Sprott’s 20/20 Vision on Gold & Gold Stocks
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February 19, 2020 | (1:05:24)
Speakers: Ed Coyne, Senior Managing Director, Global Sales at Sprott Asset Management, John Hathaway and Douglas Groh, Senior Portfolio Managers
Gold began to shine in 2019 and continues to climb in 2020. We believe we are in the early stages of this gold rally, and discuss our bullish 2020 outlook and explain why investor interest in gold and gold stocks will likely continue to grow.
Senior Portfolio Manager
Sprott Asset Management
Senior Portfolio Manager
Sprott Asset Management
Senior Managing Director, Global Sales
Sprott Asset Management
Natalie Noel, RIA Database: Cover Slide
Hi everyone, thank you for joining us for today's webcast; Sprott's 20/20 Vision on Gold & Gold Stocks, sponsored by Sprott Asset Management. Today's webcast will be providing one CFP, one CEMA, and one CFA CE credit. If you have any questions on credit, please don't hesitate to give us a call on 704-520-2657. We welcome any questions you may have at any point in time during today's webcast. You can type your questions in the Q&A box to the right of the slides and we'll do our best to get to as many of your questions as possible. In the event your question is not answered during today's event, a member of the Sprott Asset Management team will get back to you directly. We have many materials available for you to download in the documents folder at the bottom of your screen. As always, we appreciate your feedback and are striving to make these events the best they can be for your viewing satisfaction. At your convenience, please take a moment to take our survey which is located at the bottom of your console. We will cover quite a bit of information during today's webcast, if at any point in time you are interested in scheduling a one-on-one meeting with Sprott Asset Management, please click the one-on-one button at the bottom of your screen and confirm the request. In the event you missed any part of today's webcast or simply would like to watch it again, a replay will be made available, and all registrants will receive that information by email. Today we are joined by John Hathaway, Douglas Groh and Ed Coyne. John joined Sprott Asset Management in January 2020. Mr. Hathaway is a portfolio manager of Sprott Hathaway Special Situation Strategy and co-portfolio manager of the Sprott Gold Equity Fund. Doug joined Sprott Asset Management in January 2020. He serves as the co-portfolio manager of the Sprott Gold Equity Fund as well as other investment vehicles in the Sprott Gold Equity Strategy. Also, Mr. Groh earned his B.S. in Geology and Geophysics from the University of Wisconsin-Madison and an M.A from the University of Texas Austin. Ed joined Sprott in January of 2016 and has more than 25 years of investment management and sales experience. With that, I'd like to go ahead and turn it over to today's moderator; Ed Coyne, Senior Managing Director, Global Sales at Sprott Asset Management.
Ed Coyne: Slide 3
Thank you Natalie. Welcome everyone to today's call. It's always nice to have a call where the asset that we're talking about has been off to a nice start. Over 4-5% YTD and it's broke through and seems to be holding above $1,600. For those of you who aren't familiar with Sprott, I want to spend a few moments giving you a quick high-level overview of us as a firm then talk about the market. What we've seen in the last couple years and connect that into what that means for gold and gold equities. Then I'll turn it over to John Hathaway to talk specifically about Gold as a core allocation and then Doug Groh to ducktail onto gold equities, which is a more opportunistic allocation. Then we'll tie it all up with some Q&A on the backend. For those who aren't familiar with Sprott, Sprott has over $11 billion in assets under management and is one of the largest asset managers in the U.S. market. What's unique about Sprott is that the $11 billion we have under management is all focused on precious metals and real assets. We have a large breadth of our focus from the physical side to the equities side all the way through to the debt and lending side. We're a publicly traded company and we trade on the Toronto Stock Exchange under the ticker symbol SII. We have a market cap of north of $600 million and over 20% of our ownership is held by insiders. We're headquartered in Toronto with approximately 130 professionals in five offices across the globe and over 25% of our professionals have mining related degrees.
Ed Coyne: Slide 4
From a product standpoint, we've got over $11 billion in assets but what's unique about our firm is we really take an investor through the entire precious metals process. We offer a suite of solutions on the physical side with over 8 billion in assets. We give clients exposure to physical gold, a basket of both gold and silver, pure silver, or a basket of platinum and palladium. We also have a suite of factor-based ETFs that give you exposure to large-cap mining stocks or "seniors", and we also have a factor-based ETF that gives you exposure to the "juniors" or the small-cap space. In addition, we have an active portfolio that we recently acquired from Tocqueville Gold Strategies and their investment team and have created our flagship mutual fund the Sprott Gold Equity Fund with a ticker symbol SGDLX. In addition to our physical and equities we also offer a suite of private solutions both on the equity side and the lending side and have a brokerage service for those investors who want to allocate to individual securities.
Ed Coyne: Slide 5
As I've mentioned, we just recently acquired the Sprott Tocqueville Gold Team and its strategy. What's unique about that acquisition which we just closed on in January of this year is the combined strength of our established team at Sprott as well as the combined strength of the established team at Tocqueville have built, in our view, a powerhouse firm that focuses on precious metals and real assets. We believe we are the true industry leader in this space with over 11 billion in assets between the physical, equity, debt and lending strategies. Sprott offers a complete spectrum of ways to allocate to this space. We've gotten deeper bench strength with the research side, the analyst side, the buy/sell side as well as the products we design both from a support standpoint and from an asset management standpoint.
Ed Coyne: Slide 6
On the following slide I want to give you a quick snapshot of the gold team itself. Whether it's the investment team, the technical advisors or the executive team, we've got tremendous breadth, strength and history of track record of a full professional staff.
Ed Coyne: Slide 7
To close, the Sprott Gold Equity Strategy which was founded in 1998 and currently has over 1.8 billion in assets as of the end of the year. For those investors who are interested in the allocation we offer mutual funds, separately managed accounts, private funds, and for qualified purchasers, customized solutions.
Ed Coyne: Market Opportunity Slide 8
With that as the backdrop, I want to now talk about the market opportunity. This is to talk about what we've seen more recently in the market and what it means for you as an investor when allocating in both core physical gold and in gold equities as an opportunistic allocation.
Ed Coyne: Slides 9-10
The first thing is really, why does anybody care? I think it's interesting that we have more than 730 people registered on the call today. We've got north of 24 questions that have already come in today. Clearly, people are starting to pay attention. I think one of the things that we've noticed is that a typical retail investor frankly doesn't care, and I think largely that's because gold hasn't really done all that much since 2011. Albeit, the last couple of years have really started to shine again. If you look at the last decade or so, gold has been largely flat. In fact, cash has even outperformed it. For those who have a better recollection of what gold has done in previous market cycles, the prior decade, gold was truly king. It was up over 15% on an average annual basis when the S&P 500 delivered returns that were basically flat. In fact, the S&P underperformed even bonds. In times of stress or times of dislocations or recalibrations in the asset markets, gold tends to do quite well.
Ed Coyne: Slide 11
In the modern era of investing on page 11 I think when you look at what gold has been able to offer, it's quite impressive. Most investors are surprised by the fact that gold has delivered north of 8% on an annualized basis and the S&P has been just above 6%. Even with the robust returns, it's had in the last couple of years. We're not here to say that gold should replace your entire portfolio but in the current market environment with what return patterns have been in the last couple of decades with access to mutual funds, closed-end funds and ETFs, gold today is one of the most liquid, low-cost solutions to help buffer potential volatility in your portfolio. When you see what it's been able to deliver in the last two decades, now is a good time to think about allocating to both gold as a core and gold equities as a tactical.
Ed Coyne: Slide 12
One thing that I think is worth pointing out is what we're seeing clients start to do. When I say clients it's mostly at the higher end of the spectrum. Big institutions. State endowments. Universities. Large private family offices and so forth. What they're starting to do is look at gold really as an addition to or in some cases replacement of their bonds and cash in their portfolio. Historically, gold has been viewed as a way to buffer potential volatility in equities but more recently with rates continuing to be flatlined or negative, gold is starting to be viewed not only as a buffer to equity exposure but also as a replacement or addition to your bonds or cash allocations in your portfolio. Last year was no exception, gold had a nice return of 18% when bonds delivered just slightly north of 8%. This really has started happening over the last couple of years.
Ed Coyne: Slide 13
If you look at page 13 it really highlights the last four years of returns of physical gold relative to bonds. I think this really started to happen when the Fed announced they were going to start tightening again in 2015. Albeit they had some success in the early days of tightening, we certainly remember what happened in the fourth quarter of 2018 when the market started to realize that enough is enough. In fact, last year, as you all know, they started to ease again. In that type of environment, a low rate environment, we continue to see more and more investors looking at gold as not only a buffer to their equity but as a potential replacement to both their bonds and cash.
Ed Coyne: Slide 14
This is also in the face of an extremely strong 2019 for the S&P 500. As we all know, hopefully, most of us participated in a 31% plus return in the S&P yet gold still is up over 18% last year. I find it interesting that not only on the year-to-date basis of 2020, gold is outperforming the S&P by 100 basis points. Over the last twelve months plus, the S&P is up about 21.6% and gold is up a little over 20. Over the last twelve months, not only have we seen the S&P continue to do well, but gold has continued to march along with it. We've seen it do its job in periods of dislocations and we've seen it participate in the rising markets. I wanted to set that tone and really get people's expectations and understanding about what we're seeing in the market the last couple of years as a way to start thinking about gold as a true core allocation.
Ed Coyne: Slide 15
Now I'd like to shift gears and bring John Hathaway into the fold and talk about gold as a core allocation and really highlight gold as an evergreen asset, a liquid asset, a true alternative when you look at it's return patterns and a potential replacement to your bond and core allocation in your portfolio.
With that, I'd like to bring John on the line and have John address the audience with what we are currently seeing in the market, if this is a new breakout in the market, what's got us excited in the gold trade today after being in the industry for north of two decades now.
John Hathaway: Slides 16-20
Thank you very much Ed. Thank you all for being on the call. I'll just make some brief remarks.
John Hathaway: Slide 17
First, on slide 17, it's a little bit out of date but gold has broken out from a six-year basing pattern after having performed very well in the previous decade. In many ways and more many people, it's kind of in the penalty box. It is kind of off limits in terms of client portfolios but we just want to make the case that it should be otherwise.
We're now well over sixteen hundred so this chart and in my mind it would not be farfetched to think that gold could better its previous high from 2011 of $1900. We're not that far away from it and the forces that are driving it, I know right now on everybody's mind is the coronavirus and I don't really want to speak about that but I think that's kind of the headline that's driving it at least in the near term. Much more important than that is the fact that interest rates remain very low.
John Hathaway: Slide 18
When we look at slide 18, you can see that the correlation with low interest rates and gold prices is very tight. What happened last September when the Fed had to step in to support the repo market and resume quantitative easing, gold really took off again, as did the mining shares. It's very hard to imagine that in a world with $240 trillion in debt, public and private, that a one or two percent rise in interest rates wouldn't be very damaging to financial asset valuations. It seems reasonable to expect the floodgates to remain open in terms of liquidity creation and that is very good for gold.
John Hathaway: Slide 19
If we just flip to the next slide, you can see that investors are beginning to return. This is for gold-backed ETFs, physical metal. This does not show you what mining stocks are doing and frankly, last year despite the fact that the GDX was up 40 percent it had net outflows. That suggested to me, and should suggest to everybody, that there is still a good deal of skepticism in terms of the sustainability of this move in gold prices, which I think is very healthy. It is very typical of an early stage bull market where skepticism is the dominant mood. It's still early days and mining stocks, and Doug will be talking about this in a second, are still laggards even though they're up substantially if you look at the last couple of years.
John Hathaway: Slide 20
Finally, central banks have been buying gold at a record pace. This is on slide 20. In fact, they are buying 20% of global mine output. When you think about the supply and demand of gold, gold mining output globally is actually starting to decline yet central banks are buying at a record pace. That has a lot to do with the dynamics of the pricing and the price outlook. Central banks need to have their reserves in a safe place, and they're choosing gold over U.S treasuries and other sovereign debt. With that, let me turn it over to Doug who will talk about the specifics of gold equities.
Ed Coyne: Slide 21
Thank you John. Doug, what I'd like for you to hit on really is we are seeing that gold continues to show promise given the current market environment. Can you talk a little bit about gold as a tactical allocation? Particularly in a favorable precious metals market from a price action standpoint and what that means from a margin expansion standpoint, an M&A standpoint, and really talk about the value discrepancy that we're seeing in not only gold and gold equities but also the separation between the large-cap senior miners to the small-cap junior miners. If you could walk us through that over the next couple of pages and really talk about what you're seeing in that environment.
Let's talk about mining stocks being undervalued right now on page 22. What does that mean to you and why do you think we are seeing that?
Doug Groh: Slide 22
Thank you Ed. Thank you folks for joining us today. I think there's a number of different things that are very important in terms of the dynamics here in the marketplace and the opportunities for investors in this market. One is that, as John mentioned earlier, we're coming out of a six-year basing period and if you look at the basic materials sectors, you'd note that over time, over the long term horizon, there can be eleven year or seven-year type of cycles that occur. We're actually coming out of that type of cycle now and the fundamentals are real positive from a number of fronts. This cycle had a downturn in the last decade because of poor capital allocation, high costs, the miners overbuilt. Towards the end of the decade, they really realigned themselves, reduced their costs, improved their balance sheets. They did not focus on new projects the way they did in the early part of the decade and as a result we're seeing shorter mine lives which are real positive fundamentals for higher pricing and better margins for the marketplace for the miners. Also, we're seeing another dynamic and that is mergers and acquisition activity. Over the last two years, a number of mining companies who had not done exploration and had not been able to replace their resources have been really going to the financial markets to add to their asset base. We saw a number of significant M&A transactions last year with the merger of Barrick and Randgold as well as the merger with Newmont and Goldcorp. Then subsequently towards the end of the year we saw a number of merges together. Typically, when you see this type of large merger take place in the marketplace it is a sign of a bottom in the market and really projects that the opportunities going forwards are more significant for investors paying attention in that regard. In particular, the value discrepancies are quite significant in the marketplace. We can look at page 23.
Ed Coyne: Slide 23
Let's talk about that for a second, because I think that's something that a lot of people aren't really focused on. The S&P has done so well that most investors aren't looking around for other ways to allocate capital. If you're looking for an attractive buy today, there are few others that look as attractive as this gold equities chart relative to the S&P. Talk about this a little bit because as you mentioned a lot of these mining companies have cleaned up their house as it were from a balance sheet standpoint yet that inverse correlation is one of the largest gaps we've ever seen. Not that we're calling a bubble in the S&P but it's got a pretty big climb here and the return patterns relative to the gold mining stocks look pretty attractive.
Doug Groh: Slide 23
Absolutely. If you look at the returns for the century, you'll see that while the S&P was doing quite well, the basic materials sector, the gold stocks were not doing very well and there was a very large gap in terms of valuation evolving there. Subsequently, the market recognized the opportunity in the precious metals space and in the first decade of the century, gold stocks did very well. They outperformed the S&P on a broad basis. We're seeing the same dynamic occur now as the sector went through the downturn in the last 6-7 years, the S&P outperformed. Now we're really in a position where we can see the valuation opportunities and the market is beginning to recognize that too. However, the market has not fully appreciated that opportunity.
Doug Groh: Slide 24
Let me just try to run through a couple of numbers here a little bit. If we look at the gold price of today, $1,600 an ounce. If we think about the cost of production about $1000 an ounce. That's a $600 margin. If you look at $1,500 an ounce gold and $1,000 cost, that's a $500 per ounce margin, you see that as the gold price goes up from $1,500 to $1,600, that's maybe a 5-7% move, but you see that your profits go from $500 to $600 an ounce which is about a 20% expansion in terms of profits.
There is a significant amount of leverage that has yet to be appreciated by the marketplace. If you look at Slide 24, you would see that the market has really discounted the opportunity over the last 10 years but now is just beginning to revalue the gold equities. Clearly not fully valuing the opportunity over the long term. I think there's another dynamic too.
Doug Groh: Slide 25
As these companies mine out their assets they need to replace them but they have not been able to replace those resources over the last five or seven years because they were capital constrained. Thus, we went into this M&A cycle that has been accelerating over the last year and a half and we expect that to continue.
Doug Groh: Slide 26
As part of that cycle, we recognize, if you go to page 26, you'll see mine lives are shorter because there has been a lack of replacement and yet gold production has been relatively steady but cannot be sustained at these mine lives and resource base that is currently in place in the industry.
Doug Groh: Slide 27
If we look at page 27, here is further support of our argument that it's actually more attractive to go out and buy or do an acquisition or merge with another company as opposed to trying to build a new mine. That has been behind the merger with Newmont and Goldcorp and Barrick and Randgold other mergers we saw last year. One of our larger positions in the fund, Detour Gold, was acquired earlier this year by Kirkland Lake. Here too, Kirkland Lake was looking at replacing its mine life. Kirkland Lake Gold had a mine life from its assets of about five or six years. The acquisition of Detour Gold, with its mine life of about 25-30 years extends the overall portfolio for Kirkland Lake. That was an important development in the marketplace for investors to recognize that in order for these companies to carry on their operations, they need to add resources and buying right now is the preferred opportunity for a number of the companies.
Ed Coyne: Slide 27
I want to bring up one point that you just mentioned. Even if Kirkland Lake had a new discovery tomorrow, what kind of timeframe are we talking about before that can even get online? What's a realistic timeframe?
Doug Groh: Slide 27
It is quite a long time. It can be 7, 10, 12 years. Not only is the discovery made but then you have to go through the definition of the ore deposits then the company has to get the permits and the social license and the approval from regulatory authorities. They have to go out and raise capital, they have to build the mine, they have to purchase the equipment. This can take, just that part of it, can take 7 or 8 years and if there are delays along the road it can be a 10 year type of project. It's very time consuming to bring on new assets. I think an important element about the gold sector is that gold deposits are not typically huge deposits. Gold is a precious metal. It's precious because it's rare. It's rare because it's not found very easily. It's found in remote locations and the size that's found is not typically very large. It's very difficult to replace these resources and with the time element it becomes even more precious.
Ed Coyne: Slide 27-28
I think that's a good thing for people to walk away with. "What if they get a new discovery tomorrow, won't that change the mentality?". We're talking decades before a mine is brought online and is meaningful to the bottom line of these companies. The M&A cycle is something that we are likely to continue to see, particularly the larger caps consolidate and going into the small caps or juniors. I think this next page really gives a couple of reasons to be excited about the mid to small-cap space. Not just from the M&A standpoint but from the value gap standpoint.
Doug Groh: Slide 28
This is interesting. I think this presents the opportunity and this is what we're doing here at Sprott. We're seeking situations where junior miners who are not getting the valuation in the marketplace for whatever reason, it might be because the market doesn't believe in their ability to raise capital, or they don't have the scale to execute effectively. Their valuations are suffering yet the larger cap names, the senior producers, who maybe do have more liquidity and more recognition in the marketplace, are getting a higher valuation. It presents a fantastic opportunity for investors who are informed and aware of the dynamics in this market to participate in the junior segment of the market with the expectation that value will be realized either by external forces like market dynamics or from within the industry where senior producers are looking to replace their resources. Again, Kirkland Lake's takeover of Detour Gold is a great example. Kirkland Lake became a major market cap stock over the last couple of years with the success of their mine, but recognized that they really had to extend the life of their operation and thus acquired the Detour Gold assets and extended their mine life as a result.
Ed Coyne: Slide 29
I think this next page really hits that point. We're seeing more and more household names, people who aren't even focused on the gold and gold equity trade, I'm even surprised many people even know the name Barrick and Newmont and even Goldcorp, but as you go further down that realm, I think active management, in particular in this space, is really important. Also just trying to identify particular names that we think can create value whether it's through the price of gold rising or through value creation through management, cost cutting, consolidation, technology and so forth. Is there anything on this page that really jumps out at you or that you want to point out that should be highlighted as this M&A cycle really has truly begun and we think it's going to continue to be quite robust for the foreseeable future.
Doug Groh: Slide 29
I think the chart here with the depiction that there has been a number of values over the last year, but we could see a couple years of deals here in the sector. The industry is in a much better financial shape than it was some years ago. 8, 9, 10 years ago. The companies leveraged up their balance sheet. Now, today we're talking about companies that have no debt, they're cash generating significant cash at this $1,600-$1,550 gold price environment. I think it's important to recognize that we've only gotten to this price level in the last 6-8 months. These companies are not quite used to being cash rich. I think the broader marketplace has not really registered to recognize "hey, these guys are in a different position". I think the industry did itself a disservice by growing so aggressively 8-10 years ago. Loading up its balance sheet with debt. Now those balance sheets are in really good shape and there are fewer projects out there. They do really have to go out and do acquisitions. I think the bottom sample transactions really show investors that it's across the board, whether it's the large producers like Barrick or Newmont that are making acquisitions or smaller ones like St. Barbara or Evolution that have come to North America to acquire assets. We're seeing it on a global basis, it's not just a North American phenomenon. It's other countries that are looking for resources around the world.
Ed Coyne: Slide 30
That's something that so often people have started to adopt a gold allocation, but they're still very cautious about the gold equity trade. We're certainly seeing it at an institutional level, but at the retail level we're not seeing investors embrace the gold equity trade. Hopefully, people will walk away from this webcast with some more insight into how to think about both gold as a core but more importantly gold equities as a tactical or opportunistic allocation over the coming years. John, I'd like to come back to you for a moment and really talk about the outlook. Everyone likes to talk about price, we're not going to pin anybody down on what price we think we're going to see, but on page 30 we do highlight a couple of bullet points that's we think really highlight the right conditions for both gold and what that means for gold equities. As you mentioned at the start of the call, we broke through $1600 and it seems to be holding above $1600 today. I don't want to get caught up in short-term prices but if this price maintains stability, what do you think the outlook looks like for gold over the next 1-3 years?
John Hathaway: Slide 30
Basically, gold cycles last for more than just a couple of years. The first one, or the one in most recent memory, began in around 2000 and gold went from roughly $300 to $1900 or a sixfold increase. I would say that we are in the second, maybe still the first inning of this next run. The macro forces that will drive it are the huge amount of debt outstanding as I mentioned earlier, $240 trillion, and the fact that a 1% rise in interest rates, which is a tiny amount to think about, would topple the valuations of financial assets and it would cripple the global economy. The central banks are caught in a trap that they can't get out of. They're forced to continue to print money. We haven't seen it yet in inflation, and of course, financial asset valuations are very high. If you do an analysis of the S&P, most people think the multiple is 22x earnings but it's actually 31x if you weigh the components of the S&P according to their market caps. My view is that the one thing that hasn't kicked in yet that I think would drive more and more investors into gold and gold mining shares is a setback in financial asset valuations. We have yet to see it. As Ed mentioned earlier, people are quite comfortable with their mainstream strategies. If that were to change, I think you would see a huge change in sentiment and gold would be one of the big beneficiaries of that. I think it's early days, I think the outlook is very bullish and it's certainly not too late to think about adding that exposure.
Ed Coyne: Slide 30
John, I think to your point we've got a little mini preview of that in the fourth quarter of 2018 when the Fed said "We’re on autopilot, we’re going to continue to raise rates. All is good” and the broader world realized “I don’t think so” and the market sold off significantly. It took quite a while to come back and certainly the gold idea, the S&P is on a nice tear again, but I think it’s why you see over the last 12 months, both are returning about 20% because of that selloff. I think if we saw an S&P pullback of any kind of significance, that pent-up demand that has been slowly percolating up at the institutional level will filter down into the retail and institutional investor level. I would agree but we do think that there are early days on this trade still, on this investment, and that investors should be considering at a minimum gold as a core allocation.
Doug, I want to turn back to you for a minute because of the gold equity story, as you mentioned, about earnings accelerating, what other points would you like the listeners today to really walk away with as it relates to why should they think about gold equities and if they do, is it large-cap vs. small-cap, is it multi properties vs. single product? Where should they be focusing their energy?
Doug Groh: Slide 30
The better valuation proposition right now is in the mid-caps and the smaller cap names. A couple of points I’d make is that right now companies are reporting their results for 2019, and as a general statement the result of profits and earnings are much better than expected by the overall consensus in the marketplace. The reason they’re better is because analysts have been reluctant to raise their gold price assumption given the rapid rise in the gold price over the last year. A number of analysts are still using $1,450 or $1,500 gold price in their models and yet here we are at $1600 an ounce. We look at the sector and we run models on a regular basis. If you do that you would recognize that the gold stocks are really valuing a gold price of about $1,500 or $1,475. Really the market is behind the curve here in terms of valuing these stocks properly. That’s really where the opportunity is and the better valuations are in the mid-cap and smaller caps. The large caps too are not reflecting this type of gold price and environment. We talk a lot about the M&A cycle and M&A opportunities. That’s part of it. But the bottom line is the earnings that these companies generate at this gold price. The market is not there yet.
Ed Coyne: Slide 31
I’d be remiss if I didn’t talk about the actual allocation itself. As we’ve done these over the years and as I’ve met with clients over the years, typically the number one question is: Ok I hear what you’re saying about the gold allocation. Let me sit on the equity allocation and think it through a little bit. What it comes down to is “How much.” “How much should I have in this.” For the true gold believers, they would say 100%. But in the real world where we all know you need dividend-paying stocks to grow your net worth, what percent makes sense from an allocation standpoint. Is it fifty? Thirty? Twenty? What’s a realistic allocation. Doug, you had an experience recently when you were converting your 401k when you left Tocqueville and came to Sprott. That process when you went through your risk dynamics, gold was recommended which was even a surprise to us. What have you typically seen in an allocation that you think is enough to matter but not too much?
Doug Groh: Slide 31
I think 5% is a good allocation and let me just share this story that Ed was mentioning. I came over to Sprott recently and I started a new IRA account at Schwab and it’s a robo account where it asked for my profile, some information, my level of risk that I’m comfortable with, and automatically even before funding this account it gave me an allocation of approximately 2% in gold. I did not ask for that. They did not know I’m a gold investor but they gave me an automatic allocation to 2% in gold and about 3% in cash. The rest was about 60% or 65% in equity and another 30-35% in bonds. What struck me was that it was an automatic process that I was allocated gold without even my indicating an interest. Clearly, there is an understanding out there that gold adds a lot of value to a portfolio and is essential for a long-term investor in order to maintain value in that overall portfolio.
Ed Coyne: Slides 31-33
I was happy to hear that and also a bit surprised to hear it as well. We’ve done a lot of work over the years for the World Gold Council and I think a lot of the allocation comes back to what your risk on risk off allocation is. I think if you go above five percent, that’s when I think the conversation should be had with us as a firm and where your remaining allocation should go. I think a combination of both gold and gold equity would be appropriate, especially in the landscape we sit in now. What I’d like to leave everybody with before we go into the Q&A session is to go full circle here on the suite of offerings that we have. As John Hathaway talks about the physical side of the market, Sprott has a full suite of core solutions that allow you to own and a very liquid way to trade on the NYSE. Direct ownership of physical gold, silver, and even platinum and palladium. I encourage you for those who want to allocate to the physical side to reach out to us and learn more about how we can be your core allocator for the physical metals. In addition to that, we do offer both large-cap senior through SGDM and small-cap junior through SGDJ, these are factor-based ETFs that go above and beyond simply market cap-weighted ETFs. We’ve taken some of the factors that have mattered in our active strategies and we’ve applied them to a more passive type of approach in the gold equity market. For those who want a standard allocation to the space, we have some solutions that can provide that for you. Lastly, our flagship fund; the Sprott Gold Equity Fund, SGDLX, is our active strategy which allows you to get true active management predominantly in the mid to small-cap space where we are really looking for some of the greatest opportunities out there in the market.
Ed Coyne: Slide 32
There is one unique thing that we highlighted on page 32. What’s unique about our gold equity fund is that it has up to 20% in physical gold. You get kind of a one-stop-shop within the active portfolio. What I would encourage most of you to do on this call today is, at any time you can currently reach out to me via my direct cell number or email address. We also have senior investment consultants based around the country both on the east coast, midwest and west coast and I would encourage you to reach out either to myself or to them and allow them to advise you on how to think about the space. Not necessarily drive you down one solution or another but really help understand how you are allocating currently, what your clients' allocations look like, and allow us to really work with you on creating a diversified portfolio and using gold as part of that diversification. With that, I will stop on the product side and I will turn it back over to Natalie and I’m looking at the live questions coming in. We have 44 questions coming in right now which I think maybe a record for us. I don’t know if that’s an indication of having John and Doug as my guests today or if it’s a byproduct of where we are in the market. Nonetheless, we have 45 questions. We won’t get to them all today but I promise you that between ourselves and my colleagues Matt, Julia and Sergio we will get back to everybody on all these questions in the next week or so.
Natalie, I think we have about 5 or 10 minutes to address some of the top questions today so I’ll turn it over to you.
Question and Answer Section
Natalie Noel Q&A
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With that, let’s go ahead and take our first question. The first question reads: “Would you discuss holding ETFs or mutual funds with mining stocks versus the metal itself?”
Ed Coyne Q&A
Sure. As I mentioned a bit on our product suite, it really depends on you the investor. What you’re trying to accomplish. If you’re an advisor and you’re allocating to both gold and gold equities for multiple clients I think the direct coin or bar solution is probably not appropriate because for me it’s very hard to track and see how that allocates and how it works between your overall portfolio. I do think you should look at a suite of offerings, whether it’s through our trusts as I mentioned we do have a very unique trust that allows you to own the physical bars directly. They’re held outside the U.S and for US investors there is a potential tax advantage. We can certainly advise you on how to allocate to the physical side, and then as far as the equities side, whether it’s ETFs or mutual funds, that’s going to come down to how cost-conscious the advisor is. We would say, and as Doug alluded to, as you go into the mining space, certainly not buying individual mines, you certainly want to own a basket of mining stocks. Trying to cherry pick one name or another I think is a wonderful way to lose a lot of money very quickly if you get the wrong name. Having said that, as you go down in market cap, and we do believe that right now the mid to small-cap space is the most opportunistic space to look at, you really want to be thinking about it from an active management standpoint. We certainly offer that through our Sprott Gold Equity Fund. There are other peers that do it as well. Selfishly, I’ll say you need to be looking at what Sprott does and how we do it given our track record and focus. You really want to be thinking about an active approach. Doug, anything to add?
Doug Groh Q&A
I do have a comment. I outlined earlier the profit opportunity and the potential for the change in the gold price and I indicated that fifteen hundred dollars an ounce, these companies make $500. At $1,600 they make $600 an ounce. There is a significant amount of upside potential but there is a lot of risks here. There’s a lot of risk from an operating perspective, from a location perspective, from a management perspective. I think for investors it’s important that they have somebody that’s involved in the process to understand those risks and to direct capital to risks that are appropriately valued and where there is true upside and opportunity. An ETF, an equity ETF will just select names. They won’t know exactly what they’re investing in, they’ll just invest in an equity issuer. I think it’s important that investors recognize as much as there is upside there is risk and active management is a way to mitigate some of that risk in the space.
Ed Coyne Q&A
Thank you. I would agree. Natalie, what else do you have?
Natalie Noel Q&A
Thank you. The next question reads “Why do central banks invest or hold gold?”
Ed Coyne Q&A
John, I’ll turn that over to you but before I do, we’ve been dealing more and more with some private families in the last year or so. Some have come to us and some we have discovered through our travels but my favorite quote from one of the families is that they’re looking at physical gold as part of their allocation to be their own central bank. I thought this was a really fascinating way to think about this core allocation. John, maybe touch on it a bit. Why do central banks hold gold relative to some other assets out there?
John Hathaway Q&A
Gold is a super safe asset. There is no counterparty risk. Anything else you would talk about and anything else that central banks would own have some degree of credit risk whether it’s U.S. Treasuries of Euro bonds or what have you. Gold is highly liquid, it trades 24/7. Very narrow bid-ask. They own it because it’s a cornerstone of safe assets that is the mandate of central banks to have.
Ed Coyne Q&A
Thank you, and Natalie I’ll actually just address this because I’m seeing the questions as well now. One of the other questions that just came in is the gold-to-silver ratio. That’s something we get all the time but I think the bigger part of that question is that the gold to silver ratio right now is about 88. The mid-term average has been around 60 or so. Either John or Doug, if one of you wants to jump in on this, how important is that? People ask me all the time about it but I feel like silver is becoming more and more of a commodity where gold is a true financial asset as far as the way people invest in it, i.e., central banks. How important is the gold to silver ratio today?
Doug Groh Q&A
Silver is a precious metal, it often occurs with gold in nature, but silver has industrial uses that apply and so there are dynamics in the economy that drive industry supply and demand that are a little bit different from gold which really is a monetary metal. It is possible we could see a reversion back to that 60 type of ratio, is 88 the right ratio I don’t know. I think there are dynamics in the marketplace that have forced gold to be higher value than silver but we’ve noted in the past that when silver performs it can have a significant impact and perform quite dramatically over time.
Natalie Noel Q&A
Absolutely, the next question reads: “Do you recommend GLD, GDX, GDJ, or SLV?”
Ed Coyne Q&A
I would recommend none of those because those are not our funds! All kidding aside, there are different ways to think about the space. The GLD’s of the world give you exposure to the spot price. Other people, particularly institutions and families that we deal with, want to allocate away from the financial markets. John, you’ve been doing this for over two decades. What really is the difference? Why should someone think about the paper market versus the physical market as it relates to owning gold? Why is that important to a high-net-worth investor?
John Hathaway Q&A
Owning an ETF that is backed by gold such as GLD is convenient. Sprott has physical gold trusts which offer the same convenience and the possibility of buying at a small discount to the spot price so there is some attraction there. For those investors who are looking for more dynamic exposure, shares are the answer. We’ve talked about ETFs of shares, GDX being the most prominent. That’s fine and it’s done well over the years. We believe that actively managed portfolios are the better approach. The GDX is very heavily weighted to four or five different holdings which you could easily buy for yourself. Barrick, Newmont, NICO, Franko-Nevada, etc. Maybe 40% of GDX. What we offer, with active management is exposure and Doug talked about it to the hidden opportunities that can outperform the large-cap stocks substantially in a rising environment which is where we are. If you’re looking for dynamic exposure, shares are the better way to go and within that the best way to go in terms of upside potential would be an actively managed portfolio that actually focuses on mid to smaller cap names.
Ed Coyne Q&A
Thanks, John, and Natalie I think we have time for one more question. As I mentioned, for those that we didn’t get to answer your question today, we would certainly welcome you to reach out to us but we will also be going through all the additional questions and reach out to you in the next coming days whether it’s by phone call or email. How about one more question just from a time standpoint and then we’ll sign off?
Natalie Noel Q&A
Absolutely. The final question reads: “Will you invest in mines around the world regardless in location or stay away from certain countries due to geopolitical risk?”
Douglas Groh Q&A
That is very important for us. In terms of our analysis, where a mine is located and not just in terms of political aspects but in terms of access, infrastructure, whether a mine has access to power and water and a labor force and is accessible with regards to supplies. Joining Sprott was actually rather refreshing for John and me, where we recognized that Sprott has a more developed assessment of political risk than we had been used to. It’s been a real enlightenment for us as we go about looking at opportunities in the world but we certainly are aware of the challenges that mining companies face whether it’s a regulatory challenge or maybe a social challenge with regards to the local community or perhaps on a national level. We’re very much aware of that. That directs our investment process. There are countries in the world that we’re not inclined to invest in because the rule of law and the respect of land ownership is not recognized.
Ed Coyne Q&A
Excellent, thank you. I think that’s it for our time Natalie. I’ll let you wrap it up and again thank you all for joining us on the call today. We look forward to reaching out and having further conversations. We all travel together and individually throughout the country and throughout the year at conferences and one on one meetings. For those who are interested in working more closely with us we welcome the opportunity to meet either by phone and or in person. Thank you.
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