The Gold and Silver Trade is Not Dead - 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 "Monthly Wrap-Up", a new feature here at Sprott Money News. I'm your host, Craig Hemke. This is your monthly wrap-up for August 2021. And joining us this month is Conor O'Brien. You may not know Conor, but I can assure you Eric Sprott does. He's a business partner and confidant of Eric's. And so, with Eric absent, it's great to have Conor sit in. Conor, thank you so much for your time.

Conor: Well, Craig, I really appreciate you having me on. Obviously, with gold and silver prices doing what they're doing, it's very difficult to figure out what might be next.

Craig: That's for sure. I was joking on Twitter earlier this week that I've been running TF Metals Report for 12 years. It's...feels like, in gold years, it feels like 24 or 36.

Conor: Yeah. I'd say 48 to 72.

Craig: Yeah. Yeah. I think that's probably accurate as well. And I see that every time I look in the mirror. Hey, and before we get started, just to remind everybody. Whether you're here for the "Ask the Expert" segments or the "Monthly Precious Metals Projections" with Chris Vermeulen, where we'll have another one of those probably in the next week or so, or now these "Monthly Wrap-Ups", please always remember that Sprott Money is the sponsor of this content. If you can do anything as a thank-you for that, shoot us a like or a subscribe on whichever channel that you listen to this on, because that'll help us spread the word. Additionally, though, Sprott Money is a bullion dealer. So we are always happy to offer great deals on physical gold and silver, and also storage of said physical gold and silver. Premiums have come down a little, and actually now, those newly designed American Silver Eagles are starting to become available soon, too. So please be sure to visit sprottmoney.com, or, of course, pick up the phone and call them at 888-861-0775.

It is August the 26th, Thursday, the August 26th, as I'm speaking with Conor. Late in the morning, about noon Eastern. We are now within 24 hours of Chairman Powell's speech at the Jackson Hole Symposium, something everybody's been waiting and eagerly anticipating now for quite some time. Just in the last week, we've had all kinds of Fed goons kinda flipping back and forth talking about, "Oh, you know, I think we should taper." "No, we shouldn't taper." "Well, I know I was in favor of taper just two days ago, but now I'm not in favor." I mean, it's, like, all designed to be confusing like back in the Greenspan days.

Conor, we're within a day of this, though, and it's gonna be an important announcement, whatever Powell has to say. What's on your radar, and what are you expecting?

Conor: Well, Craig, it all feels like it's coming to a head, doesn't it?

Craig: Yes.

Conor: Well, and you said earlier, just in your introduction there, about physical, and the premiums coming down in it, and it's funny that it is doing that in the United States, but I just read this morning that in Germany, where German real yields trade at minus four and a quarter, and that's on 10 years, that the physical gold demand is the highest since 2009 for bars and coins. So, they're obviously getting the picture there, when you buy German bunds, that you are out minus 4.26% as soon as you do. And that's the stated rate of inflation. We all know that inflation is probably a little bit higher than that.

And in terms of where we're at, coming with tomorrow, obviously everybody's very, very concerned with what Powell would say or is going to say. But they have a lot to deal with. And I mean a lot. You look at the markets. The S&P 500 making 50 all-time new highs this year. There's clearly no problem there. But what is that predicated upon? Well, when central banks buy $875 million every single hour since COVID, and you watch the ECB balance sheet or the U.S. Fed's balance sheet and you overlay it over the German DAX or the S&P 500, they correlate pretty well. So, what did they do in order to combat what is today?

Well, they've got two problems. One of which is inflation, and obviously, it's on every investor's mind. The inflation problem is food prices are up 31% year over year. That's a UN calculation, the United Nations. And then you look at input prices, output prices. Just about every respondent will tell you, and surveys, that input prices and output prices are way up year over year. You look at core PCE this morning, up 6.1%, and the last time I checked that the Fed's target was 2%. So you're ticking a little higher even on their calculations, which we all know that the CPI data or PCE data is vastly understated.

So, they've got inflation to deal with, number one. The next problem that they have to deal with, the other half of the stagflation argument, is stagnation. You start to see the Citi Surprise Index, which is ultimately just an index when data comes in positive, the Citi Surprise Index generally will tick to the positive. And what the data has been saying, at the beginning of COVID, was minus 150 on the Citi Surprise Index, because obviously, all the data was coming in very negative. Now, things turned around rapidly. Rebounded to plus 275, and everybody thought, "Hey, this is great. What a great response by the Fed." But now all of a sudden, the data is kind of turning weak again. And so, the Citi Surprise Index is now at minus 50. Okay? So, you have that problem, but also you get the services PMI, which peaked out at 70, and now ticking at 55. You get the New York Fed, who's now downgraded Q3 GDP down to 3.5%. You got Goldman, who's downgraded GDP for 2022 down to 1.5% to 2.5%. So, they also have the stagnation thing to deal with. So, here's the thing. The Fed can't deal with both of them. They have to choose one. And so far, they've been choosing the stagnation route, and I believe will continue to do so. And I'll be shocked to hear them do kind of anything else. We'll see where it ends up from there, but kinda that's the view for tomorrow.

Craig: Hey, let's turn the tables on them a little bit, Conor. Would you say that given all that uncertainty, and with the Citi Surprise Index turning lower and all this PMIs, all the stuff we're seeing, the stagnant part of the stagflation...like I said, let's turn the tables on them. Do you think anything that Powell says tomorrow, any policy change he notes, is just transitory?

Conor: Well, I mean "transitory" is now sadly turning into permanent and sustained. So, he can sit there and say "transitory" all he wants. But banks like Bank of America would sadly disagree with him.

Craig: Yeah.

Conor: I mean, you kinda look at the stuff that they've been putting out. They no longer think anything is transitory. So, he's obviously going to have to answer to that question. It's the last question that they actually wanna deal with, because you know that Powell is a dove, and that he would ultimately like to continue upon this path of buying $120 billion of mortgage-backed securities and whatever else they're throwing out into the mix there, too. I mean, we all know that they're in the market buying TIPS. That, too. I mean, just kind of when does it end? So...

Craig: Right, right. Well, again, I wonder if their policy is now transitory, too. They're gonna say maybe taper, and then they won't, you know, and that sort of thing. We'll see. In the end, it has certainly impacted the metals and the shares as we've gone through this year. It seems that institutional investors, hedge funds, the like, had been shunning gold, at least gold futures. Silver, too. Buying the dollar. And the shares have just had a miserable year.

Conor: Yeah.

Craig: As we transition to just kinda the shares in general, Conor, how do you...I mean, we watch the GDX come all the way back down to what seemed to be a pretty important support level between 31 and 32, and the GDXJ is breaking down. What...from 37,000 feet, how does it look to you?

Conor: Well, starting from I guess a little bit of a micro perspective, okay, that from the run from $1,200 to $2,100, there was a lot of companies in between those goalposts that needed money. So, a lot of money was raised. A lot of companies got their money. But now that you see the gold market kind of unwind some of that froth, you would have called it, maybe, or somebody would've called it, maybe not us, at $2,100, you start to see investors kinda take off that money, knowing that there are other places that look better. The Nasdaq certainly goes up almost daily. The perspective from gold investors is that they've generally kind of given up, and...but that was the opposite of what it was at $2,100.

So, I think that you're at a spot now that a lot of the froth has been taken out, a lot of the people who have bought the financings have either kind of given up, or they've kept a very small position, but generally, the sellers have probably sold to stronger hands, like ours, for an example. We haven't gone anywhere. We were perfectly wary of the risks above $2,100, but we were also very eager at $1,280. And especially at $1,350, when gold started to break out. So, we know that gold and silver are very inherent with cyclicality like that. Obviously, with the Fed doing kind of what it does on a monthly basis, that it continues to keep investors' eyes elsewhere.

Craig: You know, the old man always likes to say, "You know, you gotta be able to have a party in the room by yourself." It certainly feels like we're back to that point.

Conor: Yes. Undoubtedly. Undoubtedly. I'll tell you my...Craig, that my phone was probably one of the more popular phones in Canada for a time, as gold was rallying. Plenty of financings coming. I was the busiest guy in the world. And now you won't hear the phone ringing in the background of this call for...and probably won't ring for the rest of the day.

Craig: Right, right.

Conor: Now, all of a sudden...yeah, go ahead.

Craig: No, that's fine. Conor, let's kinda wrap up with some individual equities that you might just kinda give some thoughts on, or any direction you wanna go. When Sprott Money put out that you were gonna be the guest this month, we had some people write in and say, "You know, we've very much enjoyed the 'Weekly Wrap-Up' back in the day," and Eric used to talk about companies like Tudor. Somebody mentioned Freegold. I don't know if you have any thoughts on those, but also, the last time I spoke with Eric, he was very excited about Newfoundland, and basically buying almost 20% of anything he can get his hands on up there. So, I'll just let you take it from there and share with us whatever you can.

Conor: All right, sure. So, let's start with the first one, Tudor Gold. So, there's 30 million ounces, on its way to 50, sitting there in BC. And 50 million ounces, let's say that the gold price is $2,000, you've got a $100 billion of gross metal value sitting there. The market cap of Tudor isn't anywhere close to that, and I'm not saying anything that the gross metal value should equal its market cap, but it definitely remains a very attractive stock for us, and we're very, very happy to be sticking with it. The management team has done a wonderful job, and I would suggest that...either Tudor should be accumulated down here...I would suggest that a lot of the froth, again, has been taken out of that. There's obviously been some financings done on the way, again, but Tudor I would be very much sticking with here, without question.

Craig: Freegold was another one that was mentioned.

Conor: Oh, Freegold Ventures. Okay. So, Freegold Ventures, how we look at it... Like, the market kind of thinks of Freegold as a low-grade ore body in Alaska. They've already got proven up six million ounces at, call it a gram. Okay. But, like, let's look at the latest drillhole, which was 495 meters by 1.17 grams, okay. Now a gram, as Eric has taught me many times over, in terms of its profitability in comparison to high grade...high grade, and we'll go through some of the section of Freegold's but...so, one gram...but within that hole, you've got 3.6 meters of 26 grams, 3 meters of 35, 3 meters of 20, and then 3 meters of 21. So, let's take that for an average, call that 25 grams. The difference in profitability for 25 grams and 1 gram...well, just in...and also, you have to think of it this way. So, one gram isn't your profit. You would call .2 your profit. So, let's take it from 25 and then take a gram off of that. We'll call it 24. Well, the profitability in terms of the delta there is 120 times different. So, we kind of are very hopeful for Freegold that there is a much bigger high-grade story, and a much more profitable high-grade story there.

Craig: The length of it dilutes it? Is that...am I looking at that the right way?

Conor: Yeah, correct.

Craig: Okay.

Conor: Correct. Correct.

Craig: And aren't they in Alaska, Conor?

Conor: They are. They are. They're right beside Fort Knox, a la Kinross, who would be a natural acquirer, one would think, and especially if a high-grade system ends up being proven out. Like, if they end up having, let's say, 50 million ounces, but you've got 4 to 5 million ounces at, call it, 20 to 25 grams a ton, believe me, there will be eyes looking at it.

Craig: Yeah.

Conor: We definitely are sticking with Freegold, and I just think that the market at the moment just kinda misunderstands it in terms of the way that we see it.

Craig: And let's wrap up with Newfoundland, since Eric was so excited about it a couple of months ago. I know he's friends, good friends with Dr. Henny [SP] and I know Dr. Henny sure is excited about it. And there are individual companies that...I mean, you can mention if you want or not, you know, whether it's Labrador or New Found Gold or Sokoman.

Conor: Yeah. Yeah.

Craig: Just in terms of, you know, this potential region, you know, this whole area up there. Is it still something you guys are looking into?

Conor: It is priority number one, two, and three. I would just say that when you get...like, the hole that I read from Freegold, okay, that's one thing. But then you get New Found Gold, which has 19 meters of 92.9 grams per ton, and another hole of 25.6 meters of 146 grams per ton. Like, that is on a level of ridiculous. So, basically, what we did was we frantically searched the province, and picked up just about anything that we could. Like, for an example, Canstar was at...where did we buy that at? It must've been a $20 million market cap. All of a sudden, you hear that they've got eight holes with VG in them of 22. You kinda think to yourself, "Whoa. Wait a minute here." Twenty million could turn into a $400 million market cap pretty easily. Okay. Well, let's buy that. Okay, sold. Move on to the next one.

Then you get something like Canterra Minerals. Here's another good example. Very, very small market cap, but guess who their neighbor is? Marathon Gold. And they sit on the Valentine Lake deformation zone. They've got five million ounces of gold already, and probably moving higher than that. But guess who Canterra is? It's their neighbor to the north, and they sit on the Valentine Lake deformation zone. So, do you pick up that market cap at 14 million? Yes, you do. Okay, sold to us.

Okay, so, and I can give you one more. Vulcan Minerals. The market cap of that is $19 million, and within that company, they own something called Red Moon, and now it's a salt asset. However, Red Moon is a publicly listed company, with a $55 million market cap. And they own 39% of it, and that's $21 million. So, basically, you get a whole bunch of their other exploration assets in the most prospective place on Earth, as far as we're concerned, for nothing.

Craig: Right.

Conor: Do you buy Vulcan Minerals? Absolutely. Thank you very much.

Craig: Geez. What an example of being in the room by yourself.

Conor: Absolutely. And we feel as though that we're still the only ones in the room at the moment, in Newfoundland. So, we'll take it. We'll see how everything shakes out, but it's a very exciting time in Newfoundland, undoubtedly.

Craig: Yeah. And when you think about this kind of illusionary year that we've been in, you know, where, as you mentioned, negative real rates don't seem to matter. At least...even though they've mattered for decades, all of a sudden, this year they don't. And this illusion, you know, that, again, the Fed is gonna taper and draw down the balance sheet. You know, the game they played for five years. Once that wears off, and it will wear off, man, is there gonna be interest not only in the metals but in these mining shares again. So, it sure seems wise you'd continue to preposition yourselves. That's for sure. Anything else on your mind, Conor, before we wrap up?

Conor: I would just say that...stick with it. The gold and silver trade is certainly not dead. That you've had...obviously, the shares haven't cooperated, from the GDX and GDXJ perspective, and their incumbents. But you definitely have to look in other areas. You might not find that buying those particular equities are suitable to you. You might have to look other places, which we've done fairly successfully here. And we're certainly hopeful for the latter, call it, third of the year, once we get a few, you know, kinda, "Fed moments" out of the way, and we'll see where we land from there.

Craig: Yep. I hear you. Great stuff. Again, we've been speaking with Conor O'Brien. He's a business partner of Eric Sprott's. Talks to him every day, works with him every day. Good to get your perspective, Conor. Man, I tell you, really, really appreciate it.

Conor: Yeah. Well, I'll just leave it with this that Eric says hi to everybody. I was out with him yesterday having a beer or two, and he's still excited very much so about the future for gold and silver investors, and all the best to you.

Craig: I know there are a lot of people listening that would've loved to have been at that table with you two. Myself included. I can tell you that. But I can't come to Canada at this point. I don't think they're letting Americans in, so...

Conor: Yeah.

Craig: We have to be there virtually. But anyway, Conor, thank you. And again, just a reminder on the way out. If you appreciate this content, thank Sprott Money for it by stopping by their site, taking a look at the precious metal they have to offer, their storage options, and of course, very helpful customer service that can be found any time, 888-861-0775. Conor O'Brien, thank you very much for joining me this month.

Conor: You got it, Craig. It was a lot of fun.

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