Gold, Commodities, and the Ongoing Silver Squeeze - Weekly Wrap Up

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

Craig: Happy Friday from Sprott Money News, it's sprottmoney.com. It's Friday, February the 19th, 2021. It's time for your weekly wrap up. I'm your host, Craig Hemke. Eric is still on the sidelines this week, and so we've got a returning guest, one of his friends, Bob Thompson. Bob, of course, Senior Vice President and Portfolio Manager with Raymond James in Vancouver. Old friend of Eric's, and also an old friend now of the "Weekly Wrap Up." Bob, thank you for spending some time with us.

Bob: Hey, Craig, it's always a pleasure to be on the show.

Craig: Hey, just a reminder, we're going to talk a lot about the precious metals obviously. Today, we're also going to focus on silver. Great idea, always a great idea to add some physical metal to your investment portfolio. One of the biggest questions that comes up when you invest in precious metals is where are you going to store it safely? Well, Sprott Money is one of the safest and most cost-efficient storage programs in the business. To learn more about our storage program, just visit sprottmoney.com, or, of course, you can always give us a call at 888-861-0775. We are going to talk about a number of things, Bob, today from the economy, to commodities, and the ongoing silver squeeze.

I know many of you have missed Eric's contribution for the last several months, and I've missed it as well, but hopefully, he'll be back soon. But he had a little something he passed on yesterday that he wanted me to share with everyone. Eric, through one of his investment arms, has just very recently made another almost $40 million Canadian investment into the PSLV, picking up 3 million... Bob, what do they call those things up there? Shares? Units?

Bob: Three million shares, yeah.

Craig: Three million shares. All right. So, Eric, again, just added, in support of the cause of squeezing physical silver, and we know PSLV actually owns nothing but allocated physical metal, 3 million new shares. Like I said, it's about $38 million Canadian, and he wanted to break that news here on the "Weekly Wrap Up," and hopefully, he'll be back to discuss all this personally sometime soon. But, Bob, with that news in mind, I want to move, I guess, into the regular part of the show. Let's talk first about economic news because we've had another down week in gold, though silver is up. What have you seen in the economy this week?

Bob: You know, it's crazy. I'm sitting here looking at the headlines from today. And here they are, "Treasury Secretary Janet Yellen makes push for major stimulus, sees bigger risk in not doing enough," "Jobless claims show unexpected move higher," "U.S. producer prices post biggest gains since 2009," "Household debt rises to $15 trillion due to record-breaking borrowing." I mean, craziness, craziness. At any other time, if you were to look at that, this is so bullish for all the metals -- gold, silver -- and obviously, if producer prices start moving up, that's going to help out all the commodities.

And, you know, 10 years ago, during our last 100-year financial crisis, these things only happen every 100 years, okay, Craig, but they happen every 10 actually. Our last crisis, they bailed out the financial system, as we know, right? Main Street got left on the sidelines. Obviously, we didn't see any inflation because that money never actually went through to the households. Well, this time, they figured they got the banking system straightened out, so they had to bail out all the consumers, and they bailed out the corporation. So, what I mean by that is they're sending direct stimulus checks to everybody, right? Well, those direct stimulus checks are going to Robinhood, and they're going to people shopping, and they're going to all kinds of consumer activities. And that's why we're starting to see this inflation. So, I'd be very surprised if we don't get some surprises on the upside as far as inflation is concerned. And all that's great for commodities.

Craig: Bob, a couple more I saw this week, the Institute for International Finance, whatever they are, came out and said that the world added $24 trillion in new debt last year, $24 trillion. And I just saw a headline this morning that on top of the $1.9 trillion, in what they call stimulus, that they want to vote on next Friday in Washington, some Democrats are floating a plan for another $3 trillion in infrastructure. I mean, after a while, we're talking real money, Bob.

Bob: It's crazy. And, you know, Eric's an accountant, of course, right? He has a CA. And he told me a little while ago, he says, "You know, it's crazy, the unfunded liabilities that they have on the U.S. government balance sheet that they don't put on the balance sheet, right? There's a side note and you can see what they are." But he said, "If they actually accounted for unfunded liabilities, Social Security, Medicare, everything else, which is over $100 trillion." He said, "They're not running deficits of $1 trillion to $3 trillion, you got to tack on another $4 trillion or $5 trillion a year on to that, for the unfunded liability build up." So, you mean, they're running, in a normal year, you know, $5-trillion deficits, if you look at the unfunded liabilities. This is craziness.

Craig: Madness. Bob, in the vein of rising tide lifting all boats, yeah, gold has had a tough week. Silver's doing okay. And man, the rest of the commodity sector looks like it is breaking out, starting a whole new, kind of, secular bull run. We've got copper over $4 for the first time since 2011, crude oil at the highest level seen since early last year, Lumber is setting new all-time highs on a daily basis. What do you think of the sector and the way that can support even the precious metals?

Bob: Very bullish on all the commodities, because, you know, what's happening with all of the commodities is also relevant to gold and silver. And let me explain that. Let's go back to 2000, I think we're around that time, I've said it many times that we're, kind of, at the bottom here, and the texts are going to roll over and the U.S. markets are gonna roll over and commodities have got a good extended run, just like we saw at that time. Well, that time, what surprised everybody was this massive demand from China, right? I don't think the demand this time is going to be as much, because obviously, all this printing of money is not pushing the GDPs, like it should be. But we've had such malinvestment in the...or disinvestment, I guess we should say, in the commodity space that we've got supply problems here. So, even if we get a little bit of demand increase, the supply just can't keep up and supply bull markets, a lot of times, are even more powerful than demand-driven bull markets, because you can't just turn on a switch and increase supply. You can do that with oil, right? You can say, "Okay, we got some shortage in production, we're going to get some production up here in a month or two. You can't do that with mining, you can't...It's a 10-year process.

So, all of the commodities, I think, you're in the same position. As you said, copper is over $4 now. There's not going to be a lot of investment in the copper industry, as far as copper companies are concerned, until it's sustained over that, kind of, $3.75 area, then they'll start to put some money into the ground. But obviously, it takes years from there. I mean, these big copper mines in Chile, which produce a lot of the world's copper, have been doing it for decades and decades. And it's shocking, the grades are going lower and lower and lower. Now, our technology is increasing, so they're making more efficient, but still, the grades are getting lower. And that's the same with gold, it's the same with silver, it's the same with all the commodities. We just started finding these massive deposits. And the great thing about mining is that the supply doesn't catch up with the demand right away, it takes a few years.

Craig: That's for sure. And that, kind of... we'll talk about the idea of squeezing silver a little bit as we wrap up, you know, that silver definitely lives on flow, right? What do we... maybe last year, did we even get to 850 million ounces of silver mined, Bob, with all the COVID shutdowns? I hadn't seen the numbers.

Bob: No, no. It didn't. At one point, you know, obviously, Mexico was a big factor there, because most of the mines in Mexico were shut down, that's a large part of the silver production. But, you know, that's coming on board right now, and I think we're starting to see that with the cash flows of companies. A couple of the big companies, just in the last couple of days, came out with some significantly better earnings than people thought they were going to in the silver space. So, I think the market is going to look at that too, as far as the shares are concerned.

Craig: Yeah. And that's eventually where it gets exciting, Bob, is you chew up most of that silver supply with industrial demand, it only leaves a little bit of money left over or a little bit of silver left over for investments.

Bob: Right. And that investment demand ranges around 15%, generally speaking, but all you need... Remember, all of these moves happen at the margins, right, in any company. You know, their profit margins move 1% or 2%, you know, that can seriously impact their stock price, right? It's the same thing in the silver market here, you increase that investment demand component, just by a few percent at the margin, and it pushes the prices up a lot.

You know, it drives us nuts in this industry, what you and I do, is we're trying to solve, for you mathematicians out there, we're trying to solve a huge multivariable equation. And what I mean by that is the variable we're trying to solve for is what's going to happen to silver prices, for example. Well, when you're solving a huge multivariable equation, we have to make assumptions for all the other variables that are out there, right? And the assumptions can be right or the assumptions can be wrong, but the fact is those assumptions have to change over time, too. And that's what's so frustrating is you look at things and it might not work out the way you want it to in the short run, it's because some other variable has changed that might be way down chain that we didn't even see.

So, for example, I mean, silver prices go up a lot, then people start melting down their silverware, right, and putting it on the market. They say, "I can make some money here." So, you get some supply coming in from recycling, or whatever the case is. So, you know, that's what makes, I think, what we do, kind of, exciting, but it pulls your hair out from time to time too, because it's all these multivariables and a lot of variables that we don't even know are there.

Craig: That's right. That's right. That's what makes forecasting so difficult, no doubt about it. Bob, I want to get back to those ETFs, because as I noted, at the beginning of this call, Eric moved almost $40 million Canadian into the PSLV earlier this week. Notice, he did not buy the SLV. You've got some thoughts on the ETFs, in general, I'm sure.

Bob: Sure. You know, the ETFs are a great way to suck up this investment demand, if they're allocated, right? And I think that's a big deal, and a lot of people don't pay attention to that. And if it's the same as it is in the past, nobody will pay attention to it until something happens and somebody can't get their silver, somebody realized that their silver is not allocated and that they want their silver, but somebody else has a claim on it, or there's leased out, or lent out, or whatever the case is. And that's just a huge pyramid scheme in the market. So, I think, you know, that's important is to just make sure that a company builds itself on the fact, markets it and has it, you know, where you can read it, that every single ounce is allocated and every single share or unit is backed by whatever the underlying is.

Craig: Didn't we... I think I saw some numbers earlier this week about how the PLSV has grown, especially since the silver squeeze move began. Do you have those handy?

Bob: I do have those numbers in front of me, and it's all public information, right on various websites. But, you know, PSLV currently holds about 113 million ounces of silver. And, you know, they have added over 52 million ounces of silver since January 31st, 2020, 50 million ounces in a year.

Craig: That's a lot.

Bob: Since February 3rd, 2021, you know, SLV has actually had outflows of 1.4 billion, interestingly enough, whereas, PSLV has had inflows of 558 million. So, that's an interesting data point, too.

Craig: Yeah. It will be interesting, Bob. I know they had a shelf offering that PLSV filed for about 1.5 billion last year. It looks like they're making some progress on filling out that offering.

Bob: Yeah, I mean, people just have to make... People used to go to the store and buy a silver coin, and people still do that. And it's great. I have a lot of silver that I have stored, actually with Sprott Money. But, you know, the ETF is an easy way to hold in your brokerage account, you just have to make sure that you actually own it, or if you have a significant amount of silver shares, that you can get this over if you want to.

Craig:That's right. And to that end, like I said, we know...I have full confidence, and Eric has obviously expressed his full confidence that PSLV has every ounce that it says it has. You know, we don't know for sure about the other ones. To that end, Bob, because the system is leveraged, and hyper-leveraged perhaps, you know, there was a great piece from Ronan Manly at BullionStar, that 85% of all of the silver in London, in the London LBMA vaults, is clearly spoken for. I mean, if this investment demand part of the equation continues, I mean, obviously you no doubt saw a couple weeks ago where all the dealers were cleaned out, right, over a weekend and Sprott Money was one of them. If the investment demand continues, and as we noted earlier, investment demand only makes up maybe a quarter of total silver demand on an annual basis. If that investment demand this year doubles, and all of a sudden, we're running a supply deficit. I don't know, what do you think, Bob? You've been at this a long time. Is it possible to force the banks into starting to deleverage the system a little bit and maybe squeeze isn't quite the right word, but at least forced them into some kind of a deleverage?

Bob: I definitely think they can do that. I mean, there's lots of leverage they can pull, there's lots of things that can move from warehouse to warehouse and change prospectuses or whatever is needed to do. But I think you bring up the key point there, and the key point is that this is a cumulative game. In other words, just because the system doesn't break right now, it's cumulative. The stress is going more and more and more onto it. And I equate that to an avalanche. You look at the side of a mountain, and you say, "Wow, that thing is unstable and it's ready to come down." But the snow comes on and it doesn't this season. This season, it looks fine. And next season, it looks fine. That doesn't mean it's any less dangerous. It means it's actually a lot more dangerous because it looks completely stable, right up until the second that it collapses. And obviously, the force will be three or four times if it hasn't come down in the last two or three years. So, what I'm trying to say is this is a cumulative effect. The more pressure that is put on the system, when it breaks, it's going to break that much harder. And I think that's really something that people have to pay attention to. Just because it doesn't break now, it doesn't mean it's not going to.

Craig: I like that analogy, Bob. That's a good one.

Bob: Well, you know what it feels like the silver right now, too? I mean, I'm looking here today, and it's up almost 2%. Another good analogy is it just feels like, with silver right now, it feels like they're trying to hold a beach ball underwater. You can do it, but it keeps pushing and pushing and pushing. And when you let go, it pops back up. And it just feels like that with silver right now.

Craig: Yeah, yeah. Now, you can see this on the chart, silver looks much better on the chart, I mean, radically different from the chart of gold. And actually, the silver miners, Bob, is they look a lot better than the gold miners. So, as we wrap up, let's, kind of, appeal to your day job. You mentioned margins at the silver miners and a lot of their earnings reports have been great. Can you give us a few insights from the gold digger, maybe tell us about the mining clock, and maybe other things that might be on your mind as we wrap up?

Bob: Yeah, exactly. You know, and gold is always first out of the gate, right? Then the other commodities tend to catch up, and that's what we're starting to see now. And then silver, as we get closer to the end or middle of the cycle, becomes an industrial metal and a monetary metal, right? Because it is both. So, that's why you get the significant outperformance of silver, and I think that's what we're starting to see right now. But, you know, I have a chart and the latest gold digger that I did, that shows the gold mining stocks to gold bullion ratio hasn't been this low in 25 years, right? So, it means money hasn't moved into the sector yet. And, you know, it makes sense. Why does it make sense? Because you've still got all the tech stocks rolling, people are all focused on something else other than the precious metal sector.

But what I mean by that is the leverage. When these things start to move, and people say, "Okay, we gotta look for the next sector that's going to do well, and the money flows into the sector, you know, that gold mining stock to gold bullion ratio can double, plus, the stocks do well on top of that." So, that's why it can be explosive on the upside, as far as this company is concerned.

The other thing about the silver miners is that there are very few silver miners that make almost all of the cash flow from silver, right? There's a few that are over 50%, but most of them are actually less than that. But what's important here to remember is that, what else are they mining? Well, they're mining zinc, they're mining lead, they're mining nickel, they're mining all of the other base metals. And all those base metals are, kind of, exploding upwards, as far as prices are concerned. So, the silver miners get that base metal exposure, if we're in a good commodities bull market, and they get their silver exposure. So, I think that's important to remember about the silver miners and why we're especially positive on them going forward.

Craig:Yeah. And to keep in mind, it's gonna be a long, crazy year. I remember the last time we spoke back in January, the metaphor I used is trying to ride an actual bull in a bull riding competition. You got to stay on that baby all the way to the bell if you're going to win, and it's going to try to throw you off the whole time, and that's what's happened so far this year.

Bob: That is right. And, you know, that's a normal bull market, right? You know, if we look back 10 years, a lot of the people that were bullish on the U.S. market, well, it turned out to be right. The U.S. market's done pretty well, but there was a lot of severe corrections in there along the way. And if they weren't true believers that they were right, they would have been knocked out, right? And it's the same thing in the gold sector here. And, you know, that's why I think the mining clock's pretty important. And again, in the last gold digger, I put the mining clock in there, they were probably around 6:30. And I think it's important to mention that because I'm going to change the mining clock a little bit to reflect the different metals, right? Because I think gold and silver are probably 6:37. I think copper and some of the other base metals are a little bit further back on the clock, which is important to see. And, you know, as far as uranium, we're probably still back at 4:00, which is just the beginning. So, I think it is different with the metals. And as we continue on in this economic path, we're going to start to see some divergence as far as the metals are concerned, but I'm pretty bullish on most of them here.

Craig: Bob, it's always great to talk to you. I think in the past, maybe you shared your email address if people want to reach out to you.

Bob: Sure, thompsoninvestments@raymondjames.ca.

Craig: Thompson with a P, right?

Bob: Yeah. Thompson with a P. That's right. Thompson Investments.

Craig: Got you. Got you. Bob, thanks so much for everything. It is always great to visit with you. Hey, everybody on your way out, we appreciate you listening to the "Weekly Wrap Up." Also, "Ask the Expert" also can be found here at Sprott Money. A great interview earlier this week with Danielle DiMartino Booth, you might want to hunt that down. All of this appears on YouTube and on various podcast platforms. Please do us a favor, give them a like, maybe subscribe and even share on whichever channel you're listening to. It'll help the distribution of this information, and that's the name of the game. Bob, thank you so much for all your time.

Bob: Really enjoyed it this week, Craig. Thanks a lot.

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