How to Think Clearly in a Volatile Precious Metals Market - Monthly Wrap Up

Announcer: You're listening to Sprott Money's "Monthly Wrap-Up," with Craig Hemke

Craig: Welcome back to the Sprott Money News and sprottmoney.com "Monthly Wrap-Up" for the month of June 2022 as usual. I'm your host Craig Hemke. Joining us this month is an old friend Grant Williams grant is co-founder of Real Vision. He writes a fantastic newsletter called "Things That Make You Go Hmmm." He's also the speaker, I guess if you will, at the Grant Williams Podcast. Of course, all of this can be found at grant-williams.com. You can also follow him on Twitter. He's a great analyst and a financial commentator, and it's great to have him join us. Grant, thank you so much for your time.

Grant: Hey mate. It's great to see you. It's been a long, long time since we've chatted.

Craig: Isn't that crazy? I don't even know where the time goes. But...

Grant: Yeah, right.

Craig: ...geez. It's crazy. And things are certainly seeming to speed up. Before we get into the questions and the discussion about the month that is just about to conclude, I wanna jump forward. Just a few days in which all of our Canadian listeners a happy Canada Day on July the first, but also Independence Day is coming for the U.S. We got a three-day market holiday weekend coming up next week.
Sprott Money is celebrating both holidays with some special prices on our best-selling Canadian and American bullion products. So, of course, visit sprottmoney.com to take advantage of the discounts. You can also call them at 888-861-0775. Grant, let's dive in. I think you're the perfect guest for this month because the precious metals are just flipping and flopping and going sideways and grinding lower. And they seem like they will continue to do so until the fed finally pivots away from this quantitative tightening charade that they continue to play. So, let's start there. They're trying to tell us all that that they're gonna drive rates up until they get them above, they get the fed funds rate above the rate of inflation. Do you think they'll get there? Is that something that might actually happen?

Grant: No, I don't think they will. I think they are gonna try and get rates up as high as they can in the shortest amount of time possible, to give themselves room to cut again when the next crisis comes. So, I don't think they'll get there at all. I think they're serious about people thinking they're serious at the moment and I think they probably will hike further than people expect. I think they will hike into a recession. And you know, the one thing that they've managed to do by having these large increases, you know, 75 basis points, rumors of another 75 and people talk possibly 100 is at least they can give themselves some clear air quickly. Let's say they go 100 next time and talk about maybe 50 the next time after that, look, they're being hawkish, they're managing expectations. Hopefully, it will help them dampen inflation expectations, which is the key thing they need to address. But whether inflation comes down or not remains to be seen. I suspect we're due for a little cooling-off period in the headline CPI numbers. And, you know, of course, if inflation moderates to say 5% down from 8%, it gives them enough cover to say, "Well, we're gonna pause and be data-dependent again." And then, you know, they've got a couple percent in the bag.

So, right now it's all a game of optics. We all know that inflation is a problem. We all know that it's largely supply-side driven, but the kind of X factor is the expectations, which are high and growing. And if you can't dampen those expectations, then they do have a problem on their hands. So, you know, it remains to be seen. I think they will keep hiking. I think they're serious about being taken seriously. The question is, how far do they have to go before people are convinced enough that they're serious to kind of exhale a little bit and that remains to be seen.

Craig: What do you think, Grant, about what we're seeing around the world? I mean, this is putting great pressure on the Bank of Japan to keep their yield curve control plants in place. Great pressure it seems on the EU who is... I mean, without EU or ECB I'm saying, without ECB bond-buying it seems that we'd have another sovereign debt crisis in what everybody used to call the PIIGS. Stock market is down 20%. What might be the biggest driver of forcing them to pivot?

Grant: Well, if you look around really everything you've just talked about has been a problem for a decade. The only new problem we have is inflation. That's the wrinkle to all this that these guys haven't had to face before. We've had PIIGS debt crises they've managed to fend off through lowering rates and buying bonds. They've managed to use those two tools of asset purchases and lowering interest rates to fight off every crisis that they've had for over a decade now pushing on 20 years. But the only reason they've been able to do that is because they haven't had inflation on the other side of the equation. So, they could lower rates without fearing inflation. They could buy assets without fearing inflation. Now they're kind of hemmed in by the reappearance of inflation because every time they do something now, they run the risk that it has a negative impact on those inflation numbers. So, the problem is the same, the solutions are likely going to be the same. It's the outcome that's in question. And there is a very strong possibility that the outcome this time won't be the same as the outcomes they've had previously.

Craig: Okay. So, that leads me directly to the question, thank you, that I most wanted to ask you because it seems as if the fed is just simply playing the same old game. You know, they think they can through their monetary policy, drive up rates and then get an economic slowdown. And then if the floodgates slow open and the here will come the bid for treasuries again, driving rates back down. What if that doesn't happen this time, Grant? I mean, already the Japanese have been net sellers defending yield curve control. We got the Russians and the Chinese walking away because of what happened back in March and the Ukraine situation. Do you think that's a risk that maybe next they'll be surprised and next time they're really gonna have to ramp up QE just to try to get rates back down?

Grant: Yeah, no, absolutely I do. I think there's a big surprise for them coming. You know, is it a surprise? We are sitting here talking about these. There's all kinds of commentators talking about this stuff. This is not new to them. They understand that this is a potential outcome. They're rooted in models and academics rather than the real world. So, I think that puts them in a disadvantage at times like this.

But look, you mentioned Japan and Japan's a very important case here because they have had no problems with this stuff for years and everyone's been scratching their head saying, "You know, how is it possible that Japanese can have their cake and eat it?" They can continue to print money. They can continue to buy up the entire JGB market, buy ETFs, buy everything they want. It's not reflecting the currency. It's not reflected anywhere. And, of course, now their inflation target is 2%, which was a world away from the deflation they've struggled through. And inflation, CPR inflation Japan is above that. It's 2.5% now. And very quickly, the Central Bank Governor [inaudible 00:07:41.825] talked in a press conference a couple of weeks ago, how the Japanese were quite into accept high prices. And there was a massive backlash against that. And he was forced to apologize about it and say that, you know, he could have chosen his words more carefully. So that shows you where the Japanese mindset is. Again, the public there are already worried at 2.5% inflation. They've got no whiff of the 8% inflation they're seeing in the United States.

So, you know, again, the return of inflation, whether you believe it's a long-term problem or structural problem, or just temporary, it ties one hand behind their backs. Because if you do have inflation and people are worried about it and you start cutting rates, it's gonna be reflected in that number. So, they really are in the corner that we've all kind of been aware they were painting themselves into for multiple years now. And it remains to be seen how it plays out. You know, we don't know, but I suspect they're not gonna get things the way they want them. And you can see that in Japan, look at what's happening to the yen. The yen's incredibly weak. The market is finally starting to test this 25 basis point cap on the 10-year JGB having just kind of left it alone to the extent where there have been days when the Japanese tenure doesn't trade, which is unbelievable. You know, zero trades go through in the kind of pivot point of a sovereign yield curve. It's just unthinkable. But now the market is starting to say, "All right, we can see the corner. We can see they're weak, let's start pushing it." So, the yen's, you know, gone through 135. The JGB Futures have spiked significantly and the Bank of Japan's under threat now. You know, it remains we'll see what they do, but, you know, go back to '92 and Soros taken on the Bank of England when he forced them out of the exchange rate mechanism. It's not unthinkable or unheard of that central banks get punched in the nose by markets. We just haven't seen that happen for almost 30 years, so people have forgotten that it happens, but it does. And I suspect there are gonna be people thrown a few punches at these guys for the first time in some time.
Craig: And with that, let's just go back to where we started. It seems as if the precious metals are kind of stuck here. They may begin to anticipate all of this before we know. But it seems as if prices are stuck until these policies reverse. So, if you had to guess, what would be that ultimate driver of that reversal? I mean, is it the stock market falling another 20%? I mean, is there one thing that you think when that happens, okay, this is why the fed won't get rates above inflation and that's why they're gonna have to come back with the QE?"

Grant: Well, it's usually a crisis that will make them pivot. And the stock market, it looks really interesting. This is kind of the least panicked stock market melt that we've had in quite some time. The markets are down a lot further than people feel like they're down. That's incredibly fortunate for the fed because they haven't had to come in and stabilize panics markets. There's a lot of stress in the credit markets. That's where the most likely problems are gonna be, but they haven't kind of manifested themselves yet. We haven't seen, you know, headlines about stock market crashes. We've just seen stocks are down. You know, it's tech stocks are down and high price stocks are down, overvalued stocks are down, but we haven't seen any panic yet. But it's that panic that will force them to do something. It's crisis that always forces them to do something.

Now, what happens when there is a crisis is anybody's guess because as we've already said, they will use the same tools but the outcome may be different. They may cut rates and find that it doesn't work. You know, they may start buying assets and it doesn't work. We just don't know yet. But for precious metals, I think a crisis is always a good time to own them. And again, I hammer on this a lot talking about the price of gold and the price of silver. I just don't focus on those. You know, I want to be in possession of them when the crises hit. And I want to have them for periods of inflation. And I'm not so much bothered about the price. I'm worried more about my purchasing power, frankly, and they've got a very good track record of protecting that over the longer term.

So, there will be another crisis, even though Janet Yellen promised us we wouldn't see one in her lifetime. They will throw the same old tools at the crisis but I'd think the outcome will be different. And when that outcome is different and we don't get what they expect, then they're gonna be forced into things like buying stocks, for example. Which they shouldn't be able to do but they will find a way when they need to. And at that point, it'd be evident it's a real crisis. And at that point, I suspect precious metals will react as something that you need to own in a crisis.

Craig: Yeah. I think we all see that coming as well. Do you think, Grant, there will be a time where the mining shares will go? You know, I remember that great presentation you gave, I mean, heck four or five years ago. Remember you called it "Nobody Cares."? Geez. Five years on and still, I mean, nobody cares even less. Right? What are your thoughts on the sector?

Grant: Well, no, you're right. I mean, they have cared. They have cared in the interim at various points, but as a speculation, you know, I mean, mining shares are great speculations and people love to gamble on them because I think that these are lottery tickets that can go up, you know, four, five, six, seven, eight X, and they can. The question is, do we get an environment where people want to invest in the mining shares? That's a whole different issue.

And to get people to invest in the mining shares, you need what looks like a sustainable path higher for the metals themselves. And to your point at the beginning, we're not seeing that right now. The precious metals are flip-flopping around. A lot of people expected them given the backdrop to be 2,500 or higher, and they're not. And that disappoints the people who are focused on the price.

But the mining shares will perform extraordinarily well when the metals start to perform and when people feel they need to own these things, rather than take a punt and try and make some money out of them. We haven't reached the point yet where enough people think, "I need to own gold as protection." When that happens and when we do get that kind of environment for the metals, then I think the [inaudible 00:14:17.937] will absolutely fly, but I don't think it's gonna happen just yet.

Craig: Yeah. Grant, let's wrap up with just one of the questions that was sent in because we always solicit questions when we announce who the guest is gonna be. And I'd like to get your opinion on this one. I think I like this one. This is someone who owns no physical gold. I know I probably should, but every time I look to buy, I think, wait a second, silver is got to be undervalued at 80 to 1. So, I end up buying more silver. What's wrong with me? What am I missing? Do you think silver still holds a place? Is that something you own too?

Grant: Yeah, no, absolutely. Absolutely, I do. And again, you know, it's been said many times but silver it does the same job as gold. It's just way more volatile and, you know, you could see silver outperform dramatically if you get a real precious metals bull market for sure. And so look, it's down to everybody's own personal preferences for the amount of volatility they're willing to stomach. If you wanna own silver, you wanna own gold. I mean, there are so many exasperated silver holders out there. And the ones that managed to hold on and stay the course, you know, I'm pretty confident will be rewarded at some point by the metal-reducing that kind of ratio between it and gold. But in the meantime, you're gonna have to stomach the volatility. So, if you wanna own precious metals and just put them, you know, in a safety deposit box somewhere and not worry about them, have a mix. If you're gonna be watching the price every day and you are gonna be stressing about the performance, then I would say you're better off with gold because hey, we all need sleep.

Craig: Exactly. Do you have any thoughts on the gold-silver ratio? You know, people talk about, you know, historically it was...

Grant: Yeah. Look, it's way out of whack. I mean, yeah. It's way out of whack. People talk about 6:1 being the right ratio. You know, and there are all kinds of reasons why they will back that up, which obviously means it's wildly undervalued. But look, I mean, it's all the way at one end of the pendulum right now. It will swing back at some point because these things always do. The question is will it overcorrect past the median price? That's likely, but again, it will be happening in volatile times. And it's very difficult as people in the crypto space have found out in recent weeks. When things are volatile, it's difficult to think clearly. It's difficult to hold onto a position, to stay the course, and be [inaudible 00:16:58.827]about the kind of moves you see in these crazy risk assets at times of great stress. So, it's not an easy thing to do. The bull market is always gonna try and throw you off the whole way through. And that's why for me, I own these things to make purchasing power and not to focus on the price so much. And since I started doing that, it's been a much easier exercise in just thinking about the percentage of my assets that are in precious metals. I don't worry about the price so much anymore.

Craig: Well, all right, my friend. If someone were to leave from here and go directly to grant-williams.com, what are they gonna find there?

Grant: Oh, well, they're gonna find me, unfortunately. But alongside me, you'll find plenty of really smart people that I talk to. You'll find the letter, "Things That Make You Go Hmmm..." and you'll find the podcast series, which I've been doing for a couple of years now and had some just tremendous guests. I mean, people who have been fantastic giving me their time and their insight. And you'll find a series of videos I've been doing with the, you know, real long-form in-depth conversations with a bunch of super-smart people, some of whom you won't have heard of, but all of whom are worth your time. So, go pay a visit and take a look.

Craig: Yes. Please be sure to check that out. And also before you leave, please be sure to hit the like button, maybe the subscribe button. Sprott Money doesn't ask for really anything for all this great content they put out. So, if you can at least thank them by hitting that like or subscribe button, that'll help us cast a wider net going forward. And, of course, always keep them in mind if you're looking to buy some gold or silver, sprottmoney.com and that phone number 888-861-0775. We're wrapping up the month of June, 2022. I want to thank Grant Williams for his time. Grant, thanks so much. This has been great.

Grant: You're always welcome, my friend. Great just to talk to you

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thanks for listening. We'll talk to you again next month.