Weekly Wrap Up

As Global Markets Collapse, Precious Metals React Counter-intuitively - Weekly Wrap Up (March 13, 2020)

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March 13, 2020

Friday the 13th closes out a week unlike any we’ve seen before, and it’s all driven by one thing: coronavirus. As the global pandemic roils markets, host Craig Hemke and Eric Sprott sit down for a wide-ranging discussion about the impact this is having on gold, silver, and the mining shares.

In this edition of the Weekly Wrap-Up, you’ll hear all the gold and silver news you need, including:

· There real reason markets are tanking

· The true scale of the economic damage

· Plus: is this worse than ’07/’08?

“As I sat there yesterday and looked at the gold price, which was still at 1640 as you realized that the market was going to crash… And, you know, that’s pretty damn stout that it’s hung in here as the market’s gone down 27% in a month, and gold is basically almost at its high. Well, of course that didn’t last long yesterday.”

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

Craig: Greetings again from Sprott Money News and sprottmoney.com. It's Friday the 13th. Yeah, it sure is. Friday, March the 13th, 2020. It's time for your Weekly Wrap Up. I'm your host, Craig Hemke and joining us is Eric Sprott. Eric, good morning.

Eric: Hey. Hey, Craig, good morning. A lot of carnage going on in the world here. So, we have lots of explaining to do.

Craig: Yeah, that's for sure. And it has been an interesting week. A week like probably none of us anticipated or have actually seen before, and it's all being driven obviously by the coronavirus, which is now recognized as a global pandemic. And that ripple effect is going through the global economy. Sprott Money has launched the daily drill news feed from Thomson Reuters onto our site. You can find up-to-date news on precious metals mining, coronavirus and the global economy by visiting sprottmoney.com. Just look for this daily drill news feed under the insights section of the website. We hope you find that to be a useful resource. Eric, it has been quite a week. We've had gold and silver and the shares perform rather...I'd say counter-intuitively to what may be many folks, including myself might have thought a couple of weeks ago. Just your thoughts on what we've seen.

Eric: Sure. Well, and counter-intuitively to what I would have imagined too. In fact, as I sort of sat there yesterday and looked at the gold price, which was still at 1640. As you realize that the market was going crash yesterday. And, you know, that's pretty damn stout that it's hung in here as the markets gone down 27% in a month and gold basically, almost at its high. Well, of course, that didn't last long yesterday. And unfortunately, all the while the stocks have been getting hammered. And I believe that stocks get hammered because people just look for liquidity. They need liquidity because too many people are on margin and or in speculative leveraged vehicles, which of course, are just changing violently. Imagine being long at triple long gold fund or something, I mean, my God, you're just kicked your head blown off. So, and there's a lot of those funds out there and a lot of people like doing...like investing in those things. So, the minute you have a problem like we have, we have a serious, serious problem here, everything just gets beat up like crazy. So, I think it's just...it's a liquidity thing. Now, to explain the price of gold on the other hand, where quite frankly, the demand for gold via the ETF has been very good. I do believe that yesterday's massacre is very similar to other massacres I've seen recently where basically, the commercials are running the stocks because gold is in demand. In fact, I'm going to conclude this interview with the sort of a treatise on where I think gold's likely to go here and I think it's going to be considerably up for a new reason. So, I haven't lost any hope in things performing well. I would say gold actually performed a lot. I think that is...that's a trading at $1600 here. So, you know, it's down, like maybe 3% from a closing high...not a closing high price, but I'm using 1650 as kind of like, that's a pretty impressive price. So, it only be down 3% when the rest of the world is down in the 25s and 30s. Not bad. Unfortunately, for those of us who own stocks, myself included, it's been carnage and then probably acted worst in the stock market, unfortunate. But I think if my thesis on gold holds, we'll see a pretty fast recovery.

Craig: Yeah. Here at 1600 or so. We began here at 1520. And so, gold is up about 5% year-to-date. So, all this talk about it not being a safe haven or whatever, is doing a lot of what you'd expect it to do, even though we're still using the future's contracts to price it. Eric, what do you think? It just seems to me be kind of a supply demand issue a lot of times in the shares such a tiny sector, and so get out-sized moves, that's why they can move up so far because nobody is selling at certain times. Well, we've run into a period here where nobody is buying, and that's why it seems to me you get these big drops, you agree with that?

Eric: Absolutely. And of course, I look at...I also believe that the...all markets are full of manipulations. And of course, you take a small market cap group like the gold stocks, and particular the junior gold stocks, my God, they're easy to manipulate. That's why I've always wanted the re-institution of the uptick rule here. I hope that...I hope it would happen. I hope that the authorities looking at markets getting, you know, taken apart here in a month, 10% in a day, 10% yesterday might reconsider some of those things, you know. That you don't have sort of people that can just with reckless abandon, destroy value. So anyway, that's for another day. But I think it's all part of it that we have many forces, powerful force always working against us. We're lucky that we have one thing working for us, and that is that gold is appreciated by people around the world and they continue to buy it, so.

Craig: That's right. And you know, you and I've talked for years about physical demand finally breaking the back of the pricing scheme and the banks that control it. Well, we may be on the verge of that surging physical demand. You have certainly been watching all of the rest of the markets this week. I'm sure you got a lot on your mind. We've...Eric, here we are this morning after to limit down days going into the New York Stock Exchange open so far this week. We've got limit up day on our hands. What do you think is driving that?

Eric: Sure. Well, of course, I think what's driving it is everyone thinks that whatever the central banks are proposing and or the fiscal authorities, will solve the problem. As it turned out, the problem didn't start off as a financial problem. It started off as a health problem. And perhaps I should go to the health problem. And I find it very interesting when I look at some of the comments that I have seen recently. So, for example, I read yesterday that the Department of Health director for Ohio suggested that Ohio already has 100,000 cases. Her words, not mine. Okay? And she's obviously from the medical field. I've seen articles that suggested Iran could have up to 10 million cases. I don't know where they get the numbers, but so be it. I read Mayor de Blasio, who has suggested that, "Yes. We have 95 of cases in New York City." This was stated yesterday. "But we're likely to have 1000 by next week." Like you know what, that's a big change going from 95 to 1000. And he was also...gave some interviews where he's talking about what they might have to do in New York City. And of course, he talks about major job losses, shortages of food. People in distress rent wise, like that's a very, very bleak picture. But it's a real thing. It can happen. I do believe that the public ultimately for self-interest will panic. And you may find that...for example, I went into a drugstore down here in Scottsdale about a week ago. And the lady said, "What...sir, can I help you find something?" I said, "Yeah. Could you help me find all of those things that you're missing right now?" That would be, you know, hand sanitizer, plastic gloves. "Oh, yeah. No. We're out of those." "Yeah." "Well, yeah. Well, that's what I'm looking for it. Okay?" So, that was the first level. The first level was the medical things. The next level will be sort of the non-perishables that you can store forever and then maybe it'll even get to the perishables. Who knows? But, you know, people are interested in protecting themselves. I've, you know, the Clif High interview that I mentioned last week, he suggested and this going to sound really crazy. That this could be a three to five-year thing. You know, we all hope he's not right. Even Clif hoped he's not right. But everything that we've all sort of expected mathematically for the coronavirus has happened here. And let's not forget one thing that is rarely discussed. It looks like it's a man made virus out of a bio lab with MERS in it, with SARS in it, with HIV in it. And how you come up with something that's going to solve that, that has all those strings in it? And I'm no health specialist, but I think it's fair to say you could imagine it's not going to be that easy. So, this could be with us for a while. I saw a projection of the cases in the United States, which, you know, went back, started the beginning of March and every day showed exactly where we would be, including where we'd be today and we're right there. And it concluded that on April 1st, we'll have 690,000 cases in the United States. Just math. And when I look at these numbers, the rate that numbers go up by in Italy and France and Iran, oh my God, and New York City for that matter. The U.S., the rate that they're going up by, they double every week. So, and that's in all countries, at which by the way, makes me wonder how the hell China has cured their problem. And let's take it one step further. Let's say they have cured their problem. How do they cure their problem? They stopped everything. They just stopped everything. They shut people in. Do you imagine? Let's just imagine New York City, everyone stay in your homes for six or eight weeks. What if...you know, we're probably not that willing to do that. And God knows the chaos it could create. So anyway, that's the sort of an explanation of why the market is falling here because you have so many industries. In fact, almost all industries that could stop. All of them. They had GDP going down half of 1%. How about GDP going down 40%? It's like China's car sales were down like 79% in February. Well, how can you buy a car when you're locked in your apartment building? Kind of tough?

Craig: And what does that do to the car salesman salary? You know, that's just that one example. You know, so...

Eric: I mean let's deal with the NBA and all the, you know, the people that would attend the games. The people that would work at the games. The vendors to games. I was speaking with a friend of mine whose wife is in the florist business. Well, all events are being cancelled. You know? "Oh, we don't need your flowers anymore. Forget it." Think of all the supply, the logistics, the mob and demob for all these things that are now being cancelled?

Craig: Eric...

Eric: There's a lot of people employed in those businesses.

Craig: You've been on this, Eric, for...you've been warning us about this for six or eight...I mean, really since early February. And the people you follow, the people I follow, unfortunately, have all been correct in understanding how this virus spreads and the exponential function and everything that goes with it. As you said, it now infects, that's no pun intended, all markets. Not just the stock market, but the bond market, the credit markets. All small businesses are going to have to deal with this. We've seen...the reason the stock futures are up this morning is, you know, this proposal that may be a trillion euro coming out of the EU. You know, the fed had their stuff yesterday with repo and a trillion dollars. I mean, that appears to be just a drop in the bucket. It's a liquidity issue, as you said, all of the selling exacerbates the liquidity issue. So, Eric, as you look forward, I wanted to ask you this because started thinking about this yesterday. What do you think the chances are that the markets just close for a while?

Eric: Well, you know, after yesterday's close with the Dow down 10%, it seemed like a distinct possibility to me. I mean, how much can you take? We're already down, whatever the number is 27, 28%. These...and by the way, the extent of this decline, there's three other times that we had the extent of this decline in the history of the stock markets. 1929, the stock market crash of 1987 and '07, '08. They're all crashes. And this is a crash. And unfortunately, for Americans and maybe Canadians, the response of the health people has been abysmal and irresponsible. You've only had something like 11,000 tests in the States and quite often you have to give more than one test to a person. I gather we might have had 8000 people tested. Here's the Department of Health director in Ohio thinking she might have 100,000 cases already. That's just Ohio. Which would imply some huge number for the whole, like 3 million people would have it already if I use her math, about 1% of all people. And then we've done, you know, maybe tested 8000 people. Come on. How do you get in front of this thing? You have to test, and test, and test, follow up in the context to stop the thing. Otherwise, you got to go into lockdown. And let's not forget, we've had lockdowns already in New York State, in Washington State. I know there's probably some other ones that I'm forgetting but it's out there. The lockdown possibility.

Craig: So, as we look forward, Eric, the FOMC meets next week. It almost seems as if the fed was reluctant to really announce anything this week because they want to keep their powder dry for the scheduled meeting that is Tuesday and Wednesday of next week. What would you expect? And how...what would be...what do you think people will do as these plans are announced? Will people just kind of take it and sell in to any strength there is? Is it a time to just hold and wait? What do you think?

Eric: Yeah. That's a great question. First of all, I think rate cuts are not the answer, you know. We're not dealing with rate cuts here. We're dealing with a health issue. Okay? So, what you really need to do is fire substantive resources at the health problem. That's what has to happen. And I suspect that we're just dithering here and, you know, we think we got to cut rates or let's throw a trillion at the banking system. Well are you kidding me? The banking system? How about the people? It's the people that have the problem here. So, we haven't really dealt with that and we seem to think that the most important thing is the banking system. Well, that's what the central banks think is important, but it's not the important thing. So, they're quite misguided there. But I think one of the things that people should be aware of here, one of the great...one of the big changes in the last two days was the government bond rates went up. First of all, we have corporate bonds, you can't even do a corporate bond issue anymore. The high yield bonds have skyrocketed at yield. So, there's big, big, big losses being taken in the non-government part of the bond market. Okay? And now, we have the government part of the bond market where rates are really moving up faster. And why is that? Because the governments are sitting there promising to do everything. I could print money, whatever. Well, you know what, you got to raise it somewhere. Right? Theoretically gotta raise it, maybe just print the stuff. But...so, the bond market's kind of starting to choke a little on some of the numbers that are flying around, which is not good because the bond market rallying has been a bit of an offset to the stock market crashing. And so, a guy with a balanced portfolio, at least has mitigated his losses here. But the one thing I think people should start to focus on is what is going to happen in the banking world as every customer of the bank is worse off every day. The people that aren't going to collect a salary, the businesses that are going to shut down, the loans that they have with the banks. And quite frankly, I see big, big risk today in banks. And of course, one of the first things that the Bank of England did is that "Well, we're going to reduce the capital ratio, right?" In other words, you can lend more with less capital. Well, of course they did. Because the write-offs are going to start mounting at the banks here. I mean, you saw Boeing takedown, I think it was a $13 billion line of credit. Well, you know what, I can almost predict to you that Boeing will not sell a plane for two years, you know? Like who's going to want to...who needs to buy an airplane? We got airplanes sitting around by the truckload here. Because people aren't travelling anymore. So, when is Boeing going to sell another airplane, commercial airplane? I don't know. But I'm very concerned about the banking system. And for me and I made this decision yesterday, I prefer my money not in the banking system. So, either you take a big wad of cash and stick it in your pocket or there's one other thing you can do. Buy gold. And yesterday I bought physical gold. Now, I already have lots of physical gold, but I just decided I prefer my money to be in physical gold than in a risky bank. And you look at the price of the shares of the banks, I was looking at a chart of the European banks, they've gone down by, wow, like 95% or something from their last decade high, right? That tells you something. And you look at the share prices, even the North American Bank, I mean, they have been whacked here. So, it's not good in the banking system. It's probably going to get worse if we have a full stop economy. You know, what's it going to be like to have a levered balance sheet where you've got, you know, $20 of liabilities and one...against $1 of capital. And what's the odds of that $20 of liabilities doesn't decline? Or sorry, the asset on the other side, the $20 of assets declines by 10%. So now, you've lost two points but you only had one point of capital. So that's a big concern. I went through this in '07, '08 when I remember...I love repeating this. In '09 after the crash, I bought Citi Group at $1 a share, $1 Citi Group. Why? Because it was broke. Got bailed out. Fannie Mae, I bought at a buck. Freddie Mac, I bought at a buck. Ford, I bought at a buck. They were all broke. That's what can happen with a...when you go full stop. And I think this is worse than '07, '08. '07, '08 was a housing thing where people got outside on one segment of the economy. We may not have an economy right now. Time will tell.

Craig: Yeah. Well, and as you mentioned, gold has been money for millennia. And if you know if anything is coming out the other side, it's going to be gold. And so, I think what you said is wise and I think as the rest of the world comes to grips with that, that demand has to be reflected even in the paper price, Eric.

Eric: Yeah.

Craig: Hey, I do want to ask you, you know, we still had a list of questions about stocks this week and I know, just like I haven't had time really to look. You...I know you haven't had much time to look at things like Alexco and Kootenay and some of the others that were asked about. And some folks want to know about, you know, why is Kirkland Lake going down? Well, we kind of explained that. They're all going down with so many people rushing to sell and nobody looking to buy. We did just one specific one that we probably received through for questions on this week was Bonterra. Do you have any thoughts on how that company is doing and their production in that type of thing?

Eric: Yeah. Well, of course, they don't have any production because their Metanor mine was closed down to be reopened in due course. I don't...not sure when it's going to be reopened. But I would have thought that hadn't been open today with $1600 gold, it would have been doing well. And I do believe it almost cost as much to close a mine in terms of your monthly costs versus even just losing money, you know because you still got to spend money. They've had some pretty good drilling success. I think there's a major shareholder that is kind of tiring of it. That's what I've heard. So that's not helped at all. I'm also a major shareholder and I have not been selling. And that's what happens when you end up with a determined seller and, you know, your buyers are coming in almost like by appointment and it just puts big pressure on the stock. So that's very, very unfortunate. But I'm...I still am a huge believer that gold is going to ride this out beautifully. And we will see record-high prices probably this year. Most people in the world, other than the commercials on the COMEX, love gold. So, we just got to beat him. And I noticed overnight that they did a lot of covering of their gold positions on it that they forced decline. I swear they just forced it. And then of course, every...all these technical people looking through the lines that are being broken. They're sitting there buying it from them. And of course, now, it got down to 1560 yesterday. I think it's around 1600 as we speak. So, you know, we've come back pretty well so far.

Craig: And it is the same old game. You're wise to point that out. I mean, the commercials, the banks that the bullion banks, they issue the contracts and they were as of 10 days ago the last time we had a commitment of trader survey, they were net short 351,000 contracts, my friend. So that's 35 million ounces, on every dollar they lose $35 million. So, you had to suspect that they're going to do everything they can to trim that position. Because they know what's coming too. I mean, they're not like they're walking around with their heads in the sand.

Eric: Yeah. And then, really in this market there, is there any logic to being short gold? You know, like, as a bank? You know you got more damn problems on your plate than trading gold if you're a bank these days, so.

Craig: We've been at this for quite a long time here this morning. We should probably move to wrap up. I just want to double check before we do though, is there anything else on your mind you'd like to cover before we talk again next week?

Eric: I think we basically covered everything off. Well, there's lots of other things in the coronavirus, you know, like you get the sense of...there's countries out there that I think have big cases and big problems, but they're not going there. Okay? And we're going to find out later. And so, it becomes...you know, if people are allowed to travel, this thing won't stop. So, everybody should...and I think you gotta start imagining the worst-case situation. We've already seen a partial stop of the economy, just imagine it in full stop mode and react accordingly.

Craig: Yeah. Good advice. All right. And react accordingly means preparing for time at home. We've been talking about that for a number of weeks. If you have to self-quarantine, if you're ordered to self-quarantine, you've got to have all sort...you know, everything you need to not leave your house. So, people are stocking up on supplies right now. There's also been for good reason, as you mentioned, a lot of stocking up of gold and silver too. If you haven't considered it yet, please visit sprottmoney.com. We're the largest online bullion dealers to explore which products are the right investment for you. We have some things on special like Royal Canadian Mint Gold Maples, which is our biggest seller right now, are as low as $83.50 Canadian over spot. All sorts of great deals at Sprott Money to get you started. As we said, physical gold and silver have been money for millennia. They'll be money through the next millennia. That's one thing that you can count on. My friend, thank you for all you do, for all the words of wisdom, all the warnings you've given us over the last several weeks. And now go wash your hands.

Eric: There you go. Okay. You have a great weekend and we'll speak next week.

Craig: That we will. All right. Thank you, Eric. And thank you everyone for listening from all of us at Sprott Money News at sprottmoney.com. Again, have a great weekend and we'll talk to you 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.