Don’t Be Fooled by Paper Prices, Physical Demand Is Real - Weekly Wrap Up (March 20, 2020)

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

Craig: Greetings once again from Sprott Money News and sprottmoney.com. It is Friday, March the 20th, 2020, and it's time for your "Weekly Wrap Up". As usual, I'm your host Craig Hemke, and as usual, joining me is Eric Sprott himself. Eric, good morning.

Eric: Well, what a week. What a week and what are we looking forward to? Let's have it.

Craig: Did you sense kind of the upbeat tone of my voice, Eric? Come on now. I mean, I tried to stay positive.

Eric: Sorry to ruin the party so quickly.

Craig: All right. Anyway, before the party starts, obviously, it's just been a month like nothing anybody has seen, and who knows where we're going over the next couple of weeks because you never know when this is going to clear up. So, please be safe out there. Take care of yourselves, wash your hands. Remember, it's also been a very busy time for us at Sprott Money. We thank you for choosing us. No doubt, at sprottmoney.com, we very much appreciate your business and for being the most trusted name in precious metals. This is an interesting time for precious metals. Be sure to check out sprottmoney.com for all of your bullion storage needs as well. Eric, my friend, I guess we could talk about prices, but let's just go right into this. What is on your mind this Friday morning?

Eric: Sure. Well, you know, I should follow up with, mentioning Sprott Money, I mean, I see the daily sales numbers, they're like 10 times higher than they've ever been. Okay? So, people are buying these products, the products are becoming short, the premiums are going up, and we get orders from all over the place. So, we're just shocked at the people who finally are reacting to that. And I think the fact that there's going to be this retail demand from around the world will be a big factor in where we ultimately discuss where prices are going. So, we'll get to that.

In the meantime, you know, I've wanted to focus on the coronavirus for whatever number of weeks now when you can sort of first identify as possibly negatively affecting things. And the trend-line in the U.S. cases boggles my mind. Overnight, we had 5,000 cases on a base of 9,500. These numbers are exactly in line with some projections that I viewed beginning on March 6, where some guy says, "Here's what the trend line is." And you know, we probably were at 200 cases back then and now we're at 14,000 cases, and the projection to April 1st was 690,000 cases other things being equal. Now, other things, of course, won't be, we might go into a lockdown, and I suggest that we should go into a lockdown. It may or may not have proved itself in China, I still have this niggling feeling that maybe the Chinese data is erroneous, that they're pretending they've stopped it, which they say they've effectively stopped it in their country, but now they're getting it from us. Okay? And maybe the whole story is going to be, "Oh, well, we stopped it, but now you guys are bringing it in." We'll see where that goes.

One of the things that I should mention is that in my mind, I have concluded by listening to the various authorities who know what they're talking about that it is an engineered virus, man made, therefore it's much more difficult to solve. We in North America have huge testing issues where we just haven't had the testing capacity to get a grip on this thing. So, I think a lockdown is probably likely. The government initiatives, it's actually quite hilarious to me. Okay. When you look at what was first suggested by the government that they're going to have $50 billion available for the coronavirus problems, and I mentally laughed. Fifty billion, you have no idea, do you, of what you're talking about? That was less than a week ago. Now, it's already up to $2 trillion. In other words, the people that are running the country had no idea how significant this was.

A lot of the things that are being proposed, they're being proposed for industry, not people. And of course, the one industry they always want to say is the banking industry, and the banking industry is the one that got us into this hugely levered financial system where, you know, we're playing whack-a-mole here. You know, one day it's the treasury issues, treasury yields goes up, then the next one it's the Nunez [SP], then the next one, it's [inaudible [00:04:43]. And you know, they have a program for this, a program for that, and we're always trying to solve these financial problems. But the real problem has gotta be with the people. And the suggestion of giving them $1,000 is absolutely laughable when you think of people having to go and get quarantined for a month or two or however number of months this last, and I don't think it's going to be short. I want to let people...I don't think we're talking about this thing peaking out anytime soon.

Now, I guess, move to the economy. As I said, they're dealing with the banking system. They're allowing more leverage in the banking system if you can imagine. As if we don't have enough. Like, they're taking away the capital buffers. And of course, the banks have no spread to earn theoretically because rates are down to almost zero. So, I don't know what the outlook for banking is, but it's poor. And I would paraphrase it this way, when your customer's weak, you're weak. And of course, the banks have all these weak customers who had to shut their business. I for one, what do I have? What do I worry about today? I own 80% of a mine in Nevada, which might have to close. Well, how are we going to keep it supported? What are we going to do for the employees? These are not easy things for an individual to say, "Oh, yeah, I'll pay the 200 employees just like that." I mean, it sort of is my moralistic game plan for sure. We'll see. I mean it's pretty hard to support a whole bunch of infrastructure with zero income. That's very difficult.

Craig: I'm reminded of that old adage, Eric, about, "If you owe the bank $1 million and you can't pay it back, you've got a problem. If you owe the bank $100 million, and you can't pay it back, the bank has a problem."

Eric: Exactly. And they have problems. And of course, we keep hearing these rumors of this fund having a problem, that style of investing having a problem. You know, like, there's so much...I mean look at the volatility, it's crazy. How do you go home at the end of the day and figure out what just happened to you? I mean, I gather we're going to have a pretty good day today. maybe stocks will be up 5%. Maybe they will be. In fact, I would almost venture to say they'll be up strong at the opening. Then you'll wait until you get to the close and people have to worry about the news that's going to come out over the weekend and the Monday opening because Monday this week was a horrendous opening. And I think they might start worrying about that at like 2:30 in the afternoon. So, yeah, I know there's problems all over the place and really very few answers. You know, I don't think...if you believe it's an engineered virus, coming up with a vaccine is very, very difficult. We will see.

Craig: Eric, the central bankers and the politicians are obviously going to do everything they can to keep things going so the governments...all the debtors can continue to service their debts. I mean, let's just kind of offer some conjecture here because I know I hear about it on my site. You know, as a group of sound money people, we've all kind of talked for 10 years about the math of it, the exponential growth of the debt and all that kind of stuff, and how you got to grow the economy and the cash faster than you can grow the debt and everything else to service it. And everybody says, "You know, it's a math problem. Eventually, it's all going to collapse and there's going to be this reset." What do you think?

Eric: Well, I think it's a distinct possibility. And I guess my biggest worry or concern for the financial community is if, in fact, the banks don't make it. Okay? And so, for example, let's take a regional bank who's lending money to people against their mortgages who are not going to pay the interest, where their house might be going down in value. When do the people decide, "Oh, you know what, maybe I'll take my money out of that bank because I'm a little worried about it?" And/or the bigger ones because they've got all these derivative books. Like the derivative book of JP Morgan are like $47 trillion notional. Wow. What do you think that's doing every day these days? It's crazy because the currencies are almost as volatile as the stock markets, and elements of the bond market are as volatile as the stock market.

So, man, I'd hate to be in the accounting department trying to figure out where a particular bank stood at the end of each day because there must be gigantic losses being taken in and gigantic profits too in certain sectors if you've got yourself going the right way. But generally, when everything is sinking, and you're a bank, you're sinking as well. So, I think there could be a window for gold there. I mentioned, I think it was two weeks ago that I started buying gold because I preferred to have some money out of the bank that I would have in my possession just in case...

Craig: Sure did.

Eric: ...something happened to the bank. Now, you don't need many people to be making that small decision to have a big impact on a market that otherwise was kind of imbalanced, right? All of a sudden people are buying silver coins and gold coins and institutions are talking about buying gold. I hear it every day on Bloomberg and CNBC, "Oh, yeah, I think we should add some gold." Well, you know what? It's not that easy to add gold when gold is such a small part of the market. I mean, it's less than 1% of the market. How much gold are we all going to be able to add, 1%? You know, we couldn't even add 1% because all the gold's already owned by somebody. Now, you gotta bid it up. And we're seeing that. We're seeing that the physical markets for gold have prices going up and premiums going up whereas the derivative market for gold, the paper, the COMEX, the price is going down.

And I think what we'll find is that the commercials have engineered this sell-off as they did in '08, in the '07/'08 thing. Gold went down, I think, to $8.50. And then, all of a sudden, you know, after they covered the short, everyone got religion and the price more than doubled in three years. More than doubled while the stock market was doing quite poorly, I might add. And I get the feeling that what's happening in 2020 is like a short-term version of what happened in the great financial crisis that we've seen the low on gold here, and it will start to rally, and silver seeing the low, and it will start to rally. And you know, I talked about mine closures as well. If you have to get these mine closures and they all close...Peru announced they're closing the mines, I mean, Kavelco [SP] and Jilly's [SP] closing. I know that in Nevada they ordered all businesses to close. Now, I don't think it's affected the mines yet, but it may, I mean, you get one case of COVID-19 in a mine and then they'll just shut it down so fast.

Well, people will still keep buying gold and silver, you know, they'll buy the coins, they'll take their money out of a bank, they'll want to park it somewhere. Central banks will probably still want to buy it. Well, how do you buy something that's not produced? The price has to go up. So, I think there is lots of reason to think that gold is a wonderful solution to this financial situation we're in and probably better than cash because even though cash seemingly has its value, if it's in a bank and you can't get it out, what's the value?

Craig: That's for sure. Let's kinda just expand on that before we begin to wrap up. Let's talk about...because we got a lot of questions this week, Eric, about...you know, you and I have discussed the tail wagging the dog, right? The future's tail wagging the spot dog for over a decade. You're going back a lot farther than that. And you and I understand this, people that go to my site understand it, people that already own gold and silver understand it. But a lot of people, their eyes are just now beginning to be open to this idea that they're basically trading baseball cards. You know, these derivative contracts that have no relation to physical, but that the physical is being set by the price of those baseball cards. Can you, just in your own words, explain to people why they're seeing this paper price? The price quoted on CNBC and Bloomberg go down, but yet these incredible premiums for the actual physical metal?

Eric: Yeah. Well, the same thing happened in '08. You know, the prices of, I forget the exact details of what price it got to, but let's say they got to $8.50 or something back in '08, but if you wanted to buy a coin, you had to pay between $15 and $20. The price for the physical product never went down. And it's because somehow, you know, we're trained to look at this quote that ends up in the newspaper and on the TV screen, and we think that's where things are going on. But there's another market, there's a physical market, go and try to buy it, you know, go try to buy it physical. In fact, gold went into backwardation recently, right? Where the spot price was above the future's price because it's more important to have it now. Because when you're buying a future, you don't know whether you're going to get it delivered or not.

And of course, you and I, we talked about deliveries and that ridiculous situation with the exchange for physicals that goes on every day for 20 or 30 tons of gold. Like, more gold per day is exchanged for physical and it just disappears in the ether, and we don't even produce that much in a day. Like, it's just bizarre what happens in the COMEX, and obviously, it should end, quite frankly, and lots of other things should end. They should end short-selling without an uptick. And that could be happening here soon too because the short sellers can just run rampant on a stock and knock it down 10% or 20% and everyone's shaking their head wondering what just happened to them. And there are people that that's their business, knocking the value of a stock. And it's so inappropriate, and unfair, and immoral that the regulators should do something about it.

Craig: And several questions on that this week too, Eric, not so much specific companies but just the mechanics of the mining shares in that, again, almost a tail wagging the dog thing and that we've got these ETFs and the double-levered ETFs and the triple-levered ETFs, and there almost seems to be...those seem to be driving things as well. A lot of folks are wondering, are the mining stocks being manipulated through those things, or why exactly are they falling so sharply?

Eric: Well, the tail, in this case, is the ETF. Okay? And of course, people can say, "Well, I want to be out of this ETF today," and sell it on the market. And of course, the ETFs can go to a discount to its nav, but the guy running the ETF has to go and sell the underlying security. And for example, it's triple levered, he's probably got to get off an option. Options are not that easy to trade anymore. The market makers aren't there. The market makers who are mostly banks, financial institutions, don't want to risk their capital. And in fact, their capital is already under pressure because a lot of people with a line of credit are demanding that they take the money out of the bank. So, the banks are getting more and more leveraged. And they're saying that they're trading just, "Hey, don't commit as much money as we used to commit." Ergo, the bids and asks get wider, they get thinner, and if somebody comes along and sells the ETF and you've got to trade in the options of the underlying security, there's not much of a market for it, and the spread is so large that you might have to sell it 5% under what it's trading at because that's where the guys prepared to bid.

So, it gets crazy volatility. Like, I watch Kirkland, in Canadian dollars got down...I think it might have got down to $25 and then next thing you know, it's back up at $48, and then it's back at $31, and then yesterday it closes at $39, and I presume today it will open in the $40s. Like, it's just, it's madness, the swings that we see, and it's a flow of money where no one wants to be in the market. So, for example, somebody wants to come in and buy 100,000 [inaudible 00:17:15], well, who's going to sell? Nobody's probably going to short it to them anymore. So, you know, what if there's no bonafide, he sell it, and up she goes again? There's a lot of slippage between the strength of the bids and offers and the spread that the dealers want to take as not for fear of getting wiped out the next day.

Craig: One last question for you, Eric. You know, the stories are kind of legendary about the PHYS and the PSLV, when those were begun a year ago, you know, the weights to actually get the physical silver for the PSLV. I know it's not part...you know, you're retired and that's not part of your management duties anymore. But have you heard anything about those type of actual physical funds and trusts having any difficulty sourcing bullion to meet demand and flows?

Eric: I have not heard that, no. I think I would hear it too. In fact, I've instructed people if they ever want to try to go and buy a product and they can't get it, or they can't get it at an appropriate price, I'd like to hear about it. I'd desperately like to hear about it. So no, I have not heard that. And I think I have pretty close relationships with people that if, you know, for example, if the Sprott Physical Silver Fund had to buy a million silver and it wasn't there, or you know, it was priced 10% above the COMEX price, I think I'd get a tap on the shoulder.

Craig: Okay. Let's keep our eyes and ears open for that one. My friend, just other things that are on your mind before we wrap up? We've covered a lot, and you and I could probably talk for another hour, but I know people are busy. So, what else is on your mind before we go?

Eric: Well, the one thing that, you know, I think people have to think about is there could be mine closures here. Now, whether or not the stocks have gone down enough to reflect it, I don't know. It's sort of like what stomach do you have for somebody who's gonna say, "Oh, by the way, we have no revenue this quarter and, you know, we lost whatever?" That could happen because I think shutdown, lockdown seems to be the only way. Okay? So, everything's going to come to a standstill. I hope the government changes their view and looks more to protecting the people than the industries. I mean, why do you have to protect the airline industry if no one's flying? You know? We gotta eat and we gotta keep our houses warm. Those should be the two most important things. So, let's see where that goes.

Craig: That's for sure. Well, we'll see. You just think of where we were last week compared to where we are n