121 Group: I’ve got a fantastic line-up of precious metals investors here, and we’re going to be tackling the bullish mood around precious metals and gold. I wanted to start perhaps by saying, is this bullish mood going to continue? And what have been the macro drivers around, where we see the gold price at the moment? What’s been going on in the last 12 months has driven the sentiment around precious metals. And George, perhaps you’d like to start us.
George: I think the root cause we would say is uncertainty, and then I qualify that by saying, well, the future’s always uncertain. But I think if you look at the both political and economic situation globally at the moment, there are a lot of uncertainties. We’ve got the rise of populism politically, and we’ve seen protests in many countries, which is clearly worrying people, and how that’s going to play out. And economically, we also have a lot of uncertainty. One, we’re still recovering, dealing with the issues from the financial crisis, but we also have major changes in the automotive industry, which has big structural implications. And clearly there’s still concerns about Chinese growth, and implications of that.
And if you look at uncertainty indices, of which there are several, most of them are showing record levels of uncertainty over the last 20 years. And that I think fundamentally is what’s helping gold, that it’s a hedge against uncertainty.
121 Group: So, the safe haven credentials are pulling money back into gold?
George: Well, we’ve seen the price move up this year in gold itself and gold equities. And that is clearly money coming in. I think it’s coming in and has been now for two or three years, and we continue to see that.
121 Group: Okay. Angelos, what are your thoughts on the macro picture?
Angelos: People are again becoming a little bit more nervous and they are looking at the macro picture. Not necessarily only the trade wars, but they are looking at the huge fiscal and economic problems in many developed economies, and also the geopolitical, and socio-economic uncertainties. So, all of these things are building up to a very gloomy and clouded outlook, that encourages some investors to look for safe havens. Gold is one of the historically most important safe havens, so they have been buying into bullion, again pushing the price up significantly since the middle of this year. One important factor I believe, has been the buying by some key central banks, for example, China, Russia. Russia in response of the sanctions, China in response of the trade Wars.
Last month we had the news that even the central bank of Serbia bought a record amount of gold to boost their reserves. Now, all of that gold that is accumulated by central banks is effectively removed from the trading place, because these are not people who will sell, because the price has gone to $2,000 an ounce, they keep it for their reserves. So, any increased interest by the general investment community to buy via ETFs, will only add to the demand for gold bullion, and push the price higher. And evidence of that is that we are still holding around $1,470-1,500 per ounce.
So, with any crisis, or any geopolitical unrest, or any correction in the equity markets, I believe this is going to drive further flows into gold, and ultimately the rise in the gold price, feeds into the profitability of mining companies, and could re-rate the money equities.
121 Group: But that first move of attraction back into gold, is going to be through bullion though, as you said. So not just central banks, but the generalists would move into bullion first, and then would perhaps get inspired by equities, and start looking around, and start to be attracted to move back into the stocks?
Angelos: Well, that has been the initial move for the last 12 months or so. We see the global ETF holdings backed by bullion, have risen to all-time highs. So people clearly want to be in bullion. The question is, when will they get the confidence to go into the mining equities, recognizing the impact it has, not only the profitability, but also in the re-rating of the asset base.
121 Group: And do you have an idea when that might be? Or do you feel that we’re moving towards that now?
Angelos: Well, we are clearly moving forward with that. It has already started happening in the large cap, and mid-tier producers. The question is, when will investors take the confidence to step into the perceived, more risky, single asset and smaller companies, that could have more of a corporate risk, as opposed to commodity risk.
121 Group: Okay, let’s delve into that in a little bit. Let’s keep on the macro themes. Ian, what are your thoughts on state of the markets, and the macro themes that are perhaps impacting precious metals.
Ian: Last year, I sort of had the view that it would be a mildly positive year but nothing particularly exciting, which is roughly how it turned out. This year, I’m actually far more bullish than I was last year about the outlook. The reason is that, looking forward to 2020 and looking for an out of the box economic forecast, we think that we’re going to see a return to inflation and that’s going to trigger a quite serious realignment. Out of the trillions and trillions of dollars that are currently invested in the bond markets, you only need a tiny, tiny fraction of money to head towards gold, and you could see some quite seriously positive results.
So, that would be our take on 2020. We think inflation’s going to surprise on the upside. There’s something stirring in the money supply, the bond markets, the commodity markets look like their bottoming out.
121 Group: Is that capital rotating into the gold sector though?
Ian: If you were looking at the deflation inflation argument turning around in favour of inflation again, obviously a lot of it’s going to go into inflation proof assets. So all metals benefit, particularly gold and even more particularly silver.
Lawrence: My view is that the price of gold is very much driven by where we are in the credit cycle, and real interest rates. It’s also driven by how well the competitive investments are doing. Until now, the stock market had been doing quite well. There’s a lot of data that shows that a lot of the time gold isn’t a particularly good investment, but when the credit cycle peaks and/or the stock market peaks, and they both start to go in the other direction, gold becomes an extremely good investment.
So like Ian, I’m quite bullish on the price for the next several years, because I think there’s a lot of very clear evidence that the credit cycle has peaked. We’ve had 11 years of growth since 2008. That bubble to me is very obvious, very clear, and starting to break.
In light of the cycle peaking, our day is about to come in a big way. I’ve got a lot of people looking at my fund, and saying, “Well, I’ll buy it when it comes back in a little bit. It’s already run, I don’t want to touch it”. I’m like, “Guys, you may not get the chance to have it come back in”. I think we’re going to be at 1700 very quickly and at that point in time, I think all these equities are going to re-rate in a major way.
121 Group: Do you think that they’re undervalued at the moment now?
Lawrence: Extremely. I haven’t been in the gold market for a long time, but I’ve studied the history and you can’t grow debt in excess of GDP without it eventually having a consequence that leads to a credit crisis. It’s very similar to the ’29 ’30 period. And so, I think we’re going to have a very serious credit crisis, and at that point in time, all the forms of paper become suspect, and 5,000-year-old money works.
121 Group: But you mentioned that point about the people you’re advising, and they’re sitting on the fence still, people are still not convinced. Are you talking about junior stocks here?
Lawrence: Junior and bigger stocks, but I see a lot of value all across the spectrum – large, small, intermediate. I’m absolutely convinced that, well-managed funds in the gold stock space, are going to provide two to five times returns over the next five or six years.
121 Group: How do you feel about valuations at the moment?
George: I still have worries about the junior space probably on two things. I think you have to see Rio’s experience in Oyu Tolgoi, and they’re very vocal about it. They say the problem we have with Oyu Tolgoi is we spent too much getting in. And a lot of the big companies are saying, “With all the regulations, politics, red tape etc.. Developing mines takes longer and longer. It’s now at least 10 years to get something properly developed and there’re lots of risks. So we can’t pay too much upfront to get in.”
So juniors who are thinking, “Oh, we just need to wait for somebody to come and take me out.” You could be waiting a very long time, and don’t expect a lot of money from those majors, because they’re certainly not in the mood to spend money up front, right now for those projects.
The second thing which I think is coming, and certainly we see it in the majors, is the concerns over ESG, and reporting on ESG. That takes a lot of time and effort, and even the majors are struggling, and it’s going to be tougher and tougher for juniors to do it. And you’re going to have to start doing it, and it and it takes time, and it takes cost. It’s an extra burden on small companies.
121 Group: So, the strategy for here is, hang tight?
George: It’s probably the same as it’s always been, you can’t just find something and sit there, you’ve got to come up with a proper development plan and be developing it. Because you can’t just expect somebody to come and buy you.
121 Group: And be creative about that exit as well, also look at alternative forms for the time being, until the market comes back.
Lawrence: Yeah. I find it somewhat hysterical right now that all the majors aren’t buying every small company they can. I see enormous value in the small companies. I agree with George, there aren’t acquisitions going on, but they could all be doing creative deals consistently. All the majors have a real serious problem, and that is that they’re big and they’ve got to replenish what they mine, and they have a hard time doing it in today’s world. You have juniors who are actually growing their production very consistently, but are trading at three times cash flow, and you have majors that are trading at nine times cashflow. The majors can access the capital markets, the juniors can’t. Those majors could buy those juniors, and immediately get a pickup in EPS. And yet, there’s nobody at those majors who smart enough to think about that, and do it now.
121 Group: Do you think there’s a fear there, from sort of excessive M&A, or from bad M&A and perceived risks, from the last cycle?
Lawrence: Well, that’s absolutely right. What they’re looking back at is, they remember 2011 when $3.5 billion was paid for a mine in Africa. And they know that they’ve been punished for doing stupid things. But what they’ve got to think about is, where they are in the cycle. Maybe they will come back, and maybe they will start buying mines five years from now when Gold’s a lot higher, and these stocks have all multiplied by three or four times. They should be buying them right now, but they’re not because they’re all terrified.
121 Group: Any other thoughts?
Ian: I 100% agree with that. But they never buy at the bottom. If gold goes up to 1800 and 1900, M&A activity will pick up. If it stays where it is… Apparently there’s five major law firms in Canada, in Toronto. Who specialize in M&A in the mining sector, and none of them have any work on at the moment.
Lawrence: Right. Which is stunning to me, because there’re amazing values out there. I mean three times cash flow, that’s a pretty interesting proposition if it’s a solid mine.
Ian: Much better buy at eight times cashflow when the price is higher, because they can justify that to their shareholders.
Angelos: Can I just point out that there has been an early signal of these attitudes actually changing, because some of the mid-cap Australian companies that have seen their paper re-rated far more than the Canadians, on the back of the weak Australian dollar, have been looking, funnily enough to Canadian acquisitions. So ultimately, by virtue of the capital markets forcing these companies to think about growth, I think it is going to happen. But we need the gold price stay at 1,500 and above, that’s clear. We are price takers in this industry to a large extent.
121 Group: Interesting. Let’s open to the floor, does anyone have any questions here?
Audience Question: China has about three trillion in foreign reserves present. How long do you think China will be happy with the foreign reserves keeping their value? Because they’re an asset that’s not under the Chinese government control.
Ian: Well, the Russians were in a similar position couple of years ago. They had about 600 billion in US Treasury bonds, and they virtually sold them right down to nothing now. And, most of that money’s found its way into the gold market. We suspect the Chinese will do something similar. Now people think, “Well, there’re no stories around of Chinese dumping US treasury bonds on the market.” They don’t need to, most of their treasury bond holdings are locked to five years in maturity. So, they just simply sit there and letting them mature. And when they mature, they don’t reinvest them back in the treasury market. So they’re gradually running them down in a way that is not newsworthy. Because, there’s no anecdotal stories around of Chinese dumping billions of US Treasury Bonds.
The big seller, during October, of treasury bonds were Japanese. They sold 30 billion of treasury bonds, because their own domestic Japanese bond market yields rose. So they’re not going to be big sellers, they’ll just quietly let them redeem. Their short term holdings will be redeemed, and they won’t be reinvested into treasury market, they’ll find their way probably into the gold market.
Lawrence: Yeah, I agree. I think the interesting tell on the Chinese was, they stopped growing their treasury balance in 2013, and it’s been flat and now it’s starting to trend down. What I find very interesting about the Chinese is the way they’re working to put everything in Yuan terms. You know, the Yuan Gold contract, the Yuan Oil contract, the direct trade with Russia. You see all signs of de dollarization. I think the world is figuring out, and I can say this being in the United States. The United States deficit is out of control, year on year, it’s growing at 40 or 50% a year underneath the top lying. If you look at what the real debt number is doing.
It’s a real problem and that’s what’s going to make everybody in this room really happy in the next couple of years. It’s sad, but it’s true. They just cannot stop spending. You notice that the debt ceiling came up a couple months ago. And every time in the past that that’s come up, there was at least a pretend fight over this being an important issue. “Oh no, no. We’ve got to cut back…” They literally passed it in two hours with no debate, no discussion. Let’s sweep this under the rug, this is a very tough subject. We’re all good, we’re just going to continue to increase the debt. And as the world becomes aware that the reserve currency is being hyper inflated, then they’re going to have to look for other choices. And there’s a lot of money that’s offside. There’s a lot of money that’s in bonds, there’s a lot of money that’s in dollars that’s going to just get destroyed on a real basis… and that’s the tell, that allows I think, a sophisticated investor to see that bonds are a screaming sell, and gold is a screaming buy.
121 Group: That’s a good point. Unfortunately, we’re flat out of time. But I’m a little positive for the sophisticated investor for next year then.
