Man: You're listening to "Ask The Expert" on Sprott Money News.
Craig: Welcome back to the Sprott Money News and sprottmoney.com "Ask The Experts" series. This is your segment for April 2020. I'm your host Craig Hemke and joining us this month is renowned Canadian analyst Rob Kirby. Rob is the proprietor of the great website kirbyanalytics.com, and it's great to get a chance to visit with him and lay some questions on him. So, Rob, thank you so much for joining us this month.
Rob: Let's do it, Craig.
Craig: All right, my friend. Again, we've been collecting questions through the email address email@example.com for several weeks now. That's also the same portal through which we collect questions for Eric Sprott every week with the Weekly Wrap-Up. So if you ever want to participate, just use that email address. Rob, I've got seven questions that have come in over the course of the last couple of weeks. If you're ready, should we get started with number one?
Rob: I am ready.
Craig: All right. This person asked, the Canadian big banks are often regarded as being conservative and safe; however, I find that they're extremely opaque. In the case of U.S. banks, you can go to the comptroller of the currency and gain some insight into their positions. However, in the case of Canadian banks, I have absolutely no idea what the magnitude of their derivative exposure may be. Does Rob have any insights into the derivative exposure of the Canadian big five banks?
Rob: Do I have direct knowledge? No. But anecdotally, I can tell you that years ago when JP Morgan was sporting a book of roughly 70 trillion in notional, somebody had gone through the Royal Bank of Canada's annual report and in the notes to their annual report, which I don't follow admittedly very closely, but buried in their annual reports, they do have notes about the size of their derivatives positions. And I do believe that back in the 2011 to 2012 timeframe, the Royal Bank of Canada had a book of roughly 10 trillion in notional, most of that being, of course, interest rate derivatives. But I guess the real answer to the question is yes, the Canadian banks do provide the information, but it's buried in their annual reports and these things are 200 to 300 pages long and I don't have the time to go through the Canadian banks annual reports and read that much because it's very dry.
Craig: It is wise to assume though that they've got their feet in the fire as well?
Rob: They do indeed.
Craig: And, Rob, I might follow up with that myself with the collapse in energy prices. Do you assume that the big Canadian banks have a pretty significant exposure to the Canadian oil sector?
Rob: I reckon they have to, Craig. By virtue of the percentage of the Canadian economy, the oil sands makeup, and the Canadian banks have a big presence in Western Canada. So by just by association and by the percentage of the Canadian economy that energy makes up, the Canadian banks necessarily are big players there.
Craig: Well, it's worth keeping in mind if you're a Canadian citizen who has exposure even through, what, a savings account in a Canadian bank. Rob, question number two has to deal with physical precious metal. And just simply what can, you know, the average person do to make a real difference in the fight for honest money and the rule of law, I mean, outside of stacking physical gold and silver?
Rob: Well, it's getting more difficult to stack this gold and silver, Craig, as you might be aware, because I mean, we had a period last month where the Canadian mint was shut down for two weeks. My understanding is the Canadian mint is open again, but on a limited basis. And last week, the U.S. mint shut down, so from a retail perspective, it's become very difficult to source and to physically purchase maples or eagles of either gold or silver.
And we know that a lot of the big refineries in Switzerland had been shut down in recent weeks and the Mexican silver mines have been somewhat closed or completely closed recently due to the COVID-19 virus. So we're seeing constraints on the supply side of not only the raw material that goes into making the coins but the people who fabricate the coins themselves. So it's becoming very, very difficult to access physical metal at the retail end. And there've been supply constraints put on the space.
We've seen a divergence in price between the wholesale prices as presented to us by exchanges like Colmex and what's actually being paid in the real world for physical ounces. We're seeing very, very stiff premiums being attached to both gold and silver.
Craig: And if that's the price then that's the price. It always cracks me up, you know, we talk about the gold-silver ratio being a 100 and whatever, but that's off the derivative price. I mean, what really is the gold-silver ratio? I guess we'll get to that later, but do you have any thoughts on that?
Rob: Boy, the gold-silver ratio, if you believe the numbers from the Colmex exchange, maybe the gold-silver ratio really is 120 to 1, Craig. But with a wholesale price of silver as per the Colmex being 50, finding an ounce of silver in a coin shop under $25.
Rob: Very difficult to do.
Craig: Well, and I guess, this was gonna be question seven but I'm gonna slide this one up to be questioned three then, Rob. This person wants to know is the cost ratio to pull gold and silver from the ground, if that seems to be close to 90, isn't the market price ratio somewhat justified?
Rob: Well, let's just say that for every ounce of gold that is mined out of the earth's crust roughly eight ounces of silver are mined out of the earth's crust. Most of the silver that does get mined is the result of it being byproducts from primary mining in other base metals or gold. So there aren't many primary silver mines in the world where there are...in terms of percentage of mines that actually produce silver. Whereas mines that produce gold generally tend to be primarily gold mines.
So what that means is if copper mines shut down, because a lot of silver that comes out of the earth's crust is a byproduct of mining copper, so if copper mines slow in their production that means it heavily influences the supply of silver. If the amount of zinc or lead slows, if industrial demand slows for those metals dramatically, that further impinges the supply of silver in the world. So the notion that 90 to 1 being justified in terms of... And 90 to 1 isn't the proper gold-silver ratio right now anyway, it's more like 120 to 1.
And the reality remains that for every ounce of gold that comes out of the earth's crust, eight ounces of silver roughly come out. And that tells us Mother Nature is implying that the gold silver ratio should be something in the magnitude of 10 to 1. And where I come from, there's old saying or a cliche that says it's not nice to fool Mother Nature.
Craig: All right, my friend let's move on to question number four. This simply states, would you agree that the most likely outcome of the massive stimulus QE programs that the FED and other central banks are employing will once again be able to successfully kick the can down the road without any significant negative ramifications in our lifetime? I.e. can government debt be perpetually restructured regardless of size?
Rob: There's a one word answer to that, Craig, and it's no. Perpetual money creation is a story that has a very ugly ending and it's called hyperinflation. And that may seem a little bit difficult to stomach when we've seen crude oil trade yesterday at a record low price of minus $40. But what this really shows to me is how broken the price discovery mechanism called futures really is. The notion that we can have something that has utility trade at minus $40 due to very technical circumstances, as in storage facilities being full, which is the way this is being explained away by the mainstream.
I don't buy that for a minute because if we're to believe that that is fair and well, then when people want delivery of gold, physical ounces, as in when you buy a contract on Colmex and a Colmex gold contract is supposed to represent a hundred ounces of gold, why is it when I stand for delivery for a contract of Colmex gold I don't get my 100 ounces, instead they convert it into what's called an exchange for physical and tell me to go and talk to the people in London about getting my gold from London.
But if I sell a NYMEX crude oil contract and I demand that somebody take delivery, that, you know, somebody is in a horrible position and has to sell it at a loss because they can't find a... And you see, those two lines of thought or those two expressions of reality are inconsistent with one another. And what they do is they make the price discovery mechanism called the futures market, ought to be what it really is, is a complete and utter sham and a fraud and it should be discontinued.
Craig: We're certainly seeming to head down that road as we record this collapse in the crude oil market continues. It's interesting to see people...well, it will be interesting to see if people kind of put two and two together as you suggest. Do you see that happening?
Rob: In time to me, Craig, it's an inevitability that it must happen.
Craig: Speaking of timeframes and inevitabilities, Rob, that leads us right to question number five, how about that? Simply stated, do you believe that the global economy will go into depression of inflation or deflation and what timeframe would you be looking for that to play out?
Rob: We might be experiencing both of them currently, Craig, because we're seeing... And I'm gonna actually suggest that some of this is engineered outcomes where officialdom, it suits them very well to have certain strategic commodities artificially depressed in price to provide cover for infinite money printing, which should and typically does lead to hyperinflation and runaway price inflation.
My personal view is that the FED will, and Treasury, but together they will create enough money to ultimately destroy the value of the currency unit known as the U.S. dollar. And I do believe that the last chapter in this sordid story will be one of hyperinflation where the currency achieves its true value, intrinsic value of zero.
Craig: The natural, I guess extension of that, Rob, then is again hyperinflation, is that...that's where you fall?
Rob: The last chapter in the story is hyperinflation.
Craig: Okay. All right. Two questions to go my friend, this gets back to gold and silver. It's clear, this person states, the demand is outstripping supply for gold and silver and prices are being manipulated. However, gold prices have shown a much bigger increase than silver. What is keeping silver prices down?
Rob: More sellers than buyers of paper contracts. Physical ounces cannot be had, Craig, but paper ounces, there is no shortage.
Craig: And that gets back to that question we had earlier, I mean, what really is the price? Is it $15 on the Colmex as we record this or is it $25 that you have to pay if you're gonna buy physical ounces on eBay?
Rob: Well, if you want to sell ounces, Craig, apart from being foolish if you're selling them at the prices being broadcast by Colmex but if you want to sell, people will be more than happy to take your metal from you at $15 or maybe a slight premium to that. And if you wish to purchase, you might have trouble finding ounces at $25 U.S. an ounce.
Craig: And do you think eventually there could be shortages developed because of these mine closures in Mexico and Peru?
Rob: The answer to that, Craig, the mine closures in Mexico will ultimately lead to a shortage or an absence of what we call big bars, thousand-ounce bars, which is the feed stock to the mints for the coinage that people buy at retail, whether it's maples or eagles or Philharmonics. The closure of the mints is more associated with there being a shortage of coins at the coin shops where we all like to go and purchase our trinkets.
So we've got double-barreled action going on on the supply side. We've got closures at the mints, which are affecting the supply of coinage. And we have the closure of some of the key refineries in Switzerland, which is impinging on the supply of bars that are more geared towards the institutional market. And then we have the closure of mines, primarily silver mines in Mexico, which is where the vast majority of the feedstock big bars comes from that the mints use to basically melt in cauldrons to produce the feedstock for the coins. So we're facing supply crunches on several fronts in the precious metals arena.
Craig: Well, I wonder, Rob, if what we saw in crude oil where no one wants delivery and the price falls even into negative territory because the contract basically is bidless, I wonder if we don't see the exact opposite one day in Colmex gold and silver, where everyone wants delivery and price rises because it's offerless.
Rob: One would think that that's what should happen, Craig. But with the existence of, I'm gonna call it a book-entry called an exchange for physical, the Colmex seems to have an escape patch that they can slither through and deflect all of this legitimate demand for physical off to London where the demand for physical metal goes to die.
Craig: All right, one last question my friend, and this has to do with the mining companies basically. Do you ever think that enough mining companies may get together and, rather than deal with the banks and with this pricing scheme, instead kind of band together and sell their metal directly to the end-user instead?
Rob: Craig, if they would dare do such a thing, it would be a wonderful development but the reality is mine development requires borrowed money and that makes the large pure mining concerns captive to the banks. And as long as the banks have the miners as captive audience, I don't really think that's gonna occur.
Craig: My friend, it has been tremendous to visit with you, this is such a fascinating time to be alive, no doubt about it. Can you tell everybody about what they get should they stop by kirbyanalytics.com?
Rob: Well, what you'll find at kirbyanalytics.com is my commentary on the gold market, on the silver market, on the energy market, on the bottom market, and the derivatives market. And I provide a certain amount of written commentary and I do a lot of interviews and keep people apprised of the interviews I do do via direct email, and I have a lot of contact with my subscribers.
Craig: And it's a tremendous service and it certainly qualified you to be the expert for the "Ask The Expert" segment. And again, as we mentioned at the beginning of this program, we've been collecting questions all month for Rob, but we also collect questions every week for Eric Sprott as part of the Weekly Wrap-Up with Eric. With the uncertainty of the economy and precious metals markets right now, I'm sure many of you have questions about what's to come. If you do, feel free to submit them to us through the email address. That's the word firstname.lastname@example.org and we'll try to answer some of those questions each week during the Weekly Wrap-Up segment with Eric Sprott. Rob, thank you so much for your time. It's been very valuable to hear from you. And, boy, I look forward to visiting with you again and getting your expert opinion sometime soon.
Rob: Been my pleasure, Craig.
Craig: And from all of us at Sprott Money News here at sprottmoney.com, thank you for listening. Stay healthy and stay safe.