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Manipulation, gold and the decline of the dollar – Sprott

According to Sprott Asset Management CEO, Eric Sprott, sooner or later the unintended consequences of QE will come into play, the biggest being the decline in the US dollar.

GEOFF CANDY: Hello and welcome to this Mineweb.com’s Newsmaker podcast and joining me on the line Eric Sprott, he is the Chief Executive Officer at Sprott Asset Management. Eric the last time I spoke to you was in 2011 and a lot has happened since then, but in many respects very little has happened in other respects given that a lot of the fundamentals that we saw in 2011 have remained the same if not exacerbated since then and we sit now with a gold price that is albeit substantially lower, in some respects, in a very similar position.

ERIC SPROTT: Well it’s really interesting. In fact it’s funny you should start with 2011 because I think the most meaningful thing that’s happened since 2011 (based on the statistics that come out of Hong Kong and those are the only ones we have), is that the exports of gold from Hong Kong into China have risen from under 100 tons a year in 2011 to, 1,200 tons a year in 2013, as we speak right now. That means that the Chinese are consuming an extra 1000 tons of gold. And, as you’re aware, the gold market is a 4,000 ton market, so we have a participant who stepped in to buy 25% of the gold market and the price of gold has gone down. I would challenge anyone to look at any other commodity where somebody bought 25% of it, whether its oil, or wheat, or corn, or any substance, where they would have expected that the price went down.

And it begs the question, I’ve written on this at least three occasions, that the western central banks have been supplying less gold because the supply of gold has not gone up. In fact, it was down last year, I’m sure it will be down this year, I’m sure it will be down next year. So how can we have these new entrants coming into the market and buying that much gold, and the price goes down? It’s always been my contention that the demand for gold is well in excess of mine supply, that the western central banks continue to supply that gold. In fact, it was almost hitting panic proportions back in November when Germany asked for its gold back, and of course the US Treasury said well it will take seven years to give you 300 plus tons, and of course China imports 100 tons a month just from Hong Kong, so there’s no logistical issue here to deliver 300 tons of gold. I think the fact is that the 4% of the Treasury’s gold that Germany asked for is not there, otherwise why wouldn’t they just ship it off to them, so I think we’ve had a physical problem, I think the decline in gold was engineered here to try to spring some physical gold out of the market which the GLD, and other ETFs responded to in huge proportion. There was a dump of about 700 tons of physical gold in a six month period, well that’s almost 1400 tons a year annualised. That’s about two-thirds of the mine production ex China, ex Russia that kind of hit the market on an annualised basis, and yet was consumed I might point out.

So I think that gold was needed, that’s why the raid was created so that they would panic everyone out of their gold holdings which unfortunately, in a lot of cases happened, and I think those people in the long run, or medium run or short run for that matter, will all regret the decision to dispose of their shares of those trusts and have the participants redeem the shares and take the gold and in that way, were able to make some of the deliveries that they otherwise weren’t going to be able to make.

GEOFF CANDY: It’s interesting hearing what you say. I think it was about in 2010 I was doing a radio show and I was speaking to Michael Power from Investec and we were talking about the emergence of China as a super power and their appetite for gold, and he said that gold tends to move where the wealth is and, the more I look at this market the truer that statement seems to sound.

ERIC SPROTT: Yes and as I mentioned, we only get one data point on China and that’s from Hong Kong into China. Let’s not be naïve about it, there’s lots of gold that would go from Geneva to Beijing or Singapore to Shanghai or New York and London to Beijing or Shanghai, and I think the number that China is importing is way beyond the number we see going through Hong Kong. In fact, I wouldn’t even be surprised if China is close to consuming 100% of all the non-Chinese, non-Russian gold, just a little under 100% which really means there’s no room for anybody else to buy any.

And, speaking of no room to buy, I find it hilarious that the Indian government would shut the door on gold purchases, and I’m sure they’re shutting the door on gold purchases because as you know in April and May there were just gigantic purchases in India, simply because you can’t have two groups of people having data out there which shows them buying more than 100% of the mine output that’s available because then everyone would ask the question, where’s the gold coming from that we’re not seeing reported? We don’t see these western central banks reporting that they’re delivering the gold, but somebody has to be delivering it because this is physical gold. It’s almost draconian what the Bank of India has done here in terms of various ways that are being implemented to stop the shipments into India, which of course is ridiculous because I think of India as the one country that has gained the most by the price of gold going up five times since 2000 and it’s going to put that country in way better shape than all other countries.

So, this very temporary stoppage of gold will end some day because the Indians are not going to go without their gold. I just think it’s a temporary thing to try to alleviate this shortage that’s obviously manifesting itself in the gold and silver market which you can see in the Comex and the majority, you can see the fact that all the dealer inventories in fact have dwindled and pretty well all of that has been spoken for. The fact that we had negative GOFO, that we’re getting the gold backwardation, all those are signs that things are getting very tough. And back to your original point… the reasons to own gold of course improve every day. We print, just think of how much more money we printed today than we printed in 2011. Its shockingly large and now you have the Japanese moving in with their $60bn or $70bn a month. So if people want to believe in zero interest rates and printing to eternity that’s fine, but a smart investor would take the long road and see well this is not going to work because it hasn’t worked: QE1, QE2 didn’t work. These are all stopgap measures to assist the banking business and governments in their profligate spending, so as you say the reasons for owning it have never been more prominent than they are now.

GEOFF CANDY: Where does this lead to then, the profligate spending and the printing of money, clearly if this doesn’t end well as you say, what does that mean for not only the gold market, but the financial markets more generally?

ERIC SPROTT: Sure, we know it’s not going to end well, that’s so obvious that this sort of thing can’t work and the way it will manifest itself as people looking in from the outside, the non-western central banks will all operate together and all of these countries that aren’t part of that group looking in, would say why would we possibly want to own something denominated in US dollars, specifically the Treasury Bond… and I think that’s why you’re rates go up here, I think that’s why you’re seeing dollar weakness right now and I suspect the tipoff to gold going higher will be dollar weakness as we realise the impossibility of the US to honour their obligations.

And, that is so cast in stone and so obvious, based on the US’s own data when they reported that they had a true gap accounting deficit in the 2012 year of something near $6tr in a $17tr economy and going higher every year, there is no way that they can honour the commitments. And I liken the US situation to the situation in Detroit where we knew 10 years ago they were bankrupt, and nine and eight and seven years ago and, finally, they declared bankruptcy but then they had to tell their pensioners that: ‘oh, by the way you can only get 25% of what we promised you’. Had they dealt with it 10 years ago, maybe that guy might have got 60% or 75% of his pension, but no one wants to deal with it. And the same is the case in the US, they’re not dealing with these funding obligations they have, they’re just ignoring them. But the obligations get bigger every year and the level of disappointment that will result someday will be mindboggling. When people on social security are told well you’re only going to get 50% of your pay cheque, what’s going to happen to the economy, particularly as we get more and more people who are entitled and so therefore you get a greater part of the population negatively affected. But it has to happen because there’s been no resolution of these contingent liabilities and entitlements that the US government has.

GEOFF CANDY: In terms of that and just before we get into the longer term effects, what did you make of the announcement last week by the Federal Reserve. Where you surprised they decided not to start tapering?

ERIC SPROTT: I personally was not surprised. I’d given interviews saying I just can’t see how they could possibly taper here, even just the talk of tapering doubled the 10 year yield and I think Mr Bernanke has lost control of the bond market. To actually taper when we have the kinds of goings on in financial markets that we do, where you have these non-western central banks and some western central banks selling US Treasuries because they’re trying to defend their own currencies and at the same time there’s huge bond redemptions by individuals and pension funds, and of course the US still continues to issue bonds, there’s just no way that the Federal Reserve could not stay in there and buy those bonds, because there’s an overwhelming supply of bonds. And here we have the most printing ever, particularly since Japan came in and, with all that printing, interest rates have doubled. So there’s no way they can stop printing, so I was not surprised by it. I thought they might try to fake it by saying, well we’re not going to taper now but we will taper in December. Well they didn’t even go that far, they kind of left the door totally wide open, it’s data dependent and to my mind the data is not going to force the hand of the Federal Reserve in terms of tapering because I think we’re going to see a very weak economy. I think we have a weak economy and just like last year – we started the year off thinking that 3,5% GDP and then as the year wears on, that number just keeps going down and I suspect we’re going to see the same thing and are experiencing the same thing this year.

GEOFF CANDY: Reading Martin Murenbeeld this morning from Dundee Wealth, he was saying that in many respects it wasn’t a surprise that they didn’t taper but it was concern because it becomes a credibility issue. That in many respects the Federal Reserve, and that’s going to make things more volatile in the future.

ERIC SPROTT: Sure. The Federal Reserve has lost a lot of credibility over time. First of all, the zero interest rate lacks credibility… who in their right mind would ever think that that was an appropriate interest rate. Who would have thought that printing money was appropriate, QE1, QE2, QE3 whatever, it’s totally ridiculous. If we all stand back and look at it from first principles here, we know that that’s a Ponzi scheme, that there’s going to be unintended consequences. Yes, it doesn’t show itself in the gold and silver market and yes, the stock market keeps going up, but sooner or later the unintended consequences will come into play here and I guess the biggest one will be the decline in the US dollar. If the US dollar starts going down, which is going down by the way, people owning those US Securities, not only are they getting no return, the yields are going up, they’re losing on capital and they’re losing on the currency, so there could be a moment here when there’s a revolt against US debt here and the dollar goes down and rates go up. So there’s no reason to believe anything that the Federal Reserve says, then they talked in 2009 about an exit policy – nothing’s ever happened there. They talked about tapering this year and nothing’s happened there. They have a bond market to deal with and it’s not going the way they wanted it and when Mr Bernanke was asked in the last Senate hearing what he thought about rates going up recently, he said, ‘well we’re puzzled by that’. And I thought, how can the chairman of the Federal Reserve be puzzled by interest rates going up? In other words, he didn’t really want to give the answer, and the answer is there are more sellers than buyers, and of course the sellers are selling for a reason.

They could see where this is all going here and I would, of course, encourage everyone not to own US bonds or bonds in any country for that matter, because they’re all doing the same thing and that’s why I was always and have been for the last 13 years, a strong proponent of owning gold and silver, because everyone is going to debase the currency. The best thing that’s ever happened to currencies is the other currency because they’re all going to be worthless, but every day we compare the dollar to the pound or the pound to the euro or the yen or something, the debts are unbelievable, the policies are ridiculous. What we really have to do is compare it to gold, and I happen to be of the belief that this declining gold price was engineered by the western central banks because of the physical shortage of gold, which seems very obvious to me. They want to keep faith in these FIAT currencies even though they know, those heads of the central banks know, that their policies are irresponsible. They know that, but they don’t want the market to know it so they keep pretending that everything is going to be fine and somehow there’ll be this take off or ignition, and there never is. So, we’ve left ourselves in a very difficult state – one of my partners here, Mark Faber probably put it right, we just raised the diving board higher from where the fall is going to take place and that would be probably a very good analogy of where we sit today.

GEOFF CANDY: Talking about Mark Faber, you are going to be running a round table discussion on September 24th with Mark, with Rick Rule as well, the founder of Global Companies, and with John Embry who is your chief investment strategist at Sprott, why did you decide to do that?

See also: Round table discussion on gold and silver: Sprott, Faber, Rule, Embry

ERIC SPROTT: Well one of the things that we believe in is if somebody has to stand in here for precious metals, and we’ve invested a lot of time and money and our clients’ money and our money in precious metals, I think we all see exactly what’s going on when I look back over the last decade, all of us recognised the situation as it was. Everything transpired as we expected, including the collapse of Lehman and the various events that the Federal Reserve would use to try to stop the natural flow of things that was occurring post the NASDAQ breakdown. We’ve gone 13 years with everyone trying to keep this thing from falling apart, but of course it gets more difficult every day which of course is typical that they wouldn’t, and they wouldn’t begin the tapering. So  we want people to be aware of what’s going on. We have forceful views, I think we have very logical views as to why you shouldn’t be in gold and silver, and we want to express that in the form. I’ve been told we already have 900 questions that have been asked by some of the participants, so we won’t get to answer them all, needless to say but there’s obvious…

GEOFF CANDY: I was going to say it’s going to be a long roundtable discussion…

ERIC SPROTT: Right, it might start on Tuesday and end on Thursday, but we hope to satisfy a lot of those questions that the listeners will want answered.

GEOFF CANDY: Not to steal your thunder necessarily but just to close off with how would you answer that question to somebody that’s looking in on this market, perhaps perplexed at what’s been going on. Where do we go from here, particularly for precious metals?

ERIC SPROTT: Well as I say I think there’s lots of manipulation that’s going on, we’ve seen it everywhere, okay. For people not to think this is manipulation of the gold and silver prices is almost ridiculous particularly when you see these adventures that go on in the market where things fall, huge amounts of money in minutes, some guys trying to sell $5bn worth of gold which of course he doesn’t even have the gold, or even worse, billions of dollars of silver that they don’t have, it’s so classically obvious of what’s going on and why it’s going on because we have a financial system that’s in turmoil and that’s why we keep stepping on up the bond purchases, every day. we had a quantum leap when Japan came in here as a buyer and yet rates are going higher, so there’s no doubt in my mind that the forces of physical demand which I think could exceed supply by a factor of two by the way, will win the day and I think it actually won the day and that’s what caused this sell down so they could get people to liquidate the GLD so they could get their hands on the gold so they could make some deliveries that they otherwise weren’t going to make. And that’s why they convinced the Bank of India to, under all circumstances, stop the Indians from buying gold, because there was no gold to be purchased. If the Indians had bought 125 tons of gold and the Chinese bought 110 tons of gold we’d all be scratching our heads. We only mine 185 tons a month, how can two countries buy 235 tons, where is it coming from… is the obvious question. Where is it coming from, this is physical gold and of course the answer would then be well it’s got to be coming from western central banks who are surreptitiously leasing gold into the market and causing the price to go down and they’re probably in a situation where there’s next to no gold left – I’ve written three articles on that – do they have any gold left. And I suspect that we started to get seriously into that position at the end of last year, particularly with Germany asking for their gold back, and then other events happening which have all shown a tightness in gold and that the takedown that was engineered to try to get people to either stop buying gold or liquidate their gold, and of course it backfired because India bought a huge amount, China bought a huge amount and they were going to lose that game and that’s why I think they finally… because the Bank of India is in the Cabal, they were convinced to do something even though when you and I look back at it, the smartest thing Indians ever did was to be buyers of gold for the last 13 years which went up by 400% when everything else wasn’t going up by 400%. So to come up with some policy that they shouldn’t buy gold just goes so against the grain of what’s logical and what’s good for the country. But I think they’re trying to solve a temporary problem – that will be a permanent problem by the way by temporarily suppressing imports. But that will end and gold will go its merry way and I’m sure we’ll see gold at a record high within the next year and we’ll see silver at a record high within the next year and we’ll all look back and say, well you know what, I guess it was manipulated down, and yes gold should have been in the gold market… and I guess all those fundamentals and all those guys talked about finally came to happen, which they have to happen sooner or later so people should stay calm and stay the course and its worked for 12 years now, and I think it will work for a 13th year… by the time we finish this year, gold will end up with a positive year…

GEOFF CANDY: If people are interested in listening, how do they get more information?

ERIC SPROTT: They just go to our website, www.sprott.com and they can sign up to participate in the webinar.

 

 
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