“Ready for the ‘up’ cycle.” - Eric Sprott on precious metals markets - Weekly Wrap Up (July 27, 2018)

Transcript:

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

Craig: Well, greetings once again from Sprott Money News, sprottmoney.com. It is Friday, July the 27th, and this is your weekly wrap-up. I'm your host, Craig Hemke, and joining us, as usual, this week, is Eric Sprott. Eric, good morning?

Eric: Craig, good morning. Kind of a crazy sort of week for everybody. Well, it's on the stock market and the gold stock and the precious metal, so lots to chat about.

Craig: No doubt about that and it has been a very volatile week in many regards across the markets. Hey, I've got something new for you this week, Eric. Something for you to consider, for everybody else to consider out there. That is the Sprott Money mobile app. You're a big tech guy, aren't you, Eric? You probably got all those apps on your phone, right?

Eric: I'm a little more precious metals than tech, okay?

Craig: I got you. Okay. Well, Eric, maybe this will help you out. You can download the Sprott Money mobile app on Google Play and in the Apple App Store. You get live price alerts, you can read blogs, you can listen to weekly wrap-ups like this one and get lots more on the go. You can take Sprott Money with you wherever you go. And the best of all, of course, the mobile app is free. So again, download it at the App Store. Eric, I wish we could download some positive price action, but the metal's down again this week. Gold down, clinging to support down near $1220. It's at $1224, off about over 0.5% on the week. Silver's at least unchanged, about $1550. These price levels obviously are attractive to stackers, but they're frustrating to long-term investors. What do you make of where we stand here?

Eric: Yeah, well, as I referred to last week, I was beleaguered and I see it ended up in the headline somewhere on the Zero Hedge and it's frustrating, but, you know, when you look at what's going on with the commitment of traders and the August gold contract coming up for expiry with a huge open interest, all of the EFPs, exchange for physicals that are going on, like it's just gargantuan sizes. When I see the exports of gold from Hong Kong into China go up 46% in the month of June, when you see the Russians continuing to buy gold, selling treasuries, hopefully, to buy more gold, I sort of wonder if one of the things that China wouldn't do is sell treasuries to buy gold if they get particularly upset with the new tariff regime. So I think there's lots of the possible signs that the physical demand is there, and it looks...you know, I think we might've hit a bottom, sometime when it got down to 1210, the intraday there. So still a little quite hopeful.

Craig: You mentioned the Chinese Yuan, I've been writing about that for Sprott Money, my colleague, David Brady, who also writes for Sprott Money, he's been writing about this as well. And, there's a curious thing going on, Eric. It seems as if the price of gold, the price of copper, even things like zinc are somehow trading in close correlation with that Yuan-dollar exchange rate and, you know, we've seen the Chinese devalue the Yuan versus the dollar in response to these tariffs. Is that something you're keeping an eye on as well?

Eric: Well, of course, you've got to watch it and you have to watch China all the time because they're the biggest consumer of everything, right? As both gold and copper and all of the base metals. So what happens in China is important. As you know, they were trying to deleverage their financial system, and of course, their stock market's gone into a bear market here. But during this week, it looked like the Chinese authorities have decided, well, we think we got to ease up on the monetary side, and of course, create a bit of fiscal stimulus at the same time. So the Shanghai Exchange has rebounded quite nicely. The Yuan hasn't done much yet. I mean, it may have stopped going down, I don't want to say that with certainty, but it looks like they're going to open things up there a little economically and I think that would be good for the base metals and precious metals.

But it's interesting the correlation of the Yuan and, you know, if President Trump decides he wants to go to $500 billion of tariffs, which he seems to be enjoying by the way, it could be that we'd get a further response by the Chinese in terms of devaluing the Yuan. And as you pointed out, I mean, there seems to be a pretty good correlation between the price of gold and the level of the Chinese Yuan.

Craig: That's the most interesting thing. It's absolutely right. And, you know, it makes you wonder about the overall stock market. You know, so far, it's hung in there pretty well, but when they actively devalued the Yuan back in 2015, they only devalued it by about 3.5%, 4%, and the stock market nearly crashed in August of that year and now they devalue things by 7% or 8% percent, you know? And then we've had some of the FANG stocks start to get in trouble, Eric, this week. Are you worried about the US in the global equity markets at all?

Eric: Well, you know, I've always thought that we live in a rather enchanted world where interest rates were zero and we kept printing money all the time. And it looks like, theoretically, that world has ended and the quarter stocks haven't done much this year. And now, we have certainly signs of things cracking. That too with the 20% decline in Facebook, Netflix running into a few problems, some of the companies that are affected by exports particularly autos, Whirlpool came out with a negative announcement that the costs are going up now because of the tariffs. So we have some segment of the market...housing is weak, I think housing stocks, if I'm not mistaken, are in a bear market and we had weak housing numbers here. We've had weak housing numbers both in terms of new home stats and existing home sales, and of course, that's a logical outcome of rising rates here. So, you know, it's a thing you and I have talked about ad nauseam here, but the combination of the Fed shrinking the money supply and raising rates is not going to be constructive for the market's given time.

Craig: Yeah, that's for sure. And, you know, one sector of the equity markets, unfortunately, is the mining sector. Boy, we've had tough string earnings from some of the major producers this week and it seemed that finally rippled through the sector as a whole yesterday with now the HUI Index being at more than 12-month lows. I think getting back to lows not seen since December of 2016. Any comment on the sector and what some of those big mining companies are doing?

Eric: Yeah, personally, I was shocked by some of the numbers. Whether it's Goldcorp's big loss, Barrick's like de minimis profit, Agnico Eagle's profit decline, Newmont's profit decline, and these are the captains of the gold industry and they all seem to have, you know, problems which are manifesting themselves and keeping earnings down. And the funny part is, Craig, when most of these companies say that their asset [SP] is whatever, $800, and the price is $1,200, you think there's a $400 profit in there, but when they report there's no profit and that's a lot of times because the depreciation charges are so large and that doesn't go into your asset cost. But I must confess when I look at those numbers, they look weak.

And of course, I look at it as the chairman of curriculum and what's everyone else doing, and I have a sense of where we're going and I sure hope that when we report on Monday, that it will...or Tuesday, I guess it is, it will not be seen as a disappointment. I suspect it isn't a disappointment. So on a relative basis, I mean, there are companies that are doing well. I noticed a company called Oceana did very well and so there are companies that are coming along, of which I include Kirkland, Oceana, others that look like things are kind of okay and it's important that people are invested in the winners, and not the ones that are kind of going backwards.

Craig: And historically, Eric, has it been your experience...I mean, here we are at a spot where share prices are at 12-month lows, metal prices are at 12-month lows. If we get a turnaround coming out of the summer and into the fall, is it the juniors that generally take off first? What is the sector within the sector that you would start to look at first?

Eric: Well, I don't think it's going to be the seniors if you want to....you know, the four companies I just named. I mean, they got a lot of ground to make up before their stock prices look interesting, like a lot of ground. So I think it's going to be those guys who are already in sort of a favorable position where the market's according them increasing value and they're producing the earnings growth and have a future where there can be significant earnings growth. And one of the problems with the big companies is, most of them, their production's going down. I exclude Agnico Eagle from that, but like Barrick and Goldcorp, their production's going down. So it's very difficult to have your earnings going up when your production's flat or going down. So that is a big problem with what we're getting out to say, the bulk of the market cap of the gold area. So obviously, I think that's not the place to be. I think you've got to look around and find some smaller, either explorer or developer mining company where things are happening and they'll outperform the majors in my mind for certain.

Craig: Yeah, you would think it's going to be tough if the majors aren't doing well. If they're struggling, that's going to be tough to draw interest into the sector, you know, where you get that rising tide lifting all boats. And so I would think, yeah, this is a time to be doing your homework and finding the good companies that can really shine. And I would think, again, that's where a smart investor, somebody that knows their stuff, could really benefit from doing their own due diligence.

Eric: I think it could make a big difference, you know, and there are things to be watching for. I can see certainly companies that are doing well versus the ones that aren't doing well. And I've only mentioned one today, but I know there's lots of other ones out there. So, if you have a sharp pencil, you'll figure it out

Craig: As we turn the corner into next week, Eric, we begin August, which is often kind of a doldrum month, but it's also can be quite volatile. I mentioned August 2015 as a recent example. We've got the next employment report for the US, and then, gosh, who knows what we've got in store for us? So I think by the time we get together next week, I'll be interested to see where things stand.

Eric: Well, you know, we had the COMEX August expire. We have the...the commitment of traders is in very good shape for anyone who is bullish. So I think we've had our wash, rinse, and repeat, and now we're ready for the up cycle. So let's keep our fingers crossed for a great week.

Craig: Let's do. Just one last thing for everybody. We mentioned downloading the Sprott Money App from the App Store. One other thing you can do if you want to stay on top of the latest information within the metals industry and get stuff straight to your inbox is to sign up for our Sprott Money Newsletter. And if you do, you get a chance to win a Sprott gold wafer as well. Hey, that's worth your time to sign up. You also get free shipping on your first order. So please visit sprottmoney.com. Sign up for that free newsletter now and don't forget to download the Sprott Money mobile app. Eric, it's going to be an interesting rest of the summer. Sure it looks like. I look forward to talking to you again next week.

Eric: It'll be my pleasure. All the best.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. Have a great weekend and we'll talk to you next Friday.