John Hathaway & Ted Oakley: Gold Outlook, Inflation, & Bullion vs. Miners
- 30 mins 18 secs
Companies: Sprott Asset Management
Topics: Gold, Inflation,
Ted Oakley/Oxbow Advisors: Hello, everyone. I'm Ted Oakley, a Managing Partner at Oxbow. It is my great pleasure today to have John Hathaway, who manages a number of gold funds at Sprott. And we'll give you a lot of information on Sprott. I'd like for you to certainly take a look. If you are interested in gold or gold equities, I would certainly encourage you to take a look. And during the interview today, we will be showing you how to get in touch with John and his firm. But John, I want to welcome you. Thanks for visiting with us.
John Hathaway/Sprott Inc.: Thanks, Ted. I've been looking forward to this for a while.
Ted Oakley: The one thing I like about John relative to some of the latecomers in the investment business is that John has been in the business for 52 years. And he's even a guy that would remember Howard Ruff. Am I right?
John Hathaway: Yes.
Ted Oakley: He was a big gold bug, though, for sure, back in the day in the late '70s and early 80s. But anyway, John, I want to get into a couple of things. Number one, you have a great slide discussing your outlook on gold and gold equities. Give us a macro, micro on that look.
John Hathaway: Sure. I think it has to do with this standoff between the Fed and the financial markets. I think that's where we are right now. It's kind of a stare down. The Fed has committed to stopping inflation, which they didn't see coming but caused.
Last week, President Biden, Chair Powell, and Janet Yellen, who's Treasury Secretary, had a meeting. It was like Kabuki theater, and it was all scripted, but no real news came out of it other than Biden saying, "I'm going to leave the Fed independent. They know what they're doing." Something to that effect. I think the translation is if inflation doesn't come down, it's not my fault. It's all on the Fed.
And what's interesting about that meeting is that there was no real news other than the photo op. But Interestingly, Jamie Dimon, the chairman of JPMorgan, and some of the other too-big-to-fail banks, not long after that meeting, said, "Brace yourself for a hurricane." Those are the words of Jamie Dimon. But only a week or so before that, he said the economy was in good shape. I think that meeting was about paving the way and building political consensus for an expected period of economic weakness. That's how I would set the tone of where we are today.
But my view is that they don't have a clue of what to do. Powell is a politician and former investment banker. And as I said, I believe they were the cause of the inflation, but they know that what they're doing is likely to cause economic weakness. The big question is, how much can the administration stand politically going into the midterm elections? Because I don't think there's any instant gratification.
I had a call the other day with our mutual friend Lacy Hunt of Hoisington Management. And as you know, Lacy is an expert on these matters, monetary policy. And his view — and this has been my view, but coming from Lacy with his credentials — I think strengthens the point, is that there's been so much liquidity created over the last couple of years between the growth of M2 and handouts to consumers during the pandemic, easy fiscal policy, that we have built up such an amount of liquidity that may take two years to get back to trendline. I think in the world of politics, two years is like an eternity, and the ability to keep the hand on a hawkish policy isn't there.
I am in the camp that the Fed is likely to cave in and pivot probably before the end of the summer. And what we're going to see is maybe some moderation of the high rate of inflation, although this Friday is anybody's guess for the CPI, but maybe over the summer, a little bit of slack is likely to appear in the economy and perhaps that may cause inflation to come down. But it's not likely to go away.
So where we are with gold, getting to the point, is that we're at the point where the Fed doesn't have a dial anymore. It's an either on or off switch. They're either switching off the economy and crashing financial assets and the economy, or their crying uncle and caving in, which will likely open the door to more inflation.
I think either outcome is positive for gold. Gold does well. Year to date, it's up a little bit while the S&P is down 12% or 13%. It's shown that it can be uncorrelated and help defend capital during difficult times in the markets.
If the Fed cries uncle and pivots, my guess is before the end of the summer, we're off to the races and I think we'll see new highs in the gold price, which would be around $2,200. That's the setup for anything else we'll talk about.
Ted Oakley: John, you have a great slide about asset class performance, gold leading the pack. It goes back to 2000. And I'm sure this will catch most people by surprise about comparing it to the S&P 500, the U.S. aggregate bond and the U.S. dollar. It's a super slide, though. Do you mind talking about that?
John Hathaway: Yes, I think it would come, as you said, as a surprise. Gold is performed in line—depends on when you take that snapshot—or better than the S&P over the last 20 years. And why 20 years? That's what I call the dawn of radical monetary policy; ultra-low interest rates under Greenspan, QE under Bernanke and continued by Yellen and now Powell. Gold has done quite well, even though it has a bad name.
Ted Oakley: And you have a slide on near-term performance. It's just the first quarter, which you've already mentioned. But looking at that slide, it's done better than stocks and bonds. I'm asking a question here, and it's not a statement. Hasn't there been periods when right at the end of a bear market—not in the beginning, but right at the end of a bear market—the miners would slip? Now they would come back quickly and so would go, but there would be a short period where they would decline. Would you expect that if we keep going lower this year on the S&P 500?
John Hathaway: Mining stocks are stocks. They're different than gold, even though they are very closely linked over, let's say, intermediate to longer term. If you went back to the Great Financial Crisis in 2007-2008, gold stocks performed poorly, but once they turned on the spigots of monetary creation, the gold stocks were the first thing out of the box and did very well.
Now it's a little bit different because I think the gold stocks are cheap. They trade at low cash flow multiples, almost any metric you can think of. Could there be downside? Sure, because we're in a bear market and they are stocks. But when this pivot comes, which I'm anticipating, I think they will likely go higher on a higher gold price.
Ted Oakley: You also have a slide about how deeply valued they are relative to the bullion. I haven't seen that slide before. It's interesting. We've got it. We'll show it here. But that's a fairly wide spread between normal valuation on the miners and where they are.
John Hathaway: Yes, they're very cheap relative to bullion, as the slide indicates. They're cheap relative to other stocks. We have a slide that shows that. And I think it's worth noting that it's cheaper to buy a gold mining company in the market than to start from scratch. The discount in operating businesses to historical values is unprecedented in my time in doing this, which is now going on 20-plus years.
Ted Oakley: You've never seen it that deep.
John Hathaway: Never seen these valuations like that. And going back to your point about how they would do in a continuing bear market, you have to concede that they are stocks. But I do think that their downside risk is somewhat tempered by the strong valuations that they show.
And again, I think if you wait for the Fed to pivot, you won't be able to accumulate a position. You need to be there and maybe ride with them during this build-up, this basing period—which I think is where they are, they're basing — without a huge amount of downside, to participate in what I believe is likely to be a substantial upside when the Fed changes its tune.
Ted Oakley: You've got some great information on the basics of true gold discovery. And I'll take the first one, which is discovery and production. It looks like you're saying that we're just discovering less gold.
John Hathaway: That's for sure, yes. Everything points to that, and there are lots of reasons for it. But the fact is that we are finding less and less gold that can be mined at today's prices.
Ted Oakley: And when you mentioned the lives at less than or about 30 years, is that the lowest you've ever seen? The life of a mine?
John Hathaway: The mine life of the reserve life — of the existing global stock of production—is the shortest it's been in 30 years. We've been talking mainly about macro considerations, but on a supply and demand basis, we have shrinking supply, while at the same time, you have the potential for a substantial increase in demand at the retail level and the institutional level when the Fed turns.
Ted Oakley: As a follow-up, you also show this piece here, where it shows that it is better to buy a mine than to develop a new one. Do I read you right on that?
John Hathaway: That's correct. Yes, it's cheaper to buy existing production. When you think about M&A [mergers and acquisitions] in the mining business, it's cheaper for a big company to buy a medium-sized company than to spend money exploring and then building a mine that might not come into production for another seven or eight years.
Ted Oakley: And so when you look at your primary fund, the Sprott Gold Equities Fund, for example, do you own up and down the spectrum, large, junior, bullion, everything?
John Hathaway: Yes, we own the whole A to Z in terms of what could be out there. But I think if you look at our average market cap, it's around a billion-and-a-half, which would tell us we're mid-cap, but we do have large-cap names and small-cap names.
Ted Oakley: And you mentioned too, along the same line, the buy is easier than build, that you think there's a new merger acquisition cycle underway. Do you mind talking about that?
John Hathaway: For sure. We are seeing a lot of M&A, some good, some not so good. And one thing we do in screening our portfolio is to ensure that management knows what it's doing in an M&A sequence. But there's no doubt that a lot of consolidation is taking place. And again, that's something you see at the bottom of a cycle, not at the top.
Ted Oakley: What do you look for, or what should they look for in a gold mining stock that they're wanting to buy that might be a takeout candidate, for example, but are they looking at new production, cash flow? How do they fit that?
John Hathaway: Yes, a lot of those things. I think asset quality is one thing. Another development that's taken place over the last ten years or so is jurisdictional risk. About half of our underlying assets are in North America, which has the rule of law. We have another large exposure in Australia. And then the rest of the world, we're pretty picky about. Just Africa you can't avoid because they have great geology and we screen countries based on political risk. But that's a big factor in our selection process.
Ted Oakley: Interesting. And you do own a percentage in the bullion, too, am I correct?
John Hathaway: We have about 11% last count, exposed to physical metal.
Ted Oakley: Let me switch gears and talk about if you look at equity ownership at all-time highs, which, by the way, we have to agree with, that you get these two sigma's, or one or two standard deviation above, and we feel the same way about real estate, that it would be the next trouble as well. But you have a great slide on equity ownership at all-time highs and the percent of households and where they are. But obviously, they are all in on this equity side.
John Hathaway: Unfortunately, that's true. The media does a good job of steering people away from owning anything gold-related.
And then part of the reason it's not in the mainstream is that the rationale for having any exposure at all is always taken to be some kind of a negative view on the consensus view of the world, which is rose-colored glasses and a bullish stock market outlook.
Ted Oakley: You've had a chance to be at all the gold highs, at least since I've been in business.
John Hathaway: Yes, and the lows.
Ted Oakley: Yes. But on the highs, what was the sentiment like, say the late '70s, early '80s and 2011? Did everybody want gold? What was that sentiment like?
John Hathaway: Yes. It was euphoria. It was front-page stuff. You go back to 2011 when gold ticked at $1,900 and something and then never saw that for another ten years. It was front-page news. The Financial Times talked about it almost daily; you don't see that now.
Ted Oakley: I know and you will probably get some comments on this question, but you have a lot of people talking about the fact that "Oh, you need these cryptos because there'll be a lot better hedge than gold." But that has not been a proven situation so far. And it seems like if you want to go for a hedge, you need to be looking at gold instead of something like crypto, which is getting wiped out, right?
John Hathaway: You have to be a little careful. But the world of crypto is hurting right now. And I'm not saying that crypto doesn't have merit, and it's been a great investment. Lately, it hasn't been, and the rationale for being there is very similar to the thought process for gold. But at least now—and for the last couple of years—crypto has been correlated very closely with high-tech stocks, the FAANG group and so forth. Until that correlation breaks down, I don't think it's a good diversifier.
Ted Oakley: Question for you along that line of people, for example, and I'd like for them to know this, you have a really good slide on the downside, equity protection, average monthly return showing gold versus a lot of other things. It goes all the way down to the Russell and the MSCI. That is a great slide. You might talk about that. I think that's 20 years' worth, maybe?
John Hathaway: It should be 20 years. It probably would go for longer than that. I can't remember exactly what the chart shows in terms of time span, but over history, gold has a low correlation to other financial assets, bonds, and stocks, so it is a true diversifier. That means it may not always go up when other things are going up, but when other things are going down, it holds its own and may even go up.
Ted Oakley: I've never seen this done before, but you put together a great slide here for people. As we discussed, many of them don't have any gold in the portfolio. Obviously, at Oxbow, we do. We have the miners and the bullion. But the thing about it is you have a great slide that looks at a standard 60/40 stock-bond portfolio, and what happens to that? You've done a historical on it if you add 10% gold.
John Hathaway: It certainly can help to enhance returns.
Ted Oakley: Well, it was a big number because you went from basically if you want to look at risk versus total return over a 20-year period, you basically beat the 60/40.
John Hathaway: It's not like you're betting the ranch, but it's a prudent way to protect capital. Another interesting point is that bonds have traditionally been the diversifier against a 60/40 portfolio. Institutionally, it was always the way you mitigate against risk, but that hasn't worked because when you have zero interest rates and now, say on the tenure, we're now at 3%. Bonds have gotten killed. I hate to say it, but they just have gotten killed. Bonds have not been a good diversifier, at least in recent years.
People always ask rhetorically, "Where do you go for safety? Where do you go to protect capital?" But you never hear anybody in the financial media say, "Well, how about gold?" You rarely hear it on Fox, MSNBC, CNBC, etc. Bloomberg even. It's like it doesn't exist.
Ted Oakley: You never hear, and it's almost like if they do have somebody on or they talk to them a little bit.
John Hathaway: I haven't gotten a lot of calls from the financial media lately, but I'll tell you, back 10, 15 years ago, I was getting a lot of calls to be on Bloomberg and Charlie Rose. There was just much more interest. There is zero interest now.
Ted Oakley: Let me ask you if somebody has no gold, and a lot of people watch this that we don't manage for—but not that we wouldn't want to—but the main point, if somebody shows up today and they own zero gold. They can buy your Sprott Fund and be highly diversified, but what percentage would you tell them? If I've got a 100% stock and bond portfolio, no gold presentation at all, what would you tell them would be a fairly decent number to start with, percentage-wise?
John Hathaway: I would always advise someone to lag in and not go all out, but ultimately, I would think you would want to build your accumulation to at least 5%, because otherwise if you keep it at 1 or 2%, it's like kissing your sister. On the other hand, 5% could do you some good. As our charts have shown, 10% is a reasonable exposure. I wouldn't recommend more than that, but here, at a time when there's zero interest in our space, given a contrarian point of view, why not just dip your toe in the water at 1 or 2%?
Ted Oakley: I don't know. I'm sure you know this, but I don't know what the percentage is—the S&P 500—that are gold miners, but it has to be-
John Hathaway: It's less than 1%.
Ted Oakley: Really?
John Hathaway: Oh, yes. They are probably only one or two names I can think of. It might not even be 1%.
Ted Oakley: That's interesting. There's a lot of room to run there.
John Hathaway: It's not going to be 10%, but it could be 2 or 3%, which, from where we are, could be a double or a triple.
Ted Oakley: Well, you remember just two years ago when energy was not even represented hardly.
John Hathaway: Sure. Energy, again, it was not invited to the party, and look where it is today.
Ted Oakley: At the end, you'll see how to get in touch with John and the Sprott group. I have been around a long time. There's a lot of really professional people there. I wouldn't say tons of them, but the ones are there, I only want great minds. Two or three are fine for me, John.
John Hathaway: You don't need more than that.
Ted Oakley: That's for sure. You've probably forgotten more about gold than most people know. It's really interesting to me how you manage that and what goes on with that, but I would highly recommend people to take a look. They can come to your website, which we'll show here, and get any information they need. You'll find a lot of great things in there.
I would ask you one more question. You and I both know Neil Howe on The Fourth Turning and what goes on in those crazy periods.
John Hathaway: I think we heard him speak at a recent conference we were at.
Ted Oakley: Yes, we did. He didn't change his tune any about the next 10 years, but question for you, wouldn't you think that gold, if you get into these really crazy times where you have upheavals various things, even in the U.S., wouldn't you think it would really become the asset of choice at that point?
John Hathaway: Well, it certainly would come out of the doghouse. I hate to predicate interest in gold based on worst outcomes that we all know are there, but I'll let other people do that, but certainly you can say that gold has been in the penalty box for the last 10 years. If we get into some kind of Fourth Turning, where we have unexpected outcomes, I would certainly think that having some exposure to gold isn't going to hurt you.
As you've seen over the last 20 years, if you had it, it didn't kill your performance. Maybe in some years it did, but over a long span it didn't. Right, if we go into a world of unexpected outcomes, of financial reset, as some people like to say, gold is certainly going to come out at least near the top of the heap.
Ted Oakley: One last question to you, which is a question that we get at Oxbow all the time. This question is continually coming to us, which is, if I'm an investor, should I have gold bullion delivered to me to hold?
John Hathaway: No, because that means you're self-insuring, and I think the risk of having bullion somewhere in your house in your safe or whatever, it doesn't really get you that much. There are better options, and I would just mention among them would be Sprott's closed-end gold trust, where if you wanted it to be delivered to your doorstep, we would do that.
Otherwise, it's sitting safely in the Bank of Canada vaults and it's traded publicly. It's a closed-end fund, there's a very small premium or discount. In my mind, it's not the only solution, but I think it's better than having it shipped to your doorstep.
Ted Oakley: Yes, because somebody could come and get that too.
John Hathaway: Well, that's right, and you can't transact in it. You're not going to lug a bullion bar down to your bank. They're going to have to ship it to a refiner to make sure that its purity is correct. It could take you two or three weeks or more to get cash, it's not transactable. Whereas if you have it in the closed-end physical trust of Sprott, you can buy and sell like a stock, but it is gold.
Ted Oakley: John, I want to tell you it's been our pleasure to have you here today. On the screen, people can see how to get in touch with you, find out a lot about what you do. One of the things I find in the industry is that you want the people that have been around a while. If Warren Buffett and Charlie Munger are any example, you've got a long way to go, my friend.
John Hathaway: I'm counting on it.
Ted Oakley Bio
Ted Oakley is Managing Partner and Founder of Oxbow Advisors. With more than forty years of experience in advising high-net-worth clients in the investment industry, Oakley implements the firm’s proprietary investment strategies and the “Oxbow Principles” to provide a unique investment perspective. He is a frequent guest on FOX Business News, Bloomberg Radio, KITCO News, Cheddar TV, Yahoo Finance, and many more. Mr. Oakley is a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP). He is a member of the Houston Society of Financial Analysts. He is also a Partner of Herndon Plant Oakley Ltd., an investment company. He is a Board Member of Texas State Aquarium, American Bank, and American Bank Holding Company. Mr. Oakley is a United States Army Veteran.
Ted Oakley is not an employee or an affiliate of Sprott Asset Management LP. The opinions, estimates and projections ("information") contained within this content are solely those of the presenter and are subject to change without notice.