Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

Steve Sjuggerud on Eurozone Stimulus: “The Powers of the Market Are Much Bigger than the Powers of Politicians”

Steveandbillgross

Steve Sjuggerud and PIMCO co-founder Bill Gross. Source: Stansberry & Associates

As of January 21st, we have witnessed a surprising upshot in gold and mining shares. The spot price of gold has risen from around $1,180 at the end of 2014 to above $1,280 – a 9% increase in less than a month.1 Gold miners have performed along with gold. Sprott’s Gold Miners ETF, (NYSE: SGDM), is up nearly 20% over the same timeframe.2

Steve Sjuggerud, editor of True Wealth, is one of the most widely-read writers of a paid investment newsletter in the world. His investment mantra is to look for stocks and sectors that are ‘cheap, hated, and in an uptrend.’

Mining companies were practically ‘left-for-dead,’ he said in his first issue of the year. So he recommended that readers prepare for an uptrend by investing in Sprott’s Gold Miners ETF, SGDM.

He also said that we’re in an extraordinary situation today because stocks are yielding more than bonds. In ‘normal times,’ bonds should yield more.

I spoke with Steve while he was in Anaheim, CA for the National Association of Music Merchants (Steve also designs guitars in his spare time).

Steve, you began writing an investment newsletter after a career managing money on Wall Street. What did you learn there that you’re able to deliver to readers of you newsletter?

I think the simple answer is that what you are taught in school doesn’t actually work. What you actually learn when you’re a hedge fund manager – I managed my own hedge fund and I worked for a billion-dollar hedge fund in New York – the guys that are actually out there rolling up their sleeves and doing it aren’t like the academics in the school books. They’re going about it in a different way.  What I bring to the newsletter is more of what actually works as opposed to what the journalistic or academic communities tell you.

Basically, the main idea of what makes money – what I’ve learned – is that what you want to buy is what’s ‘cheap, hated, and in an uptrend.’ That’s basically been my mantra in my newsletter for many years -- it’s made readers money and it’s kept them in the money. For example, the uptrend has stayed in US stocks, and we remained in US stocks all through the years and our readers have made a lot of money.

So I guess the short answer is: “what the academics teach you isn’t necessarily what works; what really works is this idea of ‘cheap, hated, and in an uptrend.’”

You recently wrote that you were bullish on the US stock market for 2015, for the reason that yields on bonds were lower than yields on stocks. What makes this situation unique? Are we in a bull market for bonds too?

It’s interesting that you bring that up. It’s a very rare situation. We’ve only seen it a handful of times. We saw it in 1958 and stocks soared 39% in the twelve months after we saw this situation. We saw it at the stock market bottom of late 2008 – early 2009. Stocks soared 30%. Every time we’ve seen this situation occur, stocks have soared by around 30% in the following 12 months.

Right now, we aren’t at the same type of extreme we saw in 1958 or 2008-2009, but we’re still in this unique situation. Stocks are paying dividends in the 2% range. Bonds are yielding about 1.8%. It’s a very simple idea that money flows where it’s treated best and money is going to flow out of bonds and into stocks.

If you’re going to make 10% in bonds and 1% in stocks, you’re going to take money out of stocks and put it into bonds. It’s an extreme example  but basically when this ratio is inverted and stocks are paying your more than bonds something unique is happening in the world. And it usually ends up resolving itself with the stock market going much higher – bringing ‘normalcy’ back where bonds should yield more than stocks.

So it’s a unique situation. Bonds have really run up. Usually when bonds run up it’s because there’s a lot of fear out there and that’s kind of what we’ve seen, after what happened with Switzerland abandoning its link to the Euro, and a lot of geopolitical fear. And so bonds have run up a lot and it’s one of the main reasons I’m interested in stocks. It’s just one of the many reasons why I like them for 2015, though.

What are some of the other reasons you like US stocks in 2015?

You don’t hear a lot of people talking about their stock market gains these days. Tesla was one, but it has been falling back down. And of course, oil investors are not doing so well. Nobody’s bragging about their stock market profits and that’s what you start to feel at the end of a bull market. There are many other reasons why I think stocks are a great value, but ultimately it gets down to the fact that this is not what the end of a bull market feels like yet. We don’t have that stock market euphoria yet. So I think we still have plenty of upside.

Are you also positive on bonds for 2015?

You know, I’m not that interested in bonds with these yields. In fact, what I’ve written in my latest issue of True Wealth, and what I was just on Fox News talking about as well is that today is the top in the US dollar. What’s happened is that we’ve seen extreme bullishness on the US dollar and the flipside of that is that we’ve seen extreme bearishness in the gold mining stocks. Gold stocks have fallen by 75%. But we’ve finally reached the point where the dollar is more loved, literally, than it ever has been in history.

Gold miners are more hated than they’ve ever been, as far as the sentiment (the website SentimentTrader.Com is where I go to get numbers on sentiment). As I mentioned before, what I look for are cheap, hated stocks that are in an uptrend. And Henry, you know better than I do that gold stocks are cheap, are hated, and are in an uptrend. So I’m a buyer of gold miners. In fact, what I recommended in my last newsletter (I put out 12 issues per year, so that’s one main idea per month) is the Sprott Gold Miners ETF (SGDM). So it’s good timing on this interview!

In your recommendation, you were saying that gold miners were a “left-for-dead” sector. Are you seeing this turning around? Will the rally in gold stocks continue or pull back soon?

There have been a few false starts so far. In October it looked like gold stocks were at a bottom. You could definitely have said that gold stocks were cheap, hated, and starting an uptrend back then. And in my newsletter, we stopped out of the trade at a small loss. That’s quite alright.

But this time around I think the situation is better because gold stocks are that much cheaper, that much more hated, and the uptrend has been in place for a while now. So I think that we’re in a much better position, safety-wise. This is where you want to do this trade. And I still don’t believe that anyone is paying attention to gold and gold stocks yet so I think there’s plenty of room to run. And I’m not just saying that because I’m on the phone with Sprott here. Like I said, I wrote it up in my newsletter.

I don’t have the numbers in front of me, but the last time around the gold stocks as measured by the GDX went up by over 200% after they’d fallen over 35% -- when they bottomed out in the 2008-2009 bust. They went up by over 200% from October 2008 to September 20113. We’ve seen the same type of bust this time around in gold stocks. So I don’t think it’s crazy to see another 200% gain in two years. Let’s think of it this way. If gold stocks have fallen 75%, it’s like saying they were at 100 and now they’re at 25. Well, if they go up by 200%, they’re only up to 75. So they’re still 25% below their peak, even if they rise by 200%. The point is that it sounds crazy to say that gold stocks can go up by 200% in two years, but they would still be well below their peak from their last bull run. So I don’t think it’s that crazy, especially when you consider how cheap and hated they are today.

When you decided to go long gold miners, why did you choose to recommend Sprott’s ETF (SGDM), as opposed to the traditional gold miners’ fund, the GDX?

That’s a great question, because the Sprott fund is a better fund in my opinion. The GDX is basically built on owning the largest mining stocks in order of size (market capitalization), and that’s the way a lot of ETFs are built. I’m not giving it a hard time, but if there was a ‘better mousetrap’ I’d be interested in it. And Sprott’s Gold Miners ETF is a pretty smart idea. It’s 25 gold mining companies – that’s all you hold and there are a few specific criteria about how much of each make up the portfolio. You want ones that have low debt. And you want ones where, when the price of gold goes up, they will actually go up too. That’s to say you want ones that are correlated to the price of gold. If you want gold stocks that are going to go up when the price of gold goes up, you want to own Sprott’s fund. I think it’s just a better mousetrap right now.

I also have to say I am a fan of the royalty model and Sprott does have a large allocation to the royalty companies like Franco-Nevada and Royal Gold. So it was a pretty easy decision and I’m not just saying that because I’m on a call with Sprott.

To be fair, let me give you the other side – what was the negative of the Sprott fund compared to the GDX. Well, it’s not really a negative, but I would have expected for SGDM to show a bit more outperformance relative to the GDX. There hasn’t been a very big difference between the performance of the GDX and SGDM yet. But I think that in principle SGDM should be the better fund. It’s just not that old. It’s still young.

When it comes to geopolitical news – for instance recent meeting of the European Central Bank (ECB) to discuss interest rate policy – do you think these have a real impact on investments? Or are they background noise that investors can mostly ignore?

Well, this is a really big question and it’s going to be hard to dial in the correct answer. But the brutal truth is you have to ask ‘do dollars matter?’ When there’s no money involved, unfortunately, geopolitical news is almost irrelevant to the market. I know that a lot of gold watchers in particular love to ascribe value to geopolitical events. And then they’re surprised when it doesn’t actually pan out or do anything to the financial markets or the price of gold. I think that people put a lot more value on geopolitical events than they are actually worth.

The truth is that money is flowing around the world looking for a home. I don’t know if this is an existential answer or what, but it ‘doesn’t matter until it does.’ Most of the time it doesn’t matter. I know it’s a funny answer to your question.

So would you say that the ECB’s meeting ‘doesn’t matter?’ In other words, interest rates will rise or they will fall on their own, but not as a result of what the ECB is doing or saying?

Yes, the powers of the market are much bigger than the powers of politicians.

Not yet subscribed to Sprott’s Thoughts? Click here to get insights delivered straight to your inbox, free.

For more information and disclosures, please visit www.SprottETFs.com. Our affiliate, Sprott Asset Management LP, is the sub-advisor to the Sprott Gold Miners ETF.

Dr. Steve Sjuggerud is the editor of True Wealth. Quoted by the Wall Street JournalBarron's, and the Washington Post, he is also the co-author of Safe Strategies for Financial Freedom, a bestselling book on investment strategies. Over his career, Dr. Sjuggerud has addressed hundreds of financial conferences in the U.S. and around the world, including at the New York Stock Exchange. Dr. Sjuggerud is a former stockbroker, has been a Vice President of a global mutual fund, has had his own hedge fund, and holds a doctorate in finance.

1, 2, 3 Bloomberg

 

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

Subscribe to Sprott's Thoughts

First Name  
Last Name  
Email Address     
Country  
I am:

 
RECENT ARTICLES

The page you are about to view is not affiliated with Sprott Global Resource Investments Ltd. or any of its related companies.

Investors should carefully consider the investment objectives, risks, time horizon and liquidity needs before making an investment. Past performance is no guarantee of future returns.

Continue