Sprott Radio Podcast

2023 Outlook - Gold, Silver, Uranium, Copper, Lithium, Gold Miners and Beachballs

Tuesday, 07 February 2023 | 21 | 25.45

Following up on his recent 2023 Top 10 Watch List, Market Strategist Paul Wong joins host Ed Coyne to discuss key themes for the coming year. Topics include gold, silver, uranium, copper, lithium and gold miner equities, but which one may be ready to break free like a beach ball held underwater?

Podcast Transcript

Ed Coyne: Welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. With me today is returning guest Paul Wong, CFA and Market Strategist at Sprott. Paul, thank you for joining Sprott Radio.

Paul Wong: Thank you, Ed.

Ed Coyne: Paul, in your most recent report, you discuss what to look out for in 2023. You break down the year in three parts with 10 total themes. I thought this was a perfect way to kick off the year and have our listeners dive into what this year and beyond could potentially bring to our investors with regard to precious metals, real assets, and energy transition materials. Let's dive right into part A, the macroeconomic changes you're seeing and what those themes are.

Paul Wong: For the last 30 years until probably 2021, we've been going through the great demoderation. This is where whole markets were marked by low inflation, stable low economic growth, and low macro-volatility —  relative to what we've seen in prior decades, if not centuries. It’s a very anomalous period. The point is that for most investors today, these markets are all they’ve ever known. In the last 12 years or so since the Great Financial Crisis, modern markets have been dominated by machines, algos, quants and everything they run. These markets have been calibrated toward these low-volatility, low-inflation, highly stable markets. We're seeing that this period seems to be coming to an end. 

Just for a little reference, in the early 1990s, the fall of the Soviet Union set off several things. One was that the Soviet Union at that time was the greatest producer of almost all commodities. I remember when the Soviet Union fell and I was a resource fund manager. It seemed like an endless supply of commodities was coming out of Russia for years. Then in the early 2000s, China joins the WTO, creating a source of cheap labor. Combined with Russia providing cheap commodities, we had this incredible, stable globalization of continuing economic growth that seems to be coming to an end very quickly.

What we're seeing now is that deglobalization is basically a turn of more macro-volatility. That's something most investors are probably not thinking about. It's been almost 30 years since we've seen these high levels of macro-volatility.

Ed Coyne: You bring up a fascinating point running through this. We all know what the market has looked like over the last couple of decades. What do you anticipate this could potentially mean for precious metals — and real assets in general — as this happens over the next decade or two?

Paul Wong: It's another commodity supercycle. Let’s compare it to prior supercycles of commodities, like the 1970s. In the 1970s, it was well known that [that supercycle] was mostly supply-driven, like when the OPEC oil crisis set off supply shortages.

In the 2000s, China came on the scene and eventually became the second-largest global economy. This was all driven by commodity demand, as China literally built out its entire infrastructure to build cities and export capacity. That required immense amounts of commodities.

There's nothing comparable to that, probably until what we're seeing right now, which is the energy transition side of the story. What we're seeing now in the oil market, it's a long, gradual process. Oil markets, number one, are exceptionally tight. There’s very limited growth. Demand continues to climb as global economies continue to ramp up. But we're seeing that oil flows — especially those involving China — have changed dramatically.

We see things like U.S. sanctions on Russia, Venezuela and Iran — three countries that account for up to 40% of the proven reserves globally. Those countries’ oil production is now flowing toward China at fairly steep discount pricing.

China is also making great inroads with the Gulf Cooperation Council. That's just about six Gulf oil-producing states, including Saudi Arabia, Kuwait, and the UAE, which count for another 40% of global oil reserves.

We're seeing oil flows starting to recalibrate. They're being priced in Chinese Yuan or RMB, and less and less in U.S. dollars. That sets up a situation leading to the energy transition story. It’s that first, oil markets are becoming more dominated by China. As the U.S. and the West head toward an economic war with China, it becomes relatively untenable.

Ed Coyne: It’s interesting you bring up oil, because so often people think, “Well, we’re going to go from oil and gas to batteries, and it's going to be a super smooth transition. It's going to happen overnight." The reality is we need everything and will need everything for a very long time. We're going to have third-world countries and modern economies still using oil, gas and so forth for many years to come.

This is not an overnight change. I think that dynamic is something that people in the broader marketplace need to pay a little more attention to than maybe they are right now. I don't know if you would agree or disagree with that, but the energy transition doesn't happen quite that smoothly or quickly.

Paul Wong: No, this is a decades-long process. It won't happen overnight. We're probably at the very early end of this. Things will change, so [the energy transition] will keep developing.

Ed Coyne: You've mentioned the energy transition materials, and that brings us to Part B of your most recent report, which talks about energy transition materials — specifically uranium, copper and lithium. It'd be useful for our listeners if you give us a few talking points or your views on all three of those metals and their spaces. What potential returns could we see? Where might we see opportunities today and going forward in uranium, copper and lithium?

Paul Wong: Sure. Nuclear power in the United States is about 20% of power generation, so it's already here. We're seeing in the West that nuclear power provides the element of national security that oil can't. We know oil is shipped around the world. There are bottlenecks everywhere in the straits, where oil shipments can be blocked. Also, wars can [encounter] pipelines.

Uranium can be a very stable, reliable source of energy. Obviously, nuclear energy is clean. It's the only super low-carbon-producing fuel source that can provide baseload energy generation. But, the national security aspect of nuclear energy hits home, and probably nowhere more so than what we saw in the EU.

The EU escaped those potential energy squeezes with the warm winter. But even then, there's been a lot of rolling crisis going through the EU, and you can pin it back to energy security. Until you get a secure energy supply, it's very hard to have full national security.

Ed Coyne: There's no way to run a country when you just hope the winter is milder than you anticipated. That doesn't give you a lot of security and a lot of comfort. Dodging a bullet in the short term is not a long-term solution.

Now let's talk about copper. I think copper is really interesting. I like to think of it as the evergreen metal. It's a metal we've been using forever in homes, cars, and everything else. It's becoming even more popular and prevalent as we go into more modern technology and the energy transition. Copper has multiple personalities as it relates to how it can be used. Can you talk a bit about copper and its future as we enter this energy transition environment?

Paul Wong: Sure. Electric vehicles will require almost three times the amount of copper for energy systems as a current gasoline-powered car. Jurisdictions everywhere around the world are starting to legislate out gasoline-powered vehicles between now and the next 10 to 12 years. Renewable energy systems are even more copper-intensive. They require about five to seven times the amount of copper.

But the big copper story is the complete lack of supply. In the last 10 years or so, there's been very chronic underinvestment in copper. Many copper companies, through ESG pressures, have been forced to not spend as much money as necessary to build up new mines. Corporately, because of the massive performance of tech stocks, copper companies increased dividends and shared buybacks with the capital rather than building their supplies.

You do that for over a decade and it starts to catch up to you. Then when you meet a supply shock, you get into a situation like where we are right now. There's just simply not enough copper to go around. Copper mines, or any new mine, will take at least 10 years to come along to production. The story is about basic product shortages, which would translate to higher prices. It's just natural.

Ed Coyne: It's going to be interesting to see how this happens.

The last topic I want to talk about today is battery metals. There are clearly lots of metals that go into battery technology, but from an investor standpoint, lithium is the one that investors are most familiar with and know by name. What do you think may happen in the lithium market over the next three to five years as we continue to go down this cycle?

Paul Wong: To satisfy the estimated demand for [electric] vehicles —  just car batteries —  you're talking about demand up to 3 million metric tons from where we are right now. That's about a little over 22% per annum growth per year to 2030. You compare that with an insured metal, which is 3%, roughly global GDP-type numbers. That's the demand you're looking at.

Right now, there's just no substitute for lithium-ion [batteries]. There are some exotic designs and theories, but practically, they’re just not there. We're going to be running with lithium-ion batteries for at least the next several years, assuming there’s no miracle breakthrough in battery technology. There's a price chart of lithium in the report, and you can see it's gone up almost six- or sevenfold from late '21.

A lot of that has to do with the understanding that there's going to be massive shortages in lithium for the next little while. I’ve been around long enough to know that every time we see a supply shortage, production never comes on as quickly as people think it will.

Mining is really difficult. It's exceptionally difficult. There are a lot of challenges. One thing we do need to point out is that China is absolutely dominant in the midstream portion of the supply chain for lithium. In terms of national security, if you're at economic war with your biggest competitor, then you really can't have that level of dominance [achieved] by China. You're going to have to reshore a lot of that midstream activity into friendlier and closer ends. 

Ed Coyne: From a performance standpoint, it seems to me, just on a pure supply-demand equation, that uranium, copper and lithium — as well as other metals, but really those three metals in particular — are really setting themselves up. The 3 million metric ton stat at 22% annual growth for the next decade is mind-boggling. I guess in general, what's your overall view, potentially, on the performance outlook for these metals over the next, say, three to five years as this supercycle continues to gain momentum?

Paul Wong: If you go back and look at commodity prices over the very long term on a supercycle, they have an S shape. It starts off slow and then goes into a really high ramp-up phase. Then eventually the prices slow down, reminiscent of an S.

As shockingly high as lithium has gone up, you can argue you're still in the very early portion of that S. Can it go higher? Oh, yes, it can definitely go higher. Can something happen geopolitically to drive it higher? Absolutely. Can future supply bottlenecks happen? Yeah, absolutely. That's typical of what we see in every commodity cycle. When demand starts to pick up, there are always supply bottlenecks. Again, it's been well over a decade of chronic under-investment. You're not going to be able to turn on a billing. That's the bottom line. We saw what happened with iron ore in the 2000s when it was trying to come on the scene.

If I remember correctly, in the late '90s, iron ore was about under $120 a ton, and then China announced they were going to build 30 megacities. They actually did [build those cities], which is incredible. They needed concrete, steel, iron ore and metal coal.

Iron ore goes up to $400 a ton. Again, these are all commodities, and that was 20-fold increase in pricing. I can't say we're going to see a 20-fold increase in pricing on these commodities, but directionally you’re there. Again, iron ore had that S shape curve to the pricing structure as well.

Ed Coyne: If anyone wants to look at what pain this can cause for the consumer, you only have to look at the prices of timber and cement over the last couple of years, and what that meant for economies and building. You can imagine something like this that's in global demand. You’ve got to believe that the prices are going to continue to be interesting and attractive to look at for many years to come.

We'd be remiss if we didn't cover part C, which is the core of Sprott’s history as a firm. We've had decades' worth of experience in pure precious metals, predominantly gold and silver, and we've really started to build out our network with energy transition materials. Could you talk about precious metals in general and specifically gold and silver? Start with 2022. What happened there, and what do you think could potentially happen going forward?

Paul Wong: Sure. In 2022, gold ultimately ended up being flat for the year, and that's despite the greatest, fastest Fed rate hike in 40 years. There were expectations that gold would suffer. It did. Short term, we saw the influence of trading funds, and that was the source of most of the pressure on precious metals.

Typically, when you see strong buying out of central banks, out of countries such as China and India, holding steady and buying on weaknesses, those are the long-term buyers. You know that once the short-term investment flows or sellers reach an exhaustion point, then typically you're not going to see much lower prices. You'll see a squeeze up.

That's what we saw in the past year. In terms of CFTC gold positioning: Shorts ran up to 95% tile in the last 10 years, near as high as they could take it. Longs got down to about less than about 5% of the lows, meaning that their longs were about as low as they could take. You can't go to zero, but you get darn close to it.

When you reach selling exhaustions, you typically start to think, “When will prices realize the low?” The trigger was that the aggressive break high portion was over, and then the slightly better CPI numbers catalyzed the short squeeze in gold. That took gold from just below $1,650 up to $1,750 pretty quickly. Then after that, in the last months of 2022 and into the first week of ’23, we saw massive amounts of buying out of China, and it's been unrelenting. Those are massive amounts of gold. The data we're seeing is somewhere between 300 to 400 tons of gold.

Ed Coyne: I remember this time last year, a lot of the "smart money" on the street was calling for 1,300 gold. With rates going up, the old wisdom is rising rates, strengthening U.S. dollar, and dropping gold. And it's amazing to me that gold has stayed as strong as it has. I always like to say it's a relative asset. It did very well last year relative to all the other assets out there, whether it's the S&P, the Nasdaq, even the Dow, which held up a little bit better than the other assets. It's interesting to see that it continues to do its job over multiple market cycles, and last year was no exception. To your point, it's off to quite a nice start in 2023.

Let's shift gears for a second and talk about silver, because silver lives in two worlds. It's a monetary metal to some degree, much like gold. More importantly, it's being used more and more in the energy transition markets. Silver really has multiple uses and multiple values. Ultimately that means multiple opportunities. Talk a bit about silver, what you're seeing there, and what the outlook may be for it going forward.

Paul Wong: Sure. We saw the sell-off in the summertime in silver, and that was really retail selling. If you look at silver ounces held in ETFs, and you compare that on a chart with speculative investments, it's the retail [investors] selling it. Retail selling was mainly because these investors were getting hurt on their other speculative assets. In the summertime, we saw roughly 800 million ounces sold. That works out to about 50% of total CFTC and ETF positioning. But silver held and held support. Since then, it's been bouncing back strongly. We saw strong buying again out of China into the last months of 2000. CFTC positioning has now turned around, and we're seeing silver heading back up to a resistance channel. There's a big, long consolidation channel that's been in place since 2020, and eventually, we see it breaking out.

Obviously, silver has a very intense correlation with gold. In the last 40 years, it’s had about an 84% correlation. But it reached a one percentile whole ratio in terms of the silver-to-gold ratio. Whenever you see something, with an 84% correlation, and one percentile reading, you should get really interested. We're seeing a sharp rebound in the silver-gold ratio. As investment returns back to that, you may see silver actually outperform gold.

We're pretty bullish on gold. I would call it, in a trading perspective, it's a clean setup. That's the terminology I'd use on it.

Ed Coyne: Last but not least, let's just talk for a moment about the miners. So often investors think, "Well, if I'm going to invest in metals in general, I just want to add torque to the metal price, so I'm going to own the miners." But as I remind people, they're very different investments. One's effectively — particularly as it relates to gold — a risk off-trade, while the miners can be much more of an opportunistic risk-on type trade. Spend a few minutes wrapping up this podcast, talking about the miners and how investors should think about the miners going forward.

Paul Wong: Mining equities were hyper correlations. It's a common feature when you have extremely high volatility and low liquidity, that you get these intense moments where everything just becomes correlated. We saw that in the chart I show [in my report], that the miners reach that trend line that catches back the March 2020 lows. It's that capitulation-type sell-off. It likes silver. It tends to be more sentiment-driven for a number of reasons. But number one is probably liquidity.

Again, if liquidity and volatility go hand in hand, mining equities are now starting to go up in terms of reverting to the mean terms of valuation.

They're escaping those tense correlation grasps that it had. I put a little table in the report showing that in the Q4 returns, the gold miners were up over 21% in the quarter. If you think of a big beach ball being held underwater. You're holding it down, and all of a sudden you release it. And boom, it gets back to valuation. That’s what’s happening with the gold miners. They’ve been released from that extreme grip of the rest of the market. It can now lock itself with gold fundamentals rather than general market flows.

Ed Coyne: If I hear you correctly, then you're liking the miners at this point going forward?

Paul Wong: Yes, pretty much all precious metals and commodities. I started my career at the end of a commodity supercycle when I became a geologist out of school. That was bad timing on my part. I've seen a few supercycles since then, and I guess there are a few commonalities. First, it doesn’t start with one big signal, rather it tends to be a mass of little signals. You have wide disbelief.

When China came on the scene, no one believed that China could do what it said it was going to do. It actually happened way faster than anyone thought. People tend to underestimate how much damage you do to your supply and your supply chains when you under-invest in commodities. It’s a capital-intensive industry. When you don't provide capital, things fall apart. Those two go hand in hand. But the difference this time is its demand shock from deglobalization, hot wars, cold wars and economic wars.

We're seeing an economic war and a hot war. We're seeing an energy transition that’s an existential quest to remove ourselves from carbon-producing energy sources. I don't really see an analogy for that in the prior cycles, and this is why it's different. It has a lot of components of the past: Supply shock in Russia, the world's largest producer of all commodities. One of the largest producers of almost any commodity you can think of now is basically shut off from the West. Under-investment, more so than in any of the prior cycles I can remember, is meeting demand shock of a different nature than I can remember from any other part of the cycle.

Ed Coyne: Well, Paul, this is fascinating. For our listeners out there, we're seeing more and more institutional interests in this space. I've been at Sprott now for a little over seven years, and to your point, the world is waking up to these opportunities. It does feel like we're still in the very early stages, and we'll continue to inform these interested parties about what we're seeing out there.

Paul, thank you for sharing what you're seeing as well. You do a nice job every month with your monthly report.

For those who want to learn more about Sprott, you can visit us at sprott.com. There, you can view Paul's latest report as well as sign up for future reports. In Paul’s monthly report, he talks about what's going on in the market, gives a lot of factual reports on what the numbers are, and also provides some opinions on where we think things may be headed. I think you would enjoy reading this if you have further interest in learning more about this space.

Once again, I'm Ed Coyne, and thank you for listening to Sprott Radio.







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Ed Coyne
Ed Coyne
Senior Managing Partner, Global Sales
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Paul Wong
Paul Wong, CFA, Market Strategist
Paul has held several roles at Sprott, including Senior Portfolio Manager. He has more than 30 years of investment experience, specializing in investment analysis for natural resources investments. He is a trained geologist and CFA holder.
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