Weekly Wrap Up

Eric Sprott On The Impact Of Higher Interest Rates & The Selloff in Gold Prices (Weekly Wrap-Up - May 18, 2018)

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May 18,2018

As we head into a holiday weekend here in Canada, Eric stops by to talk the latest global news in precious metals. This week, you’ll hear:


What the ongoing selloff in gold prices means for you

How the looming pension crisis will affect investors

What the Fed is trying to accomplish now


“The pension crisis is not going away. Of course, you start raising rates and it puts an even greater stress on pensions. You know, pensions own bonds—we’re in a bear market in bonds! They’re losing money. In fact, there’s a chart you can see every day that shows the net gain of stocks and bonds together. And so far this year, I think it’s probably zero—if not negative—the combined total of stock market gains and bond market losses. So these pension funds that were underfunded… now they’re not even making any money!”

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To hear Eric’s full thoughts and more, listen here:


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, May the 18th and this is your "Weekly Wrap-Up." I'm your host Craig Hemke. Joining us as usual, on this Victoria Day weekend is Eric Sprott himself. Eric, good morning.

Hey Craig. Happy to be here. Lots to chat about.

Craig: There is. And it is Victoria weekend here in Canada, where the Canadians celebrate Queen Victoria along with the start of summer... It's summer? It's actually...summer in Canada? I didn't know there was such a thing. Anyway, very exciting offer from Sprott Money. You can buy a one ounce Silver Maple for just $1.99 over Sprott. Take advantage of this special Victoria Day promotion by visiting sprottmoney.com or call 888-861-0775. A one ounce Silver Maple for $1.99 over at Sprott.

All right, it's definitely not summer in the meadows this week, Eric. We got a really big smashing gold back on Tuesday. Had a typical operating procedure, big spike down to take out the 200-day moving average and elicit some speculator selling. I'm sure you saw all this unfold this week. What are your thoughts?

Eric: Well, you know, wash, rinse, and repeat, right? I mean, it's the same old thing, and I think the tip-off quite frankly, the tip-off to me, we know we have a big June COMEX expiry coming up. I think there's something like 233,000 contracts still open interest here. We got about seven or eight trading days to clear it up. I mean, that would be something like 60 tons of gold, some number like that. And of course, there's nine tons in the inventory at COMEX. And this, of course, with all these EFPs flying over to London, pretty well every day, that are huge tonnages, like 60 to 100 tons a month, for Gods' sake.

And the tip-off was the fact that silver hasn't gone down as much, because silver doesn't have a big expiry coming up for June. It's not a key month for silver. So, silver's kind of hanging in there, you know, trading around 16.50, hasn't been too much beat up. But gold does have the expiry, it gets beat up. So, it's just the same thing and it's awful for us to have to report on it that it is has nothing to do with the world of gold and silver, but it's the world of commercial banks and messing around with markets.

Craig: However, my friend, we did see this happen 3 times in 2017. And each time they did it, they were able to wash out the cot like you said, price bottomed in about four to five days after the event. Usually about $30 below the 200-day. And then we had nice rallies. Nobody's really expecting a rally at this point and so I guess that's one reason why to expect that we might actually kick off from here. One of the things that's been driving the metals lower too is the bond market.

My gosh, Eric. We've now got the 2-year note back to the highest levels we've seen since 2007. Ten-year note, the highest it's been since 2011. I know you're following this too. What does this tell us?

: Well, it's a big deal, and you and I have spoken about this at length, because the 10-year yield going up, of course, affects mortgage rates. And you just can't have mortgage rates go up 100 basis points from let's say 4 to 5 or something like that. And, you know, that means people are going to pay 25% more interest than they would have a few months ago. Like, it's just going to kill the housing market and the auto market, and of course, at the same time, that they're getting killed on that end, they got these health care premiums that keeps skyrocketing. And now we have oil hitting a new higher price and the price of gasoline going up. So, the average guy is just taking it right in the chops here. And I think that that will play out on the thinking of the Fed, by the way, that we're not going to get those rate increases that have been predicted.

We already saw the UK Central Bank not put a rate increase through. That was expected, because they saw signs of weakness. So, I think that's ultimately, what's going to happen and it's shocking it has to take this long to play out, but I think it obviously keeps playing out the way we would imagine. Save one thing and that's the stock market going up all the time and the price of gold not doing much. I mean, it's not the worst thing in the world, but it could be a lot better, obviously.

: Hey, let's focus on the soaring U.S. dollar for a moment, Eric. It has been just a crazy five or six weeks of the dollar going straight up versus pretty much every other currency on the planet. And this is starting to impact the emerging markets. That could have some trickle-down impact on the stock market and global equity markets, couldn't it?

: Hey, and how about on the gold market too? I mean, if you're in Brazil and you're watching the Real tumble, and you're in Turkey and you're seeing the Lira tumble, and you're in Iran and you see the Dinar tumble. I mean, there's a lot of people living in these countries. They're not all stupid, you know, they're going to try to protect themselves. So, I think ultimately, it's got to play in the gold at the margin here, that there's more people whose currencies are going down than people whose currency's going up. And the people whose currency is going up, they don't buy gold anyway. So...

Craig: That's a good point.

Eric: You know, I think it's worrisome from a financial point of view, generally. Like, you're going to get soft economies and perhaps, financial chaos in those countries, because people can't repay their U.S. debts and the business starts.

But from a positive perspective for us dealing with gold and silver, I think that ultimately, the weakening of the currencies on a broad basis is going to bring people into gold and silver.

Craig: All right. Now, here's a story not many people are talking about just yet. Maybe there's some fatigue from a couple of years ago. But gosh, things are really getting interesting in the EU again. It's beginning in Italy, but as you know, all of those banks in the EU are tied together in a daisy chain of debt and derivatives. So, all of a sudden, we're going to start talking about the EU banks again. The last time this was going on a couple of years ago, the Dollar rose because the Euro was going down. But gold rose at the same time, because, you know, it was such a threat to fiat currency. Are you going to be watching the EU banks and that situation in the weeks ahead?

Eric: Well, you know, one of the problems with watching banks is Big Brother is always looking out for banks. And I couldn't believe that I actually read that the new groups in Italy were thinking of going to the ECB and say, "Well, just cancel 250 billion of debt." Like, I don't know how that works, okay. And, you know, whoever the ECB is, what if they just said, "Okay. Fine. Here. We'll cut the debt." I don't know what happens with that, you know?

I mean, obviously, some central bank that never had any money anyway just theoretically takes the hit. So, yeah it's very worrisome that it, sort of, looks like Italy may want to propose some kind of radical measures, because of the populist government forming up there. And, of course, there's always been stress in the banking system and, so far, the central banks have been able to always cobble together some kind of rescue. We'll see. I mean, I still think they will cobble something together, because the other side of that is just pure financial chaos and I don't think we're going to see that.

Craig: As we move forward from here, Eric, you've got your holiday weekend in Canada. This weekend...the next weekend here in the U.S. is our start of our summer with Memorial Day. And we're going to start to turn our sights to June and that next June, FOMC where everybody's already expecting a rate hike. Earlier this week, I had the privilege of speaking with Jim Grant of Grant's Interest Rate Observer, and that was listed here on the Sprott Money site as the Ask the Experts segment for May. I'd encourage everybody to check it out. He's extremely insightful, experienced, brilliant guy.

But he was speaking about the interest servicing cost, the debt service cost of the U.S. government going through the roof. Really, almost with every single rate hike, it expands and gets worse. You noticed this week that not only that, but we've got the entitlement issues in the U.S. that are still rearing their ugly head. As you tie all this back together to owning gold and silver, what do you expect in the years ahead and how this might all play out?

Eric: Well, you know, in a way, we've spoken about this at length, because the pension crisis is not going away. And, of course, you start raising rates and it puts an even greater stress on pensions. You know, pensions own bonds. We're in a bear market in bonds. They're losing money. In fact, there's a chart you can see every day that shows the net gain of stocks and bonds together.

And so far, this year, I think it's probably zero, if not negative, the combined total of stock market gains and bond market losses. So, these pension funds that were underfunded, now they're not even making any money. God forbid, the stock market decides to turn around and pay attention to the bond market, which, of course, when you see these kind of weak days that we've had recently, it's because interest rates are going up. Because everybody knows exactly the impact of higher interest rates and it's nothing good.

So, yeah, it bears watching and I was, kind of, shocked how quickly it just blew through 3% on the 10-year up to I think 3.10 now. So, it's a problem, and most times there's problems, it's always good for gold. And I think that these...you know, the social security came out and said in 2034 there'll be nothing in the social security fund. That's not that far away. I'm actually worried for you Craig. You're the typical guy's gonna...when it's your turn to get social security, there could be nothing there.

So, you better start planning.

Craig: You mean, I can't just move in with you, Eric? Wouldn't that...? All right.

Craig: No, I appreciate that. And just one last question about the Fed. I mean, at the end of the day, what are they trying to accomplish here? We just got the CPI and the PPI last week, there's hardly any inflation at all. It's not as if the economy is soaring. Are they just simply raising rates so that they can lower them again in the months ahead? What do you think their end game is?

: I think they're trying to look responsible after having been massively irresponsible, literally, for the last 17 years. And ever since the NASDAQ crash and then the zero interest rate policy, which was a bit of a joke, and then, of course, the financial crisis and then we got to print money. Like, that was a joke. I mean, there's just no responsibility. Are they trying to garner some respectability, I think, in financial markets and at least be ready, you know. If there's some kind of market break or something, at least they can do something. They can reduce interest rates again and say, "We've got it under control."

So, I don't think that for one second they can imagine that if rates go higher here that we're going to have a strong economy. In fact, I was shocked when Germany announced their GDP for the first quarter was up 0.3%. Point three. Like, what is that about? Why do we have, you know, these very low interest rates and they're still printing money in Europe and they grow by 0.3%. They probably don't grow by the amount of money they print in GDP in a year. So, I mean, it's really not coming together and of course, I've kind of been on that theme. And interest rates going up are just going to choke things and the market will not react well to it.

We're already at levels and thank goodness, you know, you did interview Jim Grant, because he's one of the more brilliant people in the bond market. And, you know, he's always had concern about the cost to the treasury. I mean, the debts that it's already over a trillion. You start, you know, cranking on an extra hundred...a billion for interest rates and people then start worrying about it. You can get in the worst catch-22 here, you know. Debts goes up, rates go up. Rates go up, debts goes up. Man, you don't want to go down that line.

Craig: And all of a sudden, the conversation shifts from normalization and robust economy, to something completely different that nobody's expecting at this point. And that may be very beneficial for prices for gold and silver as we go through the rest of the year. Eric, one last thing. Just to remind everybody out there, because you might want to take advantage of this too. All of us here at Sprott Money are excited to offer the 1-ounce gold RCM bar for just $25.99 over Sprott this weekend. The market is moving, so take advantage of this exciting program. You can call 888-861-0775 or of course visit sprottmoney.com for more info.

Limited quantities are available on this one. So, you want to make sure you take advantage of this very, very soon. Eric, always a good time to be stacking some metal and I think we've got some pretty interesting time ahead, but for now, I wish you a happy and restful holiday weekend.

: Great. All the best. And one thing, I'd be remiss if I didn't bring our listeners up to date in the couple stocks that I keep mentioning...

Craig: Oh, sure.

...and one is Novo, where a company 250 kilometers south-east found the same type of gold that Novo is finding, which makes the hypothesis that you have the whole bottom of the sea having gold starting to take a little bit of shape here, okay? And our friends at Garibaldi announced this morning, actually, that they're going to start drilling and that's going to be...I think it's going to be quite exciting. I'm not giving anybody investment advice, but there's all sorts of information available on these companies that, you know, if you want to take the time you'll figure out what is likely to happen.

So, I'm looking forward to the long weekend and, you know, we need the COMEX June contract to get off the board before we can look forward to better days.

Craig: Eric, thank you so much for your time again this morning. And again, have a great weekend. We'll talk to you again next week.

: All the best, Craig.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, have a great Victoria Day weekend and we will 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.

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