Man: You're listening to the "Weekly Wrap-Up" on Sprott Money News.
Craig: Welcome back to Sprott Money News at sprottmoney.com. It's Friday, January the 8th, and it's time for your first Weekly Wrap-Up of the year 2021. I'm your host, Craig Hemke. Sitting in for Eric Sprott today is his old friend Bob Thompson. Bob of course is a portfolio manager and senior vice president at Raymond James in Vancouver. Like I said, he's an old friend of Eric's, and he's glad to help out as Eric is still sidelined helping his family through some health issues. My friend, thank you for joining us.
Bob: Thank you, Craig. Great to be on again.
Craig: It has been a very interesting start to the week, no doubt about that, but again, it's going to be a long year, and all sorts of volatility is going to be ahead of us. I've made several references to my subscribers lately about bull markets are basically the, analogous to riding a bull in a rodeo. You've gotta stay on all the way to the bell. Otherwise, you don't win. And that bull is going to try to buck you off every chance it gets, and that's kind of what we're seeing here in the latter stages this week. Every price drop, though, does however give you a chance to accumulate more physical metal. Sprottmoney.com is your place to do it. Great deals on silver bullion, gold bullion, and a place to store it as well. So of course, visit us, sprottmoney.com, or give us a call at 888-861-0775. Bob, I'm sure you've got some ideas on the precious metals here in 2021. Regardless of what has happened this week with the surge Monday and Tuesday and then the elevator shaft Wednesday and again today, how are you feeling as we start 2021?
Bob: Yeah. Should I say "happy new year?" I guess so, right?
Craig: I guess. Yeah.
Bob: Well, gold's down over $50 as we're talking here this morning, and, you know, there's a few reasons for that. But what you said about, you know, accumulating when prices are lower is exactly right. It never feels good. Buying right never feels good, but it's the right thing to do and I, you know, I once heard Warren Buffet say, he said if you're accumulating something, why would you ever want it to go up? He said you'd only want it to go down until you're finished accumulating. Once you're finished accumulating, and you've bought it all at low prices, then you want it to go up. So, there you go. We want to buy things when they're down, obviously, if we're still accumulating.
So, the metals. You know, gold, I think we've, as we've got this vaccine, the perception in the marketplace is that gold is not the only metal in the house anymore, right? We're starting to see copper, you know, gold is a financial asset, obviously different than the other metals, but it gets lumped in from time to time. So we've seen runs in copper, we've seen runs in some of the other base metals based upon the growth here. You know, Bitcoin's gone up a lot. So, the market is a big competition and, you know, at particular times, one metal went out over the other metal.
The big thing with gold here, and, you know, why I think we're getting some pretty big volatility here, is people are looking at that 10-year rate, right? It's up over 1. It kind of blew through 1 and it's 1.08, you know, 1.10, and by the way, if you look at the charts on that, it's way kind of oversold, as far as the yield is concerned. So, we're probably due for a bit of a pullback there. We've had the U.S. dollar, you know, take it on the chin. That's an oversold position. So that might bounce in the short run, but the trend is down on that, obviously, for a long time.
So, I think the gold's having to work through this right now, that those 10-year yields have popped up in price. Obviously, the real yields haven't changed that much, but the market is looking at, oh boy, you know, if the 10-year's gone through 1.08 here, you know, maybe it's going to push all the way up and, you know, I think that's a really interesting point, because we talk about central banks a lot and, you know, how they suppress the gold price, or how they suppress other areas of the market.
But interesting enough here, they can't let 10-year yields run that high, you know. If the 10-year yields run to 1.5 or 1.8 or 1.9 or whatever the case is, that's going to absolutely destroy the housing market, it's going to destroy the economy because of all the debt that's out there, so they just can't let that happen. So interesting enough, from a gold perspective, we might be dependent upon the central bank coming in and quashing that 10-year yield back down to more reasonable levels, to support all the debt in the world.
Craig: Yeah, I think that's the next thing we'll be watching here in January, Bob, is the next FOMC meeting is going to be coming up in two weeks, two weeks from next Tuesday and Wednesday. You know, there was a note within the minutes from the December meeting that they're starting to think about extending the maturities that they're buying in their QE program. You know, they can talk about, you know, a lot of people talking this week about, oh, you know, they might cut the QE program by the end of this year. The absolute volume doesn't, I'm not sure it's as important if they go from $120 billion a month to $100 or to $80, as much as what they're buying. And if they shift and start buying 7-year notes and 10-year notes, you know, and start looking out even further, that will the first move towards yield curve control. Is that something you'll have your eye on?
Bob: Correct. Forward guidance is a big one. That's something, you know, and they've kind of hinted around at that but haven't employed it 100% yet. But that's one of their tools. The yield curve control is another tool, and they're going to have to do it, because just the amount of debt in the world, they just can't let the market actually function in a normal fashion and have rates go up, because if they do, it implodes everything. So, you know, I've mentioned this before, but I'll mention it again, that the last time the debt was this high to GDP was the end of World War II, and we had a few years of -10% real rates. It got up to -10% real rates after that. But interestingly enough, they were able to come out of it because we had growth. We had a tremendous amount of growth after the war. We don't have that growth now. Where's the growth going to come from? The demographics aren't there, the economy just can't pick up without increasing the debt a lot. So that's the situation. They got themselves out of it at the time, but this time, it's really tough to get out of it without that growth that's there. So that's why I think that's supportive long-term of the gold price, no problem.
Craig: You know, and Bob, getting back to the idea of central banks helping, well, we'll see. But I think that too, you know, whatever they do to cap nominal yields and drive real yields lower will benefit us. You know, additionally too, you know, Powell has spent a lot of time lately talking about not only inflation, but disinflationary expectations, how they need to fight that. Remember Jackson Hole? It was, "Well, you know, Japan's been on this cycle for 20 years" of disinflation leads to more expectations of disinflation and the thing just keeps, cycles lower. I mean, you kind of sense that the central banks actually wouldn't mind a higher gold price in 2021, simply because of what that might imply for inflation.
Bob: That's right. I mean, minds change over time, right, and I like to bring up the example of Paul Volcker, who said after, you know, in the early 1980s, he said that, he said one of the problems was we didn't control the gold price enough. So right there, you know, you can see it was important to them, because he said when the gold price went up, it, you know, told people that they were losing confidence in the system. So yes, it's first and foremost on their minds, but I think more importantly for them right now, without paying attention to the gold price, they're looking at these real yields and they're saying we've gotta get these, we gotta inflate away this debt. And whatever the consequences of that are, are fine, but we've got to inflate away this debt, and we're going to have to print a lot more money than they thought they were going to have to print, because they're not going to get the growth out of it. So, you know, I think that's the case right there, and the central banks maybe will put gold, kind of push it back a little bit and say we've got, you know, more important things to deal with right now, and that is keeping interest rates really low to keep this party going.
Craig: Yeah. No doubt about that. And it's going to be a long year. And like I said, that bull's going to try to buck you off on a regular basis, so you want to keep your eyes on the big picture. Bob, one of the big picture questions that I wanted to ask you, because it's all part of what you do on a daily basis is the, I guess I'll call it the relative valuations of the mining shares versus other sectors. Right now, no one seems to care. They just want to own Tesla, you know, and Netflix and Amazon and stocks like that. But at some point, you would think those valuations would become important from a value perspective. What are your thoughts about the sector as the year begins?
Bob: Yeah. You know, and I keep going back to this feels a lot like 1999, you know, history doesn't repeat itself exactly, but it rhymes. And there's a lot of things that are happening like happened at that time. The number of IPOs in the Nasdaq that have negative cash flows, that are multibillion-dollar IPOs, or, you know, price to sales are up at 70 or 80 or 100, or Elon Musk becoming the richest man in the world in the last couple, three days because of his ownership in Tesla. You know, I think there's a lot of things to take people's eye off the ball of from which sectors are really outperforming and which ones are really doing well and, you know, if you just run quant screens, the gold sector has got fantastic cash flows, they're increasing their dividends, and they're trading at low valuations. And, you know, the low valuations is important to kind of discuss that, because the reason that any sector, including the gold sector, is, you know, the valuations could be very low, is one of two reasons.
One, because it's overlooked by the market, and, you know, I think that's definitely the case right now in the gold sector with what's happening in all the other areas of the market. The other reason that it's overlooked is if the market expects the gold price to drop 25%, right? Let's just say that, let's just say the market expected that. Then, they would look at the cash flows and valuations and actually, they're okay at these levels, right? So those are the two reasons that, you know, the gold stocks would trade below their, you know, proper valuations.
I think number one obviously is the case, and that is just it's just an overlooked sector right now, you know. Everybody is following the index. I read the other day, right, there's only one gold stock in the S&P 500 index, and that's Newmont. Only one gold stock. So if you're going to go buy the index, you're not buying gold stocks. And that's what everybody is doing right now, is buying the index. So, you know, I think there's a lot of variables there, but as we evolve in the cycle, you know, two things happen. The valuations increase dramatically, because people get convinced that gold is going to move a lot higher, so they're willing to pay more for that.
But the other thing that happens is silver has a big run, right? So we saw that in 2011, and as we evolve in the cycle, you'll see that gold to silver ratio will compress, and silver starts to outperform, you know, especially because of its industrial metal component. So, we haven't seen...we've seen that a little bit with silver, but I think as the sector evolves here, we'll see increasing valuations, and we'll also see silver start to run compared to gold.
Craig: Hey, Bob, that gives me a question of some that were sent in this week. Again, a lot of folks continue to send questions for Eric, and unfortunately, Eric is still going to be on the sidelines for a little while to come, but we appreciate you sending the questions though. I don't want to discourage people from doing that. But we can't really get into the individual stocks. The compliance department won't let us do that at Raymond James, but in general terms, you mentioned silver, and somebody wrote in this week and said, just a simple question was, "How about AGQ as a leveraged silver play?" And of course, that is an ETF made up of silver futures. I think it's a two times ETF. I think in general, let's just kind of change that question to something like when is a good time to use leverage, you know? What are signals that you might use and go, okay, now is the time to kind of push the pedal down a little bit?
Bob: That's a fantastic question, and I won't comment on that one in particular because it's an individual security, but like you said, when do you use leverage? Well, it is tough, it is gut-wrenching, but it is, the right time to use leverage is when something is in capitulation. So, I've used leverage before in different investments, and what I do is I look at, I have a capitulation model that I follow, which tells you when something is in capitulation. It's volume, it's obviously the price, it's the technicals, it's the relative strength, it's the moving average convergence-divergence, it's all these technical indicators, and when you can see them all line up, that this is the point of capitulation, in other words, the point in which the market is throwing up whatever the asset is, and people just can't take it anymore, that's the point in which you can add some leverage.
And it feels the worst. It never feels good to buy at the right time, right? And I actually do that myself. I'm a human being. I understand the greed and fear, but when I feel really good about something and I figure, oh yeah, I can throw some money at this, I feel really good, I actually stop myself and go, no, no. If I feel really good about it, it's probably not a good time to be buying. I want my gut to be wrenching before I buy something too, and, you know, that goes back to, you know, what I mentioned a few weeks ago about, you know, Eric saying "I sit in a corner and have a party by myself when everybody else is partying in the other room," and that's when I accumulate my shares of the sector.
Craig: Certainly feel like we're sitting by ourselves today Bob, no doubt about it. But that is actually, at TF Metals report, that's one of the adages that we've developed over the last 10 years. That is, you always gotta be prepared to sell some when things look the rosiest, if you're a trader that is, and you've always gotta be able to buy some when things look the worst, and you kind of echo that sentiment there.
Bob: And that's a really good point, great point that you bring up there, Craig, because if you're a trader, like you said. Now, if you're a long-term investor, like we all are in the gold sector, well, that's great. So what you do is you don't sell, and you don't trim your position [inaudible 00:14:49], you just add to it, on days like this when you feel bad and you feel really bad and your gut is wrenching, that's when you add to it, and you hold through the other times. But you're constantly adding at lower levels when you do that.
Craig: Yup. Bob, as we move to wrap up, I don't want to call it a day before I ask if there's anything else on your mind you'd like to point out to everybody?
Bob: One last thing is the silver miners. You know, that sector, if you actually look at the CapEx rate now, it's down 18% over a year, which is actually a really, really good sign because when CapEx is down with these companies, it means we're going to be supply constrained right? And I think the last bull market for all commodities starting in 2000 was a demand market, right? So there was a tremendous amount of demand from China, etc., and that caused this amazing bull market in commodities. Well, this time around, whether it's the gold sector or any other commodity sector, but even especially gold and silver, the CapEx has been reduced so much over the years that we don't even really have to have a huge amount of demand. This is going to be a supply bull market, supply-constrained bull market. So all you've gotta get is a little bit of demand here, and then people are going to look and say, oh my god, there's no supply, right? Nobody's put any money into the ground to find any new gold, so we just can't keep up with even a small increased demand. So I think in this bull market, the reason might be different than the last bull market, but supply-driven bull markets are even bigger on the upside a lot of times than the demand-driven ones.
Craig: And, you know, we've seen silver do pretty well as of late, and a lot of talk here in the States of infrastructure programs and the like, where we need those industrial metals, and gosh, Bob, I'm sure you've noticed a lot of these investment houses and research firms are coming out with positive forecasts for silver, $40 and $50. I would imagine what you just discussed about CapEx has to fit into that.
Bob: Yeah, exactly. And that's when, you know, that's why silver tends to do better as the bull market progresses, because it has that industrial component to it, but also a big reason is silver's such a small market, it's such a small market that all it takes is a few people to turn their head and say, "Maybe I should put one-tenth of our portfolio into silver," when you have a, you know, a $500 billion firm. The market just can't absorb that. So that's why the silver prices go up very, very, very rapidly when people discover that it maybe is the place to be.
Craig: Yup. Again, we've been talking to Bob Thompson who, is a portfolio manager and senior vice president at Raymond James in Vancouver. If you enjoy these Weekly Wrap-Up segments, please like or subscribe or even share wherever you found these segments, whatever podcast platform you like. We certainly appreciate all of you listening out there. Bob, thank you so much for your time and your expertise, and maybe we'll speak again soon.
Bob: Fantastic, Craig. Great to talk to you.
Craig: And from all of us at Sprott Money News at sprottmoney.com, thank you for listening. We'll talk to you again next week.