Super Terrific Happy Hour Ep. 21: Return of the Doyen

Super Terrific Happy Hour Ep. 21: Return of the Doyen

Stephanie Pomboy and Grant Williams, hosts of the podcast Super Terrific Happy Hour, interview a true legend of the precious metals industry, John Hathaway on December 27, 2023.

Podcast Summary

Grant Williams: Here’s the bit where I remind you that nothing we discuss during the Super Terrific Happy Hour should be considered as investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So, while we hope you find it both informative and entertaining, to say nothing of super and terrific, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. Now, on with the show.

  • Stephanie Pomboy, an Economist, founded MacroMavens in 2002 and is one of the most widely respected women in finance. Her firm has delivered prescient insights on emerging macroeconomic trends and their implications for global financial markets for nearly 20 years.
  • Grant Williams is a Senior Advisor to Matterhorn Asset Management AG in Switzerland, a portfolio and strategy advisor to Vulpes Investment Management in Singapore and one of Real Vision Television's founders. Grant's Things That Make You Go Hmmm... is one of the most popular and widely-read financial publications in the world.

Please Note: John Hathaway is Senior Portfolio Manager of Sprott Gold Equity Fund (SGDLX).

Podcast Transcript

Grant Williams: As we close out another super, terrific, and (hopefully) happy year, Steph and I welcome our dear friend and doyen of the gold market, John Hathaway, back to share his up-to-date thoughts on you-know-what as we take stock of another crazy twelve months in precious metals markets.

John explains where he feels the world’s central banks currently stand regarding gold, analyzes the relationship between real interest rates and the U.S. fiscal situation as they pertain to precious metals prices, and discusses their potential impact on the price as we move into 2024.

Additionally, John walks us through the current set-up in the mining stocks, explaining how undervalued, unloved and unappreciated they are and laying out a mouth-watering roadmap towards much higher prices. Finally, he offers some sage advice for anybody thinking about investing in these incredibly volatile companies.

Here’s the bit where I remind you that nothing we discuss during the Super Terrific Happy Hour should be considered investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So, while we hope you find it both informative and entertaining, to say nothing of super and terrific, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. Now, on with the show.

Jerry Seinfeld: People always tell me, “You should have your money working for you.” Because you send your money out there working for you, a lot of times he gets fired. You go back there. “What happened? I had my money. It was here. It was working for me.” “Yeah, I remember your money.” We had to let him go.

Grant Williams (00:50): Welcome, everybody to another edition of the Super Terrific Happy Hour. Joining me as always in this particular hour is the super terrific happy Stephanie Pomboy. Are you super terrific and happy this week?

Stephanie Pomboy (01:00): I am especially happy to be joining you today, so yes.

Grant Williams (01:04): Excellent. How are you? I’ve seen you in Florida wearing a sweater. So, what is going on down there?

Stephanie Pomboy (01:10): I am a real Floridian. Just in the three years I’ve gotten here, I’ve gotten to the point where if it’s below 70 degrees, I’m in a sweater. I was in a turtleneck the last time you saw me because it was 65.

Grant Williams (01:23): Oh, my God, 65 degrees. Bliss.

Stephanie Pomboy (01:27): I’m going to have to turn the fireplace on next week.

Grant Williams (01:30): Careful now. You know that costs money. Heating is not cheap, Steph, even though inflation is low. We have one topic and one topic only at hand today, and it’s a topic dear to both our hearts and that is gold. We have a very special guest joining us, don’t we?

Stephanie Pomboy (01:44): The one and only John Hathaway of Sprott, a firm that is pretty much synonymous with gold and the precious metal space. So this should be a really great conversation. I’m looking forward to it.

Grant Williams (01:59): Was John our guest on the third episode of the Super Terrific Happy Hour? I think way back at the very beginning, he was one of our first guests.

Stephanie Pomboy (02:06): He’s been with us a couple of times now, I think.

Grant Williams (02:08): I seem to think he may have been our very first guest I think we had; it was either him or Bob Rodriguez, I can’t remember, but one of the two of them was our very first guest. So it’s a great thrill to welcome John back. What do you say? Can we bring John in and have a chat with him?

Stephanie Pomboy (02:21): Let’s do that.

Grant Williams (02:23): John, welcome back to the Super Terrific Happy Hour. Steph and I are so excited to have a chance to talk with one of America’s leading Bitcoin experts about the asset that everybody is clamoring for at the moment. So, thanks for joining us.

John Hathaway (02:37): It’s very exciting to be back. Thank you.

Grant Williams (02:42): Steph and I beat ourselves up about gold the whole time. It’s something that we’re both big fans of, and so it’s nice to get a chance to talk to a practitioner in the space who spends all of his time looking at gold miners and gold mining companies and get a sense of what’s going on because Steph, I don’t know about you, but I have no idea. Do you?

Stephanie Pomboy (03:00): Every time I think I’ve figured it out, I am reminded by the markets that I have absolutely no clue whatsoever. So I’m looking forward to picking your brain, John, or at a minimum, having a nice rigorous hand-holding session.

John Hathaway (03:20): Right. This comes under the category of psychiatric aid.

Stephanie Pomboy (03:25): Yes, thank you. The check is in the mail.

Grant Williams (03:28): A group therapy session. John, let’s get a sense of where you see the broad picture for gold right now. Obviously, we had that crazy spike through the all-time highs when everyone was foaming at the mouth and jumping on it. Even by gold standards, that was short-lived; I think it lasted just long enough for Peter Schiff to tweet: “This is the beginning of a new bull run,” and before he hit send, it had already fallen.

John Hathaway (03:48): That was a kiss of death.

Grant Williams (03:51): So just gives a general sense of where we are in the gold market at the moment.

John Hathaway (03:55): The interesting thing is that even though we’ve had this crazy last week, more than a 100-point swing, I think in a day $100 swing, we’ve made grudging progress. The average gold price year-to-date is up 7%, which doesn’t sound like a lot, but it is, nevertheless, higher than it was last year, and that is without any help at all from people we know. It’s mainly central banks, it’s Asian buying, but ETFs, which are mainly GLD, but several others have actually lost assets while gold has climbed to this record high. It's hard to imagine why, and it’s very incongruous, but I’m actually very encouraged. I would like gold to settle around these prices, maybe chop around for a while longer. But I think it looks pretty darn good, especially without any help from Western investors.

Stephanie Pomboy (04:49): The money transfer from West to East, the gold transfer continues at pace; actually, it doesn’t continue at pace; it’s accelerating.

John Hathaway (04:57): Yes, it’s central bank buying, and a lot of it is not disclosed, certainly in China. I forget what the numbers are, but they’re higher than they were last year. I met with a fellow from the World Gold Council when I was in New York last week. I guess, maybe two weeks ago, what they report is half of what’s actually being taken up.

Grant Williams (05:16): What do you make of the fact that, as you said, gold’s made great progress this year against the backdrop of sharply rising real rates, which was always believed to be the death knell for gold? That was the thing that if you get rising real rates, then gold is going to struggle in that environment. To me, the very fact that we’ve seen such a strong performance, as you say, for gold to be up 7, 8% in the conditions we’ve seen, I would not have guessed that if you’d told me what real rates were going to be this year. Do you have any sense of what’s causing that unexpected strength? Normally, we’re scratching ahead about unexpected weakness, but to me, it’s a case of unexpected strength this year.

John Hathaway (05:52): Unexpected and really unrecognized strength. I would bring it back to the U.S. fiscal picture and high real rates, again, you have to take into confidence that those projections of future inflation are correct, and I’ve always questioned that. But let’s say that high real rates are what, 2% or so? Historically that has been poison for gold. But I think the difference today is that you can see discontinuity between a lot of these relationships. So-called strong dollar, high real rates, high nominal interest rates, and tight monetary policy, if you want to call it that, all have broken down. Gold versus tips, that relationship has broken down, and we’re left to speculate as to why that is, but I think it is the market sniffing out the vulnerability of the U.S. from a fiscal point of view.

Certainly, if we have rates higher for longer, if you believe that nonsense, it is very troubling for the U.S. fiscal picture. So let’s see how that plays out. But part of the answer, and this is rambling, but maybe gold is sniffing out a sharp drop in rates across the board. Maybe we are not going to have a soft landing. Stephanie’s been on that case for a while, and I’m certainly in agreement with it. Troubling bankruptcies, rising unemployment, all the things that would go with that, that’s not in the markets, but I think gold might be sniffing that out.

Stephanie Pomboy (07:22): It does seem to your point that there is this angst that’s evident beneath the surface, and you see that obviously, aside from the fact that you have this shift in demand from global central banks, especially in Asia, but you also here have physical demand from retail buyers. I read an article about Costco. I didn’t even know they sold gold, but they couldn’t keep it in stock because it was going so fast. So there is some sense among the retail community, maybe not reflected in the ETF flows, but the guy on the street is actually starting to buy gold now.

John Hathaway (07:57): Some, but compare this to 2011 when gold made its previous peak around 1900, the buying in gold ETFs, I think the tonnage AUMs went from 1400 to 2,800. So that’s over two or three years. In this last year, we’ve seen a decline of a couple of hundred tons, which is, of course, the base is bigger today, but that’s around a 10 or 11% decline. While there are some folks who pay attention to you and people like you and who are legitimately concerned about the viability of the currency, I think they’re in a vast minority, and it’s nothing like what you saw 10 or 11 years ago.

So I think that is still ahead of us. First of all, people get excited about the fact that gold is trading at $2,000, but if you inflation adjust that, it’s probably 15 or 1600. So to me, it’s not a big deal, and it would not be a big deal to see Western buying activated by some of the events we’re all speculating about and for another 1000 tons or 50% more in terms of AUMs for these gold ETFs, and I think that would definitely take us to well north of where we are today and possibly 50% more.

Grant Williams (09:16): There’s a tendency for those of us who have an affinity for gold. It could easily be two old men and a young woman here shouting at clouds on this podcast. But what you said there is interesting because this idea that the U.S. Fiscal situation matters to gold all of a sudden, I think things like that, things like the math actually mattering, was always a big part of the bull case for gold. If you look at the numbers, none of this adds up, and it will ultimately affect the dollar's purchasing power. It will ultimately affect the U.S. Finances. It’s also going to affect interest rates, confidence in the dollar, all these things.

For the longest time now, we’ve just not had any semblance of recognition from market participants that any of this matters. I’m inclined to agree with you that I think the U.S. fiscal situation is starting to weigh on people’s minds. If we look at the CBO [Congressional Budget Office] projections, that fiscal situation is going to get much worse, and it’s going to stay bad for some considerable... as far as they’re projecting out, that line keeps going up and to the right. If that is the case, if these things are finally starting to matter to the gold price and to people that look at gold as a safe harbor from this, that suggests to me that we have potentially a multi-year bull market. It may not be a raging bull market, but we at least have some kind of floor beneath the gold price that gold can build off in the next couple of years.

John Hathaway (10:44): I agree. You’re seeing more and more even mainstream commentary on this subject. I can’t recall specific voices here, but it’s not just the…

Stephanie Pomboy (10:56): You can say it, lunatic fringe like me.

John Hathaway (10:58): Yes, the words fail me. No, you’re hearing it from more middle-of-the-road commentators, and I think that’s a big change from where we were a few years ago. It’s pretty obvious where we are. The other day, one of my colleagues mentioned that the interest on national debt is now higher than the defense.

If we have a recession like I believe and Stephanie believes, what happens to the deficit, especially in an election year?, Then you get this whole thing; you look at the treasury auctions, and the lack of enthusiasm is breathtaking. So I think the moment is here for these concerns that have been talked about till I’m blue in the face, and maybe Stephanie and a few others are finally starting to hit home and are a direct beneficiary of that. Getting back to your question, Grant, on real interest rates, that’s why these relationships have broken down in my opinion.

Stephanie Pomboy (12:02): Is the catalyst going to have to be a financial crisis or an economic crisis to really seal the deal for gold and not have us churning up and down $100 a day? Every time it looks like we’re going to break out, it gets slammed back down on some nonsense economic data. We need something bigger to get this move that Grant was talking about in motion, or do you think it’s just a steady grind as it has been for the last two decades?

John Hathaway (12:33): It has been a steady grind, and there will be a recognition moment where all these people that are mainstream investors that are invested in Nvidia, AI, and all that kind of thing will start to pay attention. They’ll only start paying attention when they see their accounts decline. So I think that’s part of the recognition. One of the things that could happen in a recession, and I’ve seen many people speculate about this, is that long rates could actually rise. The proposition that owning bonds in an economic slowdown has already been severely questioned, and certainly based on this year’s and last year’s performance of bonds in the face of a slowing economy, has been very disappointing to those proponents. Those of us who live this dream every day, dream or nightmare, whatever you want to call it, we look too closely at all the jiggles on the screen. But if you take a step or two back, I think we’ve seen a lot of progress in the gold price, which is unrecognized. A lot of people are not there.

The fact that gold has performed as well as the S&P 500 for the last 25 years makes me wonder how many people actually know that. I wonder how many people know that relative to the index without income, it’s done twice as well over 25 years. The awareness is not there, so what we need is things that will create recognition.

Again, I’m seeing more and more commentary from responsible, level-headed types, not people like us, who are talking about this issue that Grant has brought up. The fiscal issue is, I don’t see how it goes away. The only way it goes away is a crisis. I don’t see a crisis happening without gold not being higher than where it is today. How that all plays out that’s a matter of guesswork, but I think that’s ahead of us, and we have to fix entitlements. There’s a long list of what has to be fixed, political process, you name it. But that doesn’t happen without a crisis, and a crisis doesn’t happen without gold going up. 

Stephanie Pomboy (14:43): No, I watched that gold-copper ratio because that’s generally a good canary in the coal mine as it were of potential financial crises, and that’s been creeping up as well. But it’s ironic, John, as you described this untenable fiscal situation and how clearly people are starting to wake up to that that policymakers in the U.S. are still fast asleep. Yet, around the world, central banks have figured out our problem and are anticipating it and taking the necessary precautions to protect what they had in dollar assets by shifting that from treasuries to gold. At some point, do U.S. policymakers wake up, or do you think they’re just going to have to get smacked in the face with some really nasty issue, whether economic or financial before they realize they’ve already pushed this...

John Hathaway (15:35): I think the latter. I think you’re right. They’ll be smacked in the face, kicking and screaming. Of course, one of the symptoms of this is that we’re not seeing recycling trade surpluses into U.S. treasuries. Again, I think that’s why you see these very lackluster auctions, especially on the long end. I think it’s amusing that the treasury is now participating. I’m not sure quite how to figure that out, but they’re buying 10 billion a month of newly issued treasuries to stabilize the market. But as our friend Jim Grant points out, the treasury has to borrow to buy, so they only worsen the problem. It is almost getting comical. But you’re right, outside the U.S., they’ve figured out ways... Trade partners look carefully at what’s going on in the Middle East. Saudi Arabia they are starting to trade away from the U.S. dollar, and they have a surplus of RMB. They exchange that for gold.

Grant Williams (16:30): John, I’m glad you brought that up because that’s one of the other things that I wanted to talk to you about because when we look at the fiscal situation when we look at the numbers around gold, it’s very easy to quantify. You can see what’s happening. You can see the deterioration in the United States finance. You can see the projections of how bad they’re going to be. You can see numbers like interest, expense and coverage costs versus defense spending. All that stuff is in plain view. Whether people decide it matters or not, it’s just one of those things at some point it’s going to... I keep saying it doesn’t matter to anybody until it matters to everybody, and then it’s going to matter a great deal. But when you talk about the Middle East, and you talk about this idea of not recycling trade surplus into treasuries, this is the unseen piece, and this is the piece that people are very reluctant to talk about and I think it’s going to be a very, very, very, very reluctant to believe in. What it means is an enormous geopolitical power shift away from an age of American hegemony, which is all we have experienced, and into this bipolar world that people have been talking about now for a decade that it was coming. When I saw Mohammad bin Salman greeting Putin with basically as close to a high five amongst world leaders as you can get.

John Hathaway (17:42): I don’t know if a Russian or Mohammad bin Salman knows how to high-five.

Grant Williams (17:46): Plus he’d have to count his fingers after high-fiving Putin. But to see that and the contrast with how Biden was greeted a few months prior, it’s very clear to me that the, let’s use, the BRIC’s block is just an all-encompassing way to describe them. But you have here a natural group of trading partners

who have supply and demand of every vital commodity in the world. Yes, they don’t have the spending power that the United States has per capita, but there’s a couple of billion people in that part of the world that more than make up for the 350 million in the U.S. potential customers.

This shift is taking place in plain view, but people, it doesn’t seem to me, joining the dots, they’re not looking at the coming together of the Saudis, the Russians, the Turks, the Iranians, all those people in that part of the world. They’re not looking at that through the lens of what’s happening in the Treasury market, what’s happening with Russia selling all their treasuries, the Saudis selling theirs, even the Japanese selling theirs down. There’s a definite shift here. What do you make of that, and what do you think it potentially means, not just for the gold price but for the world's geopolitical stability? It’s a very long question. Sorry.

John Hathaway (18:56): No, that’s fine because I tend to give long answers.

Grant Williams (18:59): Perfect.

John Hathaway (19:01): To me, the implications are there’s an increasing issuance of U.S. treasuries, deficits, higher interest rates, lower tax collections, all of that, and Fed divesting, at least for now. The pool to absorb that has always been the petrodollar [a U.S. dollar accepted as payment by an oil exporter], and that’s no longer available. We’re not saying here that nobody’s going to invest outside of the U.S. in treasuries. Some still will, and again, they’ll have to find a suitable market rate, which the Fed and the treasury are doing their best to prevent from that discovery. But at some point, there will be a market for our paper, but you have a shrinking source of demand because of the things we’ve just talked about and an increasing supply because of QT and growing deficits, and the numbers don’t add up. So what does that mean?

It certainly is potentially destabilizing for financial markets in general. The U.S. credit has always been the cornerstone of leverage, short-term treasuries, a lot of this plumbing that I don’t understand. There are plenty of smart guys like Zoltan Pozsar who could explain it in two minutes, and I would get lost, but still, the basis of leverage is the U.S. dollar and particularly U.S. credit. If that is threatened, I watched the MOVE Index, M-O-V-E, which is the volatility of the bond market, and a lot of people have talked about this, too. If that doesn’t settle down, then the implications of your question, Grant, are very dire for, I think, valuations across the financial markets.

Stephanie Pomboy (20:38): That legendarily deep and liquid U.S. Treasury market is deep, but it’s proving to be a lot less liquid than it was. It’s actually something that the Federal Reserve is very keenly, in theory, focused on because, in all their financial stability reports, they reference concerns about potential turmoil in the Treasury market. I know Tom Hoenig, who you know well, is constantly talking about that as a consequence, quite probably, of this balance sheet reduction. But related to that, one thing that’s fascinating, and we talked about the transfer from West to East as they diversify out of dollars into gold, etc., and the BRICs and their role in that and the petrodollar, but there’s another interesting new dynamic possibly, and that is the Japanese.

They used to be a steady audience for our paper. Clearly, the central bank isn’t anymore, but they’re also engaging in a potential shift for the first time in three decades in their monetary policy where suddenly they’re going to encourage higher interest rates in Japan, which makes U.S. treasuries by comparison less appealing to a whole other... So does that factor in there? I know it’s off the beaten path, but do you have a view on Japan, or what do you think the BOJ is going to do?

John Hathaway (22:06): Well, no, I pay attention, but I’ve certainly…

Stephanie Pomboy (22:09): You’re too smart to forecast the BOJ.

John Hathaway (22:12): No, but I think you throw that into the whole mix of what we’ve talked about, just less demand for U.S. treasuries supply growing and historic demand shrinking. It sounds like longer-term rates should be much higher than they are today.

Stephanie Pomboy (22:26): Either that or the Fed’s balance sheet needs to be substantially bigger than it is today.

John Hathaway (22:31): The Fed balance sheet must be substantially larger.

Grant Williams (22:34): I was talking to Jesper Koll about this literally yesterday or the day before, and he’s been in Japan since the mid-’80s, and he’s very well-connected over there. His forecast for this time next year is that the Bank of Japan’s policy rate will be 50 basis points. If you think about that in real number terms, it shouldn’t make much of a difference. But going from -10 basis points to +50 after Steph says 20 years of 0 or negative rates is a massive change. His point was that in March all the pension funds settle on the rate on what is essentially like a money market pension fund, and he thinks that will settle around 1%. With the JGB yield now being allowed to float up to 1%, and he said they’ve taken the hard cap off now, it’s a reference rate so they’re not wedded to this 1% level.

But what that does is it allows the pension funds, with a quiet word from the Ministry of Finance, to match their liabilities through JGBs, which will take an awful lot of the heavy lifting away from the Bank of Japan. So whisper it quietly, but there is a way in which perhaps the Bank of Japan can ease their way out of this somehow. I still don’t think they’ll be able to do it, but at least Jesper’s shown me a path, and that would mean a dramatic change in capital flows. If the biggest creditor nation in the world starts repatriating capital, the place that that’s most likely to affect is the U.S. and one would imagine it in a big way.

John Hathaway (24:00): Yes, at the margin, it seems very important at the margin. Again, with issuance going up, and we haven’t even talked about what this all means, and if Stephanie’s been on this case for quite a while, for the trillions of low-grade debt that has to be refinanced, so the ripple effect of all of this seems to me potentially destabilizing and destabilization of the regular order of things is generally positive for gold.

Grant Williams (24:27): Can we talk a little bit about the miners? Obviously, this is your stock in trade.

John Hathaway (24:33): I was wondering.

Grant Williams (24:35): I have to say that for someone that invests in gold mining companies, you look a lot younger than I thought you would because to have done this as long as you do.

John Hathaway (24:47): I have a good makeup artist.

Stephanie Pomboy (24:50): No visible facial tics or anything like that.

Grant Williams (24:53): It’s truly extraordinary. It’s like you’re the guy who’s been punched in the stomach every day for 30 years, and yet you’re still standing there smiling. So, let’s talk a bit about the mining companies, the flows, and the state of the market. Just give us an overall picture of that, and then we can dig into some details.

John Hathaway (25:09): Well, if you thought gold was out of favor, you haven’t seen anything until it comes to mining stocks. There is absolutely no interest. There’s no interest in gold. There’s less interest in gold mining stocks and just the big picture number. So does that tell you something?

Stephanie Pomboy (25:37): Even with this recent, what is it? 15% move we’ve seen in the stocks over the last few months, the gold miners relative to the price of the bullion just scraping the bottom of the barrel.

John Hathaway (25:52): Yes, just some other numbers. I just looked at one of the sell-side valuation sheets across the board for the industry. Free cash flow yields are 13 to 19% at current gold prices, the price-to-cash-flow is 4.9, and the dividend yield is 2.6. So this industry, which has a well-deserved reputation for clueless financial management, is in really good shape. God forbid the gold price goes up anything like we’re talking about, those numbers are going to seem ridiculous. So I feel like if you’re convicted on some of these macro themes as I am that you’re bang for the buck, you’re really stepping out to the edge here. But owning a bunch of these names that have these kinds of crazy cheap yields and valuation metrics seems to me like it’s got the potential for five to 10 bagger-type returns.

Stephanie Pomboy (26:47): I can throw out a couple of numbers for you because I was looking up the total market cap of the XAU miners, 245 billion. Home Depot’s market cap is 330 billion. But this begs the question because it’s one I get a lot when I travel around and I meet with the long-only mutual fund complexes, and I have some people who have willing ears to hear this macro case for gold, and they’re soft to it, but they then turn to me and they say, “It’s too bad we can’t do anything with this because the space is uninvestable.” At 245 billion, if you run a fund at Fidelity or Putnam or one of these firms, you have to have an enormous position.

John Hathaway (27:34): That’s a valid point; on the other hand, to me, it translates into spectacular returns because eventually, they’ll find a way.

Stephanie Pomboy (27:43): But there are no heroes in that industry anymore, apparently.

John Hathaway (27:47): There are actually some smart people entrepreneurs who actually own stock in their companies and are doing some smart things. This is a great time to make acquisitions and you’re seeing some of that. So again, it’s not for the indexers or for the large institutions, but for family offices, smaller hedge funds, let’s say, creative thinking investors. It’s a terrific thing to look at right now.

Grant Williams (28:15): John, what about the juniors versus the majors? How are the two groups looking? Obviously, the juniors are always incredibly difficult to invest in, even for pros like you, because they’re just so volatile. Have you seen any shifts in the volatility or the relative value between the two groups?

John Hathaway (28:32): The good news is that you don’t need to go to the juniors, which are largely terribly illiquid, and very often, they’re just promotions. So you don’t have to take that risk when you have companies that are trading it four and five times EBITDA and generating free cash flow and actually earning. I think this is a time when, from a strategy point of view, I would invest, and we do, invest in companies that are producing in safe jurisdictions, which, of course, eliminates about 70% of the face of the globe.

To your point, Stephanie, even though if it’s uninvestable, just think about the illiquidity relative to the potential inflows for miners who are primarily in North America, Australia, and that’s it. So again, that’s why I think you have this potential explosion in we have to have these changes in the way people see gold, but it won’t take a lot of inflows to see tremendous returns in these kinds of stocks that are in safe jurisdictions or generating positive cash flow and actually have intelligent management. There’s a list. It’s not a huge list, but that’s where I think the sweet spot would be. Again, you have to agree with the macro premise, but now’s the time to back up the truck on these kinds of names.

Stephanie Pomboy (29:58): Well, I’m sold.

John Hathaway (29:58): I know.

Grant Williams (30:03): You have pre-sold, Steph.

Stephanie Pomboy (30:04): But seriously, I think it seems like my approach to this, John, and you have to advise me on it, has been that you first wanted to be along the bullion. Then, as the bullion started to really move, you want to get the miners long because they’re going to get leverage. Then eventually, when that move happens that you’re talking about where people realize we got to get into the space, and it goes from being uninvestable to investable and in the process quintuples or whatever happens, you really then want to move to the junior miners and keep moving further and further down the leverage pyramid you think?

John Hathaway (30:41): That’s in terms of gold price we’re a $1,000 away from that, so that’ll happen with $3,000 gold. But in the meantime, I’m going to be having so much fun. Maybe I’ll camp out next to Grant down there in the Caymans.

Stephanie Pomboy (30:55): I love it.

Grant Williams (30:57): I love the idea of someone having fun investing in gold miners. That’s a sentence that I don’t think-

Stephanie Pomboy (31:00): I do too.

Grant Williams (31:01): ... has ever been spoken before.

Stephanie Pomboy (31:02): What did the miners do? Refresh my memory because I’m so beaten down. In the lead up to the global financial crisis, I would say they must have doubled for sure.

John Hathaway (31:11): Well, they were great from 2000 to ‘07. There was a big move and then of course, everything cratered because of that. But then out of the box, again, these are numbers I don’t have on the top of my head, there was another huge run.

Stephanie Pomboy (31:25): Yeah, actually, I’m looking at this here, John. So from the summer of ‘05, basically, when they started to burst the housing bubble, it looks like the XAU went from 80 to 200 by March of ‘08, so-

John Hathaway (31:40): That had a lot of large cap names.

Stephanie Pomboy (31:42): Then it got slammed back down for a couple of months and then basically, did that same thing all over again from this time 90 to 230, so more than double.

John Hathaway (31:53): Yes, I look more at GDX, and I’m not sure that GDX even existed back in those days, but yes, you could see GDX, which is, again, heavily weighted to large-cap stock. That’s heavy weighting to Newmont, and a lot of these companies have lost their soul. They’re diversifying into copper, which, again, if you’re a contrarian, you’ve got to love it. But they’ll become investable for the Black Rocks, the Fidelity’s, etc. But for those who want to do the homework and look at the smaller asset companies or just a handful of assets in good jurisdictions, a triple in GDX could be a 10-bagger in some of these other names.

Grant Williams (32:42): What could be the reason that the three of us are sitting here crying in our cups of soup in six months? There’s always something. The gold miners have this habit of finding new and creative ways of letting you down. Is there anything out there that you sit there and think, “This is something on my radar screen. This is something I need to pay attention to because if this doesn’t happen or this does happen, then it’s going to impact us negatively?”

John Hathaway (33:07): Well, one thing you have to be careful about or certainly be wary of is a market meltdown like we had in 2007, 2008, that’ll take everything with it. Gold went down. Stephanie, remember your dad, and I were high-fiving when Bear Stearns went out of business, and gold ticked 1000? Then, the next six months, we were all saying, “Oh, my God, this is just terrible,” because it went down to 600, I think. So yeah, I think a market meltdown, which ultimately is very good for this strategy, could be painful. So that would be one thing, and maybe the main thing I would worry about.

Stephanie Pomboy (33:43): Leveraging across the board.

John Hathaway (33:45): Just wholesale deflation, credit deflation, which I definitely think is in the cards. So I guess the counter to what I just said would be that the stocks are already ridiculously inexpensive, so maybe you have some pain but it is not equivalent to what the Nvidia folks will be experiencing. I love Grant smiling on that.

Stephanie Pomboy (34:09): The cat that swallowed the canary.

Grant Williams (34:15): Yeah, no, for sure. Funny enough, this week I was going back through the gold price, back through the Great Depression and looking at what happened there in this massive bout of deflation. Obviously, it was different because the price was fixed at 20.67 an ounce, but it did fluctuate a little bit around that depending on the pressures at that time. It dropped in 1931 to $17, which is a 15% fall in the price of gold even against the fixed peg. But the interesting thing was the purchasing power pickup you had, even though gold failed based on what the stock market did, and this is the component of this that I think people don’t think about.

When you go back to Bear Stearns in ‘08, and that rush to 1,000 before gold fell 20-odd percent or whatever it was after that, and everyone’s saying, “Well, gold’s supposed to go up in a crisis, not down.” But if you look at it in units of the S&P, you could buy, the purchasing power of gold doubled, even though the liquidity concerns meant that people sold it to raise capital. It’s the purchasing power that’s so important. Everyone gets fixated on talking about the price. In the Great Depression, yes, you had the advantage of gold being fixed, but obviously, as soon as they came out of the Great Depression, we saw which way the pressure wasn’t, the gold price was to go up because Roosevelt had to move it up. But you picked up four times your purchasing power during that period in terms of gold versus the stock market.

John Hathaway (35:36): I’m glad you brought that up because margins if it’s a ‘30s repeat, that might be different. But we know that we can see that the rate of inflation has slowed, and the miners, and I should have mentioned this earlier, are even in a flat gold price environment or maybe a decline in maybe an ‘07 kind of scenario, their earning power will go up in real terms. That’s something that nobody pays attention to. I’ve seen a couple of old-timers, even more old timer than me, bring that point up because maybe they remember the ‘30s, but that’s a very important point, that price stability on the cost side, we don’t need $3,000 gold to make an argument for miners because they’ll be the only ones around that benefit from a credit deflation.

Stephanie Pomboy (36:24): There’s also one difference between analyzing today and then, and that is we now have this complete bi- furcation in the gold market. We have a paper market, and we have a physical market. It would seem to me that if we had a repeat of the 1930s, that physical market, I could see where on my Bloomberg screen gold may go down alongside the S&P and risk assets in general in this wholesale liquidation. But if I go to the guy on the corner and say, “Hey, I’ve got a bar of gold, what do you give me for it?” I would think that price would still be much higher and maintain its value, but maybe I’m just drinking my own Kool-Aid here. It seems like we definitely have two different prices for the gold market.

John Hathaway (37:13): The New York price is algos. They play these games when the gold price shot up to, was it 21 something? They load up on the short side. It was a bear trap in the first place for gold to go from below 1900 up to 2100 because everybody was short, usually negatives. These algos, how do they get short? Do they actually go to the bank and take out a... No, no, they get credit from another bank. I’m shorting a million ounces of gold. Oh, you’ve got it. Okay, you’re good. That’s the trade. There’s no gold changing hands. So if you look at the Bloomberg numbers and then you look at the Shanghai numbers, there’s a premium lately, it’s 3% or so, which is in dollars. It’s a lot, but that’s the real price to me. But again, nobody looks at it that way. But there is this paper market, which is more and more just a gambling casino, and then there’s the real market. So your proverbial guy on the corner might you do a lot more than the Bloomberg price to have the security of a kilo.

Stephanie Pomboy (38:17): Well, this is probably purely a rhetorical question because I sure as hell don’t know the answer to it, but I’ll ask you anyway. It seems to me like that Sunday night that you referenced when we were all watching the gold price go up to 21,000, it was up $50 or something. We were getting super excited and, of course, woke up the next morning, and it was getting smashed. It spoke to me of this difference between the East and the West and the Shanghai gold price, and what we see here in that there’s real physical demand there. So Sunday night, they’re actively buying, and then when the Western traders come in, they smash it I just wonder, at what point do people figure out that they’re fighting an uptrend? Wouldn’t there be more money to be made to get on the other side of this and to ride the rising tide?

John Hathaway (39:06): When you’re talking about algos, program traders, CTAs, and all of that, that’s a small percentage of the investable assets. I don’t know what the AUMs are; one of our guys knows a number. But relative to the investment universe, it’s tiny. I think we did something, a study a while back where less than 1% of the global investible assets, I guess you’d add up pension funds and sovereign wealth funds and so forth, less than 1% is in gold. So these wild gyrations that are caused by banks trading against each other, maybe some hedge funds just trying to pick off stops, run shorts and then pick off longs, it’s a sideshow in the ultimate universe of what we’re talking about. Because what we’re talking about is big shifts, geopolitically, big shifts in the value of major currencies relative to each other and maybe relative to gold, that’s a much bigger deal than just these games that are being played that capture the headlines on a day-to-day basis.

Stephanie Pomboy (40:15): Now I know how you stay sane.

John Hathaway (40:18): Tell me.

Stephanie Pomboy (40:21): Brilliantly, that’s it.

Grant Williams (40:22): Before we close, I was actually going to ask you for some advice for people who are looking to trade, particularly the stocks, because you are one of the few people that’s done this and not been carried out on a stretcher. I think whatever advice you can give people in terms of, I think most of it’s mindset really, there’s a way to look at this in a way to think about it and a way to position that at least gives you the latitude to be patient. On the one hand, you don’t want to miss the chance of the kind of gains that the gold market can offer you, but on the other side, there are so many head fakes in this thing. How do you think about that? How do you think about managing the mental side of this?

John Hathaway (41:00): The mental side?

Grant Williams (41:01): You’re not allowed to use the word padded or cell.

John Hathaway (41:06): I think you have to have conviction in a lot of what we’ve talked about, and you have to be willing to be a contrarian, which some people can never do and position intelligently. You can’t overload this exposure, and it should be tactical or maybe core, depending on your point of view. Again, trying to trade it, I think, is a loser’s game. You have to be, what was it Jesse Livermore said, “Get right and sit tight.” So there has to be some element of that in this whole thing. If you pay too much attention to the day-to-day fluctuations, you’ll go crazy. Of course, I do pay attention, but I’m paid to do it. But I think most people just come to it and say, “There’s an investment case to be made for a much higher gold price. Gold is incorrectly priced at $2,000,” and the reasons why.

If that’s the case, and if I’m on board with that, how can I maximize the return from that point of view? Then you would look at an active manager like our firm, or you might do the work yourself, which you can certainly do and own these stocks that are trading at five and six times earnings per share and these free cash flow... you have to be a value buyer, and you have to be... it’s the inverse of NVIDIA. As all three of us know, individual stock picking has gone by the boards. It’s a lost... I’ll still call it an art. Very little of the money that’s managed today, and I saw an interview Felix Zulauf gave with Ted Oakley, Stephanie, you met him at Dixon, it’s very good, I can send it to both of you, it’s 70 or 80% of the AUMs in the world today are managed by programs and by FAs, they answer phones. They don’t think, and they’re told by their firms, whatever, Morgan Stanley and Bessemer and what have you, just to, “Do this much for value, do this much for growth, blah, blah, blah.” That’s all that happens.

I like to think that for those of us who actually do the work and have these convictions about what’s mispriced and what’s overpriced there’s a huge return to be made by standing pat with this point of view. This moment in time is to be able to buy this exposure, this out of favor where you can make the investment case for a much higher stream of cash flow and earnings because of the gold price, I don’t think you’re going to see this opportunity last forever. Again, we’re just speculating on when that’s going to change. However, I am very comfortable owning what I consider to be a great value with a potential change in the environment that will create returns of 10X on those assets.

Grant Williams (44:00): Couldn’t have put it better myself. Steph?

Stephanie Pomboy (44:02): I’m sorry, I was busy adding to my gold position. You got me so amped up.

John Hathaway (44:10): Before we go, my granddaughter, five years old, was rummaging around my desk in my office where I’m sitting, and these mining companies will give you these, I think they’re probably plated gold coins, commemorating a certain mine opening, and she found one. She said, “Grandpa, does this have chocolate inside?”

Stephanie Pomboy (44:32): That’s a girl after my own heart.

Grant Williams (44:33): Did you tell her it’d be worth more if it did?

John Hathaway (44:38): The utility of the metal is suspect.

Stephanie Pomboy (44:43): Always. John, you mentioned in passing your firm and what you do. Do you want to give a little sales pitch and tell people about you write a commentary, is that available to the public? I know I have had the pleasure of seeing it, but is that something they posted on the website?

John Hathaway (44:57): I write quarterly on the Sprott website, and they scrub it, and then they post it. So I get to say 90% of what I think.

Stephanie Pomboy (45:10): Well, I’ll see if I can finagle my way to get into that. I want to find out what the 10% is. That’s the good stuff.

John Hathaway (45:18): I can’t remember that, but look up Sprott, Inc. Then you’d navigate your way through the site and I think it’s under commentaries of some sort, doing a terrible job of steering any potential readers.

Grant Williams (45:30): Don’t worry, I will find it and put a link to it in the transcript so people will be able to find it and click find it. That’s too easy.

Stephanie Pomboy (45:37): Well, thank you so much for doing this, John.

John Hathaway (45:39): This was a lot of fun. I can see why you call it the Super Terrific Happy Hour.

Grant Williams (45:44): Yeah, it’s not necessarily always the case when we’re talking about gold, sometimes it’s the miserable, depressed, sad hour, but we get through it, don’t we, Steph?

Stephanie Pomboy (45:53): We absolutely do. I love it.

Grant Williams (45:56): All right, John, thank you so much for taking the time.

John Hathaway (45:57): Okay.

Grant Williams (45:58): I really appreciate it. It’s lovely to see you.

John Hathaway (45:59): Take care.

Grant Williams (46:00): Thanks, see you. Bye-bye.

Stephanie Pomboy (46:01): Bye.

Grant Williams (46:03): As I said, I’m not sure if it is group therapy talking to John about gold for you and I, but it’s funny, there are so many periods in the cycle of gold where things line up and make sense. I struggle to think of a period in the last, certainly since that run-up in 2011, so the last 12 years. Maybe the end of 2015, things lined up pretty well and we had a really good run for the first six months of 2016. But I struggle to think of a better setup for gold than we’ve got right now.

Stephanie Pomboy (46:33): I agree. Actually, even during those periods, perhaps right after the global financial crisis was most similar to today in terms of what we’re seeing globally, not just here domestically, but it does seem to me that the setup is just so phenomenal. I am glad to have this conversation with other people because sometimes I think I can’t perceive a scenario that isn’t bullish for gold.

Grant Williams (47:00): Yes.

Stephanie Pomboy (47:00): Whether you believe in the hard landing or whether you think we escape with no landing and pursue each one to its natural conclusion, it seems like all roads lead to gold. So I want to check myself and make sure that I haven’t put the cart before the horse. So this is-

Grant Williams (47:15): Well, it’s funny because of the point John made there, and I saw Ronnie Stoeferle in Switzerland just a few weeks ago, and he put up a great chart that showed that I think since 2000, gold’s CAGR is basically 9%. So when we talk about gold, people expect it to just have these crazy years, and very occasionally, it does. But at the end of the day, the point John made, I think, is such an important one. You could have owned gold from 2000 to now and outperformed the S&P without that income component. Even with the income component, you’ve matched it with very little stress. You had the excitement of 2011 followed by the fall, then it went sideways and it’s just ground high. It’s very ungold-like. People think of it as this wildly speculative asset, but it’s been such a solid performer in those 25 years; I think there have been two down years, and the rest of them have been either unchanged or just higher. I think people forget that about gold.

Stephanie Pomboy (48:18): Well, it’s just not as interesting to talk about. So CNBC is not going to devote a whole day of programming to discussing gold. When you’re talking about the S&P, there’s so many things that you could get into there, so it sells. Gold, I guess I would say, is probably the least sexy asset out there and, therefore, doesn’t command the kind of attention, even though, like you said, its performance has been great. Hopefully, it’s about to really surprise us all on the upside here.

Grant Williams (48:45): What we need is CNBC to do a metal in turmoil sequence. Once we get the metal in turmoil sequence, we will know that things are adding up conclusively.

Stephanie Pomboy (48:53): Oh, God, please. I don’t think I have the intestinal fortitude to get through that.

Grant Williams (49:00): Either that can we pay Cramer to tell people to sell it? That might be the other way forward. I don’t know.

Stephanie Pomboy (49:04): I’d prefer that.

Grant Williams (49:05): All right.

Stephanie Pomboy (49:05): I think that’s perfect.

Grant Williams (49:06): All right. Thanks to our guest, John Hathaway. You will find his work, if you go to the Sprott website and look for Sprott Insights, it’s quite easy to find John’s work there. It is a fantastic read. If you’re interested in the gold markets or God forbid you’re invested in them, it’s required reading as far as I’m concerned. Thanks to John, as I said for joining us. My thanks to you, Steph, as always, for being such a wonderful partner in crime. I will save you the trouble of telling everybody where to find you on Twitter because I know how much you hate that. You’ll find Steph at @SPomboy, except no substitutes. There’s plenty of fakers out there. It’s @SPomboy. Don’t forget to go to as well and find out all the other stuff she does. With that, Steph, I wish you, can we say Merry Christmas or do we have to say happy holidays? I forget.

Nothing we discussed during the Super Terrific Happy Hour should be considered investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So, while we hope you find it both informative and entertaining, to say nothing of super and terrific, of course, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.

John Hathaway
John Hathaway, CFA
Managing Partner, Sprott Inc.; Senior Portfolio Manager, Sprott Asset Management USA
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