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Ask The Expert

Ask The Expert - Peter Grosskopf - March 2022

ATE with Peter Grosskopf

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Peter Grosskopf is the CEO of Sprott, Inc, with more than 30 years of experience in the financial services industry. At Sprott, he is responsible for strategy and managing the firm’s private resource investment businesses. His career includes a long tenure in investment banking, where he managed many strategic and underwriting transactions for companies in a variety of sectors. Prior to joining Sprott, Mr. Grosskopf was President of Cormark Securities Inc. He has a track record of building and growing successful businesses including Newcrest Capital Inc. (as one of its co-founders) which was acquired by the TD Bank Financial Group in 2000. Mr. Grosskopf is a CFA® charter holder and earned an Honours Degree in Business Administration and a Masters of Business Administration from the Richard Ivey School of Business at the University of Western Ontario.

In this edition of Ask The Expert, Peter answers your listener-submitted questions, including: 

  • What happens to gold price if Russia starts selling natural resources in gold?
  • What does the current volatility in base metals mean for silver?
  • Plus: thoughts on uranium, Sprott ETFs, and more

For the answers to these questions and many more, listen here: 

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

Craig: Well, greetings again from sprottmoneynews@sprottmoney.com, and welcome to another edition of the Sprott Money "Ask The Expert" podcast. I'm your host Craig Hemke, and this week we have a very special guest, Peter Grosskopf. Peter is the chief executive officer of Sprott Inc., also managing director at Sprott Resource Lending. Thanks for joining us, Peter.

Peter: Well, thanks for having me, Craig.

Craig: Well, this is a pleasure. It's great to get to know you. And I look forward to asking you some of the questions we've gotten. Thanks to all the listeners who send in their questions. We'll try to get to all of them. And please, just remember that if you liked today's podcast or any of the other content that Sprott Money puts out, and you wanna hear more, make sure you like what we're doing here on whatever channel you're listening to, maybe subscribe as well. And finally, always keep in mind that this content comes to you by a Sprott Money. So, if you're looking to buy some silver, maybe something a little unique right now, Sprott Money is the only company offering First Majestic five-ounce silver ingots. Hey, these are pretty cool, actually.

We're over 90% sold out. So, don't miss the chance to order yours. You can find more information on the First Majestic silver ingots plus a host of other products by calling us at (888) 861-0775, or, of course, you can just go online to sprottmoney.com and get yourself some. It's pretty cool. And obviously, Keith Neumeyer down there at First Majestic is somebody we wanna support. We love what he's doing down there.

So, anyway, Peter, again, thank you for joining me. We've been collecting questions for you. I've got seven of them for you as we go through this. Okay. If you're ready, can I hit you with the first?

Peter: Yes. Sounds great. Fire away.

Craig: Let's just dive right into current events. As we record this on the 25th news hit yesterday that, I can't remember the exact verbiage that the Russians used, but that they were, if you're an unfriendly country, they want you to buy their national resources in rubles, or maybe what they called hard money, something like gold. So, Peter, what do you think, what happens to the gold price if Russia begins to sell crude oil, and natural gas, and the rest in gold?

Peter: Well, I think it's part of a bigger picture, which is that the U.S. is using its dollar and the swift system to cut Russia off. In other words, weaponized the dollar. And we think that will have an equal and opposite reaction for those that don't want the dollar to be weaponized. Now, in this case, it's highly emotional and aggravated behaviors around the war in the Ukraine. But what this will do is drive other countries away from the U.S. dollar. And we think, into other hard asset stores of value, like gold, and Russia will continue to be able to interact with gold and their own ruble. But, you know, it'll take people out of the U.S. dollar and start to transact in ways that they hadn't thought of before.

Craig: Would you think of it as, you know, I've heard, even Eric say, you know, there's not enough gold to be able to do this. It's just that the gold that there is isn't priced high enough. Do you agree with that?

Peter: I do that the gold store of value in the world as everyone knows around 12 trillion. It's a tiny fraction of the financial system and other forms of fiat currency. So if there's more relative demand for gold, I think it leads to dramatic price upside.

Craig: Yeah. Yeah, for sure. All right. Peter, from your position as a CEO of Sprott Inc., this is a great question for you because it has to do with the two big ETFs that you guys manage, the PHYS, which is physical gold, and the PSLV, which is physical silver. And I should interject, I get asked a lot because I'm on Twitter and in the things I write, telling people to be out of these gold ETFs. So, what I'm referring to is the GD and the SLV the big ETFs that are managed by some of the bullion banks. The average individual investor is not able to get any metal out of those. Okay? So, when you own those, you own just simply exposure to price. And that's why I always tell people not to own them, but I, myself own PHYS and PSLV because I believe in them and I'm sure you do as well, Peter. Can you speak to the allocated nature of both of those funds?

Peter: I absolutely can. And I was around when Eric and the team at Sprott created those structures, and they are trust structures that hold the physical metal on behalf of investors. So, they are different than the ETF structures that represent what GLD and SLV are doing. So, you're talking about one-for-one allocated storage and holding those bars on behalf of investors, and investors actually have a linkage through a physical redemption mechanism, which allows under certain circumstances. Of course, there has to be minimum amounts involved, but they allow investors to pick up the physical gold and silver. And that's vastly different than the GLD and SLV, which are cash-settled.

And in this scenario that we can all envision as gold investors, where the financial system starts to fail due to its leveraged nature and dependence on unbelievable amounts of credit. If the system freezes, like it did when Lehman was frozen, you know, those financial contracts may not be able to be settled, whereas a physical contract, like what our trust is based on, can. And so there's a huge difference in those, in the very events that you're trying to protect yourself from. And therefore, we vastly prefer our structure and have from the onset to those of the ETFs.

Craig: Yeah. No, I agree with you there. And I hope that I should provide a good answer, too, for everybody out there wondering what the difference is. Let's move on to question number three, Peter. This has been a crazy couple of weeks in commodities, and really raising some questions about the pricing structure, in general, at given what's going on at the LME with nickel. But a lot of the other base metals are going bonkers as well. So the third question just simply is that, what do you think of the current volatility in base metals, nickel, copper, and the rest, and what does that mean for silver?

Peter: Okay. I'm gonna break it down into two questions. The volatility, and base metals, and the fallout from the Russia sanctions are related. It's making the movement of metals tougher to finance, and you're getting these massive swings because the market's failing to function properly now. I think it also speaks to the trend towards globalization, where the global supply chain was really very efficient when everyone trusted each other. And as soon as they don't trust each other, these inefficiencies fall away and the countries start getting much more worried about security of supply. So, that's happened with commodities now. They're tougher to finance. They're tougher to move. It's tougher to trust people in that market. And, you know, I hate to say it, but 40 years of underinvestment are starting to show itself. And so this was the event that kind of pulled the emperors, whatever, you know, the emperor has no close.

So, it's kind of, like, now we see that we're actually, you know, quite short in the global system of some of these commodities. In terms of silver, silver does relate to base metal demand, in that, there's a lot of co-production of silver with base metals. I think that, in general, silver is also, I think it's vulnerable because it's paper trade in many multiples over what it's able to be physically supplied. And if you start hitting shortage times in silver, you could easily see a knock-on effect to silver.

Craig: Well, and that's all part of, you know, what we wonder how related these markets are. Will people start to think, "Yeah, look what's going to the base metals? Maybe I should be worried about my silver." Is that something that's on your mind, too?

Peter: Well, on top of that, silver, of course, is also a monetary metal. It's known as the poor man's gold. It's a much smaller market than gold. If you start to get a run on silver by investors, it goes into short supply very quickly. And I think we're dealing with a potentially explosive environment, in that regard, too, because the market's roughly in balance from a physical perspective, in terms of industrial demand. As soon as investment demand comes in, that market can't handle it. And so you get a squeeze, and now you're gonna get a squeeze with all of these market participants not trusting each other. It could be exaggerated because of that.

Craig: Yeah. Yeah. Well, all right, Peter, we are almost halfway home as we get to question number four. Your old cohort, Rick Rule, is someone who is very excited about uranium and green energy. He had an online conference about a week ago, that was very well-attended. And I know Rick has expressed his enthusiasm for the sector quite a few times over the last year or two. What is your opinion? What do you think of uranium?

Peter: Well, we've been tracking it and investing in it for many years at Sprott, dating back into the 1990s. And in 2017, we saw this situation, where once again, it was trading well below the cost of production. And we made a call that, you know, the grid was denying the fact that really uranium needed to be a substantial part of the production of electricity by many countries, that solar and wind just weren't gonna cut it for various reasons. So, you had this whole supply chain on the uranium side, massively underwater and underinvested in. It was a great time to get back in. We got back in with the formation of spot last year. We still think uranium's trading under its long-term cost of finding acquisition and financing when you include all those metrics. And we still think the grid needs to reintroduce uranium to a much higher percentage nuclear power, that is. So, we think it's still in the very early innings of sorting itself out. These moves take a long time, you need to be patient. But I think that whole uranium supply chain, right, from mine services is going to get stretched as reactors fire back up and new reactors are built.

Craig: All right. Okay. Let's move on to question five. This definitely is right in your wheelhouse in your years of experience in the sector. Do you feel that we are now in officially a bull market in the precious metals, and how do you feel about the shares?

Peter: Absolutely. I think we have been in a bull market, to be clear, since 2000, 2001. We've had some substantial corrections, the most recent of which occurred because of the bounce back, and confidence, and financial markets as the Fed printed. Technically speaking, it was a wedge pattern that was slowly falling back to a correction low, which got hit early this year. And then you had the break out from the wedge. So, we're back in the bull pattern. And I think that because the Fed very much does not have inflation under control, and we still have negative real rates, I think you're gonna get. And now you've got increased risk and heat in the system from the geopolitics. I think gold's gonna take a run back up to its old highs. You asked about the equities, they've been mostly left behind until very recently. They've got a lot of catching up to do. They're trading at very low multiples, even compared to S&P stocks, extremely low multiples record spread to S&P equities. And those producers have a long way to catch up to the gold price even.

Craig: Yeah. It'll sure be fun to when that recognition finally takes hold, things might move pretty quickly. That's for sure. Here's one that kind of deals more spec... I don't know, it's not so specific to certain companies but it's just kind of an oddity of the market. A person wrote in and said, you know, sometimes the stocks I own trade more volume in a day than they have shares outstanding. And why is that? How does that work?

Peter: Well, I'm not privy to some of the inside secrets of quantitative trading, but when a small company gets recognized by the internet these days, you can get an unbelievable turnover coming from institutional shareholders or quantitative traders that are sometimes short. They have to cover their shorts. Retail can come in all in one day and you get this massive turnover. And on top of that, you get float trading, just as brokers make markets around that volume. So, it gets exaggerated, maybe two to one, three to one. Very close to home situation which was similar to that over the last couple of weeks was high craft mining, where company had just been absolutely punished. Lots of traders were probably sure. Lots of institutions had to sell. And in one day, it gets discovered. And I don't know what percentage of the total company outstanding it traded, but it must have been close to a 100%.

Craig: And it's a function of people just in and out, in and out, that sort of thing?

Peter: No, I think it's a function of a new perception of whether that company has been mispriced. And it's being discovered by one group of shareholders, in this case, retail, and abandoned by another, in this case, institution. And so you've got that trading volume all happening in one day, but it can happen so quickly now because it's discovered by the internet. And then it gets exaggerated by the professional trade around it, which is, if you wanna call it that float trading as they make markets. So, it's magnified by two or three times.

Craig: Terrific. All right, Peter, you've been very gracious with your time. I've got just one question left to go that was sent, and this is probably something that crossed, almost every precious metal investor's mind, at some point. This person says they usually stick just to physical metal and has a lot of silver, but then writes, like, "I'm a believer in the long-term story, so I'm getting curious in mining shares. What offers more leverage to the price, a current producer of silver, or maybe a silver exploration company?"

Peter: Well, that's hard to say between those two. They both offer a lot of leverage. The metric that we like to give is producers have roughly three times the leverage of the silver price because of the reserves in the ground that they own. And that usually holds true over time. I think an exploration company that's not even yet considered a producer, has even more leverage because they're still in the process of finding how much reserve they might have. So, I would say it kind of more than three times, more like five or six times leverage. And yet, it's hard to quantify because, for an exploration company, all those numbers are still being worked out.

Craig: Maybe it's a question of just how bullish you are.

Peter: And, on the drilling program, in the case of the Explorer.

Craig: Yes. And as we discuss, you're pretty bullish. Do you think the precious metals and the shares have some good stuff ahead?

Peter: I do. I think the metals will hit new highs due to this environment we're in. And I think the producers have even more ground to catch up because of how much they've lagged.

Craig: And again, I'd encourage everybody go to the Sprott Inc. website, check out all of the services that are available there. And if you need any assistance, I'm sure someone would be happy to help you. Peter Grosskopf, of course, is CEO of Sprott Inc. It's been a pleasure having him on here for "Ask The Expert" this month. Peter, thank you so much for your time.

Peter: Well, thanks for having me on. I'm always delighted to talk about this and look forward to catching up again sometime soon.

Craig: Let's do it. And again, everybody listening, thank you for listening. Before you go, please remember this content comes from Sprott Money should be one of your first choices for an online bullion dealer or any bullion storage that you might need. Again, you can go to sprottmoney.com, check it all out online. But anytime you want to just talk to a real human being and find out about the products and services in Sprott Money, you can give them a call at (888) 861-0775. This has been your "Ask The Expert" segment for March 2022. Thank you all for listening. We'll have another one of these segments for you next month.


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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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