Weekly Wrap Up

Eric Sprott on systemic instability (Weekly Wrap-Up - April 20, 2018)

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April 20, 2018

It’s been another week of rising inflation and interest rates, but the commodities markets look good, with silver in particular poised for a breakout.

This week, Eric tells you:

What a possible short squeeze means for you

Why you should be watching the bond market right now

And why India might be the next big buyer of gold

“It’s not just the net short position that is important. It’s: What if a Long says to a guy who’s short, ‘I’d like my silver?’ ‘I’d like my metal?’ We have over a billion ounces of short metal in silver. What if the Long simply says, ‘I can see there’s a bit of tightness showing up here in these various metals… maybe I’ll take delivery, thank you very much.’ Of course, as we know, the seller of the silver and/or gold doesn’t have the metals. So, yeah, there’s a very distinct possibility that this could erupt as people are getting more distressed… There are lots of smart guys that worry about the system crashing.”

To hear Eric’s full thoughts, listen here:


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


Craig: Hello again, from Sprott Money News, it's sprottmoney.com. It is Friday, April the 20th, and this is your "Weekly Wrap-Up." I'm your host Craig Hemke. And joining us as per usual is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. We feel like we're getting close here man but we've been waiting a long time. So, again, lots to chat about.

Craig: Yeah, baby steps to begin with. That's for sure Eric and we might have taken a few baby steps this week but it is always a good time to add to your stack. Everybody knows that. Dollar cost averaging is one of the most effective investment strategies anybody could follow and so we encourage everybody to add to your stack when you can. The folks at Sprott Money have an exciting offer for those in Canada and the U.S. looking to do so. You can buy a one-ounce Canadian Maple Leaf gold coin for just $20 over spot, $19.95 to be exact. Limited quantities are available. So, take advantage of this promotion by visiting sprottmoney.com or simply calling 888-861-0775. Again, that's a Canadian Maple Leaf gold coin $19.95 over spot. Let's see. I've got $1,345 for gold this morning. That would make that coin about $1,364. Gold is unchanged for the week, but silver is up, gosh, Eric, more than 3%. Have you had a good week?

Eric: Yeah, I've had a good week. I'm a big silver owner. Of course, I'm a big donor. It's specific gold stocks that all seem to have reacted well and as you were pointing out, in the last 30 days the stocks are up by about 10% from their lows. So, yeah, it's been exciting. The fact that silver looks like it wants to break out here and the fact we've had some good moves in gold from time to time suggest that the interest is building here. And that there's more focus on what's going on in precious metals and in all commodities for that matter, all physical commodities. We've had some good moves in nickel and lead and zinc and aluminum. There's quite a change going on which I think should augur well for the stocks and the metals.

Craig: Eric, you know, we've been talking about this possible short squeeze now for about two months as we've watched the large speculators in silver at least via that COT report. I have built this massive record actually. Historic in a sense we've never seen it before. This large of a net short position for the speculators that manage money, the hedge funds, those guys. Do you think we're beginning to see the start of that potential squeeze action?

Eric: You know, it's so hard to tell. I mean, I would love it to happen as you would, but, I mean, there's so many weird things that go on at COMEX. I mean, every day now pretty well these exchange for physicals in both gold and silver are shipped over to London and they would both equal if not exceed the amount of inventory that the COMEX says right now, every day. Every day it's more than 12 tonnes of gold...goes over to London. Every day it could be like 50 million ounces of silver go over to London, theoretically, goes to London. How it ever gets resolved is anybody's guess.

And then, of course, it's not just the short position, the net short position, that is important. It's what if a long says to a guy who's short, "I'd like my silver. I'd like my metal"? We have one billion ounces of gross short position, over a billion, billion one ounces of short metal in silver. What if the long simply says, "You know what? I could see that there's a bit of a tightness showing up here in these various metals. All the prices are climbing. Maybe I'll take delivery. Thank you very much." And, of course, as we know, the seller of the silver and our gold doesn't have the metals. So, yeah, there is a very distinct possibility that this could erupt as people are getting more distressed about currencies and stocks and bonds. And we feel interest coming into the precious metal. Maybe some people figured out there's lots of guys, smart guys that worry about the system crashing. Well, if your system is going to crash, you want to have gold and silver physical. So, it's all shaping up.

Craig: You know, we talk about a rising tide lifting all boats. You and I have discussed the commodity sector, gees, at least every couple of weeks or so for about the last year, and how maybe the undervalued sector of commodities, the undervalued sector of the mining shares might start getting some interest. You mentioned just a few minutes ago the perk up in a lot of base metals. That's been really rolling this week too. You know, I wonder if maybe this isn't some potential asymmetric warfare. Things like palladium. Russia provides 45% of the global palladium. What if they start to shut that off? Maybe that could start to impact things as well.

Eric: Yeah, sure. The whole trade war thing, and, in fact, you know, maybe the Chinese decide, "Well, you know, we don't like these duties you're throwing us. We're just going to buy up all the physical products in the world." You know, they are the ones with the money. They have real money. Well, actually they don't have real money, they have U.S. dollars, but they might choose to convert those U.S. dollars into real things. And between that and the various countries that are getting into trade wars, not just China or Russia either, it's lots of countries where someone who has a bit of a monopoly of one metal or another might decide, "Well, we're probably better off holding on to this stuff or restricting the sale." So, yeah, there's lots of things that seem to be happening amongst real things in the world and most of them are causing the prices to go up.

Craig: We had an interesting week in the bond market, Eric. There was a lot of building chatter about the inverting yield curve. In fact, the spread between the 2-year note, the 10-year note got down to just 42 basis points. One of the Fed governors, Bullard, out of St Louis went on CNN and pointed that out. So, he's very concerned about the inverting yield curve. Lo and behold, magically within hours, a big selloff began in the bond market that steepened the yield curve. Are you watching the bond market as well for its impact and what it's telling us?

Eric: Oh, yeah. You got to watch the bond market. When the 10-year got up to around 3%, I mean, it was putting big, big pressure on the stock market and we're back up to 2.91% or so. I read a very interesting article that there is some fund, I don't remember the name of the fund, that the U.S. government had where they had some superannuation funds invested in bonds. And they tapped that for about $119 billion in the last 30 days to buy bonds and it was going to stop on the 19th of April. And the suggestion was well, you know, when the government stops buying these bonds or have this influence of $119 billion, and instead you go to the Fed selling bonds, these rates could really start to rise again.

And we're seeing that. I mean, we were below 2.80% probably a week and a half ago. Now, we're in excess of 2.90% and the trend seems to be up in rates here. And, of course, any time you read anything about supply of bonds, sizes of deficits, other countries not wanting to buy bonds, or they might want to sell bonds like China, you keep wondering, well, how can rates continue to be here? All markets are a factor of supply and demand, and supply is exploding here. And if rates at the short end keep going up, the deficit is just going to keep rising here. I mean, we have $21 trillion of debt. I mean, a 1% change, its $210 billion of interest. So, we could get into the catch 22, where the deficit going up causes rates to go up and when rates go up they start to cause the deficit to go up. And then we can just get into a horrible situation. So, yeah, I watch the bond market very, very carefully.

Craig: Let's wrap up this week, Eric, about talking about the mining sector. Again, it's about the most undervalued sector in all equity markets it seems, but it's starting to perk up. You mentioned earlier that from a bottom about one month ago today in March 20th, HUI index is up about 10%. At 10% a month, that ain't bad. How do you feel about the shares here?

Eric: Well, they're looking good. I mean, I've sort of been blessed and I've been involved in some wonderful gold stocks. And, I mean, I had to experience quite the devastation that others had. But I think you can feel the interest picking up here. I have people ask me, "You know, what sort of stocks you like?" And things like that, where you can feel the interest is coming back into things. And I see it manifested even by the comments on chart lines and things like that. As an example, I can see the Australian play the whole precipitation thesis where we have the Pilboro with potentially gold all over the place as Greek came up with the stocks down there, not just noble. But whether it's [inaudible 00:09:46] or a number of other pact and minerals, things like that. They're all kind of generating some interest here and, yeah, I think it's going to be very, very exciting that there are companies out there that are finding things. Of course, I look every day at the Drill Hole results to see if something tweaks my fancy. And every day there's something out there you want to track down, and just see if somebody might be on the trails for planning something quite significant that will manifest itself in the stock going up a lot. So it's becoming much more fun. There's lots of action, stocks are moving fast here. So, everyone should get a hold on there and keep their eyes open for opportunity.

Craig: Yeah, and it would seem like you'd want to be ahead of the way. There has been some fits and starts after a long way down from two 2012 to '15. But, gosh, if the money starts flowing into the sectors, you're right. There's a limited amount of supply, again, and that's going to make things move pretty quick, won't you say?

Eric: Yeah. And by the way, speaking of money flowing into the sector, I was reading an article this morning about how all the ATMs in India have no cash in them. And I think it's because there was some bank fraud there and the people kind of raided the machines. And now somebody said he traveled for 250 miles up some highway. He went to something like 19 or 30 different ATM machines and none of them had any money. And what I find interesting about that, and I'm just pointing out so people can monitor it, you know, the Indian population fancy gold. And if they realize that, you know, it's hard to get cash but the minute they're going to get it they're going to put it in the gold here. And maybe not put it back in the bank because if you put it in the bank but you can't get it out of the bank, and we've already seen problems with cash in the banking system in India, but maybe this would bring in a lot more buying.

Here's what we need to do. We need to extend this next offer to folks in India as well because we mentioned the great deal that Sprott Money has on Canadian Maple Leaf gold coins. But they've also got one going, Eric, on silver coins as well. Again, for Canadian and U.S. listeners a one ounce Canadian Maple Leaf silver coin just $2.15 over spot. So, that's a pretty good deal right there. You can call, again, 888-861-0775 or visit sprottmoney.com for more info. There are limited quantities on this. So, take advantage of this over this weekend. I think it would be an excellent idea and, you know, if you're in India and the ATMs are empty, some silver coins might come in kind of handy, won't you say?

Eric: Very handy.

Craig: Well, all right, my friend. Thank you, again, for your time. It's been an interesting week and next week promises to be interesting as well. I look forward to talking to you then.

Eric: It should be fun. Craig, all the best.

Craig: And from everyone here at Sprott Money News, it's sprottmoney.com. Thank you for listening. We'll talk to you again 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.