Gold and Silver Consolidate Ahead of a Long Bull Market - Weekly Wrap Up

Male: You're listening to the "Weekly Wrap-Up" on Sprott Money News.

Craig: Happy Friday from Sprott Money News at sprottmoney.com. It's Friday, October 30th. It's almost Halloween, 2020, and it's time for your "Weekly Wrap-Up." I'm your host, Craig Hemke. Eric was a late scratch this week, so joining us as a sub is Rick Rule, of Sprott Inc. Very grateful that Rick could find some time on short notice to join us. Rick, thank you very much.

Rick: Oh, I'm always a little leery to step in Eric's shoes, but thank you for having me on. I appreciate it. It's an honor.

Craig: I think he'd be pleased to have you, would be my guess. And hey, before we wrap up, I mentioned it, or before we get going, I mentioned that it is almost the end of October. Of course, the Sprott Money Fall Sale is always much anticipated, one of the biggest events we have all year long, and, I mean, October ends on Saturday, so you've got today and Saturday to do some shopping at Sprott Money. Please go to our website, of course, sprottmoney.com. You'll find all the deals there, and of course, you can always pick up the phone and just give us a call at (888) 861-0775. Rick, I'm excited to talk to you, because just with your experience and knowledge, especially at this important time, I think it's...be interesting to see what you think. I mean, it's been a kind of crazy week, at least in the markets, not only in the precious metals, but the stock market. I think the S&P is down well over 200 points on the week. What do you make of this as we head into the election? And do you think the outcome of the election will matter much once it's known?

Rick: In the near term, the very near term, I think the outcome of the election could matter, in the sense that if Mr. Biden wins the presidency and the Democrats were to sweep the House and the Senate, I think the potential impact of that on all capital markets, all equity markets could be, in the near term, fairly severe. The Democrats' campaign promises, not necessarily that they or the Republicans would keep their promise, but let's leave that one aside, their campaign promises are not helpful to capital markets. Suggestions of a wealth tax, higher income taxes, corporate taxes, higher capital gains taxes, those are the stuff of market panics. And in a market panic, I'm not saying it's going to occur, but it's something you have to consider, in a market panic, near-term in a market panic, all stocks, be they supermarket stocks, bank stocks, or gold stocks, decline. That doesn't mean that mining stocks wouldn't come back as a consequence quicker, but in the near term, a liquidity squeeze, a panic, takes no prisoners. Longer-term, looking further out, there isn't any particular fiscal difference between the Democrats and the Republicans. They both are committed to higher spending. They are both committed to quantitative easing, which, if we did it, would be called counterfeiting.

Craig: Right.

Rick: In both circumstances, they are committed to more debt, to more higher deficits, and to artificially low interest rates. So, from my own point of view, looking out beyond the immediate panic that might confront markets in the event of a Democratic sweep, I don't see any particular difference between the parties in terms of the outlook for precious metals.

Craig: Okay. How about this kind of Dosey Doe we've been doing in Congress for the last 90 days about a stimulus deal? Do you think that might actually finally happen once we get into the lame-duck session?

Rick: Yeah. I'm absolutely certain. It might not happen before the election, but what the stimulus is really about is giving Congress an unrestrained ability to spend your money to support their friends. And believe me, there will be a consensus in Congress. If the Democrats get some of their bones, the Republicans get some of their bones, the idea that they can steal trillions of dollars from the American people, rather than merely billions, will be so attractive to both sides that they won't be able to resist it.

Craig: Yeah, no. You can see this coming, that's for sure. So, just in general, are you just kind of sitting on the sidelines, kind of curious personally as to how this will all play out? What are your specific plans, for yourself?

Rick: Well, certainly, for myself, I'm going to increase my own exposure to the conventional energy sector, and I'm waiting until after the election to do that. I don't see much near-term upside in the energy, so I don't see much risk in waiting. And energy stocks being stocks, and being so severely out of favor, to the extent that there's a broad general securities market decline, I would certainly be a player. I have been, relative to my norms, fairly cash-heavy the last three months, in the sense that the junior part of the mining business, which is where Sprott's competitive advantage is, got overheated. It's beginning to correct itself, and so I'm looking to increase my weights in the sector. But I suspect for the next 10 or 12 days that my fear will overcome my greed. And, you know, that doesn't mean that if a good circumstance happens, or if a drill hole comes out that, you know, we can't ignore, that I won't pounce. I'm old enough to know that if a very good stock gets pounded in a liquidity crisis, that that's actually a long-term blessing for me, because I can buy lots and lots and lots of stock, based on intellectual capital I've already spent to understand the position.

Craig: Right. Right. And in the end, what you're talking about is kind of focusing on the big picture. There may be a lot of noise in the next 30 or 60 days, but we've gotta keep our eyes on the ball for 2021. I want to get back toward something else you mentioned, though, Rick, about energy stocks. You know, I've seen some...well, actually, a number of bank, we'll call them upgrades, for silver in the last, oh, 90, 120 days, where they talk about silver industrial demand, you know, kind of a, I guess, Green New Deal type of idea, where demand for silver across solar panels and the rest of the energy industry, clean energy industry, might increase total demand for silver, and drive price higher. What do you make of that idea, and what do you make of these banks coming out with high price targets?

Rick: I suspect that the banks are adopting a narrative that has been demonstrated to them over the last 12 to 18 months. In other words, this isn't original thinking. This is just an increase in the silver price justifying the narrative to the banks after some of the easy money has been made. Let's get that part clear. As to your thesis with regards to increasing industrial demand, it's absolutely true. Even in a fairly flat global economy, the increasing uses of silver in various technologies that are essential for the ascent of man has been really spectacular. There is no substance that is as cheap, as malleable, and as reflective as silver, which is why it was used in mirrors, and that makes it really indispensable in solar panels. And as we get better at distributed storage, which is a fancy way of saying batteries, solar power becomes more and more competitive, irrespective of subsidies, which is important.

I really see solar taking off, particularly in emerging and frontier markets, where you have rural communities that can't be connected to the grid in any other fashion, and silver will benefit. What many people don't know about technology with regards to silver is that it's an absolutely superb germicide. And you're seeing increasing applications of silver in various forms, in water treatment, pollution control, and also as a liquid germicide in medical and emergency applications, wound and burn treatment, around the world. And this would seem to be... Many people would believe that this is a fairly small use. In fact, it's not a small use, and importantly, the residual silver can't be recycled out of the waste stream. So, in this circumstance, when the silver is used, unlike, say, photography, the silver is really and truly used. The probably most important medium-term supply-demand factor with regards to silver has to do with the fact that silver is produced as an adjunct of other materials mostly.

Craig: Right.

Rick: Not very much silver is produced from primary silver mines. And if, as I suspect, and I think Eric suspects, we have a weaker than expected global economy for the next three or four years, base metals production, which is already declining, will continue to decline as a, really, a function of deferred sustaining and project capital. And that has an amazing impact on silver supply. My own personal belief is that we are in the fairly early stages of a systemic precious metals bull market. And history has taught me that these markets are surprising in terms of duration, the average one is 10 or 11 years, and dimension. And history has taught me, too, that gold moves first, but when silver catches a bid, it moves further and faster than gold does.

So, my suspicion is that right now, we are in a sort of a consolidation phase in a precious metals bull market. And my belief is it's much more likely than not that the market catches a renewed bid next year, when the intentions of Congress become more evident. And if I'm right, then demand for silver as an investment product and a speculative product will pick up. And, of course, we've talked before about the lack of high-quality silver companies in the market. I'm not talking about the speculative ones. I'm talking about investible ones. When the generalist institutional money finally gets hold of the silver narrative, trying to crowd that money into a sector with such a small combined market cap... I remember Doug Casey once described that process as trying to siphon Hoover Dam through a garden hose, which I realize is an inflammatory statement, but I think it's something speculators really need to consider. I'm not going to say that absolutely positively has to happen, but what I am going to say is that there is a strong possibility that it happens, and the reward that accrues to you if you are right in the context of that happening is really mind-boggling. I can say that with personal experience. Certainly, my own silver portfolio in '98, '99, 2000, 2001 did absolutely stupid things later in that decade.

Craig: Well, let's close with that, I guess, topic, Rick, because that's something I always like to visit with you, because when I get interviewed, I'm often asked about that institutional flood gate, if you will. And I refer to it as the "Rule Rule," in that, you know, we've been down here at 1% or less institutional ownership of gold and silver in all their forms. We're waiting for that to happen. Maybe we'll begin to see that number go up in 2021. One of the questions, though, that I have always had for you, and I wanted to run this past you again, you know, we're getting all these great earnings reports now for the third quarter. A lot of the producers are sitting on cash, a lot of free cash flow, and they're increasing dividends. Is that a good idea? Does that help to draw institutional interest, especially in this low interest rate environment? Or should maybe, should be they doing other things with cash, you know, holding their own physical precious metal, things like that?

Rick: The institutions don't trust the mining companies, given the dismal performance of mining company managements in the last decade. And I really think that there are a few mining company managements who the institutions do trust, who would be allowed by institutional shareholders to reinvest cash. But certainly, there is a dearth of high-quality development projects to spend the money on. And in terms of paying a management team money to hold my free cash and gold, I personally would prefer that they gave me the money and allowed me to make the decision with regards to whether or not to hold gold.

Craig: Yeah.

Rick: So, in most cases, I look at this situation... Listen, one unsung truth around this is that mining company managements, precious metals mining company managements, often don't believe in their product. They are attracted to precious metals because it lowers their cost of capital. They don't necessarily buy into the narrative. This year has surprised everybody, because the gold price went higher than anybody, at least on the management teams, thought it would. They all had $1,200, $1,300 in their budget, and they all got confronted with $1,700 or $1,800, which means that their free cash flow yields, but surprised their fairly low expectations. Now, the question becomes what to do with the money, if it's been 10 years of underinvestment. They don't have exploration projects. They don't have development pipelines. What they have is surplus cash. What do they do with the surplus cash? Give it back to shareholders in some measure, either by way of dividends, or share repurchases.

I think this capital discipline is by and large a good thing. Now, if, as an example, Franco-Nevada, or Wheaton Precious, or Barrick, if a company that has a really good track record in capital deployment, Kirkland Lake, for that matter, saw an opportunity, I would be prepared to say, "You know what? I'll trust you with this. Go do something with it." There are other companies whose track record in terms of capital allocation is less sterling, and I would prefer that they gave my money back to me and let me make mistakes with it, rather than them making mistakes on my behalf.

Craig: Right. Do you think the dividend helps, Rick, in this low nominal interest rate environment, you know, to get more institutional ownership? What will it take do you think? I mean, another leg to new all-time highs? What do you think will get the ball rolling?

Rick: Craig, this is going to happen irrespective of the dividend. I'm almost certain this is going to happen. It's worth considering that fiscal policy worldwide means that the wind is in gold sails. Gold is competing as an asset class with the U.S. 10-year treasury, which is "return-free risk." This is a fight gold can win.

Craig: Right.

Rick: And gold doesn't actually need to win it. As you pointed it out, it needs to lose it just, needs to lose it less badly. These are not my numbers, but I frequently cite a study that suggests that the market share of precious metals-related investments, relative to all savings investment products in the United States, is less than 1/2 of 1%, against a 3-decade mean of between 1.5% and 2%. You don't have to have a massive disintermediation out of conventional financial assets into precious metals. You just have to return to the three-decade mean. That's all you have to do.

John Hathaway points out that institutional investors worldwide manage about $100 trillion, and their traditional mantra has been 60/40, 60% equity, 40% bonds and debt. But with artificially low interest rates, that 40% has a negative carry, which is to say that the institution has to make up on the equity side the money that they're losing on the bond side. And that carry is becoming increasingly difficult. Disintermediation, which is to say the replacement of part of the bond portfolio with other asset classes, is, I think, in a negative interest rate environment, absolutely positively going to happen. Will it happen next year? Maybe not. And remember, the dimension doesn't have to be fantastic. You're talking about $40 trillion. The diversion of some small amount of that into an asset class as small as precious metals can have a dramatic impact. And if you look at gold bull markets going back over 50 years, pardon me, you'll see that happening twice before, and you'll see how dramatic that impact was.

Craig: That's it. That's the Rule Rule in a nutshell, Mr. Rule.

Rick: I wish it was the Rule Rule. In that particular case, it's probably the JPMorgan Chase Rule or the John Hathaway Rule, but I stole it and popularized it.

Craig: Yeah. "Rule Rule" is more catchy, anyway. Anyway. Rick, thank you so much. And I want to, again, thank you for subbing in on short notice. And, again, everybody, before you go, again, please remember, your best deals for physical precious metal and storing that precious metal can be found at sprottmoney.com, and that fall sale ends Sunday, so take us up on it. Go to sprottmoney.com, and again, that phone number (888) 861-0775. Mr. Rule, thank you so much for your time. I hope you have a great weekend.

Rick: Always a pleasure. Thank you for having me on.

Craig: And from all of us here at sprottmoney.com and Sprott Money News, thank you for listening. Have a great weekend.