Weekly Wrap Up

“The U.S. Will Go Broke.” The Case For Gold - Weekly Wrap-Up (Jan 11, 2019)

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Jan 11, 2019

As the end of year rally continues into January, it’s time to look ahead to tax season. But when you make your final retirement contributions for 2018, should you add precious metals to the mix? Eric Sprott breaks down all the gold and silver news you need to protect yourself for the bumpy ride ahead.

In this edition of the Wrap-Up, you’ll hear:

  • Why banks are capping silver prices.
  • The “stunning news” that just hit the gold market
  • Plus: Which countries are seeing all-time highs

“There’s no doubt that the budget deficit situation has really deteriorated markedly. Particularly with the whole decrease in tax rates for corporations, the almost unconstrained spending of the U.S. government… And we talk about a trillion dollar deficit, but the debt always goes up by a trillion and a half when you have a trillion dollar deficit, for some miraculous reason. So, it’s way beyond what they suggest the deficit is, because the borrowing is considerably higher. Plus, of course, we have the unfunded obligations. The one thing that I’ve always had confidence is saying is: The U.S. will go broke.”


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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, January the 11th, and this is your weekly wrap up. I'm your host, Craig Hemke, and joining us, as usual, this fine Friday is Eric Sprott himself. Eric, good morning.

Eric: Hey, good morning Craig. Lots of interesting things going on in the gold market, silver markets, some of the stock, so plenty to talk about here.

Craig: Absolutely. And it is a new year and it's going to be in a very exciting year, but you know that also means its tax time, the tax preparation time. And so here's an important note for our Canadian listeners. You can, of course, open your own self directed precious metals RRSP or ESP or TSFSA account, and you can do that with Sprott Money. Get some physical metal in those babies.

Sprott Money is registered with quest rate bullion dealer and Quest rate, of course, is a registered investment dealer with Iraq. The deadline to contribute to your RRSP is of course, March the 1st. That'll be here before you know it, so you better give us a call at 888-8610-775 to figure out how you can put some physical precious metal in your retirement account. And man, now's the time to do it, Eric. We're off to a very good start. Continuing the rally from the end of last year and we're cooking again for about the sixth year in a row here in the first quarter. Gold's just up a couple dollars this week and silver's down about 1% and it looks like the banks are playing the same old game. They're increasing the open interest as price rises as a way to contain it. What are your thoughts though as the new year begins?

Eric: Well, I read the article that you posted on Sprott Money website about the bank sort of capping the silver price at 1,580. And that's sort of the same old drill. As you know, the banks through their deep pockets can control the paper price. The only hope we have is that somehow there is an outside physical influence that comes into the market that can change that dynamic. And as you and I discussed, I think about three weeks ago in the silver market, we had India in the month, I think it was October that brought in, was it 6,000...1,000 tons sorry.

Craig: A thousand?

Eric: A thousand tons of silver. The silver market's about at 28,000 ton a year market, so 1000 tons a month would be 12,000 a year. It would be an incredible demand for silver out of India. Now we haven't seen more recent data that I'm aware of. So that was very good on the physical side.

This particular week, what I am regarding as potentially stunning news in the gold market when the People's Bank of China announced that they bought 10 tons of gold in the month of December. And I don't know whether this is the start of something new, but as we all know, there's this great battle going on between China and the US. And China has encouraged their citizens to buy gold and has, of course, bought gold for the People's Bank of China account as well. But if China came in and started buying gold like Russia is buying gold. I mean these are major changes in the gold dynamic here. I mean, the Russians are buying like 20 and 30 tons a month. The normal supply of gold is about 200 tons a month as sort of X China, X Russia. And I think I read that India bought 60 tons in what month would that have been?

Craig: Maybe October?

Eric: I think it was December. Maybe. Maybe. I'm not sure which month it was, but you know, they're always a buyer of around that kind of numbers. 60, 70 tons a month. If the Russians buy 30 tons and maybe we get the Chinese in buying 10 or 20 and in fact I read that they were buying 15 to 20 tons a month. I don't know where that gentleman came up with that number, but that was a number in print. I mean the central banks become a significant force in the physical market. And as you and I discussed it, I think it was last week, you do sense a change in the gold market where it doesn't go down nearly as violently as it used to. It goes down fast on occasion and it's as it's done this morning, you know, you can go down to 5 bucks in 10 minutes.

Who knows why you get these flash crashes in various places. But typically I find that that's about the extent of it. I mean, we hardly ever get a $10 move on the downside anymore. Everyone used to get significant moves like that all the time. And after the quick downturn, it typically reverses and heads back up again. So I think we are seeing the influence of the physical demand in the market. And the guys pushing the paper realize that, hey, if I knock this price down too much, it's going to get somebody excited maybe at some central bank who comes in for bigs and we don't have bigs. And of course, you and I have followed the Comex all along. And there no inventory there. Even theoretically the goal that was tendered for in December never was delivered. And of course, so much of it goes offshore to London now. Like, it's just freaky what's really going on in the physical markets. And that's the one way that we can offset these commercial banks selling their paper product on the co-mix.

Craig: Speaking of the banks, Eric, I found it interesting a couple of days ago. I saw a note go across that, your friends and mine at Goldman Sachs have increased their price target on gold to the highest, you know, it'd be new highs like 1,425. Okay, so are we just the muppets in this case or is Goldman trying to unload, you know, how that works? What do you make of them going long?

Eric: I know how it works. And in fact, some skeptics [inaudible 00:06:21] were saying, well Goldman likes gold, I guess they're selling, you know. Because that is a rather aggressive target for one year, route 1,425 considering we've already had a pretty good mover here in the last few months. So I welcome it, I believe it. I like the reasoning of it, the recession thesis. I don't think we're out of the woods yet at all. I mean, yes, the markets had this wonderful rally and you know, our friend, Mr. Mnuchin spoke to the plunge protection team and all the next thing you know, stocks are rallying. I'm not so sure there has been much progress on the trade side. Yes, Paolo suggests that there was a chance he could become dovish, which I don't think is that, while it's a little unusual because he even talked about the balance sheet, maybe not continue with the balance sheet normalization.

But I think that what Goldman is looking at is that they see the central bank buying, they see the trade war not being solved. We see of course all these warnings by various companies. Of course the most dramatic was the Apple warning but before that was the FedEx warning, and then we have the car companies announcing layoffs and the airlines reporting that things aren't as good as they used to be. So, and of course, housing's been trashed anyway, so there's lots of reasons to think that a recession might be in the cards here.

Craig: Let me throw this log in the fire too, Eric. I remember back in August of 2011, things really came to a peak and we call it government discord in the US with debt ceiling debates and government shutdowns and all that. And that was when SNP cut the US credit rating to AA-plus from their AAA. Well, now all of a sudden this week we had discussions and headlines that Fitch, the other major ratings agency is considering the same thing.

Eric: Yeah. Well, of course, they should too. I mean, there's no doubt that the budget deficit situation has really deteriorated markedly, particularly with the whole decrease in tax rates for corporations. The almost unconstrained spending of the US government. And you know, we talked about a trillion dollar deficit, but the debt always goes up by a trillion and a half when you have a trillion dollar deficit for some miraculous reason.

So it's way beyond what they suggest the deficit is because the borrowing is, it's considerably higher. Plus, of course, we've got the unfunded obligations and the one thing that I've always felt very confident in saying is that the US will go broke or is broke because of the unfunded liabilities. There's no doubt about it. It's just when it's going to happen. You know what's going to happen because the underfunded amount is so significant you couldn't even tax people to get back there. So I can see where SMP did what they did in 11 and certainly Fitch warning that they might do it again if the depths that picture doesn't improve.

Craig: And Eric, one last thing I wanted to touch upon. I kind of, worked I said at the end last week, so I forgot to bring it up but its noteworthy. You know, you and I always talk about gold in dollar terms, which we kind of have to do with the dollar being the reserve currency and kind of the benchmark. But I kind of lost in the shuffle here early in the year. Our new all-time highs for gold in Australian dollar terms. Golden Canadian dollar terms is within a $100 of its highs. I mean we are talking about gold eventually getting back there and in US dollar terms but for folks in Australia and Canada, it's working out just fine.

Eric: And many other countries too. I imagine Mexican gold prices are right up there. Brazilian gold prices will be up there. Turkish gold prices will be up there. I mean they'll be all sorts of countries where the currencies have been weak where the gold price is hitting an all-time high. So you're sitting there at the end of the year, you're in Turkey. You've owned gold, you say, "Oh my God, that was a great investment. Why didn't I keep doing it?" And this is all part of the momentum here that there's so many people in the world whose currencies are getting trashed where you have to sit there and make a decision. And in fact, one of the currencies that has been trashed so far this week was the US dollar. It looks like it might be rolling over here. So yeah, there's, I mean there's lots of people in the world are believers of gold.

It was interesting when the ETF totals for the year were announced. I think they went up by like 76 times, but all of the buying was in, for the most part, was in European funds and it was selling in US domestic funds. Now that's all reversed itself. We've had a huge number happen in December here, both in the US and in Europe. In fact, I think the number for December was something like 76 tons of physical metal was bought in the month of December. So, you know, you add that to the Chinese buying, the Russian buying and all the other central banks buying and the regular buying of gold. I mean, you got some serious stuff going on the gold market. There's lots of people in the world that would be profiting immensely owning gold and silver these days.

Craig: No doubt about it, doing what it is supposed to do. Protection against destruction of confidence in your local currency, no doubt about it. It has always worked that way, it will continue to work that way. One last thing, Eric, I don't know about everybody else at listens to us, but you have done me a great favor by bringing Kirkland Lake to my attention. Gosh, what a year and a half ago when it was about $8 a share. It's now $26 a share. So anybody that's been listening to these weekly podcast has probably benefited as well. It and had some terrific earnings again this week. I just thought I'd ask you to see if you could add some color to what was announced.

Eric: Sure. Actually well, what we announced was the production. We announced production of 230,000 ounces in the fourth quarter. And for the listeners, just imagine what an analyst is doing now. In the third quarter, the company reported 29 cents of adjusted earnings with 180,000 ounces of gold production. And now we got 230,000 ounces, so that's 50,000 ounces more. And annuals might multiply the 50,000 times the $1,200 and get $60 million change. Tax it at 25%, get a net change of $45 million and divide that by the roughly 200 million shares outstanding. You might say, " Well, gee, all those earnings could be 22 cents higher than what we've reported in the third quarter."Now that that's what I would be doing as an analyst, okay?

And the one might say, "Well, why would you think would all be profit?" Because we didn't produce any more tons. We produced the same amount of tons but just got more gold out of it. In other words, we didn't have to hire people, we didn't do anything different. So when your production goes up because of grade, there's no increase in costs. So anyway, I'm going to be interested in seeing what the final numbers are. I don't know what they are, but I can imagine what the analysts might be doing in trying to sort of look ahead and see what's in store for Kirkland Lake. So it's pretty exciting all around.

Craig: It is very exciting all around and it's going to be a very exciting year. And before we sign off, I don't want our American listeners to think we're leaving them out of the fun here about putting precious metal into your retirement account. Yeah, of course. Canadian listeners can do that with an RRSP at Sprott but American listeners can do that too. You can open your own self-directed precious metals IRA with Sprott Money. Sprott Money is associated with new direction trust, which allows you to do this. So of course, just 888-8610-775. Never has there been a better time to take some money out of the stock market and gosh, maybe sell it the high and move it into the precious metals. And you can do that all within your IRA. My goodness, what a great idea. Again, call us, 888-8610-775. Eric, my friend. We are off to a hot start. Obviously, things never go straight up when you're fighting against the banks every day, but it sure looks like it's going to be a good year and I look forward to talking to you every week going forward.

Eric: Well, I look forward to talking to you too as I think I got a bit of a chuckle and nothing never goes straight up. You're fighting with the banks and ain't that the truth? Look at, we've been fighting with the banks for the last seven years here, so maybe someday we'll come out a winner. We certainly did from 2000 to 2011 when the gold price went up by 500% or 600%, so I'm not suggesting we have that in front of us, but it could be very exciting. I wouldn't be at all surprised to see new highs in the price of gold here not too far down the line.

Craig: I'm with you, my friend. So much of this resembles 2010, 2011 economically, politically. I would imagine you sense that as well.

Eric: Absolutely. It's all coming together it would seem for me anyway in the precious metals market.

Craig: Well, let's keep it coming together and let's get together next week. Eric, thank you so much for your time this morning and all of your insights and I look forward to talking to you again next Friday.

Eric: Okay, Craig. All the best. Have a great weekend.

Craig: And from all of us here at Sprott Money news and sprottmoney.com, thank you for listening. Have a great weekend and we'll talk to you again next 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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