Today’s Pain Is Tomorrow’s Gain: What’s Happening in Precious Metals Right Now - Weekly Wrap Up (Sep 11, 2020)

Man: You're listening to the "Weekly Wrap Up" on Sprott Money News.

Craig: Well, happy Friday to everyone from Sprott Money News at sprottmoney.com. It's Friday, September the 11th, 2020, and it's time for your weekly wrap up. I'm your host, Craig Hemke. Eric is out this week, so joining us as a pinch hitter is an old friend of Eric's, Bob Thompson. Bob is a senior vice president and portfolio manager at Raymond James in Vancouver, and it's great to have him step in for Eric. Bob, thank you for joining me.

Bob: Great to talk to you again, Craig.

Craig: All right. Just a couple of things before we get going. Yeah, again, Eric is out this week. We appreciate you sending in your questions, of course, but we won't be able to go through many of the individual names at all this week. Hopefully will be able to get back to that next week. In terms of sending in questions, of course, we always accept questions for our "Ask the Experts" segment. We'll be recording that later this month, and this month's guests will be Rob McEwen, probably another guy that Bob knows. Rob, of course, a legend in the precious metals in the mining industry. If you have any questions for Rob, please email them to us at the word submissions@sprottmoney.com.

And of course, we're also very excited to announce the launch of our new website, sprottmoney.com, for those of you who haven't checked it out yet. Our new website is easier, faster, more user friendly. And of course, you can always check out our wide range of gold and silver products there. If you're new to the precious metals, unsure what to invest in or have any questions, you can also just give us a call at 888-861-0775. The Sprott Money team would love to chat with you.

And for now, I'd love to chat with Bob Thompson, so let's get rolling. Bob, again, thank you for your time this morning. It has been already a busy morning with a lot of U.S. inflation data. That is having an impact on real interest rates. I think folks know how I feel about real interest rates, and how Eric feels about real interest rates, I want to know how you feel about real interest rates. Is that a good driver for gold prices?

Bob: Well, you know, it's kind of 95% correlated to the gold price, right, so, when rates are negative, in other words, interest rates minus inflation, people tend to flock to gold, you know, so it just helps the underlying factors and why gold is doing well in other ways. But it's interesting, you know, because they say history doesn't repeat itself but it rhymes. And I think it's great to look back at other times in which interest rates had to be negative, or real interest rates had to be negative. We all know about the '70s and how, what gold did during the '70s, during that negative rate environment.

And, by the way, Paul Volcker, the central banker at that time, was paying a lot of attention to gold. Central bankers say they don't do that, they don't pay attention to gold, but they really do, and Paul Volcker made lots of comments about, you know, the more gold went up, the more it meant that people didn't have any confidence in the central bank. So they know that, and Eric's talked about that, and, you know, why they want to kind of keep that price down if they can. But going back to World War II, a lot of people don't realize that the last time we had debt to GDP at this level was the end of World War II.

And it was necessary. It was necessary to have a lot of debt then because, you know, if we lost that war, we'd all be speaking a different language, right? So it was important to win that war, but they had to get out of debt for the next five or six or seven years. So what they did is they let inflation run, they suppressed interest rates, and they created these negative real rates, which hurt the bondholders over time. And that's exactly what they're gonna do again is inflate away this debt. So, you know, as much as this inflation continues to go up, and I think a lot of us don't necessarily believe the inflation numbers anyway, they're kind of a lot higher than they say they are, the more that happens, the more gold is gonna do well over time.

Craig: You know, Bob as a money manager, and all that money you manage for folks, you're boots on the ground and keeping track of this stuff on a daily basis, obviously, and next week brings the last FOMC meeting before the U.S. election. So it's going to be a consequential meeting. It'll be interesting to see what they say. You know, Chairman Powell has gone out of his way to, you know, state in as many ways as possible that he's not gonna be raising interest rates at least through 2022. That's two and a half years from now. And as you said, there is history, and they have been studying this concept of yield curve control. As you plan ahead, look ahead to next week for your clients, what are you maybe expecting to hear, hoping to hear, or maybe thinking that you'll hear?

Bob: Well, I think we'll hear more of the same. I mean, everybody's been looking for them to kind of talk about forward guidance, and they're kind of pushing around that point, but haven't gone there 100% yet. But, you know, and that's basically when they tell you what they're gonna be doing for the next couple years. They've done it in a roundabout way, but I think the Fed realizes that things are not good with the economy at all.

The stock market might be doing okay, but that's just because of you pumped liquidity into the system. I mean, if your economic output is down $2 trillion, and you print $3 trillion in money and put it into the system, it replaces everything. It makes everything look great. But I think what's important is the Fed's gonna tell people that what we are addicted to, they're gonna continue to give us. And the economy has been addicted to free money, zero interest rate money, for years and years now, and, you know, the problem with that is in order to keep yourself where you are, whatever the addiction is, you have to take more and more and more of it to keep yourself in the same place. And that's where we fit right now with the economy.

So, as long as they can continue on with the pumps, then the numbers will look okay, but obviously, the system loses confidence sooner or later in what the central bank is doing. You know, so they're trying to play that game, they're trying to make like everything's okay, to cause everybody not to panic, but they realize that things are not good with the economy, so I think they're gonna continue to tell us that they're gonna have easy money, and they're gonna try to, you know, create that ease in the economy where people go back and start spending and things like that.

But I just don't see it happening. I mean, India, for example, has gone exponential now in Coronavirus. They had a million cases on July 17, and now they have over 4 million cases, you know, here we are six weeks later. So it's still hitting parts of the world. Brazil is in tough shape. This is all gonna hurt people's economies, and it all comes back to the U.S. and Canada also. So I think we're gonna hear more of the same. You know, I think they're gonna ensure that rates stay negative for as long as they can, and obviously that puts a big bid under gold prices.

Craig: Yeah. And again, I would just kind of go back to this real interest rate thing. If we hit multi-decade lows in real interest rates, again, that is the stated nominal rate of a U.S. 10-year treasury minus the inflation rate. We hit negative 1.1% back on August the 6th, and gold was $2080. We're still right around that level, but geez, Bob, if we go to negative 2.1%, or negative 3.1%, that would probably imply higher prices.

Bob: Oh, it'll be incredible, that's right. And, you know, I think we're kind of in that back and filling stage right now, right? Nothing goes up forever. So we've had a really nice run, you know, from last summer at $1350. You gotta backfill that now. You have to have people taking profits, you have to have other, new buyers come into the market. And, you know, by the way, the average institution worldwide only has about a 0.4% allocation to gold, right? So, hardly anything do they have.

So, you know, it's new group coming in, they're buying, and, you know, we're gonna see gold prices test that $1920 level, you know, maybe even go down from there, but I always say that, you know, you're never gonna do well if you don't take a substantial amount of pain. As we always say in anything we do, no pain, no gain.

Craig: That's right.

Bob: So there's going to be times when these prices get crushed, and if you don't understand what you're doing, if you don't believe where we're going, you know, then you're gonna be selling early, and I just think that's so ridiculous with the point where we are in the cycle right now.

Craig: Yeah. Gotta stay focused on the big picture. That's what I keep telling my folks at TFMR, too. Again, we can't get into the individual names today, but I do want to pick Bob's brain on, and use his expertise, to talk about the industry in general, what he's hearing from his contacts in the industry, and where he thinks we are in terms of investing in the miners. I did hear from Eric just yesterday, though, and he said, "Hey, do two things for me. Make sure our regular listeners are aware of two developments this week." We had some fantastic earnings results out of Wallbridge, where it looks like the Fenelon area is greatly expanding, in their words. So please, everybody do your homework and take a look at Wallbridge. Eric thought that was significant news.

And he also thought the drill results out of Tudor were very good too. And of course, Tudor and Teuton, closely linked, and those are other companies that Eric likes to mention on a regular basis. So those were two little nuggets he wanted me to pass along.

Turning back to Bob, though. Bob, one of the things, I guess I almost want to call it, it's a proprietary thing really, that you do, is called the mining clock? Can you tell everybody what the mining clock is, and where we are on that clock?

Bob: Yeah, you know, I manage money for, you know, higher net worth mining executives, so you have to know where you are in the cycle. Obviously, this is the most volatile area of any place in the market, maybe other than biotech. So you gotta know where you are in the cycle, and everything's cycles. So, we actually started in a bull market about three years ago. It didn't feel like it, in 2016. But when you look at, you know, the lows that we had at the beginning of 2016, we've never gone back to those lows. So we've been in a bull market.

Remember, the first part of a bull market, hardly anybody participates. The only people that participate is true believers or people that forgot they actually owned that stock, right? So, you get that first 100% move. We've had that in the market, and now you're starting to get institutions start to prod around and see what they can buy. And, you know, my contacts say a lot of big institutional clients who haven't bought yet but they're thinking about it, and they're thinking about what stocks they should start to buy. And that's usually the second part of the bull market.

So to go back to the mining clock that you asked me about, it's great, because it actually relates the entire mining cycle to a clock. So you can see where we are at one o'clock, two o'clock, three o'clock, etc. And, you know, three o'clock is usually that's the end of 2015, the times when the big companies are going bankrupt, everybody's over-leveraged, everybody's laying off employees, getting rid of the corporate jets, and having to survive. And companies actually do go bankrupt at that point, and we had that with, you know, many companies back at the end of 2015. Then you start to get into, you know, a point where the cycle starts to get better because metals prices actually bottom. They start to go up a little bit. Companies have reduced their expenses, and what you start to see is positive cash flow.

We saw that during 2014, where companies were reducing their expenses dramatically, and the average cost of production, you know, went from $1500 an ounce down to $1,000 an ounce, right? That's great, obviously, as the price comes down. And it gets to a point where your cost of production goes down below what the average gold price is. And we saw that during 2014, 2015. Then we get into, you know, more of the boom times, which we are now, and that's when money starts coming into the sector. And it's interesting because, you know, we're gonna see some really big discoveries here, I think, in the next year, or two or three, and that's really gonna ignite the market even more because everybody's gonna want to participate in the next stock that went up 100%, or a 100-bagger, sorry about that.

So, what we're going to see with all this capital that's come into the market is that's gonna go into the ground, and we're gonna start to get some really big discoveries. And that takes us to about 6:30 right now on the mining clock, which is where we are. You know, you want to be thinking about it when you get up to ten and eleven o'clock, when you start to get stock for stock takeovers, and, you know, mega-companies are buying other mega-companies for stock. Or companies are buying companies that were small, $100 million market caps, and now have a $2 billion market cap and they're buying them for stock.

That's when you want to start thinking about it. We're way off from that time, but obviously, that's usually just before the end of the cycle, and then you start all over again. And I'm in the midst right now of actually talking to a lot of pretty high profile people in the industry, you know, Ross Beaty, Mr. McEwen, who just mentioned. I'll be talking to Eric later on, and others to see, that have been through five or six cycles, where we are in their mind in the cycle. And from what I think, I think we're probably about 30%, 35% of the way through the cycle. We're at the bottom of the third right now.

Craig: Yeah, yeah. That sounds about right. To that end, you mentioned the cycle and where we are, and you also mentioned earlier the lack of institutional ownership of the precious metal shares, and what an increasing amount of institutional ownership could do. This is something Eric and I have talked about for years. If you double the institutional ownership, that's double the amount of cash chasing really a finite number of investment opportunities. How important do you think, Bob, I mean, you're in there on the retail side, and the institutional side, I mean, you talk to these people every day. How important was the, let's just call it the green light, if you will, that Warren Buffett gave all the institutional money managers and the hedge funds and the pension funds? You know, he may have only bought Barrick, but just symbolically, how important was that, do you think?

Bob: Extremely important. And it was extremely important also because he sold off his financials, right? He reduced his position in the big U.S. banks, which is really telling us something. So, you know, I think with regard to Barrick, if you just took the name away, and you just looked at the company, or any of the gold companies right now, and said, "Hey, here's a company. I don't know what sector it's in, but look at their cash flows. Look at their profit margins. Their cost of whatever they make is $1,000, and they're selling it for $2,000? What a phenomenal business," when every other business in the S&P 500, you know, the average earnings per share is down 25%, and here's one sector that is gonna be sustained with great cash flows. So, from that perspective, I think it was really important that Buffet came in and bought Barrick, especially since he's been so anti-gold in the past, and obviously, that was really something to buy a cash flowing company.

But also on the, you know, institutional side and the generalist side, what we saw in 2000, during the tech bubble, is exactly what we're seeing now, right? Gold stocks were undervalued at that time. Eric was writing about it a lot. I read all of his commentaries back when he wrote a monthly piece, and he was talking about how undervalued gold stocks and overvalued tech stocks were, but the real money didn't start pouring into the gold sector until the tech stocks rolled over, right? Because there's a finite amount of money in the market, and it simply sloshes between sectors. So, you know, if they're not making money anymore in the big mega-cap tech stocks, they're looking for other places, and that's when the money really starts coming in. So that's what excites me now is we're starting to see that in the market. Now, not that, you know, if the market gets hit big, you know, gold stocks aren't gonna rocket up. People have to adjust to that, but then money's gonna start to flow in when they see the opportunity.

Craig: Yeah. All right, Bob, just one last question then, again, drawing on your expertise as a portfolio manager for a lot of folks. You know, we look at our individual portfolios, and we try to maximize our exposure, you know, and to get in the right, I guess, sector within the sector. At this point in the bull market, do you like to focus more on producing companies, you know, the big guys? Maybe the junior producers? Or at what point do we start to really look at the exploration companies?

Bob: Well, that's an interesting question because, you know, Eric's talked about this before, and I completely agree, you know, money generally comes into to the big stocks, and then people that sell those stocks for a profit, maybe to a new institution that's coming in, they take their profits and they go down, and they buy the mid-caps and then they buy the juniors. This has been interesting that some of the exploration stocks have really rallied dramatically in the last few months, whereas some of the developers and the producers really haven't done that much. And, you know, so it's interesting. It's a little bit backwards this time, but I do think one of the reasons for that is, you know, there's been a lot of private placements, there's been a lot of money come into the sector, and these explorers now are starting to use that money and, you know, people are expecting big things. And I should mention there, you know what the secret to happiness is?

Craig: Lay it on me.

Bob: Low expectations, okay?

Craig: Yeah.

Bob: Isn't that a funny statement, but it's true. The reason I say that is because when expectations get extremely high with stocks, then you're probably gonna get disappointed in the future, right?

Craig: Right.

Bob: But when expectations are low, which they are right now with a lot of the developers, then you're probably gonna get a positive surprise, right? So again, the secret to happiness is low expectations. That's what my wife always tells me anyway. That why she's still married to me. So I think that in that pocket, the developers, there's gonna be some really good opportunities going forward here. One of the things is, you know, there was something called the Lassonde Curve, that was made by a man named Pierre Lassonde. He used to be at Franco-Nevada. And what it says is, obviously, during the exploration stage, stocks go up dramatically. And then when they find the resource, then they have to build the tunnels and do all the technical work and all that, and the stock doesn't do anything for a period of time. And then, just before they start producing, the stock rockets up again, because you get a new investor base coming in that starts to say, hey, this company's gonna be cashflow positive, and this is a good thing.

So, you know, that's maybe where we are with some of the developers right now, but I do think when we look at the resource base that they have and when we look at, you know, what they're gonna cash flow down the road, especially if, you know, Eric and me and others are correct with these silver prices and gold prices going up, just gonna be incredible cash flows that these companies are gonna be making.

So, I think at this point, you know, we're probably more positive on silver than anything. Obviously, gold's gonna do extremely well, but silver does even better as we go on into the cycle. And having said that, there's a lot of companies out there that have a lot of byproduct silver that they haven't even thought about for years. You know, I was looking at a company the other day that's got several million pounds of gold, several billion pounds of copper, but they also have about 250 million ounces of silver, and they didn't even think about it until recently. You know, imagine what that can be worth if silver goes up a lot. So that's what I think we should be looking for.

Craig: And Eric keeps emphasizing every week he thinks we will soon, whatever soon means, weeks, months, be headed back to a gold-silver ratio that's a little closer to historical averages as well. That might kind of change the dynamic on that silver, too.

Bob: Yeah, and Eric says 15 to 1, and, you know, I was reading a report the other day by a man named Louis James, who I have a lot of confidence in. And it was interesting because he looked at inflation numbers as Shadowstats reports them, which is a great website. You know, he says inflation's been running 6%, 7%, 8%. If you actually factor in gold prices and silver prices back to 1971, with the inflation numbers that he's used, I mean, he says that silver has actually averaged $200 an ounce, right? I know it doesn't make a lot of sense. It sounds like I'm just making those numbers up, but it's because of the inflation has been understated for so very long. And I do a report called "The Gold Digger," and I actually put that chart in "The Gold Digger," and it was quite something to see. You kind of gotta sit down when you look at it and see, if we use real inflation numbers what gold and silver has averaged over the years.

Craig: Well, let's hope we head that direction. I think that'd make a lot of our regular listeners happy. And I would say a lot of our regular listeners are very happy with the admirable job of pinch-hitting you've done. Bob, I think, stepping up to the plate when called upon, and putting the ball in play and even over the wall is a hard thing to do, and I think you've done it this morning. So thank you very much.

Bob: Always great to talk to you, Craig. Thanks for having me.

Craig: Great visiting with you, my friend. Again, we've been speaking with Bob Thompson, senior vice president and portfolio manager at Raymond James in Vancouver. Of course, this has been your weekly wrap up. And I just want to remind everybody, these podcasts are available on all sorts of different channels, not just at sprottmoney.com. You can find these on YouTube, SoundCloud, Buzzsprout, Facebook, LinkedIn, Twitter, you name it. And don't forget to subscribe to those channels and hit the like button if you find these podcasts to be insightful and learning, and we try to make them insightful and educational every single week. Again, thanks to Bob Thompson at Raymond James in Vancouver, for joining me this week. Thank you all very much for your time and attention. We'll talk to you again next Friday. And again, please remember to check us out, sprottmoney.com.