"You better head for the hills.” - Eric Sprott on volatile markets (Weekly Wrap-up - April 06, 2018)

Transcript:

You're listening to "The Weekly Wrap-Up" on Sprott Money News.

Craig: Well, greetings once again from Sprott Money News and sprottmoney.com. It is Friday, April the 6th, 2018, and it's time for your weekly wrap-up. I'm your host, Craig Hemke, and joining us, as usual, this fine Friday morning is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Lots to chat about here. It's been a bit of a wild volatile week, both in the stock market and in our favorite precious metals, so a lot to chat about.

Craig: That is for certain, my friend. And before we get started, just a little shout out to our Canadian listeners. Let them know they can take advantage of a great deal that Sprott Money is offering. For a limited time only, they can buy a 1-ounce PAMP gold bar for just $17 over spot. $16.99, to be exact. Quantities are limited, so call 1-888-861-0775, or visit sprottmoney.com for more info. That's a 1-ounce gold bar, $16.99 over spot. That sounds like a pretty good deal for our regular listeners. Okay, my friend. Right out of the chute this morning we got the monthly jobs report. In my segment, we call it the BLSBS because it's all just statistical stuff anyway. But we had some downward revisions to a big number in January, some upward revisions to an even bigger number in February, and then this month came in at just 103,000 jobs with average hourly earnings ticking up a bit to 0.3%. Your take on all of that?

Eric: Well, you know, we had earlier in the week the job layoffs announced for March, and there were 60,000, which is a lot. And I think that was something like 39% above the previous year, so there's some signs of weakness in the labor area. I've never been a huge believer in the monthly jobs number. You know, one of the things I always think about, what about the 96 million people that are not in the labor force anymore, you know? It's kind of a contrast. You know, we had 100,000 jobs, but what about the 96 million people not in the labor force anymore, you know, which we never ever discuss? So I'm not a big fan of the job report. In fact, the birth-death model probably created 150,000 of those 103,000 jobs anyway, so you know, the market didn't react much to it. Gold shot up four or five bucks there. Now it's going back down again, so it looks like a non-factor here so far. And I think there are way bigger things in the job market these days.

Craig: Well, that's right. We've had a volatile week, as you said. All of these rumors of trade wars and actual trade wars are kind of kicking in and affecting the stock market and all kind of other things that really are quite noticeable, quite a big rally in the bond market that kind of eased off these last couple days. But the loan rates have been falling rather dramatically, Eric, and the stock market seems to be wanting to roll over. I would imagine this has your attention as well.

Eric: Well, of course. The big worry when I kind of look at the stock market in general, if I was a long investor in stocks, which I'm not, okay? I'm in precious metal stock, but I'm certainly not in the general stock market. I would be very concerned about some of the things that are happening on kind of a macro scale, and one of them, of course, is what happened to cryptocurrencies. And when we look back now, okay, look back four months ago when cryptocurrencies hit their high, they were in the news every hour. And some of us were non-believers the whole way, and I was one of those non-believers. And here we are four months later, and they're down 70%. It's a wipeout. It was a wipeout. It was people doing exactly the wrong thing with their money. I guess we got up to close to $400 billion. Now, that $400 billion is down to about $100 billion, so they lost $300 billion here of paper value, for the most part, I guess. But it just tells you about markets, you know, that they can go crazy.

Now, let's go to the stock market and, of course, the FANG stocks, you know, Facebook, Amazon, Netflix, Google. And here we have almost one by one, they're getting picked off, whether it's Facebook because of the data infringement situation, whether it's Amazon because President Trump thinks they're not paying enough in U.S. postal fees, whether it's Google that maybe has the same issue that Facebook has. But these stocks are starting to come under pressure. When the big ones start going, you better head for the hills here, and I just think that this stock market is looking terribly vulnerable. And I wouldn't want to be in it, okay? There's so many things that can go wrong here, and of course, the biggest thing that can go wrong is interest rate increases. We can't deal with interest rate increases. We can't have mortgage rates go higher, car loan rates go higher. Those areas are already suffering, so we're sitting here thinking we're going to have another two or three rate increases this year. We have three next year. Now we're just in la-la land thinking this is going to hold together, so lots to be concerned about in the stock market these days.

Craig: Yeah, you know, you touched upon something that I've been discussing quite a bit, too, is that it almost seems as if the Fed has painted themselves into a corner because if loan rates go up, they're going to crush the economy and increase debt service and all that kind of stuff. But if loan rates don't go up and they keep jacking the fed funds rate, they're going to invert the yield curve and, either way, we're headed straight into recession. Does it appear that way to you?

Eric: Yeah, I know. I think they have backed themselves into a corner here, and I think that when they see, for example, the jobs number this month and they see the job layoffs this month, when they see that retail sales have been sick for months, when they see the car sales, the home sales, you're going to keep raising rates in this environment? I don't think so. So I always believe that it's a big of a fake out. They're going to try to do that, but I think when it comes to even further increases in interest rates.

Craig: Yeah. No, I hear you. It definitely makes you wonder how the rest of this year is going to play out when it seems as if the general consensus is, "Oh, this is easy. The Fed's going to keep hiking," and there might be a few more variables involved.

Eric: Yeah. And, of course, one of the things, as we tend to focus on precious metals, I mean, one of the reasons that, theoretically, precious metals have been under siege here or a little bit suppressed is because, well, rates are going up, and you know, if rates go up, gold can't go up, which of course, is a fallacy. But nonetheless, it's something we have to deal with in the paper markets that we have. But I think, ultimately, if all of a sudden the Fed, as you suggested, might sort of pull back here for a second, I think the interest in gold would really spike up.

Craig: Yeah. All right, Eric, I would be remiss if I didn't pick your brain a little bit about this topic because of all times, you know, we look back to 2008, look back at 2011, and the usual, I guess, standard open interest number for COMEX silver, in this case, was usually around 130,000, maybe 150,000 contracts if it ever got, you know, really rolling, actually made an all-time high in COMEX open interest about a year ago at 234,000 contracts. And now, just this week we smashed through that level to a new all-time high in COMEX open interest. We're up north of 240,000 contracts. Eric, that's 1.2 billion ounces of digital silver. Why now? What does this tell us? Anything?

Eric: You know, Craig, I get confused by the whole thing now. I mean, it's just so non-constructive in the sense that it's non-analyzable almost. And of course, we're not even counting all the contracts that have migrated from the COMEX over to London. What would the open interest be if those had stayed in the COMEX? It would be some staggering number, so maybe it would be two billion ounces of silver that's been short. And I always sort of wonder, what is really going on? Do we really know what's going on? Let me just give you an example of that. Recently, the U.S. Mint came out and said, I think, they sold 3,500 ounces of gold in the month of March. And then the next day the Australian Mint says, well, they sold 29,000 ounces in the month of March and had a decent March. I think hold it now, how can the U.S. Mint only sell 3,500 ounces of gold in a month? Maybe they don't want to sell any gold. You know, maybe they don't want to take orders because they don't have any gold because that's entirely possible. As we analyze all this data, we keep going who's possibly got all this gold and silver? The numbers become monstrous after a while, so I don't know. It's one of those things where you can analyze it all you want, but nothing makes sense. It's a little bit like cryptocurrencies.

Craig: Right.

Eric: You can analyze it all you want, and it never makes sense until finally it plays out.

Craig: In that same sense as crypto, you want to say everybody piled into the long side in November and December of crypto. I mean, the managed money, if you break down the COT report, it's just the amount of short contracts at management hedge funds, trading funds, accounts like that, the amount that they are short, is staggering, record-breaking here at $16.25. I mean, we're $2 lower than we were a year ago when managed money was way, way, way long. So what are they seeing, Eric? And, I mean, does that kind of foreshadow price moves in your mind?

Eric: Well, we would expect so. You know, it's like, ultimately, logic should prevail, but over a substantial period of time, it doesn't. Even now, it's like the run up in cryptocurrencies, okay. It's a long time that cryptocurrencies were running up, only to find all of a sudden it looks like, you know, the whole thing made no sense. And the same with open interest. It goes up and all these exchange for physical shipped over to...it all makes no sense. But someday it comes home to roost, and bang, away you go. So, I mean, I presume that that will work out someday. In terms of timing, who knows when it is, right? But with a new open interest in silver and then the price doing what it's doing, it's not really explicable.

Craig: All right. One last thing, and I'm going to set this...this is like kindergarten T-ball, Eric. I'm going to take the ball, I'm going to put it right on the tee, okay? And we're going to let you smash this one. At 1.2 billion ounces of digital silver for open interest on the COMEX, that's about 150% of global mine supply. Now, gold has about 500,000 contract of open interest. If you do the math, that's about 55% of global mine supply. And if you really want to break it down, copper with about 250,000 contracts of open interest, that's about 15%, 16% of global mine supply. What does that tell you, Eric?

Eric: Well, it tells us the same thing that we've been complaining about. Maybe I'll go to Ted Butler who's probably the most vociferous guy complaining about the open interest in silver and the shenanigans that go on in the COMEX. And you know, why would silver have over 100% of its annual production short? I mean, it makes no sense whatsoever. And maybe they're using it to help with the suppression of gold, which is entirely possible because it takes so little amount of money in silver to knock it down. And then, of course, gold can react in sympathy by coming down, so I mean, it's just outworldly, you know? And when you get things that are outworldly, you know that something's going to change sooner or later. It just gets crazy, and I think it's quite constructive for silver that the open interest just keeps exploding and the exchange for physicals keep exploding. Someday it will do what it's supposed to do, which is rise dramatically.

Craig: Well, and maybe that someday will be between now and next Friday. You never know.

Eric: Wouldn't that be nice?

Craig: That would make for a fun Friday update, wouldn't it?

Eric: It would, indeed. We could maybe just end it, "Silver is at 200. I'm out of here."

Craig: Yeah, we'll just drop the mike right there. Eric, have a great weekend. I want to thank you for your time, and I want to thank everybody for listening.

Eric: Okay, Craig. All the best to you, too.

Craig: And before you go, make sure you head over to sprottmoney.com, or of course, call that number, 888-861-0775. You can purchase a 10-ounce Sprott-branded silver bar for just 79 cents over spot. This bar features the renowned Sprott name as well as the iconic Canadian maple leaf with 99.9% purity. It's ideal for investing and collecting. Check it out. Again, sprottmoney.com. From all of us here at Sprott Money News and sprottmoney.com, have a great weekend, and thank you for listening.