Weekly Wrap Up

“Maybe the whole fraud of the Comex is unwinding.” (Weekly Wrap-Up, January 5, 2018)

Head Shot of Eric Sprott Weekly Wrap Up

January 5, 2018

Precious metals are off to a great start here in 2018: gold has been up for fourteen of the past fifteen days and silver had a strong 2017 as well. What’s the secret?

Eric believes it’s dollar-related. “The U.S. dollar has been very, very weak. The economy is not really showing great signs of doing anything, quite frankly. It’s kind of coasting along. You have a new tax plan which is going to increase the deficit considerably…. Lot’s of people know there’s a high degree of recklessness going on at the federal government level. And people are losing confidence in currencies.”

Add to that a weak U.S. jobs report, anemic wage growth and higher-than-suggested inflation, and “it’s very difficult for the U.S. consumer to kind of hold it together here.”

After a run-down of how the commodities markets will benefit from the anti-dollar sentiment, this week’s wrap-up also includes a lengthy discussion on the “exchange for physical” phenomenon off of the Comex that you won’t want to miss.

Finally, Eric closes out with a brief chat about what’s going on with palladium.

To get his full thoughts, listen to the first weekly wrap-up of 2018 here: 


Announcer: You are listening to the Weekly Wrap-Up on Sprott Money News.

Craig: Well New Year's greetings from everyone at Sprott Money News and sprottmoney.com. It's Friday, January the 5th, 2018. This is your Weekly Wrap-Up. I'm your host Craig Hemke and joining as usual to kick-off the New Year is Eric Sprott. Eric good morning?

Eric: Hey, Craig. Happy New Year to all. We've had a good start and our views looking forward here pretty optimistic. So it's fun to get back and get at it again.

Craig: Hey, and before we get at it, just for our American listener. Sprott Money now carries Scottsdale Mint products in the U.S.A. You can order today on our U.S. site, it's sprottmoney.com.

Okay, Eric, we're off to a very good start here in 2017, gold's been up 14 of the past 15 days, and it's up 1% to start the year. Silver is now having a strong 2017 as well, what do you make of all of it?

Eric: Well I think for the most part it's dollar related. The U.S. dollar has been very very weak, you know, the economy is not really showing great signs of doing anything quite frankly, it's kind of coasting along. You have a new tax plan which is going to increase the deficit considerably. Notwithstanding the fact that the bond market has been weakened, I think lots of people know there's a high degree of recklessness going on at the Federal Government level. And people are losing confidence in currencies, and we see that in the cryptocurrencies, we see it in precious metals. And I think we see it also in commodities. So there's a thing going on that isn't normally explicable other than, I think a malaise towards the U.S. currency.

Craig: Well, and I would imagine that would continue most of this year. The dollar was down more than 10% last year, and it's obviously weak again this year. And the information we got this morning about the U.S. jobs report didn't seem to land much strength to it either.

Eric: No, it's quite weak, I mean, the 148,000 jobs is not very significant. Of course, we never really been believers of the numbers that are provided out there. And, you know, the wage growth is anemic, inflation is way higher than suggested. So it's very difficult for the U.S. consumer to kind of hold it together here.

Craig: Eric let's get back to that weak dollar because it's starting to spill over to the commodity sector. Whether you're looking at copper, or crude oil, which are probably the two most important commodities, or just a general basket of them as measured by the CRB index. Many of them are breaking out, moving higher. That, you would think, would spill over to the metals particularly silver if that trend continues. You agree with that notion?

Eric: And it is happening and I might even highlight palladium which hit an all-time high here just in the last few days. And I just think that there's been so much money made betting against U.S. dollar In a sense, and I'm using cryptocurrency as my example of that. The fact that they just exploded, the fact that the dollar has fallen 10%, the fact that most commodities seem to be moving up here you would think that people are sensing a definitive play here and it's an anti-U.S. dollar play and most things are working.

So yes I do fully expect that the precious amount, particularly in silver and gold, maybe silver more than gold, would be huge participants in any anti-U.S. dollar rally going forward here.

Craig: Do you get a sense Eric, it's a little bit like 2009 and 2010 when the QE programs first began, and the markets began to anticipate inflation that never really came. Are the markets anticipating inflation? Again these commodities markets, is that what is starting to drive them? And again could we be setting up, I mean gold had its best year since 2010 in 2017. Could we be setting up that type of return again?

Eric: Well, there’s been some big moves here. There’s big moves in palladium, I think it was up a little over 50% last year. Lead and zinc were strong, copper was strong. The oil, oil's gone very low. It was a low of $25 or something, over $60 now. So we've had some big big moves here, and people who have participated in them, become believers, right? It's like the cryptocurrency thing it goes up so much that people become believers they just keep throwing things at it. So I think it's very much likely to continue here, particularly with, you know, the day after day weakness of the U.S. dollar, you just can't seem to catch a bid here. And I think for obvious reasons that there's...the economy is not so good, the chaos in Washington is ever present, I mean, there's not a day that something crazy doesn't seem to happen in Washington. So I think, you know, the belief in the currency is quickly diminishing.

Craig: Eric let's just take a few minutes this morning before we wrap up to discuss this exchange for physical phenomenon, let's call it that's taking place off of the Comex in its transfer of the future's too physical. You know, if you...you started mentioning this about a month ago, and I was reluctant to get too interested in it because I really didn't have data. I didn't know that if a surge in EFPs was common in December, and I didn't know, you know, what kind of size was important. But now the size has gotten to be overwhelming and so we really got to start paying more attention to this.

Again we're talking about something called an EFP, this is something that the...If you can go to the CME Group website and look this up. It's exchange...it's under the category heading exchange for related positions, and exchange for physical. Again according to the CME Group is position...you're taking out of position in the underlying physical instrument. In this case gold or silver, for a corresponding futures position. So what we're saying is movement of futures contracts off of the Comex exchange in New York, and on to what appears to be London. Because there's not volume, there's not metal store in the vaults in Hong Kong to manage this amount of exchange.

Since you first mentioned this to me Eric back in late November, I've been keeping track of this for five weeks. Over just the past five weeks the total amount of Comex contracts that have been transferred off the exchange, and this exchange for physical process, is now 322,355. That if you do the math at 100 ounces per contract is over 32 million ounces which means we are now over 1,000 metric tons of gold that has been delivered, if you want to call it that, through this exchange for physical process in just the last five weeks. Now that is a big long entry ticket to your thoughts, but I want to bring everybody to speed of what's going on here. Because really we don't know what's going on here other than this data.

Eric: Yeah, it's been shocking actually and I might even point out that the trend so far in '18 is even larger quantities. We're almost doing a million ounces a day of gold that's been transferred over, I think it's like 800-odd thousand, 850, something like that. And we're about 10 million ounces of silver every day. Well, these are just gigantic numbers in the world of precious metals, and we will only produce a billion ounces of silver in a year, while if you do 250 business days times 10 million, that's two and a half times the amount of silver we produce. Same with gold, we do 80 million ounces a year, well you can't be doing a million ounces over 250 days. But that's the first three business days this year that's exactly what's happened.

And it's a new phenomenon, it's not something that I have seen before. And then a gentleman named Harvey Organ kind of pointed that in his blog and it just seems to get bigger and bigger and bigger. And there's really no valid explanation about why all these would happen. And if we were to take it at its base surface, it means that we transfer in the obligation to the deliver the physical over in London. Well those amounts are just impossible to deliver here and maybe the whole fraud of the Comex is unwinding, it's hard to know. But it's something that we got to keep on the front burner here and keep watching very carefully.

Craig: Just for a little more background, last year a guy by the name Ronan Manly who works for a company called Bullion Star wrote an article trying to figure out how much gold was in the LBMA vaults. And he found out that as at the end of the first quarter last year, the LBMA reported about 7,400 metric tons of gold being stored in eight sets of vaults locations. But the Bank of England has about 5,100 tons of that, so that leaves us about what? 2,400 tons of unencumbered if you will, gold that is not in the England vaults.

Well Nick Lare there at GOLD CHARTS R US found out that about 1,500 tones were held in the various ETFs that are back, you know, the custodians are HSBC and J.P. Morgan. So now if you subtract out of the 1,510 you're left with 858 metric tons of gold stored in the LBMA vaults that are outside the Bank of England vaults, and not held by the ETFs. 858 tons of gold that's all that the LBMA has, that's not already assigned someplace else.

And again the Comex has transferred 1,000 metric tons through this exchange for physical process in just the last five weeks. I mean this dog don't hunt, Eric.

Eric: Well it's astounding. The numbers are just totally out of this world and it's very difficult to explain. I haven't already had an explanation for it, some people suggest it's just a way of the banks squaring up the books, some are off the Comex, which is still very difficult to see how that would literally happen. So as I say it's something we got to be careful of and maybe it partially explains why gold's been that strong over that five or six-week period that post the Fed, their decision, certainly for the last three weeks it's been quite strong.

Craig: Yes, and one last thing. You mentioned palladium, palladium moving out to new all-time highs at the same time the actual physical stocks of palladium are moving towards new all-time lows. You know, the banks play the same game in palladium as they do in platinum, gold, and silver. Where they try to make a market through naked shorts and stuff like that. It would be interesting experiment here, Eric, to see how that works out over the next couple of weeks too.

Eric: When you and I talked about palladium I kind of used it as maybe a market because it's probably the smallest of these precious metal markets. Where, you know, it's fine to say you can keep it under control with paper, but when somebody finally asks for delivery of the commodity that's kind of in short supply, your paper game is over. So I watch palladium to see if maybe it might start some kind of action in the other metals and I would guess it would...might go from palladium, platinum, to silver, to gold, that sort of thing.

It's somewhat playing out that way and again something we have to keep our eye on because that's a very small market, I mean if the speculators ever wanted to get in there and literally buy up the inventory and you can have a dramatic shortage overnight, almost.

Craig: Yeah, I tell you what, put it all together we have a very interesting year ahead. Heck, Eric, we've got a very interesting January ahead, so I look forward to speaking with you again next week and seeing where the road is taking us in just the next few days.

Eric: Let's hope it continues to be as much fun as it's been for the last three weeks.

Craig: Let's hope so. And for now, I guess we'll wrap up. Thank you, Eric, for your time, and thank you, everyone, for listening. And on your way out please check out the storage page, it's sprottmoney.com. You can get a month free storage for your precious metal if you go there today. It's sprottmoney.com for more info. Again Eric thanks for your time. Thanks everybody for listening, we'll talk to you again next week.

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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.