Weekly Wrap Up

“All Hell Could Break Loose”: The Current Precious Metals Shortage - Weekly Wrap Up (May 22, 2020)

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May 22, 2020

With physical shortages and a tight market, things are getting exciting on the precious metals front. Host Craig Hemke and Eric Sprott break down all the gold and silver news you need as we head into a three-day weekend.

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

  • The burgeoning story in silver
  • Why gold is in a similar position
  • Plus: the stock Eric thinks is “highly undervalued”

“Suffice to say that most of the economic data is not even worth analyzing anymore, because it’s just a disaster… The only thing the pundits seem to do from time to time is to say, “Oh, the job losses were only 2.2 million when the estimate was 2.4 million, therefore it’s great.” Now, we have no idea where this thing is going to bottom out. There was actually a study done by one of these economic institutes suggesting that Covid-19 could cost somewhere between 3.3 trillion and 82 trillion…. There are so many unknowns about how this is going to work out.”

Speaker 1: 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, May the 22nd, and it's time for your Weekly Wrap-Up. I am your host Craig Hemke, and joining us this morning is Eric Sprott. Eric, happy Friday.

Eric: Hey Craig. Great to be here. Things are getting very exciting on many, many fronts. So lots to chat about.

Craig: That is for sure my friend. And it's also very exciting at Sprott Money because we are back in business after what was a very challenging month of April for just about every business anywhere on the planet. We are back in business as Sprott Money and sprottmoney.com. So, if you're in the market for precious metals and are having any kinda hard time finding them, be sure to check out our websites, sprottmoney.com. You can find gold and silver, Royal Canadian Mint Maple Leafs, 100 ounce, 10-ounce silver bars, we've got them. Any other options from other mints as well? So, please visit sprottmoney.com or, of course, call us at 8888610775. We're gonna talk a lot about precious metal and the scarcity and apparent building shortages of physical metal. Eric, I know you've got that on your mind this morning. The mic is yours.

Eric: Okay. Well, first of all, I should talk about a few of the economic things because we normally go there. But suffice to say that most of the economic data, I mean, it's not even worth analyzing anymore because it's just a disaster, okay? The only thing that the pundits seem to do from time to time is to say that, "Oh, the job losses were only 2.2 million when the estimate was 2.4 million. Therefore, it's great, okay?" Now, you know, we have no idea where this thing's gonna bottom out. There was actually a study done by one of these instant economic institutes suggesting that COVID-19 could cost somewhere between 3.3 trillion and 82 trillion. Now, that's a big road to go down. And, of course, one's the best case and one's the worst case and we don't know where it's gonna be. There's so many unknowns about how this is gonna work out.

I, as you know, and falling into the camp where we gotta get people back to work here, that the incidence is not as nearly as high as we thought it was because at first glance, there was a very high morbidity, because unfortunately, the vulnerable were left unprotected and in lot of places, half the deaths are in care homes and we didn't get there quickly enough. As I look at the markets, I still look at the bank stock index, which is just doing nothing here. And, you know, we're all reading the stories about how people are at the end of their chain here, both businesses and individuals. So, we gotta see where this all ends up. But so far, it's gonna be a lot of damage imposed on a lot of different groups.

The other thing that seems to be rearing its head in the stock market is the U.S.-China thing. It just seems to get deeper and deeper by the day. These are not good things economically. So, economically, it's a bit of a mess. I even happened to note that some of those jobs data, there's two different types of claims. One, you can claim unemployment insurance, or you can go to the federal government and, sort of, plead your case that you're a business owner and get money. And rather than 2.4 people making claims last week, there's something like 4.6 people making claims through the two different mechanisms. So, economically, it's a mess. I know the stock market keeps going up. I'm very skeptical of it.

Precious metals. Now, I just think there's a burgeoning story in silver here, and a silver shortage. The amount of silver, theoretically, going into the ETFs is, quite frankly, mind-boggling. We theoretically had 12 million ounces go into the ETFs yesterday. Well, 12 million times 250 trading days, let's call it, that's 3 billion ounces a year to ETFs, okay? We only mine 900 million. You can't put 3 billion into ETFs. We have the same thing happening in the COMEX where, supposedly, there's 50 million ounces delivered in the month of May. Well, that's 600 million ounces annualized. Where are we getting all this silver? We haven't even dealt with the people selling coins like Sprott Money and others.

I had a call from a rather large dealer in Bullion asking if I had any 1,000-ounce bars because they can't find any. Is it any wonder they can't find any? Look at the COMEX data. The open interest goes up almost every day, and yet every day, there's deliveries and exchange for physicals. And the numbers are incredible, both in the quantity that supposedly is being settled in both gold and silver are very, very large and very large to be non-believable. So, I think we're sitting with a shortage and, you know, they were letting silver, kinda, go up slowly and then all of a sudden, they slammed it yesterday. And I was, sort of, debating my [inaudible 00:05:39] "Well, why did they slam?" "Well, maybe they slammed it just to cool down the interest, okay?" That they gotta stop these people from buying into the silver ETFs because there's no way that you can find... You can't find that silver. Okay?

[inaudible 00:05:53] one of the major dealers in the United States phoning me looking for silver. Well, where's the SLV getting to 12 million ounces if these guys can't find a million? And they got everyone's numbers, okay? Around the world. So, I think there's a great, great story in silver shaping up here. And the same thing in gold. COMEX Open Interest keeps going up, the deliveries keep going up, and where the guys that are short, the commercials can't get out from under the shorts. So, I think all hell could break loose at almost any moment.

Craig: I've heard from several legitimate, credible sources that silver at the wholesale level is attracting premiums never before seen, more than a dollar an ounce on 1,000-ounce bars. I find it interesting that dealers are actually calling you asking if you have some, personally.

Eric: Yeah. Yeah. And he's the intermediary to, let's say, Sprott Money. He's the intermediary. Sprott Money, in turn, has to add something onto it, right? So, and as you talked about, you know, Sprott Money having product, which we do, but my God, this product is being priced very differently than what the commodity markets are telling us, okay?

Craig: Yeah.

Eric: Very differently.

Craig: Well, we're seeing a rather persistent and growing premium even in the futures market, Eric. Remember when there was a major problem with gold back in March and April, and we were told, "Well, there's plenty of gold. It's in the wrong place." But it was an acknowledgment that there was a serious physical shortage. You had this premium, the spread developed between spot and the front-month futures and it got to be as high as 2% or 3%. Well, this morning, it's now over 3% in silver. So, what's that telling us?

Eric: Yeah. Yeah. I had also one of the managers of a silver fund who would normally buy product in Canada and probably has, you know, four or five banks that would sell product. Three of them have no product. Okay? There's such a shortage. And this is right online, right now. And, of course, then this dealer, who I know actually [inaudible 00:08:06.538], this party who does the ETF buying to see if there might be some that this party could get a hold of. So, it's a tight, tight market up there.

Craig: Yeah. Yeah. I wonder if the folks at Sprott... I know you don't own the company anymore, but I wonder if the folks at Sprott are concerned of people raiding the PSLV.

Eric: Yeah. We have to be concerned about that, yes, that somebody might pay a premium to buy the SLV shares knowing very well that, boy, if we could get their hands on this stuff and, let's say, there's, as you're saying, a 5% premium and 1,000-ounce market and they pay a 2% premium on the New York Stock Exchange, they'll buy and tender it. Yes, it can happen,

Craig: Right. Right. Sure sets us up for an interesting summer. What else is on your mind after what has been an such interesting week?

Eric: Well, I have a lot of comments on stocks here, individual stocks. And I might say, Craig, that, you know, there's so much going on and I'm involved in so many things. But I'm only intimately and fully aware of things with certain companies. There's many companies I own that I bought the shares, you know, six months ago as a small investment and I don't monitor day-to-day. I don't really feel like speaking to it. And it, sort of, resolved that I should really speak to the companies where I think there's something significant that I could impart to the listeners this week. And so, I have some companies that I think have had some interesting press releases and, or developments and I'm gonna talk to them.

So, one of the listeners did ask about Novo and I actually didn't have it on my list, but you know, they released some samples from their... What do they call them? Swales in the Pilbara. They got very good recoveries, and they got very large landholdings. And the stocks reacted very positively. I've spoken to Quinton in the meantime. He tells me that it looks like the cost of producing these things will be very low. There's been some wonderful articles written by a person called the Hedgeless Horseman who, sort of, detailed what the economics would be of mining these swales. And it was very, very compelling. So, I think Novo is gonna come back on the playing field here and look pretty interesting.

I also wanted to talk about a company called Freegold Ventures. I've spoken about it before, but I think it's interesting and I wanna use my MO in doing something. So, I bought some shares, I don't know when it was, six months ago at six and a half cents when somebody said to me, "Oh, they got 6 million ounces of silver and the whole market cap's 6 million. So it's paying a dollar per ounce in the ground." I said, "Fine. I'll buy, you know, 30% of the company. Boom, here's my check." And then just I guess about three weeks ago, they came out with this new hole up in Alaska, property you can drive to from Fairbank's, drive to a property in Alaska and it's right beside a big existing mine at Kinross operates up at Fort Knox and they ended up at this high-grade intersection.

Eric comes in and buys a stock at 1710, triple what he paid a few months earlier. And then I get in touch with the company, try to assess, "Well, what's really going on here and how big could this thing be?" And I decided, "Okay..." Like a week later, maybe not even that. I paid 30 cents for an issue. That's double the price of two weeks ago and five times the price six months ago. And it's just a theory of, "If it looks good, press your bet."

So, I can have lots of losers. And I do have lots of losers. But when you get one that looks like it's winning, keep pressing the bet. And interestingly, on the Freegold Ventures, I had two people unsolicited yesterday, who are the geologists, tell me why they thought this property was so great. And, of course, my own analysis is you just look at the history, the history of mining 100 years ago. I think there's at least four mines with over one ounce of pre-ton production. There were 6.5 million ounces that were mined in the streams, cluster mining. Okay. And they say they have 6 million already in their own 43,101, and they make a discovery. Okay. Oh, now it's interesting.

So, I've now started to compare it in just one way with Wallbridge. And the one way it compared with Wallbridge is, Wallbridge, theoretically, there's an article been written by Eight Capitals suggesting at 4.1 million ounces. And the market cap's, let's call it, 700 million. Okay. 4.1 million ounces, 700 million market cap, and here's Freegold Ventures with 6 million ounces and it has a market cap of 100 million. And I think, "Well, that, sort of, points out why this thing could be undervalued." And hopefully, this 6 becomes 12 and, of course, hopefully, the 4.1 million at Wallbridge it becomes much bigger too. And while I'm on the Wallbridge, they did have three press releases this week. There's so many holes there. It was hard to keep up with it. And thank God... I've stopped trying to plot all the holes, okay, because it's just like a rat's nest, or as you like to have me refer to as a dog's breakfast.

Anyway, everything looks good there. They keep expanding the zones, they get this deep hole, the deep hole, if it hits could close to triple, the prospectivity of this thing from a vertical point of view. And, of course, they're still going out laterally along strike and, you know, every 100 meters is extra, whatever, 15% bigger or body. So, there's lots to come in Wallbridge and, of course, the stocks acted fabulously on the press release.

Craig: Yes, it has.

Eric: I got four other names I'd like to talk about. One is Pure Gold Mining. Again, there's another example where I stepped up my bet. I just paid... What did I pay? 105 I think for like $10 million of the stock. It's in the Red Lake area. It seems to have all the attributes that the Red Lake Mine had in terms of the geology, the grade of ore, the prospectivity. It's seven kilometers' strike. They've only really seriously drilled down to 1,000 meters or the reserve is down to 1,000 meters. It's likely to go much deeper. And the grade, they keep finding higher grades. I suspect that the grades in mine will be higher than what's in their pre-feasibility. And, of course, grade is just profit, plus they'll probably have extra ounces.

So, I think that the stock is quite undervalued. I love the fact that...I would imagine we'll be here 10 years from now and they'll still be finding gold up there. So, I think it's a great investment. I really should mention Discovery. There was a big issue, I guess, completed this week. I was a big investor in it. Again, I go back to... It's the billion and a half ounces of silver equivalent that I like.

Craig: That's a lot.

Eric: I would like to imagine, "Well, what if the price of silver is $50, which it should be?" "Oh, well, then they'd have 75 billion worth of metal." "Okay. What's the market cap here? The market cap's, probably not even 100 million."

Craig: You're right.

Eric: Quite like that. I should also mention Gran Colombia. Here's an interesting analysis in numbers, okay? And the numbers I work with are the following. They reported 31 cents... This was reported late on Friday, by the way. That's why I'm talking about it now. They reported at 31 cents, fully diluted, very important. Fully diluted. U.S. that's a $1.24 annualized. Put it in Canadian. You're basically talking $1.70. Now the price of gold's gone up in the meantime. So, maybe we could just round it up to a good shot at $2 Canadian, two Canadian.

Now, they have 140 million of cash. It's a 400 million market cap company. 140 million of cash, they got about 80 million of warrants money that would come in having used fully diluted shares. In other words, the benefit of the fully diluted is that money that comes in, right? There's another 80 million. Now I've got 220 million of cash that could come in with a market cap of 400. They've got investments that are about 80. So, I have to explain the last 100 million of value market cap with the company earning about 100 million a year, U.S. They earn 100 million a year U.S. I gotta adjust it by 100 million Canadian market cap. That's easy to do. That should trade at a huge multiple of that, okay?

So, and I've said to the company, I said, "If I should be embarrassed by your market capitalization. This is just a joke that I would trade here." So it's a company I own just under or just around 20% of. It's in Columbia. They have other irons in the fire and I just think that the market will finally come around to realizing that these are very valuable earnings, and that it's just the cheapest thing around. So, those are my official comments on things I'd like to about this week. If there's anything else you wanna chat about, I'm good to go.

Craig: That definitely sounds like something that the market just has missed. Like just an oversight. That's so unusual.

Eric: Well, yeah. It's interesting when they go from the outhouse to the penthouse, and the fundamental point of view. It's hard for the analysts to pick it up. Hardly anybody covered. I think two analysts covered this. Like two. And eventually, the beauty of all of this is the computers figure it out, okay? The computers could multiply 31 cents times four to get their $1.24 earnings. They know that the price of gold is higher, and all of a sudden, it starts showing up. and then, "Oh my God. This is undervalued stock."

And you know, sooner or later then, the analysts come kicking and screaming. I went through this with Kirkland Lake Gold. Nobody gave a damn. I looked Kirkland Lake when it was $10 a share, okay? Now everybody covers it, of course. I was always shocked that nobody covered it, and particularly when it was on the "Investor's Business Daily" number one stock in North America for about a year because the computer told them that. Thank God for computers

Craig: Shows up, right flashing on your screen, and gets your attention finally. Hey, Eric, let's close with this. And, again, we wanna thank everybody for writing in questions. We're gonna try to, kinda, pair this a little bit because every week, we get, let's call it, tens of questions about companies that Eric just doesn't have a current opinion on. So, we're gonna try to limit this back to what Eric thinks is important every week, and try to really focus in on some of the main things that are catching his eye week after week.

But one thing I do wanna wrap up with though, Eric, is we talked about this a couple of weeks ago, and we've gotten a follow-up questions last week and again this week, is this idea of holding your shares at a broker-dealer, whether they're in Canada or in the U.S. A lot of broker-dealers are owned by banks, banks obviously in this recessionary environment, depressionary environment are feeling a lot of stress and will continue to feel a lot of stress going forward. You've mentioned this before, and that's why people want to double back to it. Can you add any more color about holding shares, where you might hold shares, that sort of thing?

Eric: I've always been having deep concerns about the banking business. We know that, in the end of the financial crisis, the following stock traded at a dollar, Fannie Mae, Freddie Mac, AIG went bankrupt. Citigroup traded a dollar. They were broke. Lehman had already gone. Bear had to be taken over. It's a risky business when you're levered playing financial markets that are as volatile as the financial markets that we have. So, there's always a huge risk that you have your money in the financial system, things go rug, they have claim on your assets. So, please be careful.

Craig: Does that mean...? I mean, consider holding them in your own name, getting certificates, that type of thing, or do you just try to find broker-dealers that don't have relationships with banks? But that maybe doesn't necessarily lessen their risk either?

Eric: Yeah. Well, and maybe there's broker-dealers that don't use leverage. You use a capital and, you know, have it levered at 10 times. I don't know who they are. Okay? I honestly don't. But there's no harm done one, having your goal out of the system, two, having your stock certificates out of the system.

Craig: Yeah. No, I hear you. I was caught up in MF Global back in the day. And you never really know. You know? It's really hard for the average regular investor to know these kinda things.

Eric: Unfortunately.

Craig: Well, all right, my friend. As we head to the weekend, any other things you'll be watching for next week? Because things are certainly getting interesting. We've got the contracts going off the board, some option expiration month, and all that kinda stuff.

Eric: Yeah, I know. We're gonna have first notice day on Friday. They can't get these contracts down. It's gonna be [inaudible 00:21:51.838] I'm telling you. The day is coming real soon here. So, it should be quite exciting. I look forward to next Friday

Craig: And it is a three-day weekend, a market holiday weekend here in the States for Memorial Day. So, everybody keep that in mind as well, that the U.S. markets will be closed on Monday. So, with that, Eric, I wish you a happy three-day weekend. Hope you're able to enjoy it, and I'll look forward to talking to you next Friday.

Eric: It'll be fun. I only wish the U.S. was open. Okay. But I will try to take care of things here in Canada. So, you have a great long weekend.

Craig: Thank you. You too. And one last thing before we go. Again, regarding the individual shares. One of the monthly projects we have here at Sprott Money is the Ask The Expert Segment. This month was with Mickey Fulp. Many know Mickey, he is a great geologist and mining analyst. So, if you want to know more about some of the individual shares, I tried to ask Mickey some of those names too. Just go to sprottmoney.com, click the Insights tab and you'll see a tab for Ask The Expert. And there, you will find this month's conversation with Mickey Fulp we just recorded just a couple of days ago. So, it's good, fresh info. So, please check that out. Again, Eric, thank you for your time. Thank you everyone for listening, and 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.