Is Palladium Trying to Tell Us Something about Gold and Silver? Weekly Wrap-Up (Feb 22, 2019)

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

Craig: Well, greetings once again from "Sprott Money News". Sprottmoney.com. It's Friday, February 22nd, 2019, and this is your weekly wrap-up. I'm your host, Craig Hemke. And joining us, as usual, this fine February morning, is Eric Sprott. Eric, good morning.

Eric: Hey, Craig. Happy to be here. Just so everyone knows, I'm out in the Atlantic Ocean fishing. So, I hope they don't have to call fish on and I'll have to get out of here.

Craig: I'll end up just talking by myself. So what do you hope to catch today, my friend?

Eric: Well, we're trying to catch marlin, sailfish, things like that. Dorado. We'll see how it goes.

Craig: Sounds like fun. Sounds like a lot better view than the snowy field of winter that I have out my window as we talk.

Eric: Yeah. In fact, I got a call from my wife, who's in Scottsdale. Scottsdale. And there was a foot of snow in Scottsdale.

Craig: Oh my gosh.

Eric: Try that on.

Craig: Never ending. Never ending. Well, I'll tell you what. There's a lot to talk about this week, and I look forward to getting to it. I do have an announcement from Sprott Money, though, that I'd like to pass along to everybody. We have just recently hired a guy by the name of Chris Gibson, and we're happy to have him on the team. Chris is going to serve as vice president of sales. He has over 20 years of experience in the investment industry, and he looks forward to hearing, really, from just about anybody that listens to these calls, anybody that's a Sprott Money customer. So, please feel free to reach out to Chris directly. I've actually got his phone number here to pass along, 416-300-8179.

Or anybody that has questions about physical metal, how to use physical metal in your retirement plan, that type of thing, you can also email Chris at cgibson. That's pretty easy. His name is Chris Gibson. His email is cgibson@sprottmoney.com. Just another service that we offer at Sprott Money that makes it unique and a fantastic resource for anybody that's looking to add in stacks of physical precious metal. And man, what an interesting week we've had in precious metal, Eric. We ramped higher, $23 in gold on Tuesday and then smashed back $23 on Thursday. And net now, we're just about even, up a couple of dollars on the week. What do you make of action like this?

Eric: Well, it's options expiry. The commercial's actually, in the last two reports I saw, have reduced their short position, which I was quite encouraged with. I think there might be another report out that I haven't seen yet because they're catching up in time in these reports. But when options expire, you know, the drill is get the prices down, so that all options expire are worthless and the commercials make out like mad. So, I think that's...maybe next Thursday, something like that, they expire. So, sometimes we got to put up with this. But it's got a nice little bounce here today. I think the most important thing, actually, has to do with palladium. And you did a report that was on the Sprott Money site on palladium and what's really going in that market. You and I have talked about it before.

And it's obvious, there's a physical shortage of palladium. And you have a spot with the [inaudible 00:03:17] here, where with [inaudible 00:03:19], I should say. And we have the spot price above the outer months. And every day, almost every day, palladium goes up. It's marched up from $800 to now $1,500. Guys are short almost 3 million ounces, that are now about almost $2 billion, the guys who are short. And they've sort of maintained that position. So in the article you wrote, I think you said that the leverage of physical to the outstanding open interest was 680 to oners. Some number like that.

Craig: Sixty-eight. Yeah.

Eric: Sixty-eight to one. Sixty-eight ounces short for every ounce that's available. I mean, it's just ridiculous. So, hopefully, if that can manifest itself, it might kick in to gold and silver.

Craig: Yeah. That's kind of the idea. That's what we're hoping for. You're right. It is very interesting. The lease rates to borrow London if you need some for me to delivery or in excess at 10%. And you mentioned the [inaudible 00:04:24] of the board. Those two signs both just scream physical shortage. And on the COMEX, as you mentioned, there are about 29,000 open contracts, which doesn't seem like a lot. That's about 2.9 million ounces of digital palladium, if you will. But the whole thing's only backed up by 42,000 ounces of actual palladium. So, yeah. Next month is a delivery month, too, Eric. Yeah. And next month's a delivery month. It'll be interesting to watch.

Eric: Yeah. Yeah. And, you know, you pointed out just before we were chatting before the call that the gold ETF has lost a lot of tons recently. And it was also noteworthy that the palladium ETF lost a lot of palladium. And that's how the guys are making up in the physical shortage and buy the palladium ETFs and redeem it and take the palladium. And I'm wondering whether that might be going on in gold right now as well. Because the gold ETF should be taking gold in, not having gold go out, with the interest in the product these days.

Craig: Yeah. Let me lay some numbers on that for people so they know what's going on. Since January the 30th, and January 30th being a key date, that was the FOMC day when Chairman Powell came out and, you know, put the kibosh on future rate hikes and everything else. Sediment has improved, price has moved, regardless of what happened just yesterday on Thursday. But since then, the GLD has seen 34.36 metric tons leave it's...call it inventory, 34 metric tons. Again, you would expect tonnage to be going in. Instead, it's going out.

Eric: Pretty amazing. And it could very well be. I mean, one of the tip-offs to palladium was the ETF getting drained. Yeah. It's very strange that the price would go up and the ETF gets drained. I mean, that just makes no sense whatsoever. The opposite should be happening.

Craig: Right. Well, and we talked about gold demand, Eric. You and I have documented, and we got that information from your friends at the World Gold Council a couple of weeks ago about central bank demand in 2018. 640 metric tons or whatever it was. It was the largest central bank gold demand in 50 years. Here's an interesting coincidence for you, Eric. The last time central banks purchased that much gold was at the demise of the London Gold Pool in 1968. Are those dots connectable?

Eric: We're talking about rats deserting a sinking ship sort of thing?

Craig: Yeah.

Eric: Yeah? I think there's an analogy there. Yeah. They probably know what's going on. I mean, look at...they all have to look in the mirror and deal with their own currencies, okay? Now they got to know that they're all frauds and they'll all be worthless. So maybe we should stack up a little gold here before it's too late because most countries are just digging a deeper and deeper and deeper hole everyday as they stack on the debt here. So, it doesn't take much mental agility to figure out that you should be owning gold instead of some paper asset.

Craig: Yeah. To that end, the Basel III requirements are finally going to kick in. I think it was 2012 when they first came up with this stuff, Eric. And they're finally kicking in, making gold a tier one asset, beginning first of April. The most important thing about that, besides the fact that now it fully counts towards your reserves on a dollar for dollar basis, if you're going to hold gold and have it count that way, it has to be physical gold, audited. I mean, you know, the stuff that you actually stack. It can't be these derivatives, right?

Eric: It could start a real steal day, you know? The banks do a lot of things in coordinated ways. I'm talking about commercial banks too, right? And let's face it. If every commercial bank thought the other guy was going to buy gold, you don't want to be the last man in here, okay? Because there's not much gold to buy, when you really think about it. So, yeah. No, I think it could be quite dramatic. It could get palladium-like scary, you know, of 75% in 6 months. And with no end in sight for palladium, by the way. And I'm already imagining it'll be a force majeure on the COMEX in palladium, I guess, because there's just no way they can make delivery. So, hopefully, that sort of same thing starts spilling through as some of these commercial banks start loading up on gold because there's no capital cost to it all. It's the most wonderful thing. And you can sit there and make money and put up no capital.

Craig: Exactly. Exactly. And just another, I guess, thing we have going for us, another log on the fire here in 2019. Eric, I want to wrap up this morning talking about one of our, gosh, one of our favorite stocks that you first told regular listeners of the weekly wrap-up, about Kirkland Lake. Back in the summer of 2017, it was a single digit stock. I remember texting you the day that it first hit double figures on the New York Stock Exchange. I said, "Hey, look at this. It's now up to 10. That's fantastic." Well now, yesterday, it's up to like 36. I would imagine you've got some thoughts on how well that company's doing compared to other miners.

Eric: Yeah. Well, it's just knocking the ball out of the park. I mean, most of the miners are not doing well. In fact, I was looking at one of them that did well was Newmont. They reported I think it was something like 400 million U.S. of gap earnings. But their adjusted earnings were something like $748 million. The rest of them, [inaudible 00:09:56], the Barricks were losing money and/or making skinny, skinny profits. But I think it's instructive to look at Newmont that produced 5 million ounces and their adjusted earnings, I think their number is something like $740 million. Kirkland reported their adjusted earnings in the fourth quarter. The number is $106 for the quarter, which implies something like $425 annualized. And, you know, it proves the difference between there are ounces and there are ounces. Somebody produced 5 million ounces, made $740 million. Another guy produced less than a million ounces annualized, and he makes $400 million. And it's all about grade because the grade, it's just gravy.

And as we look into '19 now, we started with a base of $4 times $52, which is $208 a share, assuming we could continue to produce at the rate we are, then we increase guidance, you know? You can take DNPs guidance. Most of that is free money because it's all grade. Look at the price of gold, what it's done in the meantime since the fourth quarter and the 52-cent rate. Put that on and, you know, you can get some pretty interesting numbers here, which would suggest...and it's hard to even imagine that this stock could go higher, having done as well as its done already. But that's the truth of the matter. And I know the guys in Australia are excited about the prospects of finding, hopefully, more swans at Fosterville. And should that be the case, there can be an awful long life and some pretty zippy profits come out of that Fosterville Mine.

Craig: Yes. And on behalf of all the listeners of these weekly wrap-ups, we thank you for sharing that information with us. Just bringing that stock to our attention has been profitable for just about anybody that has been following along. And Eric, just in terms of the shares in general, they've had a pretty good week. GDX moving up, the [inaudible 00:12:02] index moving up. It looks like, again, it's all part of what looks to be a pretty good 2019.

Eric: Yeah. And you know, as we're speaking here, it's been announced...and I haven't seen this officially. But they say that Barrick is looking to buy Newmont in a hostile bid for $19 billion. Now, this just came out 5 or 10 minutes ago, so I'm not certain of its veracity or anything. But that's got to help the shares. I mean, obviously, the Newmont stock will be going up here. Whether or not Barrick goes down, that's a whole other question, because the acquire normally, the stock gets under a little bit of pressure. But man, that would take another company out of the game here. And, you know, it might draw more attention to the guys who are putting the bread in the table on the industry, including Kirkland and others.

Craig: No doubt about it. And any publicity is good publicity. And all that kind of stuff just draws more eyes and, potentially, more money into the sector. And that's exactly what we're hoping for this year, no doubt about it.

Eric: Yeah. And I was actually reading something. Some person was suggesting that Kirkland might even be S&P 500 eligible, if you can imagine. Now, I'm no expert on that. But we do make a lot of money and it's obviously going to be more. So, I think we might be in the range where we could be considered for something like that.

Craig: Sounds good to me, my friend. Obviously, as we continue to discuss week after week, this year is setting up to be a special one. You and I have compared it to 2010, 2011. And it's certainly trending in that direction. Keep your eye on the ball. It's a long game. You're not going to get all these gains in a couple of weeks. It's going to take the whole year for this to play out. But this is the time, again, if you either have not bought physical precious metal, it's time to buy some. If it's not, if you want to add to your stack and maybe bring your average price down, it's time to do that.

And then, of course, you got the issue of where you're going to store it. So keep in mind, Sprott Money is a great storage company as well, not just a bullion dealer. And you can open a storage account with Sprott. And you can store and secure your precious metals. We could store metals in any of our six global locations. So, just simply sign up for Sprott Money International Storage. And you'll also receive exclusive deals. Just call us 888-861-0775. Or of course, go to sprottmoney.com for more details. Eric, good luck out there today. I hope you land a lunker. And then, come back safely and we'll talk again next week.

Eric: Looking forward to it all. It's been a great week for those involved with Kirkland Lake gold, and gold generally. So, fingers crossed here.

Craig: Sounds good. From all of us here at "Sprott Money News" and sprottmoney.com, thanks for listening. Have a great weekend. We'll talk to you next Friday.