Once I
understood how, it became clear to me that the USA has been feeding its gold
inventory into the market. It was the
only way to maintain a stable market while satisfying real global demand. Google my posts on Tungsten and Gold
replacement. Yes children it is possible
to cover a tungsten ingot with a thin layer of gold and meet requirements. It is not even sophisticated.
Since I told
this story we have watched a nasty dance proceed in which a few fine folks have
been engaged in a delightful game of pass the grenade while holding the pin
down. Germany’s requests for their gold
were to establish for the record that they had asked and were not complicit.
None of us can
prove that most of the gold is already in the global market. At the present eighty tons per year, it may
take a long time. The problem is that it
was likely a lot more earlier on and much of the inventory is now gone.
The reticence
regarding German gold tells us that it is long gone.
Thursday, May 15, 2014
Henry Bonner
Eric Sprott:
Eric Sprott, Founder and Chairman of Sprott
Asset Management, said recently that he expects a “significant re-rating of the
gold price” due to high physical demand from China and India, coupled with a
gold supply shortfall. The effect, which he calls the “Chinese Gold Vortex,” is rapidly taking physical gold from West
to East. When the West runs out of gold, the price should go much higher, he
believes. I recently spoke with him on the phone about his near-term views.
Hello Eric, what do you see happening today
in the metals markets?
Eric Sprott: I am very excited about
developments in the gold and silver markets today. I have been speculating
since late 2012 that Western central banks could be running out of gold. I put
the sell-off in gold and silver in 2013 to the fact that the Western banks
needed a way to generate physical gold supplies. As the metals prices went
down, there was a lot of liquidation of gold which increased the supply by an
estimated 900 tonnes last year.
Let’s look at the figures. The annual supply
of gold is around 4,300 tonnes. 3,000 tonnes come from mining and the other
1,300 tonnes or so from recycled material2. In 2013, an additional 900 tonnes
came onto the market from ETFs that were being liquidated – a supply increase
of around 21%.
Quite frankly, I believe this was all
orchestrated in order to create this supply. During the time when the price was
knocked down, a tsunami of buying started. India bought 336 tonnes from April
to June of 20133. I’m sure that the central bankers went to the Reserve Bank of
India and said: “You’ve got to stop people from buying gold.”
Of course, the Reserve Bank of India went on
to create rule after rule to try to stop people from buying gold. They managed
to get monthly imports of gold down to around 20 tonnes from its normal imports
of around 80 tonnes per month. Obviously, those official numbers leave out
smuggling, which probably makes up a very large amount of gold imported into
India.
At the same time that Indians were buying,
the Chinese were jumping in, too. The mine supply, excluding China and Russia
which tend not to export any gold, is only around 190 tonnes per month. You had
Indians buying 50 tonnes and China buying 90 tonnes4 – that does not leave
much left over for the rest of the world. Blogger Koos Jansen, from In Gold We
Trust, says that Chinese demand alone last year was 2,000 tonnes5. So demand
has far outstripped supply.
There is also interesting news coming from
Dubai concerning this supply/demand imbalance. A group there is building a gold
refinery that can process 1,400 tonnes of gold per year6. Well, the current
refining capacity in the world is around 6,000 tonnes. Somebody is going to add
another 20 percent of capacity. The supply falls far short of that at only
4,300 tonnes. Why is this refining capacity so much higher than the official
supply of gold?
I believe that the volume of gold being
exchanged must therefore be much higher than the official number of 4,300. To
me, it’s just another piece to the puzzle, and it all points to central banks
surreptitiously supplying gold to China. Gold from central banks, held in
LBMA-sized bars, is being recast into kilogram-sized bars, which are preferred
in Asia. It all points to this: gold is flooding out of central banks in the
West and into Asia’s coffers.
Another piece to the puzzle is Germany’s
current effort to repatriate its gold supposedly held by the U.S. So far, it
has only received 5 tonnes back from the U.S. Treasury7. They’ve asked for 300
tonnes back over 7 years. That would imply around 3.6 tonnes per month.
It’s worth noting that the U.S. is
supposedly the largest holder of physical gold in the world. Its books should
contain 1,500 tonnes held for Germany8 and 8,100 metric tonnes of its
own9. So why have they only delivered 5 tonnes over the last year?
We now get monthly data from Switzerland
about where its gold imports come from. In February, 114 metric tonnes came
from the UK10 – a country which does not produce any gold. So where did
that gold come from? Who did it belong to? The most obvious answer would be the
Bank of England, or ETF holdings.
Data from the U.S. offers a similar problem.
The U.S. Geological Survey showed that the U.S. exported 80 tonnes of gold in
January11. The U.S. only mines 20 tonnes a month12, and imports another 20. So
where did the extra 40 tonnes of exports come from? Who supplied it? The answer
is most likely the U.S. Treasury.
The whole reason for Western central banks,
particularly the U.S. to supply gold to Asia is to suppress the price of
physical gold. Most people realize that low interest rates and printing money
will eventually be very bad for the U.S. dollar. One thing that would tip
people off to imminent danger to the U.S. dollar would be a much higher gold
price. Keeping gold’s price low is just part of the financial policy.
All this money printing is designed to help
the U.S. address its massive obligations, which include its current debts and
off-balance sheet obligations of around 80 trillion dollars. Their annual
revenues are only around 2.8 trillion dollars and their expenditures are 3.5
trillion13. Everyone knows there’s no way they can afford to keep going and
cover their obligations. This leaves money printing to cover the gap.
Ultimately, we will find out the extent of
manipulation in the gold market when someone finally fails – most probably the
U.S. running out of gold to supply the market. And I don’t think we are far off
here.
Do you think that there is merit to the
argument that other sources of gold exist that could explain how so much gold
is being delivered to China? Such as smuggling or clandestine exports through
the shadow banking system in China?
Well, I don’t think that is likely. The
Chinese government controls all exports of gold and since they are a net buyer,
they probably would not allow any exports.
The amounts of gold involved are so large
that clandestine sources seem unlikely. There is only one government in the
world that even owns 4,000 tonnes – that’s the U.S., supposedly.
I think it comes down to the powers that be
simply trying to keep things under control. The dollar is coming under extreme
pressure here, and it looks to have broken down here, in fact. That should have
people going into gold.
The U.S. GDP growth, which was expected to
be around 0.1%, will probably be revised even lower for the first quarter of
201414. I do not believe that any economic recovery is really occurring,
because the middle class is simply being routed. We are seeing no real wage
gains and inflation is well beyond reported CPI numbers, which are just a joke.
In the real world, we all know inflation is much higher.
There’s no rational explanation, in my
opinion, of where the gold is coming from apart from central banks.
What do you see happening in the broad stock
market? Are we in a bubble phase? Will problems in the general stock market
cause people to rush into the dollar?
Well, there’s going to be a point where
countries will have to assess each of the currencies on their own merits. As
you know, I live in Canada, and I can assure you that when I look at the data
that the U.S. supplies, the dollar will lose a lot of value. I am sure that
countries like China and Russia would look at the same data and come to the
same conclusion.
China and Russia look like they could
already be turning their backs on the dollar. Brazil and India have complained
about the printing of money and the disastrous effects on currencies. They
could also be turning their back on the dollar.
I am not so sure that the dollar will remain
in the same high esteem as the market has historically given it.
In the broad stock market, things have not
started to change just yet, but we are starting to see some cracks appear.
Housing numbers have been quite weak. We’ve seen tech stocks come under attack.
Some of the major banks have warnings on their trading levels going forward.
Those stocks seem to be breaking. So the generals are coming under pressure.
I’m not sure when a decline will start
happening, but I feel safe in predicting that within 24 months, the value
of these stocks will be much lower than today. I don’t think it’s nearly as
safe as the banking interests would tell you.
How do you think that the situation in the
Ukraine might affect gold?
Well, I imagine that people in the area – in
countries like Romania or Bulgaria, or in the Ukraine itself – would be
thinking about putting some of their money in gold right now. Obviously it does
bring people into the gold market.
I prefer not to fall back on these sorts of
possibilities as reasons to own gold. These are ‘black swans’ for gold. I
prefer to focus on the physical shortage argument for owning gold, because I
believe the case there is black and white. The means and motive for suppressing
the price of gold are well-known. And the physical will win the day.
Now, gold will benefit from black swans – a
war, governments going broke or the recession getting worse. These could
happen, but things are changing in the precious metals markets regardless of
these events.
Do you believe that the physical shortage
argument applies to platinum and palladium as well?
Absolutely. In fact, I find the case for
platinum and palladium even more compelling than anything else right now. When
you think that the top supplier of these metals is Russia, and that the second
biggest is South Africa, which is on strike, I find it surprising that the
price of platinum and palladium has not exploded.
I also see what goes on in the paper
markets, however. The commercials are taking on an increasing short position in
both of these metals, which is pushing the metals lower. A recovery in platinum
and palladium would certainly help all precious metals move higher, including
gold and silver.
I think that there’s a great case to be made
in platinum and palladium.
What do you make of the lawsuits taking place
in New York over alleged gold manipulation?
I’ve been very closely involved in the news
surrounding these lawsuits. I’ve read through the court cases, and spoke with
some of the lawyers involved before the suits were filed to see what kind of
work they had done. Knowing what the prize could be, these lawyers have put a
lot of effort into creating a bona fide class action case.
If the suit is authorized, we will be able
to go look through records and find out, for instance, who sold 100 percent of
the annual supply of silver in one day and 50 percent of the gold supply in one
day. The way I see it, where there’s smoke there should be fire.
I think that these are not frivolous
lawsuits. As many as 20 firms showed up in court two days ago to press for the
classification as a class-action lawsuit. There should be a lot of money and
power directed at getting this thing to court. Based on the data that we have
looked at, there will be some revelations.
I would point back to the comment by
Germany’s regulator, BaFin, who said that possible manipulation in gold could
be worse than LIBOR. I am actually surprised by the massive sums that are
traded each day in gold. The gains to be made by gaming the system are very
substantial – we’re talking billions of dollars, and the fixing process appears
to be a complete joke. When the Chairs of the committee to fix the price of
gold in London got together, about four or five people knew where the price was
going to be post-fixing. They were probably the same people doing all the
trading around it, including the derivatives trading, which is an easier way to
make money because it is a much bigger market.
I hope that the proceedings take place and
that we are able to see evidence of who was doing what in these markets over
the last 10 years.
Eric Sprott has more
than 40 years of experience in the investment industry. After earning his
designation as a chartered accountant, Eric entered the investment industry as
a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now
called Cormark Securities Inc.), which today is one of Canada’s largest
independently owned securities firms. In 2001, Eric established Sprott Asset
Management Inc. He is Chairman and President of Sprott Inc., a publicly-traded
company based in Toronto, Canada with over $7 billion in assets under
management.
1 GFMS gold survey 2014. Page 8
2 GFMS gold survey 2014. Page 10
4 GFMS gold survey 2014
11 USGS Gold Mineral Industry Surveys
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Sprott and his gold cohort have shouted the same message for well over a decade. There's no doubt about PM price manipulation. Nor can we legitimately argue against the fiat peril, and the havoc which that can pose - although that should have bubbled up in post-2009 recovery figures. The problem with Sprott et al is timing: being too early on your call is worse than being wrong - and they've been early on the direction of PMs since the 2011 peak. Mint gold demand numbers show that the public is exhausted. With everyone fully invested, the only one that can move the gold market is Morgan. Everyone else loses.
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