Ask the Expert with Dave Kranzler - July 2023

Man: You're listening to "Ask The Expert" on Sprott Money News.

Craig: Welcome back to the Sprott Money News and sprottmoney.com "Ask The Expert" series, something we do every month, where we bring in a mover and shaker in the financial industry to find out what they think about what's going on in the world. I'm your host, Craig Hemke. And our guest here in the month of July is my old friend Dave Kranzler. Dave runs a website. You can find it at Investment Research Dynamics. He's the author of a couple of different newsletters, the "Short Sellers Journal," and also what might be most important to folks listening to us now, the "Mining Stock Journal." So, Dave, long track record, long history of working on Wall Street and managing money, and it's great to get his thoughts here in July. Dave, thanks for spending some time with me.

Dave: Thanks for having me back on, Craig. It's good to be here. I would probably preface, you know, my intro with "the alleged expert."

Craig: Dave, you're so old now, you're like a maven. You know, you're up there with, like, Mr. Turk and Eric and the rest, because, you know, once you go past 60, the gray hair betrays you. Hey, and look, we've had a really good start to the month in the precious metals. Everybody watching us knows that. It's interesting how nobody wants it when prices are down, and then once prices start to rally, everybody wants to get their hands on some. Hey, conveniently timed to all of that, Monday, the 17th marks the beginning of the Sprott Money Summer Sale. This is always about the biggest sale that Sprott Money has all year. So, if you're looking to add to your stack, buy some metal, store some metal after you buy it, Sprott Money is the place to look. Go to sprottmoney.com, or just pick up the phone and give them a call at 888-861-0775.

Dave, we'll get to the mining stocks in a second, and you can tell everybody about your service and how valuable it is. But I wanna start by kind of picking your brain on where we stand from a monetary policy sense. You know, the first half of this year has been a lot like the first half of 2010, the first half of 2018, which were other years where the Fed went from, you know, rhetorically hawkish to cutting rates. And the first half of this year, the metals have traded a lot like they did in 2010 and 2018. So, here we are now in July. I just wanna get your thoughts on where you think we stand in all this. The data's gotten a little weaker, the inflation data has come down. Do you think the Fed is done or close to done, or what are your expectations going forward?

Dave: Oh, that's a great question. There's a lot to unpack there, believe it or not. I like the way you said "rhetorically hawkish," because that's what the Fed has been. It's been rhetorically hawkish. I mean, their monetary policy isn't hawkish. I mean, yeah, they've taken rates up from, what, zero to...where are we now, 5.25%, I think, on Fed Funds. But if you use a real measure of inflation, we're still at negative interest rates, right? So that's not hawkish. They've barely taken down the size of the balance sheet, which means all that liquidity that they threw into the banking system is mostly still circulating there. In fact, they had made a little bit of headway, and then, you know, at the first sign of trouble, they flinched, right, the regional banking thing. And, you know, in one shot, they pump $400 billion back in. I don't know how you call that hawkish. If anything, it's their monetary policy is still incredibly loose.

And I think that $400 billion is finally back out again. So, that takes them back to where they were in the middle of March, in terms of the size of their balance sheet, right? And I would also argue that that $400 billion injection into the banking system, that's what's caused this latest blow-off in the stock market. So, in terms of inflation... And I'm sure the Fed knows this. Certainly their research area knows this. I mean, the CPI was never designed to measure inflation, right? Real inflation. I mean, with the weightings in there, the seasonal adjustments. I think the primary reason or variable that caused the CPI to show, you know, year-over-year below 4% was used car prices falling. Well, guess what? As it turns out, people really aren't buying cars right now because they can't afford them, even used.

So, I think if you just had an index that measured the things that people spend money on every day, that they have to have in order to survive, right, so you're talking about food, energy, and not just gasoline, energy for your house, shelter... I just saw an article that talked about how auto insurance, is, rates going up at, like, double-digit percentage rates now.

Craig: Healthcare.

Dave: So, you know, I would argue that the inflation rate that you're seeing that's being published per the CPI is not really the real inflation rate. And I think your audience already knows that. You know, all you gotta do is go to John Williams's website and spend some time on that, and you understand why that's the case. So, I gotta believe the Fed knows this, maybe not all of the FOMC voting members, but certainly enough people at the Fed know that, you know, inflation's still there. Housing prices have been sticky, rental prices have been sticky. Food prices, I don't know about you, but food's still going up for me, at the grocery store and the restaurants. I think, at some point later this year, we're gonna start to see higher energy prices again. Part of the reason why is, you know, because the dollar's been falling, so it's more expensive to import oil.

And I guess that kind of brings me to another angle on this. I think the Fed has to walk a tight rope between trying to tame inflation, and I would argue that you're not really gonna tame inflation by just hiking interest rates and killing demand. You gotta remove all that liquidity, or a good portion of that liquidity that they've, you know, injected into the financial system since 2008, because that's what causes... You know, the...prices rising is the evidence that inflation has already incurred, where inflation is the increase in the money supply over and above the increase in wealth output, or the GDP, however you wanna measure wealth output, right? Essentially, simply put, you've got more currency chasing a lesser amount of widgets, right, on a relative basis, and that, you know, so then the price goes up. Simple supply-and-demand economics.

So, I think the tightrope that they're walking is, they know that if they just start pulling liquidity out of the system, and get their balance sheet down, you're gonna cause markets to collapse, banks to collapse, you know, basically a depression that would make the '30s look like a day at the beach. So, I think that's why we're not seeing that. Because certainly, we know they were putting it in in trillion-dollar chunks, right?

And then, again, rhetorically, I think they're trying to look like they have a hawkish monetary policy by hiking rates. But then again, they can't take rates too high either, and they know that, because you could cause the same thing as pulling liquidity out. So, I believe, rather than targeting full employment and price stability, right, the Fed mandates, I think what they really target with their monetary policy is keeping the banks alive. You know? Keeping them from collapsing. And we saw that in 2008. We saw that in, remember, in late 2019 when they started the temporary repo program, which transitioned into the permanently temporary repo program. It got bigger every week, it got longer in duration. And the pandemic really gave them a cover story for putting in $3 trillion all at once into the system. Right? I mean, I think they... Yeah, $3 trillion. I think, eventually, they put in $4 trillion, but they put in $3 trillion all at once. And I think that's probably what the banking system needed to be stabilized, because that's why that repo program started, was to stabilize the banks.

Craig: So, what's curious about all this then is, you know, I wonder how close they are to officially, you know, coming out, and maybe they'll never come out and officially say that they're done. I think most everybody expects one more 25-basis-point hike when the Fed meets later this month. But then what happens after that? You know, it's been a very curious month for the dollar index, and that's the second thing I wanted to ask you about. You know, it's been trending lower for the last year or so, putting a series of lower highs on the chart. It broke down as we record this, a couple of days ago, through what appeared to be support, and had been support. Why do you think the dollar is falling at this point? Because obviously, that's impacting all commodities. Is it a function of people thinking that the Fed is done? Is there something else going on?

Dave: Probably a little bit of both, thinking that the Fed is almost done, plus some other things going on. I mean, I'm just looking at this...I've got a 20-year chart of the dollar up, and it kind of went parabolic from, you know, early 2021 until the end of 2022, right? I mean, it ran from 90 up to 115. And I'm just looking at the stock charts graph. So, I don't think it's the spot index. I think it's, like, a three-month rolling contract, like they do with the precious metals. But so, I think part of it is a technical correction from that, from a parabolic move higher, over almost a two-year period. And I think part of it is the anticipation that the Fed's rate hike agenda is almost over, and I think it probably is.

And there's also another interesting facet to this going on. And that is, all these countries that are kind of, I like to call it the BRICS Eurasian bloc of geostrategic bloc of countries. You know, all the central banks in these countries are loading up on gold. They all kind of have...that's kind of the countries that are involved in this supposed gold-backed currency that's gonna roll out, which I think'll happen. I just don't know if it'll happen in August. And so, a lot of these countries are unloading their dollar reserves, because, at some point, they're not gonna need them, right?

And a lot of these countries are already trading bilaterally, in their domestic currencies, not using the dollar at all. So, that means they're busy filling up their central bank currency reserves with currencies that they're using to trade, and not the dollar, right? And it also means if they're using less dollars for trade settlement... And I'm not saying that they're completely banning it. I mean, the dollar is still the majority currency used for trade settlement. But it means that they don't have to hold as much in dollar reserves. And we've seen China, obviously has been systematically reducing their dollar reserves by selling treasuries. And even Japan has been doing that. And we know Russia sold all its treasuries a couple years ago.

So, I think they're starting to be, these dollar reserves held at central banks, especially in the eastern hemisphere, central banks, and, you know, some of the LatAm central banks, I think some of those dollars are being disgorged, and they're floating around the system, in the global financial system, and that's also pushing down the dollar a bit. So, I think there's that aspect to it also. And also just, you know, hey, you know, the Fed can't keep tightening down using interest rates, because they're gonna break something. And so, that, you know, when the Fed stops doing that, that's obviously bearish for the dollar, and I think we're seeing the anticipation of that in the chart.

Craig: Well, it certainly wasn't fun to watch that dollar rally, like it did last year, or I remember that same percentage move back in 2014 also happened, and all the commodities went in the tank. Now, in the least, maybe we removed that headwind. The metals have begun to respond. How do you feel about them going further? Are there any levels you're watching? Do you feel confident just buying some more adding to your stack here?

Dave: Well, I was actually buying more when gold was below $1900 and silver was...

Craig: $20, $21?

Dave: Low 20s. Yeah. So, you know, I may buy some more here. I don't know. Because it's hard for me to pay these prices because I started buying this stuff when gold was at $300 and silver was at five bucks, so... But yeah, no, I think, you don't own any or you need to add, I would add here. My tenor on this has been that, and I actually write about it in the intro to my "Mining Stock Journal" that'll be hopefully released later today if I can get it done... I will. But I give reasons why I think the precious metals have found a bottom. That doesn't mean that they're, you know, on a intraday or two-day basis, they're not gonna get banged down below their recent lows. I mean, you know as well as I, anything can happen when you've got, you know, paper, or as you call it, digital gold and silver, I call it paper gold and silver, you know, dominating the market for 12 of the 24-hour trading period globally, so...

And you mentioned, I think, 2010 and 2018. What the trading action right now really reminds me of is the summer of 2008, where they took gold and silver down. And, I mean, the sentiment is really bad now, but that's how the sentiment was back then. Well, it didn't bottom back then until late October. I think we're finding a bottom now. And, you know, they've been able to get gold below $1900, but not for very long, and they've been able to get silver below $23, but not for very long. And when that happens, they both shoot right back up. And so, you know, I think we could go sideways for, you know, a while, four to six weeks or something like that, because also, as you know, July can be a seasonally weak and slow period for the precious metals. But then we start getting into August and September, and the big seasonal Indian buying season kicks in. It makes it harder for them to push down using derivatives when India is hoovering physical gold hand over fist, right? And this is not gold that is kept in COMEX or London vaults. It's gold that has to be shipped over to India for actual physical delivery, right?

So, you know, in conjunction with, you know, the Fed eventually having to back off even more on its monetary policy, I don't know about necessarily cutting rates, but I don't think that that needs to happen for the precious metals to really gain some upward steam. And I think we're headed higher between now and the end of the year. And that, you know, again, I hate to put price targets on it, but, I don't know. I could see, conservatively, maybe $2200 on gold and over $30 on silver, and maybe higher, maybe not quite that high, I don't know.

Craig: Well, let's use that as a segue to the last question I have for you. You know, a lot of folks watch these programs from Sprott Money. I used to do the things every week with Eric, and he would talk about mining shares, and I know a lot of folks that own physical metal also like to make some additional fiat in the mining shares. That is your primary focus on a daily basis. Again, go to investmentresearchdynamics.com and you can find the "Mining Stock Journal." And for me, I think everybody needs as much independent objective information as they can get. You don't wanna be out there on your own trying to do this stuff unless you're really an expert. Dave, using your accumulated wisdom and expertise after all these years, what are just some basic tips that you could give mining investors, mining share investors, people that speculate on juniors and explorers? What are some things you've learned over the years that you could share with everybody?

Dave: You know, I think the most important thing is, and I see this a lot with my subscribers, you know, because I get emails, and I answer every email. And what happens is is, like, I'll present an idea and they'll load up on it, you know, all at once, and they don't leave themselves room for volatility, and the potential of that, you know...they're not gonna go straight up. So, I think, especially with the mining stocks, because they're volatile, I think the most important thing is capital management, and don't pile in headfirst if you're just starting out. And if you have positions, don't go from half-full to 100% full all at once. You know, kind of wade in slowly. Because, again, I don't know, you know, when the run's gonna start or how high it's gonna go. I'm pretty confident it will start and it'll go pretty high. You know, you're not gonna time a bottom.

And so, I would say, you know, just buy a little bit, and if price goes lower, and you still like the story... I mean, that's part of the key is, you know, and we're seeing it with the mining stocks now. I mean, the mining stocks, I mean, it feels like they're digging for China. And yet gold and silver are still at relatively high levels in the context of the last 20 years, right? And so, the mining stocks have, for sure, way underperformed the metal over the last few years. And so, in my opinion, they're fundamentally extremely cheap. And so, you're gonna make plenty of money, you know, even if you don't...you know, if you buy some now, may or may not be the bottom. If it goes lower and the story hasn't changed, and the fundamentals haven't changed, add some more. That's why you keep cash in reserve. Because at some point, when these things take off, I mean, it's gonna look like the tech stocks are looking right now, right? It's, you're just gonna wake up and every day they're gonna go higher and higher and higher.

And I guess the other important point there is don't...and again, this is just sound advice that everyone's heard before, don't get too greedy. Just like you're not gonna find the bottom, you're not gonna find the top. And so, use trailing stops. I mean, my first go-around, when the miners ran from...and this was back in, you know, let's call it early 2002 into, it was the spring of 2006, I mean, they had just a phenomenal run. To give you an example, when I first started in the sector, the HUI, the AMEX Gold BUG Index was, like, at 45. And it ran up to, like, I wanna say...you know, and this is off the top of my head, it might have run up to, like, 300 in that time period. And I'm like, "This is gonna keep going up," you know?

Craig: Right, it's going to 3000.

Dave: And guess what? You know, in mid-May, and I remember, because I was down in New Mexico, we took my parents to their 50th anniversary, we took them to Taos. And I'm sitting in a cafe late at night because it had internet, and the house we had rented didn't have internet, and it was around 11:00 at night, and I'm watching the futures, because I was a really active futures trader back then. And all of a sudden, silver and gold just started...I mean, they looked like they were on an elevator with a broken cable. And I was like, "Oh, no."

Craig: Oh, no.

Dave: And, you know, I kept holding on, thinking, "You know, this is gonna turn around." Well, no. We went into, you know, several months of a downtrend, and I gave back a lot of what I had made. So, I guess my point here is is, make sure you use trailing stops, you know, and don't make them too tight. But if we have a nice run-up in the sector, and you put in a stop-loss, say, 20% below, just keep following it higher with a 20% stop loss, because, you know, if you have a down day, and, you know, all of a sudden your positions are down 10%, you don't wanna get shaken out of them. But if they're down 20%, they're probably gonna go lower for a while, so take your money off the table and run.

Craig: Yeah. The chart will show you that sometimes too. It gets [crosstalk 00:21:57.027] reversal, and it [crosstalk 00:21:58]

Dave: Right, exactly. exactly.

Craig: That usually kills the spec momentum for a while.

Dave: Yep.

Craig: Well, Dave, it's always fun to visit with you. Again, make sure I got this right, investmentresearchdynamics, all one word, correct?

Dave: That is correct.

Craig: And once people get there, they can sign up for your newsletters, and hopefully that'll help them guide you the rest of the way through this year and next.

Dave: I hope so. I'm sure some of my subscribers think I've led the sheep to slaughter. But believe it or not, I mean, I have, like, I started the newsletter in early 2016, and I bet at least 25% of my subscriber base is from 2018 or before. So... And I get, you know, sometimes longer-term subscribers will cancel. And then, like, six months later, they're back. So...

Craig: Yeah. Yeah. Well, and you do great work. And like I said, it's just, in my opinion, if you're gonna be in the sector, even if you're just stacking precious metal, you need as many independent objective voices as you can, because the mainstream media is always gonna lead you astray. They're always just gonna be spouting whatever the narrative is. And they're never, under any circumstances, are they gonna like gold except at the top. So, find services like what Dave has, and use that as part of your full consideration for what you're doing.

Dave, thank you so much for your time. It's been very valuable for everybody to hear what you've had to say. And just one more thing on the way out. Again, remember the Sprott Summer Sale starts on the 17th of July. So, keep that in mind if you're looking for some great deals on adding to your stack. But then also, help Sprott spread the news. The least you can do maybe is give them a like or a subscribe on whichever channel that you're watching this, because that helps them cast a wider net. It helps with what they call search engine optimization, all that kind of stuff. So, help them out, thank them for providing this content. That's about the easiest, simplest thing you can do. And we very much appreciate your time and attention. Dave, thanks so much for your time and attention. It's been great visiting with you.

Dave: Hey, it's great to be back on here again. I appreciate you inviting me.

Craig: And from all of us here at Sprott Money News, sprottmoney.com, thanks for watching. We'll have some more stuff for you in a couple of weeks.