Fundamentals Point to Positive Future for Gold and Silver Markets - Weekly Wrap Up

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

Craig: Greetings once again from Sprott Money News and sprottmoney.com. It's Friday, March the 12th, 2021. And it's time for your "Weekly Wrap Up." I'm your host, Craig Hemke. Joining us this week is an old friend of Eric's, Bob Thompson. Bob, of course, a senior vice president and portfolio manager at Raymond James in Vancouver. And he's been a regular guest host of these "Weekly Wrap Up" segments while Eric has been on hiatus. Bob, thank you so much for sitting in with me today.

Bob: Fantastic to be with you again, Craig.

Craig: It's a pleasure to have you join me, my friend. And before we get started, remember, Sprott Money is the sponsor of all these great "Weekly Wrap Up," segments. The thing we now do with Chris Vermeulen at the first of every month, talking about the charts, we've got the "Ask the Expert" segment, and of course, Sprott Money, fantastic place to shop for physical metal and to even store that metal. We currently have our Sprott signature sale going on. We have over 15 discounted gold, silver, and platinum products, including our bestsellers, like the Sprott rounds and the Royal Canadian Mint 100 ounce silver bars. But there's less than 10 days left in the sale. You can get some silver and gold directly online, of course, at sprottmoney.com.

But as always, if you'd rather talk to a human being, just pick up the phone, give us a call at 888-861-0775. Bob, it's been an interesting week for the precious metals. It seems like price is fully controlled by the algos this week. If interest rates go down, gold goes up. If interest rates go up, gold goes down. And at the same time, if the dollar goes down, silver goes up. And when the dollar goes up, silver goes down. All of this ahead of what will be an interesting week next week with the FOMC. What are your thoughts as we wrap up things here on Friday?

Bob: Well, you know, it's interesting. Every week, we debate, you know, the fundamentals. We're actually looking at fundamentals. Strange, right? But we look at the fundamentals of the silver market and the gold market, and we see lots of positivity going forward. But what you just mentioned there, you know, most of the managed money out there isn't looking at the fundamentals, you know, the algos, the hedge funds. And they just have a green button for buy and a red button for sell. And if interest rates go up, if the U.S. dollar goes up, then they press the sell button automatically for gold, and silver, and vice versa. So that's all fine in the short run. And everything that's happening right now is pretty normal for this time, you know, coming out of a huge bust like we had last year with the economy.

And what I mean by that is inflation expectations are increasing, but inflation expectations are not increasing as fast as interest rates. And that's the key right now. And it's very, very normal for this time in the cycle. We've had it many times in the past in some bull markets. And I think it's healthy for a bull market. You know, isn't it interesting, as I said, that people don't worry about fundamentals anymore. They just have the red button, and the green button, and, you know, they press either one depending on what's happening in the market.

Craig: People is an interesting term to use, Bob. I guess people program the computers. But we know that in a way that even on the New York Stock Exchange, 80% to 90% of the daily trading volume is just HFT, computers. And I'm sure that translates to the COMEX as well. Until we get those inputs that the computers take their cues from, we gotta get those inputs to change, and whether that's a falling dollar or falling interest rates, that's what we need to get back to. Next week will be interesting. As we mentioned, we've got the March FOMC meeting. Chairman Powell kinda deflated everybody, expecting some big announcement when he failed to share anything last week. What are your thoughts come Wednesday? Do you expect anything interesting from Powell and his FOMC?

Bob: Well, generally speaking, you know, I've traded the gold stocks, and gold quite a bit over the years, obviously, and right around these fed meetings. And interestingly enough, you know, not 100% of the time, but many times, it's a great idea to buy into the gold sector right before the fed meeting, because this negativity is kinda built up going into it, and then the fed massages it, and it gets a little bit more, you know, dovish than people thought. And the pressure build kinda ends up in a bit of a surge in the gold stocks and the gold prices.

And, you know, as I've said before, it isn't the news that's really important, it's what is expected to be the news that's important and then how the actual news relates to that, right? So if there was a lot of negativity going in and they're not as dovish as a lot of people think they should be, then gold price might still go up because more, you know, aggressiveness was actually factored into their thoughts. And that's where people go wrong in the market as they look at the news and act upon that. It's not the news that matters, it's what was expected to happen versus what actually happens.

And, you know, just to talk about inflation, we've got inflation numbers this past week, right? And they weren't as bad as a lot of people thought. So, you know, that wasn't necessarily a positive for gold when that happened. But you know, 1.7% CPI, I don't know who out there thinks the prices only go up 1.7% in the last year. It adapts to the craziness. I don't know where they get their numbers from. And then of course, the fed uses the core PCE, which is the personal consumption expenditures, the core personal consumption expenditures, to calculate the kinda [inaudible 00:05:42] inflation.

And, you know, that factors out food and energy, which is crazy. Because, you know, I don't know who out there, you know, doesn't eat or doesn't use energy, but I guess there's a bunch of people that don't because that's what they use. Anyway, those are the numbers. And, you know, as Eric said for a long time, we got inflation. Inflation, I think, is a lot greater than what is expected out there. And that's gonna, you know, inflate away a lot of this debt. And we can get into that later.

Craig: You know, that was one of the questions that we had this week, you know? Again, you can always submit questions for "Ask the Expert" or for these weekly wrap ups through the email address, submissions@sprottmoney.com. And we use that term quite a bit, about inflate away the debt. And one of the questions was what does that mean? In a sense, it is printing a bunch of new cash to pay your interest on the debt and to provide, you know, these stimulus checks and everything else that the U.S. is doing. But at the same time, that should cause inflation, which should cause interest rates to rise. So if you're gonna inflate away and manage that debt and pay it with future dollars, you've got to cap interest rates. That's also called a yield curve control. Bob, is that something that you'll be looking for, something you expect as kind of a macro policy in the months ahead?

Bob: Right, right. At these levels here of debt... You know, it used to be federal debt, now, it's corporate debt. Corporations are in massive debt. Consumers are in massive debt. Everybody is in incredible amounts of debt. But, you know, talking federally here, sure, what governments do is they either don't pay back their money. You know, countries like Argentina and other countries throughout history have done that. I don't really think that's what's gonna happen here because that would be catastrophic.

But the other thing you can do is inflate away the debt, which means you let inflation run and you keep interest rates relatively low. And there's nothing new here, you know? All the modern technology we have today, there's nothing new from what they did during World War II or many times since. Basically, you know, after World War II, they let inflation run dramatically. At that time, the economy was actually booming, because everybody was coming back from the war. They might not have called it yield curve control at the time, but they capped interest rates across the curve. And they said, "U.S. bonds cannot pay more than this amount of money."

So obviously, if you got, you know, 7%, inflation that's even reported and you have 2% interest rates, you're losing 5% of your money every year to inflation. So in 10 years, you know, the debt has actually gone down fairly dramatically. And that's how you reduce your debt. You didn't pay anything down on your debt, you just melted away the dollars that were there.

Craig: That's exactly right. And that's what we're waiting for. The hints of that, the fed won't just come out and say, I wouldn't think, Bob, I wonder your opinion on this, they won't just come out and say, "We are hereby today, March 17, 2021, not going to allow the 10-year...anytime a 10-year rate gets above 1.5%, we're gonna aggressively buy treasuries." They won't go from 0 to 100, they'll do it in baby steps. So maybe a hint next week might be something like, "We are gonna start extending the maturities that we're buying in our QE program," something like that. Does that sound right?

Bob: Yeah, absolutely, absolutely. They will never come out directly and say that, you know, this is what they're gonna do, financial suppression basically, right? But what they are going to do is work around the edges, like I said, to get to their goal. And everybody has to look at their statement, read between the lines, see if the wording's a little bit different than what it was last time, et cetera. And, you know, I've mentioned this before, but, you know, a person like Stanley Druckenmiller said...he was one of the best money managers ever, said a long time ago, he said, "You know, isn't it funny? I used to look at the market, and see where we were going in the market, and make investment decisions based upon what I saw happening in the market." And he said, "You just can't do that anymore." He said, "We're all trying to out-guess how the fed is gonna manipulate the market, how are they going to manipulate the yield curve next, how are they going to, you know, decrease the spreads in corporate bonds, how are they going to pump up the banking system?" And he said, "All of these measures obviously, we're just trying to out-guess what the fed is doing now." Nothing is based upon fundamentals.

If you look at the fundamentals, I mean, the balance sheet is just horrific of the U.S. So, you know, I call it rearranging the deck chairs on the Titanic. That's what they're trying to do right now, right? We're still gonna get to the end place down the road, but it makes it look a little bit better as we're going along our path.

Craig: And as that Titanic sinks, that's why we all continue to, at least, I do and I know you do, and probably many of our listeners do, continue to stack physical precious metal in our own possession as preparation for that. But, like, you know, a lotta folks buy the mining shares for speculating. And we spend a lot of time with Eric when he's here talking about individual mining shares. One of the questions that came in this week, though, Bob, that I'd like to send to you is someone said, you know, "People like myself, I have an interest in mining shares, but I don't have the confidence or the background to invest confidently in individual companies." So there are a lotta ETFs out there, are there any specific ones that you think do that job better than others?

Bob: Yeah. And, you know, that's a really good question because, you know, we're experts in this industry. But to most people, this is just a subsector of the market. So if they want exposure, obviously, you know, you gotta take a diversified exposure. And I think that's a really good point because ETFs have been garnering, you know, not just mining ETFs, but S&P 500 ETFs or whatever sectors have been garnering this tremendous amount of inflow in the past few years. And nobody pays attention to actually picking stocks anymore. Everybody just pays attention to what that subsector is doing and just wants exposure to it.

So there's a couple of things that you can do within ETFs. I mean, the general ETFs, the GDXs of the world, you know, they just are pretty passive, they just take a position, you know, rebalance from time to time. Then you get other ETFs, which are factor-based ETFs. And those ones are a little bit like managed money. You don't have somebody actually picking the stocks, but they're actually looking at specific factors that make companies', you know, stock prices do better over time, right? And, you know, Sprott Gold Miners ETF is good from that perspective, you know? And there's some other ETFs that are factor-based in the mining sector. You know, then there's some junior ones, right?

And obviously, in a bull market, the junior ETFs...or sorry, the junior stocks tend to do a lot better, but they tend to get crushed on the downside too. So you just have to find your own risk level. And, you know, it's not to give advice here to anybody, people have to be comfortable with their own risk level, kinda look at the worst case scenario of any investment, or ETF, or stock, or mutual fund that you're buying, and then say, "Am I comfortable with that and the allocation that I have?" And then, you know, feel free to have an allocation to it. But there's a few different methods. And, you know, life has got a lot more complicated over the past few years. You used to just buy kind of a mutual fund where somebody is picking stocks. And that's still a great idea. There's still a lot of really good mining mutual funds out there, you know, or you can go halfway between active and passive, and by these kinds of factor-based ETFs also.

Craig: Absolutely. Bob let's wrap up talking about the stocks, because that's obviously an area of your expertise. I found it interesting this week after, you know, this long grind down, painting what appears to be kind of a bull flag on the chart. But man, this has gone on a lot longer than I thought it would. Here, we're going on now seven months. But finally this week, the shares seemed to be...it looked to me like maybe getting some bargain hunting, you know? They're not just getting washed out on every update. In fact, as we record this, about 11:00 Eastern on Friday morning, the shares are all off, they're opening lows. I mean, they're still down but we might actually get a green candle today. It seems as if there's some bargain hunting going on. Do you see that? And if that's the case, what do you make of it? Is that a good sign?

Bob: Yeah. You know, 100%, you're right there. And the stocks tend to look through what's currently happening with the gold price. And that's all a function of, you know, again, what I said today, don't pay attention to the news today, pay attention to what the news is gonna be a few months from now. And, you know, that's how the stocks seem to be trading. So, yeah, I was in there buying some of the senior stocks actually, which were beat up worse when gold hit about $1670, because I thought $1650 to $1675 was probably gonna be the washout low, and it tended to be at the upper end of that. But you saw the stocks, even when gold was getting crushed for a couple of days, that the stocks were up a bit.

And, you know, as I've mentioned before, it was like trying to hold a beach ball under water, right? You can push and push, but they just keep popping back up. And that's what it felt like. So that gave me confidence that the stocks had found a base. And we saw that back in September too. And, you know, that's where I think this rally is gonna happen. But in the short run, I think this is really important. You know, it's the real interest rates. People are still pushing the sell button right now as real rates kinda go up. But the other thing is that the U.S. dollar, you know, is up today, DX-wise, you know, up at, what, 91.83 as we talk. And, you know, that's up about 0.5%. So, you know, that's why gold is getting hit today.

And the negativity on the U.S. dollar, the amount of short positions on the U.S. dollar is it's multi, multi-year highs right now, right? And that's important to know because we are gonna get some bounces off of that, right? Usually, you know, you get some sorta short-term trend reversal when you see these extremes, either extreme positivity, or extreme negativity. And right now, we have a lot of extreme negativity in the U.S. dollar. So that's why we're getting these days where the dollar is popping up a little bit. And the other thing that's important. I think to pay attention on the gold price, is that we haven't seen this much bearishness in gold with hedge funds since May of 2019. And I think that's a really good data point.

May of 2019, that was the only other time in recent memory that hedge funds were as negative on gold as they are today. And, of course, we know what happened in June of 2019, gold popped up through $1300 and moved all the way up to $2000 in the bull market. So I tend to look at that, you know, and smile. When I see that, I'm like, "Great, the hedge funds are all negative. They're all on one side of the trade in gold again." That makes me pretty positive.

Craig: And if I tie that together, Bob, it was in middle of June '19 at the June FOMC meeting that the fed started to cut the fed funds rate after quarter after quarter, you know, seeing it rise into the end of 2018. And that kinda got things rolling. Like you said, kinda similar to where we are right now.

Bob: That's right. That's right. That's why I like to, you know, buy the gold shares before the fed meetings. It doesn't always work. But more often, you know, it has.

Craig: Bob, one of the services you offer your clients is your own newsletter you've been writing for years. Can you tell me about that?

Bob: Sure. It's "The Gold Digger" it's called. And, you know, this is a hugely cyclical industry, and we deal with senior mining executives in the industry managing their own personal finance. And when we're doing that, and people have very, very, very concentrated positions in mining shares, you gotta know where you are in the cycle. So "The Gold Digger" talks a lot about the cycle. It talks a lot about things that other people aren't discussing when we get excessive optimism, [inaudible 00:18:04] when we get excessive pessimism, it talks about some wealth management techniques, and talks about something called the mining clock, which we've talked about before.

And I think, you know, the mining clock is a great thing for taking all of this information that we say here, you know, looking through all of the noise and, you know, focusing in on where we are in the cycle. If you have a comfort level, and this is for all the listeners out there, if you have a comfort level that we're in a bull market for gold, and during a bull market, you get these setbacks, you're always going two steps forward and one step back, as long as we all understand this is one of the step backs right now, but we're in a bull market, things are gonna get better going forward, then it makes people feel a lot more confident about holding their positions, not selling your gold, not selling your gold stocks. And, you know, I think that's why it's really important to really take a look at the big picture.

Craig: You bet. Bob, if somebody wanted to reach you, you got an email address you can pass along?

Bob: Sure. It's thompsoninvestments@raymondjames.ca.

Craig: There you go. And I can speak for Bob, he knows what he's talking about. And he's a very nice guy and be happy to, I'm sure, respond to any email requests that you send him. As we begin to wrap up, again, it's going to be a very interesting week next with the focus on fed policy. Again, never a bad time to stack physical metal. And of course, you can do that at sprottmoney.com. And again, that phone number is 888-861-0775. I wanna thank everybody for tuning in this week. We appreciate all your questions and comments. And of course, if you enjoy the "Weekly Wrap Up" or "Ask the Expert" or any of the other content from Sprott Money, be sure to like, share, maybe even subscribe to whichever channel it is that you enjoy. This podcast, Bob Thompson from Raymond James in Vancouver has been our guest this week. Bob, thank you so much for your time. I really appreciate it.

Bob: Great to be on with you again, Craig. And look forward to next time.

Craig: You bet. From all of us here at Sprott Money News and sprottmoney.com, thank you for listening and have a great weekend.