“Lots of legs of the economic stool are starting to wobble” — Eric Sprott (Weekly Wrap-up, February 16, 2018)

Transcript:

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

Craig: Well, greetings once again to everybody from Sprott Money News and sprottmoney.com. This is your Weekly Wrap-Up. It is Friday, February the 16th. I'm your host, Craig Hemke, and joining us as usual, once again, is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Good morning. What an exciting week for everybody here. A lot of things coming together for precious metals so, it'll be fun.

Craig: It will be fun. It has been fun. It's been a very exciting week, with price fluctuating but going up pretty strongly. And it is very much a great time for our listeners to take advantage of a great deal that Sprott Money has. For a limited time only, you can buy a 1-ounce Royal Canadian Mint gold bar for just 20 bucks over spot. That's a savings of more than 50% off the regular premium. Most folks know that. Twenty bucks over spot's a pretty good deal. This offer is open to Canadian listeners for home delivery or for storage, and American listeners can take advantage of this limited-time deal by purchasing and storing at Sprott Money's secure facility in Toronto. You call 888-861-0775 or visit sprottmoney.com for more info. I think with prices starting to look up, it looks like a pretty good deal, doesn't it, Eric?

Eric: Well, it is a good deal and, you know, I'm sitting here marveling at getting gold in a coin, now manufactured into a coin, and you only pay 20 bucks for it above spot. Like, how thin is that margin, you know, like that's incredible. You go to buy an ETF, you probably pay a higher commission and you don't have anything real anyway. So that's a good deal.

Craig: It's a very good deal. And as we said, it's been a very good week. Gold is up $42 on the week. We are back at the highs that we saw several weeks ago, just below $1360. We are very near, that we'll call it, the renewed bull market highs that we saw back in the summer of 2016. Silver's still playing a little poky trying to keep up, but it looks pretty good, doesn't it?

Eric: Well, it does, and I'm fascinated by this. I think that we're almost at new highs, and if we go to new highs, what are we all going to say about, you know, the bull market which theoretically started in early '16 or late '15? And you know, we've had a couple of good years in '16 and '17. Now here we are in '18 with hopefully another recovery high. And you sort of say, you know, higher highs and lower lows. And man, it smells like a bull market here. And there's lots of reasons that you could imagine people would want to come into this market. We talked about them before. And it started with what I call the bear market in cryptocurrencies, the bear market in bonds, which is becoming, you know, exceedingly obvious. And of course, the little correction in stocks, which is not in a bear market yet, but my god, if it turns into a bear market, then you only have one bull market. And of course, we're seeing it in not just gold and silver. We're seeing it even in the base metals and other physical products. So the markets seem to be coming around to, "You know I want to get my hands in something real here." So it portends great things for gold and silver.

Craig: It does. You know, Eric, something I want to run past you, it feels to me a lot like 2009 and 2010, where it appeared the U.S. was going off this, just debt cliff. And you know what happened to the metals in 2009, 2010, and 2011. And here we are. It was announced this week that the Trump administration will never run less than a $1 trillion annual budget deficit. And they're going to start piling on the accumulated debt, rushing toward $30 trillion. And I think the bond market is starting to sense that, as you said. Are we on the edge of that fiscal cliff, finally?

Eric: Well, I think there's no doubt about it. I mean, there's so many negative things going on in the bond market. I mean, you've got, first of all, the Fed, theoretically is going to be a seller of bonds, and they used to be the biggest buyer of bonds. Like that's hard to imagine a market could sustain itself with that. Then you've got China threatening to sell bonds. You have Japan actually selling bonds. You had the bond fund redemptions hit a record high this last week. So the retail is selling. Well, who's going to buy? How do yields stay down when no one wants to buy this stuff and then the U.S. government has to issue whatever, 50% more in a year? It's almost impossible to imagine that the yield couldn't really ramp up here, just based on this supply-demand thing.

And then you turn around and you have this kind of inflation thing that's rearing its head. Not that I'm as big a believer in the inflation problem, because it's always been misreported anyway. You've had inflation forever. I think it's more the dynamics of the supply-demand that's going on in the treasury issuance market that's going to make all the difference to rates here. So it's not good, the fact that rates go up and all of a sudden mortgage rates go up and the housing goes down. Not that we don't have enough economic problems already, right? We had retail sales come out negative in January. They revised December from, I think it was 0.4% to 0. So we get two months in a row that we now have negative retail sales. Remember they called it late, saying everything was wonderful and the consumer's coming out? Then you finally get the real numbers and it's negative.

So you know, we've espoused very often, be very careful what you believe when it comes to data points. But the economy's weak, housing's weak. Industrial production was down...was that a January number? I guess it was a January number, down, I think it was 0.2%. So we have lots of legs of the economic stool are starting to wobble here. So, there's more and more reason to be concerned about equities. That's why we're talking about it. And of course, if equities end up with a problem, that will play into the hands of precious metals.

Craig: All right. So I want to you ask this question because you've identified it seems like the conundrum for the Fed, in that they want to, they keep talking about trimming their balance sheet and selling their bonds, but nobody's buying bonds. And higher interest rates on the long end, as it ripples through the economy, will drive mortgage rates higher. It'll drive credit card rates higher. It'll crush the U.S. economy. But it'll also blow out the U.S. budget with the interest on the national debt. So, Eric, at some point pretty soon, are we going to be talking about renewed quantitative easing and the Fed buying bonds instead?

Eric: Well, I mean, that is the $64 million question here, and I don't know what will prompt them. I mean, obviously, a big decline in the stock market would say, "Okay, hold on. Whatever policy we've espoused here, scratch that, okay?" And maybe they won't even come up with a new one yet, but they'll, "Let's just drop the three or four rate hikes in 2018 stuff." So, yeah, I think it can happen. I think the point that you're really making is like a 1% increase in rates for the U.S. government. That could be 200 billion of extra expenses. You don't want to get caught up in that do-loop. Because, you know, if people start worrying about the deficit and therefore the rates go up, and because the rates go up, the deficit goes up, oh, man, you're in a catch-22 of all time here. So, yeah, they're going to have to keep monitoring things, and I think it'll all be a function, not so much the rate per se, as what the stock market does with that rate. If the stock market looks like it's going to take a deep six here, I think they'll step in and change things.

Craig: Yeah. Eric, let's spend the rest of our time talking about the shares and then maybe a couple of specific ones. The shares on balance, I know, are frustrating people this year because they're, I guess, measured by some of the indices, almost flat versus beginning of the year last year, 2017, while you know, gold's doing pretty well, though silver's kind of a lager. Do you expect, at some point, the higher gold prices to be reflected in the shares? What do you think is holding them back?

Eric: Well, I sometimes wonder, you know, when I look at share trading everywhere, by the way, that there's these outside influences that somehow can affect prices over the very short term. So I'm always suspicious when gold stocks go down, you know, 2% and 3%, when there's a $2 decline in the price of gold. I mean, what is that about, okay? But getting back to fundamentals, I mean, we're at $1350. That's a nice price for gold producers, okay? I mean, they're going to make some serious dough here. So, and I think it's a great opportunity. I mean, I'm staying invested in gold stocks. I'm buying gold stocks. I'm sure things will work out here. And I just can't even imagine what the reaction's going to be if gold ever got to $1400 and then we all think it's a new bull market and the stocks are cheap going in. There could be a lot of upside in a hurry here. So, I'm quite optimistic there.

Craig: Yeah, no, and that's from a boots-on-the-ground level. I mean, you how the math works on several of the companies you're involved in. And then all of a sudden gold goes to $1400, $1450, $1500 that just ripples straight through the bottom line, doesn't it?

Eric: Big time. Big time. Big earnings. Not that they don't have reasonable earnings now. Most of the companies are coming out with sort of okay earnings. But you throw an extra 100 bucks on there for most of those companies, they got to be at least a 20% improvement in their earnings. At least. So that should be 20% in the stocks, and then if we think they're in a bull market, maybe you take the 20%, and turn it to 40% sort of thing. So that's what we have in front of us.

Craig: Eric, let's wrap up with some news out of Australia this week because I know you're very close to what's going on there, paying a lot of attention to the developments in that Pilbara region. And we had some news on Novo Resources this week. Can you add any color to what you've seen down there?

Eric: Well, you know, it's interesting. What they announced is they moved from Purdy's Reward, which is the joint venture with Artemis over at Comet Well, which is I think they have a 70% or 80% interest in. But they're the operator. And they announced that they've now found two conglomerate beds, both about 15 meters. And they've sort of suggested that there's more than one zone of gold minimalization as distinct from Purdy's Reward, where they only had the bottom half-meter was gold-mobilized, which is not unusual because the Witwatersrand only had like 40 centimeters and ended up with a billion ounces, billion seven ounces. But this news that they found two conglomerates, one above each other, would suggest that the chances for the whole precipitation thing to play out have increased dramatically. And I mean, it's early, early, early days in terms of proving it up, but, you know, if I was to put it out this way, imagine if you went from having half a meter to two meters. Like that's 300% more gold, okay? That's the sort of thing that can happen here. And we don't even know how wide the zone is yet, it's so early. But certainly just the fact that that second zone was there and it was as thick as it was, I think was a new item. And I'm not giving any investment advice here. I am a Director of Novo, and I'm biased because I'm a big shareholder. But I would encourage those people who care about things like that to take a look at the press release carefully.

Craig: Yeah. Yeah, it certainly made the rounds at my site. You know, it's going to be a very interesting week ahead, too, Eric. Like I said, gold is pressing up against, I guess we'll call it, bull market highs since this bull market resumed last year, or back in 2015. And the dollar is falling and interest rates are rising and the stock market is teetering. I very much look forward to talking to you again next week to see what the next five days brings.

Eric: Well, let's just imagine this. Let's imagine if we had next week like this week. Oh my gosh. We'd be at $1390. What would we all be thinking then? So let's hope we can hold it together.

Craig: Let's hope we can. All right, my friend. Thank you for your time again this morning, and for all the expertise you add, and for all that you do for the gold community. And at this point, I'll wish you a very nice weekend.

Eric: Okay, Craig. All the best to you and the listeners.

Craig: And from all of us here at Sprott Money News at sprottmoney.com, thank you for listening and have a nice weekend.