By Craig Hemke
As the Chinese Year of the Pig kicks off next week, Eric Sprott breaks down the latest gold and silver news and tells us: Will 2019 bring home the bacon for gold investors?
In this edition of the Wrap-Up, you'll hear:
- What the Fed "cave-in" means for precious metals
- Where all the new gold is coming from
- Plus: What gold investors will be buying next
"It's been a great week for those who are pigging out on precious metals, for sure… I do see and hear that mainstream institutional managers are looking at gold and gold stocks. So that's a big, big change. You can just imagine, that little bit of interest goes a long way when it comes to people deciding to put some money into what is a shrinking supply of gold and silver equities. So that's very exciting."
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, the first of February, 2019. We've already got a whole month in the books for 2019. This, of course, is your Weekly Wrap-Up. I'm your host, Craig Hemke. And joining us as usual is Eric Sprott. Eric, good morning.
Eric: Hey, good morning, Craig. I want to just be...even before we start anything, you know, it's starting to feel like the first month of 2016. And it's been pretty exciting so far.
Craig: Certainly has. And there are a lot of parallels, no doubt about that. Hey, before we get started too, we're going to have the Chinese New Year celebration this week. In fact, Chinese markets are going to be closed all week long. And gold investors usually know that that's something you got to pay attention to. And Sprott Money is excited to celebrate the Chinese New Year. Zodiac signs play an integral part in Chinese culture, and can be used to determine your fortune for the year.
2019 is the year of the pig. So we have one ounce and two ounce year of the pig silver coins. And they are produced by the Perth Mint. And they are, of course, available at Sprott Money. You can call us at 888-861-0775, or visit sprottmoney.com. Eric, this has not been a piggish week for us. We've had a very good week with what seems to be a full turnaround now in progress by the Fed. I would imagine you got some thoughts on that.
Eric: Yeah. It's been a great week for those who are pigging out on precious metals for sure. And I just find that the Fed cave in, as they describe it as, like, it's so complete. I mean, to think that they'd take the rate increases basically off the table. And then the balance sheet reduction as well and leave it kind of, like, wide open as like, oh, boy, that's a wonderful, wonderful transition for those of us who believe in precious metals and don't believe in Fiat currency. Because the Fiat currency part is basically an admission by the Fed that if they're not using the system, the system doesn't work. That's essentially what they've said here.
So it makes you look back at what happened and makes you have to think, "Okay. Am I going to buy into, well, this is just going to happen again." We're all playing the greater fool theory, right? Like, we all know it should be going up, but the Feds got it going up, so I'm going to stay in the game. But the game's going to end someday because you got to get back to some kind of normalcy. And normalcy is not zero interest rates and printing money, and buying all the government bonds.
So, I think all central banks for the last... ever since the financial crisis have had this thing where they felt that it was their responsibility to keep it together, which they did, and, of course, promoted the inflation of assets, particularly financial assets. And even just pausing is going to cause things to weaken. So I don't know, if the Fed goes back to printing money again, look out for precious metals because the dollar will weaken off here and people will realize the relative merits of precious metals versus paper assets.
Craig: Yeah. And we've got some interesting news as of late in the physical demand space, Eric. It's not just you, and I, and others. Your friends at the World Gold Council yesterday reported that global central banks added more gold to their reserves in 2018 than they have since 1967, a whopping 651 metric tons. You throw that on top of Indian demand, you throw that on top of the gold that leaves China's shores, you know, the ETF demand. Eric, where's all this gold coming from?
Eric: Yeah. It's pretty exciting and, you know, when you start looking at numbers like 650 for central banks. And ETFs weren't much last year, they were only I think 68. But you look at the Chinese demand, which is very estimated at 1,000 to 2,000 tons. And the Indian demand of, what was it, 600 tons. I mean, you can come up with 100% of the world's gold supply. The mines fly very, very quickly here.
And now as we go into '19, we have the ETFs in the month of January, already added more gold in one month than all of last year, 70 tons. I mean, we can have the ETFs adding 800 tons, and India doing 800 tons, and China doing 1,000 tons, and banks doing 680 tons, it's not going to fit. And we haven't even talked about jewelry yet, you know? So, like, it's crazy. So, the physical attributes that you're referring to are just getting stronger and stronger.
I think I alluded to this last week. When we get these, you know, potential sell-offs in paper gold, they seem to import very, very quickly. We had one this morning where the jobs number came out and looked like it was fantastic. And they immediately shot gold down $5 bucks. And it just stopped in its tracks, okay? And backup she goes, and I suspect that it's, you know, when the paper guy meets a physical guy, it's no contest, you know? They can't go there.
And so the sell-offs have been shallow. The commercials who have major short positions are losing money. I was doing a rough calculation, figuring they're at least down $1 billion. Not that that's much to them, but they rarely lose, you know? It's always worrisome that they rarely lose because they're always looking for some piece of data which they can, you know, knock gold down and then have the press says, "Oh, gold's down because there's so many jobs being done, or that the inflation rate is non-existent," or some reason like that, but it's all just orchestrated.
But so far, these raids have been very de minimis, shallow, and then they tend to totally reverse themselves. So I think the physical demand is playing a bigger hand in things than you and I might expect. We see it in palladium, where you have the backwardation. You haven't mentioned silver yet, but I know you and I discussed Indian silver demand, which was incredible for the month of November. It was up something like 138% to some huge number of tons. I think it was, like, 800 tons or something.
Craig: Eight hundred and twenty-eight metric tons just in the month of November, Eric. That's about... Since China doesn't export silver, that's about 30%, 35% of global mine supply for the month.
Eric: Yeah, for India, up 138%. How does one country get to buy 138% more silver? You know, and the silver price not go up. And of course silver is acting very steady here. It just keeps going up, you know, Bluetos [SP], not Bluetooth, went through 16, as gold went through 1,300, which were magical numbers that we had to get through. Everything looks good technically. So, I think that we have the same thing happening in silver that we have happening in gold. And I don't think it's going to be too long before we start to see investors who are buying gold start to buy silver.
And of course, at $80 to $1, you know? You can put $1 into silver versus $80 into gold. But people don't invest that way, right? If a guy likes gold or silver, maybe he's going to put $80 in gold and put $40 in silver. Well, that's not easy to do when the price is $80 to $1. So, you know, silver could get very exciting going forward here.
Craig: You mentioned the parallels to 2016. You know, a lot of folks, that rally came on so quickly and out of the blue. A lot of folks ended up chasing or waiting for a fullback, and never profiting, and not getting in maybe until the end, and that sort of thing. We've already seen, like, the HUI index, move up, 24 5% off its lows. The GDXJ seem to be breaking out. I think we're right on the cusp of some institutional money begin to flow into the sector, because the relative outperformance versus the S&P. Eric, you've done a wonderful job of keeping us abreast of some of the companies, you know, that you invest in and you're involved in. And I think that's valuable information. I would suppose you probably got a couple updates for this week.
Eric: But before we go there, I want to talk about things that I also see in here. And I do see in here that mainstream, the institutional managers, are looking at gold and gold stocks, okay? So that's a big, big change. You can just imagine, that little bit of interest goes a long way when it comes to, you know, people deciding to put some money in what is a shrinking supply of gold and silver equity. So that's very exciting.
I did want to make a couple of comments on both Sokoman and Kirkland Lake, and maybe I should start with Sokoman who released some real results that I was debating whether I would say, you know, disappointing, or unimpressive. And I guess disappointing is probably the more appropriate word. Stock sold off pretty good. There wasn't really the follow-up to the initial drilling results that they had reported in December. The company thinks they have some new way that the gold is oriented, and that the next set of grills will be more successful in the last set.
I mean, the jury is out, of course the stock weakened off here. And it's disappointing. But that's the nature of investing in a small cap exploration play. We have had a good smith so far. But in this particular news release, we didn't get a follow-up. So we got to hope that we get to do something a little better in the next one. In the case of Kirkland, I know, we probably have a few listeners who care about Kirkland. I want to draw their attention to a presentation that Tony Makuch made at the CIBC conference held in Whistler. And I think you get to it by going cibc virtual/whistler, something like that.
And it's a very interesting listen. I guess the only one comment I'll make is that Tony suggested that, yes, the stock in Canadian dollars was 40 at the time. And everyone said, "Oh, it's gone too high. It can't go any further." And he threw it out there that, you know, with what we have in front of us, we can imagine that it could get to $80. And, you know, I'm going to be excited for this fourth quarter earnings release, I have no idea what it's going to show, I don't, but I have a sense of what it should show. And I think it would show the world that the profitability of Kirkland is substandard.
I think we have a good chance of going into the TSX 60, which would bring in lots of buying. And of course, we're keeping our fingers crossed on the Fosterville drilling, just to see if that asset is a lot more promising than we think today. So, everything is kind of holding together there well.
Craig: Eric, as we wrap up, we've had a great start to the year. But you know, we never go straight up. We always get those kind of wash cycles where price gets washed back, and that sort of thing. But it does seem like it's going to be a great year. And one last thing, I know we haven't spent much time talking about are the Basel III regulations.
Eric: Oh, I wanted to talk about that. Yeah.
Craig: Yeah. I mean, I know that's on your mind. And so why don't we end there, what you're looking at and what think of all that?
Eric: Yeah. Well, the thing about the Basel III, which I think, and I was trying to look this up before this discussion, I think becomes effective on April 1st, something like that. That derivatives had a capital charge to a bank, but physical gold no longer has a capital charge. So I can imagine, I mean, if I was, let's say, banks who might talk to each other, and, you know, I might think, well, you know, if we all buy this and it's no capital charge, where is the price of gold going to go?
Imagine if the banking community came into the gold market, oh, my God, and it's already, as we've explained, I think it's undersupplied already. There's this big short position already, like, it could be quite dramatic. I have no reason to say that banks are going to go there. But you know what? When banks like Goldman (NYSE:GS) say, "Oh, Gold is going up," and JPMorgan (NYSE:JPM), "Oh, Gold is going up." And Citigroup (NYSE:C) says, "Oh, Gold is going up." You know what? Maybe they follow their own advice and buy some. And it has no capital charge.
So you can have an infinite amount of gold on your balance sheet and no charge against your capital. How nice would that be to make money that you have no capital charge, and maybe gold goes from, you know, 1,300 to 2,000, and you make a fortune on it, and no capital charge. That would be incredible.
Craig: Like they say, give a man a gun, he can rob a bank. But give a man a bank, he can rob everybody. That's always one of my favorites.
Eric: There you go.
Craig: Well, all right, my friend. It's going to be an interesting week next week with Chinese New Year and the Chinese markets closed. But, boy, we're sure ending the week well. And, you know, we're off to a great start to the year. I look forward to visiting with you going forward. And I hope you have a great weekend. I hope you enjoy the big game, as they call it. And I look forward to talking to you next week.
Eric: I'll be watching. And I know where you're watching. And I know you're going to have a hell of a hoot. So, make a good weekend. And stay safe whatever you do.
Craig: Hopefully. We'll get back together next Friday. If we can survive.
Eric: Right on that.
Craig: All right. Thank you, everybody, for listening. We will talk to you again next Friday.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.