

And so, what we saw this year was, for silver, we saw a huge increase in silver imports, which is bar demand into India, whereas in North America, U.S., and Canada, it was more official coin purchases. That's where most of the silver demand went into North America.

Geoff: So Steve, reading your articles for SRSrocco Report, we know you definitely have some expertise in silver. So let's stick with silver at the moment. So the question is is there any money to be made in the silver miners? If so, which ones? Likewise, what do you think of the recent Silver Wheaton deal with Glencore?"

Steve: Actually, I'm one of the many analysts now that think you should just own the physical metal, and I think that's wise. I think individuals should have a good holding of precious metals, physical. But I don't see a problem investing a small amount, if you're of modest means, in the mining industry. And I believe the silver miners are probably the best miners, and there are several out there. But I think owning the precious metal miners, the silver miners especially, when we have this huge reset, it'll be hard for individuals to acquire silver bullion, and we had really bad shortages for the past four months, from June to September. It's eased up now, because we didn't see a continued crash of the stock market.

So what happens when individuals can't get their hands on bullion? Well, the next best thing is to go into the mining shares. Well, the mining shares don't have that shortage of metal, so their stock prices, there's no limit to where their stock prices can go. And I think because the primary silver miners use so little energy in producing silver compared to the gold mining industry and the base metal mining industry, where 70%, or byproduct metal industry, where 70% of the silver is produced, I think primary silver miners will last a lot longer in a peak oil environment, so they are the safest bet.

Now, quickly about Glencore and Silver Wheaton. Well, Silver Wheaton's business model is to take advantage of the situation, and you can't criticize them for doing that. And so, they paid $900 million to get silver at 20% of spot. So after they pay all their bills over the next 20 to 45 years, and based on the current spot price, they can make a billion dollars. So that's not a bad deal. However, going forward, when base metal mining industry starts to come under stress of peak oil, I see base metal production declining. That's where peak silver will cut the curve first, in a base metal mining industry. So it's going to be difficult for royalty companies like Silver Wheaton to streaming companies as well, to access or to continue to get their silver streaming agreements from these base metal miners. It'll be interesting to see how that plays out in the future, but I do believe the primary silver miners are the better investment going forward. Better even than the silver streaming companies like Silver Wheaton.

Geoff: Let's move on to silver investments, Steve. In your view, what is the best way to invest in silver right now?

Steve: Well, you see that's funny. I listened to this interview about a gentleman who was processing a lot of the Vietnamese that were coming over after the Vietnam War, and some of them were coming over with buckets, suitcases of Vietnamese money, and the guy looked at it and said, "Sorry. We can't give you anything for that." Well, a few of the farmers and a few of the more modest Vietnamese people, they turned in their silver and gold coins, and they got dollars. So, I think it will always come back to the physical, that’s the safest bet, you know, the Exter’s Pyramid. It’s the safest bet is physical gold and silver. I think people need to own that, either at home in a safe or at a private facility.

But let's say they're not comfortable with doing that. I think the next best thing would be something like a Sprott physical silver ETF, not the SLV, because Sprott actually guarantees delivery of silver, you can actually get delivery of silver through Sprott. It's very difficult, almost impossible, for the typical person to get any silver. You just get your shares and paid in money. So to me, the best thing would be physical silver. If you don't want to go physical silver or you want to kind of have two different options, the Sprott’s physical silver trust and a small percentage in the silver mining industry. I think those are probably the best investments going forward.

Geoff: So, Steve, looking at the state of the global economy, we can see things are just slow as far as any sort of growth overall. There doesn't seem to be any sort of recovery in sight. And likewise, within precious metals, we know that things are being manipulated, so we're not really dealing with real markets, so things kind of look bleak. But that being said, what's your outlook, Steve? Where do you think we're going right now within the market?

Steve: Yeah, I agree, Geoff. I think the morale of the market sentiment, precious metal sentiment, is at an all-time low. And I think this last shortage we had in the silver product industry, in silver products, retail silver products, that started in June due to the possible Greek exit, increased when the Chinese market started to really crash, and then this fear of a forecasted collapse of the U.S. stock market and western markets in the fall really pushed investment demand in physical silver, I mean, really, to levels never witnessed before, and actually, a shortage from June to September. U.S. eagle sales were like 18.5 million in just those four months.

If you go back to the shortage in the same period in 2008 when the price of silver fell, it was about 6.1 million. So we had three times the amount of sales of silver and you still had a shortage. So we did not see a crash in the market. We didn't see a black swan event financially. Investors pulled back on buying silver. And so that's what we're seeing now. So the shortages are starting to be worked through, and surpluses are starting to come back in. Also, industrial demand is falling. So right now, the sentiment is low, but the thing is what investors need to focus on going forward, is the energy situation. And that's where I differ from most precious metal analysts.

I believe the manipulation is taking place because the funneling of funds, the world's funds, into financial assets that have no future. And I think we're going to see U.S. oil production decline 30 to 40% by 2020 and 60 to 75% by 2025. That's only 10 years away. I think increased stress will start to see this unfold in U.S. energy industry, as well as the global oil industry, because Saudi Arabia can produce oil at 40, but they cannot support their government and their welfare programs at 40, so they're selling U.S. treasuries. It's a disaster waiting to happen.

So when we start to see more stress on oil production, falling, companies going under, production actually declining more rapidly, it's going to put severe stress on the central banks of the Federal Reserve to prop up the markets, because in the past, Geoff, when we had a depression in the 1930s, oil prices declined. Silver prices declined. Gold prices declined up till 1933, and so did silver production. Silver production fell like, in the U.S., 70%, globally, like 60%. We didn't even see any decline in silver production when we had the crash in 2008. So, right now, we have falling commodity prices, falling energy prices, falling precious metal prices, but we have an elevated stock market. It is a total bifurcated market, and it cannot continue. Once investors get a whiff, and they're beginning to get a whiff, wealthy investors are beginning to understand something is really wrong with this current market, we will start to see more investors move into the precious metals, because we will start to see this unraveling of the greatest financial Ponzi scheme in history.

So, even though morale is low right now, Geoff, I think investors need to focus on the fundamentals, and the fundamentals show that precious metals will still be the safest assets to own going forward.

Geoff: Again, we've been speaking to Steve St. Angelo of SRSrocco Report, and we urge our listeners to -go to srsroccoreport.com to read some of the great stuff that Steve is putting out there. And with that, Steve, we'd like to thank you again for joining us today on "Ask the Expert."

Steve: It's been a pleasure. Thank you, Geoff.

Geoff: Wonderful, Steve. And to our listeners, thank you for listening. This is Geoff Rutherford for "Ask the Expert" here on Sprott Money News. Thank you for listening, and have a great day.


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