Weekly Wrap Up

Recession is coming. Are you ready? - Weekly Wrap-Up (May 24, 2019)

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May 24, 2019

The trade war is heating up and spreading out, the stock market is showing signs of weakness, and all indications point to a recession. Central Banks are buying up gold. Should you follow their lead? Eric Sprott joins us once again with all the gold and silver news you need, including:

Why all signs point to a recession—and what could make it worse

What’s behind the Central Bank gold demand

Plus: Wallbridge’s tough week

“Of course, the big macro is the trade war, which now seems to be getting really spread out as we put Huawei into the whole thing… I don’t think the Chinese are going to sit idly by and do nothing here—it’s been mostly a U.S. initiative so far. But you know the other shoe’s going to drop… There’s no doubt in my mind that the Chinese economy is way bigger than the U.S. economy. I don’t care what the numbers say.… They’re the biggest steel producer, they’re the biggest gold consumer. They’re the biggest everything, OK? … Think about what happens when the Chinese say, ‘No mas, man.’”

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Announcer: 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, May the 24th, 2019. And it's time for your weekly wrap up. I'm your host, Craig Hemke. And joining us is Eric Sprott. Eric, good day.

Eric: Craig, good morning. Another very interesting week. Market weakness, a little bit of gold strength towards the end of the week here, so it's starting to come together.

Craig: Certainly is. And before we get started, hey, just to notice everybody out there, you know, we've got the Ask The Expert series here at Sprott Money, and you can find that in the navigation bar on the sprottmoney.com home page. Every month, we interview an expert around the world. In the last couple of months, we've been interviewing the people from various Mints, whether it was the Scottsdale Mint, Royal Canadian Mint. This month, we interviewed Andrea Lang with the Austrian Mint, fabulous, a very interesting interview. And you can find it here on the home page at sprottmoney.com. If you're an owner or a collector of Austrian Philharmonics, I think you'll find what Andrea had to say interesting. Eric, I bet you've got a few Philharmonics laying around.

Eric: I got a lot of gold, man. I got them from everywhere. So, yeah, I got them, I'm sure I have every mint in the world and a lot of it is from the Royal Canadian Mint. It's one of the things I love doing, and one of the things I really like is when they bring out a big piece of gold and have a piece of Canadian art on it at the same time, that's some wonderful pieces. And then as I sit in my office, I'm staring at a few of them. So I have always enjoyed them.

Craig: You betcha. All right, my friend, like you said, it's been a relatively good week for once. Gold's up about 0.5%, silver is up about 1%. Looks like we're turning the corner on just some horrible U.S. economic news, and obviously, trade-war issues. What's on your mind this fine Friday?

Eric: Well, of course, the big macro is the trade war, which now seems to be getting really spread out here, as we put why way into the whole thing and that whole fight. And, you know, I don't think the Chinese are going to sit idly by and do nothing here. It's been mostly a U.S. initiative so far. But, you know, the other shoe is going to drop here. And as I was contemplating this call, I was actually thinking about the strength or sizes of the two economies, and there's no doubt in my mind, the Chinese economy is way bigger than the U.S. economy. I don't care what the numbers say. Okay? The car sales are 50% higher, the house sales are probably 500% higher, the amount of food they eat is 300% higher. Like, there's just no way that the Chinese economy cannot be bigger than the U.S. economy. I don't care what data somebody is putting out there, because they're the biggest steel consumer, they're the biggest gold producer, they're the biggest everything. Okay?
So, just trashing the thought that the American economy is bigger than the Chinese economy, and think of what happens when the Chinese say, "Well, no moss, man." And in fact, I was reading an article where it's embarrassing now to have an iPhone in China, you know, like, the sentiment is getting serious here.

So, everyone knows a trade war is not good for anyone, and tariffs are not good for anyone. So, that and this whole tech war that might be starting up, you know, where maybe there is something that China will do in terms of, like, banning American tech products or some darn thing. I mean, it's getting quite queasy out there. From a war, let's call it a war perspective, well, let alone the possibility of war. I mean, I couldn't believe I'm reading that President Trump was considering some way to send 10,000 troops over to the Middle East. Oh, my God, I can hardly believe it. What the hell is going on here? I thought we gave up on that stuff. Anyway. And then economically, you know, the new home sales crashed down, I think it was 8% or something. The PMIs were atrocious. I mean, they were near the weakest they've been in three years across the board, services, manufacturing, everything. So, that was bad. And then we start getting layoffs. I mean, Ford's laying off 7,000 white collar workers. And we get the banks are starting to layoff things.

So, there's all sorts of economic weakness showing up, and we're just starting the trade war, we're just starting the trade war. Where are we going to be in three months when finally the Chinese decide what they're going to do, and maybe they say, "Well, we're not buying any agricultural products, I mean, nothing American is coming in here."? Oh, my God, that would be very hard for the market to take.
And the stock market is showing definite signs of weakness here, and of course, you and I talk about the yields, I mean, the yields are plunging. The bond market is telling us, "We got a recession coming. So, stand back." I mean, it's not good owning stocks in a recession.

Craig: Right, right. And, you know, you factor all this together, and it still seems as if the, I guess, the general consensus out there is that, "Oh, maybe by December the Fed will start thinking about maybe trimming the Fed funds rate." But, Eric, Fed funds is already 25 basis points, a quarter of a percent, higher than just the two year note. I mean, they need a 50 basis point cut, just to make kind of a positive slope again from overnight to two years, and nobody's talking about that.

Eric: Yeah, yeah, the market's pricing in two cuts in the rate already. And, you know, the Fed can say they're patient as long as they want. I would imagine, if I was at the Fed today, and today it's a lot different than yesterday, by the way, and I see the house sales, I see the PMIs, I see the Kansas City Fed numbers, all these economic data, and a trade war erupting. What are you thinking here, man? You know, you can't have a tight monetary policy.

I saw another thing where appliance shipments in the U.S. are down 18% year over year, 18%. And, like, plunging, as we speak. Well, what do you think the confidence is of every consumer out there when they see what's going on here? And one of the other data points was, this New York Fed came out and said, "The average family would lose $853 of spending power because of the tariffs." That's a lot of money.
I mean, I don't know what the average family income down is, like for a combined family, maybe it's $60,000 or something. I don't even know if that's after tax, by the way, may not be, it may only be $40,000 or $50,000 after tax. Well, you can hardly take an $853 dollar hit, you know, that's 2% of your income potentially. So it's not good. The political polarization is preventing anybody on the fiscal side from doing anything. I mean, it's just mayhem down there. It's very hard to be optimistic, other than to watch the stock market go up every day.

Craig: Yeah, that's right. You know, and for people listening wondering why we pay such attention to this, because this is leading to a reversal in this Fed policy where people think that the Fed has got it under control, you know, and they're going to tighten and normalize and all this. None of that is happening. And with economic weakness and a recession coming, they're going to have to reverse, they're going to be cutting, they're going to be starting QE again. And we're right back to where we were in 2010, and I think people in precious metals remember what that was like. And so, that's why all of this matters. You mentioned even the political discord is similar to what we had back in 2010. Eric, a big difference now versus then though, is central bank demand. We had 651 metric tons of central bank demand for gold last year, they're on a pace to exceed that this year. One thing I've always wanted to ask you, we keep seeing every month, the Russians adding physical gold to their reserves, they've added over 900 metric tons in the last four years. They are now up to the fifth largest central bank holdings at nearly 2200 metric tons. Just, you know, if you were to speculate, what is their intention? Are they just simply diversifying or do you think they have other ideas in mind?

Eric: No, I think they don't have to think like Western economists, okay, because they're not Western economists. And one of the things I always start with whenever I think of where the world's going, I always say, "Well, the U.S. is effectively bankrupt today." Okay? That's so easy for me to say, and I don't regret saying it because all the data confirms it. We just haven't declared it yet. And I've used the analogy, is like, we knew 10 years before Detroit declared bankruptcy they would declare bankruptcy, and finally 10 years later ,they did, because you can't fight the growth and these obligations that keep rising faster than your ability to pay them. So, we all know what's going to happen, not just the U.S. either, it's the UK, it's Canada, it's everybody. And by the way, I was looking at something about the amount of government debt to GDP, and Russia was the lowest at 11%. And the U.S. is at, what? Eighty-eight or 98, or something like that. I mean, they don't have nearly the issues we have. And I think they realize these Western economies, they're all going to fail, and their currencies are going to fail. Why would I want to own those currencies when I can see what's going to happen? And for me to build a gold reserve, I got to do it over a long period of time. Otherwise I'm going to upset the market. So I think that's what they're thinking is.

I think the more interesting future event might be, "Well, what's China going to do here?" And as you and I know, I think for the first three months, they bought 10 tons, and in the last month, they bought 15 tons. Why do I think that the Chinese are going to start buying gold here in bigger quantities, okay? Particularly with what's going on, you know, and the fact that they want to shed the treasury bonds anyway.
I think it would make life difficult for the financial markets if all of a sudden, gold started shooting up here. And I just think that they know it too, they know the situation. Not that the Chinese government is in any better position, they're not, okay? But I think they realize that owning the currency, the paper fiat currencies, is not really where you want to put your money. So, I think that's the thinking behind it all, that they have a responsibility to maintain some value, and the best way of maintaining value is by owning precious metals.

Craig: If we can see this coming and they can see this coming, and they are moving their dollar reserves into physical gold, gosh, I sure think everybody listening should kind of think the same way, right? I mean, we all have dollar reserves, you and I and everybody listening.

Eric: Yeah, we have to overcome one thing, and that's the impact of the derivatives markets, particularly COMEX, on gold. I mean, the guy can manufacture the world's supply of gold in an hour through the commodity markets, so you can keep it suppressed as long as somehow you can make the delivery. When you fail to make that delivery, all hell is going to break loose. And of course, we're always thinking that they should manifest itself here soon as we see these big increasably talked about, India buying 58% more gold in April, it was a preliminary number and it was up 58% year over year. I mean, these are big, big numbers in a market that's only about 4,000 tons. So, you know, we certainly have the data, non-Western data that's confirming that everyone who's non-Western is a buyer of gold.

Craig: Yeah. Eric, in our few remaining minutes, I had a lot of folks this week write in and ask you to comment on what happened with Wallbridge this week. I know that's a company you mention quite frequently, and they had a tough week.

Eric: Yeah, it was a tough week. Okay. So, the news release that came out, I thought, had some weak parts to it, okay? And the weak part was it had two holes that they extended, kind of had a low grade in them, and they were in the middle of the 400 meter strike length. But there was also a positive information, quite positive that the strike length is now 700, up from 400, so it's 75%, potentially larger. It's deeper, they've got a big hit down at about 650 meters. So one might think that it's 100 to 200 meters deeper, which could add another 50% to it. And the discussion of the holes that have not yet been assayed but have been drilled, and, you know, when you drill a hole, you see the core and you have some idea of what's there. Now, it's not perfect. You can't always tell what the assay is going to bring. But I would say that the language around those holes that extend the strike of the deposit, was very encouraging. So, I think it will rebound here.

I also heard that there was a big seller in the market. I was aware of a particular seller who had actually offered his stock to our group. And I was not in a position to do anything at the time, but I gather, he might have gone in on the market and blew out $7 million shares and something like that can hurt the stock in the short term. I was happy to see the recovery yesterday. Hopefully, there'll be another recovery today. There's still could be a very, very large deposit, a very large deposit. A Detour Lake look alike, Detour Lake ended up being at 23 million ounces. I'm not saying it'll be 23 million ounces, but it has all the earmarks of looking like a Detour Lake at this point in time.
So that would be my comment.

Craig: All righty. Well, I'll tell you what, it's going to be interesting to continue to follow that, if we could just get sediment to change, you know, where it seems like if any news at all is using an excuse to sell the shares, maybe one day, they'll all start trading higher again, and in the meantime, if we get the metals going in the right direction, that'll help too.

Eric: Well, we need... I mean, to think that we've had to fight with this gold price, which is almost inert for the last few years. I mean, yes, we bottomed at whatever the number was, 1065 or something, we're at 1265 or 1280 today. But having been to 1350 and macrh back down here, I mean, and then the sentiment was lousy anyway, and the results of the big companies were atrocious. Like, it's just, we're fighting. It's tough to keep a gold stock up. Like, it's tough to have a gold stock when you have to be so outsized great to command any interest. But, I think when things turn around, the payoff could be substantial up here. Because if people would actually come back into gold stocks instead of a few of us, you know, having to carry all the water here. It would certainly help.

I probably should make a comment on Kirkland. There's really nothing new. I mean, I'm still quite keen on this new amalgamated break. I'm trying to get a real firm grip on what it could mean. And as a non-geologist, I don't quite have it yet, but I'm very, very encouraged by those drill results that they put out on May 2nd. Another company called ASX Exploration had a pretty interesting hole, I think it was 500 grams over 0.7 of a meter, something like that, but a stunning hole. And I really haven't spent a lot of time looking at it. There's been so much chaos going on around Wallbridge and all the other things I'm doing that I'm a little behind on knowing exactly how big that system could get. So I apologize for that, but as a good result, the stock was firm this week, so.

Craig: Well, perhaps everything else will be firm as we go forward, Eric. Just, you know, as we've discussed, this year looks a lot like 2010 with this economic slowdown and the change in Fed policy. And in 2010, all of the gains came in the final five months of the year. So, hopefully people are staying patient and we'll see what happens from here. Eric, thank you for your time this morning and I hope you have a great weekend.

Eric: Okay, Craig, you have a nice long weekend down there. We have to work on Monday, but we'll try to take care of things on Monday for you.

Craig: I appreciate that. Thank you. That would be great. All right. And everybody, have a nice fun weekend as well. And we will be back here next Friday with another Weekly Wrap Up. Until then, again, thank you, Eric. And from all of us at Sprott Money News and sprottmoney.com, thank you for listening.

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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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