The broad equities index remains the only “threat” to gold and gold investors, said Rick Rule, president of Sprott U.S. The “existential crisis” facing the gold sector comes from the lack of exploration activity from miners.
Well, let's move on to, uh, market trends. Now you've talked to me two months ago about, um, about, uh, the gold sector being overbought in October. And, uh, you did make the right call because you said that short term, uh, corrections could be. Could be do. And, uh, and they were due and they have come. So two months ago, gold and gold miners are trading much higher.
Uh, how do you feel today? Three comments to that? The first is that our retrenchment likely we've seen in the metal, in the metals equities. Is normal and natural, uh, consulting again, the Barron's gold mining index going back 50 years, uh retrenchments between 10 and 25% in the gold equities indexes happen with ease and the frequency with which you and I inhale and exhale.
They were unnerving, but cyclical too, clients and secular bull markets have to be expected, not tolerated. So if you prepare yourself mentally and financially, These become non events, uh, or frankly buying opportunities. If you can't prepare yourself for this psychologically and financially better to sit out the sector, better juices, just exit.
Um, so that's the first thing to understand if, if we are, as I suspect, uh, in the early middle innings of a nine inning bull market. By the time this bull market is over. If you look at a chart of it, you won't see the decline that we just went through. It will be totally insignificant. If it's the first one you've ever been through.
Of course, it's a shocking circumstance. Sure. Thing I would say is that in my experience, the gold, uh, the metal moves in virtually to confidence in standard savings products. And the fear that we felt, uh, earlier in the year when the government stimulus programs were more busily debasing the currency and where we didn't know what the outcome of government actions would be with regards to the virus meant that the fear was more on center stage.
I think society began to accommodate themselves or at least be bored, being afraid. And as fear receded, uh, the need for the antidote to fear, which is gold also receded to, I think the resurgence of that fear is wrong. I think the factors behind the increase in the gold price, uh, which are quantitative easing, which I've previously called counterfeiting on your show.
Yes. Deficit spending, which is the theft by my generation of your generations wealth. And in particular negative interest rates will continue and will continue to propel gold higher. But in the near term, I think the resurgence in fear reduced demand for gold. Finally, with regards to the gold equities.
Uh, the junior gold equities got way overheated in the summer. I've never seen that before. I've never seen market leadership go from the biggest and the best to really in a bull market and shift all the way downscale, leaving all the intermediate steps in the value chain, uh, out of the bull market. But we did see it this time.
Uh, what has been lovely about this decline from my point of view is to paraphrase the old movie, the good, the bad, and the ugly, all declined. If there are. Uh, 2000 juniors, uh, 2000 juniors went up irrespective of quality in 2000 juniors, went down irrespective of quality. So the 45 junior companies, which are on my shopping list, uh, which I wasn't able to buy in the summer because they were from my own viewpoint, uh, overpriced.
Uh, of the 45 companies on my shopping list, I think 18 and 19 are within violent range. Now, whether or not this decline continues in the near term is of no relevance to me whatsoever. I'm buying for two years from now or three years from now. And the fact that these goods are on sale is attractive to me.
If you move further up the quality trader. Uh, in the minors that is above the juniors to the intermediate producer in a single asset producers on an enterprise value to net asset value basis or on an enterprise value to EBITDA basis. Uh, these stocks are almost historically cheap. Uh, relative both to the gold price, uh, and also to, uh, other equities classes, like the S and P 500.
So I would say that the sector as a whole is very attractively priced that doesn't say it won't go lower in the near term. And it, it certainly isn't to say that there won't be other. Periods like the periods that we've just been through to test one's faith in one's pocketbook. That leads me to my final question.
You've transitioned that perfectly for me, which is a, whether or not you think gold is in a crisis. Now I asked it because a lot of people are concerned about the gold role in society and, and, and, uh, in regards to, uh, investments going forward, given the price decline that it's facing, I'm going to quote a.
David whom I've had the pleasure of speaking with a few months ago. And he said that gold is facing an existential crisis. He was referring to of course the junior mining space running out of reserves, but I'd like to extend this to the investment landscape as a whole. How can gold compete with the rise of digital currency central bank digital currencies.
Bitcoin has risen while gold has fallen in the last three months. Investors are concerned about whether or not gold is still a safe Haven asset. Can you comment on all this? Those are two very different questions. So let's unpack them potentially. Let's do the last one. First with regards to gold, gold has functioned for, uh, at least 5,000 years of recorded history as both a medium of exchange and a store of value.
And importantly, it happened throughout the world in cultures that at least allegedly didn't have much contact with each other Mesoamerica. China central and central Africa. It's unusual to find a substance. That's both a medium of exchange and distance or a value. And I think that role, uh, continues for gold.
Uh, I, I think that reasons to be concerned about fee it savings as stores of value, uh, are probably more prevalent today than they've been at any time in the last 30 years. The idea as an example, that the world's primary savings instrument, the U S ten-year treasury yields, 80 basis points of the currency.
That's depreciating by a 160 basis points. Uh, in other words, the U S government guarantees to give you back less money than you gave them. Is very good for gold gold versus digital currencies. Uh, I think there's room for both. First of all, the market share of precious metals and precious metals equities among savings and investment products in the United States is one half of 1%, which is to say the goal isn't even a rounding error to the extent that demand for Bitcoin.
Went up tenfold. It doesn't need to matter to gold. Do they compete with each other on the margin among the Robin hood crowd among the speculators? Of course, but that isn't gold constituency. Gold is real. Constituency is the pension fund, the university endowment, the family office, the private saver. The second problem that at least Bitcoin itself, relative to other digital currencies team seems to have, is that the very volatility that attracts speculators you wisely pointed out it's been in the terror.
Reduces its utility as a medium of exchange. If something is rising and falling as rapidly as Bitcoin does someone who buys it or a fraction of part of it to buy a cup of coffee at Starbucks has no idea what they paid for the cup of coffee, nor does Starbucks have any idea what they receive for that cup of coffee.
So the very volatility of cryptocurrencies limits there. One of their primary utilities, which is to say as a medium of exchange. So I don't think the gold is under any threat whatsoever from any other asset class, with one exception, the bull market that we have experienced in equities and bonds, frankly, going back to 1982.
Might lead to a circumstance where some investors and speculators believe that broad-based equity ETFs, like the S and P 500 ETF are reasonable stores of value in terms of protecting one's purchasing power. In other words, the broad equity markets may develop in many people's mind as a competitor to gold.
With regards to the gold stocks, the dearth in exploration, uh, and the dearth in project expenditures, some would say over 10 years, I would say over 30 years has in fact led us to what could become an existential crisis. Remember that every day that you mine gold, your business gets smaller. The gold mine is not like a cornfield or a bakery.
You can't stop at the top at the top of the goldmine, throw in water and fertilizer and have it grow more gold. That's not the way it works. And the industry has under invested in exploration and under invested in development for a very, very, very long time. And the consequence of that is that the industry is shrinking before our eyes.
The good news there is if you are, uh, able to differentiate between companies that have good recycle ratios, recycle ratio, meaning the measure by which the free cash flow, they, uh, Enjoy can be reinvested in their business to generate similar rates of return. Uh, if you are looking at investing in companies that have a demonstrated history of creating value over 15 years, you can obviate this problem for yourself.
Not for the industry. Similarly, if you're speculating, uh, in exploration companies, Uh, and you were lucky enough to make a strong tier two or even a tier one discovery. Uh, it is highly likely that you will be bought out of your position at an eye-popping multiple by a major who needs those ounces to continue to stay in business.
So it's a double edged sword, uh, for management teams. There is an existential crisis. Yeah. Or the investor, uh, there might be a once in a decade opportunity simultaneous. All right. So there's a risk and opportunities for all. Thank you very much, Rick. You are a wealth of knowledge and I appreciate your time today.
Always a pleasure. And I'd like to review the offer to people. Sprott usa.com, front slash rankings list. Your natural resource stocks, all rank them one to 10, all comment where appropriate. And if you say charts on your request, all include the Barron's gold mining index chart and a hundred year commodity chart, which shows just how cheap commodities are relative to asset classes.
Looking back a hundred years, David, thank you. This has been pleasant. Thank you. Thank you to you, Rick. And, uh, look forward to following up on investment trends as well. Uh, that you're looking at. Uh, and this is David Lynch for reporting for Kitco news. Thank you.