Gold and silver miners have been brutal to invest in for many. For me, I love the excitement. I am hooked on miners. But why? I did a few pieced on this in the past, so some of it may be repetitive, but I think many need to understand the leverage that is coming.
I have had videos on how to layer your silver investments and discussed miners. However, I think many of you don’t really grasp why and when to hold PMs themselves, when to leverage it – and even when to get out of it or minimize your stack. For example, I would not buy gold today to “get rich”. It’s $2000 or so now, and if it makes a massive move to $3000 in the next 1-2 years, you made perhaps 50% if you bought now. Wow! But at $3,000 are you turning around and selling your gold? Or, are you going to hold it for life, and with this, watch the value of it go up and come back down?
Below has been a model I’ve been following in my head for a few years. As I started to buy miners, I had some rentals for many years and I wanted to try and understand strategically how to build wealth.
Let’s examine my model below and put miners in here.
My portfolio prior to 2019 was all real estate and cash. To me, I was terrified of the housing market crash like in 2008, and began converting my cash to savings in money (silver in the savings area). As you are reading this, you probably understood why I converted as much fiat as I could to precious metals. Silver was $16 then, and I had gotten a ton of it before understanding this was SAVINGS and not meant for me to really get rich on.
To me, I think yield bearing assets that feed the system is the key to building wealth. Meaning, I have 3 rental properties, and the idea is, in finance, to put X dollars into something and get an ROI every year. This free cash flow can then be invested in other things, or put into savings. If you have a JOB, you have seed money coming in. You have your bills and expenses every month, but what do you do with what is left over? I, like you, used to be of the mindset to hoard cash. This is before I understood how cash is a vastly depreciating asset and needs to be put to work to preserve spending power. The model above gives you an idea how I think.
The yield bearing assets here are my rentals (and will be dividend paying gold miners) where you can squirrel away returns into savings. In gold. But just taking your cash and putting it into gold can be a problem, because gold doesn’t pay yield. You know that it appreciates over time – against the currency – but if you just take cash and put it right there, you miss out on GROWING your spending power.
With this, many people think of traditional stocks in the low/medium/high risk items. This makes sense in a bull market when equities are running hot. But in a time with ETFs and juked numbers all the time, we have a situation where equities are vastly overvalued to real estate and commodities. This presents an opportunity to play a RISK OFF bet, where your seed money (excess cash) can be invested to grow it faster than the rate of inflation. In this case, miners – even the safest ones – can be medium risk. Some of the miners to me may eventually pay high dividends, and with this, I would shift them to my yield-bearing assets pile. Can you take some of this yield and put back into more stocks and more yield bearing assets? Yes.
When I worked at Vanguard from 1998-2002, I had met with what is called a “principal” there when fixing her machine. Nice Wharton MBA diploma hanging up on the wall behind her. While her machine was reloading, she was showing me how the risk appetite should decrease with age. You can, at 22, afford to put items in much riskier things – because you have 40 years of earnings to make back mistakes. But as you get older – you want to stop the unforced errors, grow your pile, and hopefully build yield bearing assets to take you into retirement.
I also have something with excessive equity up there. Assume you bought a rental for $100,000 and now it is $300,000 and you have high free cash flows. You want a pool with your main residence. Maybe you have $50k in credit cards. Maybe you spent thousands of dollars on credit fixing up the basement in your home and fixing up rentals? You could, perhaps, borrow equity from your own property rather than selling it for a 10-20 year home equity loan to do what you need. And – free cash flows from yield bearing assets can pay that down for you.
So many people just look at the see money (their income) and max out their lifestyle to their paycheck. In reality, they should live below their means, and use a model like this to buy all kinds of things. Yes, you save, but ultimately a lot of your savings should be growing a lot faster than inflation.
Miners come in here for me as a way to see the move with the PMs coming as a means of inflating that asset class, then being able to rotate those profits into something. Maybe I rotate that money back into traditional equities? However, for me, a lot of profits from selling would be acquiring more yield bearing assets. That’s my goal here – continue to acquire yield bearing assets and eventually, that can replace my seed money and then I no longer have to work.
Miners provide a stupid amount of leverage here. And, I’m about to walk you through a fantasy land here as to how it happens.
Nasdaq went 15x?
From 2009 to 2021, the Nasdaq went like 15x. Anyone who has 401ks (I don’t) probably made out like a Texas oil barron. I can imagine that friends of mine that squirreled away every dime into these vehicles made a boat load and are comfortable now. I’m not. I took a path of acquiring rentals to get FCF. The FCF would pay down the principle and buy more units and with this, I would be able to have retirement income at some point with no bills.
But like you – I didn’t get in on that, and now I’m left with finding the next thing that might go 15x. Some of you got into bitcoin and did crazy good. But your mistake with these items is thinking they will go up indefinitely. What happens is these things have massive runs, blow off tops – and then other things become undervalued relative to it. Even gold and silver – we have seen massive runs, blow off tops – and then with this, rotation into other things. One could argue the 8x gold had from 2000-2011 could have rotated into depressed real estate and cheap stocks – which then helped grow them the last decade. Now, it may be time to rotate back.
At this point, I probably don’t have to sell you on gold or silver. I don’t see an 8x with gold here. It is possible we see a 3-6x in silver. But what time frame? IF indeed this is the end of the petro dollar, and something else is coming, wouldn’t it make sense for people holding USD around the world to spend it now? Get value for depreciating dollars? It does.
Unlike the blow off tops of 1980 and 2011, it is entirely possible this time that this is not necessarily a blow off top, but a sustained move much, much, much higher as a super inflation hits. I’m not talking 6%. I’m talking years of 10-20% inflation. This would be potentially caused by the lack of purchasing power with the dollar against imports. It would take a lot more purchasing units to then import goods. Many don’t understand this. This will lead to us making things again starting 2026-2030, but there’s a lot of pain coming as we near the end of this version of the USD.
So is it possible we have a move to $2500 gold? Yes, that could be nearer term than many think. $3000? Sure. $5000? Crazy to think in 1-2 years, but under the conditions I’m talking about – could that happen in 5 years? Sure. Silver at $50? $75? $100? What is your time frame for all of this? My bet here is by 2030, we will see 7 years or so of hell with inflation as BRICS gets stronger and the USD gets weaker. This isn’t something the Fed can fix with demand destruction. No – it’s a spending problem. It’s a credit problem.
But the overarching problem you have is if gold makes a monster move to $5000 in that time, you have to understand that means gold is 2.5x more expensive – but so are groceries, so is housing/rent, etc. Meaning, by investing in gold, you are simply preserving your purchasing power. In my chart, this gold is in the form of SAVINGS. Meaning, I choose, today, to not store my financial energy in cash as I understand how it is being actively debased as I’m writing this. With silver, we may fare much better if we wanted to make money on our savings, as the gold to silver ratio is still near highs, and silver has the ability to outperform gold here. With an investment demand for silver along with the green energy demands for solar/EVs, there’s no active conditions that would decrease the demand for silver in those 7 years – even with a depression – policies are all written today to shift us towards an increased demand of silver. Meaning, there’s a massive short squeeze building with this. IF we see a condition with $5000 gold, at a 20:1 gold to silver ratio we could even see $250-$300 silver. This is why I save in silver, and not gold.
Leverage to the metal
My assumptions with my savings will be that they will far outpace whatever inflation is coming due to the inevitable palladium-like short squeeze that is looming ahead. My contention, and those of a lot of my peers, is that silver is set to make a lot of people rich just on the metal itself. As in, inflation may go up to cost 2.5x, but your savings may grow 10x during this time if you had invested your cash into silver.
But what attracted me to the miners was the outsized leverage to this model. If the silver metal itself had a potential for 10x, what about the miners?
Assume, for a moment, that you are a silver producer of 10m oz today. At $25 silver, that’s $250m revenue. Mining is a dirty, risky business. Jurisdictions are getting worse. Fear of nationalization and socialist policies are looming around every corner. The price of fuel can be 33-40% of the cost of mining. IF we are seeing inflation – we will likely also see fuel prices increase for these miners.
This is what happened in 2021-2022, where we got the inflation trade right, but the miners got killed with higher costs – and the metals didn’t react to inflation as we anticipated. This took a toll on trading portfolios like mine – where most of my trading portfolio is a mix of miners. My real estate portfolio dwarfs my trading account – but this trading account is fueled by FCF from the real estate as well as seed money from my income. As my crystal ball HOPEFULLY unfolds in my favor, the plan here is not to grow my trading account by 20% per year, but to have those home run sectors to get that 16x that those who just held the Nasdaq index were able to recognize.
Could commodities companies do a 16x over the next 7 years? Maybe not, but this is where I would be the best alpha is. Tavi Costa posts chart after chart about how beaten down the commodities are against everything else. 40 years of cheap credit and globalization is about to reverse with a multipolar world and more expensive credit. What this means, ultimately, is the stuff you need to make stuff is going to get bid up by rival factions trying to grow faster than the other. I believe this will require massive amounts of investment in commodity companies to fuel this arms race of raw materials. Who has the most gold? Uranium? Oil? silver? Rare earths?
All of the countries of the world will be racing to get as much of this stuff secured, as cheaply as possible, for as long as possible.
Let this last sentence really, really sink in.
What I believe then is you will start to see market caps run higher of these raw materials producers, expecting higher prices. This drives up stock prices, and higher earnings then drives up P/E ratios even more as better and better earnings are expected with higher and higher prices. This may then start to have a lot of these companies really become overvalued. Consider Tesla a few years ago was a 400x P/E ratio. It was expecting MASSIVE revenues. Tesla’s P/E ratio now down to 50. Still massively overvalued. But this I believe is what we may start to expect from a lot of these companies.
Likewise, as these companies start to get overvalued, more attention will start to look at the juniors. The exploration companies finding these resources. This is where the major alpha is heading – but not right now. People like me have undersized or standard positions in many of these companies. To me, I think it is reasonable for a late stage silver/gold exploration company – by 2030, to have recognized 20-50x. This sounds outlandishly stupidly optimistic at this point. I get it. But I want you to understand that it takes 10-15 years to potentially turn a patch of land into a mine. Likewise, only 1 out of 3,000 projects currently ever become a mine. Why? Perhaps there is gold there, but you need $3000 gold to make it profitable. Maybe the type of gold you find there’s no real current technology that can separate it. Maybe permitting problems. Maybe a country nationalizes it.
Meaning – those late stage exploration items today, with a resource or near resource, could potentially be developed by 2025-2030 or so. And these items will get bid up. Remember, all of the BIG miners from above? Every oz they pull out of the ground depletes their resources. At some point, many of these companies that have viable resources will either be developed into a mine or bought. Even those who have marginal resources by today’s standards will be printing money at $4000 gold.
7-10x for a mid-tier?
I write about Fortuna Silver Mines here, a lot, but for good reason. I am massively invested in them. This isn’t about a double for me and get out. What I see with a company like this, and others, is massive, massive profit potential which may eventually lead towards very nice dividends. Today, there’s no dividend. But I want to walk you through the basics here.
It’s tough to do mining stock math. But I will show you some basics here. This is not investment advice, but how I see the math work out. Assume for a moment that FSM has a cost of $1500 to mine gold – all costs. It might be a bit higher, but work with me here. If gold is $2000 per oz, that is $500 profit, per oz. If a major like Newmont has lower costs – and takes it out of the ground at $1000 per oz, Newmont is more profitable. However, let’s assume gold goes up to $2500. Newmont’s profit per oz goes up 50%, from $1000 to $1500 per oz. FSM has a double profit, going from $500 to $1000. Meaning, as the price of the metals goes up, a mid-tier or junior will be more profitable – as a percent.
A junior producer may have costs at $1750, and with this, their profit of gold today is $250 per oz. A move to $2500 means they are now making $750 per oz, or 200% more. However, the smaller the producer, the higher the risks.
IF I’m looking at a 2030 time frame for where I see all of this maturing, I can see $2500, $3000, $3500 and even $5000 as legitimate gold numbers IF our inflation assumptions are even in the zip code of where this is going.
Assume for a moment that FSM is highly profitable with perhaps $250 per oz profit per gold equivalent oz mined. By next year, they should be in the ballpark of 500k AuEq oz. I’m using ballpark numbers here for simplicity. This would potentially have them at $125m profit. The current market cap is $1.142B. This puts them at a 9.136 PE ratio. Their “spare parts” are worth $1.22 billion. Meaning, the company’s market cap now is valued less than if you sold the damn company for spare parts.
This, is what they call value.
Now, let’s go to a reasonable world where gold is $3,000. My assumption here are fuel costs will go up, but not as much as gold. If I just did the gold profits with today’s numbers, we would go from $250 profit per oz to $1250 profit per oz. That is now $625m profit on $1.142B mkt cap, or 1.828 P/E ratio. Even assuming higher fuel costs, we can perhaps take this to a P/E ratio of 3 or 4.
OK – now assume for a minute there’s a mania into these stocks. We have a situation where it becomes a Tesla like craze. A bitcoin-like frenzy. One could reasonably see a P/E ratio at 50x or even higher. IF earnings are $500m (higher fuel) and P/E ratio is 50x, that’s a $25B market cap. Given today’s market cap is $1.142B, that would then stand to reason that a share price is 21.9x higher than today’s share price. But, that’s crazy talk, right? Maybe there is no MASSIVE run to a 50x PE ratio, but perhaps a more reasonably 25x PE? That cuts it in half to a 10x from here.
That takes the stock price from $3.93 today to $39.30 under 10x conditions from here, with a P/E ratio of 25 based on $500m in earnings for a 500k AuEq oz producer.
Even assuming I’m WAY overstating earnings, given prices all around might be higher – let’s even dial this back to a 5x. This takes the share price to $20 from here. IF we are talking about $3000 gold.
But the question is, if you are FSM, and you have $500m in earnings in a year, what are you doing with it? Sure, you pay down debt. Sure, you have to explore and build out your resources to replace your inventory. Sure, you perhaps buy some properties – but THESE are the conditions that perhaps you start to see dividends. There are 292m shares outstanding. If you are seeing $500m in earnings in a year, would it be unreasonable to see a $1 per share dividend?
We are now assuming, for the sake of argument, that $3000 is the gold blow off top. I would then wish to challenge this assertion due to the nature of the problem with the USD today. We need to consider a possibility here that in a 7-10 year time frame that $5000 or $8000 gold isn’t out of the realm of possibility. This would be based on a rapid increase in USD inflation, given you may see all of the cash printed throughout the world come to our shores to buy up gold and land.
In Weimar, we all see how the gold price went up. However, this was preserving wealth. IF you had fixed debt, you loved the ability to hold gold and inflate your way out of debt. But what happens when you take your gold that is massively inflated, then sell it for shit currency, to pay off your house or credit cards? You have no debt – but with the runaway inflation that is going up far faster than your wages, you cannot afford the taxes on your house and it is seized. Or, you can no longer afford groceries. This is where “you will own nothing” can sort of come from. They can potentially tax you into oblivion to force you to sell your house at auction, and they will then rent it to you. Yeah.
So you need to also consider yield bearing assets, not just gold or silver. You also have to consider what stocks may inflate higher than the rate of inflation. IF you understand this problem, AND the assumptions on higher inflation are correct, this means that my model can provide someone by 2030 a very, very comfortable lifestyle.
Consider a FSM provides $1 dividends per year. If the stock is trading at $20, that’s a 5% dividend. My contention is that if we see a $5000-$8000 gold price, that this dividend may be substantially higher. So while the stock is super inflated – it is a YIELD-BEARING business. And, you can take that cash and store it in precious metals. Just like my rentals – cash can be converted to PMs.
Silver is gold on super steroids
I have shown some charts where most silver primary miners are mostly extinct. But if we are in some universe where gold is $5000 or $8000 – you also have to consider we are at the $250 to $600 silver range. This sounds fantastical, but remember what I said above with unrelenting demand and 10-15 years to build a mine? Many of my friends ignored me at $16 silver, and then rushed to buy silver at $30 with $15 premiums during silver squeeze. To me, this has shown how frenzies work. How rational investment by most people is replaced by fear of missing out and complete mania.
We could legitimately see an era where commodities super inflate as an entire class. ETFs will get massive and bid up the underlying companies, just like REITs did the same thing to commercial real estate. It is reasonable to assume that a junior silver soon to be miner like Discovery Silver – with 600m to 1B oz in the ground, does a 100x at $250 silver. While the metal may go up 10x in a frenzy, a company with hundreds of millions of oz in the ground that can feed this demand will moon. You only need to put $2,000-$3,000 in a company like this to pay off your house in 7-10 years. This TYPE of play will attract those speculators. They are out there, all over the place.
The silver math is even more egregious than the gold math – where most companies who mine primarily silver are either just making ends meet or losing money. Consider an Endeavor silver, who I had read “needs $24 silver to be profitable”. Consider at $25, these are double profits $26 silver triple profits, etc. This is a relatively smallish silver producer – but think of the massive leverage when at $50 silver they have 25x the profit of now? Or $250 silver and their profit may be 100x now?
The laugh track comes when you talk about silver over $50. I get it. I also understand the Jeffrey Christians of the world who talk about the 5B oz above ground in bars, rounds, coins – and the piles of silver in dumps. While I understand the supply better than most – consider the 237m oz deficit from last year that eats into these hoards. Without prices going up, the idea here is to get people so discouraged with the investment, that they throw in the towel and get out of the trade, shaking more of that 5B pile loose.
The problem is, you can do that for only so long until acute shortages require the price to move substantially to get hoarders to sell. Most die hard silver investors have zero interest in selling any at $30, $35, even $50. Will supply shake loose at higher prices? Sure. Enough to fill another 237m oz deficit? MAYBE. But at these current prices, it’s forcing less and less silver out of the ground by miners, and with lower and lower grades and higher and higher fuel prices – you are absolutely not getting the supply side of this with mines. Meaning, this mine deficit will increase yearly – which NEEDS higher prices.
This will run into a fantastic end. One day, a Honda or Toyota is going to place an order for a million oz, and it cannot be sourced sub-$30. Today, it’s not an issue. But, the bet is….palladium. One day, and it’s not far off, a jump is coming. Whether it is $5 or $15, who knows. But a jump is coming to assist with mining production – because it needs to shake more bars out of the hands of the die hard stackers.
But that mine problem. While you will have some companies have have mines on care and maintenance start making more at $35 silver, you have a problem with the Bear Creeks/Discoveries of the world that might need $30 silver to even green light a construction decision in 2025 with rising costs.
The promise here, ultimately is that silver will go up, and by a lot – in an acute violent move that none of us can anticipate. You could see a 4-5x palladium move, but to me, that is what is needed just to find balance in the markets. While this will make your savings grow 4-5x that are in silver, your miners could easily do 20-100x if you have the right ones.
Miners are risky. It’s a shitty business model of no revenues for 10-15 years with massive shareholder dilution. There’s a good 20 risks I can think of off the top of my head – but this risk is the leverage I’m talking about. If you WANT to get rich with PMs, it’s not buying gold at $2000 to watch it go to $3000. The real money here is understanding there is a massive upside risk in PMs within 7-10 years and playing the short side of the USD in companies that produce the anti-dollar.
I talk a lot about how if you put an oz of gold in a vault 100 years ago with a $20 bill – they were of equal value. Open up that safe now, and the gold “appreciated” 100x. What most people don’t realize is that it was the dollar that lost 99% of its value in that 100 years. Why? Currency creation and debasement. And, it’s easy to find that 40% all USD in history were printed from 2020 to 2020. I ask you this. If currency debasement over 100 years led gold to 100x its value – what do you think 40% of all new currency that was created in the last 2 years will do to the gold price from here in the next 5 years as this debauchery makes its way through the system. Could gold 2x from here? Easily. 5x? Why not. Think about the currency created.
Now, consider the companies that are producing the anti-dollar. As people run to the anti-dollar and put their shitty currency into something to save them through the coming inflation, it is reasonable to expect that the companies making them are going to be ridiculously profitable.
At some point, it may be time to exit the trade. But when? I will be watching ratios and I will try and use massive profits to rotate into things that are undervalued as well as adding to my savings pile in a vault as well as adding more free cash flow vehicles to grow the savings in the vault. At some point, you may then see the gold/silver in your vault at a silly high, and with this, some of this can then be sold to exchange for undervalued yield-bearing items like dividend stocks, bonds, and even rentals/businesses.
Best luck to you all!
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