Weekly Wrap Up

Keep Calm and Buy Gold: Why It’s Not Time to Panic - Weekly Wrap-Up (Nov 08, 2019)

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November 08, 2019

It’s been a tough week for precious metals. Gold is down almost $50, silver down $1. But with prices bombing, is it time to panic—or do some bargain shopping? Eric Sprott breaks down all the gold and silver news you need, including:

Will there be another rate cut in December?

Why there could be an opportunity in Nickel

Plus: What to look for in microcap companies

“As you know, I think it sucks! And I would point out to people that you [Craig Hemke] did a great write-up basically predicting this on Sprott Money, because the open interest—and basically all short interest—has gone very, very high there. Record high. And, of course, the natural outcome of that, typically, is that prices get bombed. Which, they have gotten bombed here. But then again, we’ve learned to expect that. We’ve had a couple of days of almost record increases in shortages, so it hasn’t been fun for our side.”

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

Craig: Well, hello again from "Sprott Money News" and sprottmoney.com. It's Friday, November the 8th, 2019, and this is your "Weekly Wrap-up." I'm your host, Craig Hemke, and joining us as usual on a Friday morning is Eric Sprott himself. Eric, how are you today?

Eric: Hey, Craig. I've had better days, you know. It's been a bit of a tough week for everyone here, but we...gives a lot to chat about.

Craig: We certainly do, we certainly do. And, hey, just a reminder before we get started. Sprott Money's putting on a special event one week from Sunday. You might remember we talked about this last week. There is going to be an event happening in Winnipeg where Sprott Money is co-hosting a client appreciation event on Sunday, November 17, from 6:00 to 8:00 in the evening, called The Art of Discovery at the Winnipeg Art Gallery's Inuit Art Center.

Now, this is some art, a lot of it donated by Eric Sprott himself. And so Sprott Money is glad to put on this free reception, so this is something not just for, necessarily, for Sprott Money clients. If you're a regular listener of these weekly wrap-ups and you are in the Winnipeg area, again, a week from Sunday, you can enjoy a reception of wine, hors d'oeuvres, and special guests, and even take a tour of the wonderful collection of Inuit art on display, most of which, again, was donated by the Sprott family.

It's a free event, but space is limited so you need to RSVP. You can go to sprottmoney.com to register and learn more, and it's a great warm up for anybody that's attending that CCMEC convention the next day. Eric, I know you're having fun today with the family, and we thank you for all you do. What do you think of the market action this week, with gold down about $50 so far, and silver down a buck?

Eric: Well, as you know, I think it sucks, and I would point out to people you did a great write-up that was basically predicting this on Sprott Money, because the open interest, and basically all short interest, has gone very, very high there, record high. And of course, the natural outcome of that, typically, is that prices get bombed, which they have gotten bombed here. But then again, we've learned to expect that. We've had a couple of days of almost record increases in short interest, so it hasn't been fun for our side.

Craig: No doubt about it. And, you know, and I...my concern I have is that open interest continues to go up. In fact, the banks have issued almost 100,000 new contracts in just the last 3 weeks. So you figure most of the time they're taking the short side and speculators are taking the long side, but price has actually gone down over the last three weeks. That would lend me to think that the banks are pretty confident that they can rig price lower in the weeks ahead. Is that what that tells you, too?

Eric: Well, it kind of feels that way, because you might have expected as I would have expected, particularly after a day like yesterday and the day on Wednesday, I guess it was, that the open interest would have gone down, but in fact it's gone up. In other words, they've increased their shorts, so they got even more on the table. And if they can scare the specter of the funds into selling their positions and/or shorting on their own, then of course they can negotiate it much lower.

We had a few things that should help us out. Of course, the most important thing always is the physical market, where some government or some people, and I'm thinking of the Indians, or the Russians, or...come in and say, "Okay, fine, I'll take some gold at these prices." Of course, now you got to deliver the physical, okay, which is a totally different story than the derivatives, so hopefully that'll happen. I would think that...I've heard that the premiums in India have gone way up here, the premiums they're prepared to pay, and of course they're very patient buyers, so that might happen. And of course, some of the central banks, with these kind of prices, would certainly have a tendency to get back in the market.

Craig: Yeah, and you mentioned that article I wrote this week. You can find it at sprottmoney.com in the Insights tab. There's all kinds of great writers. I'm just happy to be included with them there. And mainly what I'm writing about, again, Eric, is just the, kind of the fraudulent nature of the system, and that they would use these contracts that are created from nothing, backed by nothing, right? I mean, 710,000 contracts at gold open interest represents 71 million ounces. The entire COMEX only has 8 million ounces in the vaults. So how is this related to gold at all?

Eric: Yeah, yeah. And $100 billion, I'd point out, okay. Like, $100 billion of gold shorted that the people who sold it don't own. But they believe...and of course the CME and the CFTC seem to not notice that there's a huge concentration of shortages, and as you and I know, it's...they run the...rule the roost here, and it's wash, rinse, and repeat, and it looks like we got another one [inaudible 00:05:10]. I hope the physical forces can offset some of this.

Craig: Right, right. And just a warning to everyone, the December contract of COMEX gold is the front month. It will go off the board at the end of this month, November, three weeks from today as a matter of fact. And so all of the open interest that's in December, which is still 400-some-odd thousand contracts, has to be liquidated and rolled, and so we've got a long road to go still, probably with more volatility. Eric, a lot of this, too, is related to the bond market. The rate, interest rate on the U.S. 10-year note is up 25 basis points just this week, which I guess calls into question whether there will be another rate cut in December. That probably is affecting things, too.

Eric: For sure, and it's...they both have different stories to them, you know. And, like, it always...it should bother equity owners that interest rates would go up that sharply, because obviously there's a lot of money being lost in the bond market these days, and as you know, 50% of most institutional portfolios are bonds, and the other 50% are equities. And if you get that kind of rate increase where we've gone from 150 basis points to 200, almost 200, 190, then there are going to be some serious bond losses taking place, and it won't make for a very good 4th quarter, and perhaps will ruin a...what otherwise would be a good year for the pension plan.

So we sort of had this discussion that, you know, things are picking up because we had two or three positive things, including the ISM non-manufacturing. But normally, the...it's the performance that determines the discussion, and with negative interest rates still predominantly around the world, the reasons to own gold are still there. The wealth disparity, it keeps showing its face all the time in more and more countries, so I don't think we're out of the woods by any stretch of the imagination.

Craig: Right, and this move back to quantitative easing and all that kind of stuff that has begun just a few weeks ago, that's probably not changing next year, so I...hopefully people keep that in mind.

Eric: No, and we have that whole repo thing that hasn't really resolved itself, and I think it was something like $88 billion the last time I looked.

Craig: $114 billion yesterday.

Eric: Oh, my God. Yeah, well there you go. It just gets bigger all the time. So, you know, you got to imagine something's going on in the banking system here, okay. That's a very unusual thing that there's that much need for repos.

Craig: Eric, I've got a nice list of questions that have been sent in over the week, and if you've ever got a question you'd like me to run past Eric, of course, you can send them to us at submissions@sprottmoney.com. That's the best way to do it, just hit us with an email. But, Eric, I've got a couple of questions here that we haven't discussed before, so I want to start first with someone wondering what you think about nickel. With falling nickel inventories, do you think there is an opportunity in nickel in some of the nickel-mining companies in the years ahead?

Eric: Well, nickel obviously is a battery, electric battery metal. The inventories are falling in the LME constantly. The price is getting moved around, I'm sure by the same forces that affect precious metals. But the bottom line is if there's going to be no inventory, they're not going to be able to push those things around like they used to. And it looks like there's been pretty consistent decline in nickel inventories. I kind of look at them every week. There's also big decline in zinc inventories, so it could be that, you know, physical tightness will win the day in those metals.

Craig: Yeah, yeah. All right, another question has to do with, I guess, the term is micro-cap companies. You've got a few that you're invested in. What do you look for in a very, very small company like that? What are some of the fundamentals you look for?

Eric: Sure, sure. Well, first of all, I have a very long-term view of anything that I invest in in precious metals, so, you know, it doesn't matter how small it is. I know when I'm in I don't get out, okay. Like, if you own 10% or 20% of the company, it's not easy to get out, so that's no different than a micro-cap or a mid-cap to me. It's...you're kind of locked, and it has to win.

So, I mean, I've bought companies with market caps as small as $5 million. You put $1 million in, you own 20%, and again, the same thing you're looking for, "Well, what are the resources? What can happen here?" Let's say if the gold or silver price goes up, how much more economic will it be to mine the ore that they've already found, and how will the market value this going forward?

So I'm quite prepared to buy micro-caps even though...like, in a micro-cap you...I might buy $2 million of a $5-million company and end up with 40%. I did that recently in a company called Stroud Resources, which has a silver property in Mexico. And I've just got to hope that the price of silver goes away. I think it's going to go and somehow we can get the property into production.

Craig: How do you... I'm just curious how you find them, Eric. I'm picturing, like, a...we'll call it Sprott tank rather than shark tank, and some guys coming in with the mining helmets on and telling you about their deal.

Eric: Yeah. I suspect that the best answer I can give you is, they find me.

Craig: I suppose that's true. I'd be looking for you as well.

Eric: They do. They do find me, yes.

Craig: All right, my friend. A lot of folks wondering about Garibaldi, with some news this week, things like that. You got any thoughts there?

Eric: Well, I looked at the release. I've been, actually, traveling, so I haven't had...done an in depth thing with it yet, but they say they're finding a pathway, I think, to the...a larger discovery, but we don't have the larger discovery yet. I guess the drilling's probably over there. I don't...we certainly don't have all the results, so there'll be lots more results coming out. I have... You know, we know they have a nickel deposit in the middle of the Golden Triangle, so it's just a question of how big. It's not going to be much more defined sort of in the next few months than it was before, but it does seem to be getting bigger.

Craig: All right. We had a question this week, this is a new company that I have not heard of before, and it comes with an offer, so let's address this one. A guy wanted to know about Gainey Capital Corp. Says he loves what we do every week and says he'll buy us all the beer we want the next time we're in Singapore if we talk about it.

Eric: Well, well, Gainey Capital is a company with operations in Mexico. I do believe I'd read this week or late last week that they had some issue with the [inaudible 00:11:44] down there, or the local people, and they have voluntarily stopped drilling, but they've had some decent success. It's, again, a micro-cap company. I hope they can resolve their...whatever the issue is. I don't really know what the issue is, specifically, but for now they're not drilling. But I'm an owner of the company.

Craig: All right. How about a company called Ely Gold?

Eric: Ely, sure. Well, I recently...well, I own shares, and I recently gave them a loan, a contingent loan on them buying some properties. The reason I got involved with Ely is they have a royalty on the Fenelon property. They have a 2% royalty, plus they've got some very interesting properties in Nevada that are about to come into production, so I really like Ely. I will end up having about 19.9% of this company.

Craig: Very nice, very nice. Let's finish up then, Eric. I finally got the earnings release for Kirkland Lake this week, and it sure looked good to me. What do you have some thoughts there?

Eric: Well, it looked pretty special. I mean, as everyone would know, I look for 75 to 80 cents [SP], and they came in with 84. It was a great earnings number. It puts everyone else to shame. The stock hasn't really reacted that well. We have one little missing ingredient, and that is we've got to find more high-grade reserves down at Fosterville. And so far there's been no release to say that we have found the continuation or a mirror image of the Swan Zone yet, so people are still a little reluctant to put the kind of multiple on Kirkland that a Neco [SP] would have, or a Barrick.

But the earnings are great, the cash war chest keeps building, and I'm sure some time they're going to be doing something with that war chest. It's probably breaking $700 million these days, so there's lots of opportunity to do that. But the earnings were great, and I think the outlook for the company's great, too. We know it had great things up at Macassa. It's only a matter of time until we find something in Fosterville.

Craig: Yeah, and, you know, put that on the list. If we are in a period here of price pullback for a couple of weeks, there might be some bargain shopping for folks that they can do, just in time for the holidays.

Eric: There you go.

Craig: All right, my friend. Hey, thank you so much for your time this morning. I just want to remind everybody, again, please stop by the sprottmoney.com website. If you're anywhere near Winnipeg next weekend, Sunday the 17th, sign up. It's a free event, stop by, view some beautiful Inuit art, and have a couple hors d'oeuvres on us. Again, you can register for that RSVP for that at the sprottmoney.com site.

And one last thing, in a couple of weeks we'll be recording our final "Ask the Expert" segment for the year. Eric and I talk about miners every week. Well, one of the world's foremost experts in the mining chairs is Brent Cook of Exploration Insights, and Brent is going to be joining us as the expert in November. So if you have questions for Brent you can send them to us using that same email address, submissions@sprottmoney.com, and we'll see if we can include them in this month's "Ask the Expert" segment that we'll be recording the last week of the month.

Eric, my friend, thank you so much. I hope you have a great day with the family and a safe trip home, and then I look forward to talking to you next week. Have a great weekend, and from all of us here at "Sprott Money News" and sprottmoney.com, thank you for listening. 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.