Forget the COMEX: What’s Affecting Gold and Silver Right Now - Weekly Wrap - Up (October 11, 2019)

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

Craig: Hello again from "Sprott Money News" and sprottmoney.com. It's Friday, October the 11th, 2019. And it's time for your "Weekly Wrap Up." As usual, I'm your host Craig Hemke. And as usual, we're joined by Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Good morning. We've had a bit of a tough run this week so far, but lots of interesting things going on fundamentally in the stock world and the gold world, so let's have at it.

Craig: Eric, I'd be remiss if I didn't wish you a happy Canadian Thanksgiving.

Eric: Hey, thank you very much. And I think you guys might be celebrating something called Columbus Day on Monday. So, all the best to you for Columbus Day.

Craig: It's just another reason to go out and have a pizza and a beer, I think. But anyway, happy Canadian Thanksgiving. In honor, I guess, of Canadian Thanksgiving, please be sure to check out the Sprott autumn sale on the deals page of sprottmoney.com. You'll find maple leaves aren't the only thing falling the season with the whole selection of silver and gold bullion from various mints on sale right now. All you got to do is go to sprottmoney.com. Again, check the deals tab in the navigation bar, or to heck with it just give us a call, 888-861-0775, and we can take care of all your gold and silver bullion needs. The market is trying to take care of all of its needs this week, Eric, with all the headlines flowing around about this trade war. I don't know about you, but I kind of hope they get something done just so we can be done with it. I'm so sick of hearing about it.

Eric: Well, it's certainly front and center. If you'd asked me midweek, was there any chance of anything happening, I mean, particularly when they're slapping restrictions on Chinese companies dealing in the U.S. and talking about raising more tariffs, I would have thought there's not a hope in you-know-what that they would come to a solution. For some reason, there's been some chatter that, you know, things are progressing well. I mean, to me, I can't imagine that anyone could come to a deal that would have any particular meaning that both sides could agree to. So we'll see. I mean, we'll hear today what the results were, if any, and then the market will react accordingly.

And of course, the funny thing is gold going up and down every, you know, movement in the discussion of trade talks. I don't know why gold's got anything to do with trade talks. When I see the physical demand for gold by central banks, for example, who I don't think are buying it because the trade talks being good or bad, okay, and the consumer is buying it because trade talks are going good or bad. The primary reason for buying it is currency debasement, that's why people are buying gold and silver, it's got nothing to do with trade talks. But of course, the guys in the COMEX pitch use any excuse to kind of slam it. So that's what we have to deal with.

Craig: Yeah. Price of gold, it had nothing to do with the fundamentals or anything else, they just take 1% off in 90 minutes if they can. Let me add some color to the things you mentioned, Eric. Central banks, as most folks know, bought the most gold they have bought in about 50 years last year at 651 metric tons, they're on a run rate through August to do 680 metric tons this year. The global ETFs are seeing a big surge of demand as well. You know, whether the gold is actually there or not is a whole other story, but we're within about 30 metric tons of the peak amount of gold that's allegedly in the ETFs. Physical demand certainly is soaring, Eric, but again, that doesn't seem to matter much to that digital price.

Eric: The only one that really has, I think, a definitive impact on today is palladium. And you had that wonderful interview on your site with David Jensen who talked about the whole palladium market and how there's likely a physical shortage right now, and of course, it's hitting record-high prices, higher than the price of gold. And it tells you that when you finally do get that physical shortage, what's likely to happen. And of course, I talked before about silver and the likelihood of a physical shortage because there's not that much available for investment.

And I always imagined, you know, apparently Russia bought about 34 tons of gold in September, a huge amount. I said, man, if they just put half that money in silver, there'd be no silver. You know, like one country, a half a month's gold purchase and it's over for silver. And you'd think that someone might figure that out, particularly like Mexico, for example, should be buying silver here and helping out their whole mining industry because they're one of the biggest miners in the world, or some South American country whether it's Argentina, or Peru, or somebody like that, Bolivia. If just one of them turned their attention to the money of silver, it would be over and we'll just forget the COMEX because it's all just paper shuffling.

Craig: While we're talking about COMEX, before we get to the economic news, and before we get to the miners, I've got to drop this on you. You may recall, it was in, I think, November of 2017, we were talking about these exchange for physicals where allegedly COMEX contracts are exchanged for physical, that's what EFP stands for, and there's these massive numbers every day, there were 11,552 contracts posted yesterday. You asked me to start keeping track of these. So, Eric, I got to hit you with this number just to get your response. Since late November, not even two years ago. I've tracked every single day the total that's posted, the total amount of contracts, COMEX contracts that have now been exchanged for physical in less than two years is 4,168,992. Now they're allegedly 100 ounces per contract, so that's almost 417 million ounces. And if you do the math, that is just shy of 13,000 metric tons.

Eric: And it's five years or four years of all the mining production in the world in two years.

Craig: In two years, exchange for physical.

Eric: Like, come on, what a joke. I mean it's the whole COMEX LBMA thing, I mean, I've sort of read articles where people say the LBMA is just a joke. I mean there's nothing physical ever happened there at all. I've actually seen these charts that show what happened when the LBMA is opened, the price of gold always goes down. So if you just kind of, I think from 2000 to today, just the price change when the LBMA is open, gold would be worth about $7 an ounce today, $7, if you took the net change in the LBMA when it's open. Whereas if you took it when Asia was open, a non-LBMA, it'd be at $20,000. So you can see the impact of the LBMA and it's all BS in terms of physical movement as far as I'm concerned, as is the COMEX, it's a joke.

Craig: Thirteen thousand metric tons. All right, anyway. And again, before we get to the shares, there was some pretty significant economic news as we've gone through the week. This trade war stuff dominates everything as if it's, you know, the key linchpin, but there's no inflation in the U.S. Inflation at the wholesale level was actually negative, CPI was flat. We know all about the PMIs last week and how we're heading into a contraction, not only in the U.S. but in Europe. Just your thoughts and what you've seen economically this week.

Eric: It's the same old story, okay. All the [inaudible 00:07:47] non-supportive of a stronger economy. I really blanche whenever President Trump says, "We've got the strongest economy, yeck, yeck, yeck." And then, you know, look like GDP is going to be in the ones this quarter. You have, for example, industrial production in India for the last report of the month was down, Germany is down. Industrial production is, I think, down now in the U.S. Like, who's kidding who about the strong economy? There isn't a strong economy. And we're going to start seeing layoffs. Look at all these bank layoffs that are announced, HSBC, Wells Fargo, there's other ones out there, probably Deutsche Bank, Credit Suisse, strikes, come on. Like everything that happens has been very constructive for people going into price metal. Of course, the biggest thing is that balance sheet expansion. What's the terminology you use?

Craig: The large scale asset purchase plan. It's not QE, Eric. It's a large scale asset purchase program.

Eric: LSAPP.

Craig: LSAPP, exactly. Well, and think about it, between the trillion-dollar deficits and the bonds that are coming due in this next current fiscal year that began first of this month, I mean, it's more than $3 trillion that has to be funded. I mean, that money's got to come from somewhere so the Fed is monetizing the debt, but it's a large scale asset purchase program instead.

Eric: Yeah, yeah. And of course, the fact that they had to have LSAPP was because there's a liquidity problem in the banking system, which might have a lot to do with Deutsche Bank, by the way, or other European banks. When you look at the price of the shares of these companies, I mean between Deutsche Bank and Commerce Bank, they're probably trading at one-tenth of what they were trading at four years ago. Since when can a bank stock trade at one-tenth and you imagine it's still viable? I mean, it just makes no sense whatsoever. And the same is true across all European banks and I think Japanese bank stocks are somewhat akin to that. So there's something going on in the banking business that you and I don't totally understand yet.

Craig: Right. All right, let's get to some of the questions this week. Again, if you have anything you'd like us to address, we'll certainly take a look at it. You can just email us that submissions@sprottmoney.com or you can tweet a question @SprottMoney as well on Twitter using the #asktheexpert. Eric, I've got a list of companies this week, but before we get to that, I do have kind of a basic question somebody wanted me to ask you. When a mining company sells its gold, where do they sell it? They sell it in London, Vancouver, New York? And do they have to sell all of their production every quarter or can they just sell enough to cashflow things and hold some back?

Eric: Sure. Well, let's deal with the second part of the question. They don't have to sell any of their gold that they don't want to. I mean, typically they have to in order to meet the payroll and other expenses but they don't have to sell it, there's no time that they have to sell it. They could decide, you know, if they think quarter end's going to be a bad time to sell it, they could choose not to sell it. Now, there are ways to theoretically have it booked as revenues but still have gold. So for example, you might sell it to the Royal Canadian Mint, but at the same time, you're buying some gold with the proceeds. Okay? So you've sold your production but you've taken the cash and invested in gold. You'd get to at least record the sale but you also, instead of having cash, you can carry gold. There aren't many mining companies that do that.

I've always tried to encourage the mining companies to own gold, it's way better than paper. Look at what would've happened this year. Look what would have happened from 2000 on, would've gone from $250 gold to $1,500 gold. I mean over that time period, it would've been a way, way, way, way, way better investment than having cash. So I would encourage them to do that. Who do they sell to? They normally sell to a mint or someone in the precious metals trading business of which there are a number of companies that trade gold. So you pick one or the other, there's probably all of about 15 guys in the world who are the primary purchasers of gold, most of them being mints and/or big trading companies and oil refineries. So that's who they sell to.

Craig: Terrific. Thank you for that. All right. And just kind of a disclaimer again, we've got the long list every week of names and I run them past Eric before we get started. If you don't hear the company that you asked us to take a look at, it's simply because Eric doesn't have an opinion on it. So to save time, we try to kind of cull the list back to companies on which he does have an opinion or know something about. So let's start this week with Discovery Metals. Can you say anything there?

Eric: Sure. Well, you know, it's interesting, I was going to point out to the listeners that sometimes they know I know the name because I participated in the transactions but I might be restricted in talking about it because the transaction hasn't completed or closed, Discovery is one of those, so I can't make any comments.

Craig: Fair enough. How about something called MacDonald Mines Exploration?

Eric: Sure. MacDonald Mines, oh boy, have I completed that transaction? I know I've had a transaction with them, I think it was closed, I can assume it's closed here because they've had some pretty interesting results up in their Scadding property, which is northeast of Sudbury. I really like the intersection they have. I like the former drill holes that had been drilled up there by various companies over the last 20 or 25 years. They've got former holes that are coming, which I think at least three of them have signs of visible gold in them. And one of the holes, number five, could be quite exciting because I think there were four intersections of visible gold in that particular hole. And it looks like they have a new reinterpretation of the geological formation up there that previous people were drilling it improperly. So I'm quite excited by what can happen and, of course, one of the reasons I'm excited, it's only a $20 million market cap, but it looks like it could be shaping up here. Trying to encourage people to go look at the drill results.

Craig: How about SilverCrest?

Eric: Well, SilverCrest, it's a stock I don't own, but I'm very aware of it, it's run by great people. They have a wonderful deposit that they keep drilling up and keep finding more and more silver, and gold for that matter. It's gotten away from me in the sense of it's larger than probably where I want to start buying. But I think it's going to be a very successful company and it's great for conservative investors. I think if you had to buy a big silver play, I would think that that would be right up there with the best of them these days. I typically, you know, fool around in smaller companies where the market hasn't recognized any success to date. The market has recognized the success of SilverCrest, but I think it's got a long way to go still.

Craig: I'm sorry, I'm laughing at myself, "Fool around in smaller companies."That's one way to put it. Okay. Alexco?

Eric: Alexco, silver producer up in the Northwest Territories, great for body, lots of upside. I'm an owner, I'm not a huge owner of the company. I'm not even sure what my percent interest is but I think it's under 5%. It's a very good company, it looks like they're making good strides. I haven't bought it in this recent rally, it's performed beautifully. I think it will continue to perform well as silver goes up here.

Craig: All right. And then finally, two that I know you know a lot about, could you speak to...let's start with Wallbridge? Several questions about Wallbridge and I know you've got some stuff to share?

Eric: Yeah. Well, Wallbridge came out with drilling results this week and there were three or four significant things. The first significant thing is that they are finding they have structures that are kind of going east-west. Typically, they used to go northwest to southeast, now they're kind of almost going east-west, a new sense of shears. They're referred to as Orion and Andromeda, but you can see all sorts of shears in the diagrams that they put out along with their news release. So that's one thing, these new sets of shears that are going east-west. But then they said they stepped out 800 meters, which is a gigantic step out, okay, that just doubles the size of the endowment if they hit something, and they did hit something, they hit a shear like the Andromeda and the Orion, 800 meters to the north-northwest. So that could have very significant results for the total endowment, i.e. could double the size of it.

The other thing that was interesting is that they said that as they drilled deeper, the existing structures widen out and they particularly referenced a 48-meter intersection of an existing zone called Tabasco where they have lots of visible gold and they'd send it in for rush assays. I can't begin to tell you that as something goes from 5 meters to 48 meters in width, that's 10 times bigger, 10 times bigger. And this is in the Abitibi region where there are mines that go down four kilometers already in the Abitibi. And what if this thing goes down and gets bigger, which would suggest there's a source below it? Like it could just blow out here.

So we got a doubling going north, we got, you know, almost a 10-bagger with width. Oh my God, this thing. And well endowed, that 48 meters, okay. We don't have the results yet, but it could be quite stunning. So I would say that their drilling release was very, very constructive, I mean, fingers crossed that we get something big in the 48 meters. I know it's in for rush assay, will be here relatively soon I would guess.

Craig: Eric, you're being very generous with your time, but I do want to close with Kirkland Lake. They had production numbers this week, stock, of course, went down. Any thoughts there?

Eric: Why not? All good news is to be sold, right? So yeah, they produced 248,000 net-plus ounces in the quarter. That's up from, I think it was, 214,000 in the second quarter. I think their adjusted earnings were at 51 or 52 cents. I would guess that with the increased throughput, which costs nothing because of grade, and the increase in the price of gold, I'm thinking the number is going to be pushing 80 cents for the quarter up from 51. And of course, the company is suggesting that the fourth quarter output will be even higher. So, you know, we could be looking at maybe this quarter we're in now, with the way the price is, I mean, we could be looking at 90 cents to a dollar in earnings.

Early days yet, I mean, I don't know what the production's going to be but based on their full-year projections, I mean it could be as much as...pushing, I think, as high as 300,000 ounces. So even another 20,000 ounces would give them an extra dime a share this quarter that we're now in. So I think the earnings certainly justify the stock price. As I mentioned, they had good drill results at [inauidble 00:20:24], we're still waiting for something from Fosterville, like the new swan or another swan zone. We don't have that yet, that's the missing ingredient. But they believe they have a great shot at it so we'll have to wait and see until we get the drill results down in Australia. But everything looks pretty good.

Craig: Terrific. Before we go, just a reminder to everyone. We do these "Wrap Up" segments every week, but once a month, Sprott Money News also hosts something we call "Ask The Expert," which is your chance to submit questions to industry experts, financial experts from around the globe. This month we are welcoming back Nomi Prins, who many know as an author, financial expert, investigative journalist, she's just terrific, she is so smart. We're really excited to have her come back and answer your questions. So please send them to us by email at submissions@sprottmoney.com, of course, use that #asktheexpert and send them in by Twitter. I get to record that and I think it's next week or the week after. I look forward to getting caught up with Nomi again. Eric, I look forward to getting caught up with you again next Friday.

Eric: Well, I must say you get great guests there and they're all very interesting and well known in the precious metal area, so I encourage everyone to listen up. And, you know, I think we've got lots of good things going for us and I'm going to look forward to next week as well.

Craig: Sounds good. Well, have a great weekend and Happy Canadian Thanksgiving to all of our listeners up in Canada. And we'll talk to you again next Friday. Eric, all the best, my friend.

Eric:Okay, you too. Have a good one, Craig.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next week.