Gold's Persistent Floor and More

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased to welcome two of Sprott's very own: Paul Wong, market strategist, and Jake White, ETF product manager. Paul and Jake, thank you for joining me today on Sprott Radio.

Paul Wong: Hi, Ed. Thank you for having us.

Jake White: Pleasure to be here.

Ed Coyne: You two recently co-authored a report titled Top 10 Themes for 2025. I thought it'd be fun today, really for our listeners, to unpack some of those themes and walk through some of the key points that you both made in this report. Paul, let's start with you. You talk a lot about deglobalization and how that's impacting pretty much everything. As it relates specifically to gold and silver, what role is that playing and how are people looking at gold and silver today as this deglobalization starts to happen?

Paul Wong: It's primarily through central bank actions. The current deglobalization started in earnest in 2018 with the first Trump trade wars with China. That was the initiation factor there. Then, COVID was another driver. The Russia-Ukraine war was probably the final straw or catalyst that accelerated central bank buying. Prior to that, central banks were buying steady amounts, but right after the Russia-Ukraine war, they nearly tripled their gold buying rate.

Since then, roughly about 2.4 times the rate prior to the Russia-Ukraine war. The starting factor was the seizure of Russian FX reserves, which was somewhere in the neighborhood of $600 billion, depending on how you want to count. That was the wake-up call for most central banks. Since then, they have been buying aggressively.

Ed Coyne: That continues to support both gold and silver. Silver still is viewed, in some circles, as a monetary metal, but this will bring you into the conversation, Jake. Silver is also starting to get a personality related to critical materials. Since we're on gold and silver, talk about silver just for a second. How is that starting to evolve over time from an investor's point of view?

Jake White: Silver is evolving. It has about half of its demand from monetary applications and the other half from industrial. A lot of that is being driven by electrical or specifically solar panels, as the world continues to evolve along the energy transition and grow its demand for solar panels. 2024 and 2023 were both landmark years in terms of the amount of silver deployed and the amount of solar added to capacity. Silver is the most conductive metal in the world. Therefore, it's critical within these applications.

Not only is the amount of capacity of solar panels increasing, but the amount we're deploying into the world is increasing but the technologies of solar panels are using more silver than previous technologies because it actually gets you a better yield of your end electricity. The amount of silver and the deficits are starting to grow year over year, and we continue to see that, and it's eating in substantial amounts of above-ground stock inventories of silver. We think that silver's well-positioned going forward from that front.

Ed Coyne: Deglobalization goes hand in hand with energy security. As you deglobalize, you're trying to secure your resources. Is that also pushing silver and all critical materials forward? Is that one of the primary drivers behind critical materials today?

Jake White: When you think about the Russia-Ukraine war, it woke up a lot of European countries specifically but had global ramifications where they can't rely on countries like Russia for natural gas, as an example, and they need to be energy self-sufficient. Something that, for example, China is not. A lot of these countries in the East and the West are increasing their emphasis on energy security. What does that mean? You don't want to rely on trade from other countries, so if you have nuclear power plants, there are some elements in the supply chain that you will have to rely on other countries.

Instead of the daily flows of oil or natural gas, where you consistently need these flows, you can change that to, "We have multiple years of uranium inventories. We can figure out where we're going to get our enrichment capacity," for example. This increases the need for nuclear energy specifically and a lot of renewable energy.

Ed Coyne: It seems like diversity in general of more energy sources is paramount. Speaking of critical materials, there seems to be a bit of an attitude shift now that Republicans are back in office at the White House. Paul, you talk a lot about potential rollbacks and what that might look like for things like solar and other metals. Can you go a little bit deeper into what you're seeing out there and what you're reading out there right now as it relates to these potential rollbacks?

Paul Wong: So far, the rollbacks have not been officially announced, though they have been indicated. We're going to see a rollback in the $7,500 EV tax credit spending for charging stations. We're going to see relaxed emissions, and EPA controls on internal combustion engines, et cetera. The rollback will be interesting only because of the way the IRA was set up, with roughly 60% of the spending in red states.

These programs create well-paying jobs and are vital for economic growth in these areas. We'll see how they roll back, but it'll be challenging to roll back jobs and economic growth.

Ed Coyne: Jake, from your point of view, as you continue to do work in the critical material space, what are some of the key themes or key materials out there? Can you talk about that a little bit? What are some of the standout materials right now?

Jake White: I think there's a couple that immediately come to mind. Uranium is a critical material for the generation of energy within nuclear power plants. I think both Republican and Democratic administrations have been pro-nuclear in the past. Funnily enough, it's been mostly Republican administrations in the past. The last four years with Biden were definitely pro-nuclear, with multiple funding initiatives and support for the sector, but that was a departure from previous ways. I think with the new administration coming in, nuclear energy is likely to be well supported.

If we're talking about repeals of specific funding, I think nuclear energy is less likely to be affected by such things. Uranium is a critical material that's here to stay. You can really see that 31 countries at the last COP29 conference pledged to triple nuclear energy by 2050. We're talking about globally advancing commitments towards nuclear energy and a lot of additional support there. Another critical material that we're really seeing from that perspective is copper. Copper is ubiquitous for anything you want to do in the new digital economy.

It's second in conductivity to silver but obviously much cheaper. Whenever you're transmitting energy, you're going to require a lot of copper. Specifically, a lot of the discussion has been about artificial intelligence and data centers of late, and all of that requires a significant amount of copper. We see the demand from the source to increase significantly. Another thing is the increasing electrification of the world globally, or its grid modernization. A lot of the grid needs to be replaced and updated, which will require a lot more copper.

Another touch point we can look at is within China. A lot of people talk about China's weakened property market. Still, the amount they're spending on copper, typically, for example, on their grid, where the state grid in China is the single biggest purchaser of copper, is actually net positive demand we're seeing out of China despite a weakened real estate sector. That's from renewable energy to these grid upgrades. I would say copper and uranium are the standouts from that perspective.

Ed Coyne: Paul, let's go back to you for a second and talk about market volatility as a whole. Maybe walk us through some of the volatility we've seen in the general markets and the critical material markets we've seen of late.

Paul Wong: In the general capital markets, volatility has been rising. There's been a lot of uncertainty that's coming in and brewing, mainly because we know there's going to be aggressive policies coming from the new administration in the U.S. We know it's going to be more aggressive in terms of spending, so that will affect debt and deficits. The bond market has been reflecting a lot of that volatility of late, especially through rising term premiums. Term premiums are the extra yield the bond market demands as compensation for risk on the longer end from monetary and fiscal policies. That's been rising.

As you increase bond yields more from a term premium perspective rather than a growth perspective, that impacts market multiples especially. There's a very narrow concentration of the market in the mag seven: very high earnings but high earnings multiples. Typically, high yields impact multiples. That's why we're seeing the volatility. Also, the bond market and equity market correlations have gone positive. You've lost bonds as a hedge against volatility in the equity market. Part of the reason why gold also looks attractive is that you see a lack of hedges in the marketplace.

What a lot of market participants are doing is they're going out into the options market, particularly the volatility market, the VIX options market. It gets a little complicated, but we've seen two or three volatility events already this year and within the last trailing year where you have these bursts of volatility. Basic market function is unable to absorb that kind of level of volatility. Nothing's broken yet, but it's a sign that things are not particularly well in the volatility market.

From an economic macro perspective, there are lots of sources of volatility. There are bullish factors. We have a massive generational tech boom led by AI, the new administration, tax cuts, deregulations and stimulus policies. We're seeing massive capital inflows to the U.S., and economic and business optimism is sky-high. That's the positive side. You'll see the day's markets reflect that. Then, the bearish side would be, again, back to the ballooning debt and deficits. We're going to be running a very hot fiscal policy for a while.

The bond market is the first asset class to notice that. We have pending tariffs and trade war protectionism coming. With that, you'll also have countertariffs and countermeasures from other countries. How far does it escalate? How far does it go? Again, that's the unknown part. That's what the market is starting to grapple with. We have sticky inflation. Chances are, from some of the Davos address that Trump made, there's probably going to be a confrontation with the U.S. Federal Reserve as well in terms of interest rate policies.

That will be destabilizing for capital markets. There are many sources of volatility from market, economic, trade and geopolitical perspectives, and many sources of volatility brewing. Again, it isn't easy to quantify and even rank them from day to day.

Ed Coyne: I want to go back to something you just said, Paul, that I think is interesting. We have been saying this at Sprott for a while about gold at least complementing bonds and, in some cases, actually replacing bonds. Is that something you see happening more and more, and partly also why gold continues to remain strong as we go into yet another year of positive returns? What's your thought on that?

Paul Wong: Gold, since 2000, has outperformed bonds, period. There was a slight correction in the 2013 to 2015 period, but that's over. Gold, relative to the U.S. Treasury Index, is just making new highs. It continues to outperform. I'll probably write up in the next quarterly review how well gold has performed relative to bonds. Central banks, roughly on average, 60%, 70%. Other reserve holdings are in currencies and sovereign bonds. The majority are currencies.

Again, as we head into what is probably a very volatile trade protectionist world, you can see most countries are starting the process of devaluing their currency ahead of the tariffs—devaluing it relative to the U.S. dollar to compensate for the impact of tariffs. You're in the process of developing a competitive currency devaluation. We're in the early innings of that. Again, it depends on how significant the trade and tariffs war occurs. That is one of the most bullish indications for gold.

Ed Coyne: From your seat and your experience, even gold, which is continuing to flirt with and hit new highs, still looks very attractive.

Paul Wong: From a fundamental perspective, yes. From a chart perspective, yes. From every measure I can think of, yes. Risk of something negative occurring from massive global trade wars and protectionism, yes, that favors gold significantly.

Ed Coyne: Jake, let's go back to you and stick to the theme of volatility for a minute. Uranium seems to be struggling a little bit recently, even though the long-term trend seems to be positive. Walk us through what's happening with uranium right now and your view longer term on how you think uranium is going to potentially play out over time.

Jake White: We’ll start with 2024. The spot price of uranium was down about 20%. I think it's important to contextualize that. Even though it was maybe disappointing a lot for investors, it's off the back of a 90% price surge in 2023. There has been some volatility for sure. The way we look at that is that it's a healthy market consolidation. There was a very rapid price increase over a very short period of time. When you look over the long term, just as you say, we're firmly in bull market territory where uranium prices were depressed for a very long time.

Now we're finally at levels that incentivize junior miners and a lot of brownfield projects to come back online. Uranium miners were able to outperform that spot price. It depends on what you're looking at, as well. That's the spot price, but the long-term contracting prices, which is a much larger market, where it's the market for which uranium miners and utilities are predominantly contracting multi-year contracts. Those prices hit a 16-year high. Convergent and enrichment prices hit all-time highs in 2024. Even if you talk about the average price, the average price of uranium was higher in 2024 than in 2023.

If you're looking at endpoint to endpoint, yes, there was a decrease, but there are a lot of periods for which uranium is performing fairly well. You see that, it's a much healthier operating environment for uranium miners. What contributed to a lot of this volatility? Recently, there were some Kazakhstan supply troubles. After a 90% price surge, there was some physical uranium forced selling going into the end of the year. This is more of a temporary dislocation. We think that a lot of hot hedge fund money entered the space when uranium was increasing significantly and has since exited.

If you bring this back to the fundamentals of the uranium market, everything's just gotten stronger. The uranium market is characterized by a significant supply-demand deficit that's been having to be met by inventories for multiple years. We don't think that any more inventories are available to sell. We think 2025 will be set up as just a record year for nuclear energy generation, especially when considering AI and data centers. They're pairing more and more so with nuclear energy, as we talked about energy security.

China, for example, is increasingly constructing more and more nuclear reactors. From a supply perspective, the U.S. passed the Prohibiting Russian Uranium Imports Act, and then Russia retaliated with an export ban on enriched uranium. There's a lot of supply uncertainty, and the amount of inventories that utilities are holding is not likely going to be able to decrease much further. One of the most important metrics is long-term contracting. We would have thought that U.S. utilities would come into the market more forcefully over the past couple of years, but they haven't.

They have not been contracting at a rate sufficient to replace their uranium inventories in the future. With the return of that, you might be able to see stronger uranium prices.

Ed Coyne: The supply-demand imbalance for copper remains fairly strong. Recycling is alive and well in copper. How important is copper to the overall supply-demand narrative? Is it increasing or decreasing? Does it matter? What have you seen in your work? Jake, we'll start with you on this. As it relates to recycling and copper, do you have any thoughts on that?

Jake White: Copper, like you said, can be recycled multiple times. Historically, copper recycling has been in the high teens. There have been some interesting studies, one by S & P Global, where they did a higher recycling environment and what that's going to look like for the supply-demand imbalance. We're relatively balanced right now but in a small deficit. The current thought is that it's going to be escalating deficits going forward, increasing in size given the increasing demands with stagnant to falling supplies.

Their analysis showed that recycling, even with it increasing to all-time highs, still strongly showed that there's going to be a supply-demand imbalance regardless of whether there was hypothetically an increase in recycling. Recycling is going to be important going forward, for sure. We should try to increase that. I think, at the end of the day, this copper supply problem is extremely hard. Copper has been something that we've been mining for a very long time, and the largest producer in the world, Codelco in Chile, produced its lowest copper production in 25 years.

These companies or state-owned organizations struggle to increase their copper production into this increased demand. I think you can see whether that be from long lead times, lower ore grades, or fewer discoveries. There's an interesting stat where treatment and refining charges just fell 70% year over year. What does that mean? Treatment charges are basically how much the smelter is going to get paid. It has two factors. One, how tight is the underlying supply of copper concentrate, and how much smelting capacity is out there?

We believe that China has overcapacity within the smelting sector, contributing to it. Given all of these mine disruptions, there's a significant shortage of copper concentrate. You can see that there has been over 70% decrease in their treatment charges. Then, even more recently, copper had a great start to the year, the first half of 2024, but it fell into the second half of the year. With that, copper inventories increased as they fell. Now, copper inventories are coming back down. It's mitigating the amount of buffer the industry has to substantiate and hold off any significant price increases.

Ed Coyne: Let's shift gears now and talk about it from an investor's point of view. We've covered copper and uranium, and we've talked a fair amount about gold and silver, but ultimately, how do we make money off this? How do we participate as investors? Paul, from an allocation standpoint, how much is too much as you look at a portfolio? How much is not enough? What would you think about those four core metals? Gold, silver, copper, and uranium? How would you basket those? What insights could you give an investor looking to allocate to this space for the first time?

Paul Wong: If you're looking at the commodities themselves, from an allocation point of view, your first consideration would be volatility. What is the historical volatility of these assets? Next would be a correlation to the other assets in your portfolio. If you're running a multi-asset portfolio, you need to understand where the correlations are: positive, negative, stable, unstable, et cetera. Whether they have hedging capabilities or not, that's the basics. Then you have to figure out what allocations, and what your risk tolerance is, your volatility outlook and outcomes you want to generate, return profile, sharpes, that kind of stuff, and you work backward from there.

Ed Coyne: Just from a gold standpoint, what would you say is something that makes sense in most portfolios? Without digging too deep into how much risk they have, is there a general bandwidth that makes sense for someone to allocate gold to their portfolio?

Paul Wong: Gold has a historical volatility of around 15%. Bonds have half of that. The problem is that bonds have been your major source of risk for the last four years. It is the primary source of risk for any multi-asset class. Historically, it was the safe haven asset. Today, it's no longer the case. It can and will likely worsen with inflation problems, trade wars, et cetera. If there is a clash between the White House and the Fed, you'll have more issues involved. Gold, to me, is probably the only reliable liquid. This is an important factor, as it is a liquid asset class you can use against your riskier assets.

It does not have a negative correlation, but it does have low correlation to most other asset classes. Equities, in particular, even general commodities as well. It provides an inflation hedge. Also, importantly, it is driven by central banks. They have their own unique set of reasons why they're buying, and it provides a reliable floor. There is a central put on gold much like the old Fed put on the equity markets 10 years ago, during the days of QE (quantitative easing).

We can see that gold has not suffered a drawdown of more than 4% or 5% in quite a while. Every time you see a pullback, you see buying return, and it's not from investment sources. We don't have complete data, but the inference is it's coming from central banks and/or sovereigns.

Ed Coyne: Let's shift gears back to critical materials. Jake, for an investor who is looking at gold as a way to offset some volatility, do critical materials play a potentially different role in a portfolio? Is it more about seeking opportunity versus offsetting volatility? How would you have an investor look at, let's say, copper and uranium as two ways to participate in a portfolio? How should they be thinking about that from your point of view?

Jake White: Yes. Absolutely. I think you hit the nail on the head there, where gold may be that safe haven asset that's offsetting volatility, but uranium and copper, you're really trying to capitalize on the opportunity. You're trying to capitalize on these long-term trends and these supply-demand deficits that we think are going to propel both of those critical materials forward. Uranium is already probably in the early innings of its bull cycle. Commodities have much longer cycles than maybe some other asset classes.

When you're talking about these early innings, there was a decade where commodities didn't do much in the 2010s. Especially uranium and copper. Where they went and were under-invested in, and that's helping create this supply shortage. When investors are thinking about allocating towards these things, I think it's something that you're trying to slot into your allocation that's trying to seek returns.

Ed Coyne: Speaking of materials, I don't want to do a disservice to some of the other critical materials out there. Outside of copper and gold, is there anything else that investors should maybe be paying attention to or looking out for as we go forward?

Paul Wong: In general terms, real assets. If we get in a situation where Trump forces interest rates lower, despite what inflation says. I think Powell's term expires in May of '26. It could happen by then or even before then. If you force U.S. monetary policy to have naturally low interest rates, real assets, by definition, will increase in value. You may as well grab any real asset that has a secular overriding demand driver behind it rather than something that's like some of the commodities that are related to the Chinese economy, iron or metallurgical coal.

That's driven by their property markets, which are, I'll be kind, overbuilt and overvalued. It may or may not happen, but if it does, I think gold and silver are natural. Then, after that, it's a grab for real assets. Be prepared. Hope for the best, and prepare for the worst.

Ed Coyne: Yes, that's interesting. Paul and Jake, thank you for carving out the time today. I thought the top 10 for 2025 themes were fantastic. I encourage our listeners to check them out on our website, Sprott.com. Paul and Jake, thanks for taking the time today to speak to us on Sprott Radio.

Paul Wong: Great. Thank you, Ed.

Jake White: Thank you, Ed.

Ed Coyne: Thank you all for listening. Once again, my name is Ed Coyne, and thank you for listening to Sprott Radio.

*Reference to gold’s ‘persistent’ or ‘reliable’ floor is not a guarantee, indication or implication that the value of gold will remain above a certain price. Informal use of ‘price floor’, in this context, relflect’s the speaker’s opinion that the gold price will continue to be bolstered by cyclical central bank buying. Past performance is not indicative of future results.

Gold and precious metals are referred to with terms of art like store of value, safe haven and safe asset. These terms should not be construed to guarantee any form of investment safety. While “safe” assets like gold, Treasuries, money market funds and cash generally do not carry a high risk of loss relative to other asset classes, any asset may lose value, which may involve the complete loss of invested principal.