“A turn to real things” — Eric Sprott’s predictions (Weekly Wrap-Up, December 29, 2017)

Transcript:

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

Craig: Well, greetings once again from Sprott Money News and sprottmoney.com. It is Friday, December 29th, 2017. And this is your final "Weekly Wrap-up" for 2017. I'm your host, Craig Hemke, and joining us to finish out the year is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Happy to be here. Kind of an interesting end to the year and, hopefully, it portends great things for next year.

Craig: Yes, it does. And before we get started, just a reminder that you can store your precious metals with Sprott Money. And if you sign up today, you get one free month of storage. How about that? You can visit sprottmoney.com for more info.

Yes, Eric, it has been a very strong week. In fact, a very strong end of the year, just as we had in 2015 and '16. Both of those Decembers set us up for really strong first quarters. We are finishing up. In gold right now, we're up almost 13% year-to-date. That unbelievably, Eric, is the best year we've had since 2010. How you feeling this morning?

Eric: Well, pretty good. And it's a little surprising, you know, to sit here and watch and see what has happened in the last three weeks or so. And, of course, it was quite predictable when we saw the change of the commitment of traders in the commercials covering their shorts and the speculators essentially going short. It's sort of awful to have to watch it. It's actually awful to have to think that's what causes things to happen.

Unfortunately for us, Craig, there are other things going on in the physical world. And the stock markets and cryptocurrencies and events like that, which I think as we discuss them, we'll realize it brings more and more people into real things rather than ephemeral things that seem to have value somewhere up there, not that we're sure why, but they seem to have some sort of value. And obviously, it won't take many people to opt into wanting the real thing for gold and silver to continue to rally here.

Craig: Yes, that should be a key factor next year. You know, and we should talk about silver, too, because you mentioned The Commitment of Traders Report. And we saw last week in the report the smallest net position of the large speculators in silver that I have ever seen on record. And like you said, that's a pretty good sign that price is going to rally. And it's been fun. It's been going up almost 1% every day for the last 3 weeks. It's been beautiful. And we're only up 6% or 7% year-to-date. But silver, copper, all the base metals and commodities, they look poised to continue this trend next year, too, don't they?

Eric: Absolutely. And even things like palladium, you know, that's at a 17-year high. Copper is sort of in the news these days and moving strongly. And it might just be sort of a turn to real things. You know, you have stock values, which, stocks, one might debate whether it's a real thing. It's a quote in a newspaper that can change violently overnight. Whereas a real things, copper, lead, zinc, nickel, these are usable items that will always have their value. The level of the value could change, but they will always have value, for sure.

And so, I think a lot of people are kind of focusing there. It's been a forgotten area. As you say, we hit our previous best year in 2010. That's a long time from now. That's seven years we've waited to have another good up year. Now, mind you, we had an up year last year but earlier in the year this year. But it does look like, as you focus back on the bottoming of gold, I think it was in December 15th, that it truly has bottomed here. It wouldn't take much more now to establish a new up leg. And it could bring a lot of institutional and retail money back into the space.

Craig: Well, and that's what it would take, my friend. And I think anybody can look at a weekly chart and see that we have been basing and bottoming for the last five years. And you can draw a level around $1,400 that you would say, "Gosh, if we could break out about above there, it'd be clear to just about everybody." And you'd be drawing in all kinds of institutional cash and begin to accelerate forward. Well, Eric, $1,400 from $1,305 is only, what, about an 8% rise? I think we got a shot at it next year.

Eric: It wouldn't be much based on what we've seen in the last few weeks. I mean, it's been a pretty steady, consistent kind of rise here. It's like something has changed in the market. I get the sense that... Well, you look at what Russia is doing in terms of buying gold all the time. I mean, God forbid that we find out that the Chinese have been buying it as well. Which, you know, these announcements can come out and, all of a sudden, you know, you find out that the Chinese bought 2,000 ton. Then we ask yourself, "Well, how could they possibly buy 2,000 tons when we're theoretically in balance in supply and demand?" But those announcements could be forthcoming.

We have lots of uncertainty, political uncertainty in the world. You know, I mean these comments about North Korea doing things. There are things blowing up in the Middle East. There's so many reasons to own gold and silver that seem to be improving over time. So it doesn't take much.

We saw what happened to the cryptocurrencies, the degree to which they exploded, the degree to which they exploded. We've seen nothing in gold and silver. Imagine if we, you know...here we're sitting talking about something going 8%. I mean, the cryptocurrencies go up and down 8% every day. So we've really experienced nothing so far. But I think there's lots of reason to think that more and more people are going to come back into this market.

Craig: You know, as we look ahead, Eric, one of the big stories here for 2017. You know, if we go back to last year at this time, everybody was talking about king dollar and how the dollar was going to be so strong this year and how the bond market bubble was going to pop and interest rates on the long end were going to spike. And as it turns out, Eric, the opposite was true. The dollar was down about 10% here this year, and long rates are actually down year-to-date. So again, as we look ahead, do you think those trends continue next year?

Eric: Well, you know, I've never been a very big fan of the dollar. In fact, I've always said the most predictable thing in the world is to predict that the U.S. is bankrupt because they can't possibly fund the commitments that they've made for Social Security and pension funds and things like that. So I would regard the long-term value of the dollar as being not worth a lot.

So I think those trends can continue. I think this whole tax thing, you know, which I don't think many people understand, but I think the bottom line is the deficit is going up. And, you know, it's got to be funded. Funding means going to the bond market. The bond's been acting kind of odd here. These short-term rates have been squeezing up at year-end because of liquidity issues. I mean, the fact that the long end keeps going down notwithstanding the Fed raising rates basically suggests that the Fed's kind of lost control, which they should have.

I know you and I would both blame most of everything that's happened here on the Fed, the fact that stocks have exploded and the fact that we have cryptocurrencies that are obliterating the relative value of currencies. I mean, imagine if we started pricing the U.S. Dollar versus the cryptocurrencies. It'd be worth a fraction of a penny today based on what happened in the last year.

So all those things I think sort of suggest that the people who think they have control are probably losing control. And I think, ultimately, it's going to manifest itself in the stock market here. And in my mind, I think it's going to negatively manifest itself in the cryptocurrency market. But I think crypto's where the great story of 2017. I was never a participant in it, but it was a marvel to watch. And I suspect as we go into '18, unfortunately for those holders, now that we have the derivatives trading, I think they're going to get treated like precious metals have been treated here. And, of course, ever since the CME started trading cryptocurrencies, it's been nothing but down.

Craig: Yeah.

Eric: And I suspect that that trend is going to hold throughout '18.

Craig: You mentioned the bond market. And the issuance of treasuries for 2018, for fiscal year 2018, the net issuance, the new issuance plus the refunding of the stuff that comes due is going to be $1.3 trillion, Eric. That is the largest since 2010. Oh, hey, and what did say just went up the most since 2010?

Eric: Yeah, yeah.

Craig: How about that?

Eric: Yeah. And, you know, you don't have ... Theoretically, these central banks should be pulling away from the buy side of that market. In fact, they should be selling. I mean, theoretically, the Fed is supposed to be selling bonds. So we better figure out who's going to buy these bonds because with the way rates are and the inclination to the solvency of governments, I don't know how people could possibly be thinking about buying U.S. government or any government bonds for that matter. I mean, it's even worse in Germany and Japan and these other places where rates are negative, which is still totally unheard of.

So, you know, we have a righting that should be happening here. You know, things have been kind of cockeyed and mixed up here for the last two years. And I think, you know, your comment about 2010, I mean, we had such a great gold market going from 2000 to 2010 and '11. And I think once you get back into that, you're going to see some great performances out of both the precious metals and the shares.

Craig: So let's just end there, Eric. Let’s talk about what you think will be the big stories for next year. Obviously, we could go in a whole bunch of different directions. You and I will talk a lot about political risk and geopolitical risk and De-dollarization, that kind of stuff. But what do you think as you look forward regarding the shares and the metals and everything else? What do you think are going to be the main stories we're going to be following?

Eric: Well, as I said, I think the biggest risk and the biggest story for '18 will be the fact, the realization that cryptocurrencies, their valuation is a function of what someone else pays. I hate to call it the greater fool theory, but it's a little bit like that. You know, somebody else has to pay higher than you for the thing to keep going up. And the fact is it was a closed system, and the minute you had the CME creating derivatives, it's no longer a closed system.

Someone can create more damn Bitcoins than you can imagine with the pressing of a button. And we've already seen it fall something in the area of 30-odd-percent here since the CME started trading cryptocurrencies. And knowing the people involved, i.e. the banks, who probably hate cryptocurrencies even more than gold, if you can even imagine. I'm sure that they want this cryptocurrency thing to end.

And I'm kind of hopeful that I could answer people that go, "What are we going to do? We still hate the currencies. We still hate the banks. We still hate the governments." Well, where are you going to turn to? That gold will command a lot of that, gold and silver, particularly silver, by the way. I think silver, as you already mentioned, I mean, it can really sprint here. So I think it could bring people back into the precious metals markets.

The stocks really haven't done much. I was surprised even this morning as I see it's going through 1,300. When I first looked after the opening, the stocks were down, which is almost impossible. Who knows what's going on there. But ultimately, as the price of gold goes up here, the effect on earnings to gold producers will be quite stunning.

And, Craig, you know, I should mention Kirkland Lake, which I'm the Chairman, is listed on the PSX and it's a part of the PSX 300. And I should point out to the listeners, we're the number one performing stock in Canada. And I'm kind of hoping that maybe next year the whole gold index will be the hottest performer because I think things are setting up to make for a pretty good 2018.

Craig: I think it's going to be a lot of fun. I think it's going to be wildly unpredictable as well, Eric. And it's going to be a lot of fun to visit with you every Friday as we make our way through 2018. But for now, I think I will congratulate you on navigating through 2017 and wish you a Happy New Year.

Eric: I wish you and all the listeners a Happy New Year. All the best.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, hey, thank you for listening to these podcasts every week. Have a Happy New Year, a happy, safe New Years Eve and everything that goes with it. And we will talk to you again next Friday, the first Friday of 2018. Thanks again for listening.