Eric Sprott on market manipulation, mining shares, and Russia’s gold reserves (Weekly Wrap-up, February 23, 2018)

Transcript:

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

Craig: Well, good morning, good afternoon, good evening, from Sprott Money News and sprottmoney.com. It is Friday, February 23, 2018, and this is your Weekly Wrap-Up. I'm your host, Craig Hemke, and joining us as usual on this fine Friday is Eric Sprott. Eric, good morning, good afternoon, good evening.

Eric: Hey Craig, good to be here. You may recall that I handed off last week's call by saying, "Well, you know, if they get another week like that week, look at where we'd be." Well, we got the opposite, of course, so now we got to do a little bit of ground work in here, so let's see how it goes.

Craig: In a stunning development, you're right. And Eric, I should point out before we get started, as you likely know, the deadline for RRSP Cs, and in Canada is coming up quick. Man, it is March the 1st, which makes it, what, like, Thursday? Something like that. Anyway, here at Sprott Money, we partner with a company called Questrade to make it even easier for you to buy and store physical gold and silver in your registered retirement account. But don't miss this deadline, it's next week. Invest in your future today. Call 888-861-0775 for more details, or you can visit sprottmoney.com and find out more there as well.

Eric, yeah, we were on the cusp of what looked like a solid move. And then, suddenly, we got hit hard late in the day on Friday, and we got smashed really good on Tuesday. To me, it looked like it was some smoothing out ahead of option expiration. What did you think of the week that just was?

Eric: I'm always skeptical of what happens. And, you know, as they always say, the discussion follows the performance, you know, so the gold goes down, everyone says, "Oh, my god, it went down," because we can be four rate increases instead of three rate increases. And it's all just a bunch of crap in my mind, and it's a language to try to explain what shouldn't have happened in the gold market. And most of what happened in the gold market, particularly on the down side, shouldn't happen. I think that, you know, we've seen lots of data which suggests that people other than the commercial banks have a big interest in gold here, but there's certain people at the commercial banks who have positions that they want to protect, and they want to, you know, skim off money on options expiry every month and quarter. So we end up with that kind of action in the...on the COMEX. So, you know, we got to bide our time again.

Oh, and it was shocking to me, I think it was even just yesterday, we were up $6 and the HUI index was down, I think, a percent and a half or something. How does that happen, you know? Like, it just...who knows. You know, you can't explain this...most markets anymore. That's the bottom line.

Craig: You know, actually, I'll ask you that question. I was discussing that yesterday. I was asked that yesterday, actually, on the Korelin Economics Report, about how, suddenly now, gold...the price of gold doesn't even seem to matter to the HUI index. It almost tracks tick for tick with silver. Do you think that's a function of HFT, Eric, or what is going on there?

Eric: I think it's a function of positioning by certain people who want to make money on swings in values who can create those swings, you know, and because of, sort of, non-...diminished regulations of the COMEX, and almost diminished regulation of stock markets, because we still allow high-frequency trading. And we hear about swooping, you know, everybody admits that they do it and, you know, they convict the guy of it, but it's just going on all the time and everybody talks about it. So it's somebody taking advantage of the stock market, and if there's anything that the SEC should have done, it should have put a time delay on high-frequency trading. It's just...It's an awful situation that we all go through.

And so, people take advantage of the dealers and the high-powered guys with their fancy computers near the exchanges, take advantage of the masses every day. That's the bottom line.

Craig: Yeah. And Eric, as you know, at 1330, 1350 gold, most gold miners are making a ton of money after, you know, slimming down and trimming down over the last couple of years. But that's, again, not reflect in the stocks at all, is it?

Eric: It's shocking in the way that, you know, you add on an extra $100 on to the gold price, and guys' earnings are up probably 25% to 33%, and the stocks are at new lows. So it's very difficult to explain, other than somebody positioning who has the power to make things go where they want. Luckily, there are some stocks that seem to avoid it, but to avoid it you better come out with some pretty spectacular results in order to fight the basic down trend. So that's the way I see it.

Craig: Yeah. This would be a good chance for me to ask you about Kirkland Lake, I know you're involved there. And I was just mentioning on my site yesterday how great it's done, that, you know, if you're in the right companies, things are going okay. Do you have any updates on Kirkland or Novo?

Eric: Sure. Well, on Kirkland, you know, we brought out our quarter. I think the quarter was $0.34 of earnings, which takes it to almost $1.40 annualized if you want to look at it that way, which, in terms of the...these are U.S. numbers, which puts it just a little over 10-times earnings if it's sustainable. And I would say on the sustainable front, a lot of the changes taking place happens because of a (inaudible) below grade and the immense high grade. And as we look into...further into '18 and '19, we just announced that we have a zone there where we found 1 million ounces of almost 2-ounce material. So as you move to that higher grade material, your production is going to go up, and the cost of the production stays the same. It doesn't cost any more to mine 2 ounces versus 2,000.

So I would think...and we haven't...we're not certain when we get to those high grade ounces, but you know it's going to happen in the next year or year and a half, and I think the impact on free cash flow will be quite dramatic. So between the...and the reserve upgrade in Foster was something like 1.5 million ounces in the year. So we produce, let's call it, 270 down there, and we actually added about 2.5 million ounces after the 270. So we all looked at it 10 years net reserves, or gross reserves, in one year, and hopefully we'll find more.

So I think it looks great, I think it looks inexpensive. I always look at it compared to some of the big stocks and what they earn, what Kirkland earned, and I just think that there's a lot of examples where we look a lot cheaper than some stocks that are trading at two and three times higher multiples than we're trading at. So that looks good.

Novo, we discussed last week that they came up with this second conglomerate of Comet Well, another 15 meters of conglomerate. There was an interview of Quinton Hennigh on the Kereport, and I would suggest that any Novo shareholder should listen to that. And I would say it was pretty upbeat in the sense that, you know, we're back to, okay, this is how we started down this process, that day we had this huge physical space over which the gold was disseminated. And, you know, we got to wait and see whether that proves out, but I would say that, you know, we've gone from the half-meter, or the conglomerate that was gold-bearing at Purdy's, to something that looks like it's going to be more significant at Comet Well. So those things are all looking good right now.

Craig: Yep. All right, turning back to some of the news items this week, Eric. How about this latest story of market manipulation coming into LIBOR? That's actually, kind of, where all the stories really started to get public a couple of years ago, and now here we are again.

Eric: Well, the funniest part, though, the funniest part is it's the FDIC, the Federal Deposit Insurance Corporation. It's suing 16 major banks because a bank in Puerto Rico went broke, called Doral, and, of course, they went broke because the guy probably thought to himself, "Hm, this LIBOR rate should be going up," and he probably bet that it would go up because everything he learned in life said it was going to go up. And, lo and behold, it didn't go up. Well, why didn't it go up? Because a bunch of banks conspired to keep it down. So all of his intellect and logic was right, but the outcome was wrong because a bunch of banks decided, nah, it ain't going up. And so now, the Federal Deposit Insurance Corporation wants to get their money back for the losses that they've incurred on Doral. So that is quite ironic, I would say.

Craig: I'd say that sounds vaguely familiar, doesn't it?

Eric: Ridiculous, you know. Whenever we talk about the banks, I mean, they've been accused of almost everything under the sun here, including some of them admitting to manipulating gold and silver. So what's new?

Craig: All of your experience tells you it's going to go up, and yet the banks get involved and it doesn't. Where have I heard that before?

Eric: Yeah. Well, we pretty well repeat it every week.

Craig: All right. I have one other story I want toask you about. Russia reported their official gold reserves again this week. For the total year of last year, they added 224 metric tons. I guess that's the real thing, too, that's actual real gold, as far as we can tell. And they added 600,000 ounces in January here of 2018, which is a lot. Everybody gets all excited about that. However, in January of 2018, the COMEX and the LBMA managed to settle 21.4 million ounces of alleged gold through their EFP process off exchange. That's 36 times the amount of gold that Russia allegedly delivered, but nobody reports that, Eric.

Eric: Yes. Well, we have paper and we have the real thing, right? And, of course, it's easy...I guess it's easier to settle paper gold than it is the real thing because of delivery issues and the fact that it's not available. And, you know, when you look at what Russia's doing, I mean, look at...the U.S. dollar's very weak here. I mean, wouldn't you much rather have your money in gold? I mean, why would you have it in U.S. dollars when the dollar continues to weaken? And it looks like it's threatening to go much weaker. So I can understand the logic of it, I can understand these other countries, China, Turkey, that are adding to the gold supplies. It seems to make sense in the foreign exchange world we live in. So good for them, and I hope other countries come into the fold because it seems like the logical thing to do.

Craig: Eric, we'll look ahead just quickly into next week. Again, as you mentioned, we were hit pretty hard in gold this week, though silver's mostly unchanged. And so, now we look forward to next week. We've got chief goon Powell headed up to Capitol Hill for his Humphrey-Hawkins testimony, you know, how gold usually is managed around those events, a lot of economic data as well. Any thoughts for everybody as we wrap up this week and move to next?

Eric: Well, I would say other than the PMI data that came out, most of the data that concerns consumers has been weak. The fact that interest rates are going higher here, and the cost to the U.S. Treasury, my goodness, if those interest rates continue to rise here, the cost of the Treasury is just incredible, 100 basis points across some $200 billion a year. Add it on to a deficit. None of us know how big it is, to be quite honest, because we're always handed these budgets that are totally meaningless versus reality. So we keep our eye on the 10-year Treasury here, which poked up to almost 3%. That's what's going to drive the market.

I'm not a great believer in the chatter that the central banks use on inflation. The real story is supply and demand for treasuries, because the Fed's theoretically a seller, and the Russians are sellers, the Chinese are sellers, the Japanese are sellers. So who's the buyer here as the U.S. government has to raise probably twice as much money this year as they did last year? So we'll see. I think if we all stand by on the 10-year, and if it keeps going higher, it's not going to be constructive for the stock market. And anything that negatively affects the stock market ultimately is good for precious metals.

Craig: Yep, yep. Well, all right. It's going to be a fun week, it's going to be an interesting week ahead. I look forward to talking to you next Friday. But for now, a happy weekend to you.

Eric: Hey, all the best to you too, Craig.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thanks for listening. Don't forget about that RRSP deadline that's coming up next week. Go to sprottmoney.com to check out the details and take action today. Again, thanks for listening. We'll talk to you next