Thursday Selloffs: Mini-Correction or a Trend Change? - Weekly Wrap-Up (September 06, 2019)

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Craig: Well, hello, once again from Sprott Money News and sprottmoney.com, it's Friday. It's September the 6th 2019. That means this is your Weekly Wrap-up. I'm your host, Craig Hemke, and joining us again this week is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig, we have a wild week happening here. So, it'll be interesting to see how this resolves itself.

Craig: It will be interesting indeed. In fact, is this a correction or is it a sale? Either way, always a good time to add to your stack of physical metal. So, don't forget that these Weekly Wrap-ups are brought to you by Sprott Money. You can always find great deals at Sprott Money. In fact, this week we are bringing out...and we have a stack for you of the RCM Silver Grizzlies, which you go to the sprottmoney.com site and check it out. That's a pretty cool looking coin. Sprottmoney.com, of course, 888-861-0775 to lay your hands on some Silver Grizzlies. I got Eric Sprott here. He's silver and he's feeling a little grizzly.

Eric: And that's exactly what I was thinking, man. I've got to get some little Silver Grizzlies. That plays right into my handbook for goodness sake.

Craig: That's exactly right.

Eric: Silver and grizzly.

Craig: That's exactly right. All right. Mr. Grizzly, let's put it this way. After falling $1.60, what is that about? Nine percent in 36 hours, silver's back up to $1,872 as we speak, which in the big picture puts it up 38 cents or 2% on the week up, 2% on the week. What are your thoughts after these last couple days?

Eric: Well, if you had asked me on Wednesday what I thought, I would have said, "Well, it seems obvious to me that the commercial banks have lost the game. That they realize that if they want to cover their shorts, obviously, you got to be in the buy-side." But because they were the only seller, where are they going to get the product from? And the losses were becoming incredible. I mean, I got their losses well over $10 billion here. Now, that's not small change anymore. And of course, it looked like silver and gold were both going to keep running here and I still expect them to keep running. We came out with a couple of minutiae economic things which were the stronger PMI and the services. And then the ADP number came out at 195. And next thing you know, they're thrashing gold. And of course, they wait for these numbers and some slight pretext for a reason to bomb gold.

And I think what happened yesterday is essentially, the only way that you can cover your position is you got to run the stops. These people who put in stop-loss orders, you know, maybe their stop loss was at $1,840 or $1,830 or $1,810 or $1,820, you pick your number, okay, and they just run the price through them. And they ended up being net buyers yesterday. So, it seems to me that's exactly what they did. I think they bought something like effectively 30 million ounces of gold and something like a million-odd ounces...sorry, 30 million ounces of silver and something like a couple of million ounces of gold to reduce their short position.

Now, I'm sure that having seen the ADP number at 195, they might've expected a better jobs report, and we might've seen a second tranche of this today. Because there's probably some pretty big stops down at 1,500 and lower. Now, they haven't quite run them yet. But anyway, with the jobs report having come out and it was whatever it was, 134,000 jobs, which is really a ho-hum report, and particularly ho-hum, when you consider that they revised both July and June down. So, it was way below everyone's expectations. And of course, that's had the effect of ending the sell-off for the time being because it's now not data-supported.

And when I see what's going on in the physical markets particularly in silver, I mean, we've discussed this before, but there was the little thing added on this week. And that was the lot of silver that got imported to India in July. And it went up by 230%. It went from 314 tons to 1,041 tons. And to put that in perspective, the silver market is a 27,000-ton per year market. So, 1,000 tons a month is 12,000 tons a year if it was an annualized pace. That would have been consuming something like 40% of the silver market. And when you change that violently in a month, it's not for industrial purposes. Okay? That's people investing. And of course, we know the Indians are famous for being very price-conscious. And when gold went up, their imports of gold went down substantially in July. So, they turned to silver.

And when I look at the silver data that The Silver Institute puts out, it suggested that investment be coins and bars and it's literally less than 20% of the market. Well, 20% of the 27,000 tons is 5,400 tons. Well, you can't have India buying 1,000 tons a month. Most of it go into investment and think you're not going to have a shortage. And of course, the same is true of the ETFs that theoretically have added 120 million ounces, which is about 400 tons. And these all occur in a very short time period. It really makes me doubt that the silver ETF got the silver. When you see what was happening in both India and here, where are you going to get that kind of tonnage? I mean, that's more than the tonnage produced in a month. And most of the tonnage produced in a month is supposed to go to industry, not to investment.

So, I think the silver shorts are in a very, very difficult position if this thing continues to heat up, and of course it probably has heated up in August. We don't have the data yet, but so far, the last 3 months in India, we had numbers like 812, 854, now 1,041. So, they're buying with reckless abandon there and there's not enough silver around to satisfy those positions. The shorts are shorts, something like 1,000,000,002 ounces, and the average production is 1 billion ounces. Where are they going to get the silver from? So, I'm hoping we get back to this sort of slow rise, where every time there's a beat down, the buyers come back again, and the price eventually goes up. The commercials have to come into the market or they got to declare force majeure. Either one is a strong possibility. So, we'll stand by on that. But I think the fundamentals for gold and silver both look good on the money flow front.

Craig: And I think what you're suggesting is then there's fundamental rationale for why silver rushed and moved pretty strongly these last couple of weeks from 15, 16, up to 19, and almost 20. That kind of substitution effect, gold keeps rising. And so, now all of a sudden there's a pickup in silver demand, which I guess, you know, this was such a violent sell-off. A lot of it coming during COMEX hours yesterday, it really just kind of seem like paper traders stop run, like you said. So, this is more of like a little mini correction than a trend change. Would you agree with that?

Eric: Well, I think it's fabricated. There's no doubt in my mind that it's fabricated. You know, these guys, they're all in it. Okay? You got eight commercial traders that are short, like a ton of silver. And of course, you notice that silver went down the most. Okay. Because that's really where the Achilles heel is, because that's where the physical demand and the money flows can change that physical demand so quickly, such a small market. There might only be 1 billion ounces available for products, that costs you $18 billion. Well, in this day and age, what's $18 billion? I mean, what if one central bank decided to buy silver instead of gold? It'd be all over.

And by the way, I love going back to the data points. When I look at the trading in the SLD and the trading in the GLD, like yesterday, yesterday, the GLD got something like they're just under $3 billion of trading. And the SLD had something like $850 million. So, we're talking a ratio of three to one. The price is 80 to one. The buying is three to one. And 90% of gold's available for investment and only 20% of silver is available for investment. And so, this is an investment vehicle. I mean, how can this go on? It's begging the question here, you know, like when to this whole thing? So, I still think it's going to break and it might just be that they got a cover on a rising price, and therefore, we could see some dramatic action in both silver and gold here, which is, I continue to appreciate that.

Craig: And before we get to some of the specific names that have been sent in this week for you, Eric, let's just talk again real quick about the dynamics of a bull market and how an increase in the price of the metal flows through to share price, to book value, to earnings, all that kind of stuff. Can you add some wisdom there just to remind people of where we are in this?

Eric: Well, of course, I've always...when I talk about...you know, when I first mentioned, well, what if the gold price goes to 1,451 when it was at 1,275? I said, "Geez, it's going to change the value of companies dramatically." And then you go to 1,550 and I've got guys talking about 1,650 and 1,700, a very interesting data point, which I'd never seen put quite the way I saw it as I was reviewing a company's corporate presentation. Now, the company's called NOVAGOLD. They're talking about their Donlin Creek project. And of course, the feasibility study was done at 1,250 gold. But they had a slight thing. Well, you know, if the price of gold doubles, the net asset value of our property would increase by 22 times, 22. And that to me is what it's all about here, that the returns that you could get from gold going from 1,250 to 25, in that instance is 22 times.

And of course, the higher the cost of production, the more that net improves the price because it kind of...it iterates on itself, right. You're getting so much more money in faster that the present value improves quickly because the first few years of present value are more important than the last years of present value. Because it's something else, 15 years discounted at 5%, I mean, the impact of a price 15 years hardly has any effect because of the discount factor. So, when people are looking at some guy's feasibility study, P-Net [SP] is X, just imagine if that could be 22x, 15 years out. I mean, it's very dramatic. And I've seen it in another company. And so, I was looking at a company where at 1,250 gold, the P-Net was X, I'm going to use X, and at 1,400 gold, the P-Net at 150%. So, on a roughly 13% increase in gold, the P-Net went up by 150%. Wow.

Craig: And Eric, I want to ask you this too. In your experience...I mean, we've seen in the last 90 days, these big run in gold and silver prices. We're getting into earning season again for the major producers. How quickly would you expect to see those gains show up in earnings per share?

Eric: Well, Craig, for most companies it's going to be immediate. And I'll just use Kirkland Lake as an example. It's not a hedge producer. The average price in the second quarter was probably like 1,307. Maybe we're going to get an average price this quarter of 1,500. If their margins were $600 at $1,300, they're going to be $800 at $1,500. So, their earnings could be up by 33%. Other companies who have higher costs, for example, a high-cost producer whose cost was 1,150, or let's say 1,100, he was making 200 gross margin, now he's making 400 gross margin, well, his earnings doubled. So, we could see some very, very dramatic improvements in all the gold and silver companies. And it happens incredibly fast. And I'm using 1,500 as, let's say, an average for the quarter. It may or may not be there. We're above that now, but even next quarter, let's say, we enter this quarter at 1,600. Well, now, we're starting the fourth quarter, we got another 100 bucks.

So, you know, a company like, for example, Kinross, they could have another 25% earnings increase by being at 1,600. So, it happens quickly.

Craig: Okay. Well, we'll keep an eye on it. Earnings season should be starting pretty soon. Eric, you're always very generous with your time and we always have folks sending in their own ideas they want your opinion on. And just to remind everybody, we look at all of them. We take all your emails, all your Twitter suggestions, and I run them past Eric. And to save time, if he does not have an opinion, then we don't talk about it because we can't get to all of them. But we ask...we look at all of them. Believe me, if you send them in, we talk about them. So, we only get the ones where Eric has an opinion. So, I've got a list of five or six, Eric. We probably better dive right into it. We had a couple people ask about Aurcana. I know that's not one you have a strong opinion in, but I wanted to make sure we get that one out there.

Eric: Yeah. Well, it's a silver producer. I had been invested in it before and it had been somewhat of a disappointment for me. I don't own it. And that might be just because of my history that I don't want to go there, but it's obviously going to move in line with the other silver producers. I guess that's probably the best way of putting it.

Craig: Sticking with silver. How about Silver One?

Eric: Well, Silver One, I made a large investment in simply because it was recommended to me by Keith Neumeyer, who was on the board of Silver One and trying to help them along. It's got very interesting resources. Of course, these stocks were trading for nothing, probably two months ago when I bought it. And they've all appreciated somewhat dramatically. But you know, with the view that silver could be $30, $40, $50, you know, we're going to get that multiplier effect. It's going to be significant. So, I like it.

Craig: Stepping away from gold and silver. How about a company called Pure Nickel?

Eric: Well, Pure Nickel actually theoretically, it's a gold company. They're making a bid for, I think, it's called [inaudible 00:15:52] Gold, something like that. I've also supported that company significantly. The people running it want to kind of do what you call a roll-up strategy, go and find some properties that are not properly valued in the environment we foresee. So, I was willing to buy a stake in it. I haven't seen the details of the effect of the merger yet. But I'm sure that will be forthcoming.

Craig: How about a company called Goldsource Mines?

Eric: Goldsource, yeah. Well, they had a property down in Guyana. I think it's called Gold Eagle or something, had Eagle in the name, that had, I think, it was like 650,000 ounces. Then they drilled a property further south of it called...it was called Salbora or something like that. And they had a pretty good hole. Now, in the follow-up drilling, they haven't yet proven that there's continuity to this. So, they had a drilling result that came out that was somewhat disappointing. I haven't been active in the stock, but I'm tempted to get active again on the long side simply because the initial resource has got increased significantly in value. Let alone finding the new resource. So, I did have a conversation with management. They're still up thinking about being able to add significantly, resources, but they haven't been able to prove it yet. So, the stock's been weak and, you know, until they come up with some continuity there, it might stay weak, but that doesn't mean that the existing asset isn't worth a lot more today than what it was three months ago, which all gold assets are worth more than they were three months ago.

Craig: Right. And finally, we had a number of people asking about a couple of our old favorites, Wallbridge and then, of course, Kirkland Lake. Do you have any updates on either of those?

Eric: Well, I don't really have any updates in the sense that there has been no real significant announcements in quite a while. Wallbridge might be five weeks and Kirkland might be two months. We do know in the case of Kirkland that, you know, the price going up has got to be helping operations. They're supposed to be having a pretty good quarter here because of Fosterville and Macassa coming through. There's some talk that it might go into the TSX 60. That would make it one of the 60 largest companies in Canada. That is supposed to be announced today. I don't know the exact time. It might be after the close that went in, it would just create some pretty good buying for Kirkland Lake.

In the case of Wallbridge, they're having issues getting their assays done. Well, if you look at what they depict on their grass and the physical gold they've encountered, I mean, we could get some stunning announcements here. I keep hoping that it should have come out two weeks ago or maybe this week. And I can't even imagine it will be next week because it's been way too long. But they want to get...these are long holes. They're almost like 1,000-meter holes and you got to get an...because there's gold throughout 1,000 meters, you got to assay the whole hole. And it takes a little time to assaying something that large. And they got to get all the assays back and rearrange before they report it.

So, it's been a bit of a slow-moving process. But I do believe they're set up to have some pretty interesting results. And of course, I'm a big owner of the company and you might think I'm biased, which I am. But the gold price has gone up a lot. The stock really hasn't gone up much because of price of gold. But obviously, that's going to help in the long run.

Craig: As we go to wrap, we've got obviously, a few hours left in the trading day and there's a speech later today from Chairman Powell. So, that might still impact things. But I guess I want to leave people with the idea that gold's actually now up $2 on the week and silver's up 50 cents. It doesn't feel like it, but at the end of the day, that's not so bad.

Eric: Well, we all had to take a thrashing the way through, right? Just like running the gauntlet here, we might've got through, and certainly, it would appear that way with the jobs number just ripping away the ADP report. So, we've taken that crutch away from the cartel support and now fine, they can say that the PMI number is good. But you know, we keep seeing that manufacturing is weak, and you see the numbers out of Germany are weak, and there's all sorts of weakness globally. So, I don't think people should get too excited about the economy getting stronger. So, yeah, it looks good. And I'm sure that the cartel would love to have bombed it with about a 220,000-job number, but they didn't get it. So, we're in pretty good shape here.

Craig: Okay. So, to that end, if you and I are right and this was just a little mini correction rather than a trend change, it's always time to buy the dip and add to your stack. Sprott Money is the way to do it. You can buy metal there, you can store metal with us at any of our locations around the world. Sprottmoney.com is where you want to go. Or of course, you can call us 888-861-0775. Eric, my friend, I hope you have a great weekend and I very much look forward to talking to you next week to see where we are then.

Eric: I'm going to get right off this call and buy some Silver Grizzlies. I just relate to that and I got to add it to my collection. So, I'm looking forward to next week. Let's hope we don't have to get thrashed again next week. We'll see.

Craig: Let's hope not. All right. My friend, have a great weekend. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We will talk to you next Friday.