Economic Outlook & Precious Metals Market

Man: You're listening to Sprott Money's Monthly Wrap-Up with Craig Hemke.

Craig: Welcome back to your "Sprott Money News," sprottmoney.com Monthly Wrap-Up. We're ready to wrap up the month of June, 2023, which means the year's already half over, for crying out loud. So, we're gonna talk about June. We're gonna talk about the first half of the year. We're gonna talk about the second half of the year in this Monthly Wrap-Up.

I'm your host, Craig Hemke, and joining us is an old friend and a favorite for this podcast. That's Bob Thompson. Bob is a longtime friend of Eric Sprott. He is a senior portfolio manager at Raymond James in Vancouver. Right across the street from a whole bunch of different mining companies up there. Kind of has a heartbeat or a finger on a pulse of the heartbeat of the mining industry. It's always good to hear what Bob has to say. So, Bob, thank you so much for your time.

Bob: Hey, Craig, it's great to be on again. We got a sunny day in Vancouver, so, think I'll go golfing or bike riding right after.

Craig: Yeah, let's do this fast so you can get outta here. Hey, and again, just a standard disclaimer, if you will, before we get started. Look, this content is provided by Sprott Money. And you can find their website, sprottmoney.com. You can call them at 888-861-0775 and tell 'em how much you appreciate this stuff. They post it for you free of charge. So, visit them. Use their services to buy metal or store metal, or at least, if anything, give 'em a like, or subscribe on whatever channel that you're watching this. That'll help them widen their net and get this important information out.

Bob, let's just dive right in, my friend. You know, on my side, I was just begging for a Fed rate hike back at the last FOMC because I wanted to get this over with. I didn't want another six weeks of hanging on every data point, you know, and, oh, now rate hike expectations are going up. Oh, no, now they're going down. Oh, God, it's driving me bananas. I would imagine it's driving you bananas too. What, at least, is your personal forecast as we go into the back half of 2023 from a macro standpoint?

Bob: Yeah, you know what I think is really funny is the Feds coming in to save the world now from inflation, but they're the ones that caused it and everybody tends to forget. But anyway, I guess they're gonna save the world for us. So, that's okay. But I think the most important thing is here, you know, it's not what the Fed says, it's what they do, right? And Powell said recently at a Senate hearing, right? It wasn't a public forum, he was just talking to banking committee or whatever he was doing. And he actually laid it out, the secret right there, and this is all you need to know. He actually said to them, he said, you know, because he was explaining to the senators about how it works, right?

And he said, "What's most important," he said, "Is that we squash expectations." And he said, "So people can't believe that inflation's gonna be over 2%, because if they do, they're gonna go spend and it's gonna be self-fulfilling. So he said, "We have to make sure that people expect inflation's gonna go back to those levels." And he said, "That's the only chance that we have of getting 'em back there." So, all this job owning that they're doing, right? You know, "Oh, we're gonna keep raising rates. We're gonna keep raising rates." Well, the reason that they're doing it is so expectations of inflation come down, right? Doesn't matter whether they actually do it or not. They just want people to think that that's gonna be the case. The other reason that they're kinda, you know, doing this is the economic numbers that they look at are still okay, right?

I mean, if we were in deep recession and the market was down 40% right now, they wouldn't be doing it, right? They couldn't do it. But that brings up the next thing here, is it takes a long time, 16 months for the economy to start showing effects of the interest rate increases. So, I expect that in the near future, and we expect, you know, some sort of recession. It depends how fast they come in and start printing money again. But this is interesting because what happened in the early '70s, and I think, you know, history doesn't repeat itself, but it rhymes. A lot of things are going on the same way, you know, from the nifty '50s stocks, or the late '60s to all the tech stocks right now, a lot of things. The dollar, the budget, you know, everything.

So, what we got in the early '70s is a double-dip recession, right? And those are killers. Because you get this recession, the Fed comes in, they print money, they reduce interest rates, they do whatever, but that causes inflation, right? So then they gotta back off the inflation, so they gotta raise rates, which causes another recession. So you get this double dip. And I wouldn't be surprised to see something like that happen. Now, coming off those bases, that works really well for metals and minerals, and value investing versus growth investing and all that. You know, a lot of people maybe don't wanna admit it, but we're in for a '70s type of decade here. And, you know, that's a great thing for metals and minerals.

Craig: Yeah, that's exactly right. That was the late '70s and the stagflation, and, you know, nominal interest rates that were 10% and higher. It was a pretty good time for the precious metals. Bob, you wonder, and I've wondered along, you know, what will it take to get the metals to finally really break out? And it probably will be a recognized movement, a shift by the Fed. We've had a couple of fakeouts so far this year. The big month of January got everybody excited. then And the data got better, and down we went in February and into March. And then we had a big April and into May, and then the data got better. I wonder if you're seeing any signs that suggest that the metals are getting ready to break out, and, you know, are we near or low again?

Bob: Right. You know, in the metal space, really, it's all about sentiment in many respects, right? Pierre Lassonde said recently, and Eric said this too in the past in a different way, but Pierre Lassonde said recently, he said, "I don't know why everybody thinks this is so hard." He said, "The precious metal space is the easiest place in the world to make a lot of money," right? And right now, everybody's thinking, "What? What's he talking about?" Right? And the reason he said that is because he said, "There's no other sector that sentiment gets so low and sentiment gets so overblown," right? So he says, "When sentiment gets terrible and everybody hates it," he said, "That doesn't happen with banking stocks or different areas of the market." He said, "That's when you go in, that's when you gotta go in. That's when there's value." And he said, "On the upside, it gets ridiculous on the upside. So you got lots of time to sell off."

And I thought that was fantastic. And as you know, I repeated, you know, this what Eric said 1000 times in this show. Eric said he loves the mining sector because the lows are so low, the highs are so high. The difference between the two is 1000%. And there's no other sector in the world that that happens, right? So, Eric's saying the same thing. But, you know, you just gotta go in when the sentiment is terrible. And the sentiment is terrible right now. And there's lots of ways to determine that, right? One is, you know, a lot of people say they don't pay attention to the gold-to-silver ratio.

You know, sure, it doesn't matter on paper. But right now, it's 85. And anytime it gets over 80, it means the sentiment is very bad for the sector, right? I mean, it hit 100 in March of 2020, right? But other than that, you know, it never really gets above 85, 90. If it does, you know, that's a great buying opportunity. So we're there on that one. The other, you know, kind of big one that I think is really important from a big-picture perspective is the HUI, which the Gold BUGS Index to the price of gold, right? And that ratio, you can go back many, many, many years, but let's just go back the last, you know, 10, 15 years. It's only been above nine once or twice. So again, that's gold divided by HUI.

So, it's only been above nine a couple of times, right? Right now, it's about 8.5. So, we're getting into that buy range, which tells you the stocks are really undervalued compared to the price of gold because really, the price of gold isn't too bad. It's up 5% on the year, right? I mean, that's pretty good. Other than, you know, seven stocks on the NASDAQ, you know, that's one of the best-performing assets this year. But the stocks aren't there. So that tells you there's a good value proposition. It was at nine at the end of 2018, right? And we know what happened in 2019, a few months later. And it reached 10. Ten was the highest that it's been, and it reached that at the end of 2015 right at that puking point, the final puking point for gold. And interestingly enough, it went to 5 in about September of 2016. So, that's what I'm looking for, you know, this 8.59 for the HUI. Again, it doesn't mean anything other than telling you that the sentiment is really, really, really terrible. And, you know, when sentiment's bad, great time to look at it, generally speaking.

Craig: And, you know, I think this came up in one of the other Sprott Money podcasts this month. You know, I remember back on March the 7th, Bob, Powell was doing one of those Capitol Hill deals, and he was talking about, "Oh, yeah, we're gonna keep rates higher for longer and all this." I mean, he's the head of the Fed, right? So, he should be aware of what's going on. It was three days later that the Silicon Valley Bank thing began to blow up. And so, you know, this could all change on a dime. And if Powell himself doesn't know what's out there, then how do we know we're not gonna walk in on Monday and you'll have missed the low? So, that's something you gotta manage too, right?

Bob: I can't believe that, you know, they really can't see things coming and get things so wrong. But in one defense, I'll say one defense here. I thought of this the other day. You know, I was leaving an event, and I think this is a great analogy. I was leaving an event and I was gonna take the freeway. And my iPhone said don't take the freeway because there's too much traffic. So, it gave me an alternative route. I got on the alternative route, and within 10 minutes, I was in this horrific traffic jam for 45 minutes. And I looked and there was an accident six blocks ahead of me on this route. So then I had to change and I had to go back to the freeway because by that time the freeway was in better shape.

So, what I'm saying here is this whole economic outlook is a huge multi-variable equation and it's dependent upon so many other things, right? So, it wasn't that my iPhone was dumb, it was just responding to what it was telling me, but it didn't know what was gonna happen, you know, five minutes into the future that there was gonna be another accident there, right? And I think that's a great analogy for the economy, because yeah, things are all going along fine. You know, risk happens slowly and then it happens all at once, right? As they say. So, yeah, you know, Powell was talking the way he was talking, then we had an accident ahead of us that was the Silicon Valley, then you gotta go a different route, right?

So, interesting that, you know, they have trouble forecasting this, but, you know, sometimes things do change too. So, I think they've been surprised, and everybody's been surprised here that we haven't had more bricks. But I think they raised interest rates so fast that there was lots of momentum and it hasn't had time to respond to that. But when it does, it'll be like hitting a brick wall.

Craig: Yeah. Bob, I wanna discuss something a little kind of semi-off-topic, I guess, and directly impacting the precious metals, but I think it's something that is of interest to most of us that are in the precious metals. You had written to me and mentioned something to me that's called Parkinson's law. And I thought, "Well, that sounds interesting." Why don't we discuss that for a minute? Because I think that's something people might find of interest.

Bob: Yeah, you know, especially your listeners. I think Parkinson's law, and, you know, I won't go into it in detail. People can Google it. But what's important to know about Parkinson's law is I think that tends to explain a lot of what we're seeing from a macro perspective. Because people are scratching their heads going, how are these job numbers good? And how are things continuing on the way they're continuing on without this bottom falling out yet? Well, interestingly enough, Parkinson's law, basically, as far as government concerned, is the reason why governments continuously expand and continuously get bigger and never really get smaller. Because with Parkinson's law, basically, you have to hire somebody... Let's say you regulate something, right? Well, now you have to hire more people to regulate the increased regulations.

Well, once you do that, well, they create more regulations. So then you have to hire more people to regulate the regulation of the new regulations. And you see how it ever expands like that. And just to show you kind of a couple examples of that. You know, the Fed has 400 PhDs on staff, 400, and a salary budget of almost $3 billion, budget of almost $3 billion. Four hundred PhDs. And the reason I've said that so many times is because once you hire somebody, they have to have somebody to support them now. And then they have to have somebody as a research associate, then they have to have somebody.

So, it just gets bigger and bigger and bigger and bigger. Stanley Druckenmiller said recently, who's one of the best money managers in the world. He said, "The reason I've been able to out-forecast the Fed as far as every recession that's happened in the last 40 years is because they look at market variables and they look at things and how the market's reacting, and credit and all that." And he says, "The Fed doesn't look at that."

Well, interestingly enough, so, one guy sitting on his computer screen has forecasted the recessions better than 400 PhDs at the Fed. And the same thing can be said for Eric. Eric saw all of this coming up into 2008, and the articles he was writing in 2005, 2006. One guy sitting at his desk saw this happening, saw the banking crisis, saw this, and the Fed didn't, right? So, that's Parkinson's law. And here in Canada, interestingly enough, these are shocking numbers. Twenty-two percent of all employment in Canada's government, that's about double the U.S.

Now, the U.S. is bad. Canada's double. That's about the same as Venezuela, okay? And here in Canada, 86% of the job growth, 86% of the job growth from the start of COVID until now has been government. So, you wonder why we're in these... Supposedly, the economy's great and we're running trillion-dollar deficits, right? You wonder why here in Canada, 10% of our total budget is spent on interest. And that never gets better. And it's due to Parkinson's law. It's quite interesting.

Craig: It's not sustainable.

Bob: No, it really isn't. It really isn't.

Craig: I mean, that's remarkable. And I thought it was bad here in the U.S. I think that it's twice as bad North of the border. My goodness, gracious. Well, all right, Bob, as we wrap up, I thought it'd be kind of fun to pick your brain a little bit. You know, I mentioned earlier, where you're situated in Vancouver, you hear a lot of things, you focus on the mining sector, obviously. I know Eric is very excited about Newfoundland. I think he's made that quite clear in the prospects, you know, all this undiscovered territory up there that they're going out. And wow, this is really something. Just in general, I mean, are there some ideas within the mining sector, areas you're keeping an eye on?

Bob: And, you know, like you said, here in Vancouver, from my office here, within three blocks, I've got about 80 junior mining companies, their head offices. So, I can head over to any of them. Head over there in two minutes. So, yeah, it's nice to have the kind of the feet on the ground in the area that's important here. But, you know, yes, I was talking to Eric three days ago, actually, and we were talking about Newfoundland again, right? Because that's Eric's primary focus right now, is what's going on in Newfoundland. And you wonder why, right? Why is that Eric's primary focus? Well, let's go back in time, 110 years ago to the first discovery in the Abitibi region, right? 1906 or 1909, you can debate. But that was the first discovery in that area, and it turned out to be this massive gold belt, hundreds of kilometers long. Kirkland Lake is right at the center of that.

And in the last 110 years, 110 years of production, there's been 200 million ounces of gold come out of there. Two hundred million ounces. Not of silver, of gold. Absolutely, absolutely incredible. So, what Eric thinks, and we have an analyst here at the Raymond James who's done a report comparing the two areas is that Newfoundland, the central gold belt there could be another Abitibi, right?

Craig: Wow.

Bob: Same distance, same length. And they really haven't started discovering. They've only started looking at things in the last 10 years. And that's what Eric sees, is that we've got a good jurisdiction, right? You know, hopefully, Newfoundland's not gonna steal the mines away from people, right? It's a good jurisdiction. It's an easy place to do business. It's an easy place to get permitting. They're pro-business, they're pro-mining.

And we could have decades here of new discoveries and gold coming out of the ground. So, each individual company, that's fine. You know, there's a couple primary companies which have made some of the big discoveries right now, but there could be just a huge area of play here. And that's what Eric's really interested in. And, you know, if it's another Abitibi, you know, this could be producing gold for 50 years, 100 years. And I know Eric says, you know, long after he's gone, you know, hopefully, these stocks will be producing gold.

Craig: Maybe the Canadian government can generate some revenue off of it and pay for all those employees they're hiring.

Bob: Pay for all the government employees. We need more government employees. That's right.

Craig: Maybe that's the plan, Bob.

Bob: That's right. That's right.

Craig: Oh, good heavens. Well, my friend, it's always so much fun to visit with you. I should ask you actually before we wrap up, where are we on the mining clock these days?

Bob: Yeah, I think we've moved back a little bit. We were probably around 7, and we're probably 6:37...

Craig: Like daylight savings time or whatever we have...

Bob: Yeah, exactly. The clocks move back. Good point that you bring up there. That's right. But I do think that, you know, these are times when the sentiment is bad. And I'll give you one more driving analogy, and that is, you know when you're on the freeway and it's stop and go, and the other lane is always going faster, you're always like, "Oh, I gotta..." Okay. And then finally, you say, "Okay, I'm gonna make my decision." And you move to the other lane, and then what happens? The lane you moved out of starts moving faster, right? That's exactly what it is in the market, right?

So right now, we're in the slow lane, we're in the slow lane in the precious metals area, and people are thinking, "Should I get out? Maybe I should invest in some AI stocks. Maybe I should invest in something like that." Well, you know, mathematically, when everybody moves over to that area, it's gonna become the slow lane. It just has to, right? And then your lane frees up and it becomes a fast lane. So, all I'm saying right now, sentiment's really bad. Stay in the slow lane, stay here. It's gonna become the fast lane pretty soon. And when it does, you wanna be there. You gotta be there.

Craig: Yeah. Sounds good, my friend. Bob, again you're at Raymond James in downtown Vancouver. As we wrap, I know in the past you've offered your email address for anybody that wants to reach out to you.

Bob: Sure. It's thompsoninvestments@raymondjames.ca. And we've got something called The Gold Digger, which is coming out actually tomorrow, which talks about the sector and some of these things we'll be mentioning here, and it's for mining executives.

Craig: Awesome. Thanks for that, Bob. And thank you for coming on this segment. We try to do this a couple times a year. It's always good to hear your perspective, and I look forward to doing it again.

Bob: Thanks again, Craig. Till next time.

Craig: It's always fun, Bob. And from all of us here at "Sprott Money News," sprottmoney.com. Thanks for watching. We'll have more content for you in July.