Hello and welcome to The Download. I'm your host, Dave Richardson. And it is Stu’s Day's, for the first time in a while on an actual Tuesday. What were you up to on the weekend? A long weekend in Canada. Most of the listeners are Canadian, but for those of you listening from other parts of the world, it was a long weekend in Canada. The May 2-4 long weekend, which is weird because it wasn't actually May 2-4 yet, but it's Queen Victoria's birthday we're celebrating, for those of us who remember her, like Stu and I. What were you up to?

Well, Dave, it was my daughter's prom. She's graduating this week. So there was a parent event, and it was exciting. A little melancholy for those listeners who have had a kid move on. But it was great.

Yeah. So you had to dress up, too?

I didn't have to dress up quite the same way. I struggled. I had to put the boutonniere on the lapel, which I messed up. It's two pins. It's not the easiest thing that you've ever done. But it was a great night. And yeah, it was a good weekend.

Did you nail yours when it was your prom, your boutonniere?

I don't recall how long the boutonniere was with me at my prom. I feel like you see a lot on the floor at the end of the night.

Yeah, I'm going to say mine didn't last very long, but it was my only friend at my prom. I didn't have a date. It's a sad story, we've talked about before. I wasn't popular in high school. Not like you. Back then, the smart kids didn't do well. Oh, wait a minute. You were one of the smart kids. Maybe it was just me. So, Stu, I'm in Timmins today. You've been to Timmins, right?

I have. It's part of the cross-country tour. It's a good spot. Blackfly season up there?

I haven't really been outside yet. I'm going to get there after we I'll finish taping this, but I imagine it is. I'd forgotten about that. So once again, thank you for always being on top of everything because it's going to be rough. You came up, I imagine, to visit the gold mine or some of the mines around here?

We've done a couple of presentations over the years. A variety of reasons to be up there. Definitely people from our gold team are frequent travelers.

So that's where I wanted to start today. We won't spend a ton of time on this, but we always do when gold hits the headlines the way it has recently, which is all-time high. And it's been on the periphery of the news for a while because the old adage goes, when you've got inflation, gold is a good hedge, so people buy it as a hedge against inflation. You also get some turmoil geo-politically, uncertainty in different ways that gold tends to find a bid, that people start to think about gold as an investment. So when you're looking at gold rate now, Stu, what do you see driving this running gold prices?

Well, I think there's been a couple of things. You mentioned the first one: inflation. The old saying, a fine tailored suit is an ounce of gold or something like this. So they tend to move in check. So there's a bit of a bias to gold when inflation has been running hot. Although the counter to that is it's normally when real interest rates are declining, and that's been the reverse this time, which has been a bit of a surprise. And then I think one of the overwhelming factors has been purchases by central banks around the world, diversifying away from the US dollar for a variety of reasons. And you can see it in the statistics. Central banks like China and other central banks have definitely been buyers of gold, which is a function of all sorts of things, the geopolitical events in the world, maybe the ongoing strength of the US dollar, what have you. That's been a dominating theme. I think one part that's been interesting is the stocks; they've been a bit better recently, but they haven't totally kept up with the price of the underlying commodity, as in oil and copper and some of the other areas. The question as to why is that? Well, first, it might be one of those relationships; for gold stock, investors like to see real interest rates start to decline as maybe a sign. But then the second thing is that there's production costs, there's life of mine, there's the amount of free cash flow that gets generated. There are all sorts of things that come in. The gold companies, they're getting better at it, but for a long period of time, they were not as good businesses for a rising commodity environment as some of those other commodity stocks. When you see the prodigious free cash flow generated by the oil companies and the prodigious free cash flow by the copper companies; we haven't quite seen the same level out of the gold stocks. And if the price stays here, that'll start to turn.

Do you typically see investment follow? I'm here in Timmins today; do they have a boom coming if prices are able to hold and then maybe even hold for quite some time? Because I think the view would be that longer-term real interest rates are headed back or not going any higher than this.

I think that's certainly a possibility. It's been harder to find new mines. We've talked about it in the copper area; we've seen a little bit more mergers and acquisition activity because it's cheaper to find a new mine sometimes in the stock market than it is to actually go out and build one. The Canadian North, just because of the safety of the rule of law and the geopolitical environment, is a pretty good place to do business. So I think that will keep up. But what people really want to see is the margins starting to expand. So we look at gold companies and we look at all-in sustaining costs. So if we fully costed how much to bring an ounce of gold out of the ground relative to the price, we like to see the margin widen, which means shareholders are getting more of that free cash.

And you haven't seen enough of that to this point?

It's definitely starting to. But we just haven't seen that real same acceleration that we've seen in the energy companies to date.

So I'm here all week. And the Canadian North is definitely an interesting place. I'm heading off to Sault Ste. Marie and Thunder Bay after this. So all mining, to a large extent. And again, this is the one spot where gold is king, but we'll get to some of the spots where some of the other commodities are a bigger deal. And then at some point, we're going to have to get back to copper, because copper just continues to confound even beyond probably what you would have expected. Would that be a safe bet?

Yeah, definitely. There's a lot of enthusiasm in the copper market right now. When you get this deep into a run, commodities are often very late cycle and the last blast of the economic cycle. We're trying to work through that. There's a great multiyear story in copper because of the usage that's going to go up and the difficulty of finding new reserves. You're always trying to weigh a very attractive intermediate term with the short term where things have got very excited, and copper has been up more days than not in recent times. So that always makes commodities a little bit vulnerable in the very short term. But the intermediate term on copper with the amount of power demand, the decarbonization of the grid, electric vehicles. There's a lot of positives to the demand side that exist on the copper front. And you mentioned gold, and gold and silver often go together. And silver doesn't have quite the same macro allure during challenging times as gold, but it also has the big usage in solar cells. So you have a little bit of two dynamics underlying silver.

The prom featured gold jewelry or more silver? Or did you go for white gold, which gives you the best of both worlds, a silver look with the gold feel?

Well, there wasn't a ton of jewelry, but probably if you had to pick one, I would probably pick silver because you can straddle both worlds. You can straddle the macro and the demand side world.

There we go. Thinking about a solar-powered prom with silver. Because that's that big driver on the silver front. We'll come back to commodities. I think the main thing that I'd stress out of this whole conversation, for most Canadian investors, if you own a good Canadian equity fund or a portfolio of Canadian stocks or the Canadian index, you're going to have plenty of exposure to gold and all of the different minerals. And really, it's almost an overweight of it relative to, say, if you were an American just buying a US index.

For sure. The weight combined between copper and gold is probably 5X or 6X of what would exist inside the S&P 500, if not higher.

Exactly. So again, as you're watching these things as a Canadian, if you've got that good Canadian equity fund and part of an overall balanced portfolio, you've likely got a pretty good exposure to these things. And so you can cheer on the price going higher and let somebody else around the corner take the risk of buying the actual bullion or trying to massively overweight one of the companies in the hope that it takes off. Now, one of the things you wanted to talk about this morning, things that are doing particularly well right now. And the sum of the driver would have been that a lot of the reports that we'd seen economically coming out in the early part of this year — we talked a lot about this with Eric — have been somewhat a surprise to the upside or giving you the feeling that things are super strong. And maybe central banks don't even need to lower interest rates as we move through this year. But you are looking at an index that you like to watch, and it's starting to show some signs of cracking.

Well, there's what they call the Citi Surprise Index. And because markets are always trying to price in the future, if ten economists think that the economy is going to grow by 2%, then that's consensus. If it's 2.1, that means it beat consensus. A couple of things happen when that takes place is the first people might ratchet it up just once, or they might start to ratchet that into their longer-term view. And the same thing when you start to have some of these consensus-type moves where all of a sudden, the headline number is a little bit less than what people expected. And you can discount that and say, well, once is not a trend, twice is not a trend. But it's something to watch when what we call the surprise index starts to be a little bit more negative than it's been in the past. And like Goldilocks and the bowl of porridge, inflation is too hot, inflation is too hot, and then the inflation data starts to look better. And now, could the economy be a little colder than maybe we thought? We flipped to the other side of the bowl in a hurry. And I think right now, the view is that the Central Bank, because they have held monetary policy at higher levels, the ability to respond should things cool is quite good. They can lower interest rates in response to any type of cooling. But it is noteworthy when everyone is very much in the camp of we're going to have a soft landing and inflation is going to come off, when you start to see a few indicators that nod at that everything's good in the economy, you have to take note.

Yeah. And you were mentioning before that Canadian inflation is out today. Fairly muted. I mean, not down exactly where the Bank of Canada would want it, but very clearly moving in the direction and coming in in line with what people were expecting at — what did you say, 2.7%?

Yeah, that's right. And the Bank of Canada has a bazillion underlying measures of inflation, too. They slice and dice this way, that way. And they were all pretty good, too. So it lays the groundwork for the Bank of Canada to ease interest rates as we move into the summer and into the second half of the year.

So we spent the week together doing more presentations than podcast last week. But one of the questions that kept coming up was around the idea that, can the Bank of Canada pursue its own interest rate policy? Can it start to lower rates well in advance of when the US starts to lower rates? It seemed like from Eric Lascelles, who was with us as well, and Dagmara Fijalkowski — both of my guests on the podcast — they were pretty comfortable saying that the Bank of Canada can go lower. I was in another conference the week before with a bunch of bankers. That seemed to be the consensus that the Bank of Canada could go out on its own and lower rates, maybe as much as 75 basis before the Federal Reserve moves. I guess the big concern is the currency. And given all these machinations of all of these numbers that we've just been talking about and that you were mentioning, the Canadian dollar seems to be holding up okay despite the idea that this could happen.

Yeah, I think that a great point is that markets are very forward-looking. So today, the Canadian dollar is weaker by a fifth of a cent on this notion that the Bank of Canada might ease. Right now, we would have the Canadian Central Bank lowering rates by probably 100 basis points more than the Fed — I can't remember off the top of my head, but it's quite a bit more. So in order for this to be new information, it needs to be more than the more we already expect, if that makes sense. So today, you get this news that paves the way for the Bank to maybe ease, and you don't really get much of a reaction from currency markets because that is expected. So what you need is incremental data that the Canadian economy is worsening more than the United States, or you need some type of data that says the US will hold even longer versus the current spread that is priced between the two countries.

And that's when you go back to your surprise index that is starting to show signs of weakness that when people were saying the Fed is going to be able to cut at some point this year — maybe not six or eight times, like there were some projections if you go into last year — but you get your two or three this year and people are going, wow, everything's great. Well, the surprise index starts to show you that maybe the higher rates are starting to have their impact on the US and that they can lower. And if they can lower, you're going to see that lowering around the world, especially when the inflation numbers like Canada comes in okay. And then the other article I was reading this morning was on the UK, where it's expected that when their inflation number comes out over the next couple of weeks, that their inflation might very well be 2% or below. So you're already down to that magic number that's been benchmarked in the sky for everyone, that inflation has got to get back down to 2%.

And the other thing that we look at is these surprise indices relative to each other. And the US had held in for a long time. Globally, we can be off a little bit. Now the US just show a little bit less on the surprise side versus the global indicator. So, yeah, it's just another «what's on the dashboard of the plane» as you fly around looking for different things to think about.

So when the $5 meal comes out at McDonald's, you know that things are starting to get weaker and the consumer is weakening as well.

That's right. And McDonald's has been spruced up inside. So you get a pretty good experience in the store, and then you add in five bucks. That's not bad eat.

They do call it the golden arches. So if they've been using some real gold in some of those restaurant designs, maybe that'll keep the demand up and business booming here.

A fellow portfolio manager told me about one of the best deals at McDonald's, which is a double cheeseburger with Big Mac sauce. Quite a bit cheaper than a Big Mac. You're really just giving up a bun.

Probably good for the waistline, too. So lots of good deals. By the way, though, the Wendy's three-dollar breakfast. I tried the Wendy's breakfast sandwich this morning for the first time. I'm going to have to give it one more shot, but I don't know. I like that biscuit. I don't know why you can't get biscuits in Canada. You got to get a McMuffin, an English muffin instead of a biscuit. But I like that biscuit.

Well, we appear filled with all sorts of good recommendations today.

And then Stu is looking for any of the listeners who want to send him a tip on the boutonniere. I should say, I actually need that tip because my daughter's prom is in a week and a half. So that's when I'm going to have to get my fat fingers and thumbs around one of those and see if I can make it work.

All right. Well, we'll talk to you next week, and maybe there'll be some tips that you can share.

Okay, Stu. Thanks, as always. I'll say hi to everyone here at the mine, and we'll see you next Tuesday.

Thanks, Dave.