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December 7, 2021 | (64 mins 18 secs)
Whitney George, Chief Investment Officer, Sprott Asset Management, identifies the major paradigm shift we are navigating post-COVID. This new landscape is marked by “globalization in reverse”; a trapped Fed juggling rising inflation, record debt levels and negative real interest rates; a new global focus on decarbonization and ESG; and a move toward more moderate politics. Maria Smirnova, Senior Portfolio Manager, shares Sprott’s 2022 outlook on gold, silver, platinum and palladium. This webcast covers:
Hi, everyone. Thank you for joining us for today's webcast, A Paradigm Shift is Underway: Outlook on Precious Metals Sponsored by Sprott Asset Management. Today's Webcast will be providing one CFP, one CMA and one CFA CE credit.
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Ed Coyne: Thank you, Stephanie, and thank you all for joining us today. Again, my name is Ed Coyne, Senior Managing Director at Sprott Asset Management. I asked two special guests to join me today, Whitney George and Maria Smirnova.
Whitney George is the chief investment officer at Sprott Asset Management. Whitney serves as President of Sprott Inc, chief Investment Officer of Sprott Asset Management LP, Chairman of Sprott US Holdings, and Senior Portfolio Manager at Sprott Asset Management, USA. Whitney joined Sprott in 2015, and previously spent 23 years in senior roles at Royce & Associates, LLC in New York. Prior to joining Royce, Mr. George held positions at Dominick & Dominick, WR Lazard and Oppenheimer and Company.
With me also today is Maria. Maria is a senior portfolio manager at Sprott Asset Management. Maria has more than 20 years of investment experience and joined Sprott Asset Management in 2005 as a research associate supporting metals and mining. Maria serves as a lead portfolio manager on multiple silver equity and precious metals funds. Prior to joining Sprott, Maria served as a product development analyst at Fidelity Investments.
For today's webcast, I've asked both Whitney and Maria to spend a specific time to cover a few topics. Whitney will cover some post-COVID major paradigm shifts, what is a paradigm shift and the macroeconomics of these shifts.
We will then turn to Maria, who will give us her outlook on precious metals for both bullion and equities. We will then wrap up the formal part of the webcast with multiple ways to implement precious metals into a well-diversified portfolio.
But before we go into the formal part, I'd like to address and I'd like to highlight a few things that makes Sprott special and unique. For our listeners who are not familiar with Sprott, we are a global leader in precious metals and real asset investments. With over 19 billion in assets under management, Sprott is publicly listed on both the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol SII. At Sprott, we offer multiple ways to allocate to the precious metals market.
We have a full suite of offerings that give investors the opportunity to own physical gold silver, a combination of gold and silver, platinum and palladium, and last but not least, uranium. We also offer a suite of managed equities, whether it's our flagship US gold equity fund with a ticker symbol SGDLX or a closed-end value strategy, or one of our two factor-based ETFs that give investors the opportunity to own senior large-cap mining stocks or junior small-cap mining stocks.
Last but not least, we round it out with lending and brokerage services again, all focused on the precious metals market. At this time I'd like to now shift gears and turn it over to Whitney to talk about the paradigm shift and what that means today. Whitney?
Thank you, Ed. First, full disclosure: I am not an economist and I'm not a committed gold bug. I'm a generalist with a long term value investor approach and the significant owner of a couple of private businesses, including a luxury hotel and a regional craft brewery. The reason that's relevant is that there's a stark contrast between what you're often hearing economists talk about and what's actually going on in the small business community.
And to put some of this into context today, I was going to talk about some paradigm shifts. This is an idea that I got from Ray Dalio about two and a half years ago when he wrote a piece about paradigm shifts. Those are things that come along once every decade or so and catch people off guard and poorly positioned. After ten years of getting accustomed to investing in certain ways and certain trends and certain themes, something can occur and change the dynamics and create another decade where a severe mean reversion takes place and things that worked very well stopped working, and things that did not work for a long time start to work very well.
Recognizing these shifts is difficult, particularly when you're in the middle of them. But with the help of some other strategists in reading, I want to walk through some slides and really talk about three paradigm shifts that I think we are in the process of witnessing, and then one that I guess is more of a green shoots idea about what might come next.
The first is globalization in reverse. Trade wars and COVID have reversed many of the trends that we've experienced over the last decade or two, most importantly, changing China-US relations and dynamics.
The second will be the true cost of tackling climate change. Policy makers are likely underestimating what that is going to cost, and we're starting to see the effects of that just here recently in the last six months with energy prices.
The third is how I believe the Fed is trapped. It has no choice but to keep interest rates low, and at the same time politically seems to be shifting even further to the left in what will be a highly politicized year.
And then finally, I want to talk a little bit about the potential of moving more back towards the political center from the polarization that we've seen over the last decade or so around the globe.
So first, globalization. China has evolved from the US workshop to a true global competitor. There's a chart here showing China's share of the global GDP using a Purchasing Power Parity index, and the lines are pretty clear. They crossed sometime in 2015, and the trend is projected to continue.
What this means is that China's own domestic economy is going to put greater demands on their ability to create services for their own population, creating shortages in other parts of the world, specifically the United States, with the increase in their domestic consumption.
On top of that, China has a water issue, which essentially China has about 20 percent of the world's population, but only seven percent of the world's freshwater resources, and many of those are compromised. Water is obviously important for agriculture, but it's also very important in the manufacturing of textiles, in the generation of power, and industrial manufacturing. So, the recent stories you've been reading about power shortages could in fact be the beginnings of a serious water issue.
What that may mean is China, after years of being a deflationary force in the global economy, could reverse and become an inflationary contributor. And I think we're seeing obviously some of the evidence of that and headlines today.
What that means is that you will have to manufacture more, and this is going to be very expensive. There's a chart on the left that shows the volume of imports from China. That chart has peaked and then the blue line would show the manufacturing trade inventory. We have benefited from things like just-in-time inventory and become accustomed to it. Currently and through COVID, we are discovering that there just aren't the transportation logistics available to maintain that. At zero interest rates, the cost of holding inventory is far less than the cost of being short.
On the right is a chart of the Baltic Dry shipping index which shows transportation costs. It did spike, but I don't think it's going back down to where it was in the prior decade or so.
The next topic that I think we're discovering this year is that decarbonization is going to be expensive. On this chart, it shows the projected demand for the materials that are required to make electric vehicles. Electric vehicles are made with 6-7 times more minerals than internal combustion vehicles. There just has not been the investment, and these are long lead-time investments. The extractive industries now take up to 10 years or more from the time a deposit is discovered to when it can go into production. And so these demand curves are not going to be met without some fairly severe price changes likely to the upside.
We're just waking up to the fact that the decarbonization is going to cost more in the form of higher energy prices. There's a chart here that shows the recent changes year to date in energy prices around the globe, including natural gas in Europe, which we've heard about, our own gasoline in this country, and very relevant to Sprott, the price of uranium, which is essential to the nuclear power industry.
At current prices, even though they're up 49 percent this year, they are probably still far off from the level that the prices will have to achieve and be sustained to encourage the mining of additional uranium. Many uranium mines were closed down because of low prices, uneconomical opportunities, and it will take 18 months to two years just to bring those back on, not even factoring in trying to discover new sources of uranium. It's a very interesting area. The whole nuclear power discussion has changed 180 degrees this year. It was a very partisan issue that has now become a very bipartisan issue and there's news about that every day around the developed world.
At the same time, the investment demand for ESG-themed opportunities is triple that of traditional non-ESG strategies. So, the cost of capital to produce energy is rising and you're seeing that in terms of the reluctance of many of the domestic energy companies not coming back into fracking and generating energy sources the way they used to. They're going to require a higher return to take added risks of ESG scrutiny.
The third area that I think is of great interest is the fact that I believe the Fed is trapped. Currently, they cannot actually control the outcome. The chart on this page that I think is very interesting shows two things. One where interest rates are, where the 10-year rate is and what it's been doing since 1981, and then the other is our debt to GDP. As you will know, we have not been in this position since near the end of World War II, and it's not a sustainable position, and there aren't very many ways to work one out of this fiscal or financial situation.
An additional problem is that there are not enough international buyers anymore to fund the increasing debt levels. International purchases of U.S. Treasuries relative to their issuance probably peaked out in about 2014, and you can see remained they've grown, but marginally, and the amount of debt issuance has grown significantly.
Another problem to marry to this is that we've made a lot of promises that we can't keep. One of the interesting charts that I've borrowed from Luke Gromen’s “the Forest for the Trees,” and who is a strategist I highly recommend is a concept of true interest expense. Essentially, what he's measuring is the true interest expense, which is the interest on the debt that we have, plus the PAYGO entitlements: social security, Medicaid versus U.S. tax receipts. What you'll see is at a time of record tax receipts, we can't even cover the promises that we've made, let alone all the additional spending that we need to keep the government running.
The question is, if they're trapped is there a way out? And on the next slide, it's a bit busy, but bear with me. My belief is that they will do what it is they did after World War II, which is do everything one can to keep nominal GDP growing rapidly, and at the same time allow inflation to run hot. And essentially what this does is create a negative real interest rate environment in which bondholders are penalized until such time that the debt to GDP adjusts down to a level that allows for a more normalized policy. And again, this can take a very long time or it can happen very quickly. It just depends on the rate. Inflation may, in fact, be transitory, but we don't know where the transition is to three years or maybe 10 years, and it's really the pace at which it occurs that will determine how long it will be with us.
Ed Coyne: Whitney, let me just ask you one question about that as it relates to inflation. What do you make of the Fed dropping the term transitory in inflation? Should that be a red sign that maybe they aren't in control like they think they are? What do you take from that?
Whitney George: I don't really believe they ever thought that they were in control of it. I think they need it, as this chart will show in terms of how do you get out of this trap. I think they just have to break it to you as slowly and gently as they possibly can. We're migrating from transitory to that meaning something more, to essentially get us accustomed to the fact that it may be here for a while until where we need to be, and we start to anniversary numbers that flatten out. And then inflation goes to zero, but obviously, it could be at a much higher price level than where we sit today.
In the short run, I think the timing of this was interesting because Powell got nominated, but he still has to go through the confirmation process in the Senate. And obviously inflation is a highly politicized topic right now, and he knows he's going to be facing a bunch of skeptical senators who have to be able to bring something to their constituents. I think his language pivot was a necessary political evil that I would expect will soften again. The hawkish activity will soften again once he gets confirmed as the next chair.
Ed Coyne: It's in the same camp of the taper. They've been talking about tapering for the better part of almost a year now, and the buy the news, sell the rumor methodology is being played out verbally throughout the entire Fed. It's interesting to see how they're playing that.
Whitney George: What's interesting on the taper is before they started the taper, they put in some emergency facilities to be able to react to market dislocations. They essentially added a third mandate, not just inflation and full employment, but the stability of financial markets.
They now have the ability to do what they did during the COVID lockdown, which is issue dollars to foreign friends or important banks in the event that the markets become destabilized. They're taking one QE away, but they have established a backup in the event that there's some dislocation and the market throws a tantrum. They're prepared for what might come next and if markets do dislocate, I would expect that they will react very quickly.
Ed Coyne: I think there's more you want to talk about on the Fed as well. They certainly have a lot to do. So much for free markets, I guess, right? Because it used to be the market was supposed to be a voting mechanism. We're pulling more levers now than ever before, but maybe take us onto the next page on 17 and talk about what else is going on with the Fed.
Whitney George: Before I leave slide 16, I'd like just to point out where real interest rates are that's the 10-year rate less the inflation rate. Look at that chart to see when we last saw this kind of level and you'll see, it was in the 1940s. Obviously, negative rates are good for some things, presumably precious metals typically always do well in a negative real rate environment. But again, it's a necessary requirement for us to get our finances back in balance.
Ed Coyne: Right.
And if that's not enough, there is a lot of discussion about redefining some of the mandates to redefine what is full employment to be able to assist the less educated or African-American communities where unemployment rates do remain highly elevated, as you can see on this chart, relative to professionals or college-educated employees.
There's also some discussion now about broadening the mandate to include climate change and other things. I would expect we are in a highly political year, this year with elections in the fall. To facilitate that and those politics, Biden has the ability to change the Federal Reserve complexion or political leaning in a way that nobody's had since Trump changed the complexion of the Supreme Court to be dominant Republican versus Democrat.
You can see on this chart with the upcoming appointments, it is likely to shift from five Republicans, 1 Democrat to 4 Democrats and just 3 Republicans which is quite a reversal and probably leads to a more progressive monetary policy.
And then the last minor point that I'd like to be a paradigm shift is the potential for political moderation. For the last decade or so everywhere in the world, we've seen politics polarized. In this country, we don't really actually have a two-party system now, we seem to have a four-party system. With progressives Democrats and moderate Republicans and then Tea Party or Trump Republicans, however you want to define them, these problems that I've outlined are going to require action and cooperation. Maybe that's a driving force, maybe it's exhaustion.
But the interesting thing we saw earlier in this fall that might be an early indication of this is the elections in Germany where you saw a dramatic pickup in the center, both just slightly left and just slightly right at the expense of the more extreme elements or parties that were out there.Then I even think our elections in Virginia and New Jersey might indicate to somebody that there is a move towards moderation. I'm not saying cooperation, but I think it's a start, and I think maybe we've seen the extremes now of the polarization that had been going on for a long time.
Ed Coyne: Yeah. We can only hope that's the case. You had mentioned at the very beginning of this webcast, I thought it was important that you mentioned your personal businesses, because so often we talk about investing as though it's something happening over there not happening in our own backyard. What have you seen in the last couple of years as relates to your own businesses, and maybe you can share that with the listeners as well. What we read and what's happening, what's actually happening on the front lines, anything there you could draw from or share with us to get some real-life examples of what's going on out there?
Whitney George: Sure. In the service industry, like a luxury hotel, we have probably been underpricing labor for a long time, and COVID created the opportunity for a reset. If you're trying to staff a hotel with people to serve the tables or clean the rooms, there is some labor issues, and it's not just about the wage rate, it's about working conditions, it's about all sorts of things that one didn't need to worry about for the last 10 years that now are front and center, as people have gone through the COVID experience and reassessing their quality of life and all aspects of that.
Certainly, the brewing industry, we've been seeing all of the disruptions and distribution, finding truckdrivers, forklift operators, and now material shortages. You could see all of this happening a year ago, way before anybody started really talking about inflation. And when you look at the solutions and the cost of those solutions, it's going to take a while to do the reset, to get back to being able to operate the service you'd like to provide or produce the products that you'd like to produce.
Ed Coyne: Hence, I guess why the Fed dropped the word transitory, right? Is transitory three years, is it five years? No one knows.
Whitney, hopefully, we're going to have some more questions come up as well at the end of this webcast. We’re going to turn to Maria now to talk about her outlook on precious metals but please stick around because I know there are some listeners that have specific questions that they love to hear your response to. With that, I'd like to bring Maria Smirnova back on the line to talk a bit about her outlook on precious metals and what we're seeing today from an opportunity standpoint. Maria, thank you for being patient and thank you for being part of the call today.
Maria Smirnova: Thanks, Ed. Happy to be here. My full disclosure is that I am likely a gold bug. I'm not a generalist. I have worked at Sprott for 16 years now, and I would say I'm a true Sprotty. I'm a true believer in hard assets. And with that, of course, I love to talk about gold and silver.
Whitney has done a great job of painting and setting the stage for me by discussing the macroeconomic situation that we're finding ourselves in. And that is debt levels that we haven't seen since the Second World War, growing deficits, growing social entitlements, deteriorating fiscal positions of multiple countries, and all of this leading to low interest rates.
And in fact, with the inflation we're seeing, we're in a negative real interest rate environment. And of course, my job is to primarily to look at equities, I always start with the macroeconomic outlook because that informs the prices for the metals. Today, I'd like to speak with you about our outlook on gold and silver bullion and the underlying equities. We'll start by looking at the recent performance of the metals. We'll talk about how real yields are at all-time lows and how gold will benefit from that and silver. And then we'll take a look specifically at silver. Silver is a special subject for me. It has its own dynamics. It has different dynamics from gold. We’ll take a look at that and then we'll turn to the gold equities and see how there's an opportunity there and how the industry is evolving over time.
Starting on page 22, we have the recent performance of gold, silver, platinum, palladium, and the underlying miners. You can see how over the last three years, beginning in 2019, with the Powell pivot and the interest rates starting to come down, the miners and the gold and silver bullion have outperformed the S&P 500, the bond index and the dollar. And that's very important. You also notice that the miners have outperformed the bullion, and that demonstrates the leverage that the equities have on the underlying metal.
Turning to the next slide, we have longer-term performance. Here we just show gold versus the S&P 500 and the bonds, et cetera. Over the last two decades, you can see how gold has performed, and in fact, it has outperformed the general market. Importantly, it's done really well in times of declining interest rates and crisis.
Now let's turn to the fun stuff. The next chart shows us the relationship between real interest rates and gold. Whitney spoke about how policymakers want to run the economy hot. We're trying to grow the economy fast or the nominal GDP faster to essentially grow out of the debts and deficits.
You can see that when the real interest rate line, and that's the blue line declining, gold did really well. In recent times as well, from about 2018, 2019, we can see that as well.
Now, recently, gold has corrected, silver has corrected, and this has been in anticipation of tapering and the potential for the interest rates to go back up. We think that gold is nearing the end of its correction, what we're seeing, and we look at a lot of factors and variables, we're seeing monetary and fiscal impulses rolling over. These two have been good predictors of growth topping and rolling over in the past. We saw that last time again in 2019.
We think that next year's slowing growth will result in Fed rate hike expectations giving way to more stimulus, in fact, potentially. I think come next year, we could be thinking about things in totally different ways. And like I mentioned, the last time we saw a turnaround like this happened in 2019, before COVID, by the way, before the big crisis hit, and this resulted in the Fed turning around and instead of raising rates, reducing interest rates. Of course, as we discussed with Whitney, we are seeing inflation. This is also affecting nominal interest rates in the sense that real yields are negative. If we do continue to see elevated inflation this will continue to put pressure on real yields. This will be positive for gold.
So I think the way I think about the current outlook for gold and silver is the fact that high-level picture, we do think that interest rates will stay low for longer, real yields will continue being negative, and ultimately gold and silver will benefit.
Ed Coyne: I was going to say, Maria, before we go to the next page that we focus on real yields, and real yields are really the story, but right or wrong so often the press just talks about Fed Funds rate. They are in control dialing up, dialing down, they can move this at will. As you talked about here, the real yield is really the story and what that means, not just for the economy, but the directional moves and things like gold and silver.
In your mind, what is really the disconnect between the world talking about Fed Funds rates versus the market focusing on real yields? Why is that the case? Or ultimately, over time, do they meld together?
Maria Smirnova: That will depend on a lot of variables. We listen to Powell, we listen to the Fed, we listen to all the officials, and also the market wants to be optimistic at all times. We want to believe in the fact that things are good and improving. We look at the job numbers, and by the way, those have disappointed in the last at least three months. But people want to be optimistic and what we look is the hard data. We see this correlation very clearly. We do think inflation is here.
I live in Canada, by the way, and we see inflation in Canada as well. To answer your question, I think it depends on certain variables, but real yields are it and that's what we should focus on.
Ed Coyne: That's helpful. I always like to say the Fed is perception and real yield is reality and think I you're right about that. It's interesting what's going on out there.
So sorry to interrupt you, but I just thought that was worth pointing out, because so often people don't think about real yields. They just look at what the Fed's doing. They quote the Fed Funds rate, and then they move on from there. Talk us through what investors are doing as it relates to gold and silver on page 25.
Thank you. Absolutely. Slide 25, I should say, this really tries to measure retail and institutional demand for gold and silver. These products or exchange traded funds, ETFs are relatively new products, I would say. As you can see, they have really grown a lot since inception.
And you can see, investor demand, it's very clear. Investor demand picks up when there's elevated market risk, when there's a crisis, but you really don't need a crisis. What we have seen in recent years is we've seen growing investment demand in gold and silver, and that's going back to the last slide of the real interest rates.
What I'm trying to say here is the demand is there. The demand has been strong notwithstanding the recent correction. You can see in the demand as well. The price correlates with the ETF flows here recently.
But what we're seeing in the physical market outside of ETFs, actually, we are seeing a resurgence of, for example, Chinese and Indian demand for gold and silver, especially in India. Last year, Indians took a break because obviously the economy was in turmoil, things were shutting down. This year as things reopened, people came back to the market, and especially when they see price weakness, they came back to the market and they want to buy gold and silver.
These are good things. If the same applies to coin and bar demand, I would say, we're seeing strong demand even this year.
Let’s also take a look at central bank demand specifically for gold, because really, central banks have been buying gold bullion, not so much silver bullion.
What I'm trying to say here is another important player in the physical market are the central bankers of the world. One of the themes that Whitney actually also touched on is that there's been less foreign demand for U.S. Treasuries. You can see central banks of the world are diversifying their foreign exchange reserves, really reducing exposure to United States dollars, but increasing their exposure to gold.
A lot of these countries, of course, are developing countries, I will say. I'll name a few: India, United Arab Emirates, Russia, Turkey, China, Poland, some of the smaller European countries, and that's all resulted in inflows to gold.
And again, not that it's a big driver of the price of gold, but it's a supportive of the physical market and show us that there is demand for this stuff. Various governments in various countries are trying to figure out what to do with their foreign exchange reserves and how they can diversify them, and obviously, they're electing to put them into gold, which is a hard asset and a protector against inflation, market volatility, et cetera.
Let’s now turn quickly to silver. As I mentioned, silver has a special place in my heart. It has all the attributes of gold and then some. It also is a great investment vehicle. Like I said, we are seeing increasing demand and investment demand in silver. Silver is also benefiting from the move to green energy, the move to decarbonization.
I will talk a little bit about, if you don't mind, the supply-demand factors that are playing out here. First of all, silver underperformed gold from 2011 until last year in March. By March of last year, the gold to silver ratio, which is something we track just as an indicator of relative value, hit about 120:1. At that point in time, I had a very hard time talking to people about silver. It was written off for dead.
But look what has happened since. Since the height of the COVID crisis, silver has actually outperformed gold, and the ratio now stands at about 78:1. We think it actually will continue and has the ability to continue outperforming gold going forward.
Why is that? What we're seeing in the physical market, in the supply-demand side of things, silver has been in a supply-demand deficit since 2019. We're expecting these deficits to continue going forward, and there's a number of factors with that.
Number one on the supply side, mine supply has been declining since 2016. We're expecting it to rebound this year, of course, as mines come back online from COVID, but we're already seeing signs that this rebound won't be as strong as people expected. And I'm seeing a revision in numbers that people are publishing. That's number one.
On the demand side, we've just seen new projections for this year for 2021. The total demand for silver is expected to hit just over one billion ounces for the first time since 2015. There's a number of drivers behind that, number one being industrial demand. Industrial demand this year is expected to hit a record high, and this is driven by solar, electrical, brazing hours and silver, et cetera. Investment demand is also strong, as I mentioned, and is expected to grow 32 percent this year.
Big drivers of this is India, and actually the United States as well, where people have been scrambling to buy silver eagles this year and last year. Of course, I would love to talk about how silver benefits from the green economy and movement to electric vehicles, a greener energy, et cetera.
Here I have one chart on the right side, and that shows projections made by Bloomberg and Macquarie Bank that are showing how silver usage in solar panels can grow over time. In fact, they're predicting that by 2030, this segment of the market, which has been small, traditionally about 10 percent as of right now, can grow to 250-400 million ounce, which would represent about 25 percent to 40 percent of the market. I cannot, for the life of me, imagine a world in which we can conjure up an extra 300 million ounces of silver just like that, it will be hard work.
From that perspective, and again, overlaying the investment demand side of things, we're quite bullish on silver. I think that covers silver quite well.
Let's move on to equities. I spent a lot of my time looking and analyzing gold and silver equities. We meet with a lot of management teams. We're seeing what's happening in the industry on that side. And of course, we have products not just in bullion but we also offer products for equities as well.
The first slide just shows simply a ratio of gold mining stocks to the gold price. You can see how over the last couple of decades, the ratio has really declined. In other words, mining stocks have underperformed the physical. Even if we were to hope that, if gold stocks were to just go back to the 35-year average, they would have to increase 155 percent from here. They're really undervalued, historically speaking, versus the bullion.
If we take a peek on slide 29, just kind of more rough fundamentals of the mining equities, this slide tries to demonstrate how we believe, actually, the mining industry has become more disciplined over time in recent years. We are seeing higher focus on governance and shareholder returns. Companies have been more careful with mergers and acquisitions in recent time, trying to avoid silly acquisitions. Companies have become more and more focused on generating free cash flow, which is something we're focusing on as well. This has led to debt repayments, stronger balance sheets, shareholder returns through dividends, and share buybacks. And you can see on the left side, the free cash flow yield of the GDM index, which measures mining equities, in this case, is actually surpassed the yield of the S&P 500, phenomenal.
And then on the right side is the dividend yield, and the dividend yield is now higher than the S&P 500. The way I think about it is we think that the mining industry has become much stronger in the last few years. If we look at valuations and if you look at another metric, the enterprise value to EBITDA, mining stocks currently are trading at about half or less of the S&P 500.
I think mining stocks really are a great opportunity right now. They're undervalued versus bullion, they're undervalued versus the general market. And if they continue demonstrating this discipline and demonstrating continuing growth in earnings and free cash flows, I think over time they should benefit. And of course, in times when gold and silver is rising and doing well, then the market floods. The space is quite small, so these things can really rock in. This is exactly what we've seen in the last three years. With that, I think I will pass it back to Ed.
Thank you, Maria. And I was just going to say it's amazing to me because if you're a value investor at all and you care about quality, you would think these stocks would really be ripping given the current prices of the physical metals themselves, but the market just doesn't seem to care.
In your opinion, what will change that? Is it simply success begets success as it starts to move further? In your mind, what would be like the one or two things that would change people's perception of mining stocks today and really have that move forward?
Maria Smirnova: I think it's at least two things. And the first one like I said, is discipline. I think investors are really demanding management teams to continue being disciplined and not waste money on overpaying for assets, essentially.
Gold and silver are finite assets by definition. Every year that we mine, we are depleting our mine life. What I get excited about is exploration, when companies find ounces instead of necessarily buying them. When they find ounces, I think that's great. And so if we see a continuation of these trends, hopefully, investors will warm up.
And then the other thing, of course, is the velocity of the prices of gold and silver. As I said, when gold and silver are going up, and they're not in a consolidation phase, that's when we see outsized returns in the equities.
Ed Coyne: Right. And it does feel like that's working its way into the market today. I suppose in a few more quarters, as the metals continue to prove their value, the equities will certainly follow suit.
Well, Maria, thank you for that. And in a few minutes, we are going to move to Q&A and I know, Whitney will have some questions that will address. We've got over 50 questions currently in queue, but hopefully we'll have time for about 6-8 questions, and then the rest will get to via email and phone calls.
But before we do that, I want to talk a little bit about gold as a portfolio diversifier and silver and the equities in general. But before I do, and this is no disrespect to the bond managers out there, as John Hathaway likes to say, bonds are at a dead end as a portfolio diversifier for a 60/40 portfolio. At zero percent interest rates, they offer minimal upside combined with substantial downside risk. As we all know, as rates go up, bond prices drop and unless you're managing duration risk or you're holding to maturity and accepting low yields, it's a strange time when your risk-off assets becoming one of your most volatile assets.
With that as a backdrop, we think portfolios that consider precious metals today are a wonderful way to replace or at least add to what bonds used to do, and in some cases, even cash, particularly for foreign investors. Of all the precious metals, gold offers really the king of portfolio protection over multiple market cycles. When you think about gold's average monthly returns in times of stress, and I would say a negative return of five percent or greater would be a time of stress in the equity markets.
You saw people in the last couple of weeks just saying, boy, thank goodness I had some cash to put to work. We had this little blip in the market. That's really nothing as we all know, but that would be considered to me a time of stress for the average investor. Gold was positive in those times.
So if you look at this chart and just looking at things like the U.S. Aggregate Bond Index, the large-cap market using the S&P 500 as a proxy or the small-cap market using the Russell 2000, when there are meaningful drawdowns in the market, gold has repeatedly over multiple market cycles over the last 20 years specifically in this chart have added value.
And that's an incredible point to make because it really is why people talk about precious metals as protectors of purchasing power. I've had advisors say gold is my green line investment. For all those out there that have Bloomberg terminals, you look at your screen and it's either all red or all green. Well, typically, when the screen is pretty much red, your gold tends to be green on those days. That's your green line investment.
I think that's one of the things that investors who have used precious metals successfully over multiple market cycles have found that to be a wonderful utility. To that point, not only has precious metals offered similar returns to stocks and real estate over the past two-plus decades, but they've done it with greater diversification. By simply just taking a small portion of your capital out of either a combination of both traditional equities and bonds or bonds, we have found over multiple market cycles that gold and precious metals, in general, including platinum, palladium, and silver, have done a wonderful job in helping diversify a portfolio.
So consider adding precious metals to the mix can add a lasting value to your overall worth. And that, I think, is a key point as well. The lasting value component is important, right? Because so often we hear investors say, my preservation of capital is where I allocate my precious metals. That is where they know that's the capital they can't lose. That's the capital they have to access in times of stress and so that's where we think adding five percent, seven percent, ten percent to a basket of precious metals. And for those that want to be more opportunistic, to the mining equities.
In the current environment, we're seeing out there in the market, this could be a real value add to the portfolio.
For investors looking to gain the long term benefits of precious metals, consider looking at Sprott and help us help you advise you on the best ways to allocate to the space. And again, whether it's a risk-off trade where you're looking just to use the physical market, whether it's gold, silver, or a combination of the two, or even platinum and palladium, or uranium, for that matter, as a way to hedge your portfolio in a very low cost, liquid way, or as a more opportunistic approach, looking at one of our many equity solutions out there, we can really help guide you and advise you on ways to make the most out of precious metals allocation.
And what I would encourage everyone on this webcast today to do is to reach out to your respective senior investment consultant. We took the liberty to put our contact information and our regional territories on this map. Based on where you call home, we encourage you to reach out to Matt, Julia, or Sergio as it relates to learning more about what we do and how we do it.
At this time, before we jump into the Q&A, I know Stephanie has a few housecleaning items that she wants to address, and then we'll turn it back over to us and try to get to a few of the questions. And as I said earlier, for those that we don't address today, we'll reach out to you by email and/or phone calls in the coming days. Stephanie?
Stephanie: Great. Thank you Ed, and thank you all for such an informative presentation. As a reminder, materials have been made available for download in the Documents folder at the bottom of your screen. We do appreciate your feedback, please be sure to take a moment to fill out our brief survey that's also located at the bottom of your console.
As Ed mentioned, there are quite a few questions that have come in so far. Thank you to everyone who has submitted those. If you have a question and have not yet submitted it, please do so by typing it into the Q&A box to the right of your slides.
We're going to do our best to get to as many of these questions as possible. But in the event that your question is not answered, a member of the Sprott Asset Management team will reach out to you directly. And lastly, if you would like to have a conversation to further discuss the ideas that were covered during today's event, please click on that “One on One” folder at the bottom of your screen and confirm the request. And with that, Ed, I'll turn it back over to you to take our first question.
Ed Coyne: Great. Thank you, Stephanie. And what we'll try to do is take it to the top of the hour. We've got about eight or nine minutes to address some questions. We do have over 55 questions, actually, 58 and counting. Thank you all for your engagement out there on the call.
Whitney, let's start with you. I've been lucky enough to have a couple of questions sent in at time of registration and I was able to pick who made sense for these questions. Whitney, this is a pretty straightforward one. And that is, is the U.S. dollar strength a risk to precious metals prices over the next 18 months? What's your view on that?
Whitney George: I guess I view precious metals, specifically, gold, as just another currency. It's the U.S. dollar strength relative to what? Is it relative to emerging markets, relative to Euro, and relative to gold?
Too much dollar strength is a risk to the global economy. All of this debt that we've been talking about, 70 percent or more of it is denominated in dollars, which means as the dollar goes up, the debt gets more expensive, less expensive. That's why you saw the Fed response back in the COVID crisis to produce dollars to satisfy all of the demand and not let the dollar strength take down the global economy.
I think I'm not concerned about the dollar other than the short term doing anything peculiar, it's nobody's interest to have the dollar get too strong or much stronger than where it is now. I think in the long run, it's in everybody's interest, probably for the dollar to go lower, and that will be beneficial to gold.
Ed Coyne: Okay. Great. Thank you. Maria, let's shift to you. You did a nice job talking about equities and really gold and silver in general, but really, specifically, equities. And this question is perfect for you. The question is, what catalyst could cause the gold futures market to more closely align with the apparent current positive global physical supply and demand markets? And I think, in short, what they're looking for here is what will move prices higher. This is what everybody wants to know. What's going to move the prices higher in the physical market as relates to gold and silver?
Maria Smirnova: Excellent question. And I think we spoke a bit about that earlier today, and that is, of course, you can have great dynamics in the physical market but if the paper market has other ideas, and we talk about perception and reality, then the two don't connect, obviously.
So when do we see gold and silver prices going up? Well, we saw them. We see them going up in times when potentially U.S. dollar is declining, there's market volatility. And importantly, as we discussed today, real interest rates are declining. And again, it's the rate of change that causes these things to move.
So again, if we see a continuation of the trend that we've seen in the last few years of real interest rates declining, we're going to see gold and silver moving again. And for that, I think we'll need a change again in that perception of or expectation of tapering and interest rate hikes coming out of.
Ed Coyne: Let's stay on that topic for one moment. This is going to shift more specifically to the equity side and I think this is really addressing all-in sustaining cost. But the question is, at what price points can gold and silver fall, or what could they fall to for the majority of the miners to still remain profitable? I guess effectively, at what price would gold or silver drop to and yet these companies still have the opportunity to create value?
Maria Smirnova: I think that these prices are actually quite a bit lower than current, to be honest. At current prices, gold miners are making very healthy margins. I think the all-in sustaining costs currently, in gold land are averaging about 1,000. And in the silver land, I might be wrong, but it's about $14, $15 an ounce. Of course, we have gold sitting at $1,783 currently and silver at $22.50, let's say.
The average costs are likely materially lower than the spot prices. Having said that, of course, that's average. There are companies with much higher costs and there are companies with lower cost. The industry will have to make adjustments at the low spot prices, but I just can't tell you exactly where it would be.
Ed Coyne: Well, thank you for that. And then this is one that I think we always get, although we get a lot less than we used to. And this relates to cryptos in general, which I guess we're making strides because people used to refer to cryptos like Bitcoin, and they understand now that it's more than Bitcoin. I guess the world is waking up to this. But many people have said that cryptos are eating gold. Can one of you comment on this issue and whether precious metals are being replaced by digital currencies, or can they coexist in a portfolio? Maybe, Whitney, you start with that. And, Maria, if you have any comments on that, that would be interesting to hear as well.
Whitney George: Sure. Well, cryptos have gone from being a convenient way for criminals to move money around without being noticed to taking on the narrative as being finite and therefore an alternative and driven by all the things that we believe will drive gold prices. And I can't disagree with that. But then more recently, they've taken on more of a speculative tone and have correlated more to Tesla stock than they do to being risk reducers. I think we're in the development stage. Obviously, there's something there. There's a lot that came out of the dot-com era that survived and improved, but at certain points in time, things get overdone.
People can argue that gold might have been frothy in 2011, and after having run up for several years and had a peak moment. Again, I think they can coexist. I think one has essentially gone unchanged for 5,000 years and cryptos are evolving. And I also think gold can evolve and at some point trade in some digitized fashion that would make it more convenient and maybe help it attract the younger audience that likes to do all things digitally.
Ed Coyne: Yeah, I know from just talking to private families that are pretty big supporters of the gold trade specifically with us, I've yet to hear an investor say I'm buying crypto in general as a store of value, particularly if it's Bitcoin they're buying because they believe it's going to go to 100,000 a coin or 200,000 a coin.
So we've actually seen, just for the listeners out there, we've actually seen more and more investors who are allocating to cryptos, actually use gold as a hedge to their crypto portfolio, which is something frankly that I've just noticed in the last 6-8 months, which is a new phenomenon in that space.
Maria, maybe you have a comment or two as well. I know you mostly traffic on the equity side of the world as it relates to precious metals. But what thoughts do you have, if any, on the crypto market versus the precious metals market, or what have you seen or heard out there that might be useful for our listeners?
Maria Smirnova: Well, I certainly agree that the crypto market is an evolving story, and we have yet to see the final outcome. We do know that mining Bitcoin and other tokens consume, I should say, not generate, consumes a lot of electricity, a lot of energy. From an ESG perspective, it's not a great vehicle.
And I do believe my stance anyway, that it is mostly a speculative instrument right now. I do know that they're tokens that are trying to do very inventive and technologically advanced things, innovative things. And if that floats to the top, I think it'll be great for the world because it will introduce new technology that the world can benefit from.
And honestly, I haven't studied the market enough to even give you an example. Beyond Bitcoin, there are other tokens that are trying to do more innovative things, and I think that could be very interesting to watch.
But as a store of value, if you think about the volatility that we're seeing in Bitcoin right now, it's crazy. As you said, it's not really a store value you're speculating on, it going materially higher. It's the greater fool theory for me. You're betting on the fact that someone else will pay more for it than I did.
Ed Coyne: We've heard that sometimes mentioned in the precious metal circle as well. But as you mentioned, with silver in particular, silver being a consumer metal, silver being a modern metal, silver actually being consumed and used, it's getting harder and hard to say that about precious metals in general, with gold being really, as Whitney said, an alternative currency. At some level, the precious metals that have centuries and centuries of history have become more modern than ever before and I think both have a place in someone's portfolio today.
The last question, I guess, which I countered up. I have several of these questions worded in different ways and I know our answer to this already, but I'm going to ask it anyway. If you had to peg a price, say six months or 12 months out on gold and silver, what would those prices be? And I'll be fair here. Whitney, I'll ask you to peg gold and Maria, I'll ask you to peg silver, and then we'll end the webcast with that. I get yelled at for this after the fact, but it's always a fun number to throw out there if there is a number, maybe it's not a number, maybe it's more of a statement. But what do you think about gold going forward?
Whitney George: I think you weren't listening to me when said I'm not an economist and I'm not a gold bug. I think 2,000, it feels like a pretty comfortable target. We've been flirting around 1,800, looking like we're breaking out and falling back down again. I think as we get into 2022 and we get this taper thing behind us, it feels unchallenging to get back up to where we were. We've been consolidating now for 15, 16 months, and I think the conditions are right, monetary conditions are right that we're likely to see it start climbing again.
Ed Coyne: Yeah, I think you hit it on the head about the conditions being right. The narrative is supportive for the price to stay relatively stable to climb.
Whitney George: But who knows?
Ed Coyne: But who knows? Exactly. We could make up any number for you. I guess that addresses a silver question as well, Maria. But if you want to throw one out there, we would love to hear it.
Maria Smirnova: Well, I think I have to go big here as well. Picking a nice round number then, as I do believe, silver should at some point start outperforming gold again. $30. Sure.
Ed Coyne: Well, it's interesting on silver. I've heard a couple of people in the technology industry, whether it's the auto industry or the green energy industry, say that whether silver doubles or not, we still need to use it. The price is going to be supportive, regardless of any number here going forward.
With that, we will wrap up the webcast. Thank you all for your time and attention today. For all the questions we weren't able to get to, expect an email and/or phone call coming from one of our respective sales representatives on the East Coast, Central region, or West Coast in the coming days. And again. Thank you for your interest in support in Sprott and the work we do.
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