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Silver Fundamentals Shine Bright

Silver Fundamentals Shine Bright

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February 23, 2021 | (60 mins 23 secs)

The silver market is abuzz in 2021. After climbing more than 47% in 2020, silver continues to play catch up to gold. Growing investment and industrial demand have driven up silver prices and created supply shortages, especially for investors looking to buy the physical metal. Silver ETFs have enjoyed record flows. We believe this silver rally will continue given the expansionary monetary and fiscal policies worldwide and silver’s critical role in helping the world embrace the environmentally friendly technologies of the “green revolution.”  In this webcast we discuss:

  • The silver price has risen dramatically but is still inexpensive compared to 2011 highs
  • The macroeconomics of high debt and low-to-zero interest rates support the outlook for silver
  • Silver is key in supporting global “green” efforts to decarbonize and electrify
  • Silver provides critical components for the EV, solar and 5G industries
  • Demand will continue to outstrip supply; mine supply has been falling since 2016

Featured Speakers

Edward C. Coyne
Edward C. Coyne
Senior Managing Director, Global Sales
Sprott Asset Management
Maria Smirnova, CFA
Maria Smirnova
Senior Portfolio Manager
Sprott Asset Management
John Ciampaglia
John Ciampaglia
Chief Executive Officer
Sprott Asset Management

Webcast Transcript

Natalie Noel, RIA Database: Cover Slide

Hi, everyone. Thank you for joining us for today's webcast, "Silver Fundamentals Shine Bright," sponsored by Sprott Asset Management. Today's webcast will be providing one CFP, one CIMA and one CFA CE credit. If you have any questions on credit, please do not hesitate to give us a call at 704-540-2657. We welcome any questions you may have at any point during today's webcast. You can type your questions in the Q&A box to the right of the slides, and we will do our best to answer 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. We have main materials available for you to download in the Documents folder at the bottom of your screen. As always, we appreciate your feedback and striving to make these events the best they can be for your viewing satisfaction. 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. 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 to all registrants via email.  With that, I'd like to turn it over to today's first speaker, Ed Coyne, Senior Managing Director, Global Sales for Sprott Asset Management. Ed, take it away.

Ed Coyne: Slides 1-3

Thank you, Natalie, and thank you all for joining us today. Again, my name is Ed Coyne. I head Global Sales for Sprott Inc. I've asked two special guests to join me today, both John Ciampaglia and Maria Smirnova. John comes to us with more than 25 years of investment industry experience and serves as the Chief Executive Officer of Sprott Asset Management and as a Senior Managing Director of Sprott Inc. John earned his Bachelor of Arts and Economics from York University, is a CFA charter holder and a Fellow of the Canadian Securities Institute. Maria holds an MBA and a CFA and is a Senior Portfolio Manager at Sprott Asset Management. Maria joined in May 2005 and has more than 20 years of experience in the financial services industry. Maria graduated with distinction from the University of Toronto with a Bachelor's of Commerce degree and has been a CFA charter holder since 2002. Today, we're going to take a closer look at silver.

Before we do, I'd like to give you a brief introduction to Sprott Asset Management.

Sprott is a global leader in the precious metals investment industry and market. With over $16 billion assets under management and publicly listed on both the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol SII, we offer a full suite of solutions. Sprott is a global asset manager providing investors with access to highly differentiated precious metal strategies with specialized investment products in physical trusts, actively managed equities, factor-based ETFs, and private equity and debt strategies. With over $11 billion in our physical trusts, we offer clients the ability to own physical metals directly, whether it's gold, silver, platinum or palladium. We also offer managed equity solutions with close to $3 billion in assets under management, backed by our flagship mutual fund, the Sprott Gold equity fund, as well as close to $1 billion dollars in private lending and brokerage services.

Ed Coyne: Slide 4

For today's webcast, I've asked John and Maria to both take a deep dive into silver. John will begin with discussing the breakout we saw in 2020, as well as how silver is benefiting from both monetary policy and industrial applications.  He'll also explore the spiking demand that we're seeing in the silver coin, bar and ETF market. Maria will take a closer look from a portfolio management point of view, exploring the macroeconomic environment of silver, its post COVID-19 recovery and its reaction to liquidity injections, fiscal stimulus and central banks. To conclude, she will focus on how silver miners may benefit from higher prices. I will close the webcast today by looking closer at how silver and other precious metals can serve in a traditional portfolio as a diversifier and how one should think about precious metals as true alternative assets that go above and beyond curly commodities.

With that, I'd like to bring on John Ciampaglia to talk about what we've seen in the silver market over the last year and what the outlook for silver could be going forward. John, please take it away.

John Ciampaglia: Slide 6 

Great. Thanks, Ed, and thanks to everybody for giving us your time today. I will start on slide 6, entitled: "Silver had a Break-Out Year in 2020." It was quite astonishing last year to see how silver had performed. It had a rough beginning of the year, but finished very strong.

Despite the gains that we saw last year being up almost 48%, we still think there's upside potential for silver. Reflecting on 2020, it was really gold, not silver, that captured the spotlight for most investors around the world, and not because gold performed better but because investors globally shifted to the safe haven asset in response to the negative economic follow up from COVID-19. Flows into gold and gold ETFs reached record highs last year while flows in the silver ETFs were modest. However, the tide has turned in silver's favor over the last few months. As central banks and governments unleash unprecedented monetary and fiscal stimulus, investor sentiment has clearly shifted reigniting interest in silver. We see silver benefiting from its dual role as both a monetary metal and an industrial metal. There are a number of key drivers that are underpinning silver right now.

First, a recovery in the global economy that is being primed by easy money policies is definitely favoring silver. Related to this, a narrative is growing surrounding reflation and as central banks express concerns about inflation. We acknowledge that Fed Chairman, Powell, was trying to talk down inflation today, but we are seeing signs of it everywhere. If you look at food prices, lumber prices, copper, housing, and other commodities, we don't believe the CPI numbers accurately reflect the true changes that most of us face each day.

Second, after a protracted bear market in commodities that lasted almost a decade, some analysts believe we are entering a new commodity supercycle. The bear market led to underinvestment in many commodities, including silver, for a number of years and we think this cycle is starting to turn. Third, silver is getting an added boost from the shift in U.S. and global environmental policy.

Silver is an essential element for the ongoing transition to green energy and electric vehicles, and we'll discuss that later in the presentation. Finally, and more recently, social media-driven investors have turned their sights on silver, which is adding further buying power to the story. As you can see on the slide, silver has broken out of its chart after being very range bound since 2013. In March 2020, silver actually fell from $18 an ounce to just below $12. I remember looking at the price when it was $11.98 and thought, "wow, I can't believe the price is this low." We highlight the $21 to $22 an ounce range as an important technical level for silver. We view this as the equivalent technical hurdle that gold faced at $1,360 an ounce. And for gold, once the $1,360 level was breached, it proceeded to reach its all-time high in August of 2020. We believe a similar pattern could unfold for silver.

Currently, we see silver trading within a range of $26 to $35, and right now it's trading around $28 an ounce. And even with silver being up about 130 percent since the March 2020 low, silver is still 40 percent below its high of 2011. When you think about the valuations of just about every other asset class in the world being very stretched right now, an asset being 40 percent below its 10-year level is quite astonishing to us.

John Ciampaglia: Slide 7

Moving to the next slide, we are simply showing the performance of the four precious metals, the S&P 500, U.S. bonds and the U.S. Dollar last year. You can see that palladium, gold and silver all outpaced the S&P 500 last year, with platinum being the lone laggard.

But more recently, platinum has broken out to the upside, and we're actually quite bullish on platinum as well. We aren't suggesting from the slide that precious metals are superior investments to financial assets like stocks and bonds, we all own these other asset classes as well, but our position has always been that they are complementary and an alternative asset class to consider in your portfolio for a number of reasons. I think Ed might talk a little bit more about that.

John Ciampaglia: Slide 8

Moving to the next slide. I just want to talk a little bit about the number of ways to gain exposure to precious metals, and we monitor them all to gauge market conditions. We're often asked by investors, what's the best way to gain exposure to precious metals? And there are a growing number of options in the marketplace for people to consider. Physical coins and bars are very common among retail investors. We also look at the premiums to spot metals, which reflect factors like investor demand and shortages. And we also look at the gold and silver ETFs as good parameters of interest. On this particular slide, we show the 2019 and 2020 coin and bar sales from the U.S., Perth and Canadian Mints, which are amongst the largest in the world.

As you can see, gold led the gains in 2020 with an astonishing 151 percent annual increase in coin sales. Silver enjoyed a 54% gain, but the gains in the U.S. were more pronounced for both silver and gold. You can see good demand for both silver and gold last year worldwide and we're seeing even more interest as of late.

John Ciampaglia: Slide 9

Moving to the next slide, I'll talk a little bit about silver coins because there's been a lot of interest in that area in the last couple of months.

We saw a demand accelerate in 2020, but they've really taken off in 2021, causing shortages and even premiums to spike sharply. On the slide, we show a recent example of how much one coin dealer was charging for a one-ounce American Silver Eagle coin a few days ago. They were asking $39.50 a coin when spot silver was $27.40. That's a 44 percent premium to silver.

While there's always premiums to spot silver when you're buying a coin because a coin is a fabricated item, there's a profit margin for the refiner, the coin dealer and others. We would suggest that the 44 percent premium that we're seeing right now is quite high relative to traditional norms. That reflects the fact that many coin dealers are sold out and it's very hard to find inventory right now.

We aren't suggesting that owning coins is a bad option. I own some myself. I like having it in my physical possession, but investors should be mindful of how much they're paying for those coins. Investors may not realize the expected gain and the value of their coins when the spot price of silver rises and this is something to be mindful of.

The wholesale silver market is very different, with the 1,000 ounce London Good Delivery Bar being the dominant form. These bars weigh approximately 68.5 pounds. It's incredible when you're inside one of our vaults, which I have had the privilege of being inside and looking at 80,000 of bars on pallets. It's quite amazing to see that quantity of metal.

We are beginning to see signs of tightness in the physical wholesale market. It has become harder to source bars locally, and bars often have to be shipped from other locations. Our vaults are in Toronto and Winnipeg. We always try to source bars locally, but when bars are no longer available in those locations, we will buy bars from New York, London and other jurisdictions.

Unfortunately, silver is not the easiest or the fastest metal to transport. In contrast, gold is predominantly shipped by plane, and many people don't realize that it's often shipped on a regular commercial flight that you may be on. Silver, given its higher mass, is transported by ship between European and North American markets, and then by reinforced tractor trailers within regions. If you're curious, one tractor-trailer typically holds 600,000 ounces of silver, which at today's value is about $17 million; this is how we receive silver into our vaults. It comes in tractor-trailers on pallets, and it's quite a laborious process to unload and to move into our vault.

Finally, one observation about the silver futures market: although it is paper-based, it can provide signals on the state of the physical market. Recently, we've seen a move to slight backwardation, meaning a spot price is higher than the forward, which is reflecting tight conditions in the physical market.

There have only been a handful of days where this has occurred over the last 10 years. Interestingly, the last time we experienced this was in 2010 and 2011, when the price of silver closed at almost $50 an ounce.

John Ciampaglia: Slide 10

Moving to slide 10. We will talk a little bit about social media, which has had quite an impact on silver over the last four or five weeks. We all know that social media has had a profound impact on our personal lives, and in the past two years, it has evolved to become a platform for the sharing of investment ideas.

Yes, it is the Wild West and nothing replaces professional advice, but it's hard to ignore what is happening right now. There has been a growing phenomenon over the past few months where a community of mostly retail investors are using social media to band together to exert their collective influence.

We saw this, obviously with GameStop and the short squeeze that they were trying to exert on a number of hedge funds with success. But more recently, one group is targeting the silver market, both the physical market and select silver miners, which they believe are undervalued.

While it's impossible to know how this will all play out, this group is having an impact on the silver market over the past few weeks, prompting at least two U.S. listed silver ETFs to amend their prospectus risk disclosures about a week ago.

John Ciampaglia: Slide 11

Moving to the next slide, I will wrap up my section of the presentation with a chart showing the total ounces of gold and silver held by ETFs in the world. These charts measure the total number of ounces of metal held by ETFs and not the dollar value of the metal, an excellent barometer of global demand from all investor types.

As you can see, the growth in gold ETFs has been steady since 2016 with a sharp acceleration in 2020 due to the risk of the environment we were in.

After a multi-year pause, silver ETFs resumed their growth in 2019, and are so far in 2021 outpacing gold ETFs in terms of net flows. With that, I will now turn it back over to Ed to introduce Maria, who I have had the pleasure of working with over the last 10 years at Sprott and has been studying and investing in the silver markets over that whole period. Here's Ed.

Ed Coyne

Thank you, John, and thank you for your comments. It's fascinating to see how the market really matured in the last two decades and how precious metals have come front and center for both retail and institutional investors.

I think to your point about social media, that's going to continue to be highlighted. And I would suspect we'll continue to see more and more investors come into the fold as the retail investor starts to look at silver and gold in a different light. Thank you for your comments on that. That was quite informative.

What I'd like to do now is shift over to Maria. Maria is in the trenches effectively day in and day out as one of our senior portfolio managers and looking at not just silver, but all mining stocks and opportunities.

I thought it would be interesting to have Maria on today to talk about the market from the lens of a portfolio manager, including what she's seeing in the current market and where opportunities potentially lie going forward. With that, I'd like to turn it over to Maria.

Maria Smirnova

Thank you, Ed. And John, thank you for that great introduction. I think you introduced the thesis for silver very well, and I wanted to go into a few more details about both the currency aspects of silver and the industrial side of silver. There's some exciting developments on the industrial side, specifically, that I wanted to highlight today. I've mentioned, I'm a portfolio manager, which means most of my days are actually spent looking at individual companies, meeting with management teams and assessing opportunities on a micro level. That said, I always have to step back and look at things from a macro-economic point of view and that's why I start there every single time, because that informs our views on gold and silver.

We have been bullish on gold and silver for a long time and that stems from our view that over time, governments overspend and ultimately try to devalue their currencies by printing more of them. As fiat currencies devalue, gold and silver serve as hard assets that cannot be debased or devalued and therefore appreciate. That's laid out in the last two decades very well. Now, nothing goes up in a straight line, there's ups and downs, but overall we've called the direction.

Maria Smirnova: Slide 14 

This slide simply shows the United States federal budget versus the federal funds target rate, which is the red line, the deficit is the blue line. So as the blue line goes down, the deficit is increasing. Now, the deficit is simply a measure of a government revenues minus its expenditures. As you can see, the U.S. budget deficit has been becoming increasingly negative. Of course with COVID hitting last year, the last 12 months to January of this year hit a negative $3.5 trillion. That's a large number for the United States.

Of course, with that, the Federal Reserve has had to reduce rates. Now they started reducing rates, actually, before COVID hit. They started reducing rates in 2019 because even then we started seeing weakness in the economy. It wasn't just the United States, it was in other economies of the world, like Europe as well. Central banks had to basically react and start becoming more accommodating. As you can see that nominal interest rates in the U.S. are pretty much zero right now and this is also the case, again, in other countries of the world. It stems from the fact that governments, particularly the U.S., have had more outflows such as payments for social security, Medicare, defense spending, than receipts and taxes. Of course, President Trump's tax cut a few years ago did not help in that direction. What does that mean? What did COVID mean last year? Going to the next slide, I like to show this table of governments around the world having to stimulate their economy, to dig out of the economic hole that was created by all these shutdowns that happened because of COVID last year.

Maria Smirnova: Slide 15

As you can see here, the U.S., Europe, Japan, China and Canada had to spend a lot of money to stimulate our economy. That resulted in over 50 percent stimulus to GDP, both monetary and fiscal policy in the U.S., similar numbers in Europe and Canada was very high as well.

What does this mean? The government had to inject liquidity into both the markets and fiscally to create more jobs or to pay people who are out of jobs to keep them afloat. That resulted in an explosion, going to next slide, of central banks' balance sheets. As you can see here, the lines for Europe, United States and Canada all exploded last year.

Maria Smirnova: Slide 16

Central banks are replacing traditional buyers of debt. They're essentially financing the spending that had to go on last year. It's interesting because specifically thinking back to the U.S., again, after the global financial crisis of 2008, people thought that the Federal Reserve balance sheet would shrink. As you can see in the graph, it continued to grow and then start shrinking until 2016 and 2018 but just to grow again. We think it's very difficult to shrink a central bank balance sheet once it starts to grow. That's exactly what we're seeing. That is positive for gold and silver.  

Maria Smirnova: Slide 17

Slide 17 shows the global government debt. Again, the result of all the spending has been an explosion in government debt. We're at levels not seen since World War II. These are really high levels. And that again applies not just to developed economies, it also applies to emerging economies. So, what and why is it important?  This has implications on interest rates. You have to service the debt as a government and therefore it means low interest rates.

Maria Smirnova: Slide 18

Going to the next slide, we see exactly that. On slide 18, we can see as the debt grows, and this shows the debt-to-GDP ratio, interest rates go down. Here I show real interest rates. A real interest rate is basically a nominal interest rate adjusted for inflation. Real interest rates are negative in many countries, particularly, in the United States. Why do I talk about the United States so much? Because most things we look at are measured in U.S. dollars, and that is very important.

Negative real rates are good for gold and silver. Even though gold and silver don't pay you, they provide protection from shocks and they're safe assets. Negative real rate environments actually work well for gold and silver. As we've had these rallies in gold and silver, we've had rallies in other metals and commodities, but why are we still positive on these metals going forward?

Maria Smirnova: Slide 19

Let's turn to slide 19 for that. Again, I speak about the Federal Reserve, but this really applies to other central banks. The ECB has a very important macro policy outlook and with a similar outlook to the U.S., I just don't have the time to go through each country on its own.

Given the Fed is very dovish and their two mandates, they're trying to target higher inflation, and they coined the term FAIT, "flexible average inflation targeting." They're trying to overshoot two percent inflation, which means even if we see inflation higher than two percent, it doesn't mean they're going to become less dovish necessarily right away.

And by the way, the Fed uses a term called PCE, personal consumption expenditures; they don't look at CPI. The numbers vary a little and I'm not going to go into the variances.

The takeaway is that it has been below two percent. In fact, when the Fed chair, Mr. Powell, speaks about inflation, he does point out that inflation has been much lower over the last three decades than in earlier times, and the long term potential growth rate is lower for economies. Therefore, the neutral rate of interest is also much lower.Therefore, they are targeting higher inflation and they're going to be dovish and continue their policies.

The second thing that the Fed is targeting is maximum employment. We don't have the definition of what that means right now, but we do know that since the COVID crisis, the unemployment rate has obviously skyrocketed. We're still down about 10 million jobs in the U.S. alone since pre-COVID.

What is the Fed looking at? Well, they're looking at the participation rate. The labor force participation rate dropped significantly since COVID. The lower right chart shows that if you adjust the unemployment rate for the participation rate, it's actually closer to 10 percent rather than six percent. Obviously, we're far from maximum employment.

What are we hearing the Fed say about this? Well, they talk about inequality and how inequality has actually widened since COVID. That makes sense because the areas of employment that were hit the hardest were travel, leisure, and areas where people don't get paid as much as in finance, for example.

On the flip side, finance hasn't really suffered. Construction hasn't really suffered. In fact, it has benefited. The disparity in income has grown and that is troubling to central bankers.

We talk about permanent job loss, or Mr. Powell does. He talks about an increase in long term unemployment levels. These are all troubling things to talk and think about. And that is why, again, the Fed is dovish. We're not expecting the Fed to raise rates for a long time. In fact, we think they will continue the quantitative easing that they have been conducting and buying treasuries and securities at the rate that they're been doing.

This is very positive for silver and gold. I watch policy very intently, and obviously everyone is trying to read the tea leaves, but that is basically the outlook right now.

Maria Smirnova: Slide 20

Let's turn now to discuss silver a little more specifically in terms of the uses and demand for silver. Silver is an interesting beast because it's not quite like gold, where gold is mostly a monetary/investment vehicle.

Silver has two heads, as I like to point out. About half of it goes into industrial uses and the other half goes into uses such as silverware, coins and bars and jewelry, which I consider to be investment uses. Both sides of the story are quite positive for silver.

Maria Smirnova: Slide 21

Going to slide 21, I think John already eloquently described the rush in investment demand that's happened in silver over the last little while.

To summarize, if we look back at last year between coins, bars and ETFs, we've seen at least $300 million flow into that part of the demand, and that represents over 30 percent of the global silver market. That is huge. The entire market is about a billion ounces a year. To have over 300 million ounces sucked into those uses is tremendous. I won't dwell on that, but let's turn to the next slide.

Ed Coyne

I was just going to say, Maria, it seems like silver is really being rediscovered at some level. For so long, to your point earlier, gold was really capturing the spotlight as investors look for a risk-off type of trade and looked purely at gold. They looked at purely precious metals as nothing more than a monetary allocation.

Maria Smirnova: Slide 22

I'm glad we're going to this next slide here on page 22, because I think it really talks to what silver is doing today, why we have more investors looking at silver and in many cases for the first time.

Ed Coyne

I didn't want to cut you off, but I wanted to pause for a moment because I think an interesting point to note is that a whole new investor circle group of investors are really discovering silver for the first time, or maybe rediscovering silver after a long period of not being invested in the space. I think this chart is one that I think a lot of people will find very interesting, which shows the usage for silver today and why we think that growth is going to continue. I'll turn it back over to you, but I just wanted to highlight that point.

Maria Smirnova: Slide 22

Yes, I agree. The great outcome of the Reddit crowd flocking to the potential "silver squeeze" was actually very positive because it brought new faces to the market and people are more closely watching the market.  Let's pause here. This is an involved slide and I don't know if everyone can read the small print, but basically what we are trying to say here is that silver has a lot of different uses. It may be in small quantities, but over time those little uses cumulatively add up. As I already mentioned, over half of the market, so above 500 million ounces a year, goes into these various uses. Of course, the silver used to be known back in the day primarily for photography, which has been declining. It has also been known throughout the ages as a biocidal agent. It kills bacteria very effectively. This is exactly one of the circles here on this chart, which shows it is used in hospitals and surgical rooms. It might be small quantities, but it doesn't take much.

I have also read recently about silver going into things like deodorants and bandages, and clothing. Technology has been evolving where silver can be used in greater things that we didn't think of before, such as to kill bacteria, which is why it's very useful. Another great property of silver is that it is very electrically conductive. Again, you don't need a lot of it, but we see it in a lot of electronics such as TV screens and circuit boards. Anything where you need to conduct electricity, it can be used. That brings me to a very large segment of the market; almost 10 percent of the market is solar panel usage.

This is where the green revolution comes in, really, because as we're transitioning to, "greener" energy uses like wind and solar, we're seeing silver use grow. It's grown to about 100 million ounces a year and I have seen projections that in about 10 years' time, it could go as high as 190 million ounces a year, which would imply an extra 90 million ounces a year that we need to use just in solar panels.

That is huge. To find 90 million ounces a year you would need nine big silver mines. As an aside, we wrote an article profiling some of these uses on the Sprott.com website. Silver is widely used in many areas of a vehicle, including electric vehicles; let's consider windshields and defrosters for windshields. Mirrors, anything electronic from braking systems to air conditioning units to radios, it's used in cars already. I think the estimate for this year is about 60 million ounces to be used in cars. As we look for cleaner things and transition to electric vehicles and hybrid vehicles, silver use will rise because solar loading in hybrid vehicles is higher than traditional internal combustion engine parts.

Again, some of it has to do with safety systems. As we have more and more safety systems, silver use is rising, but the greater the number of electric vehicles, the more silver we use per vehicle. I think the Silver Institute has estimated that in about five years this could rise by about 25-30 million ounces, a big number for reference. As I mentioned before, a large mine for silver produces 10 million ounces and we're just not seeing a lot of mines like that come on line.  The last use I will highlight is 5G networks. We all have cell phones nowadays, and the world has been racing to upgrade the networks to 5G networks. It's not a big use, but it's projected to grow quite strongly over the next 5-10 years. Amongst those three uses that I just highlighted, I can see over 100 million ounces a year extra that we will need in about 10 years. That's a big number for silver.

I think it's pretty exciting to read about some of these things and I believe when we think about EVs, for example, we think cobalt, nickel and lithium. We talk a lot about those metals when we think about these things, but we don't necessarily think of silver. That is why I wanted to highlight silver.

Maria Smirnova: Slide 23

Let's go forward to the next slide, slide 23. I'm a portfolio manager looking at stocks; what are we seeing in that regard? We think that silver stocks are actually quite inexpensive compared to prior cycles. Back in '07/'08 you can see here the price-to-cash flow chart. The gray line is for silver producers and the gold line is for gold producers. Back in '07/'08, these things were trading at 15-20 times cash flow. Now we're trading at around 10 times cash flow using spot forward prices. These stocks are not expensive.

What's interesting to me is that we see these companies, we have forecasts and we see this already translating into hard earnings. Q4 reporting season is upon us and we're starting to see real cash flow start flowing back to these companies.

These companies have been good at using cash wisely. They have been reducing debt, cleaning up their balance sheets and starting to reinvest in their business in the form of exploration and development. As a watcher of these stocks for 15 years now, it is a very exciting time and I'm glad to see that companies are doing the right thing and we're not seeing signs of overheating, such as silly M&A or silly uses of cash. They have learned to be prudent with their capital, and that has a lot to do with the fact that investors such as myself and other portfolio managers have provided that feedback to management teams. I'm glad to see that they're listening.

Maria Smirnova: Slide 24

Let's go to the last slide to summarize our outlook. We think that silver is a real asset which cannot be debased or devalued. The current environment of expansionary monetary and fiscal policies worldwide will keep rates low because we're trying to stoke inflation. This is supportive for silver. Investor interest has returned with a vengeance to silver, and it is growing, broad and global. In addition, silver is benefiting from what I describe as the green energy revolution. We think that solar will continue to do well and the price should appreciate. Just to finish, the equities of the silver miners are reasonably priced. I'll turn it back to Ed to close out.

Ed Coyne: Slide 26

Thank you, Maria. You mentioned something I thought that was really interesting, which is the number of mines that we need to develop to meet the growing demand of silver. I do think that for those looking at the space today, it can certainly go above and beyond just looking at the physical market, but also looking at the equity market.

To your point about free cash flow and to your point about how more mines will need to come on line to meet that demand, I think there's a dual opportunity today in this space. Not only can the physical market help hedge your portfolio and allow you to stay invested in traditional stocks, but also allow you to replace non-productive assets right now such as bonds or cash. I do think the equities are looking more and more attractive today for some of the points you talked about.

That really brings me to the last piece of the formal part of the presentation before we go into Q&A, which is how to think about precious metals as a diversifier when you're building out your portfolio? Traditionally, investors would typically look at precious metals or lump it into just a pure commodity basket. Often I would hear investors say, "I've got my precious metals exposure." I own XYZ Commodity Fund or XYZ Commodity ETF, but they're not really getting the benefits of owning a physical market through those funds. They're getting some participation, but they're not truly getting the benefit within their portfolio.

We have found in advising our clients, whether it's a large institution, endowment or university to a private family, individual advisors, and even directly one-on-one with clients, that precious metals can be a true alternative asset and as a diversifier within your portfolio. We have found that a 5-10 percent allocation to precious metals, whether it's gold, silver, platinum and platinum, the combination of all four, maybe even peppering in the equities themselves, the miners, whether it's a senior large-cap or a junior small-cap miner, that a 5-10 percent allocation does work wonders within the portfolio.

When you look at your traditional portfolio of a 60/40 model, where 60 percent is in traditional equities, call it the S&P 500, and 40 percent in traditional bonds, call it 10-year treasuries, the equity portion represents 98 percent of the total portfolio risk.

By allocating 10% into precious metals, you take that equity exposure risk from 98 percent down to 83 percent. Here's an asset that's liquid, relatively low cost and one that most investors understand and know, unlike many very complicated, long/short, 2 and 20-type strategies managed through hedge funds. This is a very simple, liquid, transparent, easy to understand asset that can do wonders for a portfolio when you're allocating to it to help diversify the overall portfolio.

Ed Coyne: Slide 27

And on page 27, we actually highlight some of the sweetest solutions that we offer, which really segregates the allocation into two separate buckets. We always like to think of the physical market as really a core allocation. We say core allocation simply because we believe the physical market allows you to stay invested in other assets as well, knowing you have a portion of your portfolio outside of the traditional market, allowing you to naturally hedge the overall portfolio and allowing you to stay fully invested in all assets of the market.

On the other side of the equation is the gold and silver and platinum and palladium equities, the miners. That's going to be much more of a tactical, opportunistic type of allocation. We see, given the current narrative and landscape that both John and Maria laid out, that both right now look very attractive. The physical side is a core allocation, or think of it as a risk-off allocation, and the equities are more opportunistic tactical allocation or think of that as a risk-on allocation. We think both sides of the table right now look very attractive and investors should consider getting participation within the precious metals market.

Ed Coyne: Slide 28

What I would encourage all the listeners today to do is to go to page 28 and take a look at the regional and national coverage that we offer for individual advisors. We also offer our 800 number here for individual investors that want to allocate to the space. We encourage you to work with Matt on the West Coast, Julian in a central region, or even Sergio on the East Coast to help us advise you on how to think about the precious metals allocation, educate you on the different investment solutions we offer, and help you allocate appropriately to the space and get the most out of the precious metals allocation.

Before we go into the Q&A, what I would like to do at this time is to turn it back to Natalie to read off a few housekeeping items, and then we'll open it up for Q&A, which we've got well over 50 questions that have come in either a time of registration or during the presentation itself. I'll turn it back to you, Natalie.

Natalie Noel

Great. Thank you all for such an informative presentation. Just as a reminder, a copy of the presentation as well as additional material, can be found in the Documents folder at the bottom of your screen. We 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 question 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. And 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 your screen and confirm the request. With that, I will hand it back over to you, Ed, for our first question.

Question and Answer Section

Ed Coyne Q&A

Great. Thank you, Natalie. The first question is one that we get quite often, and I think we've pretty much moved past it as a firm. It serves more as a guide, but I thought it would be worth addressing because it seems to be a question we get time and time again.

And that's a simple question of the gold to silver ratio. Maybe, Maria, as a portfolio manager, how relevant is that in today's market? Do you use it? Do you pay attention to it?

Maybe just help investors think about the gold to silver ratio for a moment today. And what that really means for you, if anything, when you're looking to make decisions in your allocation.

Maria Smirnova Q&A

Yeah. I mean, we don't use it as a predictor. We just look at it as a byproduct of what's happening and what part of the cycle we are in. When the gold to silver ratio spikes, as it did in March of last year, we knew that silver was severely oversold, and we knew that it would start outperforming gold at that time.

It's reference point, but it doesn't really inform the way we position portfolios because the way we position our portfolios is bottom-up a lot of the time, and we look for the best companies and best opportunities in terms of evaluation and growth prospects and management teams, among other things.

Ed Coyne Q&A

It's this good old-fashioned block and tackling value type of approach to the best businesses, it sounds like.

Maria Smirnova Q&A

Yes, we try.

Ed Coyne Q&A

The next question I know we touched on a little bit, but maybe it's worth exploring a bit more: to what extent is silver an industrial metal? And to what extent is it a currency?  I believe they're asking that question on an absolute basis, but probably also relative to gold. I know you touched on that a little bit.

In your mind, when you're looking at silver in general, are you looking at it really more from its industrial demand and what that can mean to the underlining price and what that means to the underlying miners? Or, are you taking into consideration the monetary component, the way you would move with gold? What's your thought process when you're looking at the use of silver as it relates to the miners?

Maria Smirnova Q&A

I would say that it's about 50/50. It's equally-weighted in terms of the end use but what drives the price is generally the marginal buyer, the marginal dollar. That is usually the investment demand and that is definitely more volatile and as we talked about last year, we had a surge in investment demand and that's what drove the price up. I consider industrial demand the backbone of silver demand. It's pretty stable, year by year, and last year we would have seen a dip because industrial activity shut down for a time, but it is pretty stable otherwise. Investment demand is more volatile and it drives the price, in my mind.

Ed Coyne Q&A

I guess you could say that there's more than one way to win with silver when you're looking at it as an investment then. The next question, maybe we push this one over to John. This is something that we haven't actually seen in our last couple webcasts and many of the calls I've had. It hasn't been a topic that's come up recently, but I guess with the recent run-up and then subsequently the sell-off we've seen, how do we think about cryptocurrencies in general?

Everyone says Bitcoin, but let's even cover a broader waterfront and talk about cryptos in general. Is that in your mind, John, taking away from the precious metal story or is it enhancing it and educating more investors on the value of allocating away from traditional markets for part of your allocation? What's your thought on that? What's your view on that with the cryptos relative to traditional precious metals?

John Ciampaglia Q&A

Sure. Okay. Well, there are definitely some commonalities between the two. Some of them are real, and some of them, I think, are narrative. The term digital gold is often used to describe Bitcoin and I would say that is a false narrative. They have very different characteristics. Gold has been a store of value for 5,000 years. Bitcoin is still relatively young in its development, and it is proven to be less of a store value given its extreme volatility. But having said that, it does have this commonality where it is an alternative for some people to the U.S. dollar and other currencies.

I think that's the appeal to some people that is why they want to put assets in things that cannot be debased. Maria spoke earlier in the presentation that central bank policy generally over the last 20 years has undermined the value of currencies. Many countries are in a race to the bottom in terms of trying to devalue the currencies to improve their competitive outlook.

Ed Coyne Q&A

We may have lost you there just a touch, John, but I know I could finish that comment for you because we certainly saw that run up and then the subsequent sell-off. Then yet again, we saw it a second time more recently here. It does seem to be more of a risk-on type of allocation where true precious metals like gold and silver team to be more of a risk-off allocation. We're not arguing that one is actually better than the other, but they're certainly different.

Maria, let's go back to you for a moment. There's a question that came out which I think is pretty interesting. This talks about the perceived weakness in the gold price recently. Gold's off a few percentage points here today. It's been basically stagnant for the last quarter or so, yet silver has started to rally quite a bit. Maybe that's partly the perceived short squeeze. Maybe that's just the perceived potential new super cycling commodities in the growing demand for silver.

But how closely do you look at the price movement of gold relative to silver, or can they really operate separately? With what you talked about earlier from a commodity standpoint, from demand standpoint, is a dog wagging the tail, or is the tail wagging the dog as it relates to silver verse gold? What are you seeing there if gold were to drop below 1,700, say? And that's the question. What would that mean for silver?

Maria Smirnova Q&A

 Well, that's an interesting observation. It does seem that silver has decoupled from gold because previous to about a year before, silver did underperform gold. And again, that's why we look at this gold to silver ratio, because when the ratio is going up, that means silver is underperforming. All of a sudden it started outperforming. I think that's exactly the effect that we're seeing as industrial activity is coming back. Silver is benefiting from that whole industrial demand factor, and it's not just viewed as a monetary asset anymore. It also has that industrial kick.

I'm actually not really worried about gold either but even if gold did dip below whatever figure, 1,700, or whatever it is, I think silver can continue doing well and outperforming gold.

Ed Coyne Q&A

Great. Thank you. And it looks like we're coming up on the top of the hour here in a moment. I know we have a lot of unanswered questions. As always, we'll get back to those questions via email and/or phone calls. But this is probably one more question for you, Maria. And that relates to miners in general, so not necessarily just silver.

But the question is, in fact, we are in the start of a new supercycle for commodities: the price of energy going up, fuel going up, and what impact can that have on silver miners or just miners in general?

Are you worried about that? In talking to management, what are you hearing? How are they planning for that? If the cost of actual energy and employment does rise, how are miners dealing with that today? What are they looking like and what are the potential risks going forward if you do want to invest in the miners themselves?

Maria Smirnova Q&A

As of right now, when we speak to management teams, they actually don't show concern for increasing input costs. Some of them have, actually, a number of them have hedged their energy requirements through diesel hedges, etc. but nobody is yet talking about wage pressure and that is a very large component of mining. People are still just happy to have jobs, and that applies to emerging economies more so than developed economies. If anything, the companies have seen costs increases from COVID.

As you have to implement distancing measures, you might have more transportation for your employees. You have to maybe extend your camps to isolate people more. There's definitely costs. We've heard that, and we've seen that, but we're not seeing or hearing about costs going forward, cost pressures from more fundamental and long standing reasons.

Ed Coyne Q&A

Great. Thank you. Well, at this time, I think we'll wrap up the call. Again, I encourage all the listeners to visit us at Sprott, S-P-R-O-T-T .com to learn more about how we can help you allocate to the precious metals trade. For all the advisors on the call, we encourage you to reach out to your respect to senior investment consultant, whether you're on the West Coast, Central or East Coast regions. And for any individual investors that were able to join us today, we encourage you to reach out to our 800 number, which is 800-477-7853, which you'll find on page 28 of our presentation deck today as well. Thank you all for listening today. We would love to work with each and every one of you and help you allocate to the precious metals market, again, whether it's the physical, the equity or a combination of both. Please reach out to us to learn more about how Sprott can be your alternative asset manager within the precious metals market. Thank you.

 

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