BONUS EDITION - Author and portfolio manager Bob Thompson on “the most overlooked trade around”. (26/01/2018)

Transcript:

Announcer: You're listening to The Weekly Wrap-up on Sprott Money News.

Craig: Well, hello again from Sprott Money News and sprottmoney.com. Hey, it is still Friday, January 26th, but we have an extra special treat for you this Friday. It's a daily double "Weekly Wrap-up," if you will, in that we have a special guest this week. We're gonna speak shortly with Bob Thompson. Bob is a Vice President and portfolio manager with Raymond James in Vancouver. Bob actually is an author as well. About ten years ago, he wrote a great book called "Stock Market Superstars: Secrets of Canada's Top Stock Pickers." And in that book, he actually profiled our old friend, Eric Sprott.

So anyway, Bob has known Eric, he's known Sprott Money for a long time, and it's a pleasure to get a chance to visit with him. Bob, thanks for joining us.

Bob: Great to talk to you this morning, Craig.

Craig: Hey, and just one thing before we get started, everybody should know, especially our Canadian listeners, that the deadline for our SPs in Canada is coming up on March 1st. So if you have not funded that thing yet or if you want to put some money in it, visit Sprott Money. We've partnered with Questrade to make it even easier for you to buy and store physical gold and silver in your registered retirement account. You can call 888-861-0775 for more details, or just visit sprottmoney.com.

All right, Bob, hey, I think the timing of this is great to speak with you, because we've had such a volatile week in Forex, particularly in the dollar. I know you've got some thoughts on that and what that might mean for commodities, so I'll just turn the floor over to you.

Bob: You know, Craig, sometimes, when we get involved in the day to day, we lose sight of the big picture, and I think the big picture is telling us a really good story right now. You know, you look back for 40 or 50 years and we have not seen commodities as related to equities this low, except for two other times in the past. And one of those times was late 1999, and you know what happened to commodities and gold, in particular, from 2000 to 2010. So we're right back there when you look at commodities as they relate to the equity markets.

And you know, it's funny. 1999-2000, I'm feeling old in this business, right? I talk to a lot of people now and say "Similar things are happening, it happened at that time." And they look at me with a glaze in their eyes and go "What happened? It's 18 years ago." Most people haven't been in the business this long...

Craig: Right.

Bob: ...now...exactly. And you look back and everybody was racing towards all these investments that seemed hot and that were going up at the time, the dotcoms, etc. And they were forgetting about the value that there was in a lot of the commodities. And you know, we've had some special circumstances in gold in the last few years; obviously, it's been going west to east, right? Gold gets smashed down, as we know, on a weekly basis or quarterly basis, but it's going to fix itself. Gold and commodities are lower than they've been in 40 years right now as compared to equities.

Craig: Bob, I want to ask you about something I've been mentioning on my site quite a bit recently, and that's just this idea of commodities being an undervalued sector; really, about the only undervalued sector where everything is overvalued. I mean, you're a portfolio manager, you do this for a living. Do you sense there's an opportunity there as portfolio managers, asset allocators around the globe look at the markets and go "Oh, boy. Look at this bond market, look at these equity markets. I've got to take some money out of there. Where am I gonna put it? Hey, look at this one undervalued sector of commodities and look at the falling dollar." Do you think that could really be a beneficial trade for us this year?

Bob: I really do. You know, I think it's the most overlooked trade around right now. And there's not many bear markets in the world right now, right? Rick Rule, who's obviously affiliated with Sprott, has said many times...he pounds his fists in the table and says "Bear markets create bull markets, and bull markets create bear markets." So you've got to look at where there's a bear, and that's probably gonna be the best place to be going forward.

You know, it's funny here in Canada. The average...you were talking asset allocation, the average asset allocator or fund manager in Canada has a zero percent weight in gold right now...

Craig: Jeez.

Bob: ...which is crazy. The TSX Index in Canada is about 7 to 8% gold. And the average manager has a zero percent weight, and I love that, really, because all that means is that when they start to come in, it's going to pop, you know, gold, obviously, up a lot because the demand is gonna be there, but also the gold stocks.

And if I could mention one thing about, you know, the guy who you have on with you every week, Eric Sprott, he told me something years ago that I have always remembered. And you know what he said to me? He said, "Bob," he said, "You have to be having a party by yourself in the room." And he said, "When everybody else is partying in the other room, they're having a lot of fun, they're making a lot of noise," and he says, "It's a lonely place to be by yourself." But he said, "What you're doing," is he says, "You're accumulating on low volume, you're accumulating things that other people don't want," and in this case, gold is the case. And he said "When they decide that it's time to party in your room," he said, "All of them come to party in your room at the same time," and he said, "Guess what? It's a really small door to get through," and he said "It's a bloodbath, as far as prices are concerned, when they come through your door."

Craig: Yeah.

Bob: And I thought, "What a great way to put it." And I think you've talked about that as far as physical and the futures markets, and what...how the futures markets control the gold price. If you're buying physical gold and not a lot of other people are doing it, there's not gonna be a lot left when everybody else wants it.

Craig: Yeah. And you mentioned, like, the shares as well. You know, I've compared this time recently to kind of the pre run-up of some of these cryptocurrencies, too. You know, all these trillions of dollars of QE that have been created just kind of slosh around the planet. And you had this limited supply, at least for a while, of Bitcoin, and that's part of what drove it up; all these funds flowing in after chasing limited supply.

And really, how is that different from the limited supply of mining shares? You know, the limited supply of physical metal if funds start flowing in this direction?

Bob: It is absolutely no different at all. And one thing I've noticed here is, you know, I wrote some articles in the past on real estate here in Canada. And I looked at it and I said, "You know, the real estate market, the gold market, the mining markets are all exactly the same. They're all exactly the same. They're all supply and demand, and you've got to be accumulating when other people don't want it." When everybody is talking about it, the market creates this massive supply when everybody is talking about something, and then supply overwhelms demand, and the cycle starts all over again. And at this particular time, you know, there's not much demand, and that's when you've got to get in, of course.

So again, I don't think it matters what the market is. They're all the same. They all act in the same formula.

Craig: Yeah, that's right. And again, that's spoken from experience. We've seen this before. You were around to watch it the last time in 1999, and again, the circumstances are eerily similar. Like you said, nobody wanted anything to do with commodities, it was all about the dotcom. And now, nobody wants anything to do with commodities; it's all about equities and crypto.

Bob: Right, right, absolutely. And you know, it's been said before that if you want to do well in investments and you want to do well in the markets, skip the degree in finance. Get a degree in history, psychology, and philosophy. It'll make you a lot better investor, and I think that's true.

Craig: So Bob, in terms of the dollar...you know, here in the States where I'm located, we watch it and we watch it go up and down. What did you think of this past week? With the events of our Secretary of the Treasury saying one thing one day and then his boss contradicting him the next, how does that make you feel about the dollar?

Bob: Right. There's a tremendous amount of uncertainty, and obviously when there's uncertainty, the market doesn't like uncertainty. And you know, whatever the asset is that people are uncertain of doesn't usually do well in the long run. So you know, that's what I look at, and you know, the President says one thing, the Secretary of the Treasury says another thing.

But I think the fact is people are starting to realize that we're getting near the end of the cycle, and surprises happen. And when surprises happen, people usually will look to gold or commodities in that environment. And you know, there's a saying in the market, right? "You discount the obvious and you bet on the unexpected." And I think there's gonna be a lot of unexpected events coming up in the near future here.

Craig: Yeah, I'm with you on that one. So Bob, with all your experience and all that you've seen, I'm not trying to make it sound like you're some fossil who's been around since the Civil War or something. But you've seen...I mean, that's a real advantage that you have, is that you've seen there, you've been there, you've witnessed all this stuff before. And as you said, it's cycles and history is your best friend. For folks that think that this is a trend, that this is a way you want to go in 2018, in general, what do you think folks should do? Do they kind of dollar cost average into positions and slowly build to their existing positions to take advantage of this? What do you recommend to folks?

Bob: Great point, and dollar cost everything is always a great strategy because...especially in a volatile asset, because you're buying more when things are down and you're buying less when things are up, which is actually the proper way to invest, which very few people do.

But I think to expand on what you just said there, you know, any bull market in gold, in commodities, in equities, can be broken into thirds. And we'll say the asset goes up 300% in a bull market, which a lot of times, that's what a sector will do.

The first 100% of a bull market, nobody participates in. Nobody. Because there's negative news, people don't realize it. The only people who participate are people who forgot that they owned that asset, generally. So I think at the beginning of 2016, we actually started into a bull market of commodities. And we're probably getting to be through that first third, because if you look at gold, if you look at the gold shares, if you look at commodities, you're getting higher highs and higher lows, and that's what happens in a bull market. So in other words, you get some volatility, but each time, the low is a little bit higher than the last low. And that tells you we're starting into a bull market. So I think we're getting into that first third. And it's interesting, because institutions now are starting to talk about how people should be allocated to gold.

The second third of a bull market is when institutions start to give in. And they decide that maybe this is a good asset to be in. The third third is when the retail gets in and generally, you get this euphoric blow-off in prices. And whether that's gold, whether that's commodities, or whether that's Bitcoin or tech stocks or whatever the case is. And, you know, we're years away from that. But I think we're into that first third of this bull market and nobody even knows it yet.

Craig: Yeah, yeah. I agree with you, Bob, no doubt about it. It's just been fabulous talking with you, and I can think of all kinds of other questions I'd like to ask, and I would assume a lot of our listeners feel the same way. I mean, if somebody wanted to reach out to you by e-mail or phone, do you have that information for us?

Bob: Sure, sure. It's bob.thompson@raymondjames.ca

Craig: Hey, that's easy enough. Even I could remember that, for crying out loud.

Bob: Absolutely.

Craig: Hey, Bob, this has been great. And I hope that as we go through the year, it'd be fun to get your perspective from time to time, so I hope we can do this again.

Bob: Fantastic. Great to talk to you, Craig.

Craig: Hey, everybody out there, thank you for listening to Weekly Wrap-up number two this week. Have a great weekend and we'll talk to you again next week.