Early in my career as a writer, I quickly became enamored with the precious metals space. I was drawn to the sector because it was so different from the others that I had been interested in following. My academic and career background is in technology, which culminated in me graduating with a Masters of Information Assurance (cybersecurity, if you wish), and spending 25 years following advancements in the technology field while participating in a wonderfully diverse and rewarding tech career.
I have now blended an interest in the metals with my existing love of technology and real estate into a broad approach to investment. And while I loved doing that work and enjoyed the career that technology allowed me to have, my long-term focus is now squarely on the investment markets with a keen interest in precious metals. I will continue to evolve as an investor and am actively looking for ways to explore my love of technology, real estate, and precious metals in a complementary approach.
And it is with that approach that I begin what I hope will be a series of articles looking into many aspects of the precious metals market that are not as widely covered, nor perhaps quite as well understood by the PM community. Of course, we all know about the shiny bullion finished products that we come to JM Bullion for.
Many of us enter that space eagerly, typically after having a quasi-religious experience the first time we pick up a gold or silver coin and roll it over in our hands exploring the intricacies of our favorite design. Truly, many of the bullion pieces we buy are not only physically valuable but also possess an element of artwork that is truly unparalleled in other forms of investment.
But my interests extend deeper than that and my curiosity has led me around the world searching for the source of these wonderful products. All while marveling at the level of technology involved in locating, extracting, and refining them into the bars and rounds. And further, examining the level of work needed to secure the real estate needed to build and operate a working mine.
Where the Streets Have No Name
I recently headed off to Mexico to explore two silver mines, one located 2.5 hours outside of Chihuahua and one in the hills outside of Mazatlán. I will document the trips here and thoughts on how the changes in the field of exploration are going to create exciting opportunities not only for a new generation of investors, but also for geologists, engineers, and other roles in a highly professional class of workers that are uncovering every stone they can to find the next batch of metals that we can turn into our favorite shiny coins and bars.
One of the first steps in the process of finding precious metals in the ground is the exploration process. Metals are formed through natural processes of metals coming up from inside the earth, and being pushed into the cracks and crevices found in our crust. This process happens over the course of thousands and even millions of years, and what is really intriguing is that the process is dynamic and quite often changing for any geologic formation.
Precious metals are often mixed with other base metals and minerals into a complex structure of mineralization. The geologists, engineers, and metallurgists’ tasks are to find those deposits with high enough concentrations of gold and silver that would be economic for extraction. For example, the country manager for Vizsla briefly discusses this process in a video I took onsite, just outside of Mazatlán.
What is interesting about this segment is the mineralization pattern of a precious metals deposit is never fully known during the mining process. When a miner hits what they think is an economic deposit by inserting drill holes into the earth and having them assayed for PM content, they continue the exploration process, oftentimes by spending millions of dollars punching more and more holes in the ground. It is akin to a very highly technical game of battleship, where the drill targets are picked per the highest probability of finding a “hit” of the metals.
However, the preparation for the drilling process takes much longer than pulling a game off the shelf and launching imaginary shots at your opponent’s target. Instead, the mining team takes months, and even sometimes many years, to examine geological studies including aerial photography, magnetic imaging, soil surveys, seismic studies, and other geophysical analysis techniques. The amount of technology used in the exploration process is quite extraordinary. We’ll cover more on that topic in ensuing articles.
Defining the Resources
What comes next, after obtaining the rock from the drill holes, is to inspect it for metal content. The drill samples are sent off to an independent firm for assaying how much metal content is present in each drill sample. While previously the drill core samples had to be crushed and measured physically, now we have imaging techniques using technology that is much faster and more economic. The result is metal grades expressed in terms of “grams per ton” (gpt) of the metal component in the rock.
In the picture below, we see several geologists and analysts examining the drill core for Discovery Silver’s Cordero project outside Chihuahua. The company’s head geologist explains to us how the metals formed inside the crust, and how subsequent movements of the earth in fault lines shaped the deposit of metals into a highly complex system of intermingled minerals, earth, and precious metals.
When enough drill core samples have been obtained, the company begins the process of examining the costs of mining the project and whether it will be economically feasible at current PM prices. This part of the process will often intrigue mining stock investors, who may pile millions of dollars into a private investment that a mining company will need to continue exploring their resources and perhaps even building a mine.
What is truly fascinating is that the process often leads to failure in that most deposits are simply not economic at current metals prices. That essentially means we have lots of gold and silver resources out there that will only be developed and turned into metal bars and coins only when gold and silver price rises, which has particularly been true the last few years with silver in mine supply deficit to the market demand. And that dynamic has contributed to the current shortages of silver available to the market we are noticing at both the industrial and retail levels of the market.
It is in fact a big component of the silver story which many metals investors believe will propel silver prices much higher in the future. In the graphic below, pulled from the Silver Institute, we can see the last few years of deficit in silver supply coming from mines when compared with current market demand.
Final Thoughts
Of course, only time will tell how this thesis works out, but I see it as a wise one given the state of mining supply in the last few years and the amount of work it takes to find new supplies in the ground. I simply do not see the readily available stockpiles of silver coming out of the ground that will be needed to satiate both investor and industrial demand for silver in the new few years.
Looking back on my early days as a PM investor, I have often felt that I took for granted the availability of precious metals. After all, I simply had to click a few times on a website and had whatever types and amounts of silver and gold I wanted to be delivered directly to my door. That seems like such an easy process and is a credit to the bullion industry for developing systems that allow easy access to investors like me and you.
But in reality, the process of finding, extracting, and refining these metals is much more complex and fraught with risk that makes the entire supply chain for precious metals perhaps much more fragile than we could have originally imagined. The sheer amount of education, experience, technology, investment, and risk-taking it requires to develop a gold or silver mine truly boggles the mind.
And it is precisely that process that gives the precious metals their value. After all, if it were easy, everyone would do it and the metals would be ubiquitous. But they are in fact very rare, as is the investor today who understands the process enough to know that silver and gold can never truly lose their inherent value.
That is why I believe they will stand the test of time and serve as outstanding investments both today and in the future. That belief was born and informed by my understanding of the entire supply chain. And it is one that I hope informs you and bolsters your belief that precious metals are a unique investment with a historic value proposition not matched by many other types of investments.
And because you are here reading this, you can count yourselves among the few that understand the value that the metals really provide us. After all, they are called precious for a reason.
