Shop talk at Sprott

I spent today in Toronto, at an editor’s forum hosted by Sprott. Great event: an opportunity to talk about metals and the markets with people like John Embry, Rick Rule, Eric Sprott, and a dozen fellow newsletter writers.
In my short pre-dinner break, here is a quick rundown of the day’s takeaways.

There is a growing sense that value-seeking US investors are starting to test the mining waters. I had been hearing talk of this of late and it was reinforced today, when it came up in several conversations before Sprott CEO Peter Grosskopf pointedly noted that Sprott is fielding investment interest from groups who have never before owned gold. Endowments, for example, are looking at gold and gold equities as they search for value in a market where everything else is overpriced. Pension funds too.
This gives me warm fuzzies. Investor disinterest is a real obstacle in the way of a mining resurgence. A return of interest could even lift equities ahead of gold, at least to start.

These value-seeking investors are coming in at a good level. The unknown is timeframe. John Embry has been investing and managing funds for five decades, of which the last two he spent focused on precious metals. His quote of the day: “This is the best opportunity I’ve ever seen.”
It’s a notion that a room full of resource investors embraces. But then the conversation turns to timing. What will it take for gold to move? When when when will the rebound finally get going?
No one had an answer. Instead, there was perspective. This bear market has hammered resource companies down by 75%. In bull markets, resource investors expect doubles, triples, ten baggers, or even better. Those numbers make for a very good returns ratio – as long as you are willing to wait it out.

We still haven’t seen capitulation. Rick, who coined the term last year to describe what happens when a sector truly hits bottom, says we got close in recent weeks, but stocks never went No Bid.

Companies have not capitulated either – at least, most have not. And that is a bad thing. Alongside a lack of bids, capitulation is marked by issuers accepting whatever terms are necessary to raise money. Today companies still regularly approach Sprott for financings but walk away empty handed after refusing to include full five-year warrants.
Long-life warrants are a necessary financing evil today – and in fact are not that evil, since they generate commission-free cash upon exercise – but a myopic focus on dilution and an illogical attachment to the past, where warrants averaged only two years, means many companies kill their chances to raise money by refusing the realities of today’s terms.
There are exceptions, the latest one a Maven holding. Dalradian Resources announced a $35-million financing yesterday. Within two hours they had $40 million and closed. Why so much interest? Because DNA priced the offering right. Even though Dalradian is a market darling, the raise was priced at $0.80 per unit, below the current share price of $0.82, and included a full 24-month warrant.
In other words, there is money available for companies will to accept today’s cost of capital.

The physical markets for precious metals are strong, supported by individuals buying up gold and silver in North America and in Asia and in Europe. India’s silver imports have skyrocketed, with the country’s 1400 tonnes of buying in August keeping it on track to import almost 10,000 tonnes this year. The entire physical silver market is only about 30,000 tonnes, so India’s amounts are significant.
Silver in India is just one example. China is hungry for gold. Russia is too. The US Mint ran out of silver eagles for a time in July and is almost out for the year because of high demand.
There are a whack more data points that show consumer buying into gold and silver is very strong, but the question that comes of it is: Could the actions of the individual become the actions of the institution? A major move into gold or silver by one big fund could unleash a wave of interest.

This is the bottom folks – still. It is dragging on, and will likely drag on for some time longer. Tomorrow’s decision from the Federal Reserve on rates may spark some significant moves in gold and the markets. Or it may not.
As regular Maven readers know, I think a rate raise is likely even though I expect it to lead to a broad market correction or crash. That downturn could be sudden or it could drag out over months. The chart below captures why:

Shop talk at Sprott - chart of the day

This look at earnings is another way to show that the correction we’ve seen in US markets of late is significant. Corrections of this size are leading indicators of bigger downside to come. I have talked this topic to death of late.

A decision to leave rates where they are is a decision to kick the can down the road. The markets will likely surge, at least for a time, but volatility will remain the defining feature of the times.
Gold will return, in time. When the world’s economies collapsed in 2008, global debt totaled $140 trillion. Today, after all has supposedly been fixed, global debt stands at $200 trillion. This is the most leveraged situation in history and extreme leveraging rarely ends well – though in this case, what’s bad for assets would be good for gold.
Sorry for the stream-of-consciousness style of today’s note, but I wanted to share the thoughts of the day and only had a limited time.
Tomorrow is Fed decision day. I will be in the air flying back to Vancouver when the announcement is made, but by the time I land the markets will have had two hours to react before closing. And I will undoubtedly have something to say!

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