Today's Key Factors Influencing Tomorrow's Precious Metals Market

Announcer: You're listening to "Ask the Expert," on Sprott Money News.

Craig: Well, greetings, everybody, from Sprott Money and sprottmoney.com. It's time for your "Ask the Expert" segment for the month of May, 2024. I'm your host, Craig Hemke, and joining us this month is said expert, and everyone's favorite retiree, Eric Sprott. Eric, always good to see you, my friend.

Eric: Craig, happy to be back with you. Again, I always like to compliment you on the work that you do in our area of precious metals, and keeping everybody on their foot. So, we're all thankful for that.

Craig: I gotta tell you, the old man's getting tired. Not you, me. But we'll keep on fighting, that's for sure. And at least it's fun when prices go up.

Eric: Yeah.

Craig: I should, before we get started, remind everybody of a couple of things. This is Sprott Money. Who? It's named after somebody that I know of, who might be joining us on this call. It is Sprott Money who puts this information out. So, if you enjoy this information, I got two things I need you to do. One, hit like or subscribe on whatever channel you're watching, because there is all kind of content that'll be coming at you this month, next month, and beyond, that you're not gonna wanna miss, and if you subscribe, you won't miss any of it. So, do that. And then, we're gonna talk a lot about gold and silver over the next half hour or so. When you are in the market for physical gold and silver, Sprott Money should be your first stopping point as you're going around trying to find the best deals, because you're always gonna find the best deals at Sprott Money. They'll store it for you too. So, make sure you bookmark and favorite sprottmoney.com, or, if any time, save it in your phone, 888-861-0775. I always like to say, never stop stacking. That's my new favorite hashtag, Eric. And I think that's probably pretty good advice here in 2024.

So, my friend, [inaudible 00:02:08] trying to remember the last time we spoke I think was back in December. And [inaudible 00:02:12] we were watching gold go sideways, in this trading range, and the good thing about a trading range, as you know, the longer it goes on, more and more people get to see it. And so, when you break out, more and more people are gonna notice. And we did break out, back at about the end of February, early March. Nobody...heck, Eric, I still see, almost every day, "Analyst Baffled as to Why Gold Price Is Surging." All right. What do you think? Why'd we break out now? What's going on?

Eric: Sure. Well, I think one of the critical items back then was in...it was in China, when their stock market was going down, their real estate market was going down. And investors had to figure, "Well, what am I gonna do with the money?" And their currency was going down, so what am I gonna do? And, of course, we had articles coming out of China about how much jewelry was being bought, and how many bars and coins were being bought. You never know, you know, what numbers exactly you should believe, but all of the hard data coming out of China was suggesting that the interest in physical metals had changed dramatically.

At the same time that that happened in gold and silver, of course, we ultimately had some huge things happening in the silver market, particularly in India, where I think in the month of February, if I'm not mistaken, they bought 70 million ounces in a month. Well, I think it was 76, or 75 million, actually. Well, you know, we only produce about, we only mine about 800 million ounces. So, that's over a month's, the month's supply going to one country, and they followed that up with, I think it was another 35 or 40 million the next month, which is, again, outsized purchases. And I think a lot of people in the world are becoming to the realization that currencies aren't to be trusted. We look at what our governments are doing and what our central banks are doing, both of whom, if you look back at the recent history, you'd be shaking your head. Like, you know, the fact that we went to zero interest rates in North America and Europe for so long. And [inaudible 00:04:23] well, what textbook did that come from? What economics textbook did that come from? Didn't come from any textbook. It just something had to do at the time. And I think that there's a legacy left over from doing those things, and people realize, "Oh my god. A lot of nasty things could happen here when you keep," when you have to stop juicing the system, which is what the central banks and the central governments have been doing. And I think we might be very close to those moments. Well, we're obviously there on the central banks. They've had to raise rates and tighten money supply, theoretically. Governments still have not decided they can't spend money, but I don't think that those days are too far away, when, on a fiscal basis, they're gonna have to be way more responsible.

Craig: Now that we've broken out, and here we are in May, we've had a little bit of a pullback over the last three weeks or so, what could drive us even further? I mean, we're kind of in an unprecedented area. We're off the charts, all-time highs. As we go deeper into this year, could the Chinese still be driving things? Are you keeping your eye on the BRICS nations? What could be a further catalyst?

Eric: Well, I can tell you, every morning, the first thing I do is I look up to see what happened in China overnight. And I look at the prices. And by the way, for example, the silver price in China today's $30.50. And our price is $27.25. Like, that's not a bad arb, I would think. The gold price is, I think $2350, $2370, something like that. It's about a 2% premium to our spot price. And then silver's about a 12% premium to our price. And I do have a keener interest in silver these days than gold, and I... When you look at the data coming out of China, with the consumption of silver, with the decline of inventories on the Shanghai Futures Exchange, and it keeps going down almost every day. I'm sort of counting, well, how many days we got left here? And based on, like, the last two or three weeks, well, maybe we got 40 days, and there'll still be some inventory there. Now, you know, once you get to only 20 days left, probably on the next day, there'll be nothing left. You know what I mean?

Craig: Yeah.

Eric: Because everyone [inaudible 00:06:47] have it figured out, right? And I think, in the world, for example, there's a huge silver shortage. Even the Silver Institute, that I don't have a high regard for, suggested that we had a shortfall of 250 million ounces of silver this last year, and maybe this year going forward. And I think their data is flawed anyway, and the demand's higher, and the supply is probably going down more than they suggest. So, I don't know how we get out of this situation. I think there's a squeeze going on in silver right now. One of the interesting things that happens in the markets is we have these ETFs that theoretically are being drained, and [crosstalk 00:07:29] commentary in the free press, who've been so helpful to us as individuals, in terms of educating us on things, tell us that, "Oh, the retail client is selling their silver." Well, I don't think that could be further from the truth. I think what's really happening is the guys who have to deliver the silver on COMEX, and outside of COMEX, have been raiding these ETFs, buying the shares and redeeming them, and taking the product out to make deliveries. That's what I think.

So, and we have this situation in COMEX where the short position won't go down. The short position that the commercials have. Like, there's about 800 million ounces short, and it never goes down.

Craig: Yeah.

Eric: It keeps pulling forward, rolling forward, rolling forward. But you know what? When there's guys with 800 million ounces short on the COMEX, and the price goes up a buck, they lost $800 million. And we've gone up, you know, like, as much as $8 and $9 recently. Think of the losses that are being incurred, just in silver. Let alone the position they have short in gold, which is down even more. I think they're down, like, $15 billion on those positions, [inaudible 00:08:40] it'll be right now. Unrecognized. So, I think there's things going on in the COMEX, where guys are not gonna be able to make deliveries. We have these raids that happen in the market. And the markets seem to adjust to them rather quickly. And we've had these big declines, and the market seems to get its footing very, very quickly, because I don't think there's that much power in these same commercial banks continuing to increase their short position, just to mark it up for a day or two, and particularly when, at the, in the, like, the last two COT reports, their short position went up, both reports. And even as the price is going down. So, they're not making any headway. I think that's because there's a bona fide physical shortage of gold and silver.

Craig: Seems as if the traditional market makers have drawn a line in the sand at $30. As, you know, as, like, it, they know that if it gets beyond there, you know, the thing'd take on a life of its own, like it did in 2011. Anybody can pull up a chart, and go back over the last four years and see how many times, even on a daily basis, the spot price of silver has gotten up to $29, traded briefly above $29, maybe closed above $29, only to be smashed down. Like, dollar-plus moves the very next day. We had one here recently, just a couple of weeks ago. I guess my question, Eric, you know, and we got this, almost seems like a pricing struggle going on with command of price being moved east or, you know, shifted east, or grabbed by the east, or whatever. What could finally break this dichotomy of this kind of physical trade that you're seeing, this physical demand versus this paper price, that, you know, it seems desperate to keep price below $30?

Eric: Yeah. Well, as I say, I mean, these guys can't keep shorting this thing. You're already shorting 800 million ounces that you don't own. I mean, come on. And you know that every year, for the last three years, the Silver Institute says there's a shortfall of silver production. I mean, what are you thinking here? I know that, you can [inaudible 00:10:54] they would probably love to be off their short position. But the minute they become the buyer, like, the price goes crazy.

Craig: Yeah.

Eric: Because the seller. And you see it repetitively, and particularly when you see the market going down abruptly, that is not a guy selling to make a profit. That's a guy selling to change the quote.

Craig: Mm-hmm.

Eric: [inaudible 00:11:16] that there's been so much manipulation. Who was it? Was it Goldman Sachs that just got fined for, I guess it was manipulating gold and silver. And we didn't get the details of how much [inaudible 00:11:30] fined it, and I don't know what the fine was, but I know it was in the papers, like, two days ago. All, lots of other houses, brokerage firms, have already paid fines for manipulating gold and silver, and that's what they do. They trade against customers. And then, of course, in excessive situations, when it's about to go up, what happens? The guy from the CFTC says, "Oh, we had to tamp it down."

Craig: Right.

Eric: Well, who the hell's "we?" Who is the "we?" [inaudible 00:12:00] Commodity Futures Trading Commission?

Craig: [crosstalk 00:12:02] you and I.

Eric: "We" must be the 20 dealers that are short, which is [crosstalk 00:12:08] okay. Without saying it. But it was a very foolish statement at the time. But that's, I'm absolutely certain, is what happens, and markets are manipulated, and you have to, you just have to defeat the manipulators. And, you know, Ted Butler's written about this ad nauseam, and I love him for it. And someday we're gonna find out exactly how deep the manipulation was, and look out above when it becomes apparent to everybody.

Craig: So, Eric, what... Because this is what I struggle with, you know, and I'm looking for catalysts that'll just drag silver kicking and screaming into the 30s. You know, that'll break that barrier. I mean, does gold have to go to $3000? Does copper have to go to $12,000 a ton? What would break the status quo?

Eric: I think silver's its own market. I mean, I'd say the fundamentals for the silver market are better than the gold market. And of course, I've always been a great believer that the multiple, the relationship of gold to silver, should not be 86 to 1, okay?

Craig: Right.

Eric: And there were times it was 15 to 1, when it was a currency. Many times it's been to 50, sometimes down to 30, which implies a massive move in one versus the other. And I'm not disparaging gold, by the way. I own as much gold as I own silver. I hope at the end of this year I own more silver than I own gold. And I hope I'll do that by doing nothing. Just have the price go up, which is what I think's gonna happen here. And, you know, I've mentioned before, a fellow named Michael Oliver, who runs [inaudible 00:13:44] structural analysis, and he's been so good on gold and silver recently. And, you know, he just thinks that silver should break through $30 here, and quickly go to $50, and has much higher targets a couple years out. And I believe all that, okay? I just believe it all.

And of course, huge targets for gold as well. Who's kidding who? Lots of guys. I was on a podcast where, I think there were four of us on there. And the estimates were anywhere from about 20 times, to somebody said 8 times, and somebody said 4 times. And I said, "Look, I'll take any one of those, okay?" I mean, I don't, these, I'm happy to take any one of those. I'll take up 30% from here. Because if we do, if you happen to own any gold or silver mining company, you'll certainly make 100%. So, I think that's what's gonna happen here. We're very close. So, I watch... Imagine if you're in Japan today...

Craig: Right.

Eric: ...with the currency doing what it's doing, and the bond market doing what it's doing. You'd surely be thinking about gold. And there's... These are big countries. Of course, the Indians already think about gold and silver. They'll use this opportunity of this recent weakness to be buyers. So, I think the buyers are just gonna overwhelm the guys who thought they could run this game, that every three months, they wash and rinse and repeat, drive it down, buy it at the bottom. This time, they haven't been able to buy a damn thing, so far. So, I...they don't, they aren't able to buy anything, and it's gonna, "Okay, what are we gonna do with the big short position?" Of course, I worry that the people who say "tamp down" might try to do something which would take our party away from us. Now, whether that's confiscating, or closing the exchange, or whatever. But you know that it's not gonna happen easily. I think the, it's set up to happen. Whether or not they let it happen in the markets, we'll see.

Craig: You know, the potential catalyst is another kind of suppression scheme that has gone on a lot longer than we might have anticipated. That's just the monetary system, Eric. You know, at my side, we've always called it "The End of the Great Keynsian Experiment," this debt-based scheme, you know, where the U.S. now is running $2 trillion annual deficits. I just saw a thing this morning, as we're speaking. Servicing the U.S. existing debt is $2 million a minute.

Eric: Yeah.

Craig: So, could that be the driver? I mean, ultimately, the printing press has to come on again, doesn't it?

Eric: Yeah. It's funny. As I said, the first thing I look at is the, what went on in China overnight. The next thing I look at is the daily treasury statement, just to see how [crosstalk 00:16:31] new debt there is, and what's happening in the cash balances, and they've been fortunate, in the month of April, of course, there's a big tax collection day on the 15th of April, and so we haven't really seen any outstanding changes yet, but I bet they'll be coming very soon here, in terms of the new debt outstanding every day.

Craig: Like you said, in Japan, Japanese yen-priced gold is up 30-some-odd percent already year to date, right? I mean, it's gonna be dollar-priced gold and silver's turned the barrel, at some point here pretty soon. But it, I mean, people talk about, "Well, they need to balance the budget." You know, these politicians [inaudible 00:17:10] Eric, under what circumstance would that ever happen? Isn't it just this spiral, that eventually just exponentially... Isn't the math the math?

Eric: We get the Minsky moment when the interest on the debt starts compounding so fast that you know you're going down. And we are very close to that, as you have mentioned. I mean, we're talking about the interest on the debt approaching about $2 trillion here now. Now, that's because [inaudible 00:17:37] rates have gone up, more so than the debt, of course. When interest rates go from zero to 5%, that causes a huge increase in your interest costs, so, that's why I've followed that. How long can the government keep having the deficit rise so fast? And of course, these things where you're forgiving, whatever, $900 billion of student debt, and hundreds of billions to foreign governments to fight wars, and, like, it's truly a drunken sailor [inaudible 00:18:05] I mean, I just, I don't think that those sort of things should be happening.

Craig: We talk about, and, I mean, you and I have been leading this fight for...you longer than me. You know, the physical gold and silver are your lifeboat, you know, your shelter in the storm, you know, the harbor in the tempest. What else? Is, I mean, I think, you know, people know that. I mean, what else can people do to protect against this?

Eric: Well, of course, I don't even wanna go to David Webb's book about "The Great Taking."

Craig: Yeah. Right?

Eric: Where he says everything you got in the bank, everything, is not secured. The bank has it, okay? The mutual funds, the cash. [inaudible 00:18:46] you got, you have the right to take it out and you find out you won't. I mean, that's a very, very depressing thought, okay? And I would encourage everyone to read his book. It's free. He makes it free. Freely available. David Webb, "The Great Taking." And it makes a lot of sense to me that these laws that have been changed, which allow the banking system to claim all the assets, because, as we know, the most important thing is the banking system, right? Well, in a few people's minds, it is, okay? Particularly the bankers' minds.

So, that, there's all sorts of reasons to, for people to have concern. The more things I... Now that people have come around to the gold and silver a little more [inaudible 00:19:29] because the price of gold has gone up, of course, you started reading the studies on gold's outperformed almost everything in the last 25 years. And as, of course, it's one of the great outperformers this year. And if our expectations are realized, it'll be one of the great outperformance for the next few years too. By a wide margin. I think if we imagine silver going to $50 or gold going to $3000, I don't think the stock market will hold together here. There'll be some other issue that will take it down, and I suspect it will be the government saying, "Well, you know, we just can't afford this." In fact, I think I read something where the people who run the Social Security fund in the States said, "We're gonna be out of money in 2035."

Craig: Mm-hmm.

Eric: [crosstalk 00:20:16] time that 2035 seemed a long way away. It's getting closer.

Craig: Absolutely. I mean, what do you think of this idea. Like, it's old Austrian economic, I think, idea, of the crack-up boom? You know, [crosstalk 00:20:29] in the interim, they just print money and it just goes everywhere.

Eric: We might be there, you know. When I look at the market, sometimes, [crosstalk 00:20:36] think I'm looking at the market and it's up, and everything's wonderful, and bad news is good news. And yes, that can happen, that people go to stocks because they're afraid of the currencies. They don't wanna do real estate, necessarily, in our countries. So, it's a place to throw your money. There could be a crack-up boom, but they'll all end. I mean, I, one of the other things I read with a lot of care is the, Doug Nolan's "Credit Bubble Bulletin," and the crack-up boom, and, you know, what are the signs that the whole thing could just crash one day. And it's obviously, we're getting to the point where it's closer, and, you know, if we can make it through this year, it'll probably be a miracle.

Craig: Feels that way. I'm sitting here, in my mind, thinking of the people that are watching us, going, "Yeah. The crack-up boom. Everything will go up except the mining shares." And I can't blame them for feeling that way. For crying out loud. You know, we've had, you know, some movement off the bottom. You know, Newmont and Barrick have come up 30% or so, at least off the lows, but they're still way, 50% what they were couple of years ago. Heck, Newmont and Barrick are the same price they were 20 years ago, for that matter. What will it take? I mean, we talk about, you know, flows of funds into the sector, institutionally, and that sort of thing. What will it take to get the shares to... I mean, higher metal prices? What is it?

Eric: I would say we're there already, Craig, [inaudible 00:22:17] and it's somewhat manifested itself. Unfortunately, for those of us in the gold space, the major producers have failed us. You know? I mean, I can remember, 20 years ago, Barrick produced 8 million ounce, and now they produce 4 million ounces. After a number of acquisitions.

Craig: Yeah.

Eric: And, you know, they just haven't grown. They've shrunk. So, we gotta not focus on the big guys. And of course, the big institutions have to focus on the big guys, just to get the money in. But I think we have to focus on, you know, smaller guys, like the Agnico Eagles, the Alamos, the...all these mid-sized producers, that can have a lot of growth, and experience tremendous profit, both production growth and profit growth. So, and it'll take nothing. I think the amount of money invested in precious metals is, like, -1%. I mean, it's so ridiculous [inaudible 00:23:22] that low. And imagine any flow at all trying to come into a market that isn't even 1% of the outstanding stocks. Any amount of money. Stocks'll go crazy.

And, of course, we've all seen lots of stocks go crazy already. Like, smaller companies. And I can think of a Jaguar, which I'm involved with, it went from $1.20 to $3.00. I mean, that's not a little move. And there's many that, of course, the prices they got to were just awful. I've had stocks, you know, lots of stock go from $0.25 to $0.50, because everyone was just throwing them away. Even now, when I call companies, when I have visits with companies, of which I had one here today, and you [inaudible 00:24:07] "Oh, my god, that is so cheap. How come nobody cares?" How come strategic guys don't care? What...don't they get it? I mean, you're gonna produce 100,000 ounces. You're gonna make $100 million of pre-tax profit, and your market cap's $120 million. That sort of thing. Like, why don't they get it?

Craig: Well, I can buy NVIDIA, for crying out loud, Eric. What?

Eric: That'll come. You know what it's gonna happen here. So, I'm [inaudible 00:24:35] But when I do talk to these companies, I can tell you that underneath the surface, there are guys sniffing around. But they haven't quite come to grips with doing something, and whether the come-to-grips is a function of, you know, gold going a little higher, or silver looking like it's breaking out, they are definitely, their eyes are, have a wider field of play here. And of course, their cash flows are going up. What are they gonna do with all this money?

Craig: Yeah. Yeah. Yeah.

Eric: So... And we've had a number of acquisitions here. So, I think we're in train. I think gold mining stocks are gonna do well this year. Very well.

Craig: Well, and I'm with you. I mean, I, again, I think the generalist says they don't have any idea of what mining stocks to own, so they just go buy Newmont or something like that. The sweet spot seems to be kind of in between. I mean, I, when we were doing our weekly calls, you got me into Kirkland Lake, like, at $7, as it expanded and then eventually got bought out. You know, you mentioned Alamos is one who... I mean, that chart looks great. It just kind of continually keeps going up. There are others like that. If that's kind of the area, what are some general things that people should look for, and identifying, kind of, that mid-major-junior, that's got a good resource, that, you know, it's close to the ground. All that kind of stuff. What would you look for?

Eric: Well, it's a very simple thing. I mean, I'm gonna call it simple. Look, a guy produces 100,000 ounces. I would say at $2300, you know he's gonna be making 1000 bucks an ounce. Now, we can all multiply that. It's $100 million, okay? Of pre-tax profit. Now, what's the market cap?

Craig: Mm-hmm.

Eric: [inaudible 00:26:15] the market cap's $150 million, you know you got yourself a deal. And that's presuming that the price of gold stays here, not goes up.

Craig: Right.

Eric: And the odds seem to be that it's gonna go up. That's for the producers. I would say, for an exploration company, how many ounces of gold you got? What's your market cap? What are you asking me to pay for an ounce of gold in the ground? And, you know, anything under 50 bucks that you're asking me to pay, for an ounce in the ground, is a hell of a deal, with the background knowledge that gold just went up $500 in the last six months. And you have to pay %50. Fine, I'll pay $50. That'll be easy. Because people will pay a lot more than that when they realize how much money these guys can make. I mean, most guys can produce for less than $1300, around $1300. Price is $2300, they can make 1000 bucks. Those aren't small margins.

Craig: Right. So, for a kind of a mid-major producer, let's look at how much annual revenue they could make above and beyond their producing costs, and divide that into their market cap, and come up with a ratio that's less than single digits? Something like that?

Eric: Yeah. Yeah. Less than double digits. And then, that, and a lot of them would come way under that. And of course, all... Nobody ever wants to credit anybody with the spot price, because it's gone up so fast, right? So, nobody ever thinks [inaudible 00:27:46] get $2300 [inaudible 00:27:47] Well, you know, yeah, they might not be getting $2300, might get $2400, might get $2500, might get $3000. Well, what are they gonna make at $3000? Whoa.

Craig: Right. Right.

Eric: You know, now I'm buying the thing for one times cash flow. So, that's what the opportunity is here. And of course, you know that anytime that the stocks run, so, '00 to '11, the gold stocks went up 1700%. The HUI Gold Index went up by 1700%. And that's what the upside is here. And we're not playing for the littles. We're playing for bigs. And even the numbers of the cash flow and pre-tax earnings calculation suggest it's easy to get a big. So, I would encourage everyone to do their research, get information from their financial planner, something on gold. Although most financial planners wouldn't know what to tell them [crosstalk 00:28:48]

Craig: Yeah.

Eric: Well, listen to you, then. [crosstalk 00:28:53]

Craig: Eric, I repeat often, on my side, your words of wisdom. I would, even at $2300, Eric, are you still... We're kind of partying in the room by ourselves, while everybody else is out having fun.

Eric: Yeah. And I think we got a lot more to come here. I really do believe we have a lot more to come. When you look at the economic landscape, oh my god. When I think of the political problems we may have in the two countries here, the things that's going on with, socially, in the [inaudible 00:29:24] states, provinces, cities. Oh, my goodness. How could this blow up quickly? And that's not something I count on, but it's something I worry about, for sure.

Craig: Yeah. Like you said, as we began, never stop stacking. That precious metal is... And the mining shares are gonna do their thing. But boy, your physical metal sure is a lifeline.

Eric: It's a good backstop, and I said before we got on the air here today that one of the things I've been very fortunate with this last year or two years is that I'm a big metal owner. And the price of the metal I own is $2300. Thank you very [crosstalk 00:30:07] This, while the gold stocks were all going down. So, I have one side going up, which is the physical, and one side going down, which was the gold stocks. Now, of course, the gold stocks [inaudible 00:30:17] very nicely, and I think the prices of the metals will continue to go up, but the real upside's gonna be in the shares.

Craig: I agree with you. [inaudible 00:30:27] I tell you, Eric, and it is so much fun to visit with you. I know you gotta head out, but I sure appreciate, and I sure, but I know everybody listening appreciates hearing from you. I hope we can do this again sometime before we get too deep into the year, and because it's gonna be such a volatile year. Be fun to visit again soon.

Eric: Happy to do it.

Craig: Let's make sure we do. And, let's make sure we hit subscribe or like on the way out, everybody. And, lastly, always visit Sprott Money and sprottmoney.com for that physical precious metal. Never stop stacking. Never a bad time to convert your dollar reserves into physical precious metal. Do what the central banks are doing at record pace, taking their currency reserves and turning it into precious metal. If they're doing it, might not be a bad idea for you to think about it too. Anyway, again, keep Sprott Money in mind. And again, like or subscribe. There'll be a lot more content still coming at you here this month of May, and as we go through the summer, and you don't wanna miss any of it. My old friend, it's sure good to see you. I wish you the best, and hang in there, and hopefully we'll talk again soon.

Eric: Hey, Craig, thanks for all your help, and good luck to all the listeners.

Craig: Thank you. And from all of us here at Sprott Money, sprottmoney.com, thank you for listening, and we'll have more content for you later this month.