Ask The Expert - Bob Thompson - January 2022

Man: You're listening to "Ask The Expert" on "Sprott Money News."

Craig: Well, greetings once again to everybody out there from "Sprott Money News" and sprottmoney.com. It is January 2022. It's time for your "Ask The Expert" segment. Of course, these are complementary services provided to you by Sprott Money. And if you wanna thank us in any way, please be sure to give us a subscribe or a like to whichever channel you're listening to. And if you want to receive notices whenever Sprott Money puts out some new information, please sign up for the Sprott Money newsletter. If you wanna receive this podcast or any of the other podcasts right to your inbox, just go to sprottmoney.com, and again, sign up to receive the Sprott Money newsletter. Not only you get up-to-date commentary on precious metals and the economy, you'll also get exclusive promotions, with hard-to-beat prices. So, again, it's time for your "Ask the Expert" segment for January. I'm your host, Craig Hemke. And joining us this month is an old favorite of ours, an old friend of Eric Sprott. His name is Bob Thompson. Bob, of course, is senior portfolio manager at Raymond James in Vancouver. And it's always good to have him visit with us. Bob, thanks for spending some time with me today.

Bob: Great to chat with you again, Craig. Looking forward to the conversation.

Craig: We sure got the year off to a hot start, my friend. Even as we record this here on the 27th, in a move that's a lot like November, we rallied, and then as soon as we got close to the COMEX expirations in December, for December, I should say, down we went, and now, here, as we've gotten close to the COMEX expirations for February, down we've gone. So, it's been a challenging time for gold and silver investors, but we've gotten some questions. People wanna ask you a few things. Probably the most popular question, Bob, is question number one. As '22 begins, what time is it on your mining clock? And for those of you that don't know what that is, Bob, why don't you explain to everybody what the mining clock is, and then tell everybody what time it is.

Bob: Sure. You know, the mining clock really helps us to get rid of the noise in the market, right? Whether the Fed is hawkish and then they're not hawkish, or Powell says something and everybody reads between the lines, so gold's down 35 bucks, or whatever the case is, like, is what's happening right now. The mining clock tends to help us push all that aside, and actually see where we are in this bull market. And believe it or not, Craig, we're in a bull market for gold. It doesn't feel like it, does it? 2016, gold bottomed at $1050. Silver was at 13 bucks at the time. So, we're five years in. We're getting... You know, it's a struggle. It's always two steps forward, one step back, and sometimes one step forward and two steps back. But we are getting a lot of higher lows as we go along here.

So, you know, we gotta fight through these times when the Fed seems to be hawkish. You know, the last time they were doing what they're doing right now was the end of 2018. Of course, the market made them rethink what they were doing, which is exactly what's happening again this time, because the market tightens the financial conditions, and then the Fed pulls back, gets to be more dovish, and then gold and silver take off like they did in 2019. Same thing at the end of 2015. So I think it's just the same recording over and over. We're in that spot right now where everybody's jumping all over gold and silver because, you know, the Fed seems to be hawkish right now, but they'll pull back and become more dovish.

So, where are we in the mining clock? We're actually in a very good spot. And for those of you that don't know what the mining clock is, it helps us to see where we are in the cycle. So, you know, 12:00 is kind of the speculative blow-off. That was the end of 2011. Then you get to 1:00, 2:00, 3:00, and that is the terrible, terrible, terrible years. That's when everybody is negative. Negativity reaches the peak, usually, around 3:00, and that probably would have been the end of 2015. And you start to get company liquidations, right? Because all these companies that are over-levered, like a lot of the gold companies were from the past cycle, have to sell off assets, right? They almost go bankrupt, right? That happened with some very, very big companies throughout 2015, and even into 2016. You get asset write-downs. You get credit downgrades, because obviously, credit agencies always are late to the party. They always downgrade you at the end, instead of when things are actually the riskiest for you.

Then at 4:00, metal prices tend to stabilize. Okay? So, we started to see that in 2016. They bottomed. Then you get a recap of the industry. So then, people become a little more positive, people reduce their costs down dramatically, get rid of the corporate jets, all that sort of thing that mining companies did in 2015, 2016. Then, miraculously, their costs come down, and they become more profitable because metal prices start to go up, or at least stabilize. They stop falling, and, again, companies get some cash flow going. Then they start to pay off debt at 5:00. And that's all happened. It's all happened over the last few years. So, these mining companies have paid off their debt, their balance sheets look good. Then they take excess cash, because they start to say, "Oh, my goodness, we don't have any, you know, gold in five or six years unless we buy some assets here, or find some more." So they start to do some cash takeovers, and that's happened. That started to happen over the last few years. You get these cash takeovers of the junior companies. And that's about where we are right now. We're about 6:30 as far as gold and silver is concerned. We've been stuck there for a little while, as we fight through this headwind of what the Fed's doing.

But we're actually in a pretty good spot. Companies are cashed up from what they did back in September, 2020. Basically, there was a lot of new issues done in that time. There's lots of that money going into the ground, and we're gonna get some great discoveries. So, we're in a good spot in the cycle right here. And any big downdraft should be bought when you're in a bull market. Now, as far as gold and silver, we're at 6:30. As far as copper, we're probably still back at 5:00, right? There hasn't been all these raises of money to do new exploration, although the copper prices have done fine.

Craig: All right. Well, I think that's what... I mean, that's reassuring to hear, because, again, that's something you've had, as your little proprietary model, I'd almost say. I don't know of anybody else that has a mining clock like that. And it's reassuring to hear that that's where you think we are. Let's move on to question number two, Bob. There was a lot of bluster toward the end of last year about the net stable funding requirements of Basel 3 being enforced, finally, on to the LBMA. The question's here, what do you think of that? Do you think, you know, if we can lessen the involvement of some of the bullion banks, do you think that would be beneficial?

Bob: Yeah. I mean, I think we can say this about anything, the more the free market dictates prices, the better off we'll all be, whether that's interest rates, or whatever the case is. And it seems like every asset class in the world now is manipulated, either by a central bank or bullion banks, or whatever the case is. So, anything that will cause the market to be less manipulated is obviously a good thing over time.

Craig: I agree with that. No doubt. And we'll see if, as we go through this year, if those impacts are just kind of gradually felt in that bullion banking business. We certainly can hope so. All right, Bob, let's move on to question number three. You, as a portfolio manager, helping your clients at Raymond James, you know, that's dealing with a lot of people, managing their net worth, that sort of thing. You've got your own money, I'm sure, as well that you manage. And so, this was a question just for you, about do you own physical metal? And if you do, what type of physical metal do you own?

Bob: Sure. And I think, you know, what you said there is an advantage for me. I am the gold and silver bull. Obviously, I believe that that's gonna be the place to be over the next few years. But also, you know, I manage high net worth people's money, and I don't have all of it in gold and silver. So I'm a generalist, too, and I think that's a big help, because you kind of come at it from a different perspective. Yes, I do own silver, and gold, and some platinum. I own far more silver than I do gold right now. And the reason for that is not because I'm not positive on gold, but gold, of course, is the ultimate macro asset, right? People that know the ins and outs of the gold market are probably some of the smartest people in the world from a macro perspective, because there's so many inputs involved there.

But considering that we are in a bull market for gold, silver, and other precious metals, the first half of the bull market, generally speaking, silver tends to underperform. Okay? Because it's thought of as a precious metal. As the economy starts picking up, you start to get the industrial component demand for silver coming. And then, as you get later on in the bull market, because it's such a small market, you start to get these more exponential rises in the silver price. So, considering we're probably around halfway through the bull market here right now, I think, you know, over the next few years, silver will outperform gold, for its industrial component, the fact that it's a smaller market. And if we look at the gold to silver ratio, it's about 76 right now, right? That actually reached 110 in March of 2020, which was just craziness. Anyway, we're down about 76 right now. And I will probably start converting my silver into gold again down the road at around 30 to 1, right? You know, a lot of people, including Eric, says it's probably gonna go back down to 8 to 1, which he could very possibly be correct on that, but I think at 30 to 1, I won't do it all in one shot, but I'll start converting my silver back into gold.

Craig: All right. Well, we're halfway done, Bob. We're rounding the curve, and headed for home with question number four. So, it's always fun talking to my Canadian friends about gold reserves. I mean, here, we can talk about your gold reserves, and we can talk about my gold reserves. But your country no longer has any official gold reserves. So, what's up with that, Bob? Why'd they do that? And do you think they'll ever get back into holding physical gold?

Bob: Well, it's interesting, because central bankers are not known for being forward thinkers. Right? They tend to be reactive, there's a political component, etc. So, it was the trend years ago for central banks, especially in developed countries, to get rid of their gold reserves and put all of their reserves into financial assets. Now, I think this has all proven to be incorrect, because a lot of countries not in the developed world, such as China, India, Russia, etc., are increasing their gold reserves dramatically. But Canada decided to kind of toe the line and sell off all their gold reserves because they wanted to be seen to be believers in fiat currencies, right? So, you know, there was a quote, when Canada was almost rid of all of its gold reserves, that, you know, a member of the Department of Finance said, and he said, "The government has a long-standing policy of diversifying its portfolio by selling physical commodities such as gold, and instead investing in financial assets that are easily tradable, and have deep markets of buyers and sellers."

Well, you know, we know that gold is a pretty deep market, so I think that's a bit of an excuse. But that's what they said. Canada doesn't have any gold reserves, which is pretty crazy because most of the gold mining companies in the world trade on the Canadian markets. And this is kind of the center for gold if you're thinking about that area. But anyway, Canada got rid of its gold reserves. They haven't bought any back. They kind of got rid of the last of their gold reserves right at the bottom. So, you know, they timed the bottom, when it was about $1050. It's double that now, but Canada sits on nothing as far as gold reserves. Central banks, as I said, tend to be not forward thinkers. And I think, you know, we're seeing that right now with the Fed. They're gonna be hiking rates into a slowing economy, and we're gonna see the implications of that down the road. But for now, that's where Canada sits.

Craig: I've heard some people say, Bob, you know, "It's okay. They've got a whole bunch of gold in the ground." Well, what are they gonna do? Confiscate the mining companies? I mean, what...

Bob: Exactly. Who knows? They did in the 1930s. They took everybody's gold in the U.S., right?

Craig: Yeah, that's right. That's right.

Bob: But you're right, there's a lot of gold here in Canada, especially in the Golden Triangle. I mean, you've talked about that on some of the other shows, and we have, and it's just absolutely incredible. Right here in British Columbia, we have the highest, you know, gold reserves, really, in the world. It's crazy.

Craig: It is remarkable. All right. Question number five gets back to the challenges we've had lately. You know, typically, people think of gold, and silver, too, as an inflation hedge. To me, I think we've kind of determined now that really, it's more about the inflation component, and what that means for real interest rates. But nonetheless, on just an inflationary level, we've had this huge surge of inflation, not only in the U.S., Canada, around the world, but yet, gold and silver prices have not necessarily risen in response to that. And that's what the fifth question is. Why is that, do you think, Bob?

Bob: Right. That sounds fine. And, you know, I just wanna go back to the last question. Canada had a thousand tons of gold in the 1960s, which is a massive amount of gold for a relatively small country, so the selling was pretty historic to go down to zero from there. But anyway, another question there. As far as gold responding to inflation, right. You know, it used to be people in the world would look at the market, make decisions as to whether they bought or sold gold, based upon kind of their expectations. It doesn't work that way in the world anymore. It's algos, that are computers, they work on special formulas, and what they look at is gold versus the real interest rate.

And the real interest rate is not what inflation is, but it's what inflation expectations are. And right now, expectations of inflation haven't been going up that much, but interest rates have. So that real yield has been hurting the gold price. It's been a big headwind to the gold price. So, again, it isn't what inflation is right now, what you read in the newspapers, it's what the market is expecting inflation to be down the road. Now, I think that's very, very important, and why gold has been hit here, is because the Fed is backed completely into a corner, right? At least in 2015, 2018, they made a policy error, they could reverse course and reduce interest rates, or become more dovish.

But right now, they're in a declining economic environment, right? The rate of change of things is slowing, and actually declining, as far as the economy is concerned. But inflation continues to surge, and that is a really bad spot to be in. So, what they have to do is they have to manage the expectations of inflation, because if you and I, Craig, expect that inflation's gonna be really bad in a couple years, you know what we're gonna do? We're gonna go buy a bunch of stuff, because we figure it's cheaper now than it's gonna be a couple years from now. And you know what that does? It causes inflation. So it's a self-fulfilling prophecy.

So, the Fed figures they have to stop people's expectations for inflation. So, right now, inflation expectations are low, for the future, not as high as they're there right now. Interest rates have been going up, so that's obviously hurting gold. So, it's a multiple-input formula here, but that's the reason why gold is getting hit right now, and I think as soon as we start to see that maybe inflation moderates a little bit, which is counterintuitive, but if inflation moderates, then the people will figure the Fed won't be as hawkish, and we'll see gold start to take off.

Craig: And maybe get those inflation expectations a little more entrenched.

Bob: Exactly. That's right.

Craig: All right, Bob. We have passed the core pole. We are into deep stretch now, and headed to the finish line. So, for my sixth and final question for you, we're gonna get back to the shares. You mentioned the mining clock and where we are. But even just so far, in the first three or four weeks of this year, up until the last couple days, gold had been higher and silver had been higher, too, but a lot of the junior miners were not. Kind of an anomaly just for three weeks, or is there something that will get them to maybe exceed the pace of the rise later this year?

Bob: Well, I think, you know, interesting enough, you've talked about this before, Craig, but later on in the cycle is when the juniors start to do well, because people become more entrenched in the idea that gold's gonna continue in its bull market. And guess what else does better later in the cycle? Silver, right? So, junior miners actually tend to be a little more correlated with the silver price, as the cycle continues. But there's three reasons why gold stocks don't...three possible reasons why gold stocks don't do as well as the underlying gold price. One of them is the market is not focused on what gold represents. And there's speculative bubbles in other areas of the market, and that's dragging money into those sectors. And I think we've seen that, obviously, [inaudible 00:18:27] you know, gold had not a bad year last year. It was down 4%. It wasn't too bad, but the stocks just got hammered, right? Because everybody's interested in all the speculative areas of the market, whether it was the meme stocks, or EV, or whatever the case was.

So that dragged money out of the sector. Another reason why gold stocks underperform is because the market expects the gold price to go down, right? So, the market kind of looks through and says, "If gold price is $1,800 now, and we think gold price is gonna be $1,600, then the stocks aren't gonna be very profitable, so we're not gonna invest in the stocks." Now, I don't think that's the case right now. That isn't the reason, but it is one of the reasons why gold stocks don't outperform. And what we wanna see at a bottom is we wanna see the stocks start to outperform gold, right? And that's the market looking through, again, looking at higher gold prices. We aren't seeing that right now, but at market bottoms, in the past couple years, short-term market bottoms, we've seen that. We've seen the gold stocks start to go up, so the Newmonts of the world, and the money starts to flow into those even with the gold prices going down.

So then, we look for that. And the third thing is, the reason why the gold stocks might underperform the gold price, is because the input costs of gold companies, whether their energy costs or labor costs or whatever other input costs they have, are going up a lot faster than the gold price is, so it impinges on their profits. And we started to see that in 2010 and 2011. And gold stocks didn't actually do that great for that last six or eight months of the bull market. And I think that was the market saying, "Wow, there's too much leverage in these gold companies, and their profits are getting squeezed even though the gold price is going up." So, those are the reasons. We might have a little bit of all those reasons right now, but we're looking for the gold stocks start to outperform, and that'll tell us we're at a bottom for the gold price.

Craig: Yeah. You know, if anything, it's gonna be a long, crazy year ahead, that's for sure. Maybe not, you know, worry too much about how we're starting, and worry more about how we're gonna finish. Because as I keep telling people, it's gonna be a really difficult, volatile, difficult year to predict. That's for sure. Again, we've been speaking with Senior Portfolio Manager Bob Thompson. He's a senior portfolio manager with Raymond James in Vancouver. And, like I said, old friend of Eric Sprott, old friend of all of us here at Sprott Money. So it's been great to visit with him.

Just one last thing as we wrap this up. You know, it's been a challenging beginning of the year for the stock market as well, tough in the cryptocurrencies, too. What better time to maybe take a little bit of money off the table and move it into some physical metal? Sprott Money currently has a great selection of gold and silver products, including the new 2022 Gold Maples, and some 2022 Silver Britannias. You can go online at sprottmoney.com and order some. If you wanna talk to a human being and do that, you can do that too, 888-861-0775. Bob, thank you so much, again, for sharing all of this accumulated wisdom and knowledge with us, and for spending some time here at Sprott Money.

Bob: Always enjoy the conversations, Craig, and look forward to next time.

Craig: I will look forward to next time as well. We'll look forward to visiting with you again with another "Ask the Expert" segment in February. Thanks for listening, everyone.