"The Goldilocks Scenario” - Guest Expert Bob Thompson on Precious Metals Markets (Weekly Wrap-Up - June 1,2018)

Transcript:

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

Craig: Well, greetings once again from Sprott Money News and sprottmoney.com. It is Friday, the first of June, 2018, and this is your Weekly Wrap Up. I'm your host, Craig Hemke. Eric Sprott is out in the field this week and unable to join us, so pinch hitting for him is a guy we spoke to, oh, a couple of months back, Bob Thompson, who is a senior vice president and portfolio manager with Raymond James in Vancouver. You can find a lot of his work at bobthompson.ca. He's also the author of the great book Stock Market Superstars, Secrets of Canada's Top Stock Pickers, and like I said, a senior vice president and portfolio manager for Raymond James, so he's a good guy to pick his brain on a summer Friday. Bob, thank you so much for spending some time with us.

Bob: Great to be with you again, Craig.

Craig: Hey, Bob, just before we get started I always like to tell everybody about the specials that are going on at Sprott Money. This week, this is pretty cool, we are offering a one ounce, silver American Eagle coin for just $2.99 over spot. This is a limited time offer, so please take advantage of this amazing deal by visiting sprottmoney.com, or of course you can call 888-861-0775 for more information. All right, Bob, the big news of the morning is the June 1 release of the U.S. Jobs Report. I always find it funny that they can give you the May Jobs Report the very next morning at 8:30 a.m. after May finished, but none-the-less, they guessed at a pretty big number and guessed at some wage growth as well. What do you think of the economic data this morning and its impact on the gold price?

Bob: Yeah. Modern technology, right? They come out with the Jobs Report a few hours after the end of the month, but I guess that's why they always revise, and it seems like they always revise down, but anyway that's what they're coming out with this morning at 223, right, for the actual number, and you know, it's interesting because gold really hasn't been affected that much. It's down about 0.5% and silver's actually up a little bit this morning, so you know, I think the market tend to look through these numbers, and we can talk about that maybe in a second, but I think what's important, you know, a lot of times good becomes bad and bad becomes good. So, in other words, we keep getting job numbers like this and they don't revise them down, then what we're going to start to see is inflation, which is obviously good for gold. So it gets to be the time were you look and you say, "Well, is this a good job number is actually good, or is it bad for gold?" Right? And i think we started to see the wages pick up this month a little bit more than what's expected and, you know, the consensus out there is that we have this technology and automation so inflation and wages are never, ever going to go up again even though we've got very strong wage growth, and I don't think that's the case. So, I think the market's kind of toying with that right now.

Craig: Bob, I want to ask you about that gold and silver price this morning. As we record here it's a little bit after 10 Eastern time and gold's only, and I say only, off $7 and silver's actually up as it trades on the COMEX. I guess if you were short you'd be frustrated and maybe surprised by that because the dollar is soaring and the bond market is selling off. I know you follow the Commitment of Traders Report. Do you think that perhaps maybe gold and silver are doing okay, just mainly because of that Commitment of Traders positioning?

Bob: Yeah. You know, I watch that obviously with great interest, and a lot of negativity out there right now, and we've talked about before that it's not going to go down anymore if everybody that's sold has already sold. In other words, if 100% of people out there are negative on something, the chances of it going down are pretty low actually. So, you look at this report and, you know, what I'd like to see is it push even further and the small speculators get even more negative and then that'll show us hopefully there's a bottom in the gold market. But I have a chart here, which obviously we can't see, but I go back pretty far and you see that every time. When these small speculators get very, very negative generally speaking that's a market bottom for gold. We're not quite there yet, but we're going in that direction right now.

Craig: Something we've got to keep track of, you know, The COT Report later on today, for those that follow it. Bob, it seems like now that focus is going to turn to the June FOMC meeting which is the week after next, coming up on Tuesday and Wednesday, whatever that is, the 12th and 13th of June I believe. Everybody's expecting another Fed funds rate hike at that point, but you know, no one's really sure what's going to happen after that, and i guess I should point out that gold is actually rallied rather sharply following five of the previous six rate hikes. What are your thoughts on the FOMC and interest rates as we go through the balance of this year?

Bob: Well, you know, it's all about not what the numbers are, but what the expected numbers are, and then not even what the expected numbers are, but what the whisper numbers are. It's crazy how this works, but there's a 70% chance that they're going to raise rates. That's the expectation, so I think gold's going to look through that. And it's a great point, if I can go back to 2011. Remember gold surged up to 1920. Everybody remembers that, right? But what happened is the gold stocks were actually starting to decline before that, and I think that was the market looking through and saying maybe gold's going to peak at this level and it's not going to be a good thing for the stocks. And we're starting to see that now, too. You know, going into even 2017 and 2018 here, the stocks have been doing okay, although gold's been trailing off, and I wonder if the market again is starting to look through that. So, you know, I think what we're going to see here is the Fed's probably going to raise rates again. That's a 70% chance that it's going to do that, but everybody's going to be negative on the market, and the last five or six times this has happened gold has rallied and the gold stocks have rallied pretty dramatically after a Fed rate hike. So, we're within two weeks of that, we've got a good job number, and we've got the Fed rate hike. Hopefully we can look forward to some good things after that, and there's some seasonality in gold, too, obviously later in the summer.

Craig: Yeah. Even just last summer, as most folks will recall, we sold off for a couple weeks after the June rate hike, and then went from 1220 to 1360 over the next couple of months, so it wouldn't be unprecedented for a late summer rally. And Bob, I just want to ask you about kind of a theory that I have, and that the Fed is kind of trapped and that if they keep raising the Fed funds rate and long rates spike, well that's going to crush the U.S. economy through higher debt service and higher mortgage rates and the like. But if they keep raising the Fed funds rate and long rates don't spike, and if instead fall they're going to invert the yield curve and that's going to lead to a recession, too. I mean does that seem to make sense?

Bob: It certainly does, and I think that's the issue here is that when you have massive amounts of credit, either on the consumer level like we do here in Canada, or on the Federal level, you get your hands tied. Whatever you do is going to end up not so good. So, I think that's what they're trying to do. They're trying to get that Goldilocks scenario right now where they keep everything just absolutely perfect, but I think what the market worries about is that if something gets out of control here, if the bond market starts to get hit pretty hard, there's not a lot they can do. And the other thing, I think, that supports gold right now is that nobody's talking about it again, and that's why it's good to pay attention to it because nobody's talking about it, and that is the trillion dollar deficit. If everything's so great and unemployment's so low and the economy's doing so well, why are we still running trillion dollar deficits? What's that going to be when we hit a recession?

Craig: That's for sure. All those budgets that show $10 trillion in deficits over the next t0 years, all assume 3% GDP growth and that's going to be a tough hill to climb.

Bob: Right. Right.

Craig: All right, Bob. I would be remiss if in our final minutes I didn't as you about the mining sector. I know that's a specialty of yours, especially where you're based in Vancouver. You've got a number of indicators that you follow pretty closely, and I know a lot of folks listening to us follow the mining sector pretty closely, so I just wanted to kind of pick your brain a little bit and have you share some of the things that you follow and see if that helps us all get a little better feel for where we are as a sector.

Bob: Sure. You know, we've talked about sentiment before, and I think it's really important, you know. As Jim Rogers said, "Skip the degree in finance if you want to be in this business and get a degree in history, philosophy, and psychology." That's what makes markets move, right? And if you can get the sentiment right, then you can make some good trades here, and I think, you know, two things here. One is, you kind of look at what representation gold stocks are in the index, in the Toronto index. In the U.S. it's never really that big, but in Canada the mining sector can get up to 10%, and right now gold stocks are a fairly low position, a lot lower than normal on the index, and that's usually positive. When gold stocks get too high, as far as a percentage of the TSX, like financial services stocks are now, or like energy stocks have been in the past, then you know that's a negative. So there's a bit of a positive, tells you we're probably at the beginning of a cycle. You can Google this. It's called the Investec Mining Clock, and they update this every so often as things change, and it's fantastic for actually seeing where you are in the cycle. It goes from 12 o'clock clockwise all the way around to 12 o'clock again. And they originally did this in January 2016, said we were at 3 o'clock which is kind of the depths of depression and the depths of negativity in the market.

But what it says is what happens at various times on the clock, so you can actually reverse engineer and see where we are in the whole cycle depending upon what's happening, so it comes with company liquidations, and dividend cuts, and asset write downs. Those are all things that happen at the bottom. And interestingly enough, we are probably around 6:30 to 7:00 right now, so it's buy time from about 5 o'clock 'til 8 o'clock, and we're in that area for the stocks. And you start to see that, right? The market's rewarding good things that are happening and, you know, if gold's down 1% in a day for various reasons, you know, you'll see some of the good stocks that are coming out with some good news, they're starting to rally and that's a good thing. That's telling you that we're probably well into a pretty good cycle here. And by the time everybody's talking about the fact that we are in a great mining cycle and, you know, gold's up at 2000 or whatever the case is, we'll probably be at 9 or 10 o'clock then because that's all factored into the market. So I think that's a positive for a lot of people in this industry, is that big mining companies realize that they've got to get more gold out of the ground, they're making investments, they're looking at small companies, and that good things are generally happening in the mining sector.

Craig: And that's the Investec Mining Clock. You said that's something you can just Google and look up, huh?

Bob: It is. Investec Mining Clock. You know, they put out the first one in January of 2016, and that was at the depths of depression as I said. They've updated it to August 2017 now, and you can see what's happening in the sector. So, no matter what happens with the FOMC meeting, or the Jobs Report, or whatever the case is, I think what we're starting to see is some good things in recovery in the mining sector, and ultimately in a sector in which you are taking assets out of the ground, or taking resources out of the ground, you're going to have to replenish those somehow and that's why this sector always tends to do well. And you know, your regular guest on here, Eric, has told me that in the past he said, "That's why I love to invest in the mining sector." He said, "The lows are so absolutely terribly low and the highs are so euphorically high, there's a huge spread in between the low and the high, and you can make a lot of money in those times."

Craig: That's right. That's right. Bob, I want to thank you for joining us. Can you tell, especially our Canadian listeners, how they can get a hold of you if they want to explore this stuff a little more?

Bob: Sure. Its bobthompson.ca is the website and all the contact information is there. But a lot of my thoughts and media are on that site, too, so hopefully it's informative. We've got a knowledge center which talks a little bit about behavioral finance which I think is important, so lots of great things on there. But as always, I love to be on the show with you, Craig.

Craig: It's always good to talk to you, Bob. And before we go I just want to remind everybody, too, we have a little special for storage clients just here in the month of June, the folks at Sprott Money have struck a one ounce, gold, roaring grizzly coin. That sounds pretty cool. $39 over spot. If you aren't a storage client, you too can take advantage of this deal though. Simply open a Sprott Money storage account with us and you'll get access to this exclusive offer. Now Canadian listeners need to visit sprottmoney.com and open a storage account today. Sounds pretty cool to me. Bob, sounds pretty cool, some of the stuff we discussed. Maybe we'll get a cool summer rally during the hot summer months.

Bob: Fantastic, Craig. That would be great.

Craig: Thank you, Bob. I hope you have a great weekend. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next week.