Weekly Wrap Up

Eric Sprott Talks Lows in Gold, Comex Shenanigans, and Answers Your Questions (Weekly Wrap-Up, December 15, 2017)

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December 15, 2017

Lows in gold, Comex curiosities - it's been an interesting week for precious metals. Whether or not there will be a rally in 2018 remains to be seen, but if history is anything to go by, there just may be a lift in the market as we turn the calendar to the new year.

Eric Sprott thinks so, too. "It's been a pretty good week so far," he says. "It's interesting and sort of sickening in a way that the commercial banks, who were shorting gold and silver, can use these Fed meetings as an excuse to knock gold down to raise rates. That's their cover, right? That's their cover for their illegal trading activities, the minute the shorts knock the prices down and the Fed raises rates, up she goes. What a massive turnaround in as little as two weeks."

While we know that it's just cover for the banks, positions have become even more extreme in the prices of gold and silver. "It's awful to say that the prices of gold and silver are a function of what the commercial banks want to do to the hedge funds. Since we don't have a true market, and there are things in the market which we can find quite constructive here outside of the CoT, and we now have a rally here, the tone for rate increases next year, it might not make a serious difference to someone deciding that he wants to own gold vs owning a bond, considering that the bond yield didn't go up anyway. Gold is certainly not less attractive post rate increase, because we didn't really get one!"

For more on gold and silver prices, Comex and CoT movements, and to hear YOUR questions answered by Eric, tune into this week's Wrap-Up, below:


Announcer: You're listening to the weekly Wrap-Up on Sprott Money News.

Craig: Well, hello again from Sprott Money News and sprottmoney.com. It's Friday, December the 15th, 2017. This is your weekly Wrap-Up. I'm your host Craig Hemke, and joining us, as usual, is Eric Sprott. Eric, good morning.

Eric: Good morning, Craig. A pretty good week so far. I'm looking forward to chatting about it.

Craig: Oh and, you know, and Eric, before we get started, I got a question for you. It's almost Christmastime. You got your Christmas shopping done?

Eric: I'm pretty far advanced there, Craig. I'm down in Scottsdale as we speak, and I did a little shopping up in Toronto, a little shopping down here, so, I'm getting pretty close.

Craig: All right, good. Well, anything you have left to do, just remember that all of the rest of the gifts you need to buy could probably be found in the 2017 Sprott Money holiday catalog. You can find it online at sprottmoney.com. You like that one? That was kind of a...that's almost like a professional segue, wasn't it?

Eric: That was a hell of a lead-in you had there, my friend.

Craig: Thank you. Thank you.

Eric: And I also like giving away coins, too. But I think they're very well received by people.

Craig: Yeah, they are. That's always fun, too. And ask people, have them look at it and say, "Oh, good, what's this worth?" And then you get to explain to them and maybe educate them a little bit at the same time.

Eric: Absolutely.

Craig: All right, my friend, it has been an interesting week. I posed a question at my site that if it was utterly predictable that prices would fall into the December FOMC just as it did in '15 and '16, why was it not utterly predictable that now we would rally just as we did in '16 and '17? And that's exactly what seems to be underway. Do you agree with that?

Eric: Well, you know, it's interesting and sort of sickening, in a way, too, that the commercial banks who were shorting gold and silver can use these Fed meetings as an excuse to knock gold down. So all the press is, "Oh, gold's down because the Fed's going to raise rates." And that's their cover, right? That's their cover for their essentially illegal kind of trading activity where, yet again, these shorts have knocked the price down. The minute the Fed raised the rate, up she goes. And we can see it in the day that comes out on the commitment of traders exactly what's gone on here.

So are we surprised? I'm sure, you know, we wouldn't have been surprised just having seen the joint administrator's data last Friday that, "Oh my God, what a massive turnaround that happened in as little as two weeks here." And of course, we've got another week's gonna be reported this afternoon, as of Tuesday of this week, and it probably will show that there's been a lot of covering going on the Chicago board.

So, I mean, it's just cover for the commercial banks. "Oh yeah, gold's gonna go down because the..." and the minute it goes up, as you predicted many times, up she goes again, and now we're on a bit of a roll.

Craig: You know, you're right. And we also got to extremely oversold levels in price. All these different things seemed to line up for us. And so now here we go. Into the new year, we've got tax law selling that's probably about done in the shares. Are you as...I guess we'll just leave it there. Are you about as bullish as I am at this point, at least in the short term?

Eric: Well, you know, it's interesting when you look at the community administrator's report, and the changes last week were stunning, where I think they had almost a 25% reduction in the commercial short position in one week. And I think in the case of silver, almost to a record low long position by the hedge funds. And then we've got one more week to report which is the weekend and this Tuesday. And of course, everything was collapsing in gold and silver, so undoubtedly those positions have become even more extreme, and which are indicative of a bottom. That's typically what happens here. So it's awful to say that the price of gold and silver is a function of what the commercial banks want to do to the hedge funds.

Craig: Right.

Eric: But that's the way it works, right? And since we don't really have a true market, and there are things going on in the market which we can find quite constructive here outside of the given administrators. And of course, we now have a rally here. I think that the tone for rate increases next year is theoretically two or three. I mean, that's hardly gonna make a serious difference to somebody deciding that he wanted to own gold versus owning some bond, particularly when the bond yield didn't go up anyway. I mean, the 10 years probably gone down. The five and two-year, the five year's probably gone down.

So, you know, gold is certainly not less attractive post the rate, the theoretical rate increase, because we didn't really get much of a rate increase. So obviously, we're in good shape here, and maybe we'll get an exact repeat of what happened I think the last two Decembers, where we got a good rally in gold and of course an equally stunning rally in the share price.

Craig: Eric, for the rest of our time this week, I wanna turn to something that the good folks at Sprott Money began a couple of weeks back. They tweeted out a hashtag that said #AskEricSprott on Twitter and said, "Hey, we'll take any feedback and we'll try to answer some of your questions each week." So I thought, "You know what? This week why don't we answer a couple of the questions that folks have submitted?"

The first one just has to deal with silver prices and the fact that the primary source of silver mining still is as a byproduct of base metal mining. And so the, one of the questions I saw was, are these higher base metal prices leading to more base metal mining, which is then leading to more silver production just as that byproduct of that mining?

Eric: Well, Craig, I haven't specifically looked at that, okay? I can't tell you that I've gone to all the lead and zinc miners and gold miners to see whether they're producing more silver. I can say that when I look at the yearly statistics that are put out by the Silver Institute and others, and comments by people in the silver business, it would appear that silver supply is declining. So I think it's obvious that we're not seeing more production. In fact, you know, to change the production in the base metal business takes a long time. It's like any mine. I mean, my God, the average mine takes 10 years from the time you find it to get into production. So I'm not so sure that they can just turn things around that quickly. And of course, silver's a very small part typically of most of those base metal operations.

So I'd say, so far we're okay. I haven't seen anything that would be noteworthy. And of course, if we could get something going in the precious metals here, I mean, the investment domain can so overwhelm the marginal amount of supply around it. Anything that's gonna happen in the base metal area would be quite insignificant if they could get investors back into the silver market. So, I think we're okay there.

Craig: And you're right, when you were out a couple weeks back, I spoke with Keith Neumeyer, and he projected that this year's global silver production might be as low as 800 million ounces, which would be a good 10% down from where it was a couple of years ago.

Eric: And it went down last year, and I think it'll be down again this year, and we ain't gonna wait for these final numbers to come in, but it certainly appears that way. And of course, let's not forget, with the price of silver under $16, it's not as though the silver miners are rushing to bring things into production either.

Craig: Right. And the other topic, Eric, is something we've discussed here the last couple of weeks, and a lot of folks want us to talk about it again. And it's a challenging topic to discuss, because the COMEX, the CME, the LBMA, they make their rules and their deliveries so opaque that it's almost impossible to get your hands on what's really going on there. But we've seen recently a massive surge in what are called exchanges for physical off of the COMEX. And when you started asking me about this a couple weeks ago, I thought, "Well, I'd better start keeping track of this."

Eric, let me lay something on you. In the last 15 market days, we're talking three weeks of market days, and it kinda coincides with the beginning of the December delivery period for COMEX silver. We've had over 200,000 contracts of COMEX gold shifted off the exchange, delivered, if you will, in what's called an exchange for physical, through London or Hong Kong or someplace else. Two hundred thousand contracts, as you know, Eric, is 20 million ounces of gold, or about 600 metric tons allegedly shifted from the COMEX and delivered elsewhere. Eric, I'm just going to drop that there and let you pick up with it, and we'll kind of go from there.

Eric: Yeah. Well, Craig, it's a great thing to talk about, because it's a nuance that's evolved on the COMEX. I hadn't heard of it before, and I've got to credit Harvey Organwood [SP] for bringing it to my attention. But to put things into perspective, I think the dealer inventory of gold on the COMEX is 28 tons.

Craig: Yeah.

Eric: So 600 tons gets shifted over to the LME, and the dealers have 28 tons. Six hundred tons also represents more than 25% of the mining that's done worldwide, excluding Russia and China, because they both don't export. So the...and this is in a three-week period. I mean, that's suggestive. I mean, if you gave it 12 weeks, it would represent all the mining that's done in a year.

So, in essence, it's the multiples of the amount of mining that's done which is, defies any sense of logic. It's hard to imagine anyone's actually gonna receive that gold. And in fact, Ronan Manly has done some work on the supply of gold available to the LME, and I think his number was...what was it?

Craig: Eight...

Eric: Around 500 tons?

Craig: Eight hundred and fifty-eight.

Eric: Yeah, 800...

Craig: Ronan Manly wrote, he wrote back in August. He did an exhaustive study on how much...you know, the LBMA said into March that they had almost 7,500 metric tons on hand, but a lot of that is pledge. It's central bank gold. It's, you know, the gold that allegedly black backs up the ETFs. He backed all that stuff out and said there were only 858 metric tons of gold stored in the LBMA that wasn't already, I guess, committed. Well, and we've seen 600 metric tons delivered in the last three weeks?

Eric: Well, we don't know about the delivered part.

Craig: Well, yeah, that's exactly right.

Eric: We know that the notice was shifted over to London. Whether...I rather doubt it was delivered. In fact, at the rate we're going, between the 850-odd tons that they have and the 600 tons that they've asked so far, I mean, the end of next week, it could be 800 tons, right? At the rate we're going.

Craig: Right.

Eric: So, like I just...you know it's not getting delivered. And I really honestly wish that I could get a firm grip on exactly how this plays out. In fact, if anybody wants to...who has an expert opinion on this, they wanna get a hold of us, just contact us at Sprott Money and tell us how this whole thing works out. Because it doesn't sound like, you know, trying to get a square peg in a round hole. Like, it's just, everyone's going to the same door at the same time and they can't get out.

So it looks like something's going on in the fiscal market. It's very difficult for you and I, just, "Well, how can you just shift 600 tons of physical demand to London? It just seems to make no sense." So, but it would be, it could be a generational thing happening that we're gonna spend more and more time trying to figure out exactly what's going on.

Craig: Yeah. It almost has to be unallocated gold, right? That they're taking delivery of. You and I talked before. I told you the story that Andrew Maguire once told me, that in the LBMA vaults, there's just a blue line on the floor, and forklifts just take gold back and forth across the line, you know, to whether it's allocated or unallocated. So this almost has to be unallocated gold. So Eric, then why in the world would somebody or something buy a COMEX contract in New York and then take delivery of unallocated gold in London? It doesn't make any sense.

Eric: Well, the question, there's one other part to it that has also not been defined, and apparently, there is some CF bonus thrown in there. So, we don't know what that is, you know? But let's say some guy had a contract to buy gold at 12.50, and as well, I can't deliver it to you, but here, I'll give you an extra 25 bucks to go take it in London, well, the guy might do that, right? Particularly if they thought they were going to get it quickly. But between the analysis that we've just done, and the hearsay we have about how long it takes for delivery in London, I'm not so sure that you'll get deliver in London.

Craig: Right.

Eric: You'll get a contract that says it's owed to you, but when you receive it is a whole different story. So, I'd sure like to find out how those settlements are playing out. I don't pretend at all to be an expert on the LME, and it's probably just to be an expert on the LME, because as you say, it's so opaque, nobody knows what's really going on. So, if anybody can help us in this, whether it's emailing you at your website or Sprott Money, we'd love to hear from somebody who's more familiar with this than we are.

Craig: I'm gonna throw one more log on the fire, too, Eric, because anybody can research this stuff on the internet, you know, and Google, and try to learn it, and hardly anything's been written about it. I found one article written by Koos Jansen about a year ago that said you can also do these exchanges for physical into...and get metal out of Hong Kong. So there's another potential angle. So, we're now delivering 600 metric tons of what apparently must be Western gold through Hong Kong into China in the last three weeks? I mean, this is madness.

Eric: Yeah. Well, the sheer dimension of it.

Craig: Yeah.

Eric: And again, when I say that the mining per year's 2,200, X China, X Russia, and we're talking 600 tons in three weeks, I mean, this is a very large square peg in a very small round hole here. I mean, the dimensions are shocking. And, I mean, we'd all love to find out that there's just this massive shortage of gold and silver that's finally manifesting itself.

Craig: I don't know.

Eric: But we're not certain because of the opaqueness of the market over there. But it sure reeks of something very, very odd happening here.

Craig: Yeah. And one other option is you can actually EFP, exchange for physical, and call your physical GLD shares. And so...

Eric: All right.

Craig: Yeah, and, but again, 600 metric tons, the whole GLD allegedly holds only 840. So I've just...

Eric: There you go.

Craig: I'm at a loss, Eric, so...

Eric: Yeah. And every day it gets bigger, you know?

Craig: Right.

Eric: Every day, I mean, the last time I read about a day, it was, like, almost 1,800 contracts, sorry, 18,000 contracts.

Craig: Yeah.

Eric: That was, you know, 1.8 million ounces for God's sake. So, it's a gigantic development that's gone on that's kind of so far have gone a little under the radar screen, but is well worth us posting more and more time on it as we have these calls.

Craig: Well, we'll keep monitoring it and we'll keep watching. But for now, Eric, I think we got to call it a day. So thank you so much for your time, and I look forward to talking to you again next week.

Eric: Hey, Craig, all good. Thanks for chatting with me. You have a good weekend.

Craig: And everybody out there, again, thank you for listening. I wanna give you one last tip. If you are buying metal, Sprott Money will actually give you real allocated physical metal, none of this LBMA garbage. If you do own physical metal, you can store it at Sprott Money, and if you sign up to vault it there, you can actually get one month of free storage with free actual metal. So visit sprottmoney.com for more info.

That wraps it up for us this week. Again, we'll talk to you again next Friday. But for now, from all of us from sprottmoney.com and Sprott Money News, thank you for listening and have a great week.


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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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