(Kitco News) - There’s a storm coming, and it’s not the kind that’s been battering the East Coast all winter.
The precious metals sector has seen a shift in ideologies. Not long ago quantity was the measure of success, but a swift drop in gold and silver prices changed the conversation to one of quality.
Quality meant refocusing the asset list and working out ways to extract profitability. One of the casualties of that approach has been exploration. Another was willing capital to fund the industry.
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Randy Smallwood, President &CEO, Silver Wheaton
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Speaking with Kitco News on Friday about their newest gold stream, Randy Smallwood, president and chief executive officer of Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW), noted the predicament the mining sector has worked itself into and how it could be good for metal prices.
“It bodes well for commodity prices,” he said. “This is an industry that needs to invest into itself, and right now it isn’t happening. That will eventually catch up with the commodity price.”
The lack of investment trickles into the exploration conversation. According to a report by SNL Metals & Mining, exploration continues to sag.
This presents a problem for supply, and companies looking to replace reserves, as senior and mid-tier producers are not sprinkling any cash on the junior resource sector to find and develop pipeline assets.
Smallwood said this is an issue that could form a perfect storm for commodity prices.
“There’s no doubt. It’s a phrase I’ve heard a couple of times and I like it– geological inflation,” Smallwood said. “Unless you invest into it, you’re going to wind up having it.
“There’s a lack of new discoveries, the easy ones have all been found, or a lot of the easy ones have been found, so it’s just going to get tougher and tougher,” he said. “The combination of geological inflation and the lack of risk capital funding exploration, I would almost say is arguing to set up for a perfect storm.
“If you combine something like that with the sudden weakness of the U.S. dollar, all of a sudden you have the right characteristics for a dramatic shift in commodity prices.”
Focusing on the U.S. dollar, Smallwood said he doesn’t understand the need for the Federal Reserve to raise interest rates when they have the strongest currency on the block right now.
“The point that I’m having a tough time with, that I can’t make the math work, is why would they even consider raising rates?” he said. “Why would you want a stronger currency? There’s no benefit to that on a longer-term basis, and especially when you’re competing – the world is very small, trade is very constant.
“Every other government, every other currency in the world, is trying to devalue themselves as fast as they can to be, and stay, competitive,” he added. "The impact within the U.S. would be dramatic.
“Exports would just drop right off and you’d wind up having all sorts of imports coming in because it’s so much cheaper to produce it elsewhere.”
Smallwood did point out that gold and silver producers outside the U.S., and operating in their respective local currencies, are profiting from the U.S. dollar strength.
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