A Look Ahead: Gold, Silver, and Precious Metals in 2021 - Weekly Wrap Up

Man: 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, December the 4th, and it's time for your weekly wrap-up. Eric is still on the sidelines this week, so joining us as a sub, but a very qualified sub, is Rick Rule of Sprott Inc. Many of you are familiar with Rick. And it's great to have him step in. Rick, thank you so much for spending some time.

Rick: Always a pleasure, and delighted to be described as subbing for Eric Sprott, who is a good friend and a great mentor.

Craig: Yeah, yeah. To many in the business, no doubt about that. And hopefully, he'll be back soon. I did announce in Sprott Money, announced during the week, Rick, that you'd be the guest, and many of the folks took the time to send in questions. You can always send in questions for these weekly wrap-up podcasts or for the Ask the Expert segment. The email address you wanna use is the word submissions@sprottmoney.com. And then be sure to like, share, and subscribe to this channel, whichever channel you're listening to this on, when you enjoy our podcast. And of course, it is the holiday season. If you need a special holiday gift, make sure you stop by sprottmoney.com, of course, call us at 888-861-0775 for the best prices possible. Rick, let's just dive right in. It's been an interesting morning, it always is, that first Friday of the month always seems to move the markets as we get the monthly U.S. jobs report, [inaudible 00:01:33] telling me this morning, through all markets, including the metals. Where do you stand at this point? As we move to wrap-up the year, we're gonna have a new presidential administration in the U.S., all kinds of talks, more stimulus in QE, the dollar is falling sharply. How do all these puzzle pieces fit together for you?

Rick: They probably fit together easily, more easily for Eric than they do for me. There's a lot of conflicting signals out there. I'm really still...maybe terrified is too strong a word, but I'm very concerned about the fact that the continuing effects of the COVID-19 virus on the broad economy aren't reflected in financial markets yet. The disconnect between financial markets, bond markets, and equities markets relative to the real pain being felt on mainstream causes me a lot of concern. As a shareholder in various companies, I'm near-term attracted to the level of private savings in the United States. Remember that there's separate economies for people that have money and the rest of the population. There is about $2.5 trillion in liquidity that's been built up in private pockets through the COVID-19 virus. And traditionally, when private savings have built up like that, there is a bit of a boom in consumer demand, and we may see that coming into the economy if any of these virus vaccines prove efficacious, which will provide near-term uplift. Pardon me, a near-term uplift. I think it's very clear that the only thing that stands in the way of a massive stimulus package is who benefits. The fight between the Republicans to benefit their constituency and the Democrats to benefit their constituency is the only thing that masks a huge willingness on the part of the political elites from both parties to spend your money. So, I don't think there's any doubt at all that we are going to see a massive stimulus package next year. The question is, which constituencies benefit?

That stimulus package will, I think, almost undoubtedly, provide a lot of liquidity in the economy, will keep interest rates artificially low, and will ultimately be quite bad for the dollar. But I think it'll raise animal spirits almost certainly. My suspicion is that the stimulus package that we see will be bigger than people anticipate. From the Democrats point of view, sort of a stealth universal basic income, it won't be pitched as such, but direct cash payments to those who are struggling, but probably more important for the Democrats aid to their constituencies, which is to say, bailouts to effectively bankrupt cities and effectively bankrupt states. Look at New York and Illinois as an example. From the Republican point of view, bailouts to corporate constituencies, banks, airlines, hotels. The truth is that what you're going to see, I'm afraid, is a sort of gorging smorgasbord across the length and breadth of the U.S. economy, which will add liquidity in the near term but reduced solvency in the longer term.

Craig: Yeah. Never let a good crisis go to waste, right?

Rick: Correct, correct. You summed it up nicely. Thank you.

Craig: Rick, there's a lot of talk, I've seen quite a few things even just this week, analysts starting to discuss the likelihood of price inflation. You know, we got the Chapwood index showing big numbers, but even on the CPI and PPI level, maybe some price inflation coming next year. What do you make of all that?

Rick: I'm not convinced that we're gonna see price inflation, because my belief is, at least in the United States, I don't wanna talk to the Canadian market, but at least in the United States, you have basically half the population with no private savings. And you see, increasingly, in the United States, the major retail credit providers beginning to tighten up on consumer lending, which is to say, credit cards. And you see the lingering impacts of the virus on the Main Street economy. I think you are probably going to see continued stealth inflation, which is to say, probably increasingly bond markets that don't reflect the real yields on bonds, but rather recognize excess liquidity in the system, and perhaps a continuation of strong equities markets, perhaps even a continuation of strong real estate markets. I think you have seen inflation. It's just that you haven't seen inflation in the CPI. You've seen it in the price of assets. And I think that's going to continue. I believe that we may see CPI inflation in the out-years, which is to say, 2022, 2023, as the raw depreciation of the purchasing power of the dollar begins to impact asset prices. But I don't think that you're gonna see demand-pull inflation, at least in 2021.

Craig: Yeah. Yeah. You know, and the commodities, obviously, reflected that, and maybe that is what you get eventually, is that kinda cost-push on the other side. You know, Rick, we watch this impact, then, on real interest rates. That seemed to have been driving the precious metals higher over the last couple of years, this trend toward more negative real interest rates. Do you think that that continues? I mean, you're always very pragmatic and thoughtful and wise when you look at these markets. And it's been a challenging three or four months in terms of price, not only the metals but the miners. What do you sense and where do you think we're headed as the calendar flips?

Rick: Well, you asked a lot of questions there. So, [crosstalk 00:07:58].

Craig: You're right.

Rick: The last three months have not been challenging if you have experience bull markets, gold bull markets before. The truth is that 10% declines in metal prices and, hence, 20% declines in gold index prices are common in bull markets. Cyclical declines in secular bull markets are something you absolutely have to be prepared for. If you went through the 2000 to 2010 bull market and studied it, and/or went through the 1970 to 1980 bull market and studied it, you would know that retrenchments like the one that we have been through and are going through are normal and natural. They aren't symptomatic of anything. They happen with the frequency and ease with which you and I inhale and exhale. So, first of all, understand that what happened over the last three months wasn't even a hiccup. When you look back at this bull market 20 years from now and you look at the chart, I don't think you'll be able to see this decline. It doesn't make it pleasant to go through, but I think it's an irrelevancy.

Going back to the first part of the question, I think that was extremely pressing. I think that negative real interest rates are more important than any other factor with regard to the gold price, because gold competes as an asset class with traditional savings and investment products. As we discussed the last time that we visited in front of your audience, the world's benchmark security has been, for 50 years, the U.S. 10-year Treasury. It's the security against which all others are ultimately priced. The U.S. 10-year Treasury right now yields about, what, 75, 80 basis points, in a currency that the Congressional Budget Office says is depreciating by 1.6% a year, which is to say that the U.S. government guarantees you a negative real yield of almost 1% a year. Jim Grant calls this return-free risk. And so, gold is competing with return-free risk. This is a fight that gold can win. I'm not saying that gold is gonna win it by the extinction of the U.S. Treasury market. I'm saying that gold will win it simply by losing to other asset classes, well, as badly. And I think we're gonna see a continuation of negative real and maybe even negative nominal interest rates, because I don't think that there's any constituency, other than savers who are scarce, for high real yields on savings, as we discussed the last time you and I talked. You can think about economic policy in the United States and Canada as a democratic process involving a war between spenders and savers. Spenders are numerous and savers are scarce. And so the spenders are going to win, which means it's highly unlikely in a North American democracy that you're going to see market-based interest rates. And the consequence of that, I think, is relatively strong gold prices.

Craig: Yeah. All right, my friend, let's move to some of the questions that were sent in. Again, that email address is always open to you, submissions@sprottmoney.com. Whereas, when I speak with Eric from his rocking chair, as an old retired guy, he can talk about individual names all day, but Rick, unfortunately, is still limited by the compliance department. So we appreciate all the names that came in. And as soon as Eric's back, we'll get back to discussing some of the individual names. But in the meantime, I've got a couple of questions I know that are right in your wheelhouse, Rick. I had one person write in, they had noticed that one of the Sprott ETFs, actually, a couple of them, there are some Sprott Inc. ETFs of Gold Miners that are doing really well, especially compared to, you know, the more widely known GDX and GDXJ. Can you speak to those and why that is?

Rick: I can. The difference between the Sprott-branded ETFs and the other ETFs, particularly the VanEck-sponsored ETFs, the GDX and the GDXJ, are that the GDX and the GDXJ are weighted to market cap and liquidity, which is to say, they reward size and they reward trading liquidities. The Sprott ETFs are factors-based. Our indexes are constructed around profitability and around revenue growth, in addition to trading liquidity and other factors, which means that we reward corporate performance. We aren't trying to buy the whole industry. We're trying to segregate by factors that have traditionally led stocks to outperform the index. And this year, that factor, particularly with our Junior Gold Miners Index, has led to a really substantial significant outperformance of the Sprott products, both the Major Miners Index and the Junior Miners Index, but particularly the Junior Miners Index relative to its peer. I think that goes to the fact that, in the Sprott organization, we don't try to be all things to all people. We don't think about supermarkets. We don't think about banks. We don't think about clothing stocks. We think about precious metals and natural resources. And that allowed us to study 45 years of prior gold markets and decide amongst ourselves what the factors were that were most important in determining individual price actions and stocks and incorporate those into an index rather than the simpler index, which just goes to market cap and trading liquidity.

Craig: Yeah. Again, boy, if you're excited about a potential bull market and where we could go over these next couple of years, I always say, you need as much help as you can get. Why not have the expertise of everybody Sprott on your side? You made...that's a very good point. Rick, here's another question for you. I think it's funny, because I know this is right in your wheelhouse too. Somebody just said, "Hey, enough talk about gold. Jeez, when is uranium gonna get rolling again?" And I would even throw platinum on there. You got any thoughts on those, too?

Rick: Yeah, very different topics. I think that the...let's do platinum first.

Craig: Okay.

Rick: The subsidence of the effects of Volkswagen's emission scandal, in Europe, in particular, but around the world, has led to an uptick in demand for diesel-powered automotive vehicles. And that has led to an uptick in demand for platinum, because platinum is the metal that's efficacious for emissions control in diesel vehicles. The thing that really killed the platinum market was the reduction in demand as a consequence of the Volkswagen emission scandals. That's worn off, and so you're seeing an increase in demand for platinum at the same time that you're seeing very, very, very long of tooth platinum mines, particularly in South Africa, being a star of the sustaining capital investments because of a period of low prices. So you have a classic circumstance where demand is recovering, supply is faltering, and price is moving. And unless we have a global recession in the near term, I mean, a really strong global recession that really impacts vehicle demand around the world, I think you're gonna see continued increases in the platinum price, particularly given the discrepancy in the prices of platinum versus palladium.

The other thing that you're beginning to see is interest in platinum around the hydrogen economy, both as a catalyst but also as a constituent in fuel cells, which is one of the ways that hydrogen energy can be used. Platinum is a critical component in that. And although the demand in fuel cells is impressive, the idea that we're moving to a hydrogen economy in terms of utilizations like, as an example, bulk shipping, rail, and things like that, means that investor interest in the platinum narrative is increasing at the same time that in the near-term supply and demand for platinum are increasing. So that's a theme that's really, really worth considering. Understand, if you're not gonna buy the metal, but rather you're going to buy the equities, that you're gonna have to deal with political risk, because platinum is produced in real commercial quantities in South Africa, in Zimbabwe, and in Russia. So, somebody who is going to play the game, unless they're gonna play the game in very [inaudible 00:16:44] fashion, which is to say, exploration, needs to wrap their arm around political risk.

Going back to uranium, some of your listeners will know that the prior uranium market was one of the finest financial events of my life. So, you know, obviously, I'm biased. I continue to believe that an increase in uranium price will, in the nearer term, be a function of Japanese restarts. But it's heartening to see the total uranium demand worldwide is now at pre-Fukushima levels, which means that new-built plants are beginning to use up the supply surplus. People who invest in the uranium space now, I think, need to be comfortable with the fact that it may be 18 months before they see a broad uptick in uranium prices. And if you're gonna play the uranium juniors, it would be very useful to the extent that some of your listeners are accredited investors, that you attempt to play the uranium juniors in the private placement market. If it takes 18 months from now to see a broad uptick in uranium prices, many of the high-quality juniors are gonna have to return to capital markets for survival capital rather than expansion capital, providing that survival capital, in a market where capital is scarce, almost certainly necessitates issuing a warrant, because uranium is so out of favor relative to gold and silver.

In my own experience, providing survival capital for the then-five remaining uranium juniors, in 1999, which was before the 2000 to 2006 bull market in uranium, delivered the best financial returns that I have ever personally experienced in my life. It's worth noting, Craig, that, in the five uranium juniors that led off the last uranium bull market, the worst-performing junior ran 22 to 1 in the ensuing five-year bull market. So, for those who have the patience and the discipline to wait and to buy judiciously, pardon the phrase, but this is a very explosive sector.

Craig: Yes. That's a fun way to put it. You're right. All right. I'm just gonna try to squeeze in one last question that I thought we could kinda pick your brain a little bit. And it has to do with, you know, these different resource categories that are mentioned from the mining companies. How do you treat, think about the different categories, you know, proven, measured, and indicated, inferred when you try to value a mining company or even an exploration company?

Rick: The question is even more complex than that, sadly. It depends, as an example, on what third party did the reserve and resource calculation. Do they have a reputation on the street for being generous? Do they have a reputation on the street for being conservative? Certainly, from my own viewpoint, in a bear market, I lean very, very, very heavily to a proven or proven and probably, because the truth is, in a market where nobody cares for gold, the best categories are viewed with the same disdain that lower-quality categories are. When you move into a market that has more favorable sentiment, like the market that we're in now, the strategy involves using your expertise or expertise that you have access to, think Sprott, to understand which companies have lower-quality categories, which is to say indicated or inferred, that will be able to be improved into measured and indicated through additional drilling. So, it's useful to consider all of the categories in terms of the target size, but you make money in a bull market by answering unanswered questions, which is to say, how much of the indicated and inferred can move up to measured and indicated? In other words, how much can show up ultimately on the balance sheet and on the income statement? That's a wonderful question. It deserves half an hour, which we don't have.

Craig: Unfortunately, but I think you did a great job of answering it. Hey, and before we go, make sure, again, and here, the holiday season, in particular, great time to get folks started understanding the value of sound money and understanding the value of physical precious metal. If you're looking for the best prices possible, be sure to visit sprottmoney.com and check out the Specials tab under Gold and Silver on the website for weekly deals. Of course, you can always just give us a call as well at 888-861-0775 to purchase directly or just simply have any questions answered. Rick Rule, you answered a lot of questions today. We very much appreciate your willingness to sub in for Eric.

Rick: I'm delighted to be of use to our cousins.

Craig: There you go.

Rick: At Sprott. I'd like, in my closing moments, if I could to repeat my normal offer, which is to say, if any of your listeners care about our opinion about gold stocks, all they need to do is go to the website, sprottusa.com/rankings. You can enter the names if the precious metals and natural resources companies that you want in your portfolio, and I personally will rank them 1 to 10, 1 being best, 10 being worst, and I will comment on individual issues where I think that my comments might have some value. In addition, if you, in your request, mention charts, we will send you the Barron's Gold Mining Index chart. Think of it as the best visual aid that there is to understand the anatomy of gold bull markets. And we will also send you a 100-year commodity chart, which will show you visually how cheap commodities are relative to their price levels against other asset classes, going back 100 years. Once again, sprottusa.com/rankings.

Craig: My goodness gracious. I don't understand why anybody wouldn't take you up on that, Rick. That's a very generous thing to do. And at a time like this, you just can't have enough help on your side in figuring these things out. I just think that's tremendous. Thank you so much for giving us that reminder.

Rick: Always a pleasure. I enjoy these sessions, and I enjoy communicating with the entire Sprott family.

Craig: It's fun. Have a great weekend, my friend.

Rick: Thank you, sir.

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