Weekly Wrap Up

“Depression” Behind Surging Gold and Silver Demand - Weekly Wrap Up (March 27,2020)

“Depression” Behind Surging Gold and Silver Demand - Weekly Wrap Up (March 27,2020)

March 27, 2020

As coronavirus continues to wreak havoc on people’s lives, uncertainty reigns in the markets. One thing you can be certain of: Eric Sprott and host Craig Hemke will break down all the gold and silver news you need to ride out the chaos.

In this edition of the Weekly Wrap-Up, you’ll hear:

  •  What’s behind the trouble in the gold market
  • The looming danger for the banking system
  • Plus: Why this is “way more shocking” than the Great Depression

“So, what is going on here? Oh my God. I’m going to try to put it as bluntly as I can: New York is the new Wuhan. Just let that sink in. That is a devastating comment. And they had to shut down for three months, and they’re not out yet. They’re. Not. Out. Yet. And I think a lot of what we’re being fed by the politicians, the supposed health experts, is that we can get this under control, it will last for two weeks and all that stuff. ‘We’ll all be OK by Easter.’ It seems to me just totally preposterous, based on the analogy of Wuhan."

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

Craig: Greetings once again from Sprott Money News at sprottmoney.com. It's Friday March the 27th, 2020 and it's time for your weekly wrap-up. I'm your host Craig Hemke. Joining us from an undisclosed location is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Great to be here amidst all the chaos and uncertainty. Let's see if we can sort it out.

Craig: Let's see if we can sort it out. There's a lot to sort out these days. And just a little heads up. I'm sure if you're listening to us you probably are familiar that a lot of retail stock at your favorite online bullion dealer has been depleted and a lot of the mints have closed up due to Covid and that's certainly the case at Sprott Money as well. If you're looking to buy precious metals or you recently purchased them in the rush of sales, please be patient with us at Sprott Money. Mints around the world are shut down indefinitely, and of course Covid-19 has limited non-essential business just about everywhere including Ontario. This means that not only are our staff having to work from home, it's also inhibiting our trusted carriers from shipping goods safely. So it may take up to 30 days to get your order fulfilled, but we are working tirelessly to restock and ship your metals as soon as possible, and hopefully some normal business will resume sometime soon, not only in precious metals but around the world. Eric, it has been another crazy week. The metals have responded well to what has been taking place, but nonetheless, and I know you got some thoughts about what you've seen this week, so have at it.

Eric: Yeah, no, it's chaotic for sure, and I might even add in terms of the customers of Sprott Money, I know I was speaking with my daughter Larisa who runs it [inaudible 00:01:51] many coins might you have a little bit of a shortage and she's [inaudible 00:01:55] 15,000 silver coins maybe. I said, "You know what? You don't need to worry. I will get you the 15,000 coins. That is not a problem, okay?" So the customers can be reassured. They will get a coin. We will not fail them on that. They may not get it exactly when they wanna get it because even the delivery services are getting hung up here. So [inaudible 00:02:13] as Craig said, try to be patient.

So what is going on here? Oh my god. I'm gonna try to put it as bluntly as I can. New York is the new Wuhan. Just let that sink in. That is a devastating comment. And they had to shut down for three months and they're not out yet. They're not out yet. And I think a lot of what we're being fed by the politicians, the supposed health experts, that we can get this under control, it will, you know, last for two weeks and all that stuff, or that we'll all be okay by Easter, I mean, it seems to me just totally preposterous based on the already analogy of Wuhan where everybody was locked down and a police force to make sure you didn't break the quarantine. So just try thinking about that. And of course it's not just gonna be New York because we have other centers in the United States like Louisiana and in Atlanta and other...and LA where things are exploding. And the virulence of this virus, and I believe it to be a man-made virus. I said that before. This is never discussed in the public media, that it's man-made, even though it seems from all the analysis I've read that it is. This is gonna be a tough nut to crack here. And unfortunately for all of us we have to change the way we live very, very dramatically. And, you know, it might wear on us after a while. We've only been in this for a couple of weeks, you know. Imagine another four weeks from now we're doing the same thing. We're all locked up and can't do...the only thing we can do is go and buy food. I mean we might get somewhat frustrated. There's a whole raft of other uncertain things. We have no idea...well we do have an idea, that we could get it again. People do get this again. So just imagine we do get it stopped in two months, does it come back again? And already the hospitals are overwhelmed. We have unfortunately...I'm gonna use the U.S situation, I'm hearing so many stories about they don't have the equipment already, already. Well, how can you not have the equipment already when it's just started? Like we're in inning one or two here and we don't have equipment. What's gonna happen when we get to the fifth inning? So this is a very, very uncertain time. People who suggest that, you know, we're gonna have some kind of recovery in the economy or some kind of recovery from the healthcare situation, I don't think they're basing it on anything but hope, because to solve the problem...and I don't believe China has solved the problem. I just don't believe the data out of China. I can't believe that those 30 other provinces didn't have it spread like all the 180 countries who are having it spread. How could China stop it everywhere? I mean I just find it very, very hard to believe, and of course the most shocking thing would be if they...somehow it finally got out that it was way worse than we all thought and was continuing, then that would just be devastating.

So I'm not very keen on stocks these days with all that uncertainty. You think of all the industries that are going through very, very difficult times, and not just industries, small businesses. I mean, there's so many...I mean, whether you're, you know, a florist or a hairdresser, whatever, I mean...and social distancing, it's hard to do the hairdressing with six feet away. So there are nothing but problems. I think the extent of the damage is highly misunderstood. When the U.S first said, "Well, we're gonna have a program to solve this, and the program is gonna be 50 billion." Two weeks ago that was the number, 50 billion. Those are people who didn't have the slightest idea what they were talking about. And now we're at two trillion with the promise that if that's not enough we'll do more, and I suspect we'll have to do more, and of course then the Fed comes in and buys every security that ever showed a rise in rates or some liquidity problem and they're talking about what...I don't even know what the number is...they're so big you can't...like maybe their balance sheet blows out by $10 trillion. Take 10 trillion to solve the problem.

Craig: Right.

Eric: And yeah, I guess theoretically it helps support the system but what's the fallout from having these huge deficits and these huge loans that if you don't solve the health problem you're gonna have a cataclysmic problem with defaults. And who's gonna own all this stuff? Well the Fed is gonna own it, and the treasury is gonna own it. Well who pays for them if there's a problem? We do. We pay for it. And I can't even imagine people getting a check for $1500 is gonna make much difference to be honest with you. I mean, I just...you're out of a job, you get a check for $1500? That's ridiculous. There's all kinds of reasons to be fearful in the economy on many, many, many fronts.

Craig: And to that end, Eric, there's been this rush into precious metal. We mentioned Sprott Money but basically every single online dealer and local coin shop is completely out of inventory. The mines...many mines around the world are shutting down. Mints...the Royal Canadian Mint, the U.S Mint is not making any production because they're on quarantine. Even in Switzerland the refineries aren't running. This is creating quite a problem obviously for the banks, their pricing system that kind of relies on just-in-time delivery, and it's hard to see where it's gonna get any better. You mentioned the financial aftermath of this. We're now living in a world where the Fed openly admitted it's QE to infinity. Hard to see where demand for precious metals is gonna ease anytime soon.

Eric: No, on that front everything is sort of coming together. I mean, the fact that the Fed would go that deep that quickly. And by the way, the problem in the money market started in September I think it was the 16th, okay, when the [inaudible 00:09:04] market blew out and there were many, many things happening before Coronavirus came along by the way where the Fed was playing whack-a-mole with the problems arising in the interest rate markets. So I think we already had a serious problem financially. And then of course this Coronavirus has just crushed any expectation of anything good happening. And of course the one thing that I ask people to think of, think about the bad that could happen and guide yourself accordingly. And I say that for the stock market, the bond market, and mutual funds and ETS and all that stuff. I'm not saying that for the precious metals. I think that, you know, what we've seen this week with these terrible divergences between the cash markets, the futures market, the futures market and [inaudible 00:09:58] like it just...it's been chaos in trying to determine exactly what's going on on the gold market specifically. I mean I'm not a guy who trades gold with all the dealers out there, so I don't know who's in trouble and who's not in trouble. I'm sure you would know that better than I would, but it sure needs a lot of explaining. I don't know if you can explain it better than I can exactly what you think happened this week in those physical markets.

Craig: Well, you know, Eric, I saw a tweet this week from a New York stock trader that's on CNBC often, [inaudible 00:10:38], and he referred to it as...and this...I thought this put it in rather simple terms. If I sell you a car, Eric, and you say I don't want the car. You just keep it in your garage. I just wanna know I have the car should I need it and I'm like, "Hey, that's a pretty good deal." So I turn around and sell your car to somebody else too under the same circumstances, and I do that maybe 50 times. All of a sudden there's 50 people who think they own a car should they need it. Well what happens if they all show up at the same time and wanting to go for a drive? Who actually owns it? And that I thought was a pretty good analogy for how the banks operate the global gold market.

Eric: Yeah, and of course the best part you said and what if they all show up at one time? And that's what's happening. They are showing up at one time. Everybody wants their gold now.

Craig: It's exactly right.

Eric: Everybody wants their gold because it's a better money than the [inaudible 00:11:26] trash that every central bank and every government is trashing. It's mind-boggling in a way. Oh by the way, if it's just announced that the United Kingdom...not president...head of the UK...
Craig: Boris Johnson.

Eric: Boris Johnson has tested positive, right? And I just find these things when there's so many...the percent of people in high places that are getting it is suggestive that well maybe there's a lot more of this out there than meets the eye, and of course probably a lot of people aren't getting tested. In fact I saw a very funny description of what happened in New York City. They said the hospitalizations went up 40% yesterday. Well not everyone has a sign of it is going to the hospital. How much would it have gone up if you kept count of the people who are at home who had started having symptoms? Anyway, sorry. We were talking about the physicalness of the market and the fact that there's these claims on people think they own gold but they don't have the physical gold and they don't even have it, you know, when you own the GLD or SLV. We can't get that gold as individuals or corporations. Yes, the dealers can. They can get it, but the average individual can't. And of course having that ownership is important for two things. One, you prefer gold to cash. Two, if you have it in your possession there's no counterparty risk. And think of the counterparty risks these days of these financial institutions all of whom's customers are hurting, all of whom's customers are probably asking for another loan, all of whom's customers are actually depleting the cash in the bank because how will you pay for the losses that you're sustaining? You gotta write checks for things like that. So, you know, there's...I never had much trust for the financial counterparties, but to look at where we are today and think of where are the banks gonna be in another two months as everybody drains their cash account to provide for themselves, and yet the banks lent the money out to somebody who can't pay it back.

Craig: Right.

ERic: So we could have, you know, a horrible problem in the banking system here and of course the banking system makes no spread anyway because of negative interest rate, so it's not good at all.
Craig: Well, and those are two points we should be sure to touch upon. One, we now definitely have QE to infinity. You know, the U.S was projected to run a $1.2 trillion deficit this year anyway and now you're gonna cut tax revenue in half, so that makes it $2 trillion and now you're gonna add on another $2 trillion from this new stimulus. Now you're at $4 trillion, maybe $5 trillion at a minimum deficit this year. And now we've got negative interest rates being institutionalized too. The three month T bill down here, Eric, has a negative yield, negative five basis points, all of this augurs for more and more demand for precious metals. I just wonder if the troubles we've seen this week aren't just gonna get magnified in the weeks ahead.

Eric: I suspect they are and I should...again, take up on the point the gentleman named James McShirley talks about. He contributes some to LeMetropole Cafe, and he said, "I can't believe how orderly the gold market is. We had the stock market go down 10%, the stock market go up 10% and gold changes by three dollars." You know, gold should be more volatile than the stock market, but it hasn't been, and of course I think because the guys who are short don't want it to go here, and I noted overnight that both in gold options and silver options, the outstanding options fell by 20% and 25%. These guys are getting out of Dodge here. The open interest is going down. The short-sellers are working their way out of Dodge because they know where this is ultimately gonna go.

I should also mention one other thing before I forget that if anyone is in need of funds and has coins and they wanna sell them back to Sprott Money, Sprott Money will buy coins here, okay? Because there's a demand for them on the other side, so if anybody is interested in sort of liquidating...and I'm certainly...I'm not recommending that. I'm recommending the opposite. But if they're in need a call and I'm sure you'll get a bid on your gold coins, gold and silver coins.

Craig: And that leads me to the last question I wanted to ask you. We could obviously keep going and going, but I was asked yesterday about the gold-silver ratio being 115 and what does that mean? And I asked the interviewer. I said, "Hmm, is it really?" Because that's what the paper price is. You know, if you look at the, you know, the trading price, but if I go on eBay I can't buy gold for less than about $1800 and I can't buy silver for less than $25. That makes the gold-silver ratio 72. So which is it?

Eric: Yeah, yeah, and that just shows you the whole distortion of these paper markets, right? And it happened in '08 by the way. Same thing. Gold went down in the derivatives market, the COMEX, but the price to buy an ounce of silver went up. And then finally, you know, once the banks covered their shorts away we go and we hit record high price of $1900 two years later. And I think, you know, we have kind of a...I think we have a bit of a microcosm of the Great Depression going on here, okay? And it funny the analogies with 1929 to let's say 1935 to '39, however long it lasted, but our market went down way faster than in 1929. The bull market rally the last three days which was a 20% rally which in the bull market rally was the last time they had a rally like that was in 1931, the middle of the Depression. We've had it already, and I suspect it's gonna roll over here if anyone is to, you know, put their mind to where is this financial world of ours going here if the stock market should roll over in my mind, but there's a lot of analogies there that, you know, lots of people are using the expression, you know, Great Depression or Greater Depression. And this is way more shocking in my mind than the Great Depression was from my reading of it. We'll have unemployment of 20% or more than the Depression probably in about a week.

Craig: Yeah, the next employment report we can talk about that next Friday. That will be interesting to see how that goes. Eric, I've got just a couple of questions came in this week because people are quite busy.

Eric: They are busy.

Craig: Not as much time to email us.

Eric: It's shocking how busy you could be when you're in quarantine, right?

Craig: Yeah, exactly.

Eric: You gotta do a lot of things, man.
Craig: Exactly.

Eric: Oh boy.

Craig: One of them...of course we all know you're retired and not involved at Sprott and Sprott Asset Management anymore, but you were around back when the PSLV and the PHYS were set up and we've had a lot of questions this week about the difference between those funds and the GLD, SLV. Can you...just anything you can add there?

Eric: Sure. Well, of course one of the biggest ones was the taxation that our trust was set up that it'd be treated as capital gains whereas the GLD I think it's treated as...what's the word they use? Like a commodity, yeah commodity, and the tax rate on a commodity gain was higher than it would be on a capital gain. But the other important thing is that you could get...exchange your shares for physical. You can still exchange your shares for physical. I know the rules have changed on those trusts since I've left but I for sure know you can still do it. There's some charge for it and they might have even reduced the amount. Like, I suspect maybe it's gotta be a minimum of $10,000, something like that, but people can go to the websites of those trusts and find out the details of those, but the fact that you can actually get the metal redeemed is a very strong quality to those products, and they trade at spot which is amazing. I mean, excuse me, you wanna go buy a coin you gotta pay a premium. You could buy these things at spot and there's even a bullion mutual fund they can buy right at the spot price equivalent. So I think they represent pretty good value.

Craig: So it's of size but at least as an individual you can redeem, unlike GLD or SLV where only the banks can put money or take metal out.

Eric: Yeah. And they gotta do it in large quantities too.

Craig: All right. So anyone that is interested in that of course go to the Sprott Money, or not Sprott Money, the Sprott Asset Management website. That probably would be a place to start. Call them, look it up online and I'm sure you can find all the details.

Eric, another question. We talk about the miners a lot, and obviously industry around the world is shutting down. We've heard about even some Canadian miners that are losing production. What do you think happens if mines are taken offline for a couple of months?
Eric: Well, then you have a real shortage for sure. And I think that's likely to happen, okay? Here's how I would guess it would happen, and I'll just use the case of Jerry Canyon which is an underground mine that I'm an 80% owner of and I have to sort of think about this all the time. So what do we watch? First of all it's in Nevada near Elko. The first thing we look it is well are there any cases in Elko? Yes, it turns out I think there's two cases in Elko. Still no sign of it at the mine. If there was any sign of... And of course we reduce staff. We try to send whatever people home we can send home to do work which is tough to do in a mine, we would, but so the head office people can work at home. But I would say the minute that a mine in Nevada starts exhibiting the virus, I think they'll all shut down, which is of course the smart thing to do. We gotta get through the health issue here. We can't worry about the business part. We gotta...because businesses is gonna be ruined, absolutely ruined if we don't get rid of this virus. So, you know, you gotta do the right thing for people's health and if it starts to, you know, manifest itself there, I'm sure they'll close it down. Some of the open-pit mines might be able to stay open because there's one guy in a truck, one guy and a shovel, you know. There's not a lot of...excuse me, aggregation of people. So you could probably continue to operate, although I'm sure never at full capacity, but there's more likelihood there than in underground. Underground, you know, you go down in a skip with 40 guys in a [inaudible 00:22:33]. That does not seem like an appropriate place to be preventing the spreading of the disease. So there's some risk that many of the mining companies will have to stop, but there's an offset to this. If you stop producing gold and silver...I can say this particularly with silver, there are some things still being consumed and invested, invested being an important word, and if there's no supply, what's the price gonna do? The price is gonna go up so that that value of the ore in the ground and the value of when you come back on will be a lot higher. And you never know, we might also break the cartel, right? I mean, I call them the cartel that have restricted the price and just break them. And who knows where the price goes? We could be talking many thousands of dollars here. Certainly if you're related to the Fed or the federal deficit or the money printing, my god you could pick a price way higher than $1600 by a long shot. In fact, when they broke the Bank of England back in '68 the price went from 35 to 900 shortly after that. So that's many multiples, that's, you know 25 times higher or so. Well what's 25 times 16? You got a big number there.

Craig: Yep.

Eric: Potentially.

Craig: And by the time the mines come back online they'd be making a lot of profits at numbers like that. So maybe kind of like a long term picture there. Just one last question, Eric that came in, and I'm sure you can address this. Somebody owns Balmoral shares and Wallbridge shares. They're just curious what happens in the end when that merger goes through? Can you explain that process?

Eric: Yeah, sure. Of course they'll keep their Wallbridge shares and they'll get for whatever number Balmoral shares, I forget what the ratio is, I think it's .41, something like that. So they get .41 of a Wallbridge share. So essentially they'll own shares of one company and that's....you know, that's the way it is in a all share transaction, which this is an all share transaction.

I wanted to mention one other thing that I've been thinking about lately. Of course you always worry as a gold owner that somebody decides to nationalize all ownership of gold. What happened back in the '30s. And as I think about that the only one positive I get out of it, man, I'd like to see what the silver price would do if they did that, you know, where your only precious metal was silver and the market so small. Oh my god, it would be absolutely astounding what the price of silver might do. So there's hope for all us depressed silver owners yet.
Craig: Yeah, that's right. Yeah, it's priced the same way just like gold, all these different people think they own it and let's see what happens. Eric, thank you. You spent a lot of your valuable time with us today but you know, you're on quarantine too so what else you got to do, right?

Eric: Yeah, no all we could do is sit here and think, right? Oh, and buy groceries and take care of grandchildren and children and [inaudible 00:25:54] all right. I gotta go.

Craig: Well, all right my friend, thank you again so much for your time. I hope you have a great weekend.

Eric: Okay, Craig, you too.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. Stay safe, keep your hands clean and come back next Friday for another edition of the Weekly Wrap-Up. Have a great weekend everyone.

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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.