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It's going to be a tough winter so hold some gold - Randy Smallwood

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(Kitco News) - The gold market continues to struggle below $1,900 an ounce, and although time is running out for the market to hit $2,000 an ounce by year-end, one mining executive said that it is more important to look at the long-term trend rather than any short-term target.

In a telephone interview with Kitco News, Randy Smallwood, president and CEO of Wheaton Precious Metals, said it is difficult for him to see a scenario where gold prices go materially lower.

Although investor optimism has picked up following positive news regarding potential vaccines for the COVID0-19 virus, Smallwood said more stimulus is needed to undo the damage that has already been inflicted on the global economy.

"We are looking at a tough winter and as businesses shut down because of new lockdowns. I wonder how many will be able to reopen again," he said. "We will continue to see an incredible amount of stimulus just to restart economies. Any currency in today's world and for at least the next two or three years is going to weaken."

Smallwood's comments come a week after Wheaton reported solid third-quarter earnings, including record revenue of $307 million, up 37% compared to the third quarter of 2019. The company also reported record free cash flow and, as a result, increased its dividend by 20%.

Smallwood said that it has been amazing to see how quickly the mining sector has been able to recover after production worldwide was disrupted because of the COVID-19 pandemic and government-imposed lockdowns initiated to reduce the spread of the virus.

Wheaton significantly benefited from near-record gold prices as its production fell 7% in the third quarter. Wheaton's production numbers reflect the mining sector's current trend as many producers have reported lower production. Smallwood said that he expects gold production to be limited in the next few quarters as companies adhere to social distancing policies.

Smallwood said that underground operations will see the most significant impact as fewer workers are on a shift.

"When you look at our portfolio of assets, the assets that are having the biggest impact from the pandemic are all the underground mines.

However, higher gold prices are more than making up for the lost production, he added. Even with prices trading below $1,900, the gold market is still up 26% compared to this time last year.

Looking at the current trend in the marketplace, Smallwood said that he expects the mining sector to enjoy recent margins for the next two or three years. He added that mining executives have learned a lot from the last bull market and are more cautious.

"A big question that is being asked is: 'How long before companies start adjusting their cut-off grades and start chasing some of the lower grade material,'" he said. "I think it will take a little while before these margins start to fall."

As for when investors will start to recognize the growing value in the mining sector, Smallwood said that it will take time, but at some point, people won't be able to ignore the profits that are being generated.

As to what is next for Wheaton, Smallwood said that he is encouraged by higher copper prices. He added that he is hoping the company will make deals for precious metal streams as companies look to build more copper mines. He said that with higher gold prices, a streaming agreement looks very attractive for companies looking to raise construction capital.

Smallwood also added that if they aren't able to put their money to work, it will go back to its shareholders.

"I don't believe in sitting on a pile of cash," he said. "If we can't make a deal by the end of next year, we will raise our dividend to 40% of cash holdings. But with the way the market is moving, I think we will be able to make some deals next year."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.