One of the most chaotic weeks ever. - Eric Sprott on the state of the markets - Weekly Wrap Up ( October 26, 2018)

Transcript:

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's Friday, October 26, 2018, and this is your Weekly Wrap-Up. I'm your host Craig Hemke and joining us this fine Friday is, of course, Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig, good morning. You know, one of the most chaotic weeks ever that probably you and I have gone through both in precious metals and in major markets and markets around the world, and the bond markets, and the currency markets, so lots to talk about.

Craig: That there is my friend, and, hey, but before we get started, get your calendar out, would you? And put this on your calendar, and hopefully everybody listening will do the same. Sprott Money is going to be hosting an RSP Lunch and Learn on Wednesday, November 28. So you got a little while to work this into your schedule. This is an exclusive event by invitation only, so make sure you don't miss it. You got to go to sprottmoney.com and sign up for our newsletter, and get more details. But, hey, lunch and learn, you can actually get some lunch, on Sprott Money. That's a good deal. The markets are getting their lunch eaten, I can tell you that. How's that for a segue my friend?

Hey, it has been a crazy week. As we record, it looks like the S&P is going to open down again today. It's down now 100 points on the week. Gold is up about 1%. Silver is not doing a whole lot. And I think probably maybe most interesting, the stock market seems to be having real trouble with the 10-year note getting up around 320. That's where it finished last week. It's now down to 308. You want to connect all these dots, Eric?

Eric: Sure, that's easy. Connect the dots, well, oh, my god, there are so many dots out there. First, I maybe even start with... Well, let's start with the economic dots then, okay. And the economic dots are that, you know, housing is definitively weak because of high-interest rates. Car sales apparently are going to be weak in October. We have various companies, most of the guys who produce something that say they have one issue or another whether it's, you know, we can't get our products over there because of tariffs, or we're paying more for materials because of tariffs, and that margins are getting squeezed.

Also, there's been a bit of a hiccup in some of the FANG stocks, Alphabet and Amazon, both look like they had moderation in growth trends and, of course, they had moderations in fourth quarter outlooks, and we're in a market that sort of takes no prisoners now and things sell off very quickly. On a sort of a separate note technically, not that I'm even a student of technical analysis nor will I even pretend to understand sort of the makeup of what makes our market. But I get these reports I read that, you know, when we went through 2750 on the S&P that, oh, my god, this whole category of funds has to sell, you know, like 400 billion of stocks. And there's all these relationship between, you know, the strikes at 2750 at 2725 at 2600. If it goes down here then all these guys got to do this.

And, of course, the reason I don't relate to it, that's never the way I would invest, okay, I buy companies who have earnings or whatever and I'm not into, well, this trades off that, and if the VIX does this and that should do that, and all these crazy swirling around of the integration of one fact to another. And facts that only a computer and/or some computer geek might even understand, not that in the final analysis it's going to hold any water, okay, they're not. But people grow up to think that these things are just automatic.

Well, and just automatically, everyone has to sell stocks, so we've obviously seen a lot of that going on. And when I think of generally markets and the carnage that's going on and there's way more carnage away from the American markets, I'm thinking of the Chinese market, the Indian stock market, undoubtedly the Brazilian, the Argentinean, the Russian, I mean you name it. There's been a lot of carnage going on, and god forbid, that you start getting margin calls.

Craig: Yeah.

Eric: And, of course, these sharp shakeouts that we have they do create margin calls, then you have to get into the whole liquidity thing. You know, one of the things that's easy to sell I guess is an ETF except the ETF's got to sell only underlying stocks. That may not be that easy because the liquidity and the individual issues is probably nothing like the liquidity in the ETF. So we'll have to stand by on it, I mean it's October, markets often have very, very weak months and crash in October. I mean it's looking very, very jittery here. I mean when people start reacting negatively to earnings in a violent manner, you know that everything has changed. So people in the market should really be careful here.

Craig: Let me just relate this to gold for everybody and just see if you agree with this, because a lot of folks that are in the metals think, "Oh, why does it matter?" And, you know, that's all just kind of a greater full skin anyway. Well, to me if the stock market rolls over that affects consumer confidence, you know, if all of a sudden it's down 20% the Fed may begin talking about rate cuts rather than rate hikes, and does that kind of eventually play into a change in sentiment for gold. Is that why this matters?

Eric: Well, there's no doubt that it matters. It matters on many fronts. The first front it matters on is if you're an investor and something is not working, you own bonds, you're a loser, you own stocks, you're a loser. Well, what are you going to do? You got to try to find something that's a winner. Okay. Now, luckily, for us, in this most recent decline, gold, not gold stocks, but gold and silver have been relative winners, not big by any stretch of the imagination but they've been winners. In fact, they're going totally against the grain of the market. And that's a very, very important distinction here.

Craig: Yeah.

Eric: And I would think that lots of people throughout the world and particularly the Chinese and Indians where their markets have been brutal, their currencies have been brutal, and they love gold, I think they would be serious buyers of gold.

Craig: Yeah.

Eric: And to that, I know, previous call you mentioned that the data out of Switzerland was like so powerful for people who believe in gold...

Craig: Let me hit you with that data Eric because this is a little notice data point that goes out month by month and it gets no coverage, certainly, no main street media coverage. You think somebody would go, "Huh, wait a second." For this is just the month of September alone, just the month of September alone. The imports into the country of Switzerland for gold, and why Switzerland, because Switzerland is where all the refiners are, exceeded about 180 metric tons, and 92 metric tons came from the UK, 92 metric tons, were imported into Switzerland out of the UK, which does not mine gold. I mean, you know, aside from, you know, the little leprechauns with their pots at the end of the rainbow they don't have any gold there, right?

So where does that gold come from that goes to Switzerland? Well, may only come from the UK and then it leaves Switzerland after it has been re-refined into kilo bars, and 38 metric tons went to China, another 29 metric tons went to Hong Kong. Eric, you would think some investigative journalist would kind of start sniffing around, saying, "Hey, where is this gold coming from? How does this work?" But it apparently doesn't happen.

Eric: And there's no question that this is Central Bank gold, okay? It has to be Central Bank gold or gold being loaned let's say from the ETF to a bank to a commercial bank and then going over to Switzerland. And there was another data point you had that I think the U.S. exported 33 tons in the same month to Switzerland but you only produce 22 tons. So again, where does 11 tons come from? You know, there's not an insignificant amount of gold here. So those numbers are just overwhelming that there was this huge demand for gold by Asia, let alone I'm sure Europe as well because they are no fools and their market has been weaker than the North American market, the stock market. And, of course, they have all these, the worries over there of whether it's Brexit or Italy, I mean, whether it's the ECB going to stop buying bonds at the end of December, and they got lots to worry about over in Europe, and they like gold too.

So you have lots of reasons for people...the majority of people in the world to want to buy gold. And maybe, yes, the Central Bank keeps supplying it and maybe, yes, as we saw in the Commitment of Traders Report last week when all this buying came into the commodity markets that the commercial banks shorted the futures to them in huge quantities, and it was a very big disappointment for us all that we might have thought that the banks would step aside this time, but believe me, they didn't. I mean the amount of gold they sold last week was stunningly large as gold was about to go up. So here we go win the game again where the paper markets are trying to keep control on the physical markets but the physical markets would argue strongly that gold should be going higher.

Craig: Hey, and just one other little aside. If we go back in time, do you remember the whole story when Germany tried to repatriate their gold, and at first, they can only send them 7 metric tons, and that the story was it was such a logistical issue. Remember that?

Eric: Yeah. I remember it very well.

Craig: But there was not a logistical issue shipping 92 metrics tons in 1 month.

Eric: No.

Craig: Interesting. All right, Eric, the other interesting news I want to touch on this week was just a slaughter yesterday of the majors. Goldcorp, Barrick, and the like, after their earnings, can you just explain to everybody why it is that majors have such a terrible trouble making money at any gold price. And maybe the advantage is to not owning majors in your portfolio.

Eric: I mean, I wish I could honestly explain it. I mean the one thing, you know, that would have negatively affected them in the quarter, of course, is the fact that the price of gold was down I guess well over $100 an ounce. So, you know, for guys like Goldcorp that are producing whatever their number is, 500,000 ounces, I mean that's $50 million of less revenue in the quarter, and I think their loss went up by something like that if not a little more. You would have hoped that at $1200 gold they could make money. The same is true of Barrick. They had...I think they broke even, I hope I'm not misstating what they did.

I mean, Newmont's earnings were the same as they were last year I think so they kind of hang in there. Agnico Eagle was weak like it's...I don't know, and maybe it's...I think it might be some you pay for past mistakes, you know, if you made some acquisition that really wasn't as well thought-out as you might have thought at the time and you got to take all these write-offs to make up for it. So, and, of course, you know, I've never been a believer in the large-cap companies because they have a tough time surprising on the upside. They do.

So where are you going to get the double bagger? You're more likely to find it in sort of a medium to small size company and/or explorer and, of course, that's played out. Unfortunately, from my perspective as the Chairman of Kirkland Lake when all the bigs have lousy earnings, the reason to own the ETF is kind of diminishing, and we're in the ETF.

Craig: Yeah.

Eric: So we get sold off and our earnings will be out on October 30th. They will be not unexpected I think. That it will be in line with whatever the forecasts are, because we had a good quarter production wise. And, yes, we had to take a bit of a hit on the price of gold but by the same token we had to increase production, so hopefully when the numbers all work out there'll be...one will offset the other. So, yeah, it's been a tough time for the majors and the majors have hurt everyone quite frankly.

Craig: And Eric, just quickly here as we wrap up, one of the companies that we've spoken about in the last couple weeks is this RNC or Royal Nickel, and these massive gold nuggets, people have probably seen the stories in the news about the largest gold nuggets ever on earth. They had some earnings there and some statements they put out this week, and I know you kind of want to touch on that too.

Eric: Sure. Well, they brought out a news release, which was I think poorly worded, and I still I'm not sure exactly what it said. And believe me, I've read it 20 times where they said the grandfather's vein produced, whatever, 27,000 to 30,000 ounces, and the extra 540 meters beyond the first 10 meters will produce 35,000. They didn't say an additional 35,000, just 35,000. So anonymous, not which one they meant. You know, they meant the total of 35,000 between the 2 things in which case would be a big disappointment. Did they mean an extra 35,000, which I don't think they really meant to be honest because, you know, how would they know it would be that number?

Craig: Yeah.

Eric: But here's the interesting thing that everyone should give some thought to. A cubic meter of gold weighs 19 tons; therefore, a ton of gold is one-twentieth...one-nineteenth of a cubic meter. That's a meter by a meter by about 3 inches, 3 inches. Now, if you look at that grandfather vein and maybe it's two feet wide, it's not all gold, but you can see what a small, little...and they found a ton. What a small little area, you can find a ton of gold in. And the key question with RNC is, have we unleashed a new depositional model for gold? And there's some thought that it is a new depositional model, it hasn't been proven, but I can tell you that there's probably four or five different places on that property where they have seen that kind of manifestation before at different levels and in different structures, and, of course, they got four structures that I think on average each go like four kilometers.

So we got a lot of opportunity to see whether we're going to have a new theory. I'm about to read a paper on the weekend which will be a heavy duty geological paper which you won't understand. I'll try. I'll try to summarize it for the layman as I hope it summarized for me the layman, just about how that gold did manifest itself down there. So hopefully I might have more to report next week. But I find it intriguing to study what's going on down there and I'm trying to make sure that if it's going to be different, if it's going to be different, that one takes advantage of it. Because if it works it's a multi-bagger, if it doesn't work, maybe you lose 50% of your money. But the multi-bagger is a lot better, you know, if you get enough of them you don't mind losing 50%. So we'll see where it goes. I tend to be...you know, I'm getting into the believer camp so we'll see where it all takes us.

Craig: That's a terrific explanation and further it's an explanation of why you are you and I am me and that you spend your weekend reading geological papers and I spend my weekend drinking beer and watching football.

Eric: Well, I try to combine them, okay?

Craig: Okay. All right, and just a reminder, again, I want to tell everybody about this one more time in case you missed it at the beginning, because this is a pretty cool deal, Sprott Money is hosting an RSP Lunch and Learn, Wednesday, November 28th. It's an exclusive event and you got to get an invitation. The only way you can get it though, you got to sign up for the Sprott Money newsletter at sprottmoney.com. So please, everybody go there and check it out. Of course, the fall catalog is there as well for great deals across the board if you're looking to add some metal at these prices. So please check that out.

Eric, please check out those geological reports, and report back to us next week, I guess. Have a great weekend.

Eric: Okay, man, as best I can, you have a good one Craig.

Craig: And from all of us here at Sprott Money News and sprottmoney.com. Thank you for listening. We'll talk to you again next Friday.