Weekly Wrap Up

“A Little Fear” Makes for an Exciting Week in Gold and Silver - Weekly Wrap-Up (May 10, 2019)

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May 10, 2019

Trade Wars, Tariffs, and Volatility. Oh my! It’s been an exciting week for investors, but what does that mean for precious metals? In this edition of the Wrap-Up, Eric Sprott breaks down all the gold and silver news on the week, including:

The significant news out of China (hint: it’s not the trade war)

Why the “Goldilocks” market may not be “just right” after all

Plus: The exciting things happening at Kirkland Lake

“There are great waves of macro-information flipping back and forth here. At the odd time, we’re told that the economy is great, and then we look at some of the data and the economy is awful. Inflation is rising, and then it’s not rising. The trade war is going to be settled, and then it’s not going to be settled. Each of these seems to be used as an excuse to move the prices around on COMEX. As you know, I always fall back on the physical side.”

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Announcer: You're listening to the "Weekly Wrap-Up" on "Sprott Money News."

Craig: Well, hello again from "Sprott Money News" and sprottmoney.com. It is Friday, the 10th of May 2019, and this is your "Weekly Wrap-Up." I'm your host, Craig Hemke, and joining us, as usual, today is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. It was a pretty exciting week for me, for sure, and some of the things we're involved with, and sort of things economically and market-wise kind of falling into place here. So lots to chat about.

Craig: Yes, there is. But probably the most important thing that we need to chat about is the fact that it's only two days now until Mother's Day. You don't want to mess this one up, everybody out there listening. And a great gift for any mother in your life is, of course, physical metal. Why would you not want to give them some samon [SP] money, teach them a little something in the process too. Sprott Money has great gift ideas including numismatic coins for our Canadian listeners. After all, what mom would not want some silver or gold for Mother's Day? Go to sprottmoney.com and check out the selections there, or just give us a call, 888-861-0775. And Eric, gold is up this week even though it seems as if on COMEX, the banks are doing everything they can to keep price in check by adding open interest which is up 8% this week while price is up less than 1%. But silver's down perhaps because it's considered an industrial metal by everybody except all of us listening. Just wondering what your thoughts are on this.

Eric: Well, you know, there's great waves of macro information flipping back and forth here. I mean, the odd time we're told that the economy is great, then we look at some of the data and the economy is awful. Inflation is rising and then it's not rising. The trade war is going to be settled and then it's not going to be settled. And each of these seems to be used as an excuse to move the prices around on COMEX. As you know, I always fall back on the physical side and you pointed out to me just in, right, previous to this call that China stepped up their buying to 15 tons last month. Well, that, you know, I find very, very significant because it was great when they started announcing 10 a month, okay? Now they're at 15 a month. And these are significant amounts of gold when you think that they could buy 180 tons of gold that they weren't otherwise buying. That's about 4% of the world's gold supply that's now being sucked into China that wasn't being sucked into China. And it's not as though gold production is increasing this year, plus we have these other governments and central banks that are also buying. The Europeans, of course, are all buying the ETFs and the Americans are selling the ETFs. But I think, you know, if there's some market fear start to rear their head here. The outlook for gold, of course, it works against the market and I think that's why it's up this week because the markets have been down about 3% across the board. So, and I think there's a little fear coming back into things here.

Craig: Yeah, certainly. It seems that way. The news yesterday and today, at least on the U.S. front was that inflation remained subdued, maybe not as transitory as Chairman Powell would like to state it. But also, obviously, the trade war which you mentioned last week was seemingly coming to a head again and, boy, you nailed that. Over the weekend last weekend, it came up and now here we are, right on the precipice of it today.

Eric: Yeah, well, you know, it's funny, oftentimes you can kind of smell these things. Now, you'll never have the press tell you the truth, okay? And you kind of got to read between the lines. But you could just sense it, man, this is not going to be an easy negotiation. And obviously, the Chinese pushed back on things. And the only option Trump had was to put more tariffs on. Because the Chinese were obviously backpedaling and we've seen written evidence of that in some of the notes that were emanating, not necessarily the U.S. but out of China and other places like that. So, and this trade war is not going to be pretty. It's going to have a big impact on earnings and sales all around the world. And those who believe that, you know, we're in a Goldilocks market might have to reconsider all of that if this plays out the way it looks like it's playing out. There is going to be a lot of volatility in earnings in a lot of industries because of the trade war. And the one thing we know about trade wars is they're not good for anybody. And that's going to be the case again. And unfortunately, the positions are a little dug in here. I mean, Trump needs to do something. I presume he thinks about reelection. And Premier Xi doesn't want to give up anything or give up as little as he can. So I think it's going to be a heated thing. So we'll see how that plays out, but it's not looking good and I think it's just going to lean on this market, the stock market for quite a while.

Craig: There are other issues with the stock market. I know you follow it closely just because of the impact it can have on Fed policy, and inflation, and ultimately, the precious metals too. I know there are some separate issues that you've been following too, things like Uber and Lyft that are on your mind.

Eric: Yeah, well, it's very interesting. Like, I find it shocking that Uber and Lyft, that both lose a billion a quarter and knock so many people out of business who are in business, all the taxi guys in the world, and lose money. And they recorded these credible valuations. And the other negative thing that they do, when they go public, and Uber, I think is raising 8 billion today and Lyft raised something like 2.8, but they've taken 10 billion out of the system, okay? That's 10 billion that was in the stock market or the financial markets that's now going to Lyft and Uber who will lose it over time. In other words, it doesn't come back into stocks. And I can tell you from history that IPOs stop stock markets from going up because it takes the money... Who's putting up the 8 billion to buy Uber today? They probably have to sell 8 billion of other securities to do it. So you get pressure on stock and if the money doesn't come back into the system, in other words, for example, when the guy buys an ETF, no money is leaving the stock market system. But when you buy Lyft and Uber, these guys are just going to chew through that anyway. That's not coming back in the stocks. In fact, those guys will probably be back in the market a couple of years from now at the rate that they lose money. And the fact that we accord them the values we do is just a whole other thing, but just looking at the money flow, it's not good for the stock market.

Craig: It's like what's this fake meat company that went public this week too? Did you see that, the Beyond Meat or whatever?

Eric: Oh, yeah, yeah. Well, I didn't. I haven't actually followed it. We've had a lot of annual meetings here in Toronto in the gold business.

Craig: That's right.

Eric: So it's been kind of a hectic week and there's only certain things you can notice. And, in fact, one of the other macro things I've noticed which came out yesterday is that Bernie Sanders and AOC have suggested a maximum 15% limit on credit cards. Well, you know what? This should have happened a long time ago, a long time ago. What a God darn ripoff those fees are. And you know who's paying them?

Craig: Right.

Eric: The people who can't pay them. And it is frighteningly ridiculous that we've allowed ourselves to get into that position. The bank gets our money for nothing and charges some poor slob 22%.

Craig: Yeah, I mean, they're basically...

Eric: Wow.

Craig: ...like a credit card payday loan, you know, pawnshop type rate.

Eric: Yeah, how unfair is that? And, by the way, don't be missing a payment because they'll be some extra fee thrown in there besides the 22%.

Craig: Exactly. Exactly.

Eric: Like, it's ridiculous.

Craig: No,

Eric: You know, that might start carrying a little bit of weight amongst the voters, by the way. And I'm sure it will.

Craig: Yeah. Yeah, no, those days are coming as well. You mentioned you've been busy all week long up in Toronto. You had a meeting with the Kirkland Lake Annual Meeting and some other things going on. What can you tell us about all that?

Eric: Yeah. Well, okay. Well, first of all, Kirkland reported their earnings. So they earned 53 cents in the quarter on adjusted earnings basis which is what everybody uses. And I think that was up like 1 cent from last quarter. And the cent of 53 versus 52 is somewhat disappointing to me. I was kind of hoping they'd have a little more, what with the price of gold having been higher. Unfortunately, their tax rate was up and their depreciation costs were up. But almost all the other metrics like the free cash flow and... I think, for example, Fosterville's cost of production was $130 an ounce. I think the whole company's cost of production was something like $300 and change. And it's funny, when I look at those kind of metrics and I was comparing them to Franco-Nevada royalty company, our cost of production is less than the royalties company's cost of production. They don't produce anything. They typically...

Craig: That's remarkable.

Eric: ...pay a guy 400 bucks for an ounce sometime in the future when they got to charge off the $400 but, you know, their cost of production is kind of fixed. You know what? Ours isn't fixed. Ours can go lower. I shouldn't say ours. I'm no longer the chairman of Kirkland Lake Gold, okay? So I'm actually kind of free to say more things about it. And I do have other things I want to say. And I think there's some very strategically important things that happened this week for Kirkland. It wasn't this week, it was actually last week, May 2nd. There was a release of drilling results from the Macassa Mine, the mine in Canada. And I'm going to read some of the grade, what they call the Key Grades, to you, 118 grams over 2 meters. By the way, the average mine mines something like 1.5 grams, okay, 1.5. This was 118 over 2.

A hundred.

Eric: Sixty-two over one, 73 over 2. Here's a beauty, 4700 over 2, 436 over 2.2, 436 over 2.8, 158. Here's another one, 2500, 523, 20, 164, 26, 827, 360, 338. Holy mackinaw, where have I seen this before? Oh, Fosterville. Oh, yeah, that's what Fosterville used to report. And then their production went from 140,000 to 600,000 because of grade. And that's what happened with grade. And the interesting thing about Macassa is that two of the areas that they had these significant discoveries in are new areas. One is called the West South Mine complex, so it's west of where the known reserve is and the other one is called the Amalgamated Break. And in the Kirkland Lake camp which has produced 25 million ounces, the whole camp, there's a break called the Main Break/'04 Break. And then we have the South Mine Complex which was south of that. And now the Amalgamated Break is south of that and it seems to be a brand-new discovery. And the Amalgamated Break runs totally through the camp, probably 7 kilometers, okay? And my preliminary discussions with people, and I'm not privy to anything that's not in the public domain, is that this can be a very significant discovery in the future. I imagine, it's just me imagining, well, first of all, when the number 4 shaft comes on, they're going to go from 250,000 to 500,000 ounces, but I think with these new discoveries and much more extensive gold occurrences, that number could double.

Craig: Wow.

Eric: Wow. And I've always thought that Fosterville essentially could do a million someday. And if this could do a million, it would be stunningly impressive.

Craig: Wow.

Eric: And speaking of stunningly impressive, there is a young fellow whose name is David Monus. He's done a couple of write-ups on Kirkland. He handed me one at the annual meeting and he's been very, very good, and sort of farce [SP] forward-looking, and quite correct. And I'm sitting here with his write-up in front of me and he's suggesting that Kirkland Lake in 2022 will have earnings of $4.76 per share.

Craig: Holy smokes.

Eric: 2022. We earned a $1.37, I think last year, okay? That's a triple in four years. What's the stock going to trade at? Twenty times earnings, $90 U.S., Can$130. Giddyup, go.

Craig: Yeah, and that's assuming prices stay at a certain level too. What if prices are a little higher than what he's expecting?

: Constant prices and no new... He wouldn't even be aware of what was happening at Macassa that was announced a week ago which could be very, very, very dramatic a few years from now. In fact, the Amalgamated Break, I think they can get to that in about six months, you know, with underground development. So that can have a quick impact on things. So I'm obviously very excited about Kirkland here, and the company seems to be hitting on all cylinders. They're a little slow in getting new results out of Fosterville but, boy, this Macassa thing sure makes things very easy for them going forward here.

Craig: Yep. Well, Eric, just one last thing before we go. And a question that was emailed in to us that somebody wanted to run past you. It comes from a guy named Ralph who just wants to know if you have an opinion on the feasibility of using gold bonds to extinguish a sovereign's debt, that that is even getting kicked around here in the States at the state level. Do you have any thoughts on that?

Eric: I sure do. Well, first of all, we have to figure out whether they own the gold. Like a lot of us believe that the central banks have forward sold their gold, and because they haven't got a contract they think they can get it back. Well, yeah. Just go try and buy it back in the real market, not the bullshit COMEX. That would not be easy. Two, the value of gold that's owned by these governments has no relationship to the debt outstanding. So buying it might cover, you know, maybe 10% of the debt or something but it's not going to begin to cover the debt and other obligations. So, for example, I think the U.S. debt is now $23 trillion and the unfunded obligations probably takes north of a $100 trillion. I don't even know if they've got $1 trillion worth of gold. So, sure, if some guy really has gold, you know, maybe Russia, maybe China, yeah, they could probably try doing something like that. Or if there was some really diligent country who kept their gold, yeah, they could do it. But I think most of the Western central banks and governments, I don't think they have the gold they pretend they own. So I don't think it's a starter.

Craig: Excellent point. Well, I will add this, if you, personally, own the gold, you got to store it someplace. And we encourage you to open a storage account with Sprott Money where you can store and secure all of your precious metals in any of our six global locations. You can sign up for Sprott Money International Storage and receive exclusive deals from us as well. So simply give us a call, again, 888-861-0775 or visit sprottmoney.com for more details. Eric, I've got a sneaky feeling this next week's going to be pretty interesting between everything that's going on geopolitically and then economically with the trade war, and the stock market, and everything else. I look forward to talking to you next Friday and see where things are then.

: I think it's going to be very exciting. I'm kind of hoping that the Walbridge company I follow is going to have some news release that might really ring the bell. So we'll wait and see on that. I'm pretty sure Kirkland's going to have a good week as people start understanding what's evolving there. And hopefully, people start moving into the gold market as the stock market fades, and the non-Western banks are leading the way here in terms of buying gold. So it looks pretty good going forward.

Craig: It sure does. All right, my friend, thank you again for your time. Have a great weekend.

Eric: Okay, Craig, all the best to you.

Craig: And from all of us at "Sprott Money News" and sprottmoney.com, thanks for listening. We'll talk to you again next Friday.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.