Weekly Wrap Up

How the Trade War Affects Gold - Weekly Wrap-Up (May 17, 2019)

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May 17, 2019

Precious metals prices took a roller coaster ride this week as the trade war with China gained heat. What can we expect in the weeks ahead? Eric Sprott is back with all the gold and silver news you need, including:

Why performance isn’t matching interest

The remarkable numbers out of India—and what it means for you

Plus: Is Nazi gold being used to manipulate price?

“We see evidence of world trade slowing down. We see it in airport traffic. We see it in ship traffic. We see it in truck haulage in the United States. We saw it in retail sales this month,that we’re down .2%. So there are many, many indications that a slowness is taking hold here. And, of course, the more the trade war manifests itself—i.e. we put on the tariffs and people start having to pay more for the same goods—that is not going to be a good situation. And, of course, the worst part about it all: the government takes in the tariff, and the people pay it. And the people that are paying it are the people who can’t afford it… It’s not a good situation that we have.”

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Male: 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 17th, and this is your Weekly Wrap-up. I'm your host, Craig Hemke, and joining us this morning is Eric Sprott. Eric, good morning.

Eric: Craig, good morning. What a crazy week, but lots to talk about.

Craig: Well, that's for sure, my friend. And before we get started we always like to talk about some of these special services that Sprott Money offers, and a lot of folks who may not realize that Sprott Money can store and secure your physical precious metal for you. All you have to do is open a storage account with us and store your precious metals in any of our six global locations. Sign up for Sprott Money international storage and receive exclusive deals as well. Just call 888-861-0775 or visit sprottmoney.com for more details. It's been an interesting week for our precious, precious, Eric. We had a really good move on Monday and then all of it reversed back out on Thursday based, I guess, on these trade war fears that haven't gone away. What are your thoughts as we're now on Friday?

Eric: Well, I find it very interesting that I would have thought that the evidence for people being more interested in gold was considerably higher this week than the performance. And, of course, we go to those days when it appeared that the trade negotiations were floundering. And in fact, as we sit here today on a Friday, I mean, it almost looks like they're over, to be honest, unless somebody pulls something out, your rabbit out of a hat here. But in Chinese are...they're getting quite vociferous in their own press literally today about how they are so upset about the American position. And I'm not commenting on one position or another. I'm commenting about whether a trade war is going to be resolved there. And it certainly doesn't sound like it's going to be resolved and that will not be good for any economy.

And we see evidence of world trade slowing down. We see it in airport traffic. We see it in ship traffic, we see it in truck haulage in the United States. We saw it in retail sales this month that we're down 0.2%. So there's many, many indications that a slowness is taking hold here. And, of course, the more the trade war manifests itself, i.e., we put on the terrorists and people started to pay more for the same goods, that is not going to be in a good situation. And, of course, the worst part about it all the government takes in the tariff and the people pay it, and the people that are paying it are the people who can't afford it. Most can't afford it. So it's just not a...it's not a good situation that we have.

Yet the market goes up merrily, looks like it'll be down today. That's been sort of predicted by Nomura, who looks at, you know, dealer gam [SP] and things like that, and where did the dealers want the market to be at a certain time so they can make the most from their customers. And it seems that we're at that point now, we're at that point yesterday where that's the best situation for the dealers right there and now it should go back down again and it looks like it's sort of following the script. So, perhaps if the market wants to go down here or there, that people might at least look at precious metals again.

Craig: Yeah. You know, it's interesting that you're right about the market. It certainly looks like it wants to go down only it rallies every day. It seems as if nothing can affect it, but at the same time the bond market is just rallying like crazy, Eric. I'm sure you're watching that too. I mean, the U.S. yield curve is now inverted all the way out to 10 years. They've raised Fed funds 4 times over the last 12 months if you, at least from 2018 to this day, but yet rates on the 2-year note, the 10-year note are actually down over that time period. So the Fed has worked pretty hard to invert the yield curve. You'd sure think all these things are lining up toward recession. It certainly looks that way.

Eric: Well, the bond market is typically smarter than the stock market. And, you know, look at...people forget, we essentially had a bear market in the two or three months to December 18th. Bang, down 20%. And it sort of tells you how vulnerable things are. And, of course, we had to have at 180-degree shift by the Fed which, I guess, fed into market optimism here. But the reason of the shift is, we were going into an economic paralysis, if you will. And yes, the fact that interest rates have gone down here is it probably improved some opportunities in housing and maybe anything related to the interest rate by car sales and stuff like that. But they're still soft. People still have hardly any wage increase, and there is inflation. I mean, there's always inflation that people never speak to. And it's sort of depressing to look at the supposed inflation numbers when, you know, you go and buy something or to try to fix something and tell me there's no inflation. I mean, it's just impossible. Anyway, and then as we get these reports come out that things are soft here, I think the GDP now forecast by St. Louis Fed is like 1.1% in the second quarter. We better not get a couple more negative numbers here, otherwise it'll be zero. And that'll be a pretty fast shift too from the theoretic 3.2%, which it really wasn't to almost nothing in the second quarter. So...

Craig: Well, there's been some interesting news this week on the physical front and price obviously still determined through the trading of derivatives, but how about the important numbers in India? I think that's rather remarkable.

Eric: Yeah, the unofficial number is 121 tons. By the way 121 tons, I think we mine about 285 tons a month, something around that number. So they almost consume half the mined gold in the world. Now you throw in Russia for 30, China for 15, a few other guys around, you can account for a big part of the goal of production just by those few parties, and that increased to 121 was a 58% increase. So it's good to know that where the mass populations are, they still love gold and you can't keep buying it in those quantities. I sort of look at what China is going to do here with their 1.1 trillion in the U.S. debt as we know they went from buying 10 tons a month to 15 tons a month. I mean, do they just keep stepping it up here, that we'll find now that we got rid of those treasuries, they will go diversify our currencies here and throw a little more at gold, that's entirely possible.

Particularly if, you know, it gets really heated. One of the things I happen to believe as much as I worry about manipulation of the whole stock market, I certainly believe in manipulation of the commodities markets because we see it and gold and silver all the time. But I also believe in sort of my heart and soul that commodity prices generally are suppressed in Colmex. And, you know, you look at the farm crisis and the meat pray, it's just horrible. The situation we have at the farm level and at the commodity level, not necessarily at the store level, you know, supposedly something is cheap, but when you go to the store, it's not cheap. But what the farmer gets is less. And I think the whole thinking is that it's more important to keep the finance guys happy than industry production guys happy. And so that's what we see play out in these markets. But sooner or later you end up with an event that causes problems. And, of course, then price can spike up quite quickly. And particularly when you just don't have it physically. And, of course, that's what we're always hoping for in gold and silver. It could be so explosive so quickly. Imagine if the Chinese started buying silver. Like they could buy all the silver in about a month. So that would be quite exciting, but the physical side looks good in my mind.

Craig: Yeah, that's for sure. Well, I have a couple of questions that were sent in over the week, Eric. I'd like to run those past you as we begin to wrap up, I guess. One question, here's a lengthy question. I think it can basically be summarized as, you know, there are a lot of theories out there about World War II gold, whether it was, you know, the Nazi gold stashed someplace. I remember there was like a rail car people thought they had found or the idea of Yamashita's gold, Japanese gold that might be buried in the Philippines. And whether these vast stores of, you know, this gold that people think is out there, you somehow used to help manage the price. I mean, do you have any thoughts on those theories, Eric?

Eric: I believe the Yamashita story. I mean, we know from all sorts of evidence that when the Japanese went into China, I mean they just took all the gold they can take. And then they realized they're going to lose the war. So they arranged to stash it in the Philippines but the Americans found it and never admitted it, of course. And so that was put to one side to fund things, and who knows what it funded. It undoubtedly funded a lot of military things, it probably funded supportive governments. But I would guess the effect of that, I mean, we're talking 70, 80 years later that that has been well disposed of and I don't think there is that physical gold around that they might want to talk to because, I mean, if the physical gold was there and you want the price of gold down, why don't you just show us a picture of the gold and let's get the price down? They don't do that. In fact, they don't even want to show us the picture of the gold that's supposedly at Fort Knox and other places. So, no, I don't think there's a great overhang of gold out there.

Craig: Fair enough. A lot of questions this week at my site. And then one sent in as well about just wondering if you could comment on Walbridge. Apparently there was some press releases this week.

Eric: Yeah, well, there was a couple of. One, they announced the results of the bulk sample. It came in, I think, it's 17 point, I'm going to say, 86 grams, which was not bad, but it was a little less than people might have hoped. At the last stope they apparently took out more waste than they should have. And, of course, when your process waste at a mill, you don't get any gold out of it. But it's still, you know, in a world scale that's in the top 10 gold mines in terms of that, the grade that they had. It was also announced that, you know, we've closed the private placement and that my ownership went to 24.99%, not that that was anything significant because everybody knew it. The one thing we're waiting for is the drilling results in the Area 51.

They did make a comment in their main presentation, I'm going to quote it to you here. It said, "All surface holes to date have intersected broad mineralization with occasional visible gold." Now, you know, they've announced that they had four holes, but they've been drilling other holes. Now I don't know whether I'm supposed to read that in May when maybe we have eight holes that they've all hit mineralization. But I suspect that's what happened. So, I am looking for a lot of interest, that news release on drilling, and it should be coming very soon.

Craig: How about Kirkland Lake? It had a good week as well.

Eric: Well, it had a good week then it had a sell-off recently. I can tell you that I have done a lot of work on this new drilling that Kirkland announced. And it was interesting, I had a report that I received and I'm going to sort of read from the report because the guy talked about the amalgamated break, and he says, I'm just going to read them, it says, "The average intercept from 8 holes drilled in the particular area was 2.5 meters of 162 grams." And it says, "Another area where they reinterpreted 15 production holes and drilled 5 holes, the average intercept of 2.4 with 89 grams." Now, luckily in my history I did that kind of work at Fosterville, and I took every hole that we drilled in that, and I'm up and I said, "Geez, that looks like it could be 75 grams." This is the same kind of work.

But it's higher than Fosterville. And it's not that far from the existing mining, so much so that... I mean, we could be mining this thing next year, or some decision was made to go there. And if all of a sudden you're mining 90 grams instead of 30 grams, my math says your production triples, other things being equal. Same sort of math that caused Fosterville's production to quadruple, and went from 150 to 600, because they went from 4 or 5 grams to 60 grams. So that's what happens with gray, and it doesn't cost any more money either. So I'm quite excited about what could happen here with this amalgamated break that's at Macassa, and that the main break where all the mining was done and it had many, many mines go along this one break, they mined 25 million ounces. Now we've got another break immediately south of it that goes the same distance and potentially higher grades. Well, I'll leave the listeners to do the math. We have a lot to prove yet, but I can tell you its early days and it looks pretty exciting.

Craig: Well, I think of anything, you know, we're all frustrated by price, especially over the last quarter or so. It seems rather counterintuitive to what's going on in the world and what's going on economically. But that doesn't mean that the entire sector needs to be shunned. There are some great opportunities there. You've listed a couple of them.

Eric: Yeah, I know there's always things that people can do that...where you can try to get in front of some developing trend here. I mean, that's what I spend all my time looking for. So there's always winners and there's always losers and, you know, it could get very exciting here. I was very happy to see the whole Unicorn thing get pounded this week. These companies that, you know, are huge market caps, no earnings and huge losses, everybody's betting on the future and they've just got zipped here, and maybe they'll get zipped again as markets head back down. And there are a lot of earnings reports. I saw two earnings reports. It talked about Apple where their earnings are down 10% but it was a beat, and then a Walmart was down 1% but it was a beat, and everyone gets excited. I mean, come on, guys. So, you know, things aren't going up here and you're paying more for it. This does not make any sense. So, you know that the market has something wrong with it fundamentally when that happens.

Craig: Yes. Well, and it sets us up again for, I think, a pretty interesting summer and it'll be interesting to see where we stand by next week at this time. But for now, I think we will wrap up this week and call it a day.

Eric: Look forward to it, Craig. All the best. Have a good one.

Craig: Thank you, my friend. Everybody, on your way out, please be sure to stop by the deals page here at Sprott Money. It's right there in the navigation bar. Never know what you're going to find there, but you're always going to find some good deals on some physical metal. Again, sprottmoney.com, or just call us, 888-861-0775. From all of us at "Sprott Money News" and sprottmoney.com, thank you for listening. Have a great weekend and we'll 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.