The Second part of Evan Harp’s interview with Sprott Asset Management CEO John Ciampaglia focuses on precious metals. You can read part one, which focuses on uranium, here.
Evan Harp: Let’s pivot to precious metals. How will sanctions in Russia impact that space?
John Ciampaglia: With respect to other minerals that Russia has a big role in – that would be nickel, while obviously oil and natural gas, but on the metal side, nickel is a big one. Palladium is probably the biggest. It’s interesting, because the prices of nickel and palladium really spiked the beginning of the war and they’ve literally completely retraced and gone back to lower levels than at the beginning of it. It’s like the world has concluded that there’ll be enough demand destruction to offset whatever supply they can no longer get from Russia, which I find absurd, because it’s pretty hard to substitute away palladium in particular, given how much comes from Russia. So those supply chains, have also been impacted.
On the gold side, yes, they do produce a lot of gold. But again, it’s not a critical mineral, it’s a nice to have mineral. Palladium you need for your catalytic converter, if you have a gasoline powered engine. So I think there’s been less impact there in terms of gold. I think the industrial metals have been the most sensitive to the sanctions.
Evan Harp: Sprott recently launched the Sprott ESG Gold ETF (SESG ). It is launched at a time when ESG is has become a weirdly controversial term for some. I would love to hear you speak to what the fund is and how you think it’s going to interact with the ESG space, given some of the kind of controversy out there right now.
John Ciampaglia: So look, there has been a little bit of a backlash against ESG, but it’s coming from two directions. One is regulators, which have basically looked at these products, scrutinized them and said, “Look, are these really ESG-centric? What are they doing with their methodology?” I think rightfully so, they kind of caught a bunch of fund sponsors that, perhaps, were doing ESG-light here. If you’re professing to be, I’m going to call it dark green, you better be dark green. I think that pulled the curtain back on a lot of sponsors. I mean, the story that blows me away is that – I think it was the CIO or the CEO of DWS, which is the Deutsche Bank – I mean, that police literally raided the offices and arrested the guy. So there’s a bit of a witch hunt going on from a regulatory perspective. Part of this is because in Europe, you’ve got the sustainable finance disclosure regulations, which are really serious. They’ve been working on these for years. So if you say you’re a Dark Green Fund, which is an Article Nine fund in Europe, you better be in Article Nine fundraiser, you better meet these requirements. A lot of funds that were claiming to be article eight, which they call light green, and Article Nine, dark green, maybe they weren’t as robust as everyone thought, and regulators have kind of slapped people on the wrist.
In the U.S., I think the ESG backlash is a little different. It seems to be much more politically driven, primarily by very Republican states like Arizona, where they’re basically saying, “Look, this is all BS. You know, our pension, our pensioners have been hurt because you’ve applied these ESG screens, and you’ve prevented us from investing in oil and gas and blah, blah, blah.” So I think there’s a political element to it.
But if I take a step back, I do think the ESG landscape, the alphabet soup of ESG, is very confusing. It needs to be standardized. I think there’s some legitimacy around the regulatory pushback, because there are so many different ESG frameworks that are not always consistent. I always use a great example of a gold company that we that we follow. We literally have one institutional client say to us, it’s on an exclusion list, because of ESG considerations. You cannot own this stock. Meanwhile, the company every year puts out a press release saying, “We’ve been included in the Dow Jones Sustainability Index again, we’re great!” I think that’s a really good case study of how much subjectivity comes into some of these decisions.
I think ESG needs to tighten itself up become more standardized. There’s too many parties trying to sell services and that creates a lot of differentiation and I think confusion with respect to ESG, and mining and gold. It’s not about political, it’s not about greenwashing, it’s about your social license to operate. And what I mean by that is, if you’re running a capital-intensive business that’s an extractive business, where you’re going into the earth, and you’re doing things to it and you have potential impacts to biodiversity, water, local communities – all of these different things – it’s not about ESG, these are like table stakes to operate.
If you are not a responsible, sustainable producer, you will lose your permits to operate, you will lose them for regulatory reasons. Environmental agencies and local communities will protest and blockade your mine site. And so, as a mining company, you’re very sensitive about these issues because you’re just at higher risk, because of the just the nature of your business. I think, in gold mining, there is a bifurcation between the companies operating in, I’m gonna call them safer jurisdictions, jurisdictions that have very high levels of regulatory oversight, environmental controls, labor laws, health and safety of workers, all these kinds of things; versus… I’m gonna pick on a country – running a gold company in the DRC, which is one of the most corrupt, poorest countries in the world. I mean, there’s differences between those two things.
So we do think there’s differences between gold companies. We’re not saying there’s bad gold companies, but there clearly are ones that I think embrace it, it’s in their DNA, it’s in their corporate culture. It’s In their scorecards, it’s in their performance measurements in terms of how they get paid.
What we’re trying to do with SESG is identify the companies that we think are amongst the best in terms of the most responsible, sustainable producers; and basically, have this ETF directly source the gold from just those producers. If I think about most gold ETF today. How do they work? Well, an authorized participant wants to create new shares, so they go buy any London Good Delivery bar, they hand it to the ETF. Where did that bar come from? I know where it was refined. But I don’t know who produced it. I don’t know what part of the world, I don’t know what mine. I don’t know how much recycled gold is in them. Where did the recycled gold come from? I don’t know if there’s any artisanal gold that may have made its way in there either legitimately or fraudulently. There’s just no chain of custody, there’s no provenance, and that bar could have been cast honestly, 100 years ago, when standards in the world were wildly different than today.
So if I think about the bars that we’re casting, these provide total transparency and traceability back to producer and back to mine siite, which nobody in the world can offer. So you can feel good about who produced your gold, where it came from, in terms of jurisdiction, the mine, we did a lot of diligence not just at the company level of the producers. But also at the mine level, we wanted to make sure there were no issues at each and every one of the six mines that we’ve reviewed. Those could be issues related to health and safety, water issues, tailings, issues with the local community, safety track record, Are there lots of accidents at the mine? What we want to be able to provide to an investor is what we think is kind of best in class in terms of full transparency around where this gold is coming from. We don’t have any recycled gold in the bars. We don’t have any gold from artisanal mining.
Unfortunately, every few years, there seems to be some kind of a scandal or alleged scandal, in terms of certain refinery gets accused of sourcing gold from artisanal miners, which, I always get a chuckle around this term “artisanal mining,” it looks like one of the worst jobs on Earth, these people are literally digging with their hands, with no shoes on, and dealing with mercury with no gloves on. I mean, it’s absolutely horrific, the environmental conditions these people are working in.
The other vulnerable part of the supply chain is obviously conflict gold, which can be smuggled into the supply chain from high-risk areas, whether those are conflict areas or areas with higher high levels of corruption. And then recycled gold. There was a very famous case a few years ago where, believe it or not, South American drug cartels were, were laundering money through a gold refiner. When this got exposed, all the bars that that refinery had produced, were all deemed to be proceeds of crime. All of a sudden, those bars, nobody could own them because they were they were basically tainted. So we’re not trying to raise an alarm bell and say there’s a big problem with the gold supply chain. But what we are saying is that it is opaque and there are some vulnerabilities with it. If you really want to avoid any of those concerns, or potential headline risks, this, we think, provides you the safest way to invest in gold, sidestepping a lot of those issues.
Evan Harp: One of the things that’s striking to me about all that is it sounds like we’re not just talking about sustainability. It’s very easy, I think, with ESG funds to focus on the E and it sounds like you are very focused on the S and the G as well with SESG. How has the investor reaction has been, especially given the odd year gold has had?
John Ciampaglia: Yeah, well, I would say that responses are still forming, meaning we launched this fund in the in the late summer and we haven’t had a chance to really engage with a ton of people yet. We’re just starting to ramp up a lot of our outreach right now. A lot of people in August just said, “look, talk to me in September.” So I don’t have a great read on it right now, but I think our big challenge is trying to educate the market. Because this is a new category, it doesn’t exist, no one’s created it. There are some funds out there that say they’re responsible gold funds. But what does that mean?
In 2012, the London Bullion Management Association implemented the first responsible sourcing standards. That was basically to deal with some of the most egregious issues around child labor, conflict zones, the most unfortunate parts of the supply chain. From 2012 to today, they’ve gone through nine versions of the responsible sourcing standards, they constantly are changing them and improving them. What these responsible gold funds do is they will only own a bar that was cast from 2012 onwards. Is that a higher degree of comfort and standard versus a bar made prior? Yes, but it’s in our opinion, because we’ve gone through nine iterations of the standard, it’s a far cry from what we’re doing, which is ESG-level diligence at the company level, at the mine level. And so we do think we have a lot of explaining to do, because unless you’re a real gold geek, like we are, you’re not going to get all these little nuances. We think there’s a meaningful difference between this “will only buy bars from 2012 onwards,” versus 2022 ESG approved gold from Sprott based on all the diligence done.
We think the big part of our work is about helping investors understand what the difference is. It’s very easy to say, they’re all the same thing, but they’re very different. So, we have work to do. That’s going to be our kind of fall campaign right now.
Evan Harp: Let’s talk about gold’s strange year. There’s been a feeling, what with inflation, its reputation as a safe haven asset, that it could take off at any minute – but it hasn’t yet.
John Ciampaglia: I mean, yeah, gold has been incredibly frustrating, because, as you said, it’s typically been a safe haven investment. But it was not spared since the Jackson Hole speech – gold has really been hit hard by rising interest rates. Whether it was treasuries or gold or typical safe haven assets, they’ve all fallen sharply with stocks.
Gold needs to break out of that, but it’s not going to break out of that until we see a clear signal from the Fed that they’re going to pause or potentially pivot. The other thing we find with gold and a lot of these calamities, is that it’s a very liquid investment. When people hold gold, they find it’s very easy to sell. So it tends to be almost like an insurance policy they cash in because they need liquidity. The last six months the market has been liquidity starved. A lot of liquidity has dried up across many asset classes. We find often at the beginning of these sell offs, gold gets sold off along with a lot of other asset classes. Eventually it stabilizes and it rebounds pretty well. Our thought is until we see this Fed pause or pivot, gold is kind of stuck in this kind of range bound zone.
Evan Harp: Silver has been an interesting one this year. It’s traditionally tracked closely to gold, but this year it’s been closer to copper performance-wise. I’d love to get your mile-high view on the silver market.
John Ciampaglia: Yeah, so silver has probably been the most frustrating metal this year. It’s really performed poorly. We were really disappointed by it.
Silver is a hybrid metal, it has monetary characteristics and it has industrial characteristics. Half of it gets used as a financial store of value and the other half gets used for everything from solar panels to antibacterial applications to electronics. I feel like silver, it’s almost like the perfect storm for silver, because both parts of its utility have been hit this year. Precious metals have been hit on the financial side because of rising interest rates. Then industrial metals have been hit because of fears of recession and demand destruction. So it’s been double hit and is ridiculously cheap right now. A lot of people think it’s a tremendous value, and we do too. But what’s going to happen is gold will probably move first, which it usually does, and then what happens is silver just basically slingshots by. It happened in 2020, where gold took off in the summer and rallied into the into the new year. Then, in January, it was like Silver’s turn and silver went on a run. That is the typical pattern that we see. It just, again, we’re waiting for that catalyst for it to go, but it’s been very frustrating to a lot of investors. And I just think it’s really stuck, being hit by its monetary roll and its industrial roll.
Evan Harp: I think that’s a solid diagnosis and I’d love to hear your thoughts on the long-term case for silver.
John Ciampaglia: There’s growing uses for silver. About 10% of all the silver produced goes into solar panels every year. So that’s one of the biggest applications on industrial side. Solar is going to continue to take more market share.
There’s slow, steady demand for silver every year, but I think the part of the story that is probably more interesting is on the supply side and the reason we say that is that there are very few pure silver mines left in the world and many of them are getting towards end of life. So, where does the silver come from? It’s mostly byproducts. It gets mined with gold, or it gets mined with copper or other elements. A lot of times they’re mining gold and there’s just a stream of silver that comes out of the ground at the same time. The silver supply, I think, is a lot more vulnerable to changes in the amount of the host metals that are being mined. It is becoming more and more scarce to find.
That’s the biggest issue we see is that many of the silver companies are gold and silver companies. There’s very few pure play silver companies left. We think that it’s getting harder and harder to find silver, we think it’s more susceptible to the ebbing and flowing of how it’s being produced as a byproduct, and so we do think the fundamentals look pretty good. The investor interest side of it has been quiet for the last year and a bit. We’ve seen a lot of momentum leave the silver monetary side of the story. And so we’ve got, both sides of the story being a drag right now.
Evan Harp: It does sound like the supply story is an interesting angle that people aren’t tracking. One more question, is there something else about the precious metal space in general that not enough people are thinking about right now?
John Ciampaglia: That’s a good question. I would say what people are probably not aware of is that the demand for gold right now, coming from the East, specifically India and China, is actually very high.
People in the West are kind of indifferent to gold right now. But it’s interesting that when gold sells off, that’s when interest in the East actually picks up. They tend to be value buyers, when the price of gold is down, they hoard and when the price is going up and has positive momentum, that’s when the Western buyers tend to buy. They tend to buy on the upside and then when the price rolls, a lot of Western investors bail and the Chinese and Indian investors are more than happy to buy metal on the cheap. We see that pattern all the time and there’s we’re starting to see a trend in both China and – we look at Gold imports coming into Hong Kong from Switzerland, they’re at multi-year highs, premiums for gold in India right now are very high.
That tells you there’s buying tension there. People are willing to pay upwards of $60 an ounce premium over spot price. I always find it interesting that the West tend to be momentum buyers and the East tend to be more value buyers.
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