Federal Reserve Policies and Silver Industrial Demand

Announcer: You're listening to Sprott Money's "Monthly Wrap-Up," with Craig Hemke.

Craig: Hello, again, from Sprott Money News at sprottmoney.com. It is time to wrap up the month of March. Oh, my goodness. Gonna wrap up the entire first quarter. This is your "Monthly Wrap-Up." I'm your host, Craig Hemke. And joining us here at the end of March is my old friend, Chris Marcus, of Arcadia Economics. Chris, man, it sure is good to see you, and thank you for joining me.

Chris: Well, thanks so much for having me, Craig. It's nice to catch up with you, as always, and certainly, after the particular month we've had, where we've had $2200 gold a couple of times, even seeing silver get to the higher end of its range, and a lot of interesting things happening. So, excited to be here, and looking forward to digging in.

Craig: No shortage of stuff to talk about. Let's do two things before we get started. Let's remind everybody, this content comes from sprottmoney.com. [inaudible 00:00:56] here's an idea. They've got IRAs and RRSPs at Sprott Money. So, it's almost tax season. If you haven't done your taxes yet, looking to add to your IRA or your RRSP, why don't you contact Sprott Money, and see if they can't help you out into some physical metal. Go to sprottmoney.com, or, of course, just give them a call, 888-861-0775. Chris, you do great work. Why don't you tell everybody a little bit about where people can find you?

Chris: Well, we're at arcadiaeconomics.com, also, which is based around our YouTube channel, Arcadia Economics, where I do a couple videos a week. We have couple other people who do content there, Vince Lanci, Rafi Farber, Dave Kranzler, and just try and get people an up-to-date view of what's going on with the major trends driving the metals, and have a daily source to go to to stay posted on what's going on.

Craig: You know, I always tell people to subscribe to Sprott Money's channel on YouTube and every place else, so you get the fresh content when it ever comes out. I would imagine they could just go to your YouTube channel and subscribe there, because you've got stuff coming every day.

Chris: Yep. So, you can certainly find us there, and subscribe, and I enjoy hearing the monthly interviews you're doing now for Sprott Money, and good to have a lot of coverage out there, especially at what I think is becoming an increasingly more turbulent time in the world. I think we're seeing the forces build in the economic conditions as well, and certainly has had a bit of an impact in the metals over this past month.

Craig: Yeah. No doubt. And what a month it has been. So, let's wrap it up, as the title suggests. I, at the end of last month, end of February, gold banging around north of $2000 an ounce. But as you mentioned, here, in March, and as we record this on the 26th, even today, gold brushed up against $2200 an ounce, so a little 10% rally over the course of this month. What have been your thoughts as this has been unfolding, Chris? What do you make of it?

Chris: Well, the first thing that comes to mind is that, unlike some of the previous rallies that were driven by the Fed, or a particular change in their policy, we really have that on this one, because if you go back to mid-February, when the rally began, really started accelerating around February 29th, I mean, back then, people were still wondering, are we gonna get another hike out of the Fed? So, it had really shifted from earlier in the year, when the market was looking at six rate cuts, and felt like game on, we're going to see the metals rally. And, I mean, that actually is a continuation. We've seen silver go from $18 in the fall of 2022, in the midst of they were still doing 75-basis-point hikes back then.

We've expected the Fed to cut rates. They've suggested in their summary of economic projections that they're coming. Yet we've still had higher for longer over that period of time, so it's amazing to see gold and silver rallying in the middle of that environment, and still, again, when this most recent rally began, there was talk about is there another hike on the way, and I've been thinking about, well, why now in particular are we seeing this rally, and I'm not saying that there is one definitive answer, although one thing that keeps popping to my mind is the issue of whether the money that was, the frozen assets of Russia, that were frozen back in 2022, when Russia went into Ukraine. Now there's a lot of talk been from the U.S. of whether these were gonna be confiscated, sent to Ukraine. Seems like that's being pushed for. It's still undecided, although now, we see, in France, they're talking about doing the same thing. And you wonder if it gets to some point where this builds, and people just start to feel less comfortable about what's going on.

And you could leave aside concerns of the Dollar, but with the Treasury looked at as a store of value, if you're an oil-producing nation, and you're sending the oil out, and you don't, you have a surplus, it kind of becomes harder and harder over time to just say, "Well, we'll put it in treasuries," when we can see the supply that's coming on. Think there's about $9 trillion set to be rolled over, another $1-plus trillion set to be borrowed this year. You see that that supply is increasing. You see the Fed, whether they've done it or not, they're still signaling they're getting ready to ease. So, add to that, of course, that Putin said if the West sends ground troops into Ukraine, we may have World War III, and what else is France saying? They're talking about sending troops.

So, a lot of these things I think have been driving that rally that we've seen. Of course, last week, we got the different story out of the Fed, where market wondering if we're going to get only two interest rate cuts this year, and Summary of Economic Projections shows three. And perhaps on top of that, the other thing, and I know you talked about this on your TF Metals site earlier this week, but Powell saying that even if inflation doesn't come down, if there's a spike in the unemployment rate, we may let inflation run hot for a while, just to keep that under control, which is a pretty significant shift. Now, and I know there's been speculation for the past couple of years, do we get to the point where, well, maybe 2% isn't the ideal target rate. Maybe 3% is good enough.

So, that, you know, he hadn't said anything to that, along those lines, but to see that change, where now, we could just say, "Well, we'll let inflation run hotter," certainly is a big one that I think is going to be one of the drivers of what we see in the weeks and months ahead.

Craig: We did fight our way through that March FOMC meeting, last week. And you're right. That, Powell, in his press conference, and then he reiterated again over the weekend to Bloomberg, that if we get any weakness in the labor market, and it's been funny how the labor market is always reported to be so strong, every, on the first Friday of every month, only to be revised lower later, but he did say it, we'd intervene, and start cutting rates. I, yeah, you know, another way to look at it, Chris, you know, if we go back to the end of the fourth quarter, right, the end of 2023, and I said, you know, and you and I were talking, and I said, "Hey, Chris, by the end of the first quarter, rates will be 25, 30 basis points higher. The Dollar Index will be 3% higher. The amount of potential rate cuts, or expected rate cuts, for this year, will have gone from seven down to two or three. But hey, guess what? Gold's gonna rally 4%," would you have thought that I was just making stuff up? I mean, that just seems like an improbability, but that's exactly what happened.

Chris: Yeah. It's been pretty stunning, and especially if gold is cracking $2200 a couple of times while we still have the higher rates, while we still have less cuts, what actually happens when the cuts do arrive? And, to that earlier point about Powell saying we could let inflation run hotter if the unemployment rate goes up, something that I haven't heard mentioned a lot, but keep in mind, back in May of last year, we had 3.4% percent. So, government numbers, you know, feelings about them aside, we have already gone from 3.4% to 3.9% in less than a year, so it's starting to happen. And at the same time, it's also interesting. Obviously, we've all been watching the inventories on the COMEX, and LBMA, and in China.

Now we're seeing the gold registered inventory climb lower. Obviously, we've seen silver inventories and have a couple of numbers here. LBMA went from 1.18 billion ounces back in mid-2021, shortly after silver squeeze. They had flat-lined around 840 million ounces by last year. Although there was a big drop, so now that's down to 814 million ounces. So, about 300 million ounces have come out of the LBMA. Shanghai Gold Exchange had about 170 million ounces in 2020. That's down to 45 million ounces. Shanghai Futures Exchange, 100 million ounces in 2021. That's down to 34 million ounces. COMEX registered was about a 150 during the silver squeeze. That's now, I think it's about 48, 49 million ounces. And obviously, we've seen about 200 million ounces come out of the ETFs. Seeing metal leaving on both the gold and silver ETFs, which is another thing that's a little bit strange, because, for the past decade or so, we've seen a pretty tight correlation between the price, and as the price has been going up, the inventory's been going up, and that's really changed at the same time Silver Institute reports us being at a deficit for fifth year in a row, if you include the ETFs, third year in a row if you don't include the ETFs.

And I know some people think, you know, the silver number should be more or less, and think it's, you know, a set of numbers that's an imperfect science as it is, although, when you factor in that we see the deficit that they're reporting, and at the same time, seeing these inventories come down, that does fit together quite a bit. And the last thing I would wanna add on to that is that, I know you remember this, and maybe some of the people watching have heard this too, but after the whole silver squeeze thing in 2021, we had that LBMA report come out a couple of months later, said if demand had continued at that pace, there would have been an issue, so we're seeing that all within a couple of weeks. So, okay. Demand didn't continue at that pace. Yet, Rick Rule, who was running the PSLV fund, he mentioned in a couple of interviews, in the year following that, that in the beginning, it was just a retail thing, because what happened was we didn't have a physical shortage. We had a shortage of the inventory dealers could sell that was hedged, so they had to suspend sales for about a day and a half, on that Sunday, until the market open.

But Rick has mentioned several times that, in terms of I think it was 50 million ounces that they were sourcing for the PSLV, in the beginning, they were able to get it, and then he says, "We got what was available in Montreal. We took what was available in Ottawa. Then we took what was available in Toronto, Chicago, and New York, and Boston," basically anything that was within truckable distance to their vault at the Royal Canadian Mint, and they were having issues sourcing it, and I just think about that. Between LBMA saying they were close to running out, then funds like the PSLV having a hard time sourcing it, and then you have all these inventories decline, and a deficit since then, it makes you wonder how stable that situation is. Again, to be clear, you know, we could see something. The COMEX registered got down to below 30 million ounces. It's gone back up by about 20 million. So, it's not a matter of we're running out tomorrow, but certainly something that would fit with the theme of a deficit, and certainly be something that I keep my eye on quite a bit.

Craig: Well, and let's segue that into something that I know that, from following your site, you and Vince and Rafi have been tracking on a daily basis, and that's that spread between the New York or the London price versus Shanghai. You know, in a logical world, you'd think there'd be some arbitrage, you know, where you buy in one place, sell in the other, and that spread narrows. But the spread persists, and actually has been widening. Do you think that's related to this, I don't wanna say shortage, but drawdown of above-ground physical?

Chris: Well, it certainly could be. I mean, we continue to see the reports of a lot of metal flowing east. In fact, Jan Nieuwenhuijs had an article out where he covered that, in his calculations, he has People's Bank of China bought 735 tons of gold in 2023. In addition, the private sector imported 1400 tons. So, that's 2100 tons. Now, the annual supply, including mining and scrap, is a little bit less than 5000 tons, so we've read the reports of, almost, seems almost fair to call it gold mania in China. I got a little concerned when I heard the story about the silver [inaudible 00:14:04] where people are paying 30%, 40% markups, and saying, "Gold is the perfect asset. It can never go down." I think, obviously, any asset is gonna have ups and downs. So, perhaps a little frothy in some ways there, but I don't know if that's representing the major portion of demand, and the fact that silver premium elevated by about $2, and that's stayed that way for quite a while now.

Gold premium did widen out back in September, came back in a little bit, but I think that we're seeing this is a sign of the demand in the East for some of these metals, and when you think about what's going on in the world, no, we don't have a gold-backed settlement medium from the BRICS yet, although some of the comments that come out from time to time, obviously, Putin's talked a lot about gold. We've heard Sergei Glazyev, who is the macroeconomic and integration commissioner of the Eurasian Economic Committee, and he's talked a lot about how he sees gold could work. It sounds as if there is still, the Russian Central Bank is not entirely on board, and they're still formulating plans, but between that, they've speculated about a Moscow world standard exchange. And there was an interesting note from Yuri Ushakov, who mentioned a couple of weeks ago that they were implementing some sort of blockchain infrastructure. And he mentions, "We believe creating an independent BRICS payment system is an important goal for the future, and the task for this year has been to increase the role of BRICS in international money and financial system, and work will continue to develop the contingent reserve arrangement, primarily regarding the use of currencies different from the Dollar."

So, reminds me of what Zoltan Pozsar said in the In Gold We Trust Report last year, where, you know, we're in the beginning of a Bretton Woods III, and if you look at any one of these things individually, maybe it doesn't seem like a big deal, but when you start adding them up over time, you get to see a pattern here. And I think what's clear is that they're making arrangements to trade outside the Dollar. It's not just Putin, and not just Russia. Lula da Silva, in Brazil, had a speech shortly after they created a infrastructure so that they could trade agricultural commodities with China, and a couple weeks after that, he's saying, "Where was it decided that the U.S. Dollar has to be the reserve currency, and everything has to be priced in U.S. Dollars?" So, I don't think, I mean, maybe one day there will be a break point, where something does happen overnight, yet you can see how some of these counterparties are feeling. You can understand the reasons that they're feeling that way, and I think certainly that's playing into the rally that we've seen, really, over the past year now, where even with the higher rates, and central bank gold demand, and Chinese demand, Indian silver demand, which had a huge 70-million-ounce import in February.

And, just to put that one in perspective, that was a monthly record for India, and also, India set their yearly record about 9600 tons, 2022, dropped off to about 3600 tons in 2023, but they're already up to 3000 tons in the first two months of this year, which would put them on pace, if that continues, which, maybe it will, maybe it won't, but would be a higher number than we saw in 2022, and, of course, Alasdair Macleod had that report where the Reliance Industries solar plant in India has, according to some people he's talked to, had trouble sourcing enough silver from their refiner, and is taking delivery of COMEX contracts. So, you can see things going in one direction, in a certain trend, certainly, and we will just wait and see how that develops. Although, one last thing to mention on that, Silver Institute had Oxford do a study of the industrial demand forecast for the next 10 years, and they had 46% expected growth in industrial demand. So, if we're in a deficit now, which would mean you would need a higher price just to meet current demand, let alone if industrial demand...

Again, those are projections over the next 10 years, so we don't know exactly what the next 10 years are gonna look like. But if you have that, plus the fact that the cost for these silver miners continues to go up, and even if you had $35 or $40 silver for two or three years, to the point where silver industry believed, "okay, this is the price now," if the deficit is as big as Silver Institute is calculating, I'm not sure that even the $35 or $40 price brings back enough production online that you're gonna fill that. So, those are some of the things that are happening, and we sit here and watch as it converges with what's happening with the Fed, and the trading on the COMEX, but certainly, interesting set of circumstances taking place.

Craig: That was a great summary. And you just rattled off a bunch of stuff that I'm sure people watching, you know, it slipped past them over the course of the month, so thank you very much for that. I'm sitting here laughing to myself about silver [inaudible 00:19:42] Someday they're gonna come and want those gigantic bars that are just behind you. I mean, those things... Anyway, I'm just kidding.

All right. So, let's wrap up, Chris. The new quarter will begin on Monday. We'll get the next jobs report. Hmm. Maybe it'll benefit the bureaucrats at the BLS if the Fed's gonna start cutting rates, that is this next-level thinking, they'd have to go, "Well, if the Fed's gonna cut rates if the unemployment rate goes up, maybe we should massage those numbers down, to get..." Anyway, it's probably giving them too much credit to think at all those multiple levels. But that's coming, on the first Friday of April, and we got a lot coming over the horizon. What will you be watching, for the precious metals, in general, as the new quarter begins?

Chris: Well, unfortunately, I certainly have my eye on that bank short position, that, especially on the silver side, which, according to past history, would suggest that there could be a pullback coming here. Would be interesting to see how far that goes. I know you mentioned that, with all the fund buying that we saw over the past month, still only moved silver $2. So, I would be prepared that we could see a pullback in the coming weeks. Yet, you know, if you see that some of these trends continue, and certainly had the highest deliveries in silver since September of 2022, and just continuing to watch the inventories come down, and certainly the latest from the Fed, where, I think if you time some of those together, could create some interesting conditions, and we'll just keep an eye on it going forward. And I might add, I love your columns and podcasts around the labor report. I'm always like, "Oh, man. I hope he's able to make it through this one," because it can be maddening to watch, but appreciate that you're doing that, and that you put such good content out there.

Craig: Well, that's kind of you to say. Yeah, we've, at my site, we've called it the "BLS BS," for, really, since the beginning. Because it's always just statistical guesswork, and I'm sure as most people have followed, the last 12 months, 11 of the headline numbers that are reported that first Friday of the month have eventually been revised lower. In fact, the most recent one was revised, like, 60% lower. So, they're kind of phony baloney, but I wonder if maybe they'll be printed out lower, to get Powell to start cutting, and help the economy, help the stock market, all that kind of stuff, with the election pending. Ah, we'll see. But it definitely is gonna make for another fascinating month next month.

Speaking of fascinating, like I said, you do great work at your site. I've known Chris for, like, geez, Chris, what, dozen years now? Most of the people that contribute on your site, I know all of them as well. I encourage everybody to check it out. This is the time when you need as much independent, objective information as you can get. You can find that at arcadiaeconomics.com. You can also find it at sprottmoney.com. And so, on our way out, I just want to encourage everybody, like I said earlier, if you're watching this on YouTube, listening to this on, you know, whatever audio podcast platform, hit the like or the subscribe button, because then, as new content comes out, you get a notification. And of course, with sprottmoney.com, we're gonna have stuff all through April. We'll be right back next week, with "Precious Metal Projections," with Chris Vermeulen. There will be articles posted all month, and you just don't want to miss any of it. So, Chris, with that, thank you so much for your time. You just do such a great job of keeping track of all this stuff, and it's been very insightful and very helpful to speak with you, so, thanks for taking the time to visit with me.

Chris: Well, thank you, Craig. Appreciate being here. Always great to see you, and look forward to following how things go going forward.

Craig: See where we go from here. And from all of us here at Sprott Money and sprottmoney.com, thank you for watching, and we'll have more content for you in April.