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A Professional's Opinion of Precious Metals

By Matt Badiali, editor, S&A Resource Report
Friday, December 7, 2007

In 1985, Robert Quartermain took the worst job in the world.

Quartermain became the president of Silver Standard just as the metal was entering a 13-year period of decline. The mid-1980s were a rotten time for silver mining companies like Silver Standard. After the unbelievable bull market decade of the 1970s, silver prices collapsed from their highs around $50 an ounce in 1980 to $6 an ounce when Quartermain took over.

In December 1992, it was clear that silver was in a bear market. Pan American Silver's shares traded for 3 cents each, an all-time low. By March 1993, silver hit a bear market bottom of $3.55. Few companies could mine silver profitably.

Robert Quartermain had a solution: In order to keep the company alive, he turned Silver Standard into a silver hoarding company.

The "hoarding" business model is simple: Buy out projects that are too costly to mine profitably when the metal price is low and hold them until prices rise to make them viable. The business model works because metal prices are cyclical – prices go up, then down, then up again. The managers of gold and silver hoarders understand the cycle and have the patience to wait it out.

Silver Standard mastered that practice under Quartermain's leadership. The company bought up projects while the price of silver was low (less than a third of today's price) and held on to them. In the meantime, the company continued to drill and evaluate the projects. As the silver price rose, the value of the projects rose... by far more than the company spent holding them.

However, hoarding can be tricky. It requires three things: money, patience, and an unswerving belief that the price of whatever you are hoarding will rise. Quartermain had all three.

Quartermain's leadership pulled the company through. Today, Silver Standard's share price is 4,850% higher than the fall of 1992.

However, last year Quartermain abandoned the hoarding model. He built a brand new, state-of-the-art mine at its biggest deposit and declared that the company was transforming itself into a silver producer.

The leap to production requires a lot more money than hoarding, a completely different skill set, and an unswerving belief that the price of the commodity you are producing will not fall.

Last December, I met with Quartermain in his boardroom. Across the sleek, hardwood table, he outlined his vision of Silver Standard's future. He talked about new applications for silver metal. How silver doorknobs could reduce flu epidemics and silver surgical instruments could prevent post-operative infections.

He saw a grand future for silver, and he saw silver production as a lucrative venture for a long time to come.

The last five years of data support his argument. The silver price outperformed the gold price by 60%. Only recently has the silver price failed to keep up with gold. In fact, over the last 18 months, the price of gold has risen more than 2.5 times faster than that of silver. I see this situation as an opportunity for us to benefit from a correction back to the norm.

And let's face it... the trend of "paper assets down, real assets up" is overwhelmingly in our favor. Gold and silver are soaring against stocks and risky bonds. In addition, in times of uncertainty, gold and silver are safe places to store wealth.

In short, I think everyone should own silver - even if it's simply insurance in a bigger portfolio of stocks and bonds. These days, it has never been easier to invest in silver, either through a vehicle like the iShares Silver Trust (SLV), a bag of silver coins, or Quartermain's blue-chip company.

Good investing,

Matt Badiali

Market Notes


The shift from "like to have" stocks to "have to have" stocks continues... Today, we look at the shift into medical stocks.

We have to admit, we barely know our way around a Band-Aid box. But we do know medical stocks are extremely attractive to large institutional investors who worry about the strength of the American economy.

You see, when times get tough, folks cut back on $5 coffees and new swimming pools... but they still break arms, get hips replaced, and take blood-pressure medicine. As we've covered before, folks are still buying the basics.

This buying is producing new highs for the PowerShares Healthcare Services Fund. This ETF is a hodgepodge of dialysis providers, drug distributors, medical-device makers, insurers, and pharmacy managers. If you've visited the hospital in the past year, you've pushed this fund higher.

Our colleague Rob Fannon covered the safest, most profitable ways to invest in the booming medical industry in today's edition of Growth Stock Wire. We highly recommend you spend a moment reading it. Click here to get started.

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