“Who’s kidding who?” - Eric Sprott on the weak U.S. dollar -Weekly Wrap Up (September 21, 2018)

Transcript:

Male: You are listening to the Weekly Wrap Up on Sprott Money News.

Craig: Greetings once again from Sprott Money News and sprottmoney.com. This is your weekly wrap up. I'm your host Craig Hemke. It is Friday, September 21st, 2018. And joining us, as usual, this morning is Eric's Sprott. Eric, good morning.

Eric: Hey, Craig. Good morning. You know, I thought it was going to be a great week here, but in this 10 minutes that we've been waiting to record this call here early on Friday morning, the price of gold got bombed. So let's go at it here.

Craig: And it has been an interesting week, Eric. But before we get started, I just want to point out to everybody that Sprott Money is celebrating a significant milestone here in September. Our 10 year birthday. So please head over to sprottmoney.com or call (888) 861-0775. And you can purchase a 10 ounce Sprott branded silver bar for just 79 cents over spot. You can also get a Sprott silver around for 89 cents over spot. These are striking products and they feature the renounced Sprott name as well as the iconic Canadian maple leaf. Three nine purity, so they're ideal for both investing and collecting and you can find them again at sprottmoney.com. Eric, again, little less expensive than it was just a few moments ago. Gold had the audacity earlier today of tapping its 50-day moving average for the first time in almost exactly five months. It's been under the 50 day. It actually tapped it this morning and now it's gotten carpet bombed here just in the last few minutes. How about your comments on this?

Eric: Well, you know, I have a view of markets, okay. And, it's almost like whatever the narrative is at the time, you know, what's likely to reverse. But for example, I look at the emerging markets here. They got hammered, hammered, hammered, hammered. The next thing you know, whoop, away they go, they turned around to the upside. It's like this invisible hand comes into the market. And so you look at the gold market and as you and I both know, we're at the 50 day, we're thinking, oh my God, it's going to break out of a downtrend that it's had for the last three or four months, it goes right to the line and bang, right back down again and viciously down, right? It's failed 10 or 11 bucks in about three minutes here. So it's just the invisible hand out there that decides, no, we're not doing that now. That's not part of the deal.

Even though, by the way, Craig, the US dollar has been very weak here. You know, like, who's kidding, who? We get down into the 93s and the DXY yesterday. Most technicians would have said that you know, you go to 94.50 and she's breaking down and got to go lower. And I think there's lots of reasons to think it might go lower. So you know, this bombing of gold, it just comes out of nowhere. And typically when they bomb it like that, my own feeling is, it tends to rally again because who knows, maybe it's some speculative fun thing. Well, I'm going to take it down to 1,200 and let's just get this going and front-loading it and then, sure enough, the buying comes in and we turn it around again. So, we'll see as the day unfolds. We were looking at a good week and now, of course, that good week just disappeared in these last 10 minutes. But, it has been a decent week for the stocks, and Silver has done well, palladium has done well. We got the base metals rallying here today, so there's hope that it's a one-off and we can recover that immediate loss we sustained here.

Craig: You pointed out two interesting things that are going on this week. This week being significant because next week brings that September FLMC where everybody's expecting another Fed funds rate hike and some forward guidance as to what you know your Fed governors are expecting for next year. But yet leading up to that meeting next week, as you said, the dollar has been going down on almost a daily basis and interest rates had been spiking on almost a daily basis. Meaning somebody is in there dumping bonds, putting those two things together. What does that tell you?

Eric: Well, you know, the unstated possibility is that China's dumping bonds. So it's bad enough that the Fed has to dump bonds and the Russians won't buy bonds. And now you've got the Chinese selling bonds. And of course, the governments issuing more bonds. I mean, that on a surface would suggests a yield should go higher. And I say on the surface because in the back of my mind I think, okay, and where's the third hand, where's the abysmal hand here was going to buy all this stuff and just put it away somewhere that no one's ever heard of, you know, the plunge protection team sort of thing, which you do, I think you tend to see in the markets here. So, even though all of the ingredients have higher yields are in place here, all of a sudden it's just like we've seen in the emerging markets, they all go down and all of a sudden, oh my God, they rallying and then why are they rallying, you know, and of course the narrative changes to react to what's happened. But, on its surface, in the physical flow of money, you would think that rates would be going higher. The long rates will be going higher here. So we'll have to stand by and [inaudible 00:05:22], but it's a big deal. Rates higher, dollar lower.

Craig: Yeah. And as we headed to next week, it'll be interesting to see the reaction come Thursday and Friday of next week once you get the Fed behind us. You know, and Eric, I just want to ask you this too, because you know, we were all, it seemed like people everywhere, especially here in the states were up in arms over all the deficit spending 10 years ago, you know, and the trillion dollar deficits that were being run at the heart of the financial crisis. And now here we are back a trillion dollar deficits as far as the eye can see. In fact, just the month of August, that month of August, US ran a deficit of $213 billion. I mean, that's a run rate of $2.5 trillion. Why does nobody care? Why does that not affect the price of gold anymore?

Eric: Well, nobody cares until it manifests in the market, okay? So for example, if you ran a trillion dollar deficit and then yields just stayed where they were, no one would give a damn, right? Because the market says it's okay. The market says it's okay. It's when the market can't digest it and all of a sudden, you know, imagine if rates went from 3% to 4%. Like to just really imagine. Markets go from 3% to 4%. What happens to housing? What happens to car sales? What happens at retail sales as people's interest payments go up by 33%, you know, which is one of the biggest costs already. I mean, it would just be devastating. So this bond market has to be watched here. And I wouldn't be surprised if, you know, if I was China and I'm in this, financial/ trade war, I don't think I'd be buying US treasuries, okay? I mean, in fact, I think I might sell them just out of spite. So, that might very well be what's happening. You're not going to hear anybody talk about it that way, but that could very well be what's...because it's been, there's been a big rise in rates here in the last 30 days. I think it's almost 30 basis points now in 30 days. So we don't need many more 30 day periods like that before it's going to start hurting, seriously.

Craig: Yeah, no doubt about that. On the physical side, starting with China, you know, they mine 400 somewhat metric, tons of gold every year and they import far more than that through Hong Kong and into the Shanghai exchange. So we know China is a big hoarder of physical gold. How about Russia though, Eric? They have been steadily increasing their gold holdings now since about 2015. We just got their numbers for the month of August. They added a precise 1 million ounces of gold. A little more than 31 metric tons in the month of August. That's the most they've added in a month since September of last year. They're on a run rate of 240 metric tons for this year is how much they'll add to their reserves. That's almost precisely their entire domestic output. And they're now up to 2,000 metric tons total in their reserves. What do you make of this consistent Russian buying?

Eric: Well, they've upped their game obviously. My recollection was they used to buy 10 to 15 tons. Now they're buying 30 tons, but why wouldn't they? They're avowing that they want to get rid of the US dollar as the world's reserve currency. They sold the treasury bonds. Why wouldn't they buy gold? That's the most logical thing for them to buy. So I would see that trend continuing here. And as you know, the central banks collectively bought 8% more gold in the first half than they did a year ago. That's about 19 tons more than the previous year. And we've seen that with, you know, some of these subsidiary central banks getting involved. Whether it was Turkey or Iran. We had India buy some gold recently. I don't even think that was the first time was in this third quarter. Kazakhstan, Uzbekistan, people who kind of are sitting back looking at the currency think hmm, I wonder where I really should have those reserves of mine, you know, do I want them in dollars or I want them to gold, do I want them in euros, whatever. And of course, more and more people are opting for gold here and I think for very good reason.

So I think the Russians will continue to buy that amount of gold, if not more. As I saw the price of gold plunge 10 bucks a month [SP]. I'm sure the people in Russia liked that. You know, they're probably in their buying right now. So they're either getting a hell of a deal and I think they probably know that they're going to stay in the market, and I got to believe that the Chinese are really net buyers of gold. You know, we're not seeing any official statement that they bought more gold, but you got to believe with what's going on that they're going to be a factor in this gold market for sure on the government level.

So, that end of its working out well. You know, we've seen some of the sales of the metals products, whether it's the silver eagles or I think the US mint ran out of a 110 ounce of gold coins, Perth mint sales strong, Canadian mint sales strong. The Indians are huge buyers. I mean, you talk about tons, I mean here's Russia buys 30 tons, we already talked about this. India imported 100 tons in the month of August. So I mean 100 tons. That's about 50% of all the gold that's available outside of Russia and China and that was up the, I think it was 50% from the previous year. And of course, the Indian Rupees been one of the weakest currencies here so people don't never have like the currency. So their reasons to buy a gold or even stronger. So that's why we've had encouragement on the physical side of the market.

Craig: Eric, I want to wrap up by asking you about the shares, you know, unbalanced, at least before they begin trading here on Friday. The shares have had a good week, which is somewhat encouraging. You think, hey, if the shares are perking up then maybe the metals themselves will perk up eventually too. But I know there's a couple of specific companies you want to address, so have at it.

Eric: Sure. Well, I should talk about a Kirkland Lake Gold because the stocks kind kinda hitting a low for the year here down at a 22 unchanged Canadian. And I just want to point out to people that there's a rebalancing of the GDXJ happening a day where they're selling $30 million shares I believe that's the number. And of course, the most disgusting part of it all is, everyone's front running it. All the dealers had been selling this thing all the way down in order to buy a piece of this block and make a nice return. And what a nice return. The stocks down 25% in 30 days. Hey, don't be analyzing 25% in 30 days, right? I mean that's a pretty fine return. So I suspect when that trade goes up, which I think happens at the end of today, this stock will hit its low.

Kirkland announced more drilling results from Fosterville. I mean, they were just outer worldly. I mean, there were spectacular intersections. The zone continues. The reserves will go up significantly when we report them at year-end based on the drilling. I mean, it all looks good. I know that production is very decent, so I can't imagine stock's going to stay down here. I also want to talk about RNC minerals. That's the company that I might've mentioned it a week or two ago that found these huge nuggets in Australia. And they said, hey, we come down to 600 ounces of nuggets, in one blast and on what day would have...on Wednesday. I guess they came out and said, well, it's not 9,600 anymore. It's now 24,000 ounces that they've taken out of this one little pocket here. And of course, now the stock's up 500% from where it was trading at about a month ago with seven cents.

But that's a lot of money. And the funny part is the stock didn't go up as much yesterday as the value of the announcement. In other words, they announced they found an extra 50 million ounces, which is worth about close to $20 million US. Stock didn't go up by $20 million. So, God forbid that they continue to find this pile of gold along the many kilometers of structure that they have, and I can't say that they will or won't, but it's a new sort of geological interpretation in where this sediment meets a structure, the gold is in place and we're only just...this was our first foray into the structure, so it will be rather interesting.

I announced yesterday that I went to 10% on the stock, so that's public information. You got to do your own due diligence here, you know. These things are all punts in a way. You've got your fingers crossed. You got to guess at where it's going to go. I don't know where it's going to go, but you guess, what's the upside versus the downside? And you have to make up your own mind. So That's interesting. And I would point out that, hopefully, Garibaldi, which is a stock that I've been involved with for quite a while, I own when 20% of it. I'm not promoting it, but there should be a news announcement here today or over the weekend for sure on whether or not they've proven up that possible nickel, copper discovery, British Columbia, so people should stand by and watch for that.

Craig: Keep an eye on the headlines there too. Well, I'll tell you what my friend. It's going to be an interesting week after the way this week has concluded and what we have ahead of us with the FLMC and all the other stuff going on internationally. I look forward to talking to you again next Friday because it's going to be a fascinating week to live through.

Eric: It's wildly crazy. This reversal in gold I see it's down almost $14 now, by the way. I mean, I can't believe. You know, I woke up and I said, oh my God, it's probably going to break out today, okay. Whoa. How wrong can you be? Anyway, that's just the nature of the markets.

Craig: No, that's right. You know, and we all talk about the speculator positioning and how short they are, you know, for the people that follow the commitment of traders report. Getting above the 50 day would've put some technical pressure on them to cover so, so much for that. But anyway, one last thing for...

Eric: Until next week.

Craig: Yeah, that's right. One last thing before we go there. We also store metal at Sprott Money. A lot of folks don't realize that. And if you open a storage account with Sprott Money to store and secure your precious metals, you can store them at any of our six global locations. So, just sign up for the Sprott Money International Storage and receive exclusive monthly deals too, just simply for signing up. (888)861-0775 is our number. And of course, you can visit sprottmoney.com for more details. Eric, it's going to be a fascinating week. I look forward to talking to you next Friday.

Eric: I as well. See you then.

Craig: And from all of us here, at Sprott Money News and sprottmoney.com, thanks for listening. Have a great weekend and we will talk to you next Friday.