We Are Still In Early Innings For Gold And Silver | Ed Coyne and Jimmy Connor

Key Concepts

• Mining Stocks & Precious Metals: Significant potential for substantial returns (3-500%) currently undervalued by many investors.
• Inflation & Money Supply (M2): Increasing money supply (40% growth since 2020) is driving inflation and eroding purchasing power, leading investors to seek inflation hedges like gold and silver.
• Alternative Investments: The traditional 60/40 portfolio is becoming outdated, necessitating allocation to alternative assets, particularly precious metals.
• Gold as the Original Alternative: Gold’s historical performance as a portfolio diversifier and its resilience across market cycles.
• Silver’s Emerging Role: Silver is gaining recognition as a critical material beyond its traditional precious metal status.
• Uranium & Copper: Critical materials benefiting from the energy transition and infrastructure development, presenting investment opportunities.
• Cryptocurrencies & Precious Metals: Cryptocurrencies have re-engaged investors in the idea of allocating capital outside traditional markets, often complementing rather than replacing precious metal investments.
• Institutional Interest: Increasing interest from institutions like Elliot Management in precious metals royalty and streaming companies.

Inflation, Purchasing Power & Monetary Policy

The discussion highlights a growing awareness among financial advisors regarding the impact of inflation on purchasing power. The money supply, measured by M2, has increased by over 40% since January 2020, rising from $15.4 trillion to $22 trillion. This increase is directly linked to the erosion of purchasing power, exemplified by a 147% increase in the price of a medium McDonald’s French fries and an 87% increase in the price of a Big Mac over the past five years. Advisors are beginning to recognize this trend, spurred by discussions with experts who emphasize the importance of monitoring money supply. This realization is driving a search for solutions, with gold emerging as a prominent hedge against inflation.

The Shift in Investor Sentiment Towards Gold & Silver

Financial advisors are expressing “shock and awe” at the recent performance of gold and silver, particularly over the last two years. While investors have long understood gold’s diversification benefits, they are now increasingly recognizing the opportunities within mining stocks. Interest in the mining space is surging, as evidenced by a recent event where a Sproad roundtable attracted over 30 attendees, a significant increase from the one or two attendees typical of five to six years ago. This renewed interest is coupled with a growing understanding of gold’s historical performance as a portfolio diversifier, a fact often overlooked in recent decades. Silver is also experiencing a resurgence, driven by its increasing importance as a critical material.

The 60/40 Portfolio & the Rise of Alternative Investments

The traditional 60/40 portfolio (60% stocks, 40% bonds) is considered increasingly inadequate in the current inflationary environment. Jamie Dimon’s suggestion of a 60/20/20 portfolio (60% stocks, 20% bonds, 20% alternatives) reflects this shift. Precious metals are identified as a significant component of the alternative investment allocation. Ed, Head of Global Sales at Sproad, Inc., describes his own “awakening” to the value of gold as the “original alternative investment,” highlighting its unique performance characteristics and ability to perform differently from the broader market. This perspective is gaining traction as investors seek strategies to offset inflation and diversify their portfolios.

Bitcoin, Cryptocurrencies & Precious Metals: A Complementary Relationship

Initially positioned as a “new gold,” Bitcoin’s role has evolved. While cryptocurrencies initially drew investors away from traditional assets, they ultimately re-engaged them in the concept of allocating capital outside the traditional market. The relationship between Bitcoin and precious metals is now viewed as complementary rather than competitive. Investors are increasingly allocating to both, using cryptocurrencies as a “risk-on” allocation and gold as a “risk-off” allocation. Ed notes that he is “thankful for cryptocurrencies” as they helped reinforce the narrative for holding assets outside traditional markets, ultimately benefiting the precious metals sector.

The Re-Emergence of Mining Equities & Critical Materials

After a period of underperformance relative to physical gold, mining equities are attracting renewed attention. Improved margins, attractive return on invested capital, and higher dividend yields compared to the S&P 500 are driving institutional interest. The historical return patterns of mining stocks, characterized by substantial gains (3-500%), are also fueling optimism. Ed emphasizes that mining stocks represent an “opportunistic allocation” and a “risk-on” component of a portfolio, distinct from the “risk-off” nature of physical gold.

Beyond gold and silver, the conversation expands to include critical materials like uranium and copper. The energy transition and global electrification are driving demand for these materials, creating investment opportunities. Uranium benefits from the growth of small modular reactors and the extension of operating licenses for existing nuclear plants. Copper is essential for infrastructure development and the electrification of developing economies. Investors are seeking ways to participate in this trend, moving beyond consumption to direct investment in these materials and the companies that produce them.

New Players & Shifting Narratives

The gold market is witnessing the emergence of new, non-traditional buyers, most notably Tether, the world’s largest stablecoin provider. Tether’s acquisition of 80-100 tons of gold and its investment in royalty companies are attracting attention. This activity, surpassing even central bank gold purchases, signals a broader shift in investor sentiment.

The narrative surrounding gold is also changing. It is becoming “okay to talk about gold” again, shedding the negative connotation of being a “gold bug.” This shift is facilitated by increased institutional interest, exemplified by Elliot Management’s significant positions in precious metals companies and its activist stance on Barrick Gold.

Notable Quotes:

• Ed (Sproad, Inc.): “Gold’s the original alternative investment. When you think about what it does over multiple market cycles, its performance pattern, its ability to perform differently than rest your market, rest of your portfolio. I was fascinated by that.”
• Ed (Sproad, Inc.): “Cryptocurrencies actually re-engaged investors in the precious metals allocation.”
• Ed (Sproad, Inc.): “It’s now okay to talk about gold.”

Technical Terms:

• M2: A measure of the money supply that includes cash, checking deposits, and savings deposits.
• 60/40 Portfolio: A traditional investment strategy allocating 60% of a portfolio to stocks and 40% to bonds.
• Alternative Investments: Investments outside of traditional asset classes like stocks and bonds, such as precious metals, real estate, and private equity.
• Royalty Companies: Companies that provide financing to mining companies in exchange for a percentage of future revenue.
• Streaming Companies: Similar to royalty companies, but typically involve a purchase agreement for a fixed amount of metal at a predetermined price.
• Base Load Energy: A consistent and reliable source of energy that can operate 24/7.
• Small Modular Reactors (SMRs): Smaller, more flexible nuclear reactors that can be deployed more easily than traditional large-scale reactors.

Conclusion:

The discussion paints a picture of a rapidly evolving landscape in the mining and precious metals space. Driven by inflation, shifting monetary policy, and a growing recognition of the limitations of traditional investment strategies, investors are re-engaging with gold, silver, and other critical materials. Mining equities are poised for significant gains, and new players like Tether are entering the market, further validating the sector’s potential. Education and awareness are key, and firms like Sproad are playing a crucial role in informing investors about the opportunities and risks associated with these investments. The current environment presents a potentially significant opportunity for investors willing to look beyond the headlines and explore the fundamentals driving the resurgence of the mining and precious metals sectors.