Closing the Books on 2020: Gold, Silver, Platinum and Palladium Opportunities

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December 2, 2020 | (63 mins 49 secs)

2020 has been a breakout year for precious metals. The uncertainty and risk-off sentiment created by the global COVID-19 pandemic have increased the luster of precious metals. Both gold and silver ETFs have enjoyed record flows. We believe this bull market will extend into 2021 given expansionary monetary and fiscal policies worldwide, aiming to stoke inflation while keeping interest rates at record lows. In this webcast, join us as we explore the key benefits of precious metals investing in the current environment:

• Gold and silver have been “winners” during the COVID crisis
• Gold reached record highs in 2020 and silver rose dramatically
• Mining equities will continue to benefit from high metal prices
• Palladium continues its meteoric rise since 2016
• Platinum is preparing to breakout
• Precious metals provide an alternative when bonds provide little return and no downside portfolio protection

Featured Speakers

Webcast Transcript

Natalie Noel, RIA Database: Cover Slide

Hi everyone. Thank you for joining us for today's webcast, "Closing the Books on 2020: Gold, Silver, Platinum and Palladium", sponsored by Sprott Asset Management. This webcast will be providing one CFP, one CIMA and one CFA CE credit.

If you have any questions on credit please don't hesitate to give us a call at 704-540-2657. We welcome any questions you may have at any point in time during today's webcast and you can type your questions in the Q&A box to the right of the slides and we'll do our best to get to as many of your questions as possible. In the event your question is not answered during today's event, a member of the Sprott Asset Management Team will get back to you directly.

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At your convenience, please take a moment to take our survey that is also located at the bottom of your console. We will cover quite a bit of information during today's webcast. If at any point in time you're interested in scheduling a one-on-one meeting with Sprott Asset Management, please click the one-on-one folder at the bottom of your screen and confirm the request.

And in the event you miss any part of today's webcast or simply would like to watch it again, a replay will be made available and all registrants will receive that information by email.

With that, I'd like to go ahead and turn it over to today's first Speaker Edward Coyne, Senior Managing Director, Global Sales for Sprott Asset Management. Ed, take it away.

Ed Coyne: Slides 2-5

Thank you, Natalie, and thank you all for joining us for today's call. It feels good to say closing the books on 2020. We all know we've had our challenges this year and looking forward to 2021. Thank you for joining us today.

My name is Ed Coyne. I'm the Senior Managing Director and Head of Global Sales at Sprott. With me today is both Maria Smirnova and Shree Kargutkar. Maria Smirnova is a Senior Portfolio Manager at Sprott Asset Management, and Maria joined Sprott in May of 2005 and was appointed the Senior Portfolio Manager in May of 2017.

Maria is part of the Precious Metals Team with over 20 years of experience in the financial services industry. Maria graduated from the University of Toronto and has been a CFA Charter holder since 2002 and has earned her MBA in 2005.

Shree is a portfolio Managers at Sprott Asset Management and began his career at Sprott Asset Management in May of 2010. Shree specializes in precious metals and commodities investing. Shree obtained his MBA from the University of Toronto in 2011 and is also a CFA Charter holder.

For those who are not familiar with Sprott. Sprott is a global leader in the precious metals investment with over $16 billion in assets under management, Sprott is a publicly listed security on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol SII.

At Sprott we offer a full suite of solutions with over $11 billion in assets under management and Exchange Listed Products, allowing investors to allocate directly to physical gold and silver, pure gold, pure silver, or a basket of platinum and palladium.

We also offer a suite of managed equities with close to $3 billion in assets under management, making up our flagship mutual fund, the Sprott Gold Equity Fund, with a ticker symbol SGDLX, as well as two factor-based ETFs. The senior one focusing on large cap mining companies with a factor-based approach with a ticker symbol SGDM, as well as our junior mining factor-based ETF, SGDJ.

In addition, we have close to a billion dollars in lending and brokerage services. In today's webcast, there are a few items we'd like to explore. First and foremost, we'd like to take a closer look at gold and silver breakout year and why we believe both metals will reach higher highs.

We'll also look at the current environment of expansionary, monetary and fiscal policies worldwide, and we'll explain why mining equities will continue to benefit from a higher metals price.

In addition, today, we'd like to identify the strong investment demand trends we are seeing in both platinum and palladium, and lastly, I'd like to close with precious metal serving as a true alternative, particularly when bonds provide little return or no downside protection in the current environments.

At this time, I'd like to turn the webcast over to Maria to talk about gold and silver by turning to Page 6 and addressing both the federal deficit and Fed fund rates. Maria?

Maria Smirnova: Slides 6-12

Thank you, Ed, and thank you everyone for joining us today. I have been with Sprott Asset Management for over 15 years now and I'm very excited about the prospect for both gold and silver, so I really appreciate the opportunity to tell you all about our views on the subject.

So on slide 6, I always like to start with the macroeconomic picture, and I start with the United States and you may ask why I only look at the United States, I don't. But I think this slide illustrates the backdrop very well, and it has many, many stories in this one slide.

We have two lines here, one the blue one, is the US budget balance and as the line is going down, that means the budget balance is becoming more negative. Then we have the Fed funds rate, which is the interest rate benchmark in the United States.

This slide goes back two and half decades so there's some history here. The first thing I'd like to point out is to talk about COVID and how this year has catapulted gold and silver price. I’d like to point out that the drive behind gold and silver has actually been in place for several years now. The price of gold has quietly been rallying in the background and that is because we've had an economic slowdown even before this year, even before the crisis hit.

For example, last year, the US GDP grew 2.3 percent, down from 22 to 29 percent. Similarly, in Europe, the  GDP grew 1.2 percent last year. You can see here the blue line of the budget deficit going down and that is because of these factors.

In March, the blue line has completely lost it and went down as COVID hit. I would say that the IMF was downgrading economic outlook last year and the year before as well. So of course, what happened last year is both the ECB, the European Central Bank and the Fed had to perform a U-turn, and they started cutting rates and adopting easy monetary policies and you can see that in the gray line as the line goes down and we went to pretty much zero interest rate.

Even now, we're in the worst recession in modern history and we'll talk more about the fiscal and monetary signals that we're seeing. Mr. Powell, the Fed chairman, yesterday spoke to Congress, and he said and I quote, "The outlook for the economy is extraordinarily uncertain."

What I'm saying here to summarize is that even before this year, we were seeing growing economic easiness around the world. We are seeing a lowering of interest rates. We were seeing a ton of negative yielded debts around the world and that, of course, is positive for gold and silver.

Let's turn to slide 7. Here is a table that is a summary of all the fiscal and monetary stimulus, monetary being by the Central Bank, that's been in place since February of this year when essentially the COVID pandemic hit to November. This is up to date to November and you can see the numbers are astounding. That's why I call it "Whatever it takes",  we use the word unprecedented a lot to talk about this, because when we look at the United States, for example, stimulus has been about 44 percent of GDP.

In Eurozone, it's 52 percent of GDP and globally over 30 percent of GDP. This is very important. This has great implications for gold and silver prices.

If we step back, policymakers actually look at employment when they consider their acts. They want to make sure people have jobs and this recession has been different. It has service more so than durable goods. People can't go out, they can't go to restaurants, they can't get haircuts, et cetera, et cetera.

The US alone lost 22 million jobs so far, they gained back 12 million but we're still over 10 million jobs short. The policymakers look at this and then look more at jobs than GDP. Again, referring to Mr. Powell and his speech yesterday, he was talking about how lower-wage workers were affected more. Women had been hit hardest, African-Americans, Hispanics.

So the Fed looks at this and their policies are targeting a reinvigoration of the employment. They focus on unemployment because they want to avoid the leveraging of households. For example, people losing their homes. If that was to happen, which it hasn't happened yet, that would have great implications to the economy. We haven't seen that yet because of government support.

To slide 8. That has implications to government debt. This slide shows the historic ratio going back a century, both the developing economies and the developed economies of government debt to GDP.

We're in the worst recession in modern history and we're tackling it with the biggest fiscal policy response in modern history. Therefore, we're seeing record highs in the GDP ratio. This is a global trend, we are seeing that everywhere, and we believe that this is likely to continue going up going forward in the next while.

Then turning to the next slide, we look at the central bank balance sheets. The worst recession in modern history is forcing the biggest fiscal stimulus in modern history. How do you finance? Well, you call your friendly central banker and you ask for the biggest monetary stimulus in modern history.

You can see in the chart in '08, '09 with the global financial crisis, there was intervention, but not nearly to the same extent as we're seeing now. More importantly, in the years in between the GFC and now the central banks haven't been able to reduce their balance sheet much. The US tried, but in Europe that was not successful and Canada has been flat.

There's been a tremendous injection of liquidity all around the world to combat this crisis, and combat a weakening economy even prior to the crisis.

Turning to the next slide. We've talked about how central banks are targeting employment rather than inflation in fact and this is a structural change. This is important. Again, because to avoid the leveraging of households, consumers and corporations, policymakers have pledged to keep interest rates low and this translates to keeping the long-term rates below inflation.

If you want to support tangible assets, you need to keep rates below inflation. Last time, as you can see in this chart in the 1950s, this was after the Second World War, negative interest rates lasted for almost a decade. This is also a global phenomenon as I mentioned. So again, great implications and we are in an environment that we have not seen in many, many decades. We're expecting real interest rates to remain negative for some time to come.

What do real negative interest rates have to do with gold? If we turn to the next slide, the bars actually represent real positive or negative and the yellow line is the gold price. You can see in the four periods of time where interest rates are negative, the gold price had a really good time.

So again, the connection here is after the pandemic, the government gets judged and governments are essentially making a negative interest rates pledge because, again, keep rates low, try to stoke inflation as much as you can and weaken the dollars. All of that is positive for gold and again, that's exactly what they're seeing in real life.

Ed Coyne

Maria, I was just going to ask because the last couple of charts to me that the common denominator is debt and the byproduct of that debt is lower rates so we can service that debt. Then obviously, the byproduct of that is potentially printing more money. It's interesting, I look at Page 11, and I think this is a chart that we should really focus on for the listeners. We’re in the fifth decade now where whenever we get to a low or negative interest rate environment, gold tends to do very well.

The old saying that gold is money, right? People think about gold as money, they think about it as an alternative currency, they think about it as a store of value. All those things. This is a pretty consistent trend in my mind for multiple decades now. Why do you think it is that gold consistently does so well in a low-interest-rate environment? What's the takeaway from that? How can investors think about gold as we go into the next couple of years of most likely a low or challenged interest rate environment?

Maria Smirnova

Well, when people criticize gold, they say it has no yield. When we are in a period of negative interest rates, obviously, that argument against gold falls away and also it has to do with the outlook for the economy. In the periods in A and B, for example, as you can see in the 70s, the negative real rates were so negative was because of high inflation.

Right now, we don't have inflation. The government is trying to create inflation and that's why it's been positive for gold. We're in a bit of a different environment than in the past, but the factors that are driving gold remain similar. Does that make sense?

Ed Coyne

It does and actually, the inflation thing is interesting because we're in a fed fund rate and real-low-rate environment, in some cases, negative rate environment. If in fact, you tack on inflation on top of that, I would expect those numbers to be even more severe. Would that be the case?

Maria Smirnova

It’ll decrease the real interest rate and in fact, the Fed has just as you know, they have adopted a different policy called FAIT. It's called Flexible Average Inflation Targeting. What they're trying to tell us is they don't just want to target two percent, they can overshoot on the upside, and they're trying to create more inflation and let it average to two percent and that, of course, will reduce the real interest rate.

Ed Coyne

Clearly we're going to have bumpy times ahead. I always like to point out to people and investors that really from 2016, 17, 18, and 19, gold was already acting the way it's been acting more recently not because it saw the pandemic coming, but because of all these financial situations that you've already talked about. Clearly, these charts that you've just touched on really have multiplied that by a factor of 3, 4 or 5, and that's probably going to continue for the next 3-5 years.

I think it's a great segue into Page 12, which is to talk about the gold price breakout and how it provides a catalyst. Because, for me, this chart really tells a lot about what the market has experienced really the last decade. Going up to 2011, the market peak and then hitting new highs here more recently. Can you walk us through this chart a bit as well?

Maria Smirnova

Certainly. I always actually like to point out that while of course, we've had the great breakout last year and somewhat of a record high this year, gold was quietly rallying since the end of 2015 with ups and downs and that's why we put a little blue line, support trend line at the bottom there.

But we really did have a bumpy ride towards last year, stops and starts. There was a lot of resistance at $1,350, $1,375 and that's where you see the red line. Then, of course, decisively gold broke out last year and never looked back. Now we are sitting on a new trading range, I would say.

If you also look at gold inflation-adjusted, we're not back to old record highs. With the recent pullback, some people are worried that we've seen the highs and the best is done but I like to think of, again, I go back to the beginning and I go back to the macroeconomic backdrop and the fiscal and monetary policy environment that we are in and in that regard, we are in a very positive environment for gold.

I actually like to see corrections. I always say nothing goes up in a straight line. For me, a correction is healthy and it's a buying opportunity and I think that's where we are. We are also in a time right now, December is generally weak seasonally, so now I'm not worried. I think again, we're in a very constructive environment and we're very excited for the prospects of the price of gold.

Ed Coyne

Well, I would agree with that, of course. It's interesting these days, you can't say the word gold without following it up with the word silver. Silver seems to be more recently, particularly this year when it really got a bad rap when the gold-silver ratio got above 100, but more recently silver is shining again and albeit November was a bit of a selloff. If you look at it over the last quarter or two, it's done quite well. At Page 13, you talk about that a little bit.

Can you address a little bit more about silver also?

Maria Smirnova: Slides 13-15

Yes. Well, as you're well aware, we are very bullish on silver as well and I have been following silver and silver equities specifically for almost a decade now actually. Silver has a bit of two heads to it. Half of the demand for silver is like gold. It's an investment, it's jewellery, it's things like that. The other half is industrial components. So silver goes into a lot of electronics. It goes into the green industries, electric vehicles, photovoltaic cells, or in other words, solar panels. It's a very interesting metal in my mind.

Of course, when we had the liquidity crunch in March, in the Western world after COVID hit, silver sold off more and we see that happen because silver is a smaller market. It's easier, it goes up more it can come down more but it did start reacting after. It broke out through the $21-$22 an ounce resistance level and it’s popped since then and in the summer, it was rallying really strongly. Again, that happens.

I will take you now to the next slide, which I wanted to talk about quickly on slide 14 about some of the investment flows that we're seeing. Gold and silver both have seen very strong investment demand and you can see that in the ETF as being one component of the demand. In fact, a year to date, in silver, we've seen almost 26 percent of the annual market in silver has gone into ETFs, and in gold, it's closer to 17 percent. Those are very high numbers just by this one vehicle alone of ETFs, that much metal has been consumed.

To me, that just illustrates that the interest in the metals is back and people are paying attention.

We've seen some outflows recently that doesn't concern me. People are probably taking profits. That's fine. But the fundamental picture is there is demand for this metal and in investment, demand is what drives the price.

Then to close the subject of silver, let's turn to slide 15. You can criticize the gold-silver price ratio as irrelevant, or some people do look at it. I do look at it just for history's sake and I always try to point out to in 2008, when the global financial crisis hit, silver went down more than gold. At the end of '08, silver went down more than gold and you can see that by the ratio going up at the end of a '08. Guess what happened after?

Silver underperformed at first but as the years went on silver outperformed gold to 2011.

For three years, it was rallying more than gold and then everyone threw in the towel on silver. In fact, I remember if it were last year or the very beginning of this year, it was very hard for me to have a conversation with people about silver because people just threw in the towel on it. But we're seeing exactly the same pattern this year. In March, silver sold off more and ever since then it's been rallying more than gold.

That is why we're excited. We think that silver has its own very good fundamental merits. It also sees a lot of investment demand from people, and I think it has a great prospect to sell. Again, it's a smaller market. Less dollars need to go into the market to drive the price up.

Ed Coyne

Well, that's a solid point that I'm actually seeing also on the client level. More and more unsolicited questions are starting to show up about silver. More investors are starting to think about silver for in many cases, the first time. I think both gold and silver look very interesting right now from an allocation standpoint.

What I'd like to do is actually bring Shree in and get his thoughts on not necessarily the physical part of the market, but as it relates to gold and silver, the miners, and get his view on the miners today what they look like from an earnings per share standpoint. What are your thoughts on Page 16 as relates to the miners today?

Shree Kargutkar: Slides 16-18

Thanks, Ed. To put this into context, two years ago, the price of gold was under $1,300 per ounce. Today, the price of gold has increased, it's trading just around $1,830 per ounce, which is about 40 percent higher. What we're looking at on slide Number 16, is the leverage you get to increasing price of gold that is being demonstrated by the gold mining companies. Since the beginning of 2019, the earnings of the 10 largest gold mining companies have increased by just over 180 percent which compares very favorably to the 40 percent increase in the price of the bullion.

Let me go a little bit further down cap and we look at the earnings growth in the mid-tier companies. The profit growth there has been even higher. It goes without saying that the gold mining space today is showing some of the most powerful earnings growth across all sectors in the equity market.

This growth in the profitability of the gold miners is in direct contrast with the earnings growth of the companies found in the S&P 500 or the lack of earnings growth. Because while the gold mining profits have increased by over 180 percent in the last almost two years now, the profitability of the S&P 500 companies, and here we're looking at the 20 largest companies in the S&P 500, they've declined by 18 percent despite all the government support, despite all the stimulus measures, and despite all the central bank actions.

The profits of the S&P 500 companies have declined.

That's a very, very important divergence that we're seeing. So massive increases in the earnings power of the precious metal miners versus the big decrease that we're seeing in the profitability of the non-mining space. I think if you flip over to slide Number 17, the divergence becomes even more apparent because this slide here, what we're looking at, is the EV/EBITDA multiple of the gold mining equities versus the S&P 500 Index.

While the previous slide was talking about the earnings growth, this purely looks at things from a valuation perspective. The recent run-up that we have seen in the S&P 500 has not been powered by earnings growth because there has been no earnings growth. The only thing increasing the S&P 500 today, has been multiple expansion. You contrast that versus the gold mining companies, and the contrast is very evident while the profits of the gold miners have increased by as I said around 180 percent over the last two years, the multiple valuations of the gold mining space has not changed. As of October 31st, the EV/EBITDA multiple for the S&P 500 was around 15 times. The EV/EBITDA multiple for the gold mining sector is around eight times and I quickly glanced up the updated chart as of yesterday and that gap has actually grown, with the S&P now trading at 16 times EV/EBITDA, while the gold miners are sitting at seven and a half times EV/EBITDA multiple.

The decrease in the multiples for the gold miners has more to do with the denominator which is the EBITDA than the enterprise value and the EBITDA has been increasing.

The next slide, slide Number 18 does a good job at talking about that. This slide is looking at price to cash flow. On the previous slide, we're looking at EV/EBITDA and I mentioned that the recent earnings growth that we've seen out of the gold companies has been showing a pronounced acceleration. This slide is current as of last week, I believe, November 23rd, 2020 and if you look at the right-hand side of the slide, you'll notice that there's been a drop in the multiples of both the gold and silver miners.

This is more to do with as I said, with the recent round of earnings because they are coming much, much better than expected as the mining companies have learned to function in the new COVID induced environment.

If you step back and look at the chart on Slide 18 on a whole, and this chart is really going back 13 years, the one thing that quickly stands out is that the gold and silver miners are trading at a significant discount to their long-term average. The sector is cheap.

A couple of slides ago, I talked about the phenomenal increase in the profitability of the sector. Cash flows, pre-cash flows, dividends, earnings are all growing, and they're growing rapidly in this space. As I demonstrated on the previous slide, the sector is extremely cheap. It's trading at a discount to the S&P 500's multiple. It has been growing its profitably at a very, very strong quip almost 200 percent and this dissonance between the miners and the broader market is not really going unnoticed.

In the past couple of years, we had seen some people take their profits early, I would say, and leave the space. But over the past few months, we have been noticing subtle moves into gold and silver equities because smart money investors have been putting new capital into precious metal mining companies.

These profits will continue to grow. These cash flows will continue to grow, these dividends are going to continue growing, and the investor interest which we're starting to see coming back into the space will also continue growing.

It goes without saying, as the investor interest builds, there's plenty of room for multiples to expand in this space. For this reason, we believe that the upside represented by the miners, both gold and silver miners, is enormous.

Ed Coyne

I think for all the value investors out there which seems like that number is shrinking every day, although more recently you do hear more about value investing again, this is the ultimate value when you think about growth, when you think about valuations, when you think about free cash flow. If you're a true value investor, you're hard-pressed to ignore the miners today so I think that's something that's worth pointing out for everybody on the call, not just in the precious metal space, but value investors in general. It's hard to ignore what's happening in the mining space today.

Shree, before we go a little deeper into platinum and palladium, I would like to turn it back to Maria just for a moment, because, Maria, you made some really great points today about both gold and silver. I thought it would be helpful for the listeners to really get your general outlook on where you're seeing the gold and silver market today.

Maria Smirnova: Slide 19

To summarize, I would say our outlook firmly rests on the macroeconomic outlook that we have, and more importantly, the policies that are in place and are being telegraphed by central banks and governments around the world. As I mentioned and as I pointed out actually several times in the presentation, the governments are pledging to keep employment going and increase employment. There has been some permanent job loss due to the pandemic so I think governments will be trying to figure out how to combat it.

Governments are pledging to keep rates below inflation and at the same time to stoke inflation. So all of this is favorable to gold and silver. Therefore, we also think that liquidity injections and fiscal stimuli will continue going forward, and also massive debt purchases by central banks will freeze interest rates at ultra-low levels.

Then going back to the equities of gold and silver. The miners, as Shree talked about, we think that the earnings and cash flow outlooks are fantastic for the miners. They have tried to fix their businesses, they have cleaned up their balance sheets, they're doing the right things and I think we view it as very positive in the Q3 reporting season that we just went through. We saw many great reports from companies. We saw dividend increases and new dividend announcements, and that is all great.

The road to recovery from the pandemic will be rocky, I think. I don't think we're going to see a stable V-shaped recovery and a quick bounce back. Of course, the vaccines will help, but I think we have a long road ahead of us and therefore again, we're positive on gold and silver.

Ed Coyne

Thank you, Maria. I think at this point, we spent a lot of time talking about gold and silver. I think for most investors, that tends to be the precious metals of choice, particularly gold and for many, both gold and silver and for others, just silver. But I'd be remiss if we didn't bring up platinum and palladium.

This year alone, palladium's done very well, in fact, it's one of the better-performing metals, just slightly being beat by silver. But platinum and palladium is its own special market, and I think it will be helpful today to turn it back to Shree, and let's start with on Page 21, the demand sources. What is platinum really used for in today's environment?

Shree Kargutkar: Slides 20-24

Thanks, Ed. The largest source of demand for platinum today is from the automotive industry as slide Number 21 will show you. Around 34 percent of the demand of platinum comes from this particular area and it's followed by industrial users. Platinum is used in glassmaking for petrochemical industries as well as for chemical industries as well. Then we have obviously investment and jewelry demand which make up the rest of the pie.

But it is very important to point out that platinum is not just a precious metal, it is a clean air metal because the largest demand for platinum is from the automotive industry. Platinum in a car ends up in the catalytic converter, which is used to clean up the noxious emissions which are coming out of the engine once the gasoline has been burnt. More recently, many countries around the world have been demanding cleaner air emissions out of cars and that's been a major source of demand for platinum as well as palladium.

Flipping over to slide Number 22 which looks at palladium, most of the demand for palladium comes from the automotive industry. It is also what I would refer to as a clean air metal. It used to trade at a very, very significant discount to platinum a couple of decades ago. That is no longer the case. As many as you guys have seen, times have changed and the palladium prices have changed. The price of palladium used to trade closer to $500 per ounce about five years ago, and it's trading around $2,400 per ounce and that is versus platinum which today trades around $1,000 per ounce.

Looking back at slide Number 22, what I will point to is that most of the demand for palladium has come from the automotive industry and it really owes much of its price success to the automotive industry. When platinum used to be the catalyst of choice many years ago, that changed with substitution towards palladium and today the overwhelming level of demand for palladium comes from catalytic converters.

As a result of that, it is perhaps the Achilles heel of palladium as well because at 84 percent of its use coming from a single industry dependent on gasoline-powered engines, it is turning into a bit of a one-trick pony because if and when the use of gasoline in transportation starts to decline, that will immediately start to affect the demand for palladium.

Let's look quickly at slide Number 23 which talks about just the divergent trends we have seen play out over between platinum and palladium for decades really. As I said before, palladium used to be platinum's poor cousin which changed with the substitution away from platinum into the more cheaper palladium during the early 2000s.

In the past five or 6 years, what has happened is that automakers became very, very comfortable with the use of palladium and when the emission standards started increasing, they were reluctant to try and mess around to the chemistries that would be involved when they're looking to substitute out of palladium and into platinum and as a result, the palladium metal has been in a protracted structural deficit.

Since 2012, palladium has not had a single surplus year and by that I mean there has been less metal produced from the mines and less metals available from recycling to meet the demand that is coming particularly from the auto manufacturers. For the past four years, I'd say since the beginning of 2016, so five years really, the ETF holdings in palladium have moved lower from 2.5 million ounces to about 500,000 ounces as suppliers have really started to eat away at the above-ground stockpiles and really the only stockpiles that are left are in the ETFs.

That helps describe what I like to say is the tale of two metals for the past couple of decades. It's something which looking ahead and this is looking at the outlook slide Number 24 for platinum and palladium it's something that's going to continue playing out because the total amount of mine output for both platinum and palladium is exceedingly small. It's about six million ounces of platinum that is mined every year, whereas about seven million ounces of palladium mined every year.

Palladium has been in a deficit since 2012. If you were to believe some of the recent trends that are touring and some of the data that is available, platinum will also be in its third year of deficit going into 2021 and we don't think that these deficits are going away. It's primarily for two reasons. The fuel emission standards in Europe and China, which are among the largest economies in the world are increasing. Both parts of the world are demanding cleaner air and that in turn increases demand for both platinum and palladium. Even if the number of autos sold around the world declines, the demand per car of either platinum or palladium is increasing.

I actually think that platinum represents a relatively interesting opportunity because more and more people are now starting to talk about the hydrogen economy. In a typical car, about two grams of platinum or palladium are used for the catalytic converter. When it comes to a hydrogen-powered fuel cell car, you need about 30-60 grams per car. So anywhere from 15-30 times the amount of metal of platinum only, not palladium, goes into a fuel cell car, than it would in a gasoline-powered or diesel-powered engine. Platinum looks very interesting from a hydrogen economy perspective.

One of the things that I found very curious is that investors appear to be positioning themselves for the cycle. They have been buying platinum. Since early 2019 investors added 1.5 million ounces of metal through ETF purchases. So in 2019, we saw almost a million ounces get bought up for ETFs and in 2020, we have seen just north of 400,000 ounces get added into the platinum ETFs.

The demand coming from investment has been increasing. The demand coming from the automotive space is likely to increase and because of the diversity of the demand sources of platinum, it looks much more interesting compared to palladium because when you look at palladium, for example, yes it has been in a deficit since 2012 and I don't believe that gasoline car parts are going away anytime soon, so those deficits will persist.

But because 84 percent of its use comes from a single source, and over time, we will start to see a small but meaningful level of movement away from gasoline-powered cars into electric-powered cars and perhaps even hydrogen-powered cars. This will likely come to a head for palladium bulls but not in the foreseeable future.

This is something that may play out over the next four or five years and beyond that. In the meantime, both these metals they are in a very, very strong deficit situation. Suppliers have been scrambling for both the metals. There is obviously a little bit more supplies above ground, stockpiles available of platinum, but those have been dwindling as well, and in the foreseeable future the outlook for both the metals I would consider to be quite strong.

I would say I'm particularly more biased towards platinum, as I said, because of potential for the hydrogen economy as well as potential for a little bit of substitution away from palladium and into platinum which seems to be underway based on some of the anecdotes we've heard.

Ed Coyne: Slides 25-28

Well, thank you, Shree. It was interesting. I was just starting to vet through a lot of the questions. We have over 70 questions, and from what I could tell in the vetting about a third related to electric vehicles. I'm glad you touched on that now and hopefully, we addressed a lot of those questions that have been coming in. Thank you for that.

Before we open up the webcast to more questions before I turn it back over to Natalie, I do want to address one question that we seem to get on every conference call I do on every webcast we do, on every meeting I do, and that is how much should I allocate to gold or why bother? But hopefully, we've addressed the why bother part.

On the allocation part, we have found with working with large institutions and family offices that 5 percent number, as I've grown to call it the 5 percent solution, tends to be a wonderful starting point for those that are looking to diversify into the equities which we would suggest now is the time to do that. As much as a total of 10 percent of your overall portfolio in today's environment should be dedicated to both the physical market and the equity market.

On Page 25, there's one particular slide here that I think is interesting. In the traditional 60/40 portfolio, equities, in general, represent close to 100 percent of the total portfolio risk, is right now around 98 percent of the total portfolio risk. That's in short, why alternatives in general have become a more popular investment solution to help mitigate that risk. What's interesting is if you add a simple 10 percent allocation to gold and gold equities, which are very liquid, very low-cost ways to diversify a portfolio through an alternative strategy, that risk goes from 98-83 percent.

Simply put, precious metals can serve nicely, really twofold. One, we have seen over multiple market cycles, precious metals, in general, have served nicely to reduce risk. But more importantly, this is where people are surprised until they look at the long-term returns, it's been able to enhance returns over that same type of market cycle. We say the physical part of the market is a wonderful way to diversify the portfolio and reduce that risk, reduce that volatility in your overall asset-allocated model, and then the equities are there to help enhance those overall returns.

Over a full-market cycle, a combination of both physical and equities, we have found for both our investors and the way we allocate to serve nicely and diversifying a portfolio and enhancing is overall risk adjusts the rate of return.

On Page 26, for those investors that are looking to add some precious metals to their investment lineup. As I mentioned earlier at the start of the webcast, Sprott does offer a full suite of solutions both in the core allocation of the physical market as well as the explorer or opportunistic side of the equity market through equity. At Sprott, we do offer four unique physical trusts that allow the clients to own the physical metals directly and for US investors in a potential tax advantage way, whether it's a combination of gold and silver, pure gold, pure silver or a basket of both platinum and palladium.

We also offer several unique equity solutions, whether it's our active 20-plus year track record mutual fund, SGDLX, the Sprott Gold Equity Fund, or our two factor-based ETS, focusing on both large cap senior miners, which is SGDM, or our junior miners, which is SGDJ, which frankly, is where we're seeing a lot of the opportunity today in the junior mining space.

For those again who are interested on Page 27, I'd encourage you to reach out to your respective senior investment consultant. We have mapped out basically the US predominantly for those investors that want to work directly with one of their investment consultants to really help learn more about how precious metals can serve as a valuable allocation within your overall portfolio, whether again, it's the physical as a core diversifier or it's the mining equities as a way to enhance your overall returns.

With that, I'd like to turn it back to Natalie before we go into the Q&A session of the webcast. Natalie?

Natalie Noel

Wonderful and thank you all for such an informative presentation. Just as a reminder, additional material can be found in the Documents folder at the bottom of your screen. We do appreciate your feedback. Please take a moment to fill out our brief survey also located at the bottom of your screen. Our speakers will be taking advisor questions. Please type your questions in the box to the right of the slides and we'll get to as many of your questions as possible.

In the event your question is not answered on today's webcast, a member of the Sprott Asset Management Team will reach out to you directly. If you'd like to have a conversation to further discuss the ideas that were covered during today's event, please click the one-on-one folder at the bottom of the screen and confirm the request. With that, Ed, I will go ahead and turn it back to you for our first question.

Question and Answer Section

Ed Coyne Q&A

Great. Thank you, Natalie. I think with the election behind us, not to get political, but I think the first question is a good one because for those that are paying attention to Biden's plans with taxes and how to spend capital, the first question comes in that states, given Biden's plan to install roughly 500 million solar panels over the next five years as part of the green stimulus plan, what will that do roughly to silver given that it's one of the primary components in the solar panel technology?

Maria, I know you've been working with silver fairly closely over the last decade or so, what are your thoughts on that?

Maria Smirnova Q&A

Well, I think that's an excellent question. Silver is already being used a lot in solar panels. In fact, the global demand for silver in that application has reached close to 100 million ounces a year which represents about 10 percent of the global market. That is a big number. That is a very big number and if President Biden introduces policies that will support that, that will only help silver. Now, I will say there's a caveat to this. Manufacturers have tried to thrift the use of silver in the panels, but there comes a point where there's law of diminishing returns in that exercise.

In addition to it, we haven't figured out yet how to recycle solar panels. All the metal that goes into them currently is gone forever and we need to find new metal. In terms of how it would contribute to the price outlook of silver, well, I consider industrial demand as the backbone of silver demand but I don't necessarily it consider the driver of the price. As I mentioned, what I pay attention to is the investment demand because that is the swing factor. The coins and bars demand and the ETFs are the greatest driver of the price up and down and that is why our view is more informed by that versus the industrial demand.

Certainly, solar panels are a very important component in that demand equation.

Ed Coyne Q&A

Thank you, Maria. I guess the other hot topic right now because it's sitting all-time highs or flirting with all-time highs depending on the day and the hour would be bitcoin. There's a couple of questions here I'm trying to consolidate this but I think the main question is an interesting one, which is, do you believe bitcoin is drawing investors and dollar flows away from gold? Or do you believe bitcoin is exposing new investors to the value of gold? That's a pretty thoughtful question, actually.

Who wants to tackle that first? I have some thoughts on that as well, but I think it would be good to hear from one of the portfolio managers first what your view is on bitcoin. But more importantly, what does that mean for the gold trade? To some extent to silver trade as well.

Shree Kargutkar Q&A

I can try and address that, Ed. I think the underlying theme that is playing out here which is driving the amount of interest into bitcoin and other cryptocurrencies as well as gold and silver today, is the overall distrust in the ability of the governments around the world to be able to tackle the burgeoning debts in a meaningful manner that would produce an economic return for a bond holder.

Both cryptocurrencies, as well as gold, I consider them to be real assets and they are not linked to the overall health of the currencies around the world. The shift into both of these asset classes probably goes hand in hand and in terms of which flavor of the day wins, it really depends on any given day if it's gold that's leading the charge in terms of price momentum or bitcoin or any other cryptocurrency that will attract the second level of speculation. But as far as my two cents go, I'm more favoured towards a currency which has stood the test of time for millennia on end, and that is gold and silver.

Ed Coyne Q&A

Well, I have one point to add that as well. I spent a lot of time sitting across the table from family offices and in many cases it's the grandfather, the father and the child. And until recently, of course, is mostly been on video conference this year, unfortunately, but until recently, usually, the child would roll their eyes at me and sometimes, frankly, just leave the room when I would start talking about gold. That has changed a bit and the younger generation, the younger investors that are inheriting the wealth now they understand the value of having a portion of the capital outside the market.

I think bitcoin really helped educate those investors in that way so it's been interesting from my point of view in needing to see the narratives and the interest level change towards precious metals as investors start thinking more outside the box about how to allocate capital. I always equate bitcoin and I always equate precious metal to the Diamond District in New York City. They're all competing with one another yet they're all on the same street.

You get a lot of the same types of mindsets and the same types of investment disciplines looking to allocate away from traditional markets so I think both gold and cryptocurrencies in general not just bitcoin can certainly coexist and grow together.

The other thing I think is interesting obviously, we've all this year have beaten to death the whole COVID conversation, but what I find interesting is this next question, which is, post-COVID, what will be the primary drivers of gold going higher? Maria, I'd like for you to address this. I think you touched on this a bit earlier in the conversation, but just reiterate again, assuming we have the vaccine, assuming we're all back to normal a year from now, what will continue in your mind to continue to drive the price of gold and silver, for that matter, going forward?

Maria Smirnova Q&A

Again, to me, COVID was the catalyst for the very quick price moves that we've seen. The prices, the appreciation in gold and silver was set up years before that, and again, for me, the drivers are the policy outlooks. We are trying to stimulate the global economy and by we, I mean all the governments and all the central banks and even before COVID hit, there was a slowdown already, right?

As I mentioned, this is very important to understand that COVID is not the be-all and end-all for gold and silver. Gold and silver I consider them to be currencies, they're hard assets, and they will be the antidote to the fiscal spending and the monetary stimulus that we are going to see going forward. I've talked at lengths about seeing neutral zero to negative interest rates going forward and as long as that is the case and in place, we will remain positive on gold and silver.

Ed Coyne Q&A

Thank you. And we're up on the top of the hour here so I want to consolidate two questions into one, and this really relates to gold miners versus gold. The first part of the question would be would gold miners be a good investment if gold just stays around $800-$2,000 levels, would gold miners be an attractive investment? And then part two of that, which I'm pulling from a separate question, is in today's environment, which is a better investment, the physical market or the miners?

I'll let you guys jump ball this one. Who wants to take it?

Shree Kargutkar Q&A

When you speak to many companies daily, and our understanding is that the gold mining space as a whole is using around $1,300 an ounce as their number to budget for 2020 and maybe that number creeps up a little bit higher. What that underscores is that any increases above and beyond that number, the $1300 dollars number, is gravy for the gold miners, obviously, on a pre-tax basis. As an industry, the costs that are associated with not only mining but being able to mine on an all-in sustainable basis, the costs are around just over $1,000 per ounce.

So at $1,800 gold, there's about an $800 per ounce margin that is available to the gold miners. Put differently, this is the highest number that we have seen for the last 10 years. These companies are not only immensely profitable today at these prices, but per the question, if the price were to stay at these levels, what would happen? I would say most of these companies that we look at are trading at single-digit price to cash flow. Many of these companies have double-digit price to free cash flow yields which are very attractive and more and more of them are starting to pay a dividend yield.

These are all very favorable metrics and the dividend yield by the way has also been increasing for many companies. If nothing changes, the price of gold stays exactly where it is, I suspect that there'll be more investors that will be attracted into this space purely because of the massive disconnect in the valuation that we see between the overall market and the gold miners.

Ed Coyne Q&A

I think that probably addresses to some degree the second part of that question, which is the physical versus the equity. We land right now on it's a combination of both. We as a firm at Sprott, I always say physical first, equity second, especially for those that are allocating to the space for the first time. But if you think about it in the terms of the reason why, it's really the physical market is there to help buffer volatility, to help allowing you to stay invested in your traditional stocks, your dividend-paying stocks and so forth knowing you have a portion of your assets allocated to something that performs differently historically over time.

Conversely, the equities are really there to add additional torque to your portfolio from a return pattern standpoint and some of the valuation metrics that you pointed out earlier I think speak to that. I'm calling all value investors right now to think about the gold equity story and allocation in conjunction with the physical allocation today I think is a pretty powerful one-two punch.

There's probably 35-50 questions if I take out the overlap that we didn't get to today, but our senior investment consultants over the next couple of days, whether it's Matt, Julia, or Sergio, will be reaching out to everyone via email and or phone call, so we will make sure we get to everyone's questions.

At this time, I'd like to thank everybody, wish everybody a happy holiday season, and thankfully say goodbye to 2020 and hopefully, a better 2021 to come. Thank you all again today for being on the webcast, and I'll turn it back to you, Natalie.

Natalie Noel Q&A

Wonderful. Thank you, and again, as Ed mentioned, all registrants will receive replay information by email as well as have follow-up if your question was not answered on today's call. I want to thank everyone for joining us and our speakers for taking the time out of their day today and I hope you have a great rest of your day.