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Gold Mining Equities: The Perfect Setup

Gold Mining Equities: The Perfect Setup

 

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June 14, 2020 | (58 mins 43 secs)

Hosted by Ed Coyne, special guest speaker Carter Worth, Chief Market Technician at Cornerstone Macro, joins Sprott’s John Hathaway and Rick Rule, to learn why gold and gold equities are outperforming traditional asset classes right now. These respected industry experts share their current views on precious metals investing and discuss why both gold and gold stocks have significant potential to move higher as the precious metals bull market continues to strengthen. Topics covered:

  • Gold is poised to move higher above its 2011 peak of $1,900
    given the Fed balance sheet is 150% higher and growing
  • Bonds, at 0% interest rates, are at a dead end as a portfolio diversifier and offer minimal upside with plenty of downside risk
  • Gold mining stocks are very undervalued relative to bullion and provide  torque to the metal price
  • The earnings and cash flow outlook for gold miners is extremely favorable
  • Investors should jump on weaknesses to establish long gold bullion and gold stock positions as a portfolio diversifier

WEBCAST TRANSCRIPT

 

Ed Coyne

Good afternoon, everyone. My name is Ed Coyne. I'm Senior Managing Director and head of global sales for Sprott Asset Management. Thank you for all joining us this afternoon to learn more about Gold Mining Equities: The Perfect Setup.

Today, I'm happy to have Carter Worth, Chief Marketing Technical Cornerstone Macro Analyst, John Hathaway, and Rick Rule to join us to talk about gold and gold equities.

Carter Worth, who has previously served as Chief Market Technical and Managing Director at Sterne Agee, was voted number one Technical Analyst on Institutional Investors All-American Research Team for the second consecutive year in 2018.

He was voted the top three in each of the past 10 years. Prior to joining Sterne Agee, Carter Worth worked at Oppenheimer and Donaldson Lufkin. He holds a bachelor's degree in International Relations from Boston University.

We also have John Hathaway, CFA and Senior Portfolio Manager at Sprott Asset Management. John Hathaway joined Sprott Asset Management in January of this year, and before joining Sprott, John was part of the Lead Portfolio Management at Tocqueville Asset Management.

John is also responsible for the Sprott Hathaway Special Situation Strategy and Co-Portfolio Manager of the Sprott Gold Equity Fund. John holds his BA from Harvard College and his MBA from the University of Virginia and also holds a CFA designation.

In addition, we've asked Rick Rule, President and CEO, Sprott US Holdings Inc, to join us. Rick began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading resource investor specializing in mining, energy, water utilities, forest products, and agriculture. Mr. Rule is also the founder of Global Resource Investments, President and CEO of Sprott US Holdings Inc, and a member of Sprott Inc's of Directors.

Before we go into the overall presentation, I'd like to introduce you to Sprott Asset Management briefly. Sprott is unique because we are a global leader in the precious metals investment space. With over $12 billion in assets under management, we offer a full suite of solutions from physical products, which has over eight billion in assets, managed equities, which is over two billion in assets, as well as a very robust business and private lending and brokerage business.

What's unique about Sprott is that investors have access to owning physical metals, whether it's gold, silver, a combination of two or platinum and palladium, both factor-based ETFs and active strategies in the gold equity space. We also offer full, detailed lending and brokerage solutions, all again focused on precious metals.

Today we're going to talk about really two main topics. The first one is why gold? I've asked Carter Worth to join us to talk about the gold space today, what's going on in the broader market, and what is setting up to be what we think is a perfect storm for the gold trade over the next three to five years.

We're also going to hear from Rick Rule about the overall Sprott outlook on the gold and gold equity market. John Hathaway will then talk about the case for gold equities and why we do believe we're hitting the perfect setup for the gold trade over the next couple of years.

With that, I'd like to turn it over to Carter Worth now to talk about the gold trade.

Carter Worth

Before looking at a few slides, I just want to go through the premise from this seat. The premise is rates to zero, gold to Infinity. Ultimately, equities, but not gold equities, are likely to be collateral damage of that hypothesis.

I think we are very clearly in a deflationary period, if not a deflationary spiral, and that gold is a good hedge as it is likely to increase in terms of the purchasing power during a deflationary period.

We know that gold has positive price elasticity. As more people buy gold, the price goes up in line with demand. Let's start with the first chart. This is data for 10 year Treasury Yields, it's available on Bloomberg, and in the simplest of terms, it's a downtrend. A consecutive series of lower highs and lower lows. Every year a consensus is for higher rates on Wall Street and that's not what happens.

And one way to measure trend is a moving average, and you see that here. If you look at the next slide, it's the same chart, but I've put in a channel. Now, I didn't manipulate the line, so they touched the lows and highs precisely. This channel projects to zero. At some point, we know we will have a proper business cycle despite what the Fed thinks they might be able to do or save and in that event, rates are very likely to be at zero.

The next slide shows the collateral damage coming. This is a chart of the top five stocks in the S&P 500. It's long ago become a circumstance where this is not an index. In fact, you can see the concentration now at almost 24% of the index top five names worth more by a long shot than the bottom 350. In fact, the top 15 stocks now are the same as the bottom 420.

This is what moral hazard is all about. So long as interest rates are low or going lower, my entire DCF model, my CAPM premise, my discount rate chosen will allow me to have any P/E multiple I want.

We have stocks that are marquee names; let's consider Adobe. We all use it. We PDF things. We use it as a word, that we would say Xerox this or Xerox that we say PDF this or PDF that. But Adobe right now is trading at 50 times free cash flow and almost 19 times sales. At some point, this is a problem, and I think that's where the collateral damage will be.

If we look at the next chart to show you where we are, of course, with equities at or near all-time highs, and yet you see here a comparative chart of gold versus the S&P versus the S&P Total Return. Not only do you see that gold has outperformed the S&P, even with dividends reinvested, but gold has also passed the preeminent equity index in the world. What's important here, and the comparative lines depict this, the blue line is at a near all-time highs.

The orange line, gold, has returned to where it was and is slightly below its peak in 2011.

The principle here is that gold is setting up for an important breakout. All of the asymmetry is clear, equities are dominated by just a handful of names trading at premium prices or gold. And we think gold is the winner and the one to own here.

The next slide looks at the actual circumstance of gold over the last 20, 25 years and it bottomed in 1999 and that's nothing random or ironic, the most valuable company in the world was Cisco. Nobody wanted gold. Of course, we know taking the road less traveled in life is often the right road. That was the peak of the dot com.

In fact, just this past week, the NASDAQ 100 returned to its relative high. From then, the NASDAQ itself is not even back there versus the S&P. You have a perfect contrary moment. Everyone wants tech, no one wants gold, it ends up being epic, first top for tech, bottom for gold.

Gold goes on the powerful run that we all know it went on and peaks in September 2011 and it was at 1923 an ounce. What's important about this point is then, of course, gold pulls back. Interestingly, there is something called retracement levels, but it's a 50% retracement, and sticks its landing, holds its low there in 2015 and has been working higher ever since.

And the next slide looks at what I have here is the Gold Stock Ratio. Traditionally, people refer to something called the Dow Gold Ratio, which is the number of ounces of gold it takes to buy a unit of the Dow Jones Industrial Average.

But what I've done is flip that around not to tell a different story, but just to tell the same story from gold's perspective. Where I've drawn the red and green tops and bottoms, essentially at the green bottom, we know that gold is a buy or said differently, equities are expensive. The first one is 1929. Equities are expensive, gold is cheap.

And then it was the opposite, obviously, starting in 1940, you want to sell gold and all the way through to the inflationary period of the late '70s, at which point you see the same thing happen again. And then at that point, gold is cheap and gold goes on up the ratio powerful move. In 1982, we were in a recession. Reagan's coming into office in the United States and the message is to sell gold. The next one in 1999 is the bottom for gold.

The next top is the dot com peak. We see in 2009 that the Gold-Stock Ratio tracks very nicely, periods where either gold is expensive to the market, equities or vice versa.

If you look at the next slide, I've simply done the same thing but just given you the trend lines, meaning if one were to simply, almost mechanically, while it's not always doable, just respect the trend. When the green line is breached there, we want to basically get out of gold and then vice versa.

There's a period where stocks outperform and then when the green line is breached to the upside, gold outperforms. And what's important about this sequencing is that we have just in the past 11 months moved above the red downtrend line and the argument here is that we are going on a new phase. Again, where gold outperforms stocks.

The next slide is the same thing, just putting it in channels. And basically, you see the blue lines, of course, there are periods where gold is expensive as it relates to equities and there are periods where it's cheap. That is the premise from this analyst position that gold relative to Equities is cheap.

The next slide is the issue of gold as a hedge; history favors gold in nervous times.

This is every single instance in the history of the S&P 500 where the market has dropped more than 20% from an all-time high. You see the return for the market and you see the return for gold and in the final column, gold's relative performance. This is incontestable. Nobody's opinion. It is for all to see.

And I think that's an important reason to also own gold, independent of one view, deflation or inflation, that these are nervous times, and it's time to have gold.

The next slide is just simply what's going on in gold. This is a textbook breakout, well defined tops at a common level. When you have a series over the past two years of higher highs and higher lows, and then you coil into the apex of what's called an ascending triangle.

A breakout is a very definitive thing. It's a lot of tension. But what I want to point out is the importance of that $1,800 plus minus top from which we've broken out. If you look at the next slide, in fact, this is what's so important. We are just now moving above the well-defined tops that have been in effect since basically 2011 and now fast approaching the all-time highs. And this is what's so ideal in the sense that there is not a lot of overhead supply left and gold can run and run and run.

The high was September 6, 2011, at $1,923 an ounce. Our thinking is we're not only going to exceed that, but exceed it in a very big way. It is worth noting that adjusted for inflation, for gold to get back to its 1980 peak, gold will have to advance 55% from here. That would take us to about $2,800 an ounce, a perfectly reasonable price objective.

The next slide looks at the opportunity of gold bullion in blue and gold and silver miners in green. That then, of course, peaks the imagination. We know there's operating leverage in stocks versus the commodity, and we all know what's happened to the stocks of late.

They've pounced the commodity. And if and as gold is truly headed to the high $2,000 per ounce, that green line is going to be very snappy. In any event, I am going to stop here and turn it over to Rick Rule and he's going to give us the Sprott outlook. Thanks, Rick.

Rick Rule

Thank you, ladies and gentlemen. Thank you, Carter, for setting up my part of the presentation very well. I'd like to talk only briefly about Sprott’s outlook with regards to gold and silver markets.

I would suggest, first of all, that gold and gold stocks are under represented in all types of portfolios. There have been studies that suggest that gold and precious metals, related investments, market share of the savings and investment assets of Americans is less than one half of 1%, as opposed to a three decade mean of between 1.5% and 2%.

We need to pay attention to the fact that the previous discussion from Carter suggests that we need to take advantage of weaknesses to increase long positions in gold. Gold is trading in a historical sense, as was demonstrated below its peak of $1,900 despite the fact that the Fed balance sheet is much higher, the debt and deficits are higher.

And importantly, the next point, bonds yield almost nothing by way of real income or risk premium. It's worth noting that Sprott's good friend Jim Grant describes the U.S. 10 year Treasury as "return-free risk". Gold and precious metals equities traditionally have done very well during periods of time where people were concerned about the ongoing purchasing power offered up by other savings products, including principally the U.S. 10 year Treasury.

Gold mining stocks, as you will learn very well from John Hathaway, have underperformed the bullion. This is common in the last eight recoveries from oversold bottoms. It's important to note that gold leads and then the gold stocks play catch up. We have seen the last two or 3 months what those catch ups look like. But the technical discussion that preceded my discussion, that is to say Carter's technical discussion, pointed out very well, the valuation gap between gold and gold stocks.

Why is this? Well, of course, the product of gold stocks is gold. The higher gold prices lead to higher margins, higher cash flows. But in particular, they lead to the equities being re-priced. They begin to be viewed through the lens of probable success as opposed to probable failure. A wonderful virtuous circle, where cash flows increase at the same time that cash flow multiples increase.

Sprott's own position, ironically, having been in the gold business for 10 years, is that the setup is really perfect. The circumstance that gold exists in, as Carter pointed out very well, is probably perfect in terms of its historical context. It competes, as we've said, with other types of savings products, and the other types of savings products currently are uncompetitive.

There is a circumstance demonstrated by history, too, that when the wind is in the sails of bullion, that the equities lag but then the equities play catch up very, very, very dramatically. I think the last two or three months in the equities has proven that in this case passes prologue, and we expect the gold price to go up, we expect the silver price to go up, and we expect the prices of the producers, developers, and explorers, that is to say, the precious metals related equities to do very well indeed.

John Hathaway has three decades of experience in the gold equities investment business, and I'd like to turn the mic back to Ed to introduce John Hathaway.

Ed Coyne

With us now is John Hathaway. John joined us earlier this year. We've got about a three-year track record with John as far as working with him, whether it's with the Sprott Special Situation Strategy or now with the Sprott Gold Equity Mutual Fund. John's entire team is now officially part of Sprott as of the beginning of this year.

With that backdrop, John, I thought it would be really interesting now to hear from you on the case for Gold Equities and why investors should be at this time thinking about not only adding to the gold trade but now really looking to add some torque to their overall portfolio by including Gold Equities.

John Hathaway

I will focus mainly on the gold stocks, but you can't talk about the gold stocks without talking about the most fundamental input. And that is the gold price itself.

And we heard from Carter based on technical analysis coming at it from many different ways why the gold price? And I have to point out that we're talking about U.S. dollars which is now in a breakout mode. And I suspect that there are investors who think that the gold price is trading near a historical high and maybe it's too late to get in. Maybe it's too risky.

What I would say is that the gold price is still too low by a long shot. Just by way of illustration, let's look at the Fed balance sheet. When gold was 1,900 in 2011, the Fed balance sheet was three trillion. Today, the Fed balance sheet is seven trillion and probably on its way to 10 trillion. Just using that one metric, you could argue, and I do argue that the gold price needs to be two to three times where it is today to keep in pace with what the Fed is doing.

And what we really have is overt undisguised currency debasement. And frankly, nobody cares about it. You don't hear about it in the financial media because in the stock market, at least the averages are going up. It's kind of like a party, and nobody is looking at the underlying facts. But just to point out an inconvenient truth, the latest monthly deficit for the U.S. government was almost as large as any previous years, and that's one month's worth.

And of course, the economy is going to recover and the deficits of that magnitude will not be of the same level, but they will continue to be high. And I don't even need to comment on the politics surrounding it. What it means is that interest rates are pinned to zero, and I would say that for years and years looking out, it will be very difficult for interest rates to go up.

Carter mentioned that we're in a deflationary period, which I agree with. If interest rates went up even the slightest amount, it would crater what is a very leveraged economy.

What does that mean? It means that bonds can no longer serve as a portfolio diversifier in the way they once did, the traditional 60-40 portfolio diversification. You had a recession, bonds went up because interest rates were going to go down and vice versa. But at the zero bound, there's very little upside in bonds and potentially a lot of risk. The risk could be inflation not immediately visible, but somewhere along the line, maybe two to three years out, or a big decline in the U.S. dollar, which would create FX-related risk.

What's there to fill in the vacuum as a diversifier? Obviously, the answer is gold. And I would just point out that big institutional money has yet to wake up to this. I recently and maybe some of you saw a tweet by Mohamed El-Erian, noting that one of the key drivers behind gold now is the inability of bonds to perform the currency diversifying function that they previously had.

What that really means is that gold can go up a lot, maybe two to three times, but you don't need inflation to do it. You just need capital to move into gold as a diversifier, which as Carter pointed out in his slides, it has historically done a very good job of.

Let's just talk about the gold stocks themselves. If the gold price is too low, you can say that in spades about gold mining stocks. They provide dynamic exposure to higher gold prices, obviously more risk than owning physical metal itself, but much more potential in terms of return for those who have the risk tolerance to invest in them.

Let's just take a look at what's going on here. In terms of the economics of profitability, the all in sustaining cost of producing an ounce of gold in today's world is roughly a $1,000 more or less, or different companies, different minds and so forth.

But a rough rule of thumb is it costs about $1,000 to produce an ounce of gold, taking into account all the related costs. That means that the profit margin at what the average gold price was last year, roughly $1,400 or so was $400. Today, using the current gold price of roughly $1,800, the run rate on the profitability of gold producing an ounce of gold is twice what it was a year ago, plus a 100%.

But the stocks are only up, let's say from last June, obviously it's going to vary depending on which index and which stock, for roughly 40 to 50%. Just on that one thing alone, the stocks, which have been good performers for sure, do not yet reflect the current level of profitability that the industry now enjoys at $1,800 gold prices probably moving to something significantly higher based on everything that's been said before me.

Let's also look at the production cost because we have to think about what will it cost in a year or two to produce an ounce of gold?

Well, we're in a deflationary environment, and one of the biggest costs of producing the metal is energy. And we know that energy costs have come down quite a bit. Unless the economy rebounds really strongly, which again, that's a big debate which would take too much time here, but I would be on the side of those who think that we will limp along for many years to come for a bunch of different reasons. The profitability that the industry is now enjoying is very unlikely to be capsized by rapidly rising input costs.

The stocks, this was mentioned both by Rick and by Carter in various ways, but they're the cheapest relative to bullion in 20 years, they're way behind what the metal price has done. There are a lot of reasons for that, and we don't have time to get into it. But the fact of the matter is that they are very inexpensive relative to gold at this very moment in time. The industry is financially healthy, unbelievably healthy. In the appendix you'll see many slides to support what I'm about to say.

The industry has low debt. To the extent it does have debt, it's being reduced. Free cash flow generation is the rule of thumb. Free cash flow yields on the larger cap companies is in the neighborhood of 5% today, and that's at $1,800 gold. For many of the mid to smaller cap companies that are producers, it's not hard to find companies with free cash flow yields of roughly 20%.

The next point is that earnings are on an upward path. Year over year, earnings are based heavily on the profit margins I was talking about earlier. The margin is 100% greater than last year, yet the gold stocks have not reflected it. Compare that to the S&P, as Carter mentioned, most big 350 components of the SPX are just lagging terribly. And it's no wonder because many of them have high debt and a poor earnings outlook. Here's an island of value and strong fundamentals against the backdrop of trouble.

And then lastly, the market cap of the industry is just tiny compared to FAANG. Again, you'll see a chart on that in the appendix. It would not take much of a switch from the leading stocks. If they start to stumble and perform poorly to move into the gold sector, which does not have a huge capacity to absorb inflows to have dynamic performance in terms of the share price.

I'll just close with this. A friend recently remarked to me that smart investors basically just sit around for maybe years on end to wait for the right moment, I guess, to put it in baseball terms, a big, fat pitch. That's what we have now in the gold stocks. They're cheap. The fundamentals are strong. The backdrop, from a macro point of view, is outstanding. With that, I'll leave you and turn it back over to Ed for Q and A.

Ed Coyne

Thank you, John. Before we go into Q and A, what I'd like to do is spend a few moments talking about the different avenues you can go down to get exposure to both the physical market and the equity market at Sprott.

And what I think you'll find that's unique is that we offer that full suite of solutions, whether you want to allocate as a core allocation to help diversify your portfolio, potentially replace your bonds, and even compliment your cash positions in your portfolio by allocating to the physical market, or if you want to take advantage of what we think is a tremendous opportunity in the gold equity space today based on a lot of the points that both Carter, Rick, and John Hathaway all spoke about, we offer a full suite of solutions in the gold equity space.

If I can briefly just touch on the physical market, what's unique about Sprott, bottom line is you get ownership of the physical metal, and for many of the U.S. investors, there's a tax advantage to the ownership of our metal. And I will refer you to our regional sales directors to do a deeper dive on those opportunities.

But for those that are looking to use the physical market, the gold market, or even the gold and silver market as a natural hedge to the overall equity markets, and again, as I mentioned, even the bond and cash market, we think we offer a very unique product that allows investors to own it in a very liquid, potential, tax-efficient way.

And then on to the equity side, we do offer two factor-based mining ETFs. We offer a senior mining ETF, and we offer a junior mining ETF. The senior effectively being large-cap established mining companies that are already in production in many cases, multiple years of production with multiple mines, multiple geographic locations, and so forth.

And then the juniors are typically your more small-cap mining companies that are either early-stage production or late-stage development, in many cases that have single properties. And then on the active side, and this is really where we think the greatest opportunity lies in the next three to five years, largely because of a lot of the things John Hathaway touched on, we offer these Sprott Gold Equity Fund, with over a 20-year track record of giving you an active approach to the gold space.

And what's unique about this fund, unlike the ETFs, is that we can go up and down market cap based on where John and his team are seeing opportunities in the market today.

We offer a full suite of solutions both on the physical side and the equity side and I encourage you to work with your respective representatives, whether it's on the West Coast with Matt Harrison, at the Central Region with Julia or on the East Coast with Sergio. You'll find that we have a suite of Senior Investment Consultants that are well versed in the overall gold trade.

And what we find is that we typically work with our investors not from a sales standpoint, but really more from an advisory or consultant standpoint to help you think about how to allocate through the space.

And then for your individual investors out there, through Rick Rule and his group, we have these Brokerage Services, which is based out in Carlsbad, California. And I would encourage you to reach out to the 800 number, or contact sprottglobal.com to learn how Sprott could help advise you on an individual basis, whether you're looking to buy individual Securities or a basket of Securities managed by the Sprott team.

Question and Answer Section

What I'd like to do is now direct our time to the Q and A session. And we've got, currently, we've got 82 questions that have come in. We're not going to get to all 82 questions, but what we will do is, we see the emails that come in as well. We'll have the opportunity to go in and respond to everybody by email and or phone call where phone numbers are provided over the next probably three to five days.

If we don't get to your question today, we will certainly get to you over the next couple of days directly based off the different regions and territories.

I'd like to start with the first question, and this may be a good question for you, Carter, because this really talks about a potential mid-cycle correction within the gold and gold mining sector, given that we've had a nice run here up in the high teens for physical market and in the mid-twenties for the equity market, do you see a potential mild correction happening over the summer, leading and setting the stage for a potential Bull run going into the fall? What would be your view on that?

Carter Worth

If you look at the percentage gain off the March low and you were to look at a chart of gold itself, we know that everything plunged with the pandemic, meaning equities plunged, and copper plunged, and oil went negative, and rates plunged. And if you simply look at the percentage gain off the March low, it looks excessive or maybe ahead of itself, copper, gold, all having rallied substantially, silver, too.

But equities too, right. Equities are up 40, in some cases, 50% off the low. From that March low, bullion is up 26%. And in that sense, it would appear to be ahead of itself. And yet that's simply optics in the sense that it's taking the plunge low and then running the numbers from there.

What we know, essentially is that gold bullion right now is the same price it was in the second week of April and here we are, the second week of July. On a sort of week over week, month over month basis it's not that extended. And while there are always corrections, give back, dips, pullbacks, whatever nomenclature one prefers in many ways they're healthy, right?

They're not a negative. They're a positive, because if you get too steep, you get action where shorts are forced to cover longs panic, and then that can set up a more enduring top. I think dips if and as they are around the corner, are healthy, not something to worry about. And if I were taking the structural view of gold and gold miners that is presented on this call, I wouldn't think anything of it. Only if one is not big enough, then using the dip to get bigger.

But sure, there can be a dip in the fall. I would simply take advantage of it to get even bigger in one's positions.

Ed Coyne

Thank you, Carter. And the second question that comes in, John Hathaway, I think this would be an appropriate one for you. And this is really as relates to mining stocks. It says, what would you or how would you recommend accumulating individual mining stocks, given the fact that we may enter a likely downturn in the short term? Would you recommend that through individual securities or basket of names?

And I guess, as I read, this is sort of a self-serving question for us. But, John, maybe talk about it from your standpoint. In a portfolio, how do you add a new name to a portfolio? How do you decide to increase a position or decrease a position within your Gold Equity Mutual Fund?

John Hathaway

Okay, thanks. Essentially, one needs to be diversified. Mining is a capital intensive business. Many of the mines are located in jurisdictions that are less desirable, let's say, the kind of thing that we have in North America or, let's say, Australia. We do a tremendous amount of due diligence, both on the geopolitical side as well as the mining economic side. And it's an ever-changing picture.

Our team has a daily discussion. We have frequent phone calls with management. Many of our analysts actually visit mine sites. The level of due diligence is quite substantial.

And out of that, we build conviction as to which stock to buy in a pullback or when something goes wrong, and it can go wrong, when we want to stay away and maybe wait for a better time or possibly even sell the position. I would say I would find it very difficult to do this as an individual investor, making all of those kinds of decisions on which where the best values lie, where the best opportunities lie.

And of course, and as Ed said that's a self-serving question and a self-serving answer, which is to say hire somebody to do it because it is as I say, to do it on your own is really tough and having done this now for 20 years, I know how difficult it can be.

I think unless one is willing to spend a huge amount of time doing the kind of thing that we do, why not just sleep at night and have a professional team make those decisions for you?

Ed Coyne

Thank you, John. And Rick, this actually is a good one for you. This is a question as it relates to the Gold Silver Ratio. Given your extensive history in the trade, the question basically is, has the Gold and Silver Ratio lost its meaning in today's market?

Rick Rule

The silver bugs will hate me for my answer. I don't think it was ever relevant, except to justify a narrative because it doesn't cover utility. Price shouldn't be set by the relative scarcity or abundance of something in the Earth's crust. Most silver is produced, as an example, as a by-product from producing other materials. To understand the supply side of silver, one must understand the copper market, the lead market, and the zinc market, as well as the industrial markets that are covered by silver.

The truth is that my belief is that prices are set not merely by supply and demand but also by their relative utility and further by the narrative.

In the 45 years that I've been involved in the precious metals market, there have been patterns that repeat, and I'm sure that Whitney would second this, Gold Bullion moves first, and it moves because people are afraid. They're afraid of the ongoing purchasing power of whatever their domestic fiat currency is. Silver moves, I would suggest, as a consequence of the gold move, the momentum in gold kicks off the silver. But silver, because of its lower unit cost, is a more democratized store of value than gold. Silver, when it begins to move generally moves further and faster.

In both cases, the case of gold and the case of silver, the equities lag the metal. One can expect that silver equities will lag the gold equities just as they will lag silver itself. But I would suggest that relative to the question with regards to the Gold Silver Ratio, that while it's interesting as a way to justify a narrative, it has less use as a predictive mechanism.

Ed Coyne

Perfect. Thank you. Carter, let's go back to you for a moment. This is the question that relates to interest rates. It's basically more of a statement, but I'd be curious to get your take on that and how that relates to the physical gold market. Basically, the question is rates have been low for 10 years. Why not for another 10? What's your view on that?

Carter Worth

I think so. I mean, I think that's just it.. But there's always this, whether it's the mortgage lenders who are trying to get you to refi, someone's always saying, "No rates are about to go. Rates are going to go." It's just not true.

And yes, been down here for a while. And why can't they stay down here, but ultimately even go negative? There's a big debate whether the Federal Reserve of the United States would allow that or even go in that direction and all of that's speculative anyway. But to the question, why can't they stay down for another 10? I certainly think they can. And I think they will.

Ed Coyne

Carter, let's stay with you for one second, because this is something I think everybody wants to talk about, which is what do you think happens to the gold price, again I guess this is the reference to the physical price, when or if there is a COVID 19 vaccine?

Carter Worth

Right. In principle, if indeed, one of the premises for gold is that it's a safe haven as described, or that history favors gold in nervous times, that would be a data point for being less nervous, right, less uncertainty would imply opening up of global economies and so forth.

And while one might expect a news-related vaccine-related sell-off in gold, it really still has nothing to do with the long-term premise of deflation, which is sort of with us one way or another. We know that from all the productivity data, we know it from the declining birth rates, and we know it from the embracing of death and so yes surely a safe haven element would be off the table for a bit, if you will, but the long term structural premise for gold would, of course, have just as much validity as ever.

Ed Coyne

Great. Thank you. John, let's go back to you. This is related to your optimistic outlook on gold equities. And the question basically is, what factors in your mind would have to change for you to alter that view?

John Hathaway

Well, I'd have to have a less positive view of the gold price, because at the end of the day, the gold price or the silver price is the key fundamental in determining earnings and cash flow. If for some reason the long term view that's been expressed here by all of us that we're in a Bull market in U.S. dollar terms for gold and silver is no longer valid, then I think I'd probably try to find something else to do. I don't think that's the case, and I think one has to take a long term view of it.

I would say that's first and foremost, and the second thing would be if there was extreme over valuation. And I hope I made the point that we're at the opposite end of that spectrum. Yes could it get overdone, could it get seriously overdone the way it was in 2011 at the previous gold peak, that would be another reason to sort of pull back from this exposure.

Ed Coyne

Thank you. Rick, let's go back to you. And again, I refer to you as sort of a long term gold investor as well as the overall team that you oversee in Carlsbad, but how would you balance your precious metals physical allocation relative to your gold stock allocation? How would that look in your personal portfolio? And what would you advise others to think about or look at when they're allocating to both gold and gold stocks?

Rick Rule

I'm not sure that's a one size fits all question, Ed. I think they are two different asset classes. For me personally, gold is insurance. I own gold because I'm fearful, I own gold as an anchor, and as a store of value. And for me, I almost consider gold to be uncorrelated liquidity, which is to say I have cash in my portfolio and I have gold in my portfolio. What I have found is that liquidity gives me both the tools and the courage to take advantage of market volatility or market sell offs when other people have neither.

That liquidity gives me both cash and courage. I own the gold stocks for a different reason. I own the gold stocks because they leverage the upside move in gold, and they are better sort of contrarian performers than the metal is itself.

I also own gold stocks at Sprott because I believe I have a durable, competitive advantage over other gold stock investors. A, because gold is part of the DNA of Sprott. We're not a generalist advisor that tries to follow supermarkets, financial services and shipping as well as gold. We do gold, gold, gold, gold, and gold and the consequence of our financial analysts’ expertise in the gold sector and our geologists and engineers, I believe that in addition to doing something that I like, we do it better than other people.

The answer as to how each asset class fits in somebody's portfolio is as much a function of their own means and needs and risk tolerance. But since you asked the question of me, I answered from my own perspective, obviously my circumstance is different than many other investors, but we'd love the opportunity to help people answer that question either as advisors or individual investors and tailor both gold as an asset class and gold stocks as an asset class to each individual circumstance.

Ed Coyne

Thanks, Rick. And let's go back to John Hathaway. This is something that we as a firm have been really focused on the last year or two as it's become more of a dictated more by clients. This is a question as it relates to ESG. The question is, do you think that ESG considerations will dampen some institutional interest in investing in the miners going forward? Let's start with you, John. And maybe if anybody else wants to add to that, given this topic that may be insightful as well.

John Hathaway

Okay and certainly ESG has become much more conversational in the last couple of years, and certainly we have conversations with potential investors about that. What I would start off by saying is that that's part of our due diligence. We look at corporate governance, we look at environmental compliance, we look at social interaction of miners, both with local communities, with host governments. It's all part of the analysis that we do.

But having said that, I would like to say that the gold mining industry has probably gotten a bad rap on this whole score, and they have for I'm not saying each and every company has a good record here, but I would say the industry as a whole, and I would encourage people to go to the World Gold Council's white paper on this matter.

The industry has set very high standards for ESG compliance, and we overlook that as investors doing our due diligence to see that in fact, they are. But essentially, the industry has gotten a bad rap. I do think it will keep some large institutions from ever crossing the line and making an investment in this sector.

But I do think many others, to the extent that they do look into the facts, will find out that the industry as a whole has done a very good job and that we as managers, oversee and look very carefully at how these companies are doing on that score.

Ed Coyne

Thank you John. Carter, let's go back to you. I know Rick just spoke about gold and silver as related to Gold Silver Ratio. And Carter, I know all your charts are really related to gold, but I've gotten repeated questions here about do you have any insight or view on silver? Do you follow it or do you focus predominantly on gold? What's your view on silver if you have one?

Carter Worth

Sure. Lots on it. Thank you. Two pieces put out, in fact, on the Gold Silver Ratio, not as to its import, because that's not within my per-view, but just how it also is a technical setup candidate over and over and over. In fact, if I were to look at the Gold Silver Cross or Ratio, however you want to look at it, it was the single biggest move ever recorded, which we saw on the spike associated with COVID, meaning the spread between gold's role, right, it's the one that catches the real fear of trade.

And we had a textbook breakout in the Gold-Silver Ratio or cross and now it's back to a point where there's sort of parity to some extent, but I follow silver closely, multiple reports on it. And I would say this and we heard this from John, it's the thing that can really come to life in the event of another or a worse kind of nervous period. I'm for both. And I think you can find exposure in many ways, and we've heard a lot of those ways, but silver has to be a part of anyone's approach.

Ed Coyne

Thank you, Carter. And I know we're approaching the top of the hour. Let's maybe get one more question in here and John Hathaway, I'd like to go back to you on this. This relates to really small cap versus large cap or in the gold equity space, juniors verse seniors. What, I guess the question is, what consideration do you take into account to buy junior miners over the seniors? Are the juniors worth the risk? That's really the question.

John Hathaway

These slides show the relative valuation of smaller caps to larger cap. It's as wide as it's ever been. It's astonishing, but I think part of the reason is that passive investing needs capacity in large cap names. The junior sector has been essentially an orphan for a number of years.

That doesn't mean that they don't produce gold. That doesn't mean that they don't have good economics, but they just don't have substantial enough market caps for the trading kind of money that goes in and out of the passive funds, such as GDX.

I think that will change, and I think it will change because once we have a recognition moment, that this is a place to be and more money comes into it and maybe it's a breakout over 1,900, which Carter talked about, I think that probably would do a lot of good.

These junior stocks will provide very good relative performance compared to gold itself, and probably compared to the more accepted institutional names that we all know.

So, again, that's our specialty. And we have a skew in our portfolio to the mid to small cap sector, again, because we can get to know them. We do the work, the due diligence, the conversations with management, whatever you want to talk about. We're very confident that this is within a very undervalued sector, the greatest opportunity that lies ahead in the landscape that we have, all three of us, have talked about.

Ed Coyne

Thank you, John. Well, I think at this point I'm happy to see we peaked at 121 questions, so we're certainly not going to do that today. As I mentioned, we're hitting the top of the hour. We certainly appreciate everyone who stayed on the call to go through the Q and A session. If your question wasn't addressed on this call, you'll be hearing from one of our Senior Investment Consultants over the coming days to address your question.

And we look forward to working with you at the advisor level and the individual investor level in the coming weeks, for those interested in whether it's allocating to the physical market, the equity market or a combination of both.

We look forward to working with you and having you learn more about how Sprott can be your truly alternative investor, Investment Manager focusing on the precious metal space. Again, thank you for your time today, and we look forward to working with you all in the future.

SGDLX

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