Multiple “Tsunamis” Converge on Gold and Silver - Weekly Wrap Up (April 9, 2020)

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

Craig: Well, greetings once again from Sprott Money News and sprottmoney.com. It is Thursday, April the 9th, and it's time for your "Weekly Wrap-up." You've noticed it's Thursday, not Friday, and that's because the markets in the U.S. are closed tomorrow, Friday, April the 10th, in observance of Good Friday, and the three day Easter weekend. So, one day ahead of schedule we get your "Weekly Wrap-up." I'm your host, Craig Hemke, and joining us is Eric Sprott. Eric, good morning.

Eric: Hey, Craig, good morning. You know what's interesting about this? We got a four day week, but have we ever got a lot of stuff packed into four days. It's incredible.

Craig: It is something else, isn't it? I just...it seems like every day, you just never know what's gonna come next.

Eric: It's like the multi tsunamis, right? The financial tsunami, the economic tsunami, the precious metals tsunami, the Coronavirus tsunami. I'm, like man, they're all moving.

Craig: Yeah, that's right. And we're gonna talk a lot about precious metal today, obviously, and the physical markets, and what's going on there. And a lot of dealers are out of stock. And some dealers, like Sprott Money, are actually temporarily closed in Toronto, because of the quarantine and people asking to social distance. However, there's still reason to visit sprottmoney.com. One of the reasons you'd want to is to sign up for our email newsletter. If you wanna get information such as these "Weekly Wrap-up" podcast, plus other precious metals news right to your inbox, you can visit sprottmoney.com and sign up for that Sprott Money Newsletter.

You can "sprign up," too, if you want, Eric. All right, my friend, this is another really interesting, fun week. Gold is surging again as we speak, highest levels, back close to the highest levels we saw back on Monday. But still some of the highest closing levels perhaps that we've seen in more than seven years. Very interesting time to be alive. What are you noticing?

Eric: Well, I think precious metals are the number one topic, of course, particularly for us, because the other two topics we'll talk about, the economy and Coronavirus, are sort of continuing in a particular trend. But the action in the precious metals is wild. I would say that the key change that's happened in this last week was as the price of gold went up sharply on various days, the open interest didn't, which meant that the commercials were not trying to keep the price down. We used to have a measure that, you know, for every dollar that the price of gold went up, there'd be an open interest increase of 1,000 contracts.

Well, we had days when price has gone up 40 bucks, and there's, like, no increase. And that's continued to happen here, that we've had some very large days, and there's hardly been any increase in the open interest. And I think it suggests that the commercials know the gig is up. And you've obviously done a lot of work and reported on this on your own website and on Sprott Money. The difference between the spot price and the futures price, the fact that the futures price could just explode all of a sudden, as we're seeing here this morning with gold up 40 or 50 bucks here, and something like $30 in the spot market as we speak.

And of course, there's a certain tightness, a physical tightness, in the market. And I can only give my own example of it. I was thinking about buying some silver, and I thought... I wanted to buy about $5 million worth of silver. And, you know, maybe I better not put in that big an order because they'll just turn around and tell me they can't get it, so I'll put in a smaller order for a couple of million. And I think I was able to buy it, but I did speak to the trader who was handling the order, and believe me, it's getting tight. So, can you imagine we're in a world where somebody who trades silver all the time, and gold, can't buy it? What is that about?

And of course, lots of people are watching the price of gold going up here, and they realize that silver is a beautiful alternative. In fact, it probably is a better alternative from a total appreciation point of view. And yet there's none available, and you know, and we've talked about the premiums for coins, which are just nasty. I mean, they're $10 and $12 a coin above the spot price, which is kind of ridiculous. I tried to buy 1,000 ounces bars, by the way, which don't trade at those kind of premiums. And I presume I was able to buy a small amount, but it's interesting that things have changed so rapidly.

I would draw people's attention to, for example, the Silver ETFs. I think they put on 42 million ounces in the last month. Well, you know how I love annualizing things like that. That's about 500 million ounces, okay? Well, we only mined about 900 million ounces. Of course, we don't even mine 900 million ounces anymore, because of the shut down in Peru and Mexico. So, you have the investment business buying all of the production, more than all of the production.

What does that tell you that the price is gonna do? Particularly when you and I talk about COVID-19 in the economy, that people have to be aware that there are big issues going on out there, which suggest that owning gold is very appropriate, whether it's disinflation, which is the more important reason today in my mind, or whether it's gonna be inflation in the future, because of all the spending by governments here.

Craig: You know, Eric, you mentioned this difference, this deviation between the spot price and the futures contract, which, as someone who's been in futures, you know, I follow futures, and I trade the futures, and I trade the options and all that stuff my whole life, that spread is usually just a couple dollars. And at times over the last few weeks, it's blown out to as many as $70. And it's $50 this morning. So, I kinda wanna to get your opinion on that, because I see that as a crisis of confidence. Because what should happen is that it's a risk-free arbitrage trade for someone with big enough money, because you can, to close that gap, you can sell a futures contract and buy at spot, which then narrows that gap. And it's a free trade. I mean, you buy the spot, you hold to get the metal, you hold on to it for the whatever it's gonna be now, six weeks before the June goes into delivery, and then you deliver it. And you make $50 an ounce. You do it on one contract, that's $5,000. You do it on 100 contracts, that's $500,000. And no one is doing it.

Eric: Yeah, well, it's interesting. I have a personal way of looking at this. And I look...of course, everything I look at has to do with what the commercials are doing on the COMEX, okay, because they're the guys that run the price up and down. In fact, one of the things I should have mentioned, as I looked at what happened to both gold and silver about two weeks ago, they just hammered them. Like, there was no reason to hammer them like that, other than those guys trying to cover their shorts. And, you know, they took silver down to $12.50, and it's now whatever, $15.50. And they took gold down to $1,450. It's $1,700, I mean, a couple of weeks later. Are you kidding me? It was like sharply down, sharply up.

But my own assessment of why the June contract is so much above the spot contract is there is an incentive for someone to sell the June contract. And you know what? There's an incentive for someone called a commercial bank to buy the June contract, and get me out of this short before the price of gold explodes. And that's why I think they've created this divergence in the price. Because, you know, when you go to ask for your spot to gold or silver, you probably won't get it anyway. But meanwhile, the guy's off his June short. So, that to me is a big part of what might be going on here.

Craig: That's a good point. You know, a lot of folks are trying to apologize for the system by saying, "Oh, no, it's just a problem that gold is just not in the right place. Right? And so the COMEX is amending their rules so that you can deliver fractions of London bars and stuff like that." Eric, you and I have spoken for years about how hyper-leveraged this fractional reserve system is, and how there are so many beneficial owners of each individual ounce. I gotta lay a stat on you. And I told you before, I wasn't gonna give you this information till we were recording, just so I could get your reaction.

You know, they trade...The biggest hub in the world of unallocated gold trading is in London, right?

Eric: Yep.

Craig: In the month of March alone, it has been reported that the volume of gold traded in London, month of March alone, 32,255 metric tons.

Eric: Thirty-two thousand. Oh my God, that's about 10 times the annual mine production, traded in one month.

Craig: And you annualize, what's that times 12, Eric?

Eric: Yeah, no, just, it's mind-boggling. Hundred and twenty times the world's supply of gold, and who's trading this stuff? Who needs to trade this stuff? Why do they trade this stuff? It sounds so phony. You know, it's just like a bunch of guys throwing up trades with each other. I don't know what the purpose is, you know. I mean, and by the way, the amount of money is staggering. Put those contracts into money. It's probably $70 billion or some ridiculous amount of money being traded. It's just mind-boggling. That does surprise me...

Craig: So they tell you...

Eric: ...because we never understood the LBMA, right? I mean, there are no, hardly any data ever comes out of that place. So, who the hell knows what's going on there?

Craig: "But there's plenty of gold," they say, "Oh, it's just to the wrong place, Eric. There's all kinds of gold." And the LBMA has a trading volume of over 32,000 tons in a month. Remarkable. All right, my friend, I've got a list of questions that I wanna run past you because we haven't had a chance to get to questions for the last couple of weeks. But before we do, just other things that might be on your mind that you've noticed as we've gone through the week?

Eric: Yeah. Well, I wanted to bring up a couple of things about COVID-19. And these are data points I read today for the first time. In South Korea, there's 51 cases where the guy had the Coronavirus, he was treated and presumed to have been cured, and it was reactivated. That's a scary, scary number. I also read that in China, that one out of every three patients was likely to show no antibodies after having had the disease. Now, that's a frightening prospect because one of the theories that we use about the way you solve this thing, of course, the easiest one would be some vaccine, which we don't seem to be making much progress on.

But two way might be, you know, have everyone get it and we all develop an immunity. But if a third of the people didn't develop the immunity, you have this continuing problem. It's a lesser problem if it's only 30% or 33% of the population. But it still, it doesn't go away too fast. That's, I guess, the point that I'm trying to make. So, these are kinda scary, scary statistics. The numbers are bad enough as they are. I mean, this whole thing with the market going up because the caseload's coming down, which hasn't proven to be the case for a second.

And even if it comes down, my God, "Oh, gee, we only had 29,000 cases instead of 30,000 cases." You know, not as though we're all gonna go to the bars the next day. We're gonna be stuck in our homes for a while here I'm afraid to say.

Craig: Yes, and we're seeing today, what did the Fed announce just this morning, another $2.3 trillion of free money created, cash, you know, imaginary money, it's just infinite, sent out to loans?

Eric: Yeah, in terms of the economic impact, we also had the initial claims, okay. They were at 6.6 million, new claims. So now, we've had almost 17 million claims in the last three weeks, which by the way, is 13% of the working population. Thirteen percent of the working population? Oh my god. So, maybe we get an unemployment rate of, like, 16% or something. And this all happened in three weeks, okay. The economic decline we're experiencing is at unheard of proportions. And I find it very interesting, and I think I commented on this before, the first Coronavirus program that the Congress passed was $50 billion.

And I laughed at the time, and "Oh, you guys have no idea what you're talking about." Then I think it was an...then there was an $800 billion, and there's a $2 trillion. And now we've got a $2.3 trillion. And of course, the problem is the whole financial system is cratering, all the loans, all the businesses, all the small business, all the big businesses. There is no business. There's no business. The only business that's sort of carrying on is financial and government, and healthcare. And everything else is basically shut down almost. So, what's the cost to the government, and/or the Fed going to be when it's said and done?

I think they have no idea. I have no idea. But it's not a little amount of money. It is gonna be staggering. And I think that's why gold is obviously running today, because gold, and what people investing don't realize, oh my god, think of, you know, if the U.S. government has to, and the Fed have to put in whatever number you wanna pick, I don't know what the number is anymore, but let's say it's $10 trillion. Well, what about the rest of the world? What are they all gonna print? And what's the currency gonna be worth at the end of the day? So, anyway.

Craig: Well, and that's all part of what I've been discussing for 10 years at my site, and what you've been doing for decades now, trying to warn people that this was coming. This infinite cash creation was coming, and people are figuring this out. It's all part of this shortage of metal that's not going away as this hyper-levered system is forced to de-lever and actually deliver metal. So, as I get to some of these questions, Eric, the first one is this. "Would Eric please discuss the possible consequences of a long contract holder standing for June delivery, and the bullion banks being unable to deliver? What would the settlement look like? And what would be the possible losses to the banks?"

Eric: Well, of course, for COMEX purposes, the ultimate deferral thing is we settled...we're allowed to settle for cash, okay. They don't have to deliver the gold. That's written into the contract, that if there's an event of default, they can settle in cash. And I'm sure that's what's gonna happen here. I don't think you should believe that when you buy the June contract, you're gonna get into gold, because you're not, would be my guess.

Craig: Right. All right. Second couple of questions, how to deal with silver. Silver has recovered somewhat after that huge sell-off you mentioned and the reasons behind it. But it's nowhere near...Actually, it's up more percentage basis since QE to infinity started than gold is. But it's still down at, obviously, $15 something. Why is it still $15? And how long do you think the mints will stay closed? Because that's obviously affecting the shortage as well.

Eric: Sure. Well, I think the reason that it went down as much as it did is the commercials can do anything they want with silver. It's, the whole silver market per year is $15 billion, okay? The amount of silver produced, billion ounces times $15. It's nothing, $15 billion. So, somebody with deep pockets i.e., the commercial banks, they can take the price in the short term anywhere they want. And they did. They took it to $12.50, started covering their shorts. They've covered almost...I think they've probably covered half their silver shorts. We're getting down to almost the bare minimum. Some people use 135,000 open interest as kinda like the bare minimum that you ever get down to.

It might go lower this time, because there really is a shortage. So, my view happens to be that this gold/silver ratio is ridiculous. That when people all decide they want physical assets, that physical asset which is in the shortest dollar amount, will go up more than others. So, I think silver, platinum, palladium, will probably outperform gold, would be just my off the cuff guess here. And of course, I've been...as I said, I'm trying to buy silver, and it's impossible to buy here. And I don't think it's gonna get any easier as we go forward here.

Craig: Oh, all right, here we are, what? Three and a half months-ish into 2020. Gold is up now more than $200 year-to-date. But yet most of the mining shares, and particularly junior miners, have gone down. So, the first question is, "What's the deal?" The second one is, "If somebody were to start dabbling into the mining shares, someone that doesn't own them at all, in your opinion, what are the safest, if you will, of the mining shares to buy?"

Eric: Sure. Well, first of all, you have to worry about the mines being closed down here. Anybody with an underground mine is vulnerable to a close down, because, typically, in underground mines, when you're transporting your employees to an underground location, these guys are going cheek to jowl down the shaft in the skip. And that is not a socially safe distance, okay. So, that's a concern. I would say the best guys are probably some intermediate producer who's open-pit, that's been kind of undervalued. I don't have that name in mind. I know that I think one of the cheapest ones happened to be an open, a underground company called Gran Colombia, that's probably trading in two and a half times earnings.

But there's that risk that you might have to shut down. But there's a corollary and a benefit to shutting down. If they shut down, if in the future they shut down, now there's no gold supply, and all this demand for gold. What is the price gonna do? And I think they would realize, you know, when we get back to wherever we're gonna get back to, if we ever get back to normal, that owning precious metal stocks is a damn good bet versus a lot of other things that aren't gonna recover. So, I don't know if I've answered it, but I have not been much of a participant lately in buying stocks. I have been in terms of buying gold and buying silver. But I could tell you now, I'm starting to look again.

And I've had lots of the things I own that have gone up very sharply recently, surprisingly sharply. In other words, somebody came in looking for a little bit. The stock was up 20% just like that. I mean, it's been crazy. So, I think there's lots of opportunity there.

Craig: The underperformance of the juniors, given that price is up $200? You got any theories?

Eric: Well, that's not untypical. You know, these smaller companies and the explorers always take a little while to command much attention. But as an example, Kirkland Lake, from its low, is up 100%. It's amazing to think that, but it is up 100%. And I think that this will happen to other stocks, you know, that don't quite have the same attention that the Kirkland one had. So, it just takes time. I think that it's probably not a bad bet versus everything else that's going on. And yes, the stock market seems to wanna go up here. I'm not a believer in the stock market here, okay. I think the only reason the market is going up because everyone thinks the Fed and the Treasury can print enough money to bail everybody out.

But, you know, there's one thing that's gonna happen. They gotta report their earnings, and they gotta cut their dividends. Everyone is gonna be eliminating their dividend, okay? I mean, that's just almost a given. Even these banks will have to give up their dividend. It's ridiculous that the Fed would be putting that much money in the banking system, and letting those guys pay dividends and bonuses. Are you kidding me? Not gonna happen, I don't think.

Craig: All right, one last question. We'll wrap up with this one because you mentioned it a little bit earlier. Some economists are forecasting deflation over the next two to three years before we get any sign of inflation, as consumer spending and business investment retreat on a scale not seen in decades. How would the precious metals behave in such an environment?

Eric: Well, I think in a deflationary environment, the precious metal are gonna act superbly. And the reason for that is, it's the safe asset. Like, you know, I don't believe the banks are safe. Every one of the banks' customers, save a few, are losing money, or taking their money out of the bank because they gotta pay off some bills of some sort. Whether you're a corporation or a person, everybody is way, way, way worse off. If all your customers are in bad shape, you're in bad shape. But the Fed has put enough fuel on the fire here that it hasn't kinda spilled over yet. But I personally wonder whether the government and the Fed have enough ammunition to deal with the size of the problem.

Because you start off with debts. I don't know what the total debt picture is. Is it like a couple of hundred trillion or something? You know, and all of a sudden, you can't service the debt. And that's a lot of money to not service.

Craig: The U.S. passed $24 trillion yesterday.

Eric: Yeah. For the government. Yeah. I'm thinking of the corporate debt, right? All the corporate debt out there. Imagine, you know, you've got corporate debt for an airline. And what's his...he doesn't even have any revenue today. He just has expenses. Wow. That's not easy to deal with.

Craig: No, that's for sure. All right, as we begin to wrap up, I just wanna point out we are still operating, obviously, at Sprott Money. So, again, sign up for that email newsletter at sprottmoney.com, but also be sure to check back in a couple weeks. We're still gonna do "Ask the Expert" this month. And "Ask the Expert" for this month is someone a lot of Canadians know. A guy by the name of Rob Kirby. I know Eric knows Rob quite well.

Eric: Oh, yeah.

Craig: Good time to pick his brain on everything that's going on. He will be our expert. We're gonna record in a couple of weeks. If you have any questions you'd like to ask Rob Kirby, email them to us. Submissions, the word "submissions," submissions@sprotmoney.com, and yours truly will be sure to pass them along to Rob when we do the interview. Eric, hey, I hope you're able to have a peaceful, relaxing Easter weekend. Try to put some of this stuff out of your mind, and then I guess we'll get right back at it come Monday.

Eric: It should be exciting. You know what's funny? We all look forward to the six o'clock opening on Sunday nights, right, just to see how the world adapted to whatever events transpired over the weekend, because there are so many things going on, including...Imagine us having to analyze the new $2.3 trillion program? The new data that we're gonna get on the Coronavirus. It's just such a vibrant, crazy chaotic time. So, it's something that some of us actually do look forward to. So, I'll look forward to seeing you next Friday.

Craig: You got it, my friend. Well, have a great weekend.

Eric: Okay, you too.

Craig: And from all of us at Sprott Money News and sprottmoney.com, have a great holiday weekend, and we'll talk to you again next Friday.