“Big Things About to Happen” as Gold and Silver Reassert Themselves - Weekly Wrap Up (May 29, 2020)

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Craig: Welcome back to Sprott Money News at sprottmoney.com. It's Friday, May the 29th, 2020 and it's time for your "Weekly Wrap-up." I'm your host, Craig Hemke and joining us on this interesting Friday morning is Eric Sprott himself. Eric. Good morning.

Eric: Good morning, Craig. It feels like the clockwork's starting to work here. And I just hope they can hold it together because there's a lot of interesting things to talk about.

Craig: You got that right, my friend. And we're gonna talk a lot about the physical metal situation, the COMEX, other things on our plate this morning. But before we get there, a lot of this gets tied back to some of the physical shortages that we saw back in March and April. As you know, Sprott Money was even offline for a couple of weeks, but we are now back in business and open. So if you're in the market for precious metals, and still having a hard time finding them, please be sure to check out sprottmoney.com. You can find gold and silver Royal Canadian Maple Leafs, hundred-ounce bars, 10-ounce bars, and other options from other mints as well. So please stop by sprottmoney.com, or just simply call us at 888-861-0775 and get yourself some physical precious metal.

Eric, it appears that you and I and everybody else listening to us aren't the only ones in search of physical precious metal. Let's start today with the news from yesterday about the, really, what is an extreme historic amount of contracts standing for delivery on the COMEX for the delivery month of June. We had a huge outrageous number in the last delivery month of April, a record-setting number, a record-setting number for the non-delivery month of May, more than 10,000 contracts and now it appears we have more than 47,000 contracts standing for delivery in the month of June. What do you make of all this?

Eric: Yeah, I know, it's a shocking, shocking number. And believe me, I've been staking this out every day, I would always look at the open interest, I'd look at the actual deliveries, the exchange for physicals, both of those two numbers should reduce the open interest. The open interest hardly ever goes down, notwithstanding huge amounts of physical deliveries, which really means everyone who's short is hung, because they can't get the open interest down. So, as you know, there's either long or short. And we have the...in silver, for example, we have shorts that are equivalent to something like 650 million annual ounces of silver production. I don't even think we produce that now with all these mines out on strike. We have ETF deliveries that in the month were something like 27 million or was it even 50 million? We have big COMEX deliveries. And then, of course, we hear, all those poor banks. We keep hearing about the poor banks losing all this money in gold, and HSBC lost $200 million in one day.

And today we hear that the Canadian Imperial Bank of Commerce lost $64 million in one day. We had Bank of Nova Scotia close their metals trading operation and announce they're gonna take a write-off of $168 million. Who knows whether that's over? "Oh, will you guys all short the metals here? Ah, isn't that horrible?" And of course, let's think about the guys who are still short the metals who haven't fessed up yet. And everything that we see, and when I meant "clockwork," okay, we had the options expiry yesterday. We have a LBMA options expiry today. We have the rollover, on the rollover was interesting, the fact that, as you pointed out, so many people stayed in the June contract and are gonna ask for delivery. And the dealers, the banks who, of course, are short, had this $20 spread between them. Well, if you wanna get rid of June and you wanna buy August, you got to pay $20 more, and it should only be the cost of money.

Well, the cost of money is like 1% a year, okay. It shouldn't be $20 in a two-month period, but they were just pulling their chain is what they were doing because they're trying to get off of this short position. We're sitting here today, I see silver's up 40 cents today. Silver is well below 100:1 on the gold-silver ratio now. It's broken out of its 30-day downtrend here. Pretty soon it'll be breaking out of its one-year downtrend, we're probably within 20 cents of that. Gold's reasserting itself here. So, there's hardly anything that's not suggesting that big, big things are going to happen. And as you properly pointed out, keep your eyes peeled on those delivery notices, we will get those delivery notices tonight. And I think they're gonna be massive. And I think all the banks are hooped here, and it's gonna be very difficult for them to buy these metals back without the metal prices going substantially higher.

Craig: Yeah. You know, and again, we were told the normal, you know, the people that seem like they're just paid shills for the industry came out in April and said, "Oh, this is just a one-off, you know, the gold's all there, it's in the wrong place, and the airplanes aren't flying," and all this kind of jazz. Yeah, when there were 31,000 deliveries in April, that's about three times the normal amount. Now we're on peg to do five times the normal amount in June. Sounds like it's not necessarily just a logistics problem, Eric. And as you mentioned, these banks taking massive losses. There was an article yesterday from Reuters, which is kind of the mouthpiece of the banks, talking about bullion banks no longer willing to hold large positions on COMEX and wanting to reduce their trading there. That could rather have a significant impact as well.

Eric: Yeah. And nothing could be more pleasant to us right?

Craig: Right.

Eric: We know that COMEX is a fraud, that it's all paper contracts, has nothing to do with the real. And then all of a sudden, the real thing comes along and, "Oh, gee, we lost a lot of money because somebody actually wanted this gold or needs the gold." Or think of the guy standing in there who's got these 47,000 contracts. We're talking a lot of money here. We're talking almost $100 billion standing. Well, who is this? Is somebody taking them on here? It would look that way. That's a lot.of buck standing. And I think anybody who's, kind of follow things would realize, "Hey, someday these guys are gonna pay the piper here." For the wash, rinse, and repeat of messing up with the gold stocks, the gold options, the gold futures every three months, we just knock them down. We make the money, we laugh, we party with all our fellow bankers, and you know what? It looks like that's gonna come to an end right now.

Craig: Yeah, it is really, you know, we've been watching this stuff, you've been watching it for decades, I've been watching it for more than a decade. You know, and there's always the alarm bells about, "Oh, the COMEX is gonna, this is gonna be..." This is the first time that I think I personally can say this is really interesting. Eric, let's move on. We've got some real-world stuff to talk about. There's gonna be some big news today regarding U.S.-China relations. Are you watching that situation?

Eric: Well, for sure. And God forbid that we start a serious trade war now. Like, we're like where you might have two worlds, of the Chinese-centric world and the Western-centric world, and we're not gonna deal with each other? Like on top of COVID-19 and the disastrous economic results we already have and the disastrous effect on people's ability to pay or companies have to file bankruptcy or get bailed out by somebody and the country's thinking they have the wherewithal to bail everybody out. I mean, Japan just announced another trillion dollars yesterday on top of the former trillion dollars, and to think that you can bail out all your corporations, and all your people. I don't think that's possible. We're talking too much money here. And that, again, leads people to gold and silver. And the fact that the stock market is wavering a little here is very important as well and, you know, we had the nice rally going and then it faded today where it looks like it'll be down again. Things are not good. We're not going back to normal. We are not gonna go back to normal. So when you figure out where we're gonna be, then you'll know whether you should like certain things in the stock market, but I don't think I'd wanna be taking that risk other than gold and precious metal stocks. We have a lot that says it's our time.

Craig: Certainly looks that way. Are you following, still, COVID developments, anything that makes you optimistic for a rebound?

Eric: Yeah. Well, there's one thing that came out this last week and that's, apparently, the CDC said that the morbidity was not that significant, which seems to be proving up, like I think they're gonna have it down to 0.1 or 0.2. And as we know, a lot of the early deaths were from these home care facilities. And of course, that was for the virus was probably easy [inaudible 00:09:57.406] and not so easy with people under 60-years-old. So I think that the likelihood of us trying to work through it here, partially open up and move forward is where we should be. The one thing you have to be concerned about is if you get a second wave, you just can't stress the healthcare system. That was what the real issue was, it's just the hospitals [inaudible 00:10:21.788] clogged. But we see now that the hospitalizations have gone way down, the ICU units has gone way down. So I think we can see our way through it. Where we're all gonna end up? Who knows? I mean, who wants to run a restaurant with 25% capacity? Or do we really wanna wear a mask for the rest of our lives? I mean, it's sort of depressing to... I wouldn't wanna be in the jewelry business when everyone has to wear a mask. If you follow me. Unless they're gonna put the jewelry on the mask, which I suppose they might figure out, but it kind of takes away the pleasure of meeting people face-to-face if everyone's wearing a mask. So.

And the other thing about COVID-19, we don't know what the long lasting impacts are and far be it from me to opine on it because we just don't have enough information. But I mean, there are signs of it repeating, there are side effects to other organs, so it's very uncertain.

Craig: Turning back to the general stock market, you mentioned that it has been quite a rally since QE to infinity began. I think the S&P is up something like 30% in the last 10 weeks, all on this easy money, this free money that trickles into the stock market. There's still a lot of concern, though, about the actual fundamentals and whether that'll eventually drag the stock market back down. We had several questions this week, people wanting to know in general as you kind of game this out, in your mind, is what do you expect out of the precious metal equity? I mean, they are stocks after all if the stock market rolls over.

Eric: You know, I think we've been through the first test on precious metal stock, they got bombed in March. I'm trying to do an analogy with the '07, '08 experience. And again, the stocks bombed, but they got bombed over a longer period of time. Like it was about three or four months, and then they rallied while we're in the midst of it. That's one thing, I bombed for about a month and we rallied. And back in '07, '08, they just kept rallying right up to 2011, and I suspect that we'll have the same thing that we've seen our crunch here. The fundamentals for the companies could not be better for the prices we have, not so much for the silver guys, but for sure for the gold guys. You know, with a price pushing $1,800 here, these guys are making a lot of money. They're gonna have good dividends, they'll probably have buybacks. I mean, it's one of very few areas in the market that you can actually look at the fundamentals and think you're doing the right thing. I notice I look at the, something called "Investor's Business Daily," top 50 stocks in the United States and at least two of them are gold stocks. Well, there's Franco-Nevada, Kirkland, there might be another one in there. And that's just something picked up on the computer. The computer says, "Oh, my God, look at the fundamentals of these things. Their earnings are growing, their revenues are growing." And I think we're probably okay with the gold stocks here. Getting through what we're going into if the stock market has a big decline.

Craig: Seemed like every time gold goes up and really gets rolling, again, some of these folks, you question their motives, where they're coming from, but they'll come out and they'll say, "Oh, I don't own any gold, because the last time we went through something like this, there was a gold confiscation program, not only in the U.S., but in other countries." And a number of Canadian citizens write in this week concerned about just that because, well, Eric, your country doesn't own any gold. You own more gold than Canada does.

Eric: I'm lucky that way. It's funny how life moves in those strange circles. I think it's less likely that Canada would confiscate gold, because we have a very thriving gold mining industry and a mining industry generally. And I think we wanna protect natural resources because it's a bigger part of our GDP. Whether or not the U.S. will confiscate gold. I mean, I just read an article recently sort of explaining that it's so international that it's not likely to happen. And perhaps somebody might demand an audit of the U.S. gold reserves, which I suspect aren't there anyway, if that was to happen, so I'm a little ambivalent on it. I mean, we all know that we all have to try to take some measures that we have to have our gold out of the system, some of the gold out of the system. That's the best advice I can give and then, we're all on our own when the government comes calling, so let's leave it at that.

Craig: All righty. I know you keep your fingers on the pulse of the market every single day watching the positions you own and considering other companies. Which stocks caught your eye this week?

Eric: Well, I had an update with a gentleman named Ken Konkin who's with Tudor Gold. And they're drilling as we speak. They've had some core that they've delivered off to be assayed. We don't know the results of that. This is up in the Golden Triangle. This is a place where we hope we'll find tens of millions of ounces. We already have Seabridge that says they have, I think it's something like 40 million ounces there. You have Valley of the Kings through Pretivm that has 10 million or 15 million. They have something called Snowfield that I think has 20 million. These are all very close to each other by the way. They're probably not 15 miles away from each other. And Tudor has the Treaty Creek property that they're drilling and it's starting to smell like they're gonna come up with something big, which would help them and the other two participants in the area which are Teuton Resources and American Creek. So that was interesting and I believe the fact that, you know, when people keep finding a string of these, you're the next guy on the string, you're likely to find it, too. So, fingers crossed on that one.

I also want to comment on royalties generally and probably more specifically Ely Royalties. As most people know, I'm a very large owner of Ely and I bought a lot of it because they have the Fenelon Royalty. They have 2% royalty on Fenelon. They also have a royalty on a company or a body called REN which is in Nevada. And speaking of, you know, right along it, it goes right along the trend that Barrick is mining right down there right now and they probably come up right to their border. And we'll be on that property pretty soon. Barrick owns the property, but Ely has a one-and-a-half percent royalty on the property. It's a deep underground deposit. The only hole that I don't have any data on was 42 meters of 34 grams of gold. Now that's one ounce gold, okay, 42 meters. I mean, that is like an astoundingly large intersection of high grade gold.

So, they have royalties on these things. One of the things that I've come to conclude, you know, people, when they calculate what a royalty is worth, they do the gross value of the stream over whatever number of years and then discount it to the present value. And I personally believe it should not be discounted. In fact, it's probably gonna be higher than the gross value that we recognize today for two reasons. One, the price of gold will be higher, two, the orebody will get bigger. Most orebodies get bigger. So, those things make the future value even greater than what we think the present value is. And when you discount, as an example, a 15-year orebody at 5% a year, the gross value of x becomes just a little less than one half of x because of the discounting, and my belief is it's worth x plus 50% due to these other outside influences where it gets bigger, price of gold goes higher. So I think and I know at least in the case of Ely, I can look at the Fenelon royalty, I can look at the REN royalty and I probably got another 20 royalties there that I haven't even spent any time on, but I think those two tell me that even today, after the stock has gone up a lot, after they did the issue about two weeks ago, that it's still a buy. And I hope to buy more. It's hard when I own the percent I own because it's very difficult to keep within the rules of buying but I think it's pretty impressive what the prospects are.

Craig: That is exciting and there are a lot of exciting opportunities out there. I think I'd just jump in for a second and go back a week and plug something, a regular feature that we have here at Sprott Money is called "Ask The Expert." It's a monthly interview on the sprottmoney.com website. If you click the Insights tab, you'll find a tab specifically for all of our past "Ask The Expert" interviews. This month, recorded just last week, was a podcast with Mickey Fulp. Many will know Mickey, independent geologist and mining analyst. And his newsletter, completely free, just sign up. It's an email newsletter, doesn't cost you anything. So for everyone interested in equities and the names we get every week, I encourage you to check out that podcast with Mickey Fulp. Again, right there on the Insights page, "Ask The Expert" for May. Eric, anything else on your mind as we go to wrap up?

Eric: You know, I should say one other thing just to seal the royalty case, okay? Franco-Nevada trades at three times net asset value. Three. That tells you that discounting the net asset value is inappropriate. That just, you know, "Oh, our net asset value is x and we're worth three times x." Well, how do you get to be worth three times x? Because you know what? Because the net asset value was improperly calculated. Enough said.

Anyway, it looks that we've had a great day here so far this morning. We got, the stocks look like they'll be down. Financials were weak into the close yesterday. We even saw one of the smaller Canadian banks reduce their dividend. I think you're gonna see more of that because their earnings aren't there and, of course, we're seeing silver having a very big move here this morning. And both the metals look like they wanna get to new highs.

Craig: Sets us up for an interesting week next. And next week we'll have the next U.S employment report to talk about which they say could be historically awful. So, gosh, what an interesting week ahead we have. With that, I'll wish you a good weekend, and I look forward to talking to you next Friday.

Eric: Okay, Craig, all the best. It's been fun.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. Have a great weekend, and we'll talk to you again next Friday.