Gold is About to Break Out

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

Craig: Well, hello again, everybody, from Sprott Money News at sprottmoney.com. It is now the end of January, and it's time for your "Monthly Wrap-Up." The month of January is already over with. I'm your host, Craig Hemke, and joining us today to wrap up the month is my old friend Andrew Maguire. Andrew is a director at Kinesis Money, and a world-famous trader of all things gold, and it's good to have him join me this month. Andy, good to see you, my old friend.

Andrew: Hey, great to be with you there, Craig. And yeah, I mean, nice, impromptu little visit. Didn't even have a shave for you.

Craig: Well, I mean, that's what old guys are supposed to do. We're supposed to look like, you know, grooming habits out the window. You know, we don't even care anymore. Hey, before we get started, just a reminder of what Sprott Money's doing here this month. You can actually can extend it all the way into February. It's a leap year, by the way, so you get an extra day in February. Through February 29th, if you buy yourself a thousand-ounce silver bar... Of course, Andy uses those to work out. He sits there and bench presses them, and does all this. But if you buy a thousand-ounce silver bar, you can store it at Sprott Money for free for 90 days. That's not a bad deal. So, go to sprottmoney.com. You can get more details there. Of course, you can just pick up the phone and give them a call, at 888-861-0775. Andy, I bet you got a bunch of thousand-ounce silver bars laying around, don't you?

Andrew: Yeah. As you say, it's good for working out.

Craig: It's like, if it never snows where you live, you can put them in the back of your car, and get better traction. You know, there's a number of things you can do with those things, but...

Andrew: I mean, do you know what? Most people have never lifted one of those suckers. They are very, very heavy.

Craig: I mean, we're not joking around. I mean, it's 60 some-odd pounds, right? You can sit there and curl them. Anyway, a great investment, especially with silver. We're down here, $23, $23.50, something like that, very near the cost of production. That's pretty good investment, with definitely more upside potential reward than downside risk, you would think, from here. Andy, it's been a heck of a month. We'll wrap it up. We're recording this ahead of Powell's FOMC and press conference here on the 31st, so we're just gonna go with what we know. It's been a heck of a month. Gold's been under pressure most of the month, but it's kind of rebounding here late in the month. What have you seen?

Andrew: Yeah, exactly that. I mean, to be honest, not unusual to see this kind of action. If you remember, last year, we opened up and we had the opening of Basel III legislation, and we had the gold being, morphing into a first-tier asset class, and we had the usual pushback from the officials. And we've seen a bit of a pushback, because, hey, gold is looking like it really wants to break out. And so we got a lot going on, and I think, you know, the stories are enormous. I mean, put geopolitics aside, just for a second, because obviously there's a lot of reasons to want gold in an unknown situation like now. But that aside, and, I mean, as you say, you've got Powell coming up shortly. What we're talking about, an official, a little bit of an official intervention, however, as much as every single technical analyst out there was expecting very much lower prices, into the $1900s and in some instances, [inaudible 00:03:46] lower than that.

But basically, what's thwarting that is basically de-dollarization, and we're seeing every ramp in the dollar being sold into. And it's not being sold into to buy the pound, the euro, or any other FX currency. Yes, it is the least dirty shirt in the laundry bag, but we're seeing gold being purchased. And I think one of the things where we have a really good insight is into the wholesale market, and we deal with a lot of first-tier liquidity providers, who are very open about the fact that there is huge central bank interest in gold. Silver, we'll talk about silver in a minute, because, you mentioned silver, and yes, it is a hell of a bargain. But central bank buying is enormous. And I think you wouldn't notice that had you seen... If you look at the, just at the...if you look at a short-time chart, and you take a chart from the first of January, and you look into the end of the month here, well, of course it was first notice day, and but you always expect first notice day to be probably the point where things turn around.

So, yeah, and, but essentially, you wouldn't realize, if you looked at that, because it's all leverage against an unleveraged physical market, how strong the central bank buying is. And it's nothing... Geopolitics is obviously another factor, but this is about de-dollarization, and it is massive. And it is so far advanced. And I just did something very recently on that, and it is not realized how advanced that is. And I don't know if you happen to have seen the last episode I did of the "Live from the Vault," but brought attention to a chap called Setser. And this guy is the former U.S. Trade and Treasury official. His name is Brad Setser. And he assessed that China's reported $3.24 trillion of foreign exchange reserves was only half of what is realized. And he was talking about, "This presents a new risk to the global economy," and he's, this, I mean, his words. He said China is so structural to the global economy, that obviously, his concern was that this can have an enormous impact at some point. But I guess what we're saying is, and what our first-tier liquidity providers are saying, which is I'm hoping provides a bit of an insight, because that's an angle that we really have a close look at, really, everyone is saying, "Hey, guys. This is...where do you think these foreign exchange, this extra $3 trillion of foreign exchange reserves sit? You think they just sit in the dollar?"

[inaudible 00:06:58] you need to de-sanction yourself. You need to... I mean, there's a hell of a lot of stuff coming down the pike. So, and this, to me, explains why we have an estimation, from all our liquidity providers, the estimation is somewhere plus or minus 40,000 tons. And a lot of people have come up with estimates of 20,000 tons, to more than 40,000 tons. But that kind of really backs up what we really, really believe. And I think, when it comes from the kind of people that we're dealing with, who are first-tier liquidity providers, in Russia, China, and in that part of the world, I take notice, and I really believe that this extra $3 trillion that, let's face it, you're talking about the ex-former Treasury official who already had figured that these shadow banking reserves were in China. So, it's interesting, interesting times. Dedollarization, to me, is so much more advanced than anyone thinks.

Craig: I think that's probably gonna be a pretty big driver going forward through the rest of this year, right? I would imagine that's reflected in the central bank demand, which we've now had two years in a row, right, the highest central bank demand in over 50 years.

Andrew: Yeah. Yeah. That's exactly right. Correct.

Craig: So, Andy, I have thought, you know, you mentioned technical analysts thinking this last pullback was gonna go to $1800 or something like that. You know, and early in the year, I saw a technical analyst saying, "Oh, yeah. Gold's going to $1200," and that sort of thing, just based on where real interest rates are. And I thought all along, "They can't do that. Demand would be so great, you'd break the whole system if they let the digital price fall that far." Do agree with that?

Andrew: Yeah. I think if... Here's the thing. If one just looks at, if one believes that the market is the COMEX, if you believe in your mind that that is the only thing you need to look at, if you don't look at what is underneath all of that, then yes, I can believe how you could say, "Technically, we could go to zero in silver." Technically, we could go to zero. And it's so, you know, these guys, and these CTAs, what I call the non-sticky guys, the guys that don't realize that gold is a first-tier asset class, who employ gold as a hedge to other risk investments, and there is a certain percentage of these CTAs who used to be very much just rinsible who are not rinsible, because they're using gold for, even though it's paper gold, they're using gold for what it really is, what it says on the box, you know, as a risk hedge. But it's the largest percentage of them. And, you know, you had a Bloomberg...Bloomberg was estimating that the oil market is going by these CTAs running some, there were between 70% and 80% of all oil trades, run with these CTAs, right? Well, they also mentioned in the same report, these are the same guys that trade gold and silver. And so, is it any surprise that these guys can be led by the nose? And we call them the useful fools of the cartel...

Craig: Right. Right.

Andrew: ...because you know exactly... You're running the book. You hold the book on their... You sell them credit, right? And you know exactly where their credit is untenable. So, again, this is the same story, Craig. I know you know this as well as, better than most people. Once you've sold them the credit, then you know where their pain point is, you just lead them to do something, and then out they go. Rinse.

Craig: Right. Right.

Andrew: And there is, so, yeah, technically, if you didn't look outside of that COMEX bubble, and you didn't realize, "Hang on a minute. That's not plausible, because look at all this central bank demands..." Now, and there's a little thing called T+2 demand. So, the minute gold became a first-tier asset class, and it is NSFR-compliant in the over-the-counter markets, which, unfortunately, [inaudible 00:11:26] U.S. traders are not able to touch since 2013, are kind of evicted from the over-the-counter markets, forced to trade in this bubble. So, it's understandable, well, why would you look at anything else? You look at the COT report. And you see, "Oh, look at all this short interest. Swap dealers are sort of gross short." Even though they might be net, you know, net long on a intra-month basis. You know, but what they're not realizing is, hang on a minute. There is, because the related market, the over-the-counter market, which they require a hedge on, because their over-the-counter position is physically-backed, because it has to be physically-backed to even, to be a provider, a liquidity provider in London, where...say, in London or the over-the-counter markets, wherever you are in the world, you have to be NSFR-compliant. You have to have the physical to back that position.

So, then, you can run the short, you run the short hedge in the COMEX. So, when you look just at the short position, you're missing the fact that, hang on a minute, there's a long on this. And yes, you know, we know, that they'll leverage that position. So, you've got these guys, CTAs to be pulled by the nose to do stuff. So, yeah, you can probably figure out, "Wow, there's a point...Yes, it's unbacked, but maybe I'll throw a few extra shorts in there." And knowing that, "Well, I can probably get these guys out at a certain point, end of the month, options expiry," whatever it might be. But I think, to answer your question, the game's changed, because, now, because you've got this physical backing to, really, what is the 10-times-larger market, and we're looking at this tail wagging that dog, the COMEX tail wagging this dog, we're finding that it really is, is that we're reaching a point where the physical market is really, really going to dictate the extent that you can take the gold down.

Craig: Right.

Andrew: It is simply not possible, because there's an EFP back door, so the minute...and you watch the EFPs every day. You track them. You talk about it all the time. But that EFP is your back door. It's the Achilles heel. It is the ability to take a COMEX warrant and transfer it over to a physically deliverable NSFR position, which has to be delivered. So that is a back door out of the COMEX. So, you play that game too deep... And of course, the insiders, who have a foothold in, who are a market maker in the COMEX, market maker in the over-the-counter markets, well, of course they're not gonna expose themselves to a delivery obligation they cannot or do not wish to fulfill. So, yeah, I think we're looking at a much healthier market.

Craig: I can kind of sum it up as, the dips will continue to be shallow, and not prolonged and extended, like some of the technical analysts would tell you. And we saw that just this month. What, we were down $50 at one point, mid-month, and now, as we wrap up the month, we're almost all the way back to even on the year, in terms of both the spot price and now the new front-month April contract on COMEX. Andy, let's shift to silver, for the back half of this. I just saw this morning another report from the Silver Institute, you know, if we wanna talk about physical demand. They're projecting 1.2 billion ounces of physical demand this year, and that, you know, I guess still has some rather conservative investment, or retail demand components to it, because, as you've taught me, you know, when the price of gold gets up, people in India, Turkey, places like that, they start to buy more silver. So I just wonder if the whole picture for silver doesn't, again, present a pretty compelling image, in terms of risk versus reward here. What do you think?

Andrew: Yeah, and you just, I mean, this is how we opened the show, silver. I mean, silver, to me, is really [inaudible 00:15:53] as we know, is the most undervalued commodity on this planet Earth. There is no other. We all know that. But it doesn't help, when you have this game, really, played inside this bubble. And so, it's the dislocations that we're looking at. And so, when we made a bottom in silver, that spike bottom that we saw, what, about a week or two ago? I [inaudible 00:16:20] haven't got the chance [crosstalk 00:16:20]

Craig: Down to $22.04, what, 10 days ago.

Andrew: There you go. And you know exactly what day it was. Well, but that was the day, that very next weekend, and on the Monday, we had Indian wholesalers... Now, these guys never pay over spot. They don't have to. They know... They're savvy guys. They know exactly where to buy thousand-ounce bars. Refiners, Dubai, places that you can buy it under spot. Ran out, completely. Now, they weren't just chasing us. They were chasing every single desk I know, from Switzerland, you name it. They're saying... They'd already been through all the refiners in Switzerland, and Germany, LBMA bars. They're not too bothered about an LBMA bar. But yeah, it's because they're gonna melt it down. They're gonna do all that stuff with it. So, they want LBMA bars. They wanted it from the refiners. So, seeing as the refiners had no more to give them, and this was on the Monday, following this spike low, and we also saw 503 tons suddenly enter the ETF, the SLV ETF, that very next day... But what it told us was, "Hang on a minute. These guys have no physical...they have no thousand-ounce bars, or not enough thousand-ounce bars, so they're willing to pay over for it." Now, I think what fooled everyone COMEX-centric was, "Hang on. Look, look, retail demand's soft. Well, let's short the hell out of silver. It's soft," you know. But what they're failing to see is on the wholesale side, it was not soft. And it takes a while to, as you know, to feed through. And by the time it feeds through, and you're seeing $10, $12 premiums in coins, it's already done. You know, it's already done.

So, to me, it was really interesting that silver... And I really believe that silver, at 90-to-1, which is mind-boggling, actually mind-boggling, to me, to even think... I mean, what kind of a synthetic bullshit trade that is, where you can actually believe, in this world, that it would take 90 ounces of silver to buy an ounce of gold. I mean, it is pure synthetic-ness. And as this de-dollarization feeds through, and again it's going to affect silver, big time, and as gold rises, there comes a point where you cannot drive it to 100, 120... What are you gonna do? Drive it to 120-to-1, when gold is gonna be revalued, what the hell's gonna happen to silver? Well, I don't know if you see the same level as me, but most of our liquidity providers figure, you get over 35 bucks in silver, goodbye. We're in $50. We're at probably $200. At that point there, you don't...you can throw everything out. It's no longer a synthetic market, because anyone that is in trading that ratio trade is gonna dump both sides. They want out of that trade. It is no longer a feasible trade. And that means that's where the bubble is. To me, that's where this synthetic world of 90-to-1 lives. Because other than that, should be 8-to-1, should it?

Craig: Yeah. Right. Hey, it's funny you mentioned the CTAs, the hedge funds being led by the nose by the banks. Four times, last year, those banks, if you got, dig into the weeds and the Commitment of Traders report, the hedge funds ended up being net short, the banks net long, the swap dealing banks, and it immediately marked a bottom and a short squeeze. I mentioned that low, that you said, back on Monday, the, whatever it was, 22nd, we dipped all the way down to $22.04. Tuesday, price began to rally a little bit. It was still $22.20 or something, Andy. But that was the COTS, the Commitment of Traders Survey day. And we got that Commitment of Traders last Friday, and guess what? The funds were net short again, as of Tuesday. No, you're kidding. I'm stunned. And now, price is what, a dollar, dollar-and-a-quarter higher? Off the lows already? Gee. Gosh. Amazing.

Andrew: And the swap dealers, at that point, even at that point, before, before you'd have seen the rest of that, always the big moves, always happen after a Tuesday, as we know. And by design. So, because that report could actually be published at the end of every day. We know that. They have the data. So, just withholding it for... So, in other words, that is a tool of the cartel. So, in other words, why are they... So, when they fix it at that...when they captured it at that level, they couldn't actually hide, the swap dealers couldn't actually hide, they were gross long, and gross, you know, they were gross long, as well as net long.

Craig: There were net long.

Andrew: Well, I mean, who's gonna win this bet, for God's sake, in this bubble world?

Craig: Right. Right. That's what I've always said, Andy. If we all recognize, at tops, that the banks are heavily short, and the funds are heavily long, and we know what's gonna happen next, well, when it's the opposite, why wouldn't you expect the same thing? And it's playing out again. It'll be fun to see where we go from here. Just as we wrap up, Andy, some thoughts, looking ahead to February, it's gonna, you know, get this Fed behind us, we got the next jobs report on Friday. We got all, you know, go through all the data again. What are your thoughts as February begins?

Andrew: Yeah. Well, okay. Well, obviously, we've got Powell later. And he will already have the Non-Farm Payrolls data. So, because, obviously, that's on Friday, of course they have the data. All the insiders have that data by now anyway. They had it probably on Tuesday. So, I would watch, personally, what, if what he says... He will know what that data is, so I kind of...he'll give it away. He'll give it away when he talks about strong or weaker jobs number, or whatever it might be. But to be honest, it's all bullshit All of that is irrelevant. It is short-term chart chatter. Of course, we are moving into a year where we're gonna see a revaluation in gold. And of course, a revaluation in gold, because de-dollarizing is going on. And that hasn't even...we haven't even talked about geopolitics. I mean, we're talking at war here. This is a really, potential, very... Of course we're gonna see more physical demand coming in. People are looking for safe havens now.

So, you know, and I think February is gonna be a super-strong month. I think we're gonna have a super-strong year. We're gonna have a revaluation, I think, personally, in the first quarter, just looking at everything. And I know, I mean, we're talking... I mean, this is a strong thing to say, but it just doesn't add up to have gold at these levels. It doesn't add up. There's something...the synthetic side of this trade is not viable. It's just not possible to keep, with such strong demand. And because the commercials, who are exposed to the physical market, they don't wanna give up their big gold hoards, and their big silver hoards. Of course they're not gonna give a penny of the, not one ounce is gonna get away. So, if they can't lay it off on one of these CTAs, of which we've talked about that bandwidth shrinking, then, of course, the price has to come to a point where it's, they're willing to let some gold go.

And I think, so, there's where we are, and it's tight, and the physical market is too tight. And one of the beautiful things, I think, and I know we're sort of trying to wrap up here, but you have a huge process going on in the States, which really has my attention. And it is this safe money, the legal tender legislation that's coming through.

Craig: Oh. Yeah. Yeah.

Andrew: That's huge. And I know you do work on that. Maybe you could tell me. What do you think? I mean, that, because that puts gold and silver on the same footing as Federal Reserve Notes.

Craig: Right.

Andrew: And it's about breaking the debt cycle, with sound money. I mean, what are you seeing, my friend, there?

Craig: Yeah. No, it's a movement that's gradually gaining more and more momentum, and you get these individual states, where their laws, you're not taxed for either, you know, for gains or anything, if you liquidate and convert your metal back to fiat. You can use your metal to purchase other things, in some places, like real estate. There are big states like Texas that are building their own depositories. So, yes, it's something, kind of like the de-dollarization thing. It's happening in the background, and you know it is generating positive momentum, but it's not necessarily something you see every day, reflected in price.

It does, however, though, provide that floor. And I think that's probably the most important thing that I would take away from our conversation this morning, Andy. If you're a buyer of physical gold and silver, and you're sitting around, waiting, "Well, I'll buy it the next time it goes to $1800," that sort of thing? You might not get that chance. And so, the better idea, at least in my mind, is just be gradually adding some. And you use a place like Sprott Money to just have regular programs, where you buy an ounce a month or something like that. You take some of your dollar savings, like these central banks are. They take their dollars and buy physical gold, so why wouldn't you take your dollars, or your Canadian dollars, or your Euros, or whatever, and buy some physical gold? I'll just add one last thing as we wrap up. It's tax season, Andy. I know you know that, right? Oh. I gotta do that. That's hanging over my head. I gotta get all my receipts, you know, and all the other stuff that we all have to do. But also, it means it's time to fund your retirement accounts. And that's another place where you can own physical gold and silver. Sprott Money can help you with that, whether it's an RSP, up in Canada, an IRA in the U.S., Sprott Money can help you transfer your funds into physical metal. Not a bad idea. Again, sprottmoney.com, or of course, call them at 888-861-0775. Andy, it's always so fascinating to speak with you. I thank you so much for spending some time with us this morning, and I look forward to doing it again sometime.

Andrew: Yeah, great to be with you, Craig, and good luck with everybody who follows you. I think they should, and I think you provide a lot of service, good service, to this whole industry, to be honest.

Craig: Well, thank you, my friend. And thank you, everyone, for watching. Remember, keep an eye on this channel wherever you're watching it. We'll have a whole bunch more content from Sprott Money as we go into February. It's gonna be a volatile month. So, sure keep an eye on us, and we'll be sure to talk to you then. Thank you, Andy. Thanks everybody for watching. Have a great rest of your day.