Weekly Wrap Up

After Five Years in the Desert, Gold and Silver Investors See Promised Land

Head Shot of Eric Sprott Weekly Wrap Up

July 24, 2020

It’s been an amazing week in precious metals, and the remainder of 2020 promises to keep up the momentum. As we head into the back half of the year, host Craig Hemke and legendary investor Eric Sprott break down all the gold and silver news you need to navigate the road ahead.

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

  • The bullish trial balloon floated by the Fed last week
  • What should cause gold prices to go up by “at least 100 percent”
  • Plus: the extreme activity in the silver market

“A lot of the reasons that it’s going up are the reasons that we talk incessantly about. And the most poignant reasons, I guess right now, are that from an economic perspective we have this potentially weak economy. We have the Covid-19 problems. We’ve got a U.S. dollar that’s weakening. We have bonds with no yields. And we have equities that are stretching the valuation parameters that would be considered normal.”

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

Craig: Hello again from "Sprott Money News" at sprottmoney.com. It's Friday, July the 24th. It's time for your weekly wrap up. I'm your host, Craig Hemke. And joining us after a great week is Eric Sprott himself. Eric, happy Friday.

Eric: Hey, happy Friday to you. Boy, we're lucky, aren't we? That we had one hang of a good year and I think we got lots of great things happening in front of us, so I'm sure the listeners will enjoy the show.

Craig: Yeah, you know, I know we have a lot of new listeners, but I hope that we've had people listening all year long, because this has certainly been beneficial for a lot of folks, no doubt about it. And now it's time, obviously, with the precious metals moving up the way we've been discussing and expecting. A lot of you out there are looking to purchase gold and silver, or possibly both, maybe even a significant amount, which is a current trend we're seeing at Sprott Money.

If that's the case, don't forget you can store that stuff with us too via our Sprott storage program. We have competitive rates, we have safe, highly secure facilities, and your order is insured and fully segregated from others. You can read about it more on our website, sprottmoney.com, or of course, just give us a call at (888) 861-0775. Eric, here we are on a fine Friday morning in the late summer of 2020. In this week, gold, as we speak, is up $80, or about 4.4%, silver is up $3, or a little more than 15%. What are your thoughts on this fine summer morning?

Eric: Well, of course, whoever would have imagined it, right? That it could actually happen. We all imagined it in our mind that it should happen every week, but did we imagine it would actually transpire, and there it is. And a lot of the reasons that it's going up are the reasons that we talk incessantly about. The most poignant reasons I guess right now are from an economic perspective, we have this potentially weak economy, we have the COVID-19 problems, we've got a dollar, the U.S. dollar, that's weakening, we have bonds with no yield, and we have equities that are stretching the valuation parameters that would be considered normal.

I find it rather interesting that the number of commentators that talk about gold now, most of these are all portfolio managers of one stripe or another, that talk about and recommend gold. And I also, and I don't even listen to the channels that intently. I mostly have just the video on, so I can see what's going on, but don't have to listen to the jabber jabber, but I think twice today, people specifically commented on silver.

Now, you know, as you say, we've gone through the desert in the last five or six years in terms of gold and silver, but to think that two commentators might come out and recommend silver in one day, and CNBC and Bloomberg putting it on their television networks, is quite a contrast to what we've previously been used to. So, lots of great things that are all leading people to gold. I didn't even mention the money printing yet, which is probably the number one thing, but between the forex, the bonds with no yield, the printing of the money, the equity valuations becoming questionable, wow, you can't ask for much more momentum than that which we have right now.

Craig: Yeah. You know, and I'd ask everybody if you, while you're on the sprottmoney.com site, there's a tab there for "Insights," and I myself and about four or five other folks write something for Sprott Money every week, where you find blogs. And I made sure to write this week about a headline, Eric, that I'm sure you probably saw last Friday. It came out before we spoke, but I didn't know it was there, from Bloomberg, of all places. So you know this isn't, you know, just hyperbole, this is a trial balloon, that said soon the fed is gonna wave off part of their dual mandate, and they're going to allow inflation to overshoot 2% this time, while at the same time instituting yield curve controlling, holding interest rates back. Eric, how could there be a more bullish bit of news than that?

Eric: You can't ask for much more than that. I mean, we have pretty well everything suggesting you should go there, and we had confirmation in the price. I mean, think of the rally we've had here from the $1,300 level back in, I guess it was April of '19, and now we're at $1,900. It's almost a 50% move in the price of gold, which should cause all gold stocks to go up by at least 100%. And in fact, the indexes, I guess, are up 100% over that timeframe. But I mean, it has been stunningly falling into places. There's hardly anything missing, including the performance of the stocks.

Craig: Yes. And as you mentioned, the state of the global economy, the U.S. economy specifically, since we're talking about dollar-priced gold, is so poor, given COVID, and it's not gonna come rocketing back, and so therefore, these conditions should persist. One of the things that I know is driving people crazy, and we've gotten a bunch of questions about it this week, is the relative underperformance of the shares this week, given, especially since earnings season's right around the corner. Can you comment on that?

Eric: Sure. Well, I must confess that I was quite struck by the non-performance of various indices, precious metal indices, and stocks in particular, and in fact, I'll even comment on one stock, and it's Discovery Metals. And it's one with about a billion ounces of silver in the ground. And I include it in what I call my leveraged plays on metal prices. And I think that stock, now it was down about 20 cents from three days ago, with the price of silver up $3.

And so the value in the ground of the metal has gone up by $3 billion, and the market cap's down by, I think it's, it maybe had a $200 million market, maybe it's down by something like $30 million or $40 million, on the greatest change, and a breakout, too, technical breakout. Let's not forget that part. It's not just the $3, it's the fact that we're through $20, and running here, that it might, and the running might be every bit as significant as the breaking, and I think it will be more significant than the breaking. So yeah, it's, lots of stocks have not reacted, but it's probably because they ran up so darn much in the market. The stock market's, the equity market's been a little weak here, so maybe there's some sympathy with the gold stocks, but hey, the fundamentals are really picking up here and we're gonna have a very, very good run on these stocks going forward.

Craig: Yeah, and earnings season, which began, well it began last night with Yamana, as it always does, and they had tremendous earnings, and raised their dividend again. And what other sector is doing that, with strong, better, beating earnings expectations and raising dividends?

Eric: Yeah. And in fact, I think we'll see more dividend increases. I think one of the reasons you'll see dividend increases is that the opportunities for big companies to make mergers, and buy things cheap. Cheap [inaudible 00:07:57] there's nothing cheap anymore. And if you couldn't buy it when it was cheap, are you really gonna buy it when it's up 5 and 10 times in value, as a big company, with money? Well, you're probably gonna hesitate to do that. Ergo, what are you gonna do with the money? I mean, we have stunningly large cash flows, and I think of Jaguar when I think of this, I think of Jerritt Canyon mine that I own, where the money's pouring in at $1,900 gold, are you kidding me? I mean, each extra hundred bucks is all profit. So the money's pouring in, and you gotta find something to do with it, and it could be that the stealing season is over. So it gets tougher and tougher to find ways to use the money as effectively.

Craig: Right, right. Eric, one other thing before we get to some of the shares. If you could please address and explain to folks what happened late last week. There was an announcement of a filing for the PSLV. Lot of hype this week that seems to be people don't understand what actually is taking place. Could you please explain it to everybody, so we could dispel some of that?

Eric: Sure, sure. Well, the PSLV has what they call an at the market offering, where if there's an excess of buyers over sellers, the trust agent on the floor will short the shares, and in turn send the money that the shares would represent to the fund, which will buy the silver. So that's an ongoing process during market hours. But you have to have a prospectus on file, and you have to indicate in the prospectus how much this prospectus will cover in terms of sales. You don't know how long it will cover it, because it could cover it in three months or six months or six years or whatever, but you have to put a number down.

So the number was 1.5 billion. Some people misinterpreted it that the fund was gonna buy a billion and a half dollars that day. That is not the case. It'll take time. But one thing I can assure you, that time will not be as long as the last time they had the prospectus on the shelf, because we see what's happening to these ETFs and the interest. And one of the things I'd like to sort of segue into is the whole goings-on in the silver market and the extreme, extreme activity that's happening.

And let's start off with the SLV. In the last four days, this, would be [inaudible 00:10:31] has taken in 37 million ounces. Thirty-seven million. Almost 10 million ounces a day. And 250 trading days, that's two and a half billion ounces if you could maintain that. Two and a half billion ounces a year. We mine 800. Of those 800, maybe 200 are available for investment. Maybe 200. So we're buying, the SLV, that one SLV, the one SLV is getting 10 times more demand for silver than is available in a normal year. And there's other SLVs too, like the PSLV and all sorts of other vehicles. And how about other countries, and how about the coin sales? And didn't I read an article that the U.S. mint sold 700,000 gold coins one day, and there's some secret meeting about not having any more silver sales because they're just running out, and everyone can see that.

We also see it in, and there's huge option activity. The trading of the SLV yesterday, 90 million shares traded. The activity in the COMEX has been, I think close to record levels in both gold and silver. And speaking of the COMEX, I think one of the features of the COMEX was when we had these two big days, Wednesday and Tuesday, that the open interest did not go up much, in other words, they stopped shorting. They let it go up. They realize their goose is cooked here, okay? There's just no way they can stand in front of this thing. The paper cannot cover the physical.

So, I think we have some pretty clear sailing here. Fine, it was down a little yesterday on the COMEX, the COMEX is showing down today, but the spot prices of silver's actually up a little. And of course, there's a lot to be said before the day's over to the, in what's going on. And if I was to sorta encapsulate silver, the key item is what is the gold-silver ratio going to go to? We hit a high of 125, we're down to I think, 88 or 87. As most of us studying this ratio know, the mining is about eight ounces of silver for every one ounce of gold. It's typically, as a currency, used to trade at 15 to 1. I think it's going back there again.

Now, if it goes 15 to 1, with the price of gold at $1900, that implies $130 silver. Hundred and thirty dollar silver. That's without gold going higher. If gold goes higher, then you can even add to that. And I just think silver is the greatest setup trade here for a large, large return. And I would recommend that people gotta own physical silver or own the PSLV. I don't believe in the SLV that much. Or find some way into some silver stocks, but I think that's the big play here.

Craig: I'm trying to do the math in my head, Eric. I haven't had enough coffee. Hundred dollar silver, that...what'd you...that Discovery Metals you mentioned, with a billion ounces in the ground. I'm trying to do the math on what that would be.

Eric: Yeah. Well, the gross metal value would be $100 billion. They'd probably have earnings on that of $80 billion, pretax, $40 billion after tax. Forty billion after tax, market cap is maybe $200. There you go.

Craig: There'll still be some naked shorters out there selling the news, I'm sure.

Eric: There's a lot of room there. And it's funny, because I think that ends up being like a 20 or 30 or 200-bagger, whatever it is. And, you know, I've used the word ten-bagger in here, but I got a great laugh this morning, was on one of the chat lines [inaudible 00:14:30] "...you're recommending this thing. It's going to be a 25 bagger." Oh, man. We're really stepping out here now to start making calls like that. But you know, we've had lots of stocks go up by 10 bags this yea. So it can all happen where we are, and I think silver looks like it's the place to be. The size of the silver market in terms of the amount of physical silver that might be available, is like all of $40 billion. Like, you see all these guys saying, "I want a silver component in my fund." How is that possible?

Craig: Right, right. Well, and one more plug for that "Insights" tab in the navigation bar at sprottmoney.com. Earlier this week, I spoke with your friend and mine, Andrew Maguire, and if you, under that "Insights" tab, you'll find the "Ask The Expert" tab, and there you'll find this recent interview from, I don't know what day it was, Tuesday or Wednesday this week, with Andy, where he discusses the gold-silver ratio and wholesale shortages and the difficulty he has sourcing thousand-ounce bars for his wholesale clients, that sort of thing, so please check that out.

Eric, it's already getting late and I had 90 questions sent to me this week, and of course, you can submit questions to us through the email address submissions@sprottmoney.com, but we had 90 of them this week, which obviously is impossible to touch on all of the names that folks sent in. However, Eric's got some ideas this week how he wants to bunch some names together and have them categorized, so you may very well hear one of the names you sent in in these categories. So Eric, go ahead and have it.

Eric: Sure. Okay. First of all, let me point out to the listeners the interview of Andrew Maguire that you did. I love Andrew's contributions to the precious metals arena, and I would recommend that everyone take the time to listen to that interview, was well worth it. Before I even start talking about the stocks specifically, I just want to say there's another big macro that we should focus on here. The big macro is all of these advisors saying, well, you should have 5%, 10%, 15% in gold, okay? And I keep coming back to the gold stocks and the gold probably represent 1% of financial assets. The increase in the supply of gold per year is one and one-half percent. So if we're all at 1, we can go to 101.5% through the production of more gold. We can go to 101.5, but they want us to go to 5. Well, how do you get to 5? There's only one way. And that, everything has to inflate by 400% from here.

So you should bear that in mind when you're looking at well, where could all this go? That's just to get to 5%. You know, you and I might say, "Hey, everyone should have 10%," or you should be like Eric. He's got 90%. You know? And, like, that's to me the biggest thing, that when people try to move into this space, it's going to be very, very difficult. Now, in terms of looking at the shares, I sort of put them in four categories of things that I look at today, and the way I look at them. I'll just start with the four category. Anything with silver in it. Anything with silver in it. And I'm not even gonna define the names that are silver, but, you know, if silver goes to 50 bucks, you could buy anything blind and make 200%, 300%, 400%, 500%, okay? In silver. Okay.

The other categories, leverage to pricing. And that pricing could be either in gold or in silver. And, you know, I've talked before about the following, like Freegold Ventures, that has six and a half million ounces, hopefully, on their way to 10 or 10 million or more, Spanish Mountain that has 10 million ounces. Hopefully, that can grow. We have the Treaty Creek Properties in BC, Tudor, Teuton, American Creek, where I was just doing some numbers this morning. I figured, man, that they certainly look like they've already got 20, and they could easily get to 30 or 40 or 50. And of course, the price of gold. Who knows where the price of gold is going? I mean, it could go, like, you know, would $3000 seem ridiculous? Hardly.

So, you know, these things that have these ounces in the ground, those ounces in the ground get more valuable. In the case of silver, of course, my favorite silver stock in terms of this way of playing it is Discovery with their billion ounces, which we've talked about. Okay, the next category is the category of companies that have significant earnings possibilities. And I'll just talk about the ones that I own, but I mean, whether it's, you know, Kirkland Lake or Jaguar, I recently bought something called Steppe Gold. Pure Gold Mining's gonna start up their mine, when is it? Second half of '20 here, oh, second half of...oh, no, latter half of this year. Right. And then even MAG Silver is gonna be starting up even sooner. So all these companies will end up with excellent earnings, and that's another way of playing it.

Then of course we have the exploration plays. Most people would recognize that I buy into a number of situations where they've had pretty good drill holes. I bought into one called Black Rock this week, with a very stunning silver play down in Nevada. Of course, I like Core Mining, I like Amex, I like Wallbridge for the future drilling success. So there's lots of ways of playing the precious metal stocks. The most conservative is just to buy earnings. That's the easiest way to do it, and just wait for the earnings to kick through, and hopefully, like Yamana, generate a yield through dividend payments and things like that. So there's lots of ways of playing it, and they'll all have great success, but the greatest success will probably be in the leverages plays, if these price targets are met. For example, if you got to $3000 gold or $50 silver, and $50, to me, is the first stop. So, anyway, that's the way we're playing it.

Craig: All right. Let's just wrap up with two things. Every time we talk about Wallbridge, I get emails from people saying, "Please stop saying it's a billion-dollar market cap. It's not anymore."

Eric: Well, it isn't, no. And of course, I always look at things in fully diluted manner, and that fully diluted is now down. Well, it was a billion when it was traded at one, that's not a billion anymore. We're down to around 700-ish, or maybe even under 700.

Craig: Canadian?

Eric: Canadian, yeah, yeah. So, all the more reason that it can get some action with some drilling results here if they come out and extend the Tabasco Zone and/or get some great drilling on their other properties up in this Detour-Fenelon area, then we'll be off to the races again.

Craig: And then finally, we had a couple of questions this week, because obviously people have been listening to us this year and in past years, that are now up quite a bit in some of their mining shares. And they're wondering what is, I mean, again, this is not for everybody, this exit strategy, but in general terms, what is an exit strategy? When do you figure, okay, that's gone up about as far as it's going to go for now?

Eric: Well, the way I look at it on an individual stock basis is as follows. Can I get better action somewhere else? So for example, as everyone knows, I was a seller of Kirkland Lake Gold. Why did I sell? And I haven't sold it all, but I sold a lot of Kirkland Lake Gold. Why did I sell it? It had had a large rise. Everyone started to recognize the merits of Fosterville, and priced that into the stock. And they're one of the highest margin guys already, so they're not gonna get the margin play of a guy who's got high costs, which I discussed many times. So I thought, well, I would be happy to move into the leverage plays, the cheaper multiple plays, the guys that have, will get a little more action out of the exploration play, because their market cap, in the case of Kirkland Lake, was $10 billion, so one drill hole is hardly gonna move it. But if you move your money around and get into smaller companies, one drill hole can move it. So that's, on a company basis, that's the standard I use.

In terms of exiting the gold space, which I can't contemplate for a while, but what would happen? It would be where there were other asset classes that for some particular reason were begging you to own them vis-a-vis gold. And let's just imagine that we end up with a huge gold market, and gold stocks are all trading at over 50 times earnings, and yet you have, let's say, utility yielding 15% because no one wants to own them. You know what? They might trade to 50 times earnings stock for the utility yielding 15%. That kind of thing. So that's what I would imagine would happen. And I use utilities because typically, the gold stocks are the last thing to run in a bull market, and of course, sorry, the last thing to top out, but the first thing to run in a real bull market is the utilities. So you end up rotating out of gold into utilities, and then start moving up the investment line.

Craig: There's the old stockbroker in you coming out there, Eric.

Eric: There you go.

Craig: I like it. Well, you've been extraordinarily generous with your time, and I'm sure everybody listening very much appreciates it. As we wrap up, did I leave anything out? How are we doing? Okay?

Eric: I think we're fine. Most all the data is screaming at us that big things are gonna happen, and I think the most important thing is silver. The lack of selling by the commercial banks, the reason, with the size of the moves here, I think they've lost control of both of these markets, gold and silver. So I think the road ahead should be a lot easier than the rough road we had to go through.

Craig: For the past several decades.

Eric: Right.

Craig: All right, my friend, thank you so much for your time. I really appreciate it. And hope you have a great weekend.

Eric: And I see that the August gold price is $1901, so...

Craig: Oh, really? As we... Look at that. It's going up while we talk.

Eric: There you go. We should keep talking, right?

Craig: Yeah, exactly. So, what do you got going on this weekend, Eric?

Eric: Well, you know, it's funny. There's been a lot of times this week when, if you keep talking, the gold price keeps going up.

Craig: Let's hope that's the case.

Eric: Considering it's now probably close to 100 bucks this week.

Craig: Oh my god. Yeah, that makes it $90, right there, so that takes us up to 5% for the week. It's been a lot of fun. Well, enjoy a couple of down days. You deserve it.

Eric: Yeah. Well, you know, the weekends, we can't prosper on the weekends anymore, right? We need the market to be open. So I look forward to the beginning next week, and chatting again on Friday.

Craig: That we shall do. All right, my friend, thanks for your time. Thank you everyone for listening. Please be sure to visit sprottmoney.com on your way out for the best bullion and bullion storage deals you'll find on the internet, and then come back next Friday for another version of our "Weekly Wrap Up." Again, thanks everybody for listening. We'll talk to you again next week.

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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.

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