Markets and Metals Navigator (August 2nd, 2020)

Gold and Silver Keep Charging!

The precious metals bull run is firing on all cylinders, gold was up 4% on the week and silver was up 7%.

Gold had its strongest month in July since 2012, with bullion up 11%. Silver however took the spotlight, up 35% for the month. It’s clear investors have accepted silver as leveraged play on gold.

Gold & Silver Performance for the Month of July, 2020

While gold has smashed through the previous record high ($1,921) this week, the World Gold Council highlights that it is below its inflation adjusted high of $2,800/oz  (1980).

The U.S. 10-Year real yield (10-year yield minus inflation) is fallen below -1%, the lowest on record. Low real yields are very bullish for gold as it eliminates the opportunity cost of holding the metal (it doesn’t pay interest).

U.S. 10-Year Real Yield

Additionally, Deutsche Bank’s analysis has found that the 10-year U.S. government bond yield is at a 234 year low.  The tailwind for gold and silver is very significant.

10-Year US Government Yield

Diversified miners with silver exposure are well positioned in this backdrop, as strong incremental cash flow from their silver byproducts drive earnings leverage in the business.

Sierra Metals (NYSE:SMTS, TSX:SMT) is one of the companies that will significantly benefit from higher silver prices, producing over 3.4 million ounces of silver in 2019. The company announced on July 28th that it will restart operations at it’s Cusi Silver Mine in Mexico.

Cannabis Week in Review

Canadian cannabis equities had an inline week, the Horizons Marijuana ETF (HMMJ) finished ahead of the S&P 500 and TSX. However cannabis equities were up significantly more earlier in the week, only to give it back as Aphria earnings didn’t spark the imagination of the sector bulls.

Aphria (TSX:APHA, NYSE: APHA) Q4 earnings results beat analyst revenue estimates by 3%, which was driven the retail division, revenue was up +18% y/y for the quarter.

The company also announced a $100 million USD at the market offering which management states will be used for expansion and general corporate purposes.

On balance this wasn’t the blow out quarter bulls had hoped for, the stock lagged on the week however is still outperforming the index YTD.

US Cannabis Stocks Breaking Out

We’re seeing a clear breakout in the US cannabis names relative to the Canadian names. Last week the 4 largest US cannabis companies (Trulieve, Curaleaf, Cresco, Green Thumb) were up on average 10% vs. the Horizons Marijuana Index up 2%.

On a year-to-date basis the performance differential is far more pronounced.  Trulieve, Green Thumb and Curaleaf are up 40.8%, 40.7% and 37.7% respectively.

Price-to-Sales multiples are reasonable as well, ranging from 3-6x; in comparison Canopy Growth trades on 17x.  Additionally the U.S. companies have significantly higher growth, Trulieve and Curaleaf are expected to grow sales this year by 70% and 200% respectively.