“You can smell the breakout.” - Eric Sprott on precious metals (Weekly Wrap-Up - April 27, 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's Friday, April 27th, 2018. And this is your "Weekly Wrap-Up." I'm your host Craig Hemke. Joining us, as usual, this fine spring morning is Eric Sprott himself. Eric, good day.

Eric: Hey, Craig. Quite a week. And I should mention that first, it's been a very tough week for people in Toronto here with the tragedy that occurred here earlier in the week. And, you know, our best thoughts go out to all of the people who were affected by that. It's just terrible. Things like that shouldn't happen, particularly in, you know, what we consider a great city here in Toronto, so our best thoughts to the families.

Craig: No doubt. Our thoughts and prayers go out for them. That's certainly a terrible tragedy. Eric, I do want to point out, as we often do before we get started with this discussion. Of course, these weekly wrap-ups are brought to you by Sprott Money. And this week we are offering the Enduring Britannia one-ounce gold bullion coin for just $25.99, U.S. dollars, over spot. Our Canadian and U.S. listeners can take advantage of this promotion. Just call 888-861-0775. Or, you can just go to sprottmoney.com for more info. Now, there's limited quantities, so take advantage now. Again, that's a one-ounce Enduring Britannia one-ounce gold bullion coin, $26 over spot. That spot price is down this week, so you actually save a little money if you waited from last week to this week to buy. Gold is down about $17 on the week. Silver, after having the audacity to rally last week, has been smashed backwards almost 4%. But the shares are holding in there, Eric, which is encouraging to see. What do you make of the action this week?

Eric: Yeah. Well, you have a difficult job predicting the price of gold and silver on a weekly basis when, you know, it's month end, options expiring, everyone trying to run...well, the commercials trying to run the price down for a month and then it rallies up. And the worst part is, for all of us, and you and I in particular, I mean, you can just smell the breakout, right? You are so close to it. Silver is at whatever $17.50 and gold at $13.55 recently. All my God, just another 10 bucks and away we go or whatever.

And we just missed it, man. And we've been there a couple of times already in the last couple of months. But maybe, you know, when we finish with the options expiry at the end of this month things will turn back up again. I certainly hope so. And I think it's a very good sign that the stocks kind of hold in there anticipating where this thing could go because, as we've talked about many times before, when the prices go up, these stocks just fly. So, there's lots of opportunity there and I think people recognize there's lots of opportunity. So, I think that's why the stocks are kind of hanging in notwithstanding some disappointing earnings. We've had disappointing earnings I think out of Agnico, we had disappointing earnings out of Goldcorp, Barrick. I mean these are your generals here that are stumbling a little. And it doesn't help the whole group that some of the bigger companies aren't performing as well as we might hope.

Craig: You know, I do want to point out something, too, about those earnings. I just...it was pointed out to me this morning that Barrick, which is one of the largest or if not the largest gold producer in the world, has seen their gold output, the actual stuff, how much they pull out of the ground, has fallen by 50% since 2012. You know, we keep noting that demand certainly is increasing. Whether it was the Turkish government repatriating all their gold or the continued buying by the Russians, another nine metric tons this month, the GLD is at its highest inventory level since November of 2016. So, demand is there and supply is falling. You'd think if physical fundamentals had anything to do with price it might be rising, Eric.

Eric: Well, ultimately, physical does have everything to do with price. You know, I mean it's just shocking when I have to read about how much gold is traded in a day or silver traded in a day where, you know, they'll trade over 100% of the annual supply of gold in a day in the paper markets or silver. I mean, it's almost incomprehensible. What are these people doing that are trading all this stuff? I mean, they're just pressing some button and I don't get it. I mean, it bears no relationship whatsoever to the physical market for gold and silver. So, ultimately, when that day comes that somebody says, "Okay, I'm going to take delivery," and the guys don't want to offer it up, things could change very dramatically. You and I have commented on the whole EFP exchange for physicals like the one on the COMEX. I mean, there are just incredible amounts of these EFPs that get transferred over to London and I think each of the last 3 or 4 months has been like 600 tons of gold that's been transferred over to theoretically to London. And we only produce about 220 tons of gold a month in the whole world from mining. And yet somehow, somebody is going to get 600 tons of gold from someone in England. It just disappears somehow. I don't know what it is. It just evaporates somehow. I don't know how they do it and I'd love someone to explain it to me someday. But there's lots of strange things going on.

Stocks as an indices kind of holding it is good. And there have been some performances of stocks that have done very well. For example, I look at Kirkland and has already hit a new high this month and it's trading very well. And, for example, in the case of Kirkland...I think Agnico...I'm sorry. GoldCorp earned $0.08 and we'll earn I'm sure in excess of $0.20 when we announce the numbers next week. So, we earn two-and-a-half times what they earn per share, but we trade at almost similar prices. And the same with Agnico. I think they earn $0.19 and our earnings are very similar to theirs. They trade at $54 Canadian and we trade at $21 Canadian. So there's all sorts of funny things that go on in markets that, to me, are a little inexplicable. And quite frankly, for me, it's been a good couple of years in the gold space. And again, it's been sort of a decent week this week. So, I don't have to hang my head down too far and hopefully, the metal prices turn around and everything gets logical again.

Craig: Yes. It is frustrating for a lot of folks to see this beatdown this week. And it's interesting. I'd invite everybody, if you can, go to a site where you can pull up a chart, take a look at the weekly chart of silver and notice how all of the lower highs that have been made all connect perfectly in a straight line as if it was painted that way. But we are making some progress and it won't take much now to get prices to rally. And we're watching so much calamitous behavior in all these other markets, Eric. The 10-year note has moved above 3% up from 2% just a few months ago. The dollar, all of a sudden, has decided to soar. The stock market is teetering. It keeps trying to find support. I mean, do you sense that things are rather tenuous in other markets and that that perhaps could drive some funds into our sector?

Eric: Well, I would firmly believe that. And probably the best example I can give you is, Jeff Gundlach, who is now the bond king, keeps talking about gold and how it seems to be set up to surprise us all. And I think he's quoted as saying it could move $1,000, which, of course, I wouldn't find that difficult to understand. So when generals like that, who are seeing their markets kind of turn to bearish as the bond market, and they have to start looking out. And instead of focusing on the stocks, which he's not going to do because he's obviously a believer as we are that, as rates rise, I don't think stocks are...companies are not going to be faring that well. There's a cost to having debt at the company level and at the government level. And it's that government level that could really come home to hurt if rates continue to rise here.

So, I pointed out before we have to watch that 10-year note. It did hit a new high this week. It came back again yesterday. And still, I think just a tad under 3%, but it gets worrisome when rates start pushing higher here because when you've got whatever the number is $275 trillion of debt out there and a lot of it's hooked to , that's a huge price for the world's economies to pay for higher interest rates.

Craig: Let me just ask you one last question this week, Eric and kind of draw up on your experience. And maybe you can share some wisdom with everybody because we go back to the period of 2004 to 2007. And that was the last time the Fed was consistently hiking the Fed funds rate. In fact, in 17 consecutive quarterly meetings, they raised the Fed funds rate 25 basis points 17 times in a row. But over that same period, the price of gold went from $400 to $1,000 an ounce. So, this notion that you have to have zero interest rates and stuff to make gold go higher is not necessarily the case. What do you recall from that period 2004 to 2007? Was it just kind of a buy and hold period? Or was it a time that you had to be aggressively trading your portfolio and any other nuggets you could share with everybody?

Eric: Sure. Well, I mean I lived through it and I prospered tremendously during that time both as a gold owner and ultimately, as a shorter of stocks as the '07, '08 financial crisis hit. And I just...there were all sorts of reasons to own gold. Well, first of all, the insanity of Nasdaq in 2000 was just crazy. It fell out a bit and bottomed out I guess in '03. And then somehow, you know, we hit these...some rate changes that convinced people that things were better. But ultimately, you could see underneath it all, which was very noticeable that the strength would not carry on, that there was way too much lending. We got into the sub-prime stuff and, mean, the things that were going on financially were ridiculous. So those of us who were looking, they said, "Man, this thing is go crash. What are we going to do? We got to buy gold." And, of course, I think that's the primary reason why the gold price kept going up because you only need a small part of the population to move a little money in gold to make a difference. And if one was observing, you could see that there were all sorts of issues. As, for example, today, as I mentioned, if you have $275 trillion of debt, well, you don't really want interest rates to go up by 100 basis points because it's going to cost somebody $2.7 trillion. I don't even know if the world earns $2.7 trillion in a year to be brutally honest with you, amongst public companies.

So, that is, you know, that's we are in the same type of situation. And of course, we have rallied here for the last couple of years in gold and silver, mostly gold. And I think it's because we see that this whole story of economic growth is one based on false premises. And the false premise is let's print money and have low interest rates. And we just got the GDP for the first quarter, the U.S. is 2.3%. Well, let me remind our listeners, we always go into every year and we're going to have 3% GDP growth. That is until we announce the first quarter GDP and realize, "Oh, we don't have 3% GDP growth." And then the estimates keep coming down. So, again, we don't have the economic strength that everyone is suggesting that we have. I mean even 2% growth is pretty paltry here and when you realize a lot of it is because of government spending money that they don't have, which helps GDP by the way. But sooner or later, if you're spending money you don't have, you're not going to be able to spend it the next time because you truly don't have it. And the bond market is going to make you pay for the money. And then you'll come to your senses and stop spending. So, I think we have a kind of a déjà vu here that we are all going to find out that the rising market was built on false premises.

Craig: Yeah. And even if it's just a natural business cycle, eventually rates get so high that things fall back down and the metals anticipate that by rising ahead of it. You're right.

Eric: Totally, totally. And Craig, I might mention one other thing because I've talked about Novo before on this chat we have every week and they brought out some results when was it? Wednesday? Wednesday this week of some nuggets from the conglomerate down in Australia. And I just wanted to sort of weigh in on the...it looked pretty good.And this is not an investment advice. I'm just saying that the 88 nuggets they had from the 8 tons look like an interesting sample. And Quinton Henning was speaking recently and was pointing out that the whole Pilbara area, which is huge, has now seen more and more indications of gold manifestation in quite a large geographic space over the Pilbara, including a place called Beverley Dome, which is 250 kilometers south of where Comet Well or Novo is where he thinks that the outcropping of Beverley Dome is the other side of the basin coming up to surface. And, of course, the theory is that the basin is loaded with gold. We will see. That's something that I bought into and Kirkland bought into but the fact that we are seeing these occurrences so far apart is leading to the...leading us to a potential conclusion that it might be a lookalike and we all know how significant that would be.

Craig: I think that would work for almost everybody. You are right. Very good.

Eric: Well, if you are an owner.

Craig: That's right, that's right. Well, thank you for that update. Hey, one last thing before we go. We talked about the Britannia gold bullion coin at $26 or $25.99 over spot. Sprott Money has one other offer for people that like to stack silver. This is for Canadian and U.S. listeners. You can buy a one-ounce Canadian Maple Leaf silver coin for as low as $1.75 over spot. That's anything...anytime you get it under $2, that's really great. Limited quantities of this are available, so take advantage. Again by visiting sprottmoney.com or calling 888-861-0775.

Eric, thank you for all of that information. I look forward to next week. We've got another employment report next Friday to discuss. Between now and then, we'll see which way prices go. It should be a fun week. Thanks for everything. Have a great weekend.

Eric: Okay, Craig. You too.

Craig: And from all of us at Sprott Money News, and sprottmoney.com, thanks for listening. Have a great weekend. We'll talk to you next week.