“We’ve been in a bull market for two years.” - Eric Sprott on the state of gold and silver (Weekly Wrap-up - March 29, 2018)

Transcript:

Announcer: You're listening to the "Weekly Wrap-Up" on Sprott Money News.

Craig: Well, greetings once again to everybody from Sprott Money News and sprottmoney.com. It's Thursday, March the 29th, and this is your weekly wrap-up. I'm your host, Craig Hemke, and joining us, as usual, is Eric Sprott. Eric, good morning.

Eric: Good morning, Craig. Lots of chaos and stresses out there, so let's get to it.

Craig: Let's do. Eric, though, as you know, we usually do these weekly wrap-ups on Friday, but today is instead Thursday because it's a holiday weekend, and tomorrow is Good Friday. And this weekend alone, our friends at Sprott Money have a very exciting Easter promotion for our listeners. From now until Easter Monday you can actually buy 100-ounce silver bars from the Royal Canadian Mint for just 79 cents over spot, 79 cents over spot. So please visit sprottmoney.com for more information. And again, this offer is only valid until Easter Monday. See, we got to give you something to do this weekend.

Eric, it's going to be an interesting weekend. We are watching the stock market, we're watching the bond market, but let's start with gold and silver. You know, just last Friday you mentioned that we were within the spitting distance of this new bull market high for this new bull market. Instead we got the spit kicked out of us these last couple of days. What do you make of the action this week? Is it just the end of the quarter window dressing stuff?

Eric: Well, I think the end of quarter and options expiry have a lot to do with it. You know, the things that go on in the precious metals markets are just ridiculous. And normally, at month end they're weak, right? And the same thing happened last month. I remember we were close again, sales off. And sure enough, you know, as the months unfolds, it gets right back almost testing. You know, went to a new high in a month versus the month before. But we never really did crack that barrier of 1,360.

And of course, there's all these weird, weird things going on in COMEX, and the option market, and the exchange for physicals that go over to the UK, the all of which make no sense whatsoever in a market where the price of gold's going down. I mean, it just makes no sense, and really nobody understands exactly how you can shift the delivery of 200 tons of gold a month over to London when we only mine 200 tons of gold in a month. So it's kind of silly, but that's what we're used to putting up with. And hopefully our day is yet to come. So [crosstalk 00:02:36].

Craig: It was interesting to note again, Eric, in February big exports of gold from the US, the UK, UAE, all of those going into Switzerland. And then, once again, the big exports from Switzerland going to China and India. I believe we're talking 70, 80, 90 metric tons, again. Ain't that remarkable? I mean, last I checked, you know, the UK has got a really big mining industry over there.

Eric: Yes, exactly. Yeah, like zero. And it's always interesting when you see the flow from the UK into Switzerland, that's telling you...that's central bank gold for sure. And the fact that the US would be an exporter is kind of ridiculous, too. You know, they certainly should be able to consume their own annual gold production. So if they haven't exported that, it might also be from sort of government sources. So all the data that we see, the buying, even the ETFs, you know, when gold was pushing to 1,350, there was lots of buying of ETFs, by the way, which is supposed to turn into physical gold buying whether and whenever it does or not, it's hard to tell.

Craig: Right.

Eric: But we saw that even in our own ETFs that there was a fair amount of gold buying, and silver buying for that matter, as prices were moving up here. So I think if we can get it going up again...There's more and more reasons. When I think of the competition to gold, the first thing you think of is stocks, which are showing a lot of vulnerability. Bitcoin, of course, or cryptocurrency was by far the biggest thing that would've drawn people, you know, people that don't like banks, they don't like governments, they don't like fiat currency, the go to cryptocurrencies. And that sucked a lot of money away from the gold market. But as we're kind of finding out here as we look at what's happened to these cryptocurrencies when they're down like over 60%, that's...I don't think it's just a little correction or anything. Okay? I think it's telling you that the gig's up here and you better...if you want to not have fiat currencies and get out of the banking system, you should own precious metals, not cryptocurrencies here. And then the market, you know, it'll be a whole discussion where the stock market's going from here.

Craig: Well, that's right. And I think that's the main thing we should discuss here on this fine Thursday morning. It's a rather interesting dichotomy going on. You've got the stock market just clinging to support trying not to break down, all this concern about trade wars, and that's having an influence on the dollar. But, Eric, the most interesting thing, I think, since the Fed meeting last week is that the LIBOR rate has continued to climb to multi-year highs, that's a short-term funding rate. But yet the bond market has rallied, meaning long-term interest rates are falling. In fact, right after that Fed meeting, the 10-year note got to 2.94%. This week, just yesterday, it got down to 2.74%. That's quite a flattening of the yield curve going on, Eric. How does that all play out in your mind? How do you see this?

Eric: Well, it's kind of shocking when you think that we have all this issuance going on, we have people threatening not to buy the bonds, i.e., China, and Russia, whatever. And people saying that there's this, you know, great economy, and yet yields are going down. And as you point out, it's quite a dichotomy. Normally, bonds are telling you the economy sucks. And I've always been in the camp that the economy has been held together simply by low interest rates. And the minute they start going up, it's over. And I look at, you know, the Fed's sort of statement that they're certain they're going to have, you know, three rate increases this year, and three next year.

I'm telling you, man, you put that in the equation, it just spells doom and gloom for stocks, and profits, and budget deficits. I mean, it's just staggering. I read a data point where we have $350 trillion of debt. Well, $350 trillion at 1% increase in rates is $3.5 trillion, a total 2% increase in rates is $7 trillion. I don't even know that the world makes $7 trillion in a year. So we can't deal with interest rates moving up as much is being suggested, but they are in the short end. And of course, the long end is reading through it all and saying, "Okay, this is going to lead to a disaster." And I think 10-year bonds are a safe bet. So that's sort of my analysis of it.

Craig: So does that eventually lead to...I mean, is the Fed just whistling past the graveyard trying to tell us that they're going to be hiking rates all year long and next year? I mean, does that just lead to a complete disruption of that plan, and instead they have to reverse and start cutting rates again?

Eric: Well, of course, they must love the action of the bond market. But they certainly won't like the action of the stock market here, you know, where we've had these pretty corrections so far. And we're right on some key technical lines, not that I'm a technical guy, I'm not, but you can kind of smell a problem in the stocks here. Okay? I mean, first of all, when the stocks went up over the last, whatever, five or seven years, it was always on low volume. There was never any commitment, it's almost like someone else was in there just forcing things up, whether it's high-frequency traders, or whether it's the hand of the government, or whatever. It's just everything was always up but the volume was never ever confirmed.

Even on the up day that we had this week, the volume fell like a stone on the up day, but then on the down day, the volume was very, very strong. So it looks...and you look at the comments of people who've run money for a long time, for the most part they're very concerned about where we're going to be. And of course, all I got to do is look at, "Well, where are rates going to be? Are we going to have a 3.5% Treasury bill in 12 months or 18 months? What's going to happen at housing, in car sales, and income statements?" Like, it's not good. I mean, the math's right there for anyone to look at. So I put the market's woes down to LIBOR way more than I do to a trade war.

Craig: Yeah. Would you agree with the statement that the Fed has kind of painted themselves into a corner? Because if long rates go up, they're going to crush the US economy, and the consumer, and the service, the debt service issue that you mentioned. But if long rates keep going down, they're going to invert the yield curve. So it seems as if they're in a bit of a corner, doesn't it?

Eric: Well, of course, the short rates are going up, right? So if you're a borrower, you're paying. You know?

Craig: Right.

Eric: When your bank says...And I have a loan, for example, at LIBOR plus. Well, you know, when LIBOR goes up, it'll cost me more. Most loans are based on LIBOR. So most companies, their cost to doing business...and even for governments, for example, most of the US paper that's out there these days is short-term. So they're going to be paying a lot more for all this borrowing that they're going to have this year, you know, the trillion plus of borrowings will be up 100 basis points certainly in the front end. It's probably still up in the back end, even though the bond market, the rates have improved here. I just think that the bond market has it right. I think the best thing that could happen for us is that the market breaks here, the stock market breaks. And then the Fed kind of has that moment, you know, like, "What are we doing here? We should've known all along that when you have zero interest rates and you're printing money, and then you reverse it, bad things happen." And bad things are starting to happen, and we haven't been that long into it yet. So I think there might be a reversal of Fed policies as the year unfolds.

Craig: I hear you there. Let's just wrap by turning back to the metals. As we wrap up the first quarter, it looks as if gold is going to finish up the quarter on the plus side. That'll make it the third consecutive quarterly gain which, believe it or not, that's the first time that's happened since 2011. So that's just another sign of this renewed bull market that we're in. But I want to ask you, Eric, about the COT report, the Commitment of Traders report, there's a lot of attention being paid to this. And you and I have discussed this last couple of weeks, but I want to hit it again just because of the historic nature of it that we're seeing in silver, the large speculators have a net short position, the largest ever recorded. And the commercials, the banks, being down to where they're basically neutral, they're not even short anymore. It's not a trading indicator, but what does your experience tell you about that report and what it means?

Eric: Well, we have to watch it because the commercials kind of run the market. And if they're going to turn around and go net long silver, you can certainly imagine the price is way more likely to go up than go down. And of course, they're just pooching off the technical funds all the time. That's their business, right? Their business is to take money from their clients. And they've just found a group of stockers that keep watching these trend lines, and, you know, if you're going down to the 100-day, you sell, you know, if you're going back up to the 100-day, you buy it. And of course, these guys, the commercials, can just orchestrate that because they have such deep pockets and there's no delivery asked for. So come on, you know, it's just money. And when you have the kind of balance sheets that the commercial banks have, you can throw a lot of money at this and end up every month, every quarter, in and out, you make a profit on the precious metals.

But as you're pointing out, the COT is very, very favorable now for a significant change in direction here, in particularly silver because it's just been languishing all year long. And I'm happy to see the gold's gone up for three months in a row. I would also point out, it's gone up for two years in a row, and now we've got the third year. When do you finally say, "Hmm? Maybe it's not in the bear market?" You know, we always talk like it's in the bear market, but we've had now, you know, two and quarter years of the price of gold going up. So someday we'll come to realize that, you know, it's not that bad an investment here, particularly when you see bitcoin and bonds that are in the bear market, and then maybe stock's going in the bear market. Hey, we've been in the bull market for two and a half years here, get on board.

Craig: Get on board is right. And Eric, just one last thing. In order to get on board, the folks at Sprott Money have a very exciting deal for Storage clients for the month of April only. So get on board next month. Storage clients can buy a 1-ounce gold Britannia from the Royal Mint in the UK for only 30 bucks over spot. Twenty...sleeps less than that time, I can't even read this stuff right, Eric. I got to get my glasses on, $25.99 over spot, that's 26 bucks over spot, that's an even better deal. If you aren't a Storage client, you too can take advantage of this deal, though. Simply open a Storage account with us, and you'll get access to this exclusive offer. Visit sprottmoney.com to open a Storage account today.

Eric, it's going to be a long three-day weekend. I wish you a happy Easter and a peaceful weekend. But then we've got a big week next week with the employment report coming on Friday. First week of the quarter should be very active. I look forward to talking to you then.

Eric: It'll be a lot of fun, Craig, and I'm looking forward to it. You have a good weekend, too.

Craig: Thank you. And from all of us at Sprott Money News and sprottmoney.com, have a happy, safe, peaceful Easter Weekend, and we will talk to you next Friday.