Silver price volatility provides some exciting profit opportunities for investors who develop the right strategies to take advantage of the action. In this exclusive interview with The Gold Report, Sean Rakhimov, publisher of the SilverStrategies.com website, talks about how the global forces of monetary policy and fear are expected to push investment demand for silver much higher and highlights some companies he expects to profit most from the coming silver boom.

The Gold Report: You last talked with The Gold Report in January 2011 and at that time you gave us your view on the prospects for silver for 2011. What's your analysis now as to what happened in 2011?

Sean Rakhimov: 2011 was a breakthrough year for silver. Last time we talked I think the title of the interview was "Silver Going Mainstream," which I believe it did last year. The silver price did run up to $50/ounce (oz). It settled back slightly under $30/oz, and sometime around the end of last year and the beginning of this year I believe we put in a major bottom in both gold and silver. The markets have been looking up since then.

There's been a bit of consolidation going on largely based on geopolitical events. It's been my long-standing theory that the action in the metal prices is not necessarily determined on a day-to-day basis by the fundamentals of the metals themselves. It's more of a reaction to the external news, whether it's in financial areas, geopolitical or some other areas.

TGR: Do you think people are trying to figure out what they think other people are going to do, and then somehow profit from it?

SR: Yes, but in the case of gold and silver, I don't believe the reasons or the information pertaining to the metals themselves are as dominant in the conversation as it is in some other assets. Gold and silver are the only markets driven by fear, and fear usually does not emanate from the metals, but from other areas. A lot of the other assets are driven by greed.

TGR: I know you don't like to make specific price predictions, but you published an article at the end of October 2009 where you said that silver was going to hit a high somewhere between $30/oz and $50/oz. We did see the $50/oz price last year. At this point, what do you think it's going to take for silver to break through that $50/oz barrier for good and establish that as a new base price?

SR: The catalyst, I believe, will probably be somewhere in the currency space, whether it's in Japan, Europe, the U.S. or maybe even some other region that we don't think of on a day-to-day basis. I view gold and silver as monetary instruments, at least at this stage, although silver has a great degree of industrial uses. I also think that we probably will see a new high in both gold and silver this year. For silver, that would be over $50/oz and for gold that would be somewhere in the $1,800–1,900/oz range.

TGR: How closely tied are gold and silver as far as price performance goes? Is gold going to drag silver up with it or can you see any kind of catalyst that would make silver go up on its own?

SR: As a rule, they move together. Silver does display a high degree of volatility and I believe its fundamentals are far superior to those of gold due both to its industrial usage as well as price. Silver is far cheaper than gold and a lot of investment has been switching over to silver. For instance, Sprott says it sells equal amounts of silver (in dollar terms) to gold, which means in today's numbers, silver is selling 50 times more in ounces than gold.

So, I think silver has far superior fundamentals, and it's definitely more affordable. It will take on a life of its own, and at some point, outperform gold significantly.

TGR: Lots of people out there have all kinds of opinions about where it may ultimately go. Do you have any outer limit expectations for it?

SR: I don't, but if you look back at some of the early interviews I did with The Gold Report, I think I was among the first to say that I expect three-digit silver. That was when silver was definitely below $15/oz and maybe even below $10/oz. So, I was one of the early people who thought silver had far higher to go. Today, I believe that silver has at least a 10x appreciation potential from the current level. Again, being a monetary instrument, an awful lot is going to depend on what happens to other monies elsewhere. For the cycle, I don't have a number target, but I do think that the gold:silver ratio will get below 20, probably closer to 10:1. It's over 50:1 right now; so, that should be a good guideline.

TGR: That really gives it some upside potential from here. So, from a monetary standpoint, do you see the possibility that governments are gradually going to get serious about somehow making silver a part of the monetary system if gold goes in that direction also?

SR: I think some governments will at least attempt to. In Mexico, there's been a long-standing movement at high levels of government to bring silver into the currency equation. I don't know how that will shake out for several reasons. One, silver is not as plentiful as we think. I also don't know how gold will come into that equation. I believe that if gold does take on the currency role again, it will be more in inter-government relations rather than day-to-day uses.

I don't think we have enough silver, basically, to use it as a currency. With the paper currencies facing all these challenges, a new and better financial system will have to be developed. For a while, gold and silver may play that bridge refuge role until they sort out what the new system is going to look like.

TGR: So tell us what sort of strategies you're using at this point to benefit from the current silver market and what you think is going to be coming up here in the next couple of years.

SR: Well, in terms of investment I have always advocated that silver metal is a good investment; so is gold for that matter, but I think you get a wide variety of experts on your website discussing the metals. I think investors would do better and will be better served if they spend some time figuring out exactly what their personal take or expectations or intentions are. I think the majority of investors don't spend enough time on figuring out their strategy. Am I a long-term investor? Am I a trader? Am I looking for a tenbagger in the next year? Am I a high-risk taker? Do I want some stability (in my portfolio)? Do I want to be in blue chips?

I think those are very important questions and should be part of their thinking. A couple of years ago I made the case that we were entering the second phase of the bull market. This is the institutional phase, where investors would be better off if they followed the money, so to speak, and positioned themselves in companies and investments that institutions will come into.

The case I made was for companies that have established operations or assets and are kind of "out of the woods" in terms of if they're going to make it, but their full potential has not yet been realized. The article is available on my website, and there's a flow chart there that shows money flows the way I expect them to flow around. So, I think the midtiers or the up-and-coming producers or producers that are expecting a bump in their production would perform well in the current period. And I still hold that view.

The other strategy I employ is to find stories early, and then you either bet on the team or the asset or both.

TGR: Would you like to talk about some of these that you like at this point and tell us where they are in the hierarchy?

SR: For companies that are out of the woods and poised for significant appreciation, I look at a company like SilverCrest Mines Inc. (SVL:TSX.V; STVZF:OTCQX). It's a profitable silver and gold producer in Mexico. The company has a decent share structure, plenty of cash and is looking to double its production from the current operations. It just made a brand new discovery where the first resource came out at 100 million ounces (Moz) of silver equivalent. Its target for the deposit is 200 Moz plus. That deposit alone should be valued by the market at roughly the current market cap of the company today.

It seems that whatever the SilverCrest management team touches turns into gold, so to speak. SilverCrest went into El Salvador initially and made some discoveries. Ultimately things did not work out in that country for political reasons. Then, it came to Mexico, made a discovery and put a mine into production. Now, it has another project and has made another discovery.

The same people had another company called Goldsource Mines Inc. (GXS:TSX.V) that was operating in Saskatchewan, and there they made a huge coal discovery. So, those are the people that one should track closer than usual because they deliver. They don't have big names; they don't speak on TV every week, but they do deliver.

I recently became a consultant to the company, though I have been following and writing about the company for several years. I don't normally talk about companies that I am involved with, but in this particular case, the upside of the La Joya project can be spectacular.

Another company that I like these days is Huldra Silver Inc. (HDA:TSX.V). This is also an emerging producer with a very high-grade silver project near Merritt, British Columbia, a couple of hours drive east of Vancouver. This is an historic mine that Huldra should have back in production some time later this year. The company has a very attractive share structure, around 35 million (M) shares. It trades around $1.30/share, which gives it about a $45M market cap. Now, if it does get into production with the current share structure, or anything close to it, and it hits the target of, say, 2 Moz annualized production, it holds tremendous potential and the shares should appreciate several-fold over time.

TGR: Can it get there without too much dilution from here?

SR: I think it can; it did the financing for the current production preparation with debt. I believe it has about a $10M facility, which it's working through. Even if it did tap the equity market for additional financing, I still believe there's plenty of upside there because it's very close to production and the bulk of the money has been spent. It even has some stockpiles of ore already that will be used to fine-tune the mill.

On the other end of the spectrum there are some of these junior exploration companies. One that I've been recently looking at closer is Minaurum Gold Inc. (MGG:TSX.V). It's been around a couple of years, and the attractive thing about this company is that it employs two of the top geologists in Mexico—David Jones and Peter Megaw. These people have a proven track record and no problem raising money. The stock is trading around $0.40 with a market cap right now of about $16–17M. It has about $4M in the bank, and it's going to be drilling some 11,000 meters this year. With a company like this, a discovery is sort of a matter of time, and I think it doesn't have to be all that long and could become a big story overnight.

TGR: There's a lot of action in silver in Mexico. Any more names you like there?

SR: One company that investors should take another look at is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.A; GV6:FSE), which has been around for about three decades and only has about 27M shares out. It has a mill and recently did a bulk sample worth over a few million dollars and is getting ready to put its Avino mine into production. It's just very attractive, trading at less than a $50M market cap and ready to go into production sometime later this year. I think the story is very compelling.

TGR: How about some of the bigger companies that have more established production?

SR: I like Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) a lot. I visited Fortuna's newest mine in Oaxaca, Mexico, last year, and it's a fantastic operation. Unfortunately, it seems to be having some trouble with the local population not liking its presence there. As an operating company, I think it's an excellent company. I like the management a lot; they're very good operators. Its Caylloma mine in Peru has fantastic production and cash flow. It was divested by a bigger silver company and Fortuna turned it completely around. Assuming the local issues in Oaxaca will be resolved, I think it's still undervalued.

Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) expects in excess of 4.5 Moz of silver production this year, and it's certainly performed very well. It's not a cheap stock, but that doesn't mean it's not going higher. I think it's done extremely well, and if it does succeed in adding another producing asset to its portfolio, I think that's going to make a big difference.

One of my favorites is First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). I've known and followed the company practically from inception. It's a company that I've been pounding the table on in previous interviews. Now it's a $2 billion company that trades around $20/share and it's probably going to get bigger. It has an excellent pipeline of projects and it's expanding one of its mines (La Parilla) right now, which should increase its production by about 50%. It's also building another operation called Del Toro, which will be its highest grade mine and has at least one more sizable project in the pipeline. It has plenty of cash and excellent management. That's how you go from a penny stock to a $20/share stock. I don't see why it can't go much, much higher.

TGR: Anything else that you'd like to comment on?

SR: In the exploration space, where I like to get in early, there's a company that I do have shares in. It's an Argentinean story called Netco Silver Inc. (NEI:TSX.V; NTCEF:OTCBB). Netco is a very cheap stock with a good project that's advancing with some very good grades. The rest remains to be seen, but it's still early.

There's also a company called Andover Ventures Inc. (AOX:TSX.V). It's a $0.50/share stock with about 100M shares out. This is the type of situation that I like to be involved in because it has tremendous assets. This company is the second largest landholder in the state of Utah, where the largest landholder is the Mormon Church.

TGR: How can it afford to keep up its assessment work every year?

SR: Well, Andover owns the land outright, not just the mineral rights, and I think it did a great job putting together the projects. This company is absolutely loaded with assets. The land package it controls in Utah hosted something like 50-odd companies in the last cycle, and it has the entire land package to itself. It also has a joint venture with Rio Tinto's (RIO:NYSE; RIO:ASX) Kennecott subsidiary and they're hunting for elephants. Andover also has a major volcanic massive sulphide (VMS) deposit in Alaska. The market cap is very cheap.

Now, I will say that the market has not been all that kind to the mineral sector in general of late; so, there are a lot of cheap companies out there. Sooner or later the market will have to pay up for assets like these. In the case of something like Andover, at least the perceived geopolitical risk is minimal because both of the assets are in the U.S.

TGR: Is there anything else you would like to mention or just leave some parting thoughts?

SR: One company I should have mentioned is Esperanza Resources (EPZ:TSX.V), which is run by another one of those groups that whatever it touches, it comes up with something good. Next time we can get into the reasons why I like that company.

Generally speaking, though, with silver, we are probably somewhere midway through the cycle and have another 10 years to go. Investors should constantly revisit their reasons for being in this space and what exactly they are looking to get from it. I think there's nothing to worry about in the volatile price action. Silver is about the most volatile asset that you can be in. Other than that, I think it is up and up from here.

TGR: That's a good, positive outlook, and I think you've given us some good stocks to look at and research further. Thanks for speaking with us.

Sean Rakhimov launched his website, SilverStrategies.com, in 2004. His writing has appeared on such Internet portals as Le Metropole Café, 24hGold, 321gold, Kitco, Gold Seek, Gold Seiten and The Gold Report. He previously designed financial systems for the investment banking business, learning about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. Rakhimov is constantly looking for value opportunites in new and established stories.

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DISCLOSURE:

1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: SilverCrest Mines Inc., Avino Silver & Gold Mines Ltd., Fortuna Silver Mines Inc., Endeavour Silver Corp. Streetwise Reports does not accept stock in exchange for services.
3) Sean Rakhimov: I personally and/or my family own shares of the following companies mentioned in this interview: Silvercrest Mines Inc., Huldra Silver Inc., Andover Ventures Inc., Netco Silver Inc. I personally and/or my family am paid by the following companies mentioned in this interview: SilverCrest Mines Inc. I was not paid by Streetwise Reports for participating in this story.