What Will Work in the Post-Covid Economy? Hint: Gold and Silver - Weekly Wrap Up (Sep 18, 2020)

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Craig: Happy Friday from Sprott Money News at sprottmoney.com. It's Friday, September the 18th. And it's time for your weekly wrap up. I'm your host, Craig Hemke, and back with us this week is Eric Sprott himself. Eric, nice to hear from you.

Eric: Hey, Craig, good to be back with you. Unfortunately, there were some family health issues that I had to deal with last week, so I apologize for not updating folks. But we're coming up to speed here.

Craig: Hey, family comes first. There's no doubt about that. And it's just nice to have you back. And hey, before we get going, just a reminder that one of the things you can always find at Sprott Money is all sorts of free information, whether it's blog posts from some of the writers that post things every week at Sprott Money, to our "Ask The Expert" segment. We do one of those every single month. This month, the expert will be Rob McEwen, legendary gold investor, and of course CEO of McEwen Mining. If you have any questions for Rob, send them in to us, using the email address, the word submissions@sprottmoney.com. Again, submissions@sprottmoney.com, and we'll try to work them in, and we got a lot of questions we'll try to work in from some of our regular listeners too, Eric, but let's start with some of the things that have gone on this week. It's been a wild week in terms of fiscal policy or monetary policy. A lot of things happening, a lot of things not happening. I'm sure you've got some thoughts on it.

Eric: Sure. Well, I haven't spent as much time looking at the overall economic stuff as I used to, because I think whatever people are projecting is never seem to be based on reality, and even the numbers we get when somebody reports something and it beats the estimate, I mean, it's such a weak guidepost, the estimate. The estimate's always weak, of course, and then it's a little better than the weak estimate, and we're all supposed to get excited about it. But I would guess, and sort of what I see happening is we had a kind of a weak retail sales number for August, we had July revised down. We had, for example, car sales in Europe were down 20% in August. Now, that's not a very interesting looking V, by the way. That almost looks like it's starting another V going the opposite direction.

We had housing start kind of come in below where people thought they would, because the rental market just cratered. And, of course, we know why nobody wants to build a rental home. Because most of the people living there are the ones who are affected by the economic recession that we're in. So that's been weak as well. I would say one of the things that we have to worry about economy-wise is we have an election coming up here in, what? Less than six weeks. And I, for the life of me, can't figure out what's gonna happen if either guy gets elected, because there's gonna be this bipolar thing where the people who lose get so utterly dismayed by the result, that who knows what might happen? So it's a scary thought, actually. I mean, November 4th could be a kind of an ugly day or the night of the 3rd might be an ugly day in various cities around the United States.

So if I was an American institution with stocks, and there's an election coming up, I think I might be trimming a little here. And we're seeing some weakness, general weakness in the market, for the last couple of weeks. We saw the Fed come out with kind of a blasé kind of projection and statement and support level. Nothing changed. In one way, I find it shocking that the market demands more of the Fed. I mean, they've given them pretty well anything you could possibly give them. Your interest rates are almost zero, we print money, almost anybody can borrow money. The only people who can't borrow money, you know who they are? Those are businesses, where there was this loan opportunity created with $800 billion, and where you go to your bank and you say, "I got a working capital problem. Could I lend the money?" They've only lent out 2% of the money, because the banks won't lend it. And I find it shocking that banks, who probably earn 25% to 30% of all profits in the United States, would take that attitude, that "In tough times, we're not helping. We're doing the opposite of helping." And I think there'll be a great price to pay for this. And of course, those stocks have acted sick anyway. Because there's no margin either, because the rates are so low. So I'm really concerned economically going forward here. As I say, I don't spend as much time looking at it because I wanna focus on what's going to work. And of course, what's going to work will be the precious metals, so we can focus on that.

Craig: I hear you there. I was, kind of a surprise. Well, maybe not. Astonished would be a better word, that the reaction to Powell announcing that it was gonna continue at a $120 billion a month in QE and zero rates to 2023 that somehow that was not dovish enough. Eric, my goodness gracious. But nonetheless, the metals have held in there. It feels like it's been a down week, but actually, as we speak, gold's up about half of 1%, and so is silver. So, and the shares are doing even better.

Eric: Well, one of the funny things is, I mean, I look at the COMEX every day to see what's going on. And the day of the Fed announcement, there was a very anomalous thing that happened in the gold market, and that was that there was 13,000 EFPs that day. And typically they're 1,000 to 2,000, and there were 13,000. And then the next day, yesterday, there was almost 7000 EFPs. Now, that's 20,000 contracts, 2 million ounces, $4 billion, all the while gold's gyrating, but not doing much. And one of the other strange anomalies in the COMEX gold market is that, I'm kind of looking back, and I'm gonna just guess that I'm seeing about 30 days, maybe 25 days in a row, that whatever the spot month is, the number of contracts goes up every day. In other words, someone comes in and asks for physical delivery. "Here's the contracts I wanna buy. I want physical delivery from these contracts."

So we've had something like, well, we might end up with about 2,000 contracts of physical delivery in gold that weren't on first notice day. They're an addition to first notice day. And I think first notice day was like, about 6,000. But just the fact that it happens every day. And even in silver, it happened yesterday, where we had deliveries of 305, but the open interest in the month didn't go down by 3005. It only went down by about 160. So we ended up picking up 155 new contracts in silver, which is not insignificant. And these are oddities. Normally in the commodity markets, that open interest in the spot month tends to go down every day, marginally. But we're seeing the opposite of that.

So, I think the outlook for gold is good. I personally like the fact that the open interest in gold is rising, okay. Notwithstanding these EFPs and deliveries and all that, because I think it's really the big eight shorts, the commercial banks, trying to keep a lid on the thing. Because if we go back to $2,000, I mean, Katie, bar the door here, because this could go crazy. I think the average institution who owns bonds should be thinking about getting out of bonds and into gold. I mean, it's a natural trade here. You're trying to create inflation, and the bondholders, a loser, by definition. The Fed policy states that you're a loser if you own bonds, and you're a winner if you own gold. Well, why don't you make the trade? And of course, we've seen it in a few instances, but I think we'll see a lot more of that.

Craig: Yeah. And, you know, to that end, I wanna add two things. You mentioned those EFPs, because that was a sudden surge. They went to maybe 1,000 or 2,000 a day, as you said, after everything broke back in late March. But suddenly, we had 13,000 a couple days ago. If I might just plug my own site for a second, I spoke with our friend Andrew Maguire yesterday. And there's a podcast right at the top of the TF Metals Report homepage, with Andy. And he addressed that. And where I was a little bit concerned about that, he thought it was great, because he thinks basically, there's no place else for anybody to go to get gold, that they've turned the COMEX into a physical market. And that's where they have to go to get it.

Eric: Yeah. Yeah. But of course, the big question I have is do they get it?

Craig: Well, yeah, of course. Yeah.

Eric: You and I both watch these exchange for physicals, which are ginormous amounts, by the way, for a month. I mean, if I was to look at this last month, the exchange for physicals, I'm just looking at my sheets here, I mean, we're probably 40,000 contracts just in the last 15 days. Well, that's 4 million ounces of gold. That's about what we produce in a month. Not quite. We produce about seven a month, but, though, that's just in 15 days, by the way. So maybe by the end of it, we will have exchange for physical, the whole month's mining production, which, I don't really believe people are getting the physical. Somehow, there's some accounting entry happening over there that I owe you, and you'll get from me, but we're not gonna deliver it. So what do I know?

Craig: We just won't tell anybody.

Eric: Yeah, right.

Craig: Hey, and along those lines. One other thing that we did not discuss a couple weeks ago when this came out, but it ties into what you mentioned. You remember, Warren Buffett giving kind of tacit approval to all the institutions to start buying gold, and shortly thereafter, did you see the story about that little itty bitty, really itty bitty, Ohio pension fund? Buying gold, did you see that one?

Eric: Yeah, absolutely, 5% of their portfolio no less.

Craig: Yeah. And that was six, it, mean, it's the Ohio Fire and Police Pension Fund. I mean, there's hundreds of these things in the U.S. alone. Sixteen billion dollars, they wanna put 5% in gold. Now, I don't know if they'll buy the GLD, or what they'll do. But nonetheless, that's $800 million, at $2,000 an ounce. That's 400,000 ounces.

Eric: Yeah, I know. It's a lot of gold.

Craig: That's just one.

Eric: I much rather stick to the, you know, if everyone had to have 5%, all the gold and all the stocks in the world aren't 1% today. And we're not creating more stocks, and we're not creating more gold. Gold grows at 1.5% a year, the amount of gold in the world. How do you get from 1% to 5%, which is a change of 400%? There's only one way, and that is the prices go up. And speaking of prices going up, I mean, I've seen a lot of stocks, and particularly names that people don't recognize, and fortunately, I've invested in some of these things, and all of a sudden you look at it and, "Oh, my god, it's up ten times." And, "Oh, look at that. It just tripled in the last month." And the interest is coming back here, and it's gonna take no buying of any substantial amount to change the price of these things. So I think that supports the thought that these stocks can go, like, substantially higher from here. And certainly from the producer point of view, even on a cash flow basis, they're dirt cheap. So, I think there's lots of excitement there, been lots of great drilling. We should talk about a few of the stocks, but I think generally, you can sense that these pensions, pension funds, and other major institutional investors, will be looking to gold and gold shares to diversify their portfolios.

Craig: Yeah, absolutely. And again, someone like Buffett giving that kind of tacit approval should open a few eyes. That's for sure. Eric, before we get into some of the individual stocks, I thought this was a fun question. Because this is gonna be helpful, hopefully going forward for just about everybody. A gentleman wrote in and said he's got about like a 25-bagger in something called Greatland Gold. And I was sitting here thinking, as you were speaking, I've got one similar. You had told us all, geez, two, three years ago about something called De Grey Mining down in Australia. And that thing's gone from like five cents to $1. And so you get these 20-baggers and 25-baggers, however you wanna put it. The question was, what is a proper sell signal for something like that? Is it the market cap reaches a certain level? Is it value the metal in the ground at a certain level? I mean, because hopefully this is a problem all of us are gonna have. We gotta figure out what to do when prices get up that high?

Eric: Yeah. Well, let me assure the listeners it's not market cap, okay. I mean, I can't tell you the number of times I've bought something very, very well. For example, when I bought Goldcorp at, probably $5 a share back in 2000, something like that. And I probably sold it when its market cap got to be $700 million, and it went through, I think, $15 billion. So don't use the fact that something's gone up a lot as a reason to sell it. It's got to do with relative value. Where else can I put the money, based on what I know today about company X, and whether it's ounces in the ground, whether it's gonna be future production, future cash flows, future dividends, something, and compare it to other opportunities. And so, for example, I mean, I've used the example of me selling some Kirkland Lake, because it had gone up a lot, and it was trading at a semi-decent multiple, but I could go and find things that were cheaper, that were overlooked, that the market was paying no attention to. One of them I think of is Jaguar, that I paid eight and a half cents for, which is effectively 85 cents based on the stock price today, and it's trading at $8 about a year and a bit later.

So there's a 10-bagger, where you're making that switch, and they both produce gold. And of course, nobody was paying for the possible earnings coming out of Jaguar, or the dividend for that matter. Its yield is already higher than Kirkland Lake Gold. So you have to hunt around for other opportunities. If it's way overvalued vis-a-vis other things, then fine. You sell it, and have something else to put it into. And ultimately, that something else, you know, maybe someday it won't be a gold stock. If they all go up as much as we think they're gonna go up, someday we're gonna probably have to switch from gold stocks to utilities or something, when a real bull market starts. That's what always goes first, are the utilities. So anyway, that would be my answer.

Craig: All right. Very good information. Everybody should make a mental note of that. Also noted, I think this was maybe late last week, it was announced that you'd done a private placement with your friend and mine, Keith Neumeyer, at his company, First Majestic. A lot of folks wondering what you see there?

Eric: Sure. Well, first of all, I have great respect for Keith. He stands in there as one of the only CEOs of a metals company who thinks about the metal, not the mining and the orebody. Think about the metal and what's going on in the pricing of your product. And, of course, for all of us to think that the price of silver has been manipulated for 35 years, and what the hell can we do about it? And from time to time, Keith doesn't sell his silver, because he sees that they've knocked it down. It's like when they knocked it down in March. Okay, fine, he decides not to sell silver. Two months later, the price has doubled. Well, if everybody did that, there should have been no silver available down there.

So it's important for these CEOs that are running a silver producer or gold producer to think about the price of their product. The reason I bought First Majestic is the price of silver has gone up by, I think it's like 59% over its average price last year. And First Majestic has done zero. And of course, they've had various issues with, well, first of all, the most notable one is of course the COVID-19, starting up some new mining operations. But knowing Keith and the guys there, they're gonna solve these problems. I think they'll be in the sort of the mid 20s millions of ounces of silver equivalent production. The price is way up. Imagine the price being $10 higher than it was two months ago. And the stock's almost done nothing. Okay, enter Eric. I'll take it. You guys wanna... and there's a big short position in it, there's a lot of naked shorts, I believe in that stock. And I just think it's great value here for, and of course, it's buyable, like, you can put serious money into it. It's got a multi-billion dollar market cap. So I like the opportunity.

Craig: All righty. Hey, we got the, seemed like the old days. What was it, late last week, when Freegold announced some drill results, and it almost seemed like it didn't matter what they said. They were gonna smash the stock anyway. And that's what happened. Were the results troublesome, or was it just the same old, same old?

Eric: No, the results, believe it or not, were great, okay. But. But, they weren't what people were looking for, including myself. We would have hoped there would have been a high grade intersection here, okay. We didn't get the high grade intersection. But I'll tell you one thing we did get. We got a very, very long hole, with excellent economic grades, better than their existing economic grades. I read a report that was written a couple, three years ago, said that their ability to go from 6.5 million ounces to 10 million ounces will be like shooting fish in a barrel. And that's what this drill hole is all about. You do 150 meter step out, and you hit, in total, about 200 and I think it's, 37 meters of economic gold grade? Wow, do you ever add ounces. You probably added at least a million ounces to the six and a half million. And it's just the first extension hole. We haven't even counted what the first hole might have added.

And they've drilled other holes near the number one hole that had the high grade intersection. I'm sure we'll get those results very soon. Fingers crossed, I hope they can extend the high grade area. There's lots of places to drill on this property. There were something like 24 former indications of mining on the property in different places. There was six and a half million ounces taken out of the streams around this orebody. Like, it has all the signs of being big. It had six and a half million ounce resource at one time. So I'm hanging in there. I wish I could buy, but I can't, I own such a large percentage. But I'm hopeful that the next couple of holes will right the ship here and away we go.

Craig: Another one that's had a lot of news lately that several folks have written in and want your comments on his Wallbridge.

Eric: Yeah, and that's why I referenced the news release from I guess two weeks ago. And I've actually forget the words, and I don't have it right in front of me here. But it was something like, "We're greatly expanding the size of the Fenelon property." And that's a pretty big word to say. And they drilled, they found an intersection 800 meters south of their existing drilling. That was on the Balmoral property. They've found stuff 500 meters west of known intersections before. So they say they've got this 1.8 kilometer strike length. They're almost up to 1000 meters of width, if you will. The depth, I mean, this thing could go very deep here. We have never found the bottom of this thing yet. And being in the Abitibi, the odds are it goes a long way down, like, I'm talking multi-kilometers here, okay. And I think the deepest hole we have is something like 950 meters.

So we could still double it just with depth, and as you go to depth, the grade tends to improve. And because they've got these high grade areas of, would, I think be mined first underground, but mine those, and then they'd go and mine the shear zones that go about 90 degrees off of there. So it should be, I think rather straightforward mining. You also got the open pit up in area 51, you have... It's gonna be included in the GDXJ tonight. So at 4:00... Actually it'll be announced, I think, at 3:40 or 3:45, they announce that there'll be a market on close imbalance, because the ETF's gotta come in and I think by 28 million shares. So the last time this happened, the stock went up about over 10% in a day. So we're kind of hoping that that will happen again this afternoon at 4:00. So we'll stand by on that one.

Craig: All righty. Lot of folks writing in this week about a company called Karora, which used to be called Royal Nickel.

Eric: Yeah, Karora. I stepped up my interest in that a while back. They own the Beta Hunt Mine and the Higginsville operations. I think they have lots of milling capacity now. And of course, they have a huge tract of land. I don't even know, I don't remember how big it is, but the number is something like 165,000 square kilometers or something like that, rings a bell. Like, these are huge tracts of land down in Australia. And of course, there's been indications of precious metal endowment all over the place, and base metal endowment, for that matter. They've got their royalties reduced on their Beta Hunt Mine. I think they'll be drilling to see if they can find another one of those Father's Day Veins, which was two years ago, by the way, and I'm sure that, my view is they're gonna be all over the property, okay. That's just what I think's gonna happen.

So, hold on here. Any day, you could get a really good announcement. They're hoping to produce, I think the number's 100,000 ounces this year. Paul Huet has done a great job of pulling things together there, and out finding and acquiring other orebodies. So I think we're gonna see a company whose production is gonna grow pretty fast here. And if you can buy things and not overpay, which I think you can do in Australia, they don't have quite the appreciation of opportunities, I think, that we do in North America. So I think there's probably are some pretty good opportunities down there. So I own it. I'm happy with it.

Craig: Just the final two on my list, Eric. I think I recall some good news out of Discovery Metals, and then you I think you mentioned Jaguar earlier, but you might double back to that.

Eric: Yeah. Well, let's go with Discovery. They had a 400 meter, 400 meter. Now that's not a little [inaudible 00:22:38], just walk 400 meters, okay. Look out your window and imagine 400 meters later, and for that whole 400 meters, you're in precious metal endowment. So they had a great hole. It was 400 meters. I think, I'm, this is a week and a half ago, I think it was something like, I don't know if I have the number right, but 130 or 160 grams, so highly, highly economic, and will raise the grade of the orebody that they've already defined, that has a billion ounce equivalent of silver. So I just think this orebody's gonna get bigger here. The price of silver's acting beautifully. I expect to see both silver and gold kind of break out here. And they keep attempting to break out, and then they kind of get pushed back. But I think the day is coming when they're gonna make the big move here. And you might go to sleep one day, and silver's at $28 and the next day, or next week, it's at $35. So Discovery, of course, has the largest orebody that I can find for the money, for the market cap. So it's sort of my favorite big exploration play in silver.

And lastly, Jaguar. One thing I didn't even appreciate when I bought it... I was, when I funded this, just to keep them alive and give them an opportunity to turn around, I wasn't thinking about the exploration opportunities. I recently listened to Vern Baker talk about the opportunities to find gold on their existing properties. And they just bought the property from IAMGOLD, I think it was. They bought like 26,000 hectares, and they already had 25,000 hectares, so they got a lot of property down there. And they're in the what's called the Iron Quadrangle, and it has a history of producing gold. So they have lots of places to go, including known orebodies, where the grade wasn't high enough. Well, you know, at 1900 dollars, the grade is high enough. And he's got about...and he could increase his production threefold and not have to build a new mill, if you're can imagine.

So he's in a wonderful opportunity to make things go there. He's already had, he earned, what was it, 80 cents in his last quarter. No, that's wrong. That's the dividend I'm thinking of. And I'm, gotta do the 10 for 1 split. Yeah. Oh, no, it was, I think it was four cents. And so it would be 40 cents. So they're making about a buck sixty annualized, and the stock's under $8. So it's not as though anyone's paying up for this thing. They just paid a dividend, and in fact, I received my first dividend check yesterday. And I'm sure that dividend is very secure. And I'm hoping that that dividend goes up here. So we've already got a nice coupon on it. And I think that coupon could likely rise, and the production would likely rise, and, you know, it all comes together. And it's already up tenfold from where I bought it, but I think it could go a lot further.

Craig: You were mentioning something to give you the magnitude of 400 meters. For you, Eric, that's a driver and two hybrids, isn't it?

Eric: No. For me, that's about three drivers.

Craig: All right, my friend. As we go to wrap up, I wanna make sure I've touched all the bases. Anything else you wanna pass along to everybody?

Eric: Well, first of all, I should say, Rob McEwen. I mean, I really admire Rob McEwen, okay. I remember back in 2000, when I first got interested in precious metals, he was the go-to guy. He was the guy that understood what had happened to gold, and why the price was suppressed. And he spoke very well about it, and I will always admire him for being brave enough to come out and say the things that he said. And he's still very, very, very upbeat about where the price of gold is gonna go. I don't know what number he's using these days, but I know it's many thousands higher than where we are today. So he'll be a great listen, and he's a great student of the precious metal, so well worth listening to.

Craig: No doubt about that. Again, if you have questions for Rob, we'll try to work them in. You can email them to us at submissions@sprottmoney.com. Also at sprottmoney.com, obviously, you're gonna find about the best deals around on bullion and coins, but also storage. When it comes to storing your precious metals, you've gotta have a trusted partner there too, and some countries are more ideal than others. And Sprott Money only partners with the most secure, reputable vault services around the world. So of course, you can always give us a call at 888-861-0775 if you have any storage related questions, but also give us a call or go to sprottmoney.com if you're looking to acquire some metal, and man, it is still the time to acquire some metal. I know you know that, Eric. Maybe you ought to go buy some today.

Eric: Well, I always buy some every day. Whether or not, like, I probably have two warrants that are expiring this month, right? So I'll be putting more money into various things. But I mean, I'm shown probably 10 opportunities every day, and every now and then I get weak and buy one. So, let's see what happens.

Craig: Keeps you busy. All right, my friend. Thank you so much. It was really valuable today, and you gave us a lot of your time, and I know everybody listening really appreciates it. So thank you.

Eric: Happy to do it. Look forward to next week.

Craig: And from all of us at Sprott Money News at sprottmoney.com, thank you for listening, and have a great weekend.