Weekly Wrap Up

The Looming Silver Shortage Isn’t the Only “Huge Problem” - Weekly Wrap-Up (Oct 18, 2019)

October 18, 2019

From the ongoing bank liquidity crisis to the Fed's renewed QE program, there’s a lot happening in the world of precious metals. And as the U.S. slips towards recession, what can we expect from the final months of 2019?

In this edition of the Wrap-Up, Eric Sprott breaks down all the gold and silver news you need, including:

The “huge problem” happening under the surface

Why the mining shares are lagging

Plus: the looming silver shortage

“I think the biggest takeaway is: why is all of this happening? It started in mid-September when the repo rates shot up to close to 10% one day, which must have sent shudders through anybody in the fixed income market. It’s just crazy that something like that would happen. They fact that they let it happen! The fact that they weren’t aware that it was happening! So there’s this huge illiquidity situation in the banking business which they thought they’d solved….Who knows what’s really going on behind the scenes?”

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

Craig: Well, hello, once again from Sprott Money News and sprottmoney.com. It's another Friday. It's Friday, October the 18th, 2019. This is your Weekly Wrap-Up. I'm your host, Craig Hemke. And joining us as usual is Eric Sprott himself. Eric, good morning.

Eric: Craig, good morning. What a crazy, crazy week with all the goings on. Gold's kind of hanging in there. Things are, I think, looking [inaudible 00:00:24] for us.

Craig: Yeah, it has been a crazy week, and we certainly have a lot to talk about. But before we get started, I understand you have something you'd like to talk about. What do you got for us?

Eric: Well, I'm being told that I should talk about the fact that it's the 40th anniversary of the Gold Maple by the Royal Canadian Mint. And I did suggest to the staff that sometimes you got to offer up something for free and they're going to offer up a 40th anniversary wafer, with the Sprott Gold Wafer for anyone who buys the 40th anniversary gold coin. And if you enter the coupon code "wafer" when you purchase online on Sprott Money or mention it when you call the Sprott Money sales representative at 1888-861-0775, you'll get the free wafer. So, any incentive that we can offer to get people to buy gold and/or silver should be on the top of your list.

Craig: So, there's a little free gold, you're saying.

Eric: Free, free, free.

Craig: Free?

Eric: Yes, it's free.

Craig: So, people want to buy a 40th anniversary Gold Maple in the first place because they're pretty cool. And on top of that, if you buy one and then at checkout you enter just the word "wafer," you get a free gold wafer, too? That's pretty cool.

Eric: There you go. Yeah.

Craig: I'm going to call up and get one myself for crying out loud.

Eric: There you go.

Craig: And they're a little less expensive than they were last week. It's been an odd week. We've had all sorts of just really bad economic data here in the U.S. I mean, we're clearly slipping into recession. But it seems as if the Fed's new QE program is kind of rejiggering the bond market a little bit and the algos don't know quite what to do with that. I know you've got some thoughts about everything that's been going on this week. What do you think?

Eric: Well, I think the biggest takeaway is, why is all of this happening, you know? It started in mid-September when the repo rate shot up to close to 10% one day, which must have sent shudders through anybody in the fixed income market. I mean, it's just crazy that something like that would happen and the fact that they let it happen, the fact that they weren't aware that it was happening. So, there's this huge illiquidity situation in the banking business which they thought they'd solve with their first, I think, an overnight repo of like 30 billion which got massively oversubscribed then it went to 50 and 75. And I think we're up to 80s now. Plus, they've had to announce monthly purchases of T-bills and T-bonds. Like, there's something happening underneath the surface where bank illiquidity is encountering a huge problem.

And, of course, we're never going to be told what's happening, just like we weren't told in the '08 crisis, that, you know, $24 trillion was utilized to put out the fire. We're not going to be told. And who knows what's really going on behind the scenes? But the most likely thing is somebody is blowing up their derivatives book and all the banks are calling in loans to other banks for fear that whomever's derivative book is blowing up, it's going to cause someone else to have a domino effect where their situation blows up. So, the repo market has come under tremendous stress here.

And, of course, as you say, we got the whole economic thing going on with retail sales weak, industrial production weak, all the transportation indices are weak. I see where Volvo announced that their truck sale is going to be down 29% next year, and there's weakness throughout the world. I mean, you look at Indian, car sales down. You look at Chinese, GDP was reported weak today. You see UK sales weak, Germany sales weak. I mean, there's something going on economically. And I think what it is, to be quite honest, is that the average person is tapped out. He can't borrow anymore. He can't borrow more money to buy a car. He's already stretched his loan out to eight years and he'd borrowed against the house and there is nothing left. Everyone borrowed to the hilt here. And no one gets much of a wage increase and people are tapped out.

Craig: Yeah. You know, and, Eric, you mentioned something there that I want to ask you about. One of the questions we had sent in this week was about the mining shares and they're not really participating in the rate that, so far at least, that people would maybe have come to expect in a rising gold price. But, you know, all the stuff you mentioned I think is going to preclude gold from going down, right? I mean, a lot of folks are like, "Well, there's going to be a pullback to some 1200 or 1300 or something." But I think the world's getting used to this price, this dollar price. At some point, does that begin to get reflected in the mining shares? Because that was one of the question we got this week. Why are they lagging so badly?

Eric: Sure. Yeah. Well, you know, there were some very strange things that happened in mining shares just this week. So, on Wednesday the silver shares were up 4% in the day when the price of silver was unchanged. Go figure. Yesterday, gold stocks were up 2% when the price of gold was effectively unchanged. And I think that there is an interest in these things. I think more and more people realize that the price is suppressed. One of the individuals that you interviewed, David Jensen, who's a Canadian at the BC who I've spoken to on a couple of occasions, gave a great interview.

And he basically suggested that because the money supply had been decreasing since 2017, the economies of the world are just going to go down. And as we sit here, they just seem to be going down. But one of the more interesting things that David talks to, and I've mentioned this before, he says, you know, the price of rhodium has gone up by whatever, five or six times because it doesn't trade in the COMEX. And even palladium that does trade in the COMEX has gone up by three times, 300%, in the last couple of years because there's obviously a shortage. And I can tell you, I think there's going to be a shortage of silver.

We get information from dealers looking for supply and paying premiums, which is almost unheard of. And when I look at the amount of silver going into the ETFs, the amount of silver going into India, there's just no way that there's not going to be a shortage. So, I think...and throw in a banking crisis and we're in pretty good shape I think here for metals doing something quite surprising. Maybe we'll pull a rhodium here, you know, and go up by 300% or 400% in a few years.

Craig: That'll make a lot of people happy. You mentioned the ETFs. That's another question we had this week, Eric, you know. You and I often mention the metal that's allegedly going into the GLD and the SLV. And so many times, that's just promissory notes and promises to deliver that then just get cancelled as you see the tonnage come back down. And there's been all kinds of studies about commingling of the assets there, though they're not supposed to. I did get a question this week, Eric, about the Sprott Physical Trust and how do we know there's actually metal there? Can you just kind of touch on that for a second?

Eric: Sure. Well, first of all, it's stored at the Royal Canadian Mint. It's audited every year. The auditor would go to the Royal Canadian Mint and see the gold there. He wouldn't sign off if it wasn't there. There are exclusions for, for example, the SLV and the GLD. There's an exclusion right in their prospectus. They're allowed to have a note to say that someone is storing gold for us and we don't have to audit it, okay? So, we know that it's questionable there. We don't have that note in our prospectus, that we can accept a note from someone that they say they have the gold but we don't have to audit it. We do audit it.

And I think, you know, between that and sort of our history of chastising the banks for the non-ownership of physical metal that they've claimed before and paying fines for not owning it, that's why we created these things. To overcome that concern in the market. So, trust us. Trust the auditor. What else can I say? Trust the Royal Canadian Mint.

Craig: Yeah. No, that's right. While we're on the topic of other questions, someone actually wrote in, too, and wanted us to go back to what we talked about last week about why don't more of the mining companies withhold some of their production and wait for higher prices before they sell it. And they can get financing so cheap these days. Why do they feel like they have to immediately sell what they pull out of the ground? Can you just talk about that a little more?

Eric: Sure. Well, yeah, it surprises me, you know. Even Kirkland Lake, we had discussed that and I think they own a little bit of gold, but there was really no commitment to it by management and even though they have, whatever, $600 million. And I don't know whether it's management aren't believers in gold and silver like their miners, they're not, you know, guys studying the gold and silver markets, or it's the fear that they have to market to market so if gold goes down, they have to take the charge in that particular quarter and they don't want it to affect their earnings.

I would guess that's by far the biggest thing, okay. I mean, there have been companies before that have...particularly Goldcorp when Rob McEwen was running it,that did put their money into gold. But we're not seeing that. I'd love to see that change. I would, of course, recommend, in particular, zero interest rates, why wouldn't you own gold? And, come on. We have insurance companies that own gold because of negative interest rates but we don't have gold companies that own gold because of negative interest rates. You'd think they'd come around somewhere [inaudible 00:10:26]. It's been disappointing though.

Craig: Eric, before I get to some of the other minor questions, anything else on your mind this week?

Eric: Well, let's see. What would be on my mind? U.S. dollar has been weak here.

Craig: Yeah.

Eric: Which is interesting. Now, I think the economic collapse and the goings on the repo market are by far the biggest concerns and that potential shortage of physical metals would be the next most interesting thing.

Craig: Yeah. And there's a lot of uncertainty going into the end of the year. We've got the next Fed meeting coming up, not next week but the following week. That's certainly going to be interesting with the new debt monetization that the Fed is doing, I'm sure. I get it. Just to get a lot of reasons why gold should at least be stable here. And, boy, I'd sure think the longer it's stable, the more attention the sector will get especially with the miners, right?

Eric: Well, imagine if you and I and our listeners actually had to contemplate negative interest rates, what are we all going to do, you know? We don't have that yet. And lots of countries have it. And people are... That's why there's more purchases of metals in Europe than there are in North America so far. They're seeing it. They're the guy that the bank [inaudible 00:11:42] charge you to put money in here. Well, come on. When do you make the move?

Craig: That's right. All right, Eric, I've got some names for you this week. Again, I want to thank everybody for taking the time to send us names and send us questions each week at submissions@sprottmoney.com. And let me assure you, as Eric and I are discussing this before we begin to record, I ask about every single name that gets sent in. If you don't hear the company that you asked us to discuss mentioned, that's because Eric just simply doesn't have an opinion on it at this time. But we look at them. So we looked at things like, I asked him about Equinox Gold, and Liberty Gold, and Marathon Gold, and Arizona Silver, and a whole laundry list of names. So, I promise you, I asked him about them. Some of the ones we can talk about this week, Eric, how about Wesdome?

Eric: Well, Wesdome is a minor that has actually performed incredibly well. I actually was a pretty significant owner of it about a year and a half ago. They've had some very successful drilling in Quebec at their Kiena mine. It looks like that will come into production. Very high grade. They had good production for the quarter just reported. So, it's a rising star for sure.

Craig: Here's a couple of them. I'll give them to you back to back. Bonterra and Osisko.

Eric: Sure. Well, both are drilling in the same area in Quebec. Osisko's had some stunning intersections. They're very deep, however, and it'll be quite a while before that mine gets going. They're very well managed. They're opportunists, so I like it. I know that Kirkland is an owner of Osisko shares. They're also an owner of Bonterra shares because of the drilling that's going on in what's called the Windfall Lake area. Bonterra had some pretty good drilling results that they announced just, I think it was yesterday. So, I own Bonterra. I don't own Osisko. I have owned Osisko from time to time and, believe me, I keep my eye on it because I think they have some very interesting properties and they're very aggressive.

Craig: How about Pure Gold Mining?

Eric: Sure. Pure Gold is trying to redevelop the Madsen Mine. They've had some very good drill results. It looks like that will be a typical Red Lake type mine, very high grade. They've had a good recent history of discovering more gold and I think it's one of the particularly undervalued stocks. I own it. I bought it in the last two months, I'm going to say. I think it's quite exciting.

Craig: One more. SilverCrest Metals.

Eric: SilverCrest, I don't own. But I look at it often because it's one that got away, let's put it that way. Okay. I hadn't bought it in the last...I haven't owned it in the last few years. I've owned it before. They've had some stunning success in Mexico. They continue to hit high grades and it's mostly silver, but they have significant gold, too, now in that deposit. So, I think it's very well run. It's a stock that I think will command a lot of institutional attention. It's going to be a bigger company. It got away from me. I don't like buying stocks that are already [inaudible 00:15:25] at close to a billion dollars because I don't think I'm steeling them anymore. But I think it will do very, very well.

Craig: And any of the updates you might have on some of the ones we regularly mention? I heard Royal Nickel had another big old boulder they unearthed.

Eric: Yeah, they just announced they found 3,000 ounces in some very small area. They're doing much better. Their production's been good, about 8,000 ounces a month. But I think the key to that is explaining to people how the boulders are going to be found continually. And even with this press release, it sort of shows that over a very small area they've had about...I think there were six or seven occurrences of these boulders. Now, only one was 30,000 ounces but when you can find 3,000 ounces in a very small, like almost a handful of rock, that's quite significant.

And I for one believe, I can't prove it, but I think that that will recur all throughout the shear zones that they have that stretch over...I think there's like 16 kilometers of shear zones. And I think that you're going to find that that's a repeatable thing. I wish the company could explain why it's repeatable. I would love to know why it's repeatable. But, normally, these things, they're just not one-off when you've found a number of them already, and there was a previous history of finding these high-grade modules, if you will. So, I think it's going to be repetitive and will change the way people look at that company.

Craig: Are they the ones that bought that mill?

Eric: Yes. They bought a mill, which I still don't think they should have done. I think the real prize here is the gold at Beta Hunt where they're finding these big chunks and, you know, they'll go ahead and spend $50 on a mining operation and get back into debt again. I just didn't agree with it. That CEO that was there, he's not there anymore. I think they're going to get a grasp of what's really there at Beta Hunt and that will be the difference maker.

Craig: Yeah. All right. Hey, look, and just before we wrap up, I want to remind everybody about a couple of things that Eric mentioned over the course of the show. One, again, call us up at 888-861-0775 or go on to sprottmoney.com, and you'll find these 40th anniversary Gold Maples, all right? This is the Royal Canadian Mint's anniversary gold coin on sale and when you buy one and you get to the end and you check out and you type in the coupon code "wafer," you get a free gold wafer. I mean, free gold for crying out loud, you know. Everybody else with massive dollar reserves, the Chinese, the Russians, the Indians, you name it, if they're buying some gold with their dollars, probably good idea if all of us little people do the same.

Eric: Absolutely. And don't forget the banking crisis that might hemorrhage everything.

Craig: Yeah. No, that's right. Well, all right, my friend. Thank you for your time. I hope you have a great weekend.

Eric: Okay, great. All the best to you, too.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next Friday.


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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.