Weekly Wrap Up

Eric Sprott Talks Global Demand for Metals, Impact in 2018 (Weekly Wrap-Up, December 1, 2017)

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December 1, 2017

With metals up and down, it can be easy to think that the market won't rise. However, Eric Sprott talks gold and silver, the COMEX, and the potential for a rally in 2018.

The global precious metals demand is through the roof, Eric says. "There's a serious misallocation of physical gold and silver," he says. "This is not a little bit [of silver]. This will be interesting for us to study this whole play that's going on and the movement of the physical delivery."

And what about Bitcoin? "Most Bitcoin people don't know how bad [Bitcoin futures] would be," Eric says. "The reason [Bitcoin can rally] is it's essentially a closed loop."

Want to know more about the December contracts, their effect on the market and trade, geopolitics, Bitcoin, and more? Listen to Eric and Craig Hemke on this week's Wrap-Up.


Male You're listening to "The Weekly Wrap-Up" on "Sprott Money News."

Craig: Well, greetings once again from "Sprott Money News" and sprottmoney.com. It's Friday, December the 1st, 2018. And this is your weekly wrap-up. I'm your host, Craig Hemke. And then joining us, as usual, is the one and only Eric Sprott. Eric, good morning.

Eric: Hey, Craig. Happy to be here. It's been kind of a lackluster week. Nothing seems to be working for us, but there's some exciting things happening sort of underneath things that don't seem to be that visible, but that might be quite constructive for our metals here.

Craig: Yeah, you know, if anything...and I should, of course, mention before we get started...I'm so excited to talk to you...that now is the time to sign up for Precious Metals Storage with Sprott Money and get one month free storage. Free. How about that? Visit sprottmoney.com for more info. All right. So here's what I want to talk to you about. Here we are again. We went through the expiration and moving off the board of those December contracts. Always the biggest volume front month of the whole year. And just as in 2015 and '16, price has fallen dramatically. Just as in 2015 and '16, we've got a Fed rate hike coming up here in a couple of weeks. I mean, we're just simply tracing out the same old pattern where we're looking to buy the dip here soon and rally into next year.

Eric: Well, certainly the data on COMEX has been incredibly positive for us, okay, in the sense that, with the fiscal part of it here. I think there was 39 tons in December. And I think there's something like 20 tons sort of in the dealer-eligible inventory. We had nominations for 39 million ounces of silver. And there's only 53 million ounces in available inventory, and you and I have sort of seen these exchanges for fiscal contracts that are part of every day's trading now in the COMEX. And this is where someone says, "Well, I'll give you a contract where you can take delivery in London. And therefore, it eliminates the open interest." On first notice day the guy won't say, "I want that," because it goes over to London.

And a guy named Harvey Organ's been following this very carefully, as have some others, but the amounts of metal are astounding. So, for example, yesterday there was 20,000 contracts. That's 60 tons of metal was shifted from the COMEX to London, 60. They only nominated for the whole month to get 39, but 60 that day went to London. And I think the numbers for the most recent months is something like, you know, 500 to 700 tons. And nobody really keeps a big daily running tab on it, but these are monstrous amounts of tonnage. I mean typically, we only mine 200 tons a month, mine. So, you know, I'm not going to be transferring 600 or 500 tons of one over to London.

I mean, it's just incredible amounts. They not only are transferring in the December contract, they're already transferring it in the March contract in the case of silver, but the February contract. So the first notice days were great. The exchange for physical contracts are unbelievable. I mean, I don't pretend to fully understand where this gold's going to come from, but I've got to think that there's a serious misallocation of both physical gold and silver. Even silver, for example, I think yesterday's was 5,000. So that's 25 million ounces. That's not a little bit of silver. And there have been many days like that.

So it's going to be very interesting for us to sort of study this whole play that's going on and the movement of the physical delivery of silver to London, of course. And when they go to London, it's unregulated. So it's like, "Okay, chap. You know, I owe you 50 tons. I'll get it to you when I can," sort of thing. Like I don't think there are any firm, hard rules that you have to live with. The guy just has to acknowledge that he owes it to you. And some day he'll get it to you, which, you know, it's bad enough that we've got to deal with open-ended paper shorting, now we have to deal with open-ended physical delivery. So anyway, it's very interesting. I think it probably points to great things that could happen for us.

Craig: Yeah, you know, it clearly points to increased physical demand. And again, what's hard to gauge is how often this tool, if you will, the sediment tool, has been used in the past. I know that one of the things that you can settle for when you use an EFP is GLD shares as if, you know, that's a substitute for the real thing, but we're not seeing any increase in the amount of GLD tonnage at all.

Eric: No. No.

Craig: In fact, it's been static all through the month of November. So it doesn't seem to be there. It also seems that they can do these EFPs in Hong Kong and places like that, but we already know there's extreme demand there. It's really an odd phenomenon. And you're right. It's something, Eric, we're going to have to start paying really close attention to, to see how much is being done, if it's consistent, and then try to figure out exactly what it means. Is there suddenly that much extra physical demand? It's quite compelling.

Eric: Right. And when is it settled, you know? And does the trade actually take place, right? Once you get over to London, nothing's very visible over there, unfortunately.

Craig: Right. Andrew McGuire's told me a couple of times that in London, there's just like a painted line on the vault floor. And they just forklift pallets of gold back and forth across the line, the line being what demarcates unallocated and allocated.

Eric: Yeah. I never really believe there could be as much trading as they say happens over there. They're theoretically trading hundreds of millions of assets, something like that, a day. And I said like, "Who possibly could need to trade that amount of gold and silver in a day?" It just seems incredible to me.

Craig: Well, it is a rather interesting time to be watching all of this. You know, as we move into the next year, you know, we've got to get this month first. We've got the employment report next Friday, and then we've got this FOMC meeting in two weeks. But as we move into next year, there's certainly going to be two big stories, geopolitical and political, that are going to be influencing prices. Is that something you're going to be watching, as well?

Eric: Well, you know, I think the most devastating news all week, by the way, which has nothing to do in a way with markets, the fact that the North Koreans have a rocket that can get to Washington, okay, but I just couldn't believe how quickly their ability to deliver a nuclear warhead that far has changed. They sent a rocket up 4,500 kilometers up vertical. So obviously, they've developed a new stage two rocket that has tremendous power and it's a very, very scary thought. And you know, it creates a whole sense of worry here because you've got a bit of a wild man at either end, quite frankly.

So who knows what's going to happen, but it's a very sobering thing to think about while we have a billion things going on in the stock market and Bitcoin and all these crazy, crazy things happening and say, "Oh, yeah. Use your rallies in the stock market every day," seemingly because we're going to get a tax bill passed, which you wouldn't have thought. I mean, how long can you play this, right? This tax bill thing's been around for, you know, two months almost, but every time we talk about it, the markets go up. And as you, I think, mentioned just earlier, every time that the people say there's going to be a tax bill passed, they knock gold. I never even noticed that relationship because I probably would never be looking for it, but anyway, I guess they'll try to get a tax bill passed.

Craig: Yeah. Maybe they can drag that out for another couple of years and just run out of...

Eric: Yeah, that will do it.

Craig: Say, you mentioned Bitcoin. It's been a wild week for Bitcoin. It seemed like over the American Thanksgiving holiday, everybody that knew something about it told somebody. And Coinbase opened 100,000 new accounts, and up it went. That's nice for teaching a whole new generation of people about money and what really is money. But at that same time, that whole new generation is just about to get a dose of some education about the banks too because we just got notice this morning that the SEC has approved Bitcoin futures. What do you suppose that might do to the market?

Eric: Well, it's funny, people don't know how bad that news is, okay? It's just horrible news because you and I live with this COMEX thing, okay, and then what they can do to hold it under commodities. And where great things like Bitcoin can rally as much as it did, in the scheme of things. It's just ridiculous that something grew by that percentage and hold its own, but the only reason it can do that is it's essentially a closed loop. I mean yes, there's a little bit of incoming every day, but it's a closed loop. So everybody who wants to own a piece of this has to go into that closed loop and try to buy it. And the incremental buying drives the price up.

And one of the things that's different with Bitcoin going up or versus let's say stock, if a stock goes up and gets to some ridiculous value, you know what? Management is willing to sell some stock to you. They'll do an issue and increase the size of the flow. So there's two things that could dictate. One's already happening. And that is all these other claims for people buying Bitcoin. So that has a weakening impact. But I'll tell you, these contracts trading on the commodity exchange, that's going to make the supply side unlimited. And the people who are probably going to offer up the unlimited supply might happen to be commercial bankers who I'm sure hate Bitcoin because it takes money out of their bank.

And between them and the powers that be, the governments and central banks, who all are looking askance at this thing and going, "What is really going on?" I think it's just going to be a huge sentiment on the part of the powers that be that, "We want this price down. We don't want everybody piling into Bitcoin here." And of course, that's what you can do on CME. If you've got limited amounts of money, I mean, as you know, in gold they'll sell $4 billion worth of gold in a minute. Well, you know what? If some guy comes along and wants to sell $4 billion at Bitcoin in a minute, it's going to knock the price down. So I think, you know, you have to look at it very cautiously here with this thing beginning to trade I think it's on December 10th on the COMEX. It will be very interesting for us to watch and see exactly what happens.

Craig: Eric, lastly, just one last quick question. The folks at Sprott Money have put a hashtag out on Twitter. It's just simply "askericsprott," no spaces, #askericsprott. And asking really anybody on Twitter if they have anything they'd like to ask you directly. I had one question this week. We'll try to do at least one every week. And this one is just about silver in general. You know, it's been a tough year. All the other base metals, industrial metals, have all had great years it seems, but silver's only up 2% year-to-date. Of course, you and I probably have some thoughts as to why, but nonetheless, this person on Twitter wanted just to know what do you think and what are your thoughts for the supply/demand situation and price for silver in 2018?

Eric: Right. Well, I do find it very ironic that silver is about the only thing that hasn't moved, right? I mean, everything, whether it's nickel or zinc or copper or lead, I mean, everything, cobalt, lithium, and some of them with tremendous moves. I mean, it's obvious that there has been and continues to be a huge short position held by the commercial banks in solar. And they are not wanting it to rise here and they're trying to find a way to cover their shorts. And the trading hasn't really provided them that opportunity. If I had to answer that based on, well, what's going to happen with the COMEX, well, I have a pretty good idea of typically what should happen on the COMEX. That's why we always talk about the physical demand for things.

So there's only the physical that throws its demand in the works because sometimes the physical blows out and the demand is obvious and the price goes up. And that's why we are talking about these in exchange for physical contracts that are being laid off here in London here for huge sizes of both gold and silver. And it's suggesting to us that things are getting very tight here. And with these prices, we're not going to see any increases in production. In fact, we'll see decreases in production, and so therefore, supply. I happen to be a believer that all this money that's being made in Bitcoin when people sell it, I think they're going to buy precious metals, by the way, because theoretically they hate fees in currencies and governments and banks. And that might be a very logical thing to do to diversify. So I've always been upbeat about the supply/demand situation. It's just a question of, you know, defeating the crooks on the CME and getting the physical to carry the day.

Craig: Yeah. I hear you. Hey, and before we go, just to remind everybody, Sprott Money now carries Scottsdale Mint products in the USA. Anybody can order those on our U.S. site today as a great gift item. Eric, you're a great gift item to all of us. Thank you for all you do, and thank you for your insights each and every week as we visit here on Friday, but for now, we'll give you the rest of the day off.

Eric: Okay, man. I always look forward to it. And it's exciting, what's going on. It would be a little more interesting if actually analysis meant something, right? Like there doesn't seem to be a lot of reason for anything anymore, but you know, at least we can go back to basics. And some day, of course, the basics will always win out. So let's hang in there together and hope we have a great week.

Craig: You got it my friend. And from all of us here at "Sprott Money News" and sprottmoney.com, thank you for listening. Have a great weekend. And we'll talk to you 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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