Sprott is a Toronto-headquartered asset manager specializing in precious metals and critical materials (NYSE/TSX: SII), tracing its roots to Sprott Securities founded by Eric Sprott in 1981 and now led by CEO Whitney George. It runs physical gold, silver and uranium trusts, ETFs, active strategies and resource lending, with about $65bn in AUM. The Insights column carries monthly commentaries and white papers on uranium, gold, silver, copper and critical materials by Paul Wong, Jacob White and John Hathaway (ex-Tocqueville gold manager) — note the house's structurally bullish commodity stance, as it sells the corresponding trusts and ETFs.
This report covers the brutal first half of 2022: the S&P 500 fell 20%, U.S. Treasury bonds dropped 9%, but gold only lost 1.2%. The key point: gold held its value as a safe haven, while stocks and bonds both crashed—breaking the usual pattern where bonds offset stock losses. The Fed is hiking rates aggressively to fight inflation, but the report says the real causes (supply chain issues) can't be fixed by monetary policy alone. A deep recession may be needed. For ordinary investors: don't assume stocks are cheap just because they've fallen—earnings estimates are still too high. Gold looks like a better bet for preserving capital, especially if a recession hits.
Sprott's June 2022 report noted that the month was one of the toughest for most asset classes, with the first half of the year delivering the worst performance in decades. Spot gold fell 1.64% to $1,807.27, down just 1.20% year-to-date, showing relatively stable performance; spot silver dropped 5.90
This chapter focuses on market performance in June and the first half of 2022, noting that it was one of the most challenging periods for most asset classes in decades. Against the backdrop of a broad sell-off in risk assets, the report highlights gold's performance as a safe-haven asset and examines the impact of high inflation and the Federal Reserve's aggressive tightening on markets.
The report's central judgment is: Gold has successfully maintained its store of value function during the risk asset bear market and is at a nine-year support level, with a potential large-scale reallocation toward safe-haven and capital preservation assets in the second half of 2022. The counterintuitive point is that despite the Fed's aggressive rate hikes pushing real yields higher, gold has remained relatively stable, while traditional safe-haven assets (U.S. Treasuries) have fallen in tandem with equities, breaking the historical negative correlation between stocks and bonds.
| Indicator | June 30, 2022 | May 31, 2022 | Monthly Change | Monthly % Change | YTD % Change |
|---|---|---|---|---|---|
| Gold Spot | $1,807.27 | $1,837.35 | -$30.08 | -1.64% | -1.20% |
| Silver Spot | $20.28 | $21.55 | -$1.27 | -5.90% | -13.00% |
| Gold Senior Equity Index | 111.15 | 126.24 | -15.09 | -11.95% | -9.90% |
| S&P 500 Index | 3,785.38 | 4,132.15 | -346.77 | -8.39% | -20.58% |
| U.S. Treasury Bond Index | $2,271.46 | $2,291.62 | -$20.16 | -0.88% | -9.14% |
| U.S. 10-Year Treasury Yield* | 3.01% | 2.84% | +0.17% | +0.17% | +1.50% |
| U.S. 10-Year Real Yield* | 0.66% | 0.19% | +0.47% | +0.47% | +1.77% |
*Note: Monthly % change and YTD % change for yields are in basis point differences, not percentage changes.
This chapter focuses on the extreme deterioration of market liquidity at the onset of the Federal Reserve's Quantitative Tightening (QT2) and the resulting systemic risks. The report points out that current market depth is far inferior to that during QT1 in 2018, leading to price behavior characterized by "selling into a vacuum," while global recession risks are rapidly escalating.
The author's central judgment is that the Federal Reserve's choice to sacrifice the stock market (Option 4) to curb inflation is the path with the least systemic risk. However, the current decline in the S&P 500 is solely driven by valuation compression, with earnings expectations not yet fully adjusted downward. The report argues that a significant downward revision in earnings is imminent, and an economic recession will force analysts to sharply cut earnings forecasts, while the Fed will not pivot dovish until inflation data remains persistently high. The counterintuitive point is that despite the substantial market decline, valuations (16.6 times P/E) are not cheap, and earnings downgrades will introduce additional downside risk.
1. Extreme Deterioration in Market Liquidity: At the start of QT2, market depth (a composite indicator of liquidity across bonds, stocks, credit, and currencies) was at a "dismal" level, far below that of 2018. The lack of liquidity means that selling will exacerbate price declines, especially during crisis events.
2. Sharp Tightening in the Financial Conditions Index (GS FCI): The 13-week rate of change is the fastest since the 2008 financial crisis and the March 2020 pandemic sell-off. The Fed aims to reverse the wealth effect by tightening financial conditions to lower inflation expectations. Among the four options (interest rate volatility, credit spreads, dollar appreciation, and stock market decline), a stock market decline carries the least systemic risk.
3. Overly High S&P 500 Earnings Expectations: Earnings expectations for 2022 are still rising at an annualized rate of about 8% (upper right corner of Figure 6), but the author believes this is unsustainable. In historical recessions, the median peak-to-trough decline in earnings expectations is approximately -20%. The current P/E ratio of 16.6 times is on par with the post-2008 financial crisis average, indicating that valuations are not cheap.
4. Rising Recession Risks: The Atlanta Fed's GDPNow model projects Q2 GDP at -1.0% (Q1 was -1.5%), placing the U.S. in a technical recession. Eurodollar futures spreads have widened significantly, suggesting the market is pricing in three rate cuts in 2023, a stark contrast to the current aggressive rate hike path.
5. Accumulating Systemic Risks: The risk of a global synchronized recession is rising, while developed central banks continue to hike rates aggressively. The U.S. debt-to-GDP ratio stands at 120%, and the combination of stagflation and high debt is a "strong risk generator," enhancing the appeal of gold as a safe-haven asset.
| Indicator | Current Value | Historical Comparison/Implication |
|---|---|---|
| S&P 500 2022 P/E Ratio | 16.6x | On par with post-2008 average, not cheap |
| Median Earnings Decline in Historical Recessions | -20% | Current earnings expectations still rising, significant room for downward revision |
| GDPNow Q2 Forecast | -1.0% | Sharp decline from +2.5% in mid-May |
| Eurodollar Futures Spread | Pricing in three rate cuts in 2023 | Severe divergence from current rate hike path |
| U.S. Debt/GDP | 120% | Risk amplifier in a stagflation environment |
1. Avoid U.S. Equities: Current valuations are not cheap, and the risk of earnings downgrades has not yet been priced in. The S&P 500 still has significant downside. Do not assume it is "cheap" simply because prices have already fallen.
2. Increase Allocation to Gold: Under the combination of liquidity drying up, rising recession risks, and aggressive central bank rate hikes, gold, as a hard asset with no counterparty risk, is a core choice for capital preservation. The report explicitly expects a large-scale reallocation toward safe-haven assets in the second half of 2022.
3. Beware of Credit Bonds: QT-induced liquidity loss will "seep into" spread products (non-Treasury taxable bonds), pushing up credit spreads and increasing risks to the financial system.