Greg Orrell: Leveraging The Bull Market | Why Gold & Silver Are Surging

Key Concepts

• Precious Metals Performance: Significant gains in precious metals, particularly gold, exceeding typical annual movements.
• Currency Debasement: The ongoing devaluation of fiat currencies due to government debt and lack of fiscal discipline.
• Gold as a Monetary Metal: Gold's historical role and continued relevance as a store of value and an asset for international finance.
• US Dollar Weakening: The global trend of moving away from the US dollar as the primary reserve currency, increasing pressure on the US to manage its finances.
• Central Bank Buying: Foreign central banks increasing their gold reserves as a hedge against dollar devaluation and for long-term stability.
• Gold Miners: The investment potential of gold mining companies, with a focus on value investing, disciplined management, and long-term prospects.
• Silver as "Poor Man's Gold": Silver's historical correlation with gold and its potential for significant gains, especially when the gold-silver ratio is high.
• Value Investing Philosophy: A long-term approach focused on buying quality assets at attractive prices, with low turnover and a focus on future potential.
• Dilution in Mining: The negative impact of excessive share issuance on per-share value for investors.
• Cutoff Grade Management: The importance of maintaining profit margins in mining operations rather than simply prolonging mine life through lower cutoff grades.
• OCM Gold Fund: A long-only mutual fund with a specialized focus on precious metals equities, managed since 1996.

Summary

This discussion with Gregorell, President of Ourel Capital Management, delves into the current state and future prospects of precious metals, particularly gold and silver, within the broader economic and monetary landscape. Gregorell, with 40 years of experience in the industry, shares his perspective as a long-term value investor.

Precious Metals Performance and Underlying Drivers

Precious metals, especially gold, have experienced an exceptional year, with gains well over 50%, which Gregorell describes as an "outlier" compared to the typical 20% annual movement. This surge is attributed to fundamental drivers, primarily the escalating levels of government debt globally and the resulting currency debasement. Gregorell highlights that governments have reached a "tipping point" where further debt accumulation necessitates currency devaluation.

The Weakening US Dollar and Global Monetary Shift

A significant theme is the world's gradual move away from the US dollar as the dominant reserve currency. This trend puts pressure on the US to "get its house in order" as global financing for its debt becomes less certain. While the US dollar is expected to remain a reserve currency for the foreseeable future, its position is "certainly weakening," a sentiment reflected in the gold market. Gregorell notes that countries like China and those in the Eastern Bloc are actively seeking to reduce their reliance on the dollar, with gold playing a role in facilitating international trade among them.

Gold as a Monetary Asset and Investment Strategy

Gold is characterized as a "safety net" asset that investors often buy "reluctantly." Gregorell advocates for a long-term allocation to gold, suggesting a 5% to 10% position, citing historical performance where such allocations have yielded strong returns. He emphasizes that currency debasement is an ongoing process, and until there's a definitive move towards sound currency, gold will continue to experience periodic strong rallies followed by consolidation. He projects potential future bases for gold in the $4,000 to $7,000 range.

Government Shutdowns and Their Impact

While government shutdowns can cause short-term market fluctuations, leading traders to cover shorts, Gregorell views them as a "short-term phenomena" and not a primary driver for long-term gold investment. He recalls that during the 2018 US government shutdown, gold prices rose, but then pulled back upon resolution.

Central Bank Demand for Gold

Central banks are increasingly looking to gold to maintain reserves as they witness the US's persistent large deficits and lack of fiscal discipline. Gregorell describes this demand as "inelastic," as central banks are focused on long-term value preservation rather than short-term price fluctuations. He believes this trend will continue to drive demand for gold.

Gold Miners: A Value Investment Perspective

Gregorell's investment philosophy centers on being a "value investor" with a low turnover rate (3-11%), focusing on companies with a clear five-year outlook. He applies this to gold miners, emphasizing the need to assess their ability to replace reserves and the longevity of their mines. He notes that the mining sector has become more investable due to increased discipline, drawing parallels to the oil industry's past shift towards discipline.

Key criteria for investing in gold miners include:

• Jurisdiction: The ability to obtain permits efficiently.
• Management Team: The talent and wherewithal to raise capital and attract further expertise.
• Project Viability: Focusing on projects with a clear path to production, rather than just "holes in the ground with a lighter on top."
• Long-Term Cycle Awareness: Recognizing that bringing a mine online can take 7-10 years, requiring a long-term investment horizon.
• Disciplined Capital Allocation: Avoiding excessive fundraising that dilutes shareholder value, emphasizing the importance of holding equity dear.
• Per-Share Growth: Investors seek growth in gold production and value on a per-share basis.

Gregorell expresses concern about companies that raise excessive capital without a clear roadmap, leading to dilution. He also criticizes the practice of lowering cutoff grades solely to prolong mine life, arguing that investors seek leverage to gold prices and margin expansion, not "profitless prosperity."

Silver: The "Poor Man's Gold"

Gregorell is "very bullish on silver," referring to it as "poor man's gold." He points to the high gold-silver ratio (currently around 81:42) as an indicator that silver is poised for significant gains. He believes that as gold prices rise, making individual ounces less accessible, investors will increasingly turn to silver for monetary metal exposure. While not held in central bank vaults, silver has a historical precedent for value appreciation. He notes that pure silver miners are scarce, leading them to trade at a premium, and that consolidation in the sector is occurring.

Platinum Group Metals (PGMs)

Gregorell does not focus on PGMs (platinum and palladium) as his fund is primarily a "monetary metal fund." He views PGMs more as industrial metals, noting that the EV trend has impacted demand for catalytic converters, though prices are starting to pick up.

The OCM Gold Fund

Gregorell has managed the OCM Gold Fund since 1996 (originally started in 1988). It is a long-only mutual fund that exclusively invests in the precious metals equity sector. This singular focus, he believes, allows for better market understanding and performance.

Conclusion

The overarching message is that a combination of currency debasement, increasing government debt, and a weakening US dollar creates a favorable environment for precious metals. Investors are advised to consider a long-term allocation to gold and silver, with a particular focus on disciplined, value-oriented investments in the mining sector. The key to successful investing in this space lies in understanding the long-term cycles, focusing on quality management, and avoiding dilution.