Where Will All the Silver Come From?

Man: You're listening to Sprott Money's Monthly Wrap-Up with Craig Hemke.

Craig: Well, hello again for Sprott Money News at sprottmoney.com. It is late in the month of October, 2022, so it's time for your Monthly Wrap-Up. I'm your host, Craig Hemke. Joining us this month is Conor O'Brien. Many will recall from times we visited with Conor in the past, he's a business partner of Eric Sprott. So, he's always a good person to talk to, find out what his thoughts are. Conor, thank you so much for joining me again on the Monthly Wrap-Up.

Conor: Craig, thanks for having me. How are you?

Craig: Well, I'm fine, thank you. And I have a question for you as we get started.

Conor: Sure.

Craig: Because I think most folks know you're up in Canada, you're in Toronto. It's starting to get a little chilly up there. Have you seen any Christmas decorations or heard any Christmas music yet?

Conor: Well, we're getting ready for Halloween here mostly. I've got three young daughters that are all gonna be the Chipettes for Halloween.

Craig: Oh, sweet.

Conor: Everybody's very excited.

Craig: I saw a great picture on Twitter of a guy dressed up, he had his daughters dressed up like from "A League of Their Own," the movie about girls. And he had a hat on, he was dressed up with the manager holding a beer. It was fantastic.

Conor: Beautiful.

Craig: So, anyway...

Conor: Yeah, we take Halloween pretty seriously up here, that's for sure. So, I'm now looking forward to that first.

Craig: And you've had your Thanksgiving already.

Conor: Yeah.

Craig: So, no Christmas yet.

Conor: Not yet. Probably next week.

Craig: Well, the only reason I bring it up is because at sprottmoney.com, you will find the Sprott Money Holiday Gift Guide. It is already up and posted here on October 27th. Now, it's for U.S. customers only at this point, but this is something you can download, start to look through. Nothing better than giving a gift of physical metal, especially now in this day and age. And actually, for kids, for grandkids, you want to get them started, get them holding some sound money in their own two hands. This is a place you wanna do it. Go to sprottmoney.com, look up the Holiday Gift Guide. It's right there on the homepage. If you wanna order something, give 'em a call, 888-861-0775.

All right, Conor, let's dive right in. What a heck of a month we've had, and what a heck a month I'm sure November's gonna be. We're gonna be right at it with the Fed and the next FOMC meeting next week. But as we look back in October, one of the things that's gonna stand out in my mind is just the crazy supply and demand situation, and really in all commodities, copper and the like, but particularly in silver. I would assume you've got some thoughts on that.

Conor: Yeah. Well, I can tell you that for the, like, Sprott Money customer that we are buying in earnest 1000 Ounce silver bars at the moment, and we're finding them a little bit more difficult to find at the moment. We know that it's very hard to find retail level silver where...everybody has seen the ZeroHedge article this morning and commenting on Twitter about how APMEX is willing to pay $10 through spot to basically any customer per ounce.

But, you know, here we are trading at $19.55 as I see it, down 4 cents. And you kind of wonder as to what is kind of going on behind the scenes. And I would just say from our perspective, the reason why we're doing it is because you see the supply and demand side of this metal, and you just know that something's got to give. Like, where somebody's willing to pay 30 bucks U.S. for an ounce of silver, yet it trades on the COMEX for $19.50.

So, let's go through a little bit of the demand side then. Let's start with actually the Silver Institute's projections for 2022 for a deficit of 100 million ounces. Obviously that's way before this year started where they had no idea that there would be a Russian conflict. They had no idea that there'd be an Inflation Reduction Act. They didn't know that natural gas prices in Europe would soar to all-time highs, and then some. Obviously that's pulled back quite a bit as supply has kind of generated itself, but nonetheless, still very much an energy crisis that's been ongoing. But then you kind of go down the list of demands where you're just kind of like, "Well, India, let's start with that." So, in 2021, they bought 3000 tons of silver, call it 100 million ounces if you want to. This year so far they've bought 8,500 tons. And if you annualize that, that's somewhere between 10,000 and 11,000 tons, which is somewhere around 350 million ounces.

Craig: A third.

Conor: Right. And so when you look at global annual production of, call it 800 million ounces, they're taking up what, almost half of it?

Craig: Almost half really. Yeah, you're right.

Conor: As one consumer alone. And sure enough, some of that's industrial, but a lot of that is like Indians, they buy gold and silver and they're very savvy buyers of it. They buy it on the cheap when gold's cheap and they buy silver on the cheap when it gets cheap. And clearly, that's kind of where we are. So, there's 350 million ounces that we didn't think was gonna be part of the demand equation for silver.

Then you get into the solar side where as an alternative energy, solar panels are being put in all over the globe. Even in places like the UK, we hear installations are up three times where it's, I don't think you would call it Africa sunny. And ultimately, we were of the understanding that now silver is being used 200% to 300% more in solar panels in order to get the electricity amped up. So, what the Silver Institute carries as a demand number for 2022 is 130 million ounces.

Now, we hear that if the silver usage in solar panels goes up two to three times, but then solar installations are ramping up to the nth degree all over the globe, what is that number gonna be? Now, you're talking that you might have a deficit somewhere on the order, and I mean, this is just so bizarre to say, but it's the truth, of like 300 million to 500 million ounces. Like, how often can you keep doing that?

Craig: Well, and we're seeing great physical depletion around the world. And it's consistent with the LBMA for all their awards. What'd they report in September? Their vaults were down 5%?

Conor: Yeah, absolutely.

Craig: I'm sure you're seeing what's been going on in COMEX with the registered supplies falling. And again, the...

Conor: Registered being down to a piddly 35 million ounces.

Craig: Well, it makes you wonder, you know? And you've got this price that gets quoted on CNBC and Bloomberg that is the future's price. And the future's price is determined by the supply and the demand of the futures contracts, not the physical metal.

Conor: Right. You know what? So, Craig, I guess there must be a lot of supply. We might as well go through the supply side.

Craig: Right, let's talk about that.

Conor: Well, the supply side, you just kind of wonder to yourselves as investors in silver who are literally in tune with almost every tick of this metal where we search high and low for companies that are even some way investible, which might see themselves being with some kind of find or some kind of an asset that can put itself into production. And they're very, very hard to find. And so you look all over the globe where you're like, "I wonder who's producing all this silver?" And you sit there and go, "Well, the supply side from places like Peru has gone from like 160 million ounces in like 2016, something like that around there. And now it's 100 million ounces. And like places like Australia, which used to produce 80 million ounces, now it produces 35." You just sit there and kind of go like, "Well, where is all this gonna come from?"

And the fact of the matter is you know that supply from just about anywhere in the globe is going lower, but demand is going way, way higher, like, exponentially higher. But here we are where you have these CTAs that are just feeding on one another who short silver, who sell paper silver short, and all on the matter of that the DXY ticked up by a tick, or that the U.S. 10-year rate ticked up by a tick. And so there, inversely, we must sell silver as a result. But the guy who is doing the solar really doesn't care that that's what the last tick was in the DXY, and nor does India care either. They just sit there and wave it in, and take the physical metal and just kind of laugh about it.

Craig: Well, it does set up, again, a situation we've seen in the past, I mean, most recently March of 2020, went in just a global liquidation event as COVID was setting in. COMEX silver went to 12-something, right? But you couldn't buy it anywhere for less than 25.

Conor: Right.

Craig: And eventually you had this correction, that bifurcation is not allowed. I would imagine you think that's probably where we're headed again.

Conor: Yeah. We had a lot of people short covering their paper at those prices, didn't we?

Craig: Yep, that's right.

Conor: I don't know whether or not they're waiting for another, like, capitulatory type of event, but it doesn't really seem to be coming from the retail side anytime soon, nor from India, nor from solar. And when the supply and demand dynamics are kind of like what they already are, like, we don't really know what people are waiting around for. I mean, if all of a sudden you get some kind of Fed, let's just use that word, pivot that everybody's hoping for, I mean, it's tough to do in the face of inflation where it's like somewhere between 6% and 10%.

It's tough for them not to kind of keep that whole momentum going or that kind of Fed speak about it. But if you ever get something like that, which the market's kind of trying to sense where the dollar again is flat today and is down for whatever, three or four of the last five days, and all of a sudden the U.S. 10 year is now below 4%, I mean, the market might be telling you something.

Craig: Right. Well, let me ask you that, that'd be the second thing, the other item I wanted to ask you about as we wrap up October. Because we've all been looking for that Fed pivot. Heck, I was writing about it back in January. And I thought it would come by summer because I thought all it would take would be a 20% drop in the S&P. And that did not prove correctly, they keep on going.

Conor: Yeah, right.

Craig: However, we might look back at October as the month when the gears started to shift a little bit.

Conor: Right.

Craig: We had this situation in the UK, but even just yesterday, your...I'm gonna call it your Bank of Canada, Conor.

Conor: Yes, please do.

Craig: Your friends at the Bank of Canada didn't hike as much as everybody's expected. What do you make of all that?

Conor: I think that when you see new home sales for September, and this is, like, a new home from a developer for the month of September in Toronto with 6 million people as a population that they sold 45 houses, 45.

Craig: Forty-five.

Conor: And you just look at an economy like Canada's or even micro like Toronto's, and surrounding areas, that so much of it has been built up on housing, and so much in terms of people's net worth is attributable to their housing. In other words, they're using their homes as, like, lines of credit in order to finance other purchases of, like, their Mercedes-Benz or stock purchases, or whatever it is, their Gucci bags, or their groceries for that matter. I mean, it basically kind of all falls down to that home equity line of credit.

Now, all of a sudden, if you've got, let's say your house was worth a million bucks before, and now it's worth kind of $750 million, and you were taking out money against it, your home price is down 25%. It's not a pretty sight, especially if your income starts to go lower. So, them doing 50 basis points, no kidding, I wouldn't be surprised if that's it. Like, you saw what happened in Australia, they did the same thing. Now, obviously inflation's ramped back up again there, but they're the same kind of situation where it's, again, very financialized. Their housing prices have done nothing but good for the citizens who own the properties. And by the way, you can...

Craig: Well, Conor.

Conor: Yes, sir.

Craig: I'm sorry to interrupt you, but it sounds to me like it's maybe not full blown like Japan, but is the loonie gonna go the way of the yen? I mean, if the Fed keeps on pushing and Canada can't keep up, it sounds like you might get a little pressure on your Canadian dollar.

Conor: Well, you know what I would say the one thing that the Canadian dollar might have going for it is commodity prices, where energy prices, if they continue to let kind of the supply side where there's really not a heck of a lot of investment going on into hydrocarbons, that you might find some support for the Canadian dollar as a result of that, and the same as the Australian dollar. But the fact remains, do you see that of the pound? Maybe.

Craig: That's right.

Conor: Depending on what they wanna do in order to kind of, like, stem the gilt market and, you know, basically give a free pass to the pension funds who are using these LDIs. And, you know, obviously everybody asks the question, "Well, is this going to happen in the U.S?"

Craig: Right.

Conor: Who uses this kind of leverage in the United States? Well, there's a whole list of them. And I don't know whether or not everybody knows it, but I'll give you a few examples where Raytheon Technologies has 55 billion in defined benefit assets, 23 billion of which are LDI assets.

Craig: Oh, goodness.

Conor: Okay. Then there's UPS, United Parcel Service. Yeah, that's right, 52 billion in assets. It has 20.9 billion in LDI. I mean, the list goes on. General Electric, 61 billion, LDI assets, 20.3 billion. Like, the leverage in the system is kind of being unwound, and you don't know where all the losses really hide. Obviously we know that there's been... You can measure it mathematically in terms of the losses that the markets have sustained in the United States where I think it was as of the end of August, Bank of America put something out that between credit and equity, the losses were on the order of 58 trillion.

You kind of sit there and wonder, you're like, "I wonder if these guys are pressing a little too hard in terms of interest rates." And there's no question in my mind that they're doing it just because of the pressure that they're putting on companies, the pressure that they're putting on pensions, the pressure that they're putting on individuals, the pressure that they're putting on house prices. And this is all in a matter of six months, like where essentially in February they were still buying MBS.

Craig: Right, right.

Conor: Like mortgage-backed security, you just kind of like this is in the same calendar year.

Craig: Right.

Conor: And since that, the NASDAQ's down 30%, and I mean that for, like, some of the stocks in there are down 80, 85. And you see the likes of Google, Meta, Microsoft, and you're kind of like, "Is this the bottom for the NASDAQ?" I don't know. I would guess not. I don't really have much of an opinion on it, but truthfully, it's tough to make a case for it.

Craig: And Conor, just to back up. That was such big news what happened in the UK. I wanna make sure everybody understands what you're discussing. As I understand it, you know, your pension fund has this return target that they've got to meet for all their future liabilities, but with rates at 1% and 2%, they couldn't possibly come close with those traditional kind of fixed income investments. And so they lever 'em, they collateralize them.

Conor: Absolutely.

Craig: And you buy $10 million of this and then you pledge it and you buy another $9 million, then you pledge that, and you buy another $8 million. And that's how you get hyper levered to low interest rates. That's what we're talking about, right?

Conor: Absolutely. Absolutely.

Craig: As rates rise, that whole thing just implodes.

Conor: Yeah. And the cost of funding any of these trades goes way up too, in terms of the rate on the derivative or, you know, you can name it, from almost any perspective, the price of all of it is going up, and when the price of the asset that you bought is now down 25%, 30%, I mean, the losses just end up being staggering.

Craig: So, in the end, let's close with this, Conor. We are gonna turn the corner now in the last couple months of the year. Do you think we're close? And what do you expect to happen if when the Fed has to kind of finally turn and pivot?

Conor: There's no doubt in my mind that they're gonna have to pause or they're nearer to the end, everybody has their opinion on that. But really what I think you have to do is just kind of...like for silver for us is priority one, two, and three, and you just kind of look at the supply and demand dynamics of it. And so you can kind of take maybe the Fed out of it for a minute, and you can just sit there and say to yourself, "There's no doubt that solar is going to be a thing for the next decade. There's no doubt."

And I mean, you just kind of look at it from a supply side, you're like, "There's really no supply coming, there's no real investment that's gone into these mines in terms of like getting them into production, there's, like, none." So, like, where does the world come up with 800 million ounces every year? Like, obviously, they rely on recycling quite a bit for 100 million to 200 million ounces. But again, I just think that taking the Fed out of the equation for silver is probably appropriate.

Craig: Yeah. It's right.

Conor: And I mean, really, you can attribute that to copper, nickel, lithium. You can kind of see how they all trade, but lithium doesn't really have the monkey on its back. And I know we all know what I'm referring to in terms of nobody's selling paper lithium because the guy who wants the lithium is taking the lithium. Not always is that the case with silver, despite the fact of what's happened on the COMEX for the last couple years, where they're using this area because the silver's cheap and always basically trading at the spot market where they know that they can get the metal at that price and it's the cheapest silver you can find in quantity.

Craig: And in the end, it's a little bit Econ101, right? I mean, they're like apartments in New York City, if you have rent control and you artificially hold the price low, you end up with shortages.

Conor: Absolutely.

Craig: And here we are. Well...

Conor: Absolutely.

Craig: Sure sets us up. Again, it's such a compelling story. I'm glad you're able to fill in some of what you and Eric are thinking. And again, we're speaking with Conor O'Brien, longtime business partner of Eric Sprott's. And so it's always good to get your perspective, Conor. Before we go, I just wanna remind everybody again, this content is brought to you free of charge by Sprott Money. So, if you want to thank them for all they do through the course of the month with the ask-the-expert, or all the free articles that are posted on their site, the video I do with Chris Vermeulen every month, anywhere, you get all that for free, give 'em at least a like, or a subscribe on whatever channel you're listening to, that'll help them spread the word.

But then again, it's time to be buying some physical metal. Great time for holiday gift shopping as well. Stop by sprottmoney.com, check it all out. And of course, always just give them a call if you want to talk to a human being. 888-861-0775. Conor, thank you so much for your time. It's always fascinating to visit with you.

Conor: Anytime, sir. Thanks for having me. Appreciate it.

Craig: And from all of us at Sprott Money, thank you for listening. Have a great rest of your month of October, and we look forward to talking to you again in November.