Big Picture: The Fundamental Strength of the Bull Market - Weekly Wrap Up

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Craig: Well, happy Friday from Sprott Money News at sprottmoney.com. It's Friday, November the 6th, 2020. It's time for your weekly wrap-up. I'm your host, Craig Hemke. Eric is unavailable again this week, so joining us is his old friend Bob Thompson. You'll recall Bob has sat in for Eric before. Bob is actually a Senior Vice President and Portfolio Manager for Raymond James in Vancouver. He knows a lot about the mining sector, knows a lot about the market in general, so it's always great to have him sit in for Eric. Bob, thank you for spending some time with me this morning.

Bob: Great to be with you again, Craig,.

Craig: As we always point out, we like to take questions. We can't answer a lot of questions today about the specific shares just for, the compliance department doesn't allow us to do that. Right, Bob?

Bob: That's right. But we can talk about the junior stocks in general. I think that's pretty valuable.

Craig: And we will certainly do that. And we'll talk about the macro case, the big picture as well, as the metals have had a good week. And again, feel free though to send us questions through the email address submissions@sprottmoney.com. Hopefully, Eric will be back soon, and we'll get back into the specific mining share questions. And always please visit sprottmoney.com for all your gold and silver bullion and bullion storage needs. We had a great week, no doubt about it. And I think we are reestablishing the uptrend here. So if you've never a better time to add to your stack than the present. So again, go to sprottmoney.com. Or, of course, you can call us at 888-861-0775. Bob, let's start with the big picture, man. And we've been preaching this every week on these Weekly Wrap-Ups about try not to get caught up in the tick for tick and to recognize the fundamental strength of this bull market and the rationale behind it. What do you think? What did you see in the big picture this week?

Bob: Yeah, Craig, it's a great point. And not just with the precious metals, but with everything out there, you ever notice the market does exactly opposite of what people think it's gonna do? And the reason that it does that is because whatever the consensus is, is already factored into the market. It's already factored in. So if what happens is...if what is expected to happen actually happens, it doesn't affect the market. So that's why people make so many mistakes, here, lightening up their positions, or whatever the case is, well, if everybody's lightening up their positions, then you're gonna get surprised in the wrong direction. So, we saw metals, obviously, surge this week, the stock market surged this week. The stock market likes to have some sort of clarity. And it looks like Biden's pulling ahead here. So, who knows whether that's gonna be good or bad in the long run. But generally speaking, the metals do pretty well when a Democrat gets in, and especially gold. Interestingly enough, going back to the election, 1980, every single Democrat that's been elected since then, the gold price is up around, 90 days past, it's up a couple percent, a year past, it's up around 3% or 4%. When a Republican gets in, actually, 90 days past, the gold price is down an average of 7% or 8%. So, interestingly, the gold market tends to like Democrats, so we'll go with it.

Craig: Maybe that's in relation to the dollar. Who knows. I know we've had a heck of a big down move in the dollar index this week. What do you make of that?

Bob: Yeah. It's been important, right? We've talked about real rates before, and you've talked about that quite extensively with Eric, and I think real rates are going more negative. So that's good for gold. But the other big one is the dollar index, and people tend to look at it in the short run. But let's look at it in the long run here. I mean, going back, what is it, 20 years, I think we're in a situation to where we were kind of in 1999, 2000. And going back to those levels, the DXY, which is the dollar index, was pretty high levels at that time. We're talking up over 100. Right now, it's around 92.30 today, right? So, if we're looking back at 100, I mean, it hasn't actually come down that far in the last few weeks. And what it actually bottomed at in 2011, 2010, was about 72 to 75. So you can imagine if gold is $2,000 right now, then when it gets to 72 to 75, you can imagine what the gold price could be.

Craig: Yeah. Bob, I always think it's kind of funny that the generalists out there like to say, well, gold goes up as the dollar goes down, but they rate the dollar off of the dollar index, and all the dollar index is is it compares the dollar to other fiat currencies that are devaluing just as fast. Doesn't that seemed kind of silly?

Bob: It is really, but the gold price is most related to the U.S. dollar, and it's crazy, really, because every currency in the world is devaluing. But I think what's really important is the relationship isn't really that mysterious. People tend to think of the dollar as the unit of currency. And then they tend to think that gold goes up or gold goes down in dollars. Well, let's think of gold as the unit of currency. So, if the dollar goes down, then of course, gold is gonna go up. It has to, in related to dollars, right? So it's not that the gold price is going up, it's the dollars are going down, right? A hunk of gold is worth a hunk of gold. If production is increasing by 1.5% a year, it's relatively stable as far as the supply. So it's the fiat currencies that are fluctuating dramatically, and when you think of it that way, you can just think of what the negative real rates are gonna do and all this money printing, and why something that only has a supply that goes up 1.5% a year can absolutely go pretty ballistic in price.

Craig: Right. Bob, what did you think of the FOMC headlines yesterday, and Chairman Powell's press conference? I mean, to me, we've been talking at TF Metals Report all week about it didn't really matter who the engineer is. Maybe with one engineer behind pulling the levers, the train just goes off the cliff a little bit faster than the other engineer. Chairman Powell seemed to recognize that. What did you think of his comments yesterday?

Bob: Well, they have a saying for that, right? Exactly what you said there. They're rearranging the chairs on the Titanic, the deck chairs, right? So, something could be delayed a little bit, but we're going in the same direction, right? Because they've made a decision that they have to inflate away this debt, right, they have to let inflation run, they have to keep interest rates very, very low. And if they can do that, then the bondholders end up losing money, and they inflate away the debt that they have, because the only other way that they're going to inflate away this debt, or sorry, pay down this debt, is if we get excessive growth in the economy. And they've been trying that for 10 years, and it isn't happening. So they're gonna have to figure out a way to get the dollar down. You know, the currency wars are starting again. They're gonna have to keep negative rates where they are, and they're not gonna say that. They're not gonna say this is what we're gonna do, right? But they say one thing and they do another, and what they're going to do is keep interest rates as low as they can, and hopefully get inflation to run.

Craig: Bob, one more question about the markets and prices of the precious metals. And this will kind of lead us into the mining shares. We've been watching this downtrend, a consolidation phase, for the last 90 days. It's a lot like last year. We did about the same thing from September into December. This year it's been August into November. But yesterday, with those big rallies, COMEX Gold, COMEX silver, both of the major ETFs, the GDX and the GDXJ have all blasted above their 50-day moving averages, and they look perhaps to close above those levels today. Do you put a lot of significance into that in what you do?

Bob: Well, from a fundamental basis, it doesn't matter that much, because I like fundamentally what everything's doing, but so many people watch the technicals and so many institutions do, and hedge funds, etc. that yes, it is important, because if they're all looking at our range here of $1907 to $1980 for the gold price, for example, as far as resistance on the downside, resistance on the upside, then they're gonna trade around those numbers. So sure, it jumps through that moving average, everybody's gonna say, "Okay, here we go. We're gonna continue with the bull market," and they're gonna dive in, which, guess what happens? It goes up more when they do that, right? And then they say, "Oh, it's confirmed. We were right." Well, they were right because everybody was looking at the same number. So yes, it is important in the short run, and, but I think in the long run, I mentioned it before, GDXJ used to be $160 a share. It's $60 now. We got a long way to run if gold continues to go up.

And I wanted to, just going back to your question before about Chairman Powell. You know what I think they've realized? They've realized that we basically can never, ever have a recession again. A recession is when things get reset. The people that are overleveraged go bankrupt, capital gets allocated to the right places, and you start again with a new, good economy. Well, it just can't happen now. There's so much debt in government, so much debt in consumer, so much debt in corporate, so much leverage in the system, through derivatives, etc. They can never, ever have a recession, because if it actually happens, just wipes out everything. So they just continue to plug it and plug it and plug it. We are in a terrible recession right now, if you look at GDP numbers, unemployment, all these sorts of things. But real estate is hitting all-time highs. Why is that happening? Stock markets hitting all-time highs. So, it's kind of like we're not in a recession, right? It's just because of the amount of money that they flooded in and they realize they just can't let a normal recession happen again, so that'll work until it doesn't work.

Craig: That's right. And again, that's one of the fundamental bases of why gold and silver have surged the last couple years and should continue to surge, because it's hard to see that trend changing. Bob, I wanna get to the shares in our remaining time. Again, unlike Eric, you're a little bit constrained about if we can talk about individual names. So hopefully, we'll get back to that format as soon as we can. But in terms of the sector in general, Bob, we've had another great round of earnings reports coming out of the third quarter, got a lot of the big major companies producing a lot of free cash flow, increasing dividends. What are your ideas in general about where we are for the mining shares? What does that mining clock of yours show?

Bob: Right. I think that's really important, because individual stocks are volatile, they go up and down, but you just don't wanna make the wrong decision by buying the...even by buying the right stocks. That's what I'm gonna talk a little bit about is the psychology of the sector, because it's hugely, hugely volatile.

Craig: Yeah. Please.

Bob: So, yeah, what happens, and I've talked about the mining clock before, and three o'clock is kind of the worst time, that's the end of 2015, when companies are going bankrupt, and everybody's overleveraged, and they're getting rid of the corporate jets. And everybody wonders whether there'll ever be a mining sector again. So we went through that, 2015, we got a big bounce off of that in 2016. And then we settled back in to kind of a blah market for a couple years. But during that timeframe, the companies continued to increase their efficiencies. They reduced their average cost of production, metals price stabilized, metals prices started to go up, and companies started to get cashflow positive. That happens around four or five o'clock on the mining clock. So, now that that's happened, the prices have gone up even more, with the average cost of production around $1000 and gold almost at $2000, the profits of these companies are pretty immense in the cash flow.

So, last time, what happened in the last cycle is these companies took these nice profits, and they started to overpay for other assets, right? The market is kind of wary of that this time, and they don't want people to necessarily do growth at all costs. So, as you said, they're gonna be under pressure to start to increase some dividends, give some money back to investors, which, over time, as far as the general stock market is concerned, a big chunk of your returns is actually dividends. So I think the institutional investors are gonna want that. And they're gonna want some dividends to come back. And they're maybe gonna want these companies to grow a little less slow. And I think that's going to be very, very important for the sector, because it'll probably extend out the sector a little bit, right? It'll extend out the time that this is actually going to be a bull market.

So, companies are gonna start to get cashflow positive. We've seen some dividend increases. They're gonna be prudent with their cash, right, because they're all very cautious about something bad happening again and them getting caught overleveraged. So that's why my mining clock's been stuck around 6:30 for a while here, right? We had our trade wars. That put us back a little bit as far as the M&A activity that happens. Now we've had this election drama, we've had Coronavirus. M&A is not happening because of Coronavirus, right? You have to go and kick the tires at a mine if you're gonna buy it. And if you can't go there because everybody's in lockdown, then you're not gonna be buying.

So the M&A's been put off a little bit again, so we've been stuck here on the mining clock around 6:30 for a while, but the M&A is gonna pick up, and what happens when that happens is a company buys out a junior or a company buys out a developer. And then the market goes, wow, here's a company with 2 million ounces of gold that just got bought out for X amount of money. Well, who's all the other companies in the market that have 2 million ounces of gold? They should be trading at the same valuations, right? So then it raises the whole sector. And that's what you start to see in the market. We haven't seen that yet. It's going to happen. And then when it does, ultimately, the prices become overinflated, too much money comes into the sector, and we start the cycle all over again. We're nowhere near that.

But I think these corrections that we get are really, really, really important to trade them correctly. We've had that in the last couple months. A lot of these stocks are down pretty significantly. And it's just really, really important to understand we are in a bull market. And when you're in a bull market, you wanna buy the dips. When you're in a bear market, you wanna sell the rallies. Unfortunately, people get that confused, right? You would have done phenomenal. Yeah. You would have actually done phenomenally well in the mining sector from 2013, or 2012 to 2015 if you had sold the rallies. There was lots of rallies that were up 50% in the mining shares, but we were in a bear market, so it ended up giving it all back again. Now we're in a bull market. You buy the dips. They say the portfolio is like a bar of soap. The more you touch it, the smaller it gets. So keep that in mind. Don't trade around too much. And Eric tends to hold stocks for a long time, right?

Craig: Yes, he does.

Bob: He does. And one of the things that he always mentioned to me, he said, "You gotta hold on to your winners, and you add to your winners, because," he said, "if it's a winner, it's continuing to get better and better and better." And most people don't do that. They sell their winners, and they hold their losers, right?

Craig: Right.

Bob: Because that's how we're kind of hardwired to do. And just think of the math if you do that, if you sell all your winners and you hold all your losers, you end up with a portfolio full of losers.

Craig: Exactly. Exactly. Exactly.

Bob: Right? So that's the way it works. So, I think in the venture stocks, over the past 40 years, since the early 1980s, we've had four or five significant corrections where the venture stocks went down by 75% to 80%, which is just absolutely crushing, as we know. But that's when I get interested in something, when it's down at 80%. GDXJ, two or three years ago, was down over 80% in value. Then when something starts to move up, Eric has a rule called the 20% rule. And when something, it's copper, or gold price, or whatever the case is, whatever he'd used to trade, goes up 20%, he [inaudible 00:16:35] starts to look at it because that's telling you that maybe a new bull market has started. So that's kind of the big picture to keep in mind here. You gotta understand what you're doing. If you're just chasing hot ideas, it's probably not gonna work out for you.

Craig: Bob, I think you've mentioned in the past that if anyone wants to email you that you'll be happy to send them some information on that mining clock and how that works. Is that still the case?

Bob: Yeah. That certainly is, and we profile that mining clock in "The Gold Digger." We do a report every month called "The Gold Digger," which is quite interesting. Talks a lot about the sector.

Craig: And how can they reach you?

Bob: Sure. It's bob.thompson T-H-O-M-P-S-O-N @raymondjames.ca.

Craig: There you go. Hey, I always tell people, man, you just can't have enough informed opinions in something like this. Yeah, you gotta be in there, and you wanna stay invested if it's truly a long-term bull market, but you need all the sources of information you can get, and "The Gold Digger" is great. So, thank you, Bob, for providing that. My friend, thank you for stepping in for Eric on short notice. I very much appreciate it.

Bob: Fantastic, Craig. Always great to talk to you and look forward to next time.

Craig: On your way out, again, please remember to stop by sprottmoney.com. Always great deals on bullion. And in a bull market, it's always a great time to buy any dip you can get your hands on. Great deals on physical gold, physical silver, and if you need a place to store it, we can help you there, too. sprottmoney.com, and again, that number, 888-861-0775. Bob, thank you. Have a great weekend.

Bob: Okay. Thanks, Craig.

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