Charlotte McLeod of Investing News Network interviews Shree Kargutkar on February 1, 2022, on his outlook for gold and silver.
Charlotte McLeod: I'm Charlotte McLeod with the Investing News Network. And here today with me is Shree Kargutkar, Managing Director and Portfolio Manager at Sprott Asset Management. Thank you so much for joining me online today.
Before we get started on our 2022 questions, I want to take a quick look back at 2021 and get your thoughts on gold's performance. I wondered if you were surprised to see a more muted gold price last year than what we saw in 2020 when there was a big rise?
Shree Kargutkar: Yes, gold had a strong year in 2020, and even 2019 was a strong year as well. I mean, if memory serves, spot gold rose 25.12% in 2020 and it was up almost 18.13% in 2019. I suspected that we were due for consolidation as we entered 2021.
However, what surprised me most was perhaps the about-face in investor enthusiasm towards gold. Despite the persistent negative real rates, runaway inflation, and increasing deficits worldwide, investors cut their bullion allocations in 2021.
And the combined gold ETFs that we track saw their holdings reduced by almost 9% through 2021. It was not the fact that gold had a muted price response in 2021 because we had such a strong previous two years, but it was more the sentiment, which was very poor, from the investor community; that's what surprised me most.
Charlotte McLeod: That's interesting. And you mentioned rates and inflation. One of the key questions that we have for 2022 is whether the Fed will be able to control inflation. This is quite difficult to predict, but can you give me your sense of whether the Fed will be able to fulfill the plans that it's laid out?
Shree Kargutkar: The inflation we're seeing now seems to go beyond monetary policy. We have supply chain bottlenecks; for example, ships are waiting to unload their cargoes at ports. We cannot find enough truckers to move goods around the country. And that's just on the logistics side of things. We have tightness on the commodity side. Everything from orange juice to oil is rising. And we're seeing consumer demand translate to higher prices. And that's what seems to be feeding inflation right now.
We'll leave the wage pressures on the side for now, but the Fed as we know it has a dual mandate. They have to ensure that there is maximum employment and that there is also price stability. And right now, we are at an interesting juncture. If the Fed hikes rates too quickly, the nascent economic expansion will be the casualty. If they hike too slowly, we'll likely continue to see fairly robust inflation.
I think that the Fed may choose the lesser of two evils, which for now is to ensure that there is continued economic stability. And as a result, my thinking currently is that the Fed will hike, but not with the aggression needed to significantly tamp down the inflation that we're seeing right now.
As a result, we will probably see real rates come back under renewed pressure as inflation expectations start to move higher. The other casualty of that could well be the U.S. dollar. And both of these are quite positive as far as gold is concerned. I think as a result of the potential Fed action, or rather inaction, it probably creates a very good opportunity for gold to move out of its current consolidation and into a new uptrend.
Charlotte McLeod: Thank you for laying that out. That makes a lot of sense the way you explain it. As we said, the Fed's actions will impact gold as we move forward. What other factors are you looking at for 2022 that you think will influence the yellow metal?
Shree Kargutkar: I think the single biggest factor will be investor demand. In 2020, we saw gold make a new high, and investor demand for gold in 2020 was at an all-time high. Almost 24 million ounces flowed into gold bullion ETFs.
However, in 2020, due to COVID, the physical demand out of the two largest buyers of gold, China and India, was nowhere to be found. That weakness continued into the first half of 2021. But in the second half of 2021, Asian imports surged once again. I think India had the largest gold import year in the past six years in 2021.
I expect to see that demand continue for both India and China heading into 2022, and we're starting to see early signs of investors starting to come back to gold. We saw one of the largest inflows of gold bullion into the physical ETF just a few days ago. If this trend were to hold and we have both the investors and the physical buyers rolling in the right direction -- as I said before, investors were moving away from gold last year when the Asian buyers were coming in -- but if you get both the physical buyers buying and the investors coming back into the space, this should create a little bit of magic for gold prices.
Charlotte McLeod: Let's take a closer look at what this all means for prices. Do you have a particular range that you think we would see for gold in 2022?
Shree Kargutkar: Charlotte, my crystal ball has gone missing, but we saw an interesting thing in 2021. Despite gold declining on a year-over-year basis last year, the average price of gold in 2021 was higher than in 2020. I expect gold to do quite well in 2022, and I would not be surprised at all if it were to make a new high this year.
Charlotte McLeod: Obviously, it's very difficult to predict, but thank you for giving that information. I also want to talk to you about gold stocks because I know you're involved in Sprott Gold Equity Fund. I want to ask about 2022 and where you see the most opportunities.
Shree Kargutkar: I think there is tremendous opportunity in the precious metals equities today. I've been following this space for well over a dozen years now, and I've never seen anything close to the valuations that we're seeing in precious metals equities today.
For example, the GDM Index1 trades at a 5% discount to the S&P 500 Index.2 And in the last couple of weeks, we've had a large crash in the S&P and the NASDAQ, and that discount is still as wide as I've seen it.
What we're starting to also see in the precious metals space is high dividend payouts from certain companies that are producing gold. We're also beginning to see buybacks start to happen. We have valuations, buybacks and dividends that are being announced and or increased.
Now, within the sector itself, I think the biggest opportunity is in two areas. The first area is the mid-tier and perhaps some small producers as well, so small- and mid-tier producers. And the second opportunity within the precious metals space is in the earlier stage exploration companies.
There is inflation occurring, unfortunately, as far as mine buildouts are concerned. Some developers are probably positioned not the best as we would like to see them. And that could be the one area of weakness that I can think of.
Overall, precious metals producers are cheap; they're returning capital, growing their margins, and growing within their means. They also have record-high margins right now, with gold trading near $1,850 per ounce. So that's the one opportunity, and the other one, as I said before, because of the dearth of exploration that has been done over the past decade, high-impact exploration companies have the potential to create some incredible value for shareholders.
Charlotte McLeod: That all sounds very promising. The one thing that I would want to talk a little more about is the inflation concerns. We know that this is happening in the world, and of course, mining companies are no exception. They are going to have to deal with this. How much of a concern should that be for investors? What should they be looking at when considering making investments in precious metals stocks?
Shree Kargutkar: Gold and silver mining companies are not being left alone by inflation. As I said before, we are seeing major inflation related to the cost of building a mine, but on the production side. Yes, if you're a producer, there are cost increases, but the cost increases are somewhere in the range of 7-13, 14%, depending on the producers in question. But this being said, margins are at or near an all-time high for many of these producers.
Most of the companies that we track are basing 2022 production somewhere around $1,500 or $1,600 per ounce of gold. There is ample margin for them to be wrong on the inflation front and still generate very substantial margins for shareholders. As it relates to the industry as a whole, I'm not overly concerned, except for a few cases that have been hit, given that they were underprepared and, in certain instances, overleveraged. But as it relates to the industry, I don't foresee too many companies getting into trouble as a result of cost escalation, especially on the production or exploration front.
Charlotte McLeod: I want to ask also on the note of the gold companies, are there any trends that you think investors should pay attention to, things they might be missing too because I know people tend to just focus on what the price is doing and get stuck with that.
Shree Kargutkar: I would say the number one focus, for us at least, has been on the cost escalation front. It is very challenging to be a developer if you're looking to build a big mine these days. Inflation is certainly a trend to worry about. But the other area that we're also watching closely is supply chain logistics. For companies operating in certain parts of the world, especially those with remote operations, supply chain logistics and procurement have never been as important as it is today, and this is due to all the issues that we're having on the supply chain side. That's a trend that we're keeping a very close eye on.
Also, there is an increased focus on ESG [environment, social and governance], which has been a big topic of conversation for many industries. The precious metals industry is no stranger to this. I would say that most of the companies that we track and that we invest in have generally been fairly good stewards on the ESG front, but they didn't have a lot of conversations with the shareholders before, and they're starting to do that now. As investors start to look underneath the surface of some of these higher-quality names, they might be pleasantly surprised that these mining companies are taking care of all the stakeholders, including those that live around them, those that come and work for them, as well as the environment.
Charlotte McLeod: That's very helpful. I think now that we've covered a bit about what's going on in gold, we should head over to silver. It's often described as a dual metal. It's got its precious side; it's got its industrial side. I wonder which one you think will take the lead for silver in 2022?
Shree Kargutkar: Silver demand has always been overwhelmingly tilted towards the industrial side of things and that's unlikely to change in 2022. However, investor demand is a key determinant, at least in my opinion, for the direction that silver prices take. For example, the SLV ETF saw almost 300 million ounces of inflows in 2020. This 300-million-ounce number is important because the annual mine production is roughly around 850 million ounces every year. That was an outsized move that we saw from the silver ETF front.
But in 2021, we saw a small outflow from silver-backed ETFs. I think part of the weakness for silver in 2021 had to do with weakened investor demand. But this being said, the demand for coins and bars has remained quite robust.
I think the key determinant in 2022 will be the focus that institutional investors and large retail investors start to pay toward silver ETFs and if they're allocating money into either the ETFs or the bullion funds or in the physical metal outright. I think that will be the single most important driver as far as silver prices are concerned.
Charlotte McLeod: That's interesting. I want to ask you a question on the industrial side of demand for silver because one thing that I've started to hear from people lately is there's some expectation that large companies may want to step into the space, secure their supply of silver, and that could be a big deal for silver. I wanted to get your thoughts on that, and if you think that's something that could be possible.
Shree Kargutkar: I don't see it as a near-term risk. We have not seen the shortages in silver like what we have seen in palladium and nickel. That doesn't mean that if investment demand starts to significantly draw a lot of supply away from the industrial side, that could lead to companies becoming more interested in securing their supply. But this will have to come at a premium to spot prices. But this is not a near-term risk. This is something that could certainly occur in two, three, four years if silver investment demand starts to make a strong comeback or even grow beyond what we saw in 2020.
Charlotte McLeod: In terms of the silver price in 2022, usually we hear that the $30 per ounce level is pretty crucial. We couldn't get there in 2021. Do you think there's a chance this coming year?
Shree Kargutkar: Again, my crystal ball has gone missing, so I don't know exactly whether or not we will see a move like that. But I'll give you a little bit of context. Silver is at $24 right now. A move in excess of 25% would put it through that $30 level. This may seem like a big move for people who are not used to keeping a close eye on the space, but silver tends to make large moves regularly. Since 2005, we have seen silver move 25% or higher on five occasions. Five times since 2005, we have seen silver make the kind of move necessary for it to break above that $30 barrier.
My thinking is that if gold has a strong year, silver is likely to do quite well. If gold has a strong year and we get that resumption up into the right for the gold space, it would not be surprising for me to see silver trade past $30.
Charlotte McLeod: Okay, I think that context is really helpful, and it leads a little bit into the next question, which I think is a fun one. Are you more bullish on gold or silver for 2022?
Shree Kargutkar: I'm going to hedge here a bit, and I'm going to say that I'm bullish on both metals, but for different reasons. Gold has been a store of value for thousands of years, and with inflation persisting and economic growth flagging, I cannot help but be bullish on gold as an asset allocator.
But as a speculator, I'm just as bullish on silver. It is more volatile than gold, but silver tends to do even better when gold does well. I think silver has more upside than gold if we're talking about price appreciation purely from a percentage price appreciation perspective. But depending on whether you're a speculator or an asset allocator, there are reasons to be bullish on both gold and silver in 2022.
Charlotte McLeod: I think that's a very fair answer, and it does go back to the point that people always bring up, which is that people are individuals, right? Each investor needs to make their own choices, which as we finish up, I wanted to ask what your best advice is for investors in 2022, of course, as we keep in mind that people need to make their own decisions ultimately?
Shree Kargutkar: I believe that we are in the early innings of a gold and silver bull market. The sentiment towards precious metals, especially precious metals equities, is at or near rock bottom, and the opportunities that we continue to uncover are unlike anything that I've seen since I've been involved in the space, which is going back to 2010.
I think we are on the cusp of a similar type of a generational opportunity today. I would encourage every single one of our listeners or viewers to maybe dust off their old notebook and do a little bit of research on some of these precious metals companies, especially those that are well-managed and well-positioned. The same goes for companies that are engaged in high-impact explorations.
Charlotte McLeod: I think that's a great note to end on. I hope that people will take that to heart and start doing some research. Thank you so much for coming to talk today about what's going on with gold and silver.
Shree Kargutkar: It's a pleasure, Charlotte. Glad to be here.
Charlotte McLeod: We'll see you again soon. Once again, I'm Charlotte McLeod with the Investing News Network and this is Shree Kargutkar with Sprott Asset Management.
1 | NYSE Arca Gold Miners Index (GDM) with dividends reinvested. GDM is a modified market capitalization weighted index comprised of publicly traded companies primarily involved in the mining of gold and silver in locations around the world. |
2 | S&P 500® Index represents 505 stocks issued by 500 large companies with market capitalizations of at least $6.1 billion. This Index is viewed as a leading indicator of U.S. equities and a reflection of the performance of the large-cap universe. |
3 | The NYSE Arca Gold BUGS Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. BUGS stands for Basket of Unhedged Gold Stocks. |
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