A Tough Six Months for Precious Metals?

Craig: Welcome back to the "Sprott Money News Monthly Wrap Up." This is for November of 2022, and what a month it has been. I'm your host, Craig Hemke, and joining us this month is my old friend Dave Kranzler of "Investment Research Dynamics," and the great newsletters, "Short Seller's Journal," and "Mining Stock Journal." Dave, a recognized expert in the precious metal sector, and like I said, an old friend. Dave, good to see ya.

Dave: I'm glad you consider us to be old friends.

Craig: Old, emphasis on the old part.

Dave: Let's clarify one thing, alleged recognized expert.

Craig: Exactly, exactly. After the year we've had, it's even more alleged than usual for both of us.

Dave: Oh, unbelievable.

Craig: But let's begin to wrap it up. Before we get going though, just a reminder. I mean, it's November, end of November, so technically it's the holiday season. And that of course brings the...what's always looked forward to at Sprott Money, that's a Sprott holiday gift guide. So, you go to sprottmoney.com, look for the holiday gift guide link right on the homepage, it'll take you there. You'll find all sorts of bargains and deals for your holiday shopping.

And why not give some precious metal to your kids, your grandkids? Great way to get them to understand what's money and what is not, and likely to see some appreciation in value over the years as well. So, go to sprottmoney.com, check the holiday gift guide and do some shopping. Maybe another good gift would be a subscription to the "Mining Stock Journal." How's that, Dave? You like that?

Dave: Love it.

Craig: Tell everybody what you do for a day job and what the "Mining Stock Journal" is.

Dave: Sure. So, the "Mining Stock Journal" is a biweekly newsletter, so it comes out twice a month. And I focus primarily on junior mining stocks and junior micro-caps. I mean, the idea here is looking for total rate of return ideas. And I try to find ideas that are not trampled all over by dozens of other newsletters, Bay Street analysts, etc. So, you know, it's getting harder, but, you know, I try to look for ideas that haven't been as discovered yet. So, in fact, one of 'em just yesterday, Viva Gold doubled in price on some, like, stunningly ridiculous assay results from their Tonopah Gold Project. So...

Craig: Well, as Eric would say, you do your homework, you can find things like that. And you need allies and you're still out there doing the homework.

Dave: Exactly. And that's what it is. I mean, it's, you know, a lot of my subscribers are begging me to raise the price. They're like, "You're selling this information for too little." But at some point, I probably will. But, you know, my...you know, I don't want to charge a ton of money like some of these outfits do. And it's...you know, I try to also educate as much as I can for not being a trained geologist on, you know, mining terms, geology terms, things like that. So, and I also...

Craig: You do a great job. And again, all of...

Dave: Oh, thank you.

Craig: Your website is investmentresearchdynamics.com?

Dave: Yes.

Craig: And all the information...

Dave: I actually offer the "Short Seller's Journal," which believe it or not, as much as I love the precious metal sector and I've been, I mean, knee deep in it, maybe neck deep in it since 2001, I actually kind of enjoy writing the "Short Seller's Journal," which is a weekly newsletter, more than I do the "Mining Stock Journal."

Craig: Especially after the year we've had. Again, both of those at your website, investmentresearchdynamics.com. All right, Dave, let's first look back at some of the key events here of November. The first thing on my list is the November FOMC where we got another 75 basis point rate hike, promises another 50 here in two weeks when the FOMC meets again, but all in the face of what appears to be some pretty sharply slowing economic data. What do you make of all this and where do you think the Fed's headed in the short term?

Dave: Is it set in stone that it's only gonna be a 50 basis point hike?

Craig: Well, that's what Powell told us back in September, so that's what I'm going with still. But who knows? You're right.

Dave: I mean, it's never really clear to me. I mean, I think the narrative they're trying to push is that they can reign in price inflation by destroying demand. And as fact, I saw it yesterday and it was driving me nuts. They're trying to cool down the economy. Well, on a real basis, the economy was never hot.

Craig: Right.

Dave: You know, and they point to the employment numbers and we know those are bogus. So, to me, you know, I... I mean, if you study monetary economics, price inflation, yeah, in the short term, you can have supply bottlenecks or a surge in demand that outweighs the amount of supply that's out there. And you might get temporary price increases because it's the function of the price to clear the market, right? Balance out supply and demand.

But real inflation comes from increasing the money supply at a rate that's in excess of the increase in wealth output. And we haven't had a lot of real wealth output really since 2007. And the money supply obviously has gone to Pluto. So, I think most of the price inflation that we've been seeing really since I guess maybe late 2020 is... I think what happened for most of the time between 2008 and then that big $3 trillion push of money printing in March, you know, spring of 2020, a lot of that went into the stock market, the bond market, right? We had record low interest rates, record low mortgage rates, record high stock prices, the housing market, you know, housing price inflation. So, I think that was kind of capturing a lot of that printed money. But ever since everything's kind of rolled over, you know, financial assets, and I consider a home a financial asset because most people use, you know, at least a 90% mortgage and in many cases much higher than that. And a mortgage is a financial asset. And, you know, the price of a home, the price of it is derived from the amount that you can borrow to pay for it, right? So, now that financial assets have started to head south, all of a sudden, you know, the money that's being printed or had been being printed was showing up as price inflation at the grocery store, at the gas station, insurance premium, etc.

So, to me, yeah, I mean they might be able to slow down inflation a bit by hiking rates, but it's really gonna...they're gonna have to remove a lot of that liquidity that they've printed and pushed into the banking system. Because now that it's being unleashed from financial assets into the real economy, that's where...that's the real source of your inflation, is the devaluation of the dollar. You got more dollars chasing less widgets, less units of wealth output.

Craig: Right. Right.

Dave: So, yeah, I mean, go ahead and raise rates up to 5%. I guess they're saying now, I think I saw one of the FOMC members, I don't remember was actually a voting member or not who said that he thinks Fed funds rate needs to...the terminal rate should be somewhere between 5% and 7%.

Craig: Right.

Dave: But even at that level, you've still got negative real rates versus just CPI inflation, let alone a real measure of inflation. And negative rates are...you know when you have negative rates, it continues the devaluation of the dollar or a fiat currency. So, to me, hiking rates might slow inflation down, but it's not gonna rein it in.

Craig: Well, and you mentioned that was goon, I call him goons, goon Bullard said that.

Dave: I know, I love that.

Craig: And he's the same guy that has spent 36 years at the Fed in his ivory tower. He's never had a job outside of the Fed. Same guy that thought inflation was transitory and we wouldn't even have rate hikes until 2023. And now we're supposed to believe... They would seem to be hopelessly behind the curve, if not just simply hopeless. It'll certainly be interesting to see which way it goes especially with the meeting coming up in two weeks. Maybe we'll talk about that next month.

Dave, the other thing that has been really interesting here this month has been just the continued meltdown of all of these fraudulent Ponzi schemes in the crypto space. I always like to make a distinction between the Bitcoin I own and then all these little scams, you know, where they promise 20% yields and stuff like that, that are basically Ponzi schemes. I would imagine you got some thoughts on that. And do you think... We haven't really seen that bleed over to the equity markets yet. Do you think it could as we go deeper into the year?

Dave: Well, I mean, it did bleed over temporarily, you know, when FTX filed and, you know, the whole crypto world headed south, had a leg down. The stock market also started to sell off and then all of a sudden, you know, pivot hopes kicked back in.

Craig: [inaudible 00:09:52]

Dave: Yeah, exactly. So, that's a good question. I mean, you know, I think the damage that's been done to the crypto world is reflected right now in the stock market. But, you know, because, you know, unless something, another big event like FTX implodes, I think the stock market with respect to what's going on in the crypto world is probably stabilized. But, you know, who knows? I mean, if we get another big leg down in Bitcoin, yeah, I think we'll see a pretty sharp stock market sell-off related to that.

Craig: And that could impact the Fed too, you know? And I look at all that money that was printed, like, I should say currency that was printed that went, you know, from the Fed...added to the Fed's balance sheet and drove that inflation, you know, we were all frustrated. It was a nice move in the precious metals, but clearly a lot of the demand for gold and silver, the ETFs and mining shares was siphoned off not only into Bitcoin, but into these crypto scams.

I just wonder if now that they've all been revealed as frauds, if, you know, the next time the spigots are turned on and the printer goes burr, we won't have maybe a little more of a, you know, a rally, a more...a little more of a spotlight shown on traditional sound money. What do you think of that?

Dave: Oh, I think there's no question about it. I think we kind of started seeing that when FTX, you know, bit the dust. It kind of felt like the precious metal sector started having a more firm-bedded bid, at least the paper side of it. I mean the physical side obviously there's always a firm-bed bid from the Eastern Hemisphere. But yeah.

In fact, one of the things that I've noticed is that...and it may be related to the FTX situation, is that on days when the stock market starts to sell off, a lot of...on a number of those days, the precious metal sector actually rises or diverges positively from the rest of the stock market. Today's a good example, right? I mean, the Dow was green early in the morning as was the precious metal sector.

Now the Dow's down over 100 points, the NASDAQ's down...well, the NASDAQ 100's down almost 1%, and the precious metal sector is still firmly bid. I mean, the HUI index is up 2%. I mean, it never really pulled back or it maybe pulled back just a tad when the rest of the stock market started to head south. So, you know, there may be an element of money that might have been going into these cryptos when the stock market started selling off, that money may be starting to flow into the precious metal sector, but we'll need more time to really draw to conclusion.

Craig: That takes us to the last thing I want to talk to you about in the month-end, you know, wrap-up here, is physical demand and declining vault stocks around the world, not just for silver, but copper and lead, and zinc, and nickel, aluminum. And, you know, one of the reasons why, you know, you mentioned we're recording this on the 29th and the whole commodity sector is bid, is this idea that maybe, finally, that China is gonna start to reopen and lessen their COVID restrictions and everything else driving Chinese commodity demand maybe into the new year. Dave, are you following that story as well, this vault stocks, declining physical metal stocks? Do you think that could possibly eventually have an impact on the digital prices?

Dave: Gresham's Law baby, right?

Craig: Yeah, yeah.

Dave: Bad money chases out good. And smart money knows, you know, COMEX contracts, SLV, GLD, that's not good money. Those are derivatives. So, it's going for physical metals, it's going, you know... It wants possession of the physical metals. And that's what I think we're seeing, is you've got a... I think it's a low-grade run on physical gold and silver because it's not just in London, it's in New York also.

Craig: Right, right.

Dave: And it's...

Craig: [crosstalk 00:14:27]

Dave: Right. And I mean, I remember someone, there's a guy on Twitter who does a great job keeping track of the vault stocks, the warehouse stocks on the COMEX. And he was getting all excited when silver was, you know, dropped from...I forget, like, 340 million ounces down to close to 300. And I'm like, "Well, wake me up when it's below 300." A couple weeks ago, we went below 300. So, there's definitely physical metal that's disappearing from above-ground visible stocks. And I think that's smart money saying, "Time to cash in my fiat chips and move into something that's really gonna preserve my wealth."

Craig: Yeah. It'd be an issue.

Dave: Well, I think at some point, and again, I don't know, I don't know what the trigger's gonna be, but at some point, I think we're gonna see a more widespread rush to convert fiat currencies into physical metals.

Craig: Be an interesting story to follow in December and then into the first quarter. One last question for you. Let's begin to look ahead a little bit and tap into that alleged expertise in the mining sector. But no, I joke. Dave knows more about...he's forgotten more about the mining sector than I'll ever know.

Dave: I don't know about that.

Craig: It has been... Well, yeah, I'm losing it quick so it doesn't, you know... The bar is set pretty low, Dave.

Dave: [crosstalk 00:15:55]

Craig: As we look ahead, I mean, obviously this was really challenging year. I mean, the gold fell seven months in a row from April through November, the longest losing streak on a monthly basis since 1968, which coincidentally was when the London Gold Pool blew up. But that just played heck with the mining... I mean, was it Newmont that got cut in half over the course of 60 days from 85 to 42?

And again, we're seeing a lot of stress in the juniors and the explorers, you know, maybe starting to run outta cash because they can't get financing. I mean, this is a really challenging year. This is a question? Yeah, well, I guess it is. Dave, tell everybody a little bit about historically how the shares might perform in December with tax-loss selling, that sort of thing, and maybe what you'd expect as the year begins and as we get into the first quarter if the metal prices respond and that sort of thing.

Dave: Sure. Well first of all, the chart pattern that we saw this year in the precious metal sector, very, very similar to what we saw in 2008. Because if you remember, in 2008, the gold and silver hit, it wasn't...I don't remember if it was all-time highs, but the gold had run up over 1,000, silver had run up to I think maybe 19 and maybe even 20 or 21. And then in mid-March, you know, when Bear Stearns was like, "Yeah." And it sold off hard into the end of October, very similar to the way it sold off hard starting in April, you know, into...you know, through the end of the summer and into the early fall. You know, obviously, there's a lot of interesting parallels between now and 2008 in the whole financial system. So, I kind of think we could see a similar pattern.

Now, you mentioned, like, tax-loss selling. Yeah, I think that's a factor. It's probably more of a factor in the junior micro-cap stocks because there's been a... Last week there was a couple stocks that got hit that I actually cover in my "Mining Stock Journal." And I'd have subscribers emailing me, you know, "What's going on?" I'm like, "There's no news." I said, "There's either a fund getting out before the end of the year or tax-loss selling." You know, and I'd get in contact with the CEO, "Hey, is there anything going on, you know, or is this tax-loss selling?" He goes, "Well, one of 'em is like, well, we have a fund selling and then the rest of it's retail tax-loss selling." So, you know, I don't really try to play the tax-loss selling effect because we could have, you know, starting at the beginning of November, we could have a two-month period here where the metals are off to the races like they were in 2008. I mean, don't forget in 2008, gold and silver bottomed in late October and GDX more than doubled between early November and the end of the year.

Now, I was running some numbers the other day on GDX, and actually, I ran 'em again this morning in case you asked me about this, GDX, since November 3rd is up 23%. No one's reporting that, no one's talking about it. That's a hell of a move in a three-week period, you know? And so, yeah, we're probably...I was thinking we might get a sharper pullback than we've had. It was up 26% a couple days ago. But again, we could be back into a period like we were in late 2008 where the stock market continues to go south and the precious metal sector diverges positively and heads north. And, you know, until I'm proven otherwise, that's what my call is right now.

So, regardless of tax-loss selling... And again, it's gonna be more of an issue for the micro-cap illiquid, you know, junior project development companies than it is for the larger cap producers who are generating revenue and cash flow. But, you know, I think that, you know, we could be significantly higher by the end of the year than where we are now. Now, I'm not putting all my chips on the table for that, I'm playing it cautiously. But, you know, if we see a move like that, I think we could be off to the races in 2023.

Craig: Well, I [crosstalk 00:20:24].

Dave: And certainly fundamental supported.

Craig: And Dave, in March of 2009 following that period, you mentioned that's when the Fed first got involved with QE who were well down the road from QE1. But a similar thing could easily happen in the first quarter or first half of 2023, where the Fed has to get back involved as a, you know, buyer of last resort for treasuries to try to get the economy going again after the damage they've done.

Dave: I'm not so sure they're worried about the economy as much as they're gonna be worried about funding treasury debt.

Craig: Right. Right.

Dave: Because the U.S., the government's gonna have to start issuing a lot of paper, and I don't know who's gonna buy that. But again, I'm not sure that, you know, a turnaround in the...or a big move higher in the precious metal sector is gonna require, you know, a pivot to more money printing. I think this time around we could see pressure from the physical market start to push the paper, gold and silver market higher, you know? At some point, the supply-demand imbalance. I mean, even some of the official gold and silver organizations like The Silver Institute are saying, you know, there's gonna be a massive silver supply deficit in 2023, and how do you fix that? The price goes higher.

Craig: Right.

Dave: Market will fix it by taking the price higher. And I was actually looking at a silver chart, a daily silver chart over the weekend. I was like, "Holy crap, that's a bullish-looking chart." So, you know? And it got bounced below the 200-day moving average yesterday, but if it springs back above it, it could be off to the races.

Craig: Right. Right. And boy, if we get into next year and break out above the highs of 20 and 21, and even this year up, you know, get north of 28, start trading with a 3-handle, that's asking a lot. That's 50% move from here but we've certainly seen it before.

Dave: We've seen silver do that before. I mean, that's the one thing, you know, just like the GDX moved 23% in 3 weeks. I mean, we've seen gold and silver make moves like that in a very short period of time.

Craig: Yup. You got that right. Dave, it's always fun to talk to you. And again, I personally at least encourage everybody to check out Dave's services. And again, if you're in the mining sector, that's always a key. I mean, you gotta do your own homework, but you need trusted sources of info to help you out and make sure, you know, kind of double-check your homework. And Dave's services definitely does that.

One thing before we go, I definitely wanna remind everybody too, all of this information that comes out every month from Sprott Money, whether it's the "Precious Metals Projections" with Chris Vermeulen, all of the articles during the month, the "Ask the Expert," these kind of monthly wrap-up conversations, I mean, they're all free of charge. The least thing you can do is help support Sprott Money either by checking the site and buying some physical metal or at least just give 'em a like, or a subscribe on whichever channel you're watching because that helps 'em to cast a wider net, get more educated people out there regarding the precious metals and that helps all of us.

So, please give us a like or a subscribe before you leave. Dave, before you leave, I just wanna wish you a happy holiday season and a prosperous 2023. The bar's set pretty low in terms of coming out of this year. Hopefully, next year will be a little more fun.

Dave: Thanks, Craig. I would like to wish you a happy holiday season also. And I'm not rooting for the Chiefs, but it looks like you might have a winner on your hands there.

Craig: We'll see about that. They are the Chiefs after all. Anyway, thank you, Dave. It's always good to visit with you.

Dave: Thank you, Craig.

Craig: And from all of us at "Sprott Money News" and sprottmoney.com, thanks for watching, and we'll see where things head in the final month of the year.