The Uncertainty Monster

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 back Paul Wong, Sprott's market strategist. Paul, thank you for joining Sprott Radio.

Paul Wong: Thanks, Ed.

Ed Coyne: For our newer listeners that are joining for the first time, could you just tell us a bit about yourself and some of the work you do at Sprott?

Paul Wong: Sure. I’ve been in the business for more than 35 years. I’ve been involved with hedge funds and been a prop trader. I've run resource funds and been on asset mix committees; before all that, I used to be a geologist, which was my first career. At Sprott, I am a market strategist. I provide market commentaries and internal research for the Sprott people.

Ed Coyne: Paul, we've got a lot to talk about today.

Paul Wong: A lot is going on.

Ed Coyne: I was looking at the numbers year to date, and we're at the mid-level of this year, which is hard to believe. It seems like it's gone fast. I thought it'd be interesting to review what's happened in the last six months and maybe give a glimpse of what might be happening going forward. Let's start with the last six months. Maybe give us a couple of highlights of the last six months, what's happened, what you've observed, and what might be different.

Paul Wong: Year to date '25 has been pretty dramatic. The big thing is the return of Trump (Trump 2.0). I guess that many of these items I will talk about were in the process of occurring, starting even before Trump 1.0. Since the return of Donald Trump in January this year, it's accelerated. What he has proposed or is proposing to do is essentially reordering the global trade system, leading a trend towards further de-dollarization. He's trying to influence monetary policy.

He is expanding U.S. deficits to extraordinary levels and changing the entire architecture of U.S. institutions. Any one of these items would be pretty dramatic. Still, the fact that all of them are occurring simultaneously leads to a lot of confusion and uncertainty in the marketplace. What we've been seeing for a while now will likely continue this year and probably next year.

Ed Coyne: One of the things I wanted to do today was unpack something you've been talking about a fair amount. I think it's an interesting topic, which is that we're seeing a lot of similarities between the 1970s and today. I thought it'd be fun for our listeners to go through that. What does it look like when you think about things like oil, gold, the economy, inflation, all these things?

If we could just go through that and talk about what you mean when you see these parallels between the '70s and today. Let's start with that. Something that maybe everyone follows, probably even closer than gold, would be oil. What's going on in the world today, and why are there so many similarities to what we saw in the '70s?

Paul Wong: With oil, actually, it's very different today versus the '70s. In the 1970s, geopolitics influenced oil. We had the old OPEC oil embargoes and the Iranian revolution cutting off supply, so we had massive oil spikes. Today, we don't see that. Today's oil market is relatively well supplied. Today, oil is different. U.S. shale didn't exist back in the '70s. Today, it's the primary driver of oil growth. In the '70s, the U.S. needed to import roughly 70% of its oil needs. Today, it's completely oil independent. In terms of oil, there are not a lot of similarities.

Where the similarities lie, though, is that there is a stagflationary impact that's being felt in today's world, much like the '70s. There's a lot of geopolitical instability that's occurring today. Part of that is the process we left in the prior 30 years of globalization. We are now deglobalizing into a multipolar world where we're seeing the return of superpower and economic competition amongst different countries, along with excessive monetary policy and changes in the currency reserve systems. In the 1970s, we had the end of the Bretton Woods system that echoed through almost a decade.

Today, we are in the process of de-dollarization. Some of it is driven by the administration, and some other countries want or need to de-dollarize, but the process is there. It'll be, again, probably a long, gradual process like the '70s, and that will have its own implications. It's the uncertainty, the dramatic changes in geopolitics, and the changes in economic outlook. There's a lot of uncertainty going on today, much like the '70s.

Ed Coyne: You mentioned Bretton Woods. In corners of the room, for sure, people talk about a resurgence of a Bretton Woods kind of policy. Is that a gold bug mentality, or do you see with Central Bank buying that to be some sort of way, shape, or form reality where we start pegging things back to gold?

Paul Wong: Right. I guess it'd be an echo of the Bretton Woods system. Bretton Woods is a gold reserve system, meaning that the U.S. dollar was convertible directly into gold at the time, and Nixon broke the gold convertibility in 1971. Essentially, the US was running massive deficits with the Great Society programs and the Vietnam War. At the time, everyone realized the gold system was no longer sustainable.

Many countries were starting to force the conversion of U.S. dollars into gold, and if that kept occurring, then the U.S. would begin to lose its gold reserve, so the system was ended. Today, what we're seeing more likely is a movement towards a multi-asset reserve system with gold as a key component of that, depending on who's calculating the numbers and how they're calculating. Right now, gold has moved up to about 25% of central bank reserves, up from about the 10% to 12% range near the lows.

Again, the numbers vary depending on who does the calculation, but that's roughly the same number. Today, right now, we're seeing that number increase either through gold price appreciation versus a fall in the U.S. dollar or a fall in U.S. bonds or continuing purchases from central banks, predominantly the developing and emerging economies.

Ed Coyne: If I saw this correctly, there are a couple of different research pieces out there saying that surveys with central banks and so forth see that continuing, at least for the next 12 to 24 months, based on the hand they're showing. Do you buy into that? Do you think the central banks are going to continue to buy? Is that the primary reason why gold continues to move, because the central banks are propping it up, or is there more going on than that?

Paul Wong: Central banks and sovereigns have been the predominant buyers of gold. There's a stacking effect. The first stack layer we saw was in Q3 of 2022, when the Central Bank started purchasing enormous amounts of gold, two and a half times on average what it used to purchase a decade prior. That was driven by the seizure of Russian reserve assets. The whole notion of the U.S. Treasury being sacrosanct was basically removed at that point in time.

Any central bank with an adversarial or semi-adversarial relationship with the U.S. or the West thought long and hard and probably started buying gold and repatriating it out of the Western Bank vault, London Vaults. We've seen that process occur. Then, with inflation, as a store of value and as a hedge, we started seeing more central banks buying gold because bonds and currencies would be damaged in the face of inflation.

Then we started seeing the trend towards de-dollarization, so again, it ties hand in hand. Now, with the second Trump administration, they are openly questioning the benefits of a high U.S. dollar. They openly want to bring down the U.S. dollar, and that in itself will increase the value of gold and pretty much any other hard asset that's measured against the U.S. dollar.

Ed Coyne: If we de-dollar and Trump becomes the head of the Fed, I don't know if you saw that comment recently.

Paul Wong: Oh, yes, I saw that.

Ed Coyne: He drops rates by 250 basis points in one day. I've got to believe that helps gold as well. If you get rates aggressively dropping again, bonds struggle, the dollar weakens, and gold goes higher. It seems like right now all the black swans are jumping in the pond together at the same time. I had a question last week about what white swan could come in and change this direction, and it doesn't seem like there's one out there right now. What's your thought on that? Is this the new normal for the foreseeable future?

Paul Wong: Right. It's hard to see a white swan. What would drive a white swan? It's a return to globalization. It'd be a return to free trading systems and multilateralism. It's the reverse of what we've seen, especially this year and the last few years. It doesn't seem like we're heading in that direction. We've only started this multi-year process, and we'll probably continue along this path. The next Fed chair will likely be hyper dovish. It's pretty obvious President Trump wants lower rates. I think his tweets are considered official. His last tweet said he wanted a 250-basis point rate cut, which is a pretty big rate cut.

Obviously, that would drive yields down in the short end and probably considerably push up yields in the long end. You get an absolutely wicked bear steepener on the curve, and that would literally push down the U.S. dollar and drive gold up higher. The whole idea of an independent Fed would go out the window. Again, parallels the '70s, Arthur Burns, who was Nixon's Fed chair at the time. He maintained a very easy monetary policy, one of the key drivers that led to inflation and stagflation.

Ed Coyne: Speaking of the '70s, between 1970 and '79, where do you think we are in that cycle? Because if you look at gold's returns in the '70s and silver's returns relative to the S&P, they did quite well. They were up over 30% on average per year, and they peaked in '79. If you're an investor thinking about this, "Hey, I missed this move, maybe I did, maybe I didn't," where do you think we are right now in those 10 years from a market cycle standpoint?

Paul Wong: It's not perfect, but I would guess we're somewhere around 1976, '77. I'm just using the inflation plot. If you plot a U.S. year-over-year change in CPI, you see a large peak. It was '74 roughly, and it started to trend lower, then it made its lows in '76, '77. It started turning back up '77, '78, '79. We started seeing the first signs of yields higher, dollar lower, gold higher, equities lower, much like we saw when Trump announced the Liberation Day tariffs in early April.

That cracked the market. For the first time since the late '70s, you saw that effect where yields are higher, the dollar is lower. Typically, you see that in emerging markets. Typically, that is a sign of asset capital flight away from U.S. assets. Something, again, you had not seen since the late '70s.

Ed Coyne: What you said earlier, I think, tracks, then, that this is a multi-year potential opportunity cycle as people look to allocate capital. Whether you're an existing investor and know how to rebalance or a new investor coming in, this area certainly deserves some additional attention. One of the comments made recently when we talked about central bank buying is that silver is doing pretty well, and central banks aren't buying silver. I guess the question is, is silver stepping out of gold's shadow, finally becoming its own metal? What's happening in the silver market right now?

Paul Wong: Silver still has monetary value. If you run correlations on silver versus gold, it still has a very high correlation. That correlation is stable long-term. You will get some variation in the short term, but the long-term correlation is typically pretty robust. It's still maintaining a store of monetary value. Silver has always had an industrial component, so it also runs a very high correlation with copper, the ideal metal for tracking economic cycles. We have that going on.

In the reports I've written in the last few months, what's become apparent is that the amount of free trading silver in inventory has been depleted. You can see it in the Silver Institute data. If you look at the supply-demand picture, the amount of silver drawn out of inventory is roughly 100 million ounces. If you use silver held in the ETFs and CFTC positioning, that is a proxy for investment demand for silver, and it takes minimal buying now to push the silver price higher.

That's a sign that you're probably depleting that free trading inventory of silver, meaning that the demand for silver, especially through retail investors and investment funds, is getting closer to a price squeeze in silver. Again, I don't know when or at what level, but you can see the progress in that direction. While silver may not have central bank buying, it has investment flow buying. Again, if you look at the Silver Institute data, go down the line where it reads investment demand from ETPs or ETFs; they are the swing driver of silver.

Looking at the LBMA data, there's been a massive drawdown in silver, and you know you're getting closer and closer and closer to an eventual silver squeeze. It can happen. The best way to put it is that when you buy a lot in a very short period of time, that's how you initiate a squeeze. You may not get a squeeze if you buy a lot over a long, protracted period. If you look at the buying history of retail investors, they tend to come in swarms and can initiate a silver squeeze out of the vaulting system.

Ed Coyne: What do you make about silver then becoming more of a true consumer metal, in that it gets talked about more and more in the critical material side, whether you're talking about solar panels, reflective technology and cameras, and so forth? Unlike gold, which may have some uses, it's a monetary metal, whereas silver is really that bridge metal, as I like to call it. Do you think that's adding fuel to the fire as well, or do you think it's still predominantly being driven by the investor and aggressive buying side of it?

Paul Wong: In the long term, it's driven by the use of silver in more electronics and advanced technologies. As a conductor, there's nothing better than silver. If you want to increase the efficiency of any electrical system, solar panels are a good example, you need more silver. Recently, there's been some thrifting in the newer silver technologies. The Silver Institute has a relatively flat demand profile for this year and next. Still, as more applications develop in the future, more panels get rolled out, you will probably see an increase, again, in silver loadings for the solar panels.

Because of the rollback and the energy transition, there's a lot of negativity in the U.S. toward the whole energy transition theme, but if you look globally, the pace has not changed. It's accelerating in some areas, especially China.

Ed Coyne: Yes. It's amazing how we get it as an investor; we're going day to day. The reality is we need so much more of this stuff long-term, but the markets get it wrong in the short term, and then they wake up to, "Oh, wait, hang on. We actually do need this longer term. We need to keep investing in it." I think that it's fascinating that that happened.

Let's shift to another gear now. We've talked about gold a little bit. We've talked about silver. I mentioned that I wanted to talk a little about uranium and copper because they are general commodities or hard assets. Can you spend a few minutes talking about them? Because here at Sprott, that's a big theme for us. Can you comment on both and how people should think about those two metals today?

Paul Wong: It comes down to energy security, especially for uranium. In terms of a green energy base load power and size scale, nothing can match nuclear power. We will likely see more geopolitical conflicts and stress as we deepen into deglobalization. Usually, what it does is play out in terms of energy security. Energy security becomes the overriding concern. We haven't had that for almost three decades, since the '90s. I'm old enough to remember energy security from the '70s and the '80s. That was a really important stress point for advanced economies.

We're heading back towards that as well. Again, think about uranium in terms of energy security. It's impervious to any embargoes, any disruptions, and it's clean and scalable. Newer technologies are emerging right now that will broaden their reach and scale. We are also heading towards the fourth industrial revolution. Power demand is rising. It's rising faster than it has, probably since the '60s. I guess AI is in the most topical energy demand right now, but it needs power. It needs clean, reliable power. Nuclear power is the best fit for that growth in AI.

The future of economic growth in the U.S. will need ever larger, more secure electricity sources, and nuclear power is the best in that world. Solar and wind are great if you have batteries attached to them. That works well. In terms of scalability, nuclear power is what you need, especially in terms of the sheer amount of power the AI data centers will demand. Again, part of that feeds into copper.

A while ago, I did note the copper demand related to AI. For AI, you will need to expand the grid in the U.S. Parts of the grid are over 100 years old in the U.S., and the bulk of it was built in the '60s and '70s. A lot of that needs to be rebuilt. The whole theme of the digital economy and the growing electrification of the economy needs copper. Copper is, by far, the next best conductor and a fraction of the cost of silver.

Ed Coyne: For now.

Paul Wong: For now. We can see that the future of manufacturing is robotics. It's automation and robotics. Again, the fourth industrial revolution. It's the age of electrification. That means electricity demand, nuclear and copper.

Ed Coyne: Paul, it's always great to talk to you. I start every week by talking to you. I look forward to your reports, and anyone out there following us, we publish Paul's piece once a month. It's just more of a weather report and what's going on in the market, but I think you'll find it insightful. If you want to follow us, I encourage you to do that. Paul, again, thank you for joining us on Sprott Radio.

Paul Wong: Great. Thank you, Ed.

Ed Coyne: Again, my name's Ed Coyne. Thank you for listening to Sprott Radio.