No Return to Normal: Why The Economic Wasteland is “Dramatic” - Weekly Wrap Up (June 12, 2020)

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

Craig: Happy Friday from Sprott Money News at sprottmoney.com. It's Friday, June the 12th 2020, and it's time for your Weekly Wrap-Up. I'm your host, Craig Hemke, and joining us as usual this Friday morning is Eric Sprott. Eric, good morning.

Eric: Hey, Craig. Wild and crazy week so far, and we might get a little more wildness here today in the precious metals side. Lots of things to chat about.

Craig: Lots of things to chat about. And we of course always try to answer your questions that you send in through submissions@sprottmoney.com. But I encourage you to use that line also for questions for this month's Ask the Expert segment, coming up next week, where Eric is certainly an unabashed expert in the precious metals. So is Ronnie Stoeferle. Ronnie, friend of mine, I'd like to say, who is the principal author of the annual "In Gold We Trust" report, which is something I know Eric reads, I read every year, everybody in the precious metals sector looks forward to the "In Gold We Trust" report. So Ronnie is someone who is very well-versed in the industry, and can answer any question you have. And so we would love to have you send in some questions. Again, submissions@sprottmoney.com. We'll record that next week, get it posted by late next week, so you can hear your questions answered. Eric, I got a lot of questions for you. That's for sure. Like what the heck happened yesterday? But for the week, after the terrible week we had last week, gold's up pretty good. About $65 as we speak, silver's up 30 or 40 cents. How are you feeling this Friday morning?

Eric: Well, pretty good. Because we've got a continuation of the gold rally here this morning. I think the closing high on the spot retail sales is $1748, and we're within spitting distance of that. I think we're $1741 now, so it should be good. I think the market breaking yesterday, of course, should be positive for people who care about safety. And it looks like that's playing out here today. Unfortunately for all of us, this COVID-19 is not going away quickly. And in fact, the biggest concern in the market is this supposed second wave. And of course, we've seen 22 states that have dramatically increasing cases, which is a very, very bad sign.

Craig: Yeah.

Eric: And from an economic perspective, I mean, I just can't even imagine. It's bad enough that we've been, I mean, I've been shut down here for three and a half months now. And I'd hate to think that it went longer and/or even worse, that there is no return to normal. Which is, I think, what one should fear here, that things aren't going to ever be the normal that we had. Unless there's some vaccine, hopefully, that someone can come up with here, but the economic wasteland out there is becoming incredibly dramatic. The deficits that governments must be running up, and not just the federal government, but the state governments, city governments, all of whom aren't receiving taxes, and yet probably have greater expenses today than they've ever had because of the, trying to support the population.

So it's not good what's happening here. We've always known it was virulent. That's the one thing that we know COVID-19 is all about. I think we gotta sort of live through this, and we're gonna have to develop a herd immunity and/or a vaccine, but I just can't imagine that we're all gonna go into lockdown again.

Craig: Well, the Fed certainly is making it look that way, Eric. They, in the FOMC this week, it was all about, "Hey, we're gonna pump as much cash and keep interest rates at zero for as long as possible."

Eric: And I think the Fed realizes that it's not gonna be a V-shaped recovery at all. Like, even the word "recovery" might be, come into question here if we have to continue in the manner that we are today, because weakness begets weakness. The whole, with this possible tsunami of defaults here, whether it's people, corporations, governments, that can't be ruled out, and that's gotta be an ever-present thing, so am I surprised that the market sold off like it did yesterday? No, I'm not, because the economic outlook is very weak. And we had rampant speculation happening in the stock market, where retail investors were buying big parts of the market, and of course, their favorite thing is buying calls. Well, you can make money quickly, but boy, you sure can lose it quickly. That and the fact that the put/call got wacked out, that the retail was such a large part of the market are telling you these are signs of a top. And of course, it broke hard yesterday. And we got a lot of work to do to try to get this economy back into shape here.

Craig: How about some of the mainstream stuff we're seeing? Some pretty big names out there talking about gold and the value of having gold and silver in an environment like this.

Eric: Yeah, I'd actually like to talk about three people that made interesting comments during the week. The first one is Stephen Roach commenting on the U.S. dollar, basically saying, "It's over for the U.S. dollar." And of course, he's not the only person saying that, but he came out and suggested it. We also have Jeff Gundlach, the bond king, and what's his favorite thing to invest in? Gold. And on that front, Scott Minerd from Guggenheim was interviewed on CNBC yesterday, and I heard, and I wish I could replay it. But I'm absolutely convinced he said he's a bear, that he has as much money invested in silver and gold, particular with the emphasis on silver, because hardly anybody ever mentions silver, so I found that very interesting, than he does in equities. And of course, lots of people think anybody who has over 10% in gold and silver is being a ridiculous speculator.

And as you know, a guy like me has 80%, 90% of it in precious metals, and I'm glad to see that the Guggenheim folks have a lot of money in gold and silver. And the fact that he mentioned silver, and I know you and I talked ahead that he had mentioned that silver would be his best trade recommendation for this year. I think he made that back in February. But the fact that he mentioned silver, and we see the kind of investment in silver that we do. For example, yesterday, the silver ETF garnered almost 8 million ounces, well, 8 million, that's 1% of the annual production, in one day. Just for investment, and it's needed for other things too. And for the month, the trailing 30 days, there have been 72 million ounces put into the ETF. Well, that's about what we produce in a month.

So somebody's obviously buying this stuff, and obviously, he's one of them, and I'm sure there'll be many others, because we keep seeing these ETFs garnering lots of purchases. I kind of wish they wouldn't put it in the GLD and the SLV because I'm always worried that the gold and the silver they own might be unallocated gold and silver, i.e., it doesn't really exist. But the fact that these considered experts are all leaning in the same direction that we choose to lean in is very supportive.

Craig: Yeah. Well, you know, Eric, and too, we've seen this huge ramp up in COMEX deliveries, starting with gold in April, and then silver in May. Silver, [inaudible 00:08:23] 10,000 or 11,000 contracts, a vast, I mean, a huge amount of silver compared to what we've seen historically. I can't even remember what the number was. Now we've got over 50,000, which is by far a record for June, in gold. I know you wanna talk about that. But then we're gonna turn around and look at July silver beginning in a couple of weeks.

Eric: Yeah. As I've mentioned in a few of the recent weeks, I plot this every day now. And the most stunning thing about watching the COMEX is, pretty well every day in gold, the open interest in the current month, which is the delivery month, even though deliveries are being made, there's net buying of new contracts every day, which means that the deliveries go up, which was what you were pointing out, that we started off I think with 47,000 contracts, thereabouts, that were expected to be delivered, and we're through 50,000 now.

So even though the number started out big, it keeps rising. And I wanna also point out that even though the open interest in gold is down by 50,000, the deliveries were 50,000. In other words, in order to get the open interest down, you gotta make a delivery. Now, does that mean that the total open interest ultimately will be delivered? Perhaps. And I'm sure that many institutions, as they're trying to buy gold and silver think, "Well, fine, I'll just go into the COMEX, and let's take delivery of a contract." And we've seen it in both gold and silver that, I think there's been, in silver there's been an increase of almost 50,000 in the open interest while there've been net deliveries. So as you point out, we're gonna have a big month coming up here for July. So everything on the COMEX points to a tightness, and a very bizarre situation where the shorts can't cover.

Craig: And Eric, there's continual news of the banks that, the bullion banks that are responsible for physical delivery, mainly in London, that are exiting this market, wanting to get out of it, because they can't get out from under these shorts. Sure makes you wonder where it's headed, because, you know, you get this impression from the media, that they're, "Oh, everything's fine. There's gonna be this V-shaped recovery and everything's gonna be right back to normal by Thanksgiving." That's not gonna work out that way, right? I mean, so this demand for gold and silver is not going away.

Eric: No. And I think it'll pick up a lot of momentum here, particularly... Hey, we've gone through, in the same time period we're talking about, let's say the last six, seven weeks, we've gone through one of the greatest bull market rallies of all time in the stock market. Well, now, what happens if that ends, and then people have to start picking their investments a little more wisely, and maybe sticking with the bond market and sticking with gold and silver? We could see huge amounts of money pouring in here. So everything kind of points that way. And lots of people are coming on to the theory that that's where you wanna be. So I think we just stay the course here.

Craig: The shares sure took a beating yesterday, Eric. I kind of write it off a little bit as, you know, we're just kind of in that lull period between earnings seasons. It was May, and then the next one will be mainly in early August. And so there's kind of a, some profit-taking. We've had a huge run. I mean, GDX is up 60% in the last 12 weeks, so, you know, you get a little profit-taking. Do you look at it that way?

Eric: Well, you know, it's funny. I'm maybe more of a skeptic than you might be. I don't really trust the trading in the stock markets. I was appalled, I think it was maybe on Wednesday, or maybe Tuesday, when one day that gold was down some part of 1% and the stocks were down almost five, and I thought, "How is this making any sense?" And I wouldn't be surprised that guys, "Hey guys, let's take gold down a percent, and we'll knock the stocks down 5%, and we'll buy them all." Kind of not a bad game if you can play it.

So I'm very wary of sort of reading anything into one day's performance amongst the precious metals equities. I think the important thing is to realize that, hey, at $1740 gold, the fundamentals have never been better, never. And most of the fundamentals for most stocks, save some of the IT ones that are used more in a lockdown situation, the fundamentals are deteriorating rapidly. And the fundamentals in gold and silver are in fact appreciating. And these, I think there are gonna be some serious cash flows. We're probably gonna get into dividend payouts and so on. And I think the outlook generally for the precious metals is great. And I don't spend a lot of time looking at the daily fluctuations. I think you should use them as opportunities. If it seems like they're sold off too much, probably great opportunities to buy.

Craig: Right. You recognize the long term trend. The daily stuff will just drive your bats, and cause you to do irrational things. You just gotta keep your eye on the long term, and I think the long term is in our favor. Here's a long term question for you, Eric. We had a number of questions again this week. Some that are just general, and that's what I wanna get your opinion on. One of them was having to do with jurisdictions, and potential of mine nationalization and stuff like that. We worry about things like that in faraway places. This question was, "Of the top five jurisdictions," and the guy says, "maybe it's Canada, U.S., Mexico, Peru, and let's throw in Australia, do you have concerns about government expropriation in gold and silver mines?"

Eric: Of course, I'm always concerned about expropriation of just grabbing the metal from people, more so than the mines. And the only way I can answer the question is, if I was to prioritize which ones would be the least likely to ever do that, I'd say Canada is the least likely, then Australia, then the United States, then Mexico, then Peru. It can happen. Hopefully people would be compensated for it. It would only happen in a very disastrous economic situation, which we are heading into. But I think that on a relative basis, if that were to happen, you would have already done exceedingly well with investments in those particular areas.

Craig: Yeah. That's a good point. All right, how about this one? In general, in terms of investing, and I know you do a lot of exploration companies and the like, but do you look to reserves and resources as a primary reason? Or do you look at earnings per share and potential cash flow, things like that?

Eric: Well, of course, you have to differentiate between the explorers, who won't have any cash flow, and the producers. In the case of producers, I actually look at earnings. Sometimes cash flow can be very misleading. If you overpaid for an asset and you have huge depreciation, it looks like you have lots of cash flow, but you just have money that's a result of overpaying for an asset, because you have to depreciate the darn thing. So I like to go to earnings as my starting point, and of course, I'm very conscious of the cash going into the cash account too, which is a separate item. That's in, for producers.

In the case of explorers, believe it or not, I'm not strictly a guy that's into reserves. Reserves are the highest classification of your gold inventory. I actually am quite willing to accept the definition "resources," which aren't necessarily proven up, but they look like they're there, kind of thing. And I look at resources versus market cap. I look at the likely margin on those resources. What are you gonna earn on those resources? In other words, a guy can have lots of resources, and the grade's like 0.3 of a gram. Well, how much money you gonna make at 0.3 of a gram?

So you gotta also look at the margin that you're likely to have. If somebody has an open pit and it's got two grams, I mean, it's gonna be highly profitable. If you've got underground, and you're above six grams, you're likely to be very profitable. So I look at resources and compare it to the market cap.

Craig: Yeah. Speaking of market cap, that's a question that came in this week. You know, now that the Wallbridge-Balmoral merger is complete, the market cap there is nearing a billion dollars. What do you make of that?

Eric: Kind of nice, isn't it? Has a nice ring to it.

Craig: It does.

Eric: Particularly if you're involved [inaudible 00:17:19] started getting involved when it was 50 million market cap. But it does change the way you have to look at the company. So for example, when I look at Wallbridge today, I say to myself, "When you're at a billion, you have to appeal to a different style of investor for that stock to appreciate." And the style of investor you have to appeal to is an institutional type investor. And I sense that Wallbridge is now doing that. I look at the volumes and I hear about the interest in it at an institutional level. Once you get to an institutional level, your upside can never be as much as of course when it was trading under 100 million, the leverage you get on the upside.

The upside could still be a billion dollars, but if it goes up by a billion, it doubles. It doesn't go from 10 cents to $1, which is 10 times on your money. So it's gotta be different style of investor that will come in here and move it. I'm still an owner, but I also am always looking for new things that might have a little more leverage than Wallbridge. And I mentioned one, I think two or three weeks ago, that I was involved in something called Freegold Ventures, which at the time I think was a market cap of 50-odd million, it's now 100-plus, and saying this thing has theoretically $6 million of resources, and it was trading at a very low market cap, and maybe vis-a-vis Wallbridge, it would, had the better upside to it, which for sure, it has the better upside. It's not as nearly as advanced as Wallbridge, but that's where the speculator comes into it, right? You're willing to speculate that they can prove these things up, and/or it gets better. So it's a different kind of investor needed for Wallbridge today, and I think they're going to accomplish that with the uptake of the coverage by the various brokers that now follow it. There were hardly any. Now there's a number of them. So in that sense, it's fulfilling that role.

Craig: Exactly. Getting a brighter light shined upon it, or shone upon it, whatever the right word is there. There's a few others I know that you've looked at recently. Anything you wanna share with us?

Eric: Well, I just thought I'd mention there are a couple of things that I've been buying this week. And I bought a company called G2, which is operating Guyana. Very good drill results. Early days. So I'm a fan of nice drill holes, because typically one thing leads to the other. I also bought one called Galway. That's drilling in Nova Scotia, has had very good success. They seem to have outlined a very significant strike length that they're drilling up. And it's got good people involved. So that one has been of interest to me. I bought some Teuton this week. It's a name I've mentioned many times. I also bought some Freegold ventures, to take me north of, I don't know where I am. I'm somewhere under 30, I think, but I love the opportunity of sort of doubling up the resource there and maybe significantly improving the grade. So that's one that I purchased last week.

Last stock I'll mention, unless there are questions on something. There was a write-up out on Tudor, done by some group in Germany, and I think the translation of that is available on various chat lines, whether it's a Stockhouse, or ceo.ca, where the writers suggested if you start modeling out what they might have, in broad strokes, is that they could have as many as 32 million ounces of gold potential. And of course, that's the sort of thing that intrigues me. And I see exactly how he gets it. It's a pretty simple calculation. You know, its length, times width, times height, times specific gravity, times grade, and Bob's your uncle, and you got 32 million, because we're dealing in bigs up there, and it's very likely that they're gonna extend the size of this thing. So stand by. It could be one hell of a freight train here.

Craig: And you asked if specific companies, that did have a couple of other questions though about, just silver miners in general, with silver being, you know, the gold/silver ratio now is almost 100 again. And you mentioned Scott Minerd and Guggenheim, and some of this institutional money. Just in terms of silver miners, anything you can kind of go back and discuss there?

Eric: Well, I think the two that I've invested in significantly were SilverCrest and MAG Silver, both of them with operations in Mexico, both high grade. MAG is just about to start mining. SilverCrest will probably make a mining decision pretty soon. And we're gonna get a new 43-101 just to see how big this thing's gonna be. I think they've scaled it out at 1250 tons is what the expectation is. I'm hoping that if they keep having the kind of discoveries they had, maybe that production number will pick up as they develop the mine. So those are my two key investments. Of course, in a more speculative nature, I own many other silver companies. Discovery Mines is one of them that has this huge potential resource. I own Kootenay, I own Brixton, Silver One. I probably own 50% of the small silver stocks out there to one extent or another. So...

Craig: You get diversified.

Eric: Well, it's hard to find them, you know. They're all small. They're very difficult to find. Even the major silver producers, most of them now are mostly gold producers. The majority of their production is gold, or some other metal other than silver. So it's a very difficult field to play in.

Craig: And it is. No doubt about that. Well, thank you for the assistance there. That helps a lot. Anything else on your mind before we wrap up, Eric?

Eric: No, but I think people, we're gonna be facing tough times in the market going forward here. I think it's wishful thinking to think that we're gonna have any sharp economic recovery. Do not be fooled by the fact that, let's say auto sales go up by 10% in one month versus another month, but they're still down 70% year-over-year, you know?

Craig: Right.

Eric: Everyone's gonna try to convince you that there's this major recovery going on. But as I see it, we're kind of locked out of things. How do we all move forward here with this virus racing around at the rate it is, so I'd be very careful in the stock market, but I think you can certainly participate in the precious metals.

Craig: In a sense, it's like you were supposed to earn a dollar a share, and you cut your earnings estimates to 20 cents and then came in at 25. And they said, "Hey, you beat by 25%."

Eric: Exactly. And then we're all supposed to looked roar in and buy the stock. Which is at its all-time high.

Craig: Right. Right. Or bankrupt.

Eric: Or bankrupt. Yeah, right.

Craig: Oh, goodness gracious. Well, thank you for all your time this week, my friend, I wish you safety and relaxation in your lockdown location, and we'll talk again next Friday.

Eric: Okay. You have a great week too, and we'll look forward to next Friday.

Crag: On your way out, please, folks, do not forget to stop by the store here at sprottmoney.com. I know it's hard to find some precious metal products to purchase, but Sprott Money, we've got a very good supply of 2020 Royal Canadian Mint gold and silver maples, plus other various bullion products to choose from, at competitive prices. So please don't forget, if you're looking to add some metal, and you probably should be, sprottmoney.com, or just call us, 888-861-0775. Thank you, everybody, for listening. We'll talk to you again next Friday.