Eric Sprott Blog

Eric Sprott: Physical Demand for Gold and Silver is Draining Supplies

noreply@blogger.com (Ili) — Mon, 24 Jun 2013 20:25:00 +0000

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott: Physical is Going to Dominate the COMEX

noreply@blogger.com (Ili) — Fri, 14 Jun 2013 12:00:00 +0000

"I think the plan was, let’s knock the hell out of gold and let’s get people to cave on owning gold. The interesting thing was the exact opposite happened. There is not a data point on gold where we don’t see changes in demand by 100%, or even many hundreds of percent.

Whether it’s US Mint sales of gold in April, I think they went up by 1,000%, the Canadian Mint sales are up 128%, we see Chinese data where I think the number was up 300%. I think the World Gold Council said that India would import at least 100% more than they did last year (during the same period) in the second quarter.

So we see all of these numbers are in hundreds of percent change, whereas the supply of gold from the mining side will probably be down. The supply of recycled gold will be down significantly with the price having come off here. So I think that this raid totally backfired, and unleashed a torrent of buying.

And ultimately the physical is going to dominate the COMEX price as determined by a bunch of guys trading paper ... I would encourage everyone to, one, hold tight, two, if they can, increase their position.” - Eric Sprott via a recent King World News interview

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott: Huge Decline in GLD

noreply@blogger.com (Ili) — Thu, 13 Jun 2013 11:48:00 +0000

"We've seen this huge decline in GLD because it’s actually the last bastion of supply to satisfy this demand. So I don’t regard the GLD losing gold as a sign of weakness whatsoever. It’s not institutional investors getting out of GLD. It’s the (gold from) GLD being shipped over to the East and someone spinning it as a weakness, and I totally disagree with their conclusion. In fact I think it’s quite a sign of strength. I would like all of the gold out of the GLD to disappear and let’s see what happens after that.” - Eric Sprott via a recent King World News interview

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott: A Rude Awakening In Metals

noreply@blogger.com (Ili) — Tue, 14 May 2013 19:27:00 +0000

Eric Sprott; “Gold And Silver, The Greatest Sale In History”

noreply@blogger.com (Ili) — Thu, 18 Apr 2013 13:30:00 +0000

“I’ve always imagined that gold would hit a new high by the end of this year, over $1,900, so that is what I think,” Mr. Sprott said in an interview on Tuesday.

Mr. Sprott believes the yellow metal is safer than paper money, which can be printed by governments. He backs that up with his own investments, saying a few months ago that he has about 80 per cent of his money in the precious metals sector.

“I think [gold] will end up for the year, just like in 2008 ... because in a financial crisis, you don’t want your money in a bank,” he said.

He compared the current pullback to 2008, when the price of gold fell 30 per cent in eight months amid the financial crisis to $712 an ounce, only to rally to $873 by the end of the year and more than $1,900 by September 2011.

Mr. Sprott expressed his resolve for gold a day after prices nosedived nearly 10 per cent.

Mr. Sprott asked his investors to stay the course on a conference call Tuesday, and even encouraged the purchase of more physical gold and silver as global investors flee from risky assets and commodity prices tumble.

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott's April Commentary: Caveat Depositor

noreply@blogger.com (Ili) — Fri, 05 Apr 2013 18:37:00 +0000

Eric Sprott of Sprott Asset Management is out with his April commentary entitled, "Caveat Depositor." In it, he delves into the Cyprus situation and the macro effects moving forward.

Caveat Depositor

by Eric Sprott & Shree Kargutkar, Sprott Asset Management

“If there is a risk in a bank, our first question should be: ‘Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: ‘What can you do in order to save your own banks?’” – Jeroen Dijsselbloem, March 26, 2013 1

A deal has just been struck with Cyprus. However, it was not the deal that Cyprus saw other countries receive. This was not the deal received by Greece, Italy and Spain. There were no bailed out banks in the aftermath. There was no transfer of risk from over-levered banks to the taxpayers. The risk was pushed back onto the banks. Their equity was wiped out. Their bondholders were wiped out. Their uninsured depositors saw their accounts raided for additional liquidity. It wasn’t just that the rules of the game had changed, the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed. Going forward, this is expected to be the “template” for dealing with risky, over-levered banks and the countries which support them.

For the first time since the crisis began, we are faced with a new paradigm, or a “template”, for how a major central bank will address weakness in the financial sector. While the old template involved “bailing out” through transfer of risk from the corporate sector to the taxpayer, the new template calls for “bailing in”, whereby the risk is contained within the affected institution at the expense of equity holders, bond holders and finally the depositor.

How does the new template affect you?

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads:

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.

2 Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads: “The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”

3 Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.

4 Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.

We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. For the layperson, a typical bank’s assets are primarily composed of the loans they have originated while the liabilities are primarily composed of deposits they have accepted. With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies.

Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. The depositor is a lender to the financial institution that he banks with. However, most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. We have been vocal about our concerns over the state of the global financial system for the better part of the decade. The Greek tragedy is now being played out in Cyprus with a new twist as depositors have been unwillingly turned into sacrificial lambs. Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account. It is not our intention to be alarmist here, merely to say, “caveat depositor”. "

Footnotes: 1 Import Export Stats – US Census Foreign trade: http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem- interviewtranscript/ 2 http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf 3 http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf 4 http://www.centralbanking.com/central-banking/official-record/2257939/rbnzarticle- says-open-bank-resolution-helps-keep-banks-in-line

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott: Real 2012 US Deficit $6.9 Trillion

noreply@blogger.com (Ili) — Fri, 15 Mar 2013 16:16:00 +0000

Eric Sprott: Canada has no Gold

noreply@blogger.com (Ili) — Fri, 15 Mar 2013 16:12:00 +0000

Eric Sprott: Is the West Dishoarding Its Sovereign Treasure

noreply@blogger.com (Ili) — Sat, 02 Mar 2013 11:50:00 +0000

Sprott: Is the West Dishoarding Its Sovereign Treasure?

noreply@blogger.com (Ili) — Thu, 28 Feb 2013 15:55:00 +0000

Eric Sprott Precious Metals Round Table

noreply@blogger.com (Ili) — Sun, 17 Feb 2013 15:52:00 +0000

Eric Sprott Expect from Gold this Year

noreply@blogger.com (Ili) — Tue, 05 Feb 2013 15:50:00 +0000

Eric Sprott On Ignoring The Obvious

noreply@blogger.com (Ili) — Sat, 26 Jan 2013 18:18:00 +0000

Ignoring The Obvious
Not a day goes by without hearing about the fiscal cliff, the debt ceiling or another political deadlock. We would not disagree that some of these are important issues that need resolving but, in the grand scheme of things, they are relatively superficial.

As we all know, central banks around the world have been frantically expanding their balance sheets. While exceptional times might warrant exceptional measures, Figure 1 below paints a rather troubling picture. The monetary base, the amount of money in circulation in the economy, has expanded at an incredible pace. Since the mid-80s, the U.S. monetary base had been very stable at around 5-6% of GDP. Through fractional reserve banking, this amount was sufficient to maintain annual inflation around 2-3%. With the banking system collapsing in 2008-2009, it was necessary for the Fed to increase the monetary base. However, banks are now in much better shape than they were in that period and the benefits of monetary expansion seem to be waning.

The Fed is not the solution to every economic and social woe and trying to hide real problems (eg. structurally high unemployment and rampant poverty, unsustainable income inequality and exploding government liabilities) with money printing achieves nothing constructive.

FIGURE 1: U.S. MONETARY BASE AS A % OF GDP

Source: Federal Reserve Bank of St. Louis, U.S. Department of Commerce: Bureau of Economic Analysis

Employment
First, while we are supposed to be in the midst of an economic recovery, about one in five Americans are on food stamps (Figure 2). As the chart below shows, this measure of poverty has been fairly steady for the past year. We also find it hard to reconcile this data point with the headline unemployment numbers, which seem to be improving. We prefer a more comprehensive measure of unemployment, commonly referred to as U6, which includes discouraged workers and those working part time against their will. By this measure, we see that “Total Unemployment” has come down, but remains extremely elevated at around 14% of the labour force. Moreover, food stamps and “Total Unemployment” tend to move together. If food stamps users stabilize at current highs, we believe that it is a sign that the natural unemployment rate in the U.S. economy is now significantly higher than it was pre-crisis.

FIGURE 2: EMPLOYMENT IS NOT AS GOOD AS IT SEEMS

Source: U.S. Department of Labor: Bureau of Labor Statistics

Income Inequality
Second, income inequality has been growing steadily since the mid-1980s. Figure 3 shows the share of total U.S. income earned by the middle class and the top 5% of households. As of 2011, the top 5% of households brought home over 22% of all income generated in the country, whereas the middle 20% of households (quite literally the middle class) got less than 15%. Coupled with the unemployment picture, this shows that a majority of the U.S. population has been losing ground to the most wealthy. In a society that relies on consumption for 70% of its economic activity, this certainly does not bode well for the future, since the wealthiest traditionally do not consume much of their income. To top it off, the recent “fiscal cliff deal” just reduced disposable income further by increasing payroll taxes by 2% for all those working, putting additional strain on the working class and their discretionary spending dollars. (See Figure 3).

FIGURE 3: SHARE OF AGGREGATE INCOME RECEIVED BY HOUSEHOLDS

Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements

Government Obligations
Another obvious problem is the liabilities of the Federal Government. The current cash reporting basis that the Department of the Treasury uses, vastly understates its deficit and future liabilities. Some estimates put the current unfunded liabilities of the Federal Government at about $222 Trillion and show an increase in the deficit from 2010 to 2011 of around $11 Trillion, which represents about 70% of the U.S. total GDP.1

Simple back of the envelope calculations can be made using the Treasury’s “Financial Report of the United States Government – 2012”, which comprises a detailed breakdown of its future financial obligations for health care, social security and other government services.2 This reporting is similar to what every corporation is mandated to calculate for the purposes of U.S. GAAP reporting.

Of course, accounting can always be “massaged” to improve one’s situation. This problem is most acute when there are many assumptions, like for pension and benefits accounting (a.k.a. social security and Medicaid/Medicare). ShadowStats makes the necessary adjustments and finds that for 2012 alone, the deficit amounts to $6.9 Trillion.3 This represents about 45% of annual GDP. While laudable, the current haggling by policy makers for a meager $2 Trillion in deficit reduction over 10 years represents only the tip of the iceberg.

A significant part of these deficits is caused by current and future health care spending. The Deloitte Center for Health Solutions recently published a report entitled “The hidden costs of U.S. health care: Consumer discretionary health care spending”, in which they analyze the many components of health care spending and how those expenses are underreported in official numbers. Figure 4 shows their estimates for total health care spending by age group for 2010.

FIGURE 4: TOTAL HEALTH CARE COSTS BY AGE - 2010, $ BN

Source: The hidden costs of U.S. health care:
Consumer discretionary health care spending, Deloitte

FIGURE 5: U.S. POPULATION 65+ YEARS

Source: US Census Bureau 2012 National Population Projections

What is striking - but not that surprising - is the very large increase in health care costs faced by seniors. The report cites that “Seniors and Baby Boomers account for 64 percent of health care costs, but comprise only 40 percent of the U.S. population.” For seniors, total health care costs represent, on average, approximately $30,000 per person per year. Other estimates by Carnegie Mellon University professor Paul Fischbeck (although a bit dated) show that these annual costs increase dramatically as people age, reaching as much as $45,000 for 80+ year olds.4 Considering that GDP per capita was about $46,800 in 2010 and the income inequality mentioned earlier, these are figures that would put most households in dire straits.

Also, structural trends will lead to an ever greater share of the nation’s income being dedicated to health care. Figure 5 above shows the evolution of the U.S. population for the 65+ age group, as forecasted by the U.S. Census Bureau. The U.S. will end up with a steadily increasing segment of its population (from 13% in 2010 to 20% in 2030) composed of persons aged 65 and over. This matters for two important reasons. First, this means a smaller workforce contributing to GDP growth and paying taxes to support government programs. Second, and this is related to the first point, this trend will put tremendous pressure on social security and health care spending in the country, thus leading to structurally higher deficits.

These facts are by themselves troubling, but coupled with the population trends described in Figure 5, they become alarming. To illustrate the impact of overall population aging on total health care costs, we use the per capita numbers implied by the Deloitte study and apply them to the U.S. Census Bureau projections for all age groups. While we believe that those numbers fundamentally underrepresent health care inflation, we inflate per capita costs for each age group using the average “medical care” component of the U.S. Department of Labor Consumer Price Index. Finally we assume a 4% nominal GDP growth, which some might argue is overly optimistic when taking into account the smaller workforce we discussed earlier. In any case, Figure 6 shows the results of our simulation.

Only with the change in the composition of the U.S. population, total health care costs are forecasted to go from 22% of GDP in 2010 to over 30% in 2040. These are huge numbers! To put them in perspective, in 2011 total U.S. GDP was $14,500 Billion, so an increase from 22% to 30% of GDP would represent a $1.2 Trillion increase in health care spending in that year. If we increase the health care inflation rate by only 100bps, we calculate that by 2040, the share of GDP attributed to health care will jump to 40%.

FIGURE 6: HEALTH CARE SPENDING AS A % OF GDP

Source: US Census Bureau 2012 National Population Projections,U.S. Department of Commerce: Bureau of Economic Analysis, U.S. Department of Labor: Bureau of Labor Statistics & The hidden costs of U.S. health care: Consumer discretionary health care spending, Deloitte

According to the Deloitte study, about 60% of those costs are borne directly by households and the remaining 40% by the public sector (30% to Medicare and Medicaid). This means that households, of which the majority is either poor or in the declining middle class, will face an even larger squeeze in their discretionary spending.

Conclusion
To conclude, 20% of the population is on food stamps, an ever increasing gap between the wealthy and the rest and ever-increasing health care spending are all deep rooted and immensely important problems that get a ridiculous fraction of the attention that they deserve. The impact of these issues on both government finances and future economic growth are enormous.

As we discussed, the purpose of asset purchases by the Fed might no longer be improvements in the real economy, but rather a more subtle financing of U.S. government deficits. However, in the long run, expanding the money supply inevitably leads to inflationary pressures. Luckily for the Fed and the U.S. government, there is so much slack in the labour market that inflation might be years away. And, if we are right about the long run unemployment rate being structurally higher, then the Fed has all the room it needs to continue Quantitative Easing (QE) to infinity. This might allow them to continue to hide the true financial position of the government for many years to come.

Nonetheless, the rising GAAP deficit and the sheer size of the U.S. Federal Government’s liabilities to its citizens makes it clear that one day or another, services (health care, social security) will have to be cut. Financial alchemy can hide reality, but it does not provide any tangible services.

Europe’s (unresolved) experience with its debt crisis provides an insightful window into the future. Austerity measures in Ireland, Portugal, Spain and Greece have caused tremendous pain to their citizens (25% unemployment rates) and wreaked havoc in their economies (double digit retail sales declines).

Source: Zerohedge

Eric Sprott Video: Silver to Outshine Gold as the Investment of This Decade

noreply@blogger.com (Ili) — Tue, 22 Jan 2013 13:09:00 +0000

Eric Sprott: People are Losing Faith in the Financial System

noreply@blogger.com (Ili) — Sun, 30 Dec 2012 10:22:00 +0000

Eric Sprott: Silver to Outshine Gold as the Investment of this Decade

noreply@blogger.com (Ili) — Sat, 15 Dec 2012 11:51:00 +0000

Eric Sprott on Gold as a Solution to the Banking Crisis

noreply@blogger.com (Ili) — Fri, 07 Dec 2012 14:57:00 +0000

The Basel Committee on Banking Supervision is an exclusive and somewhat mysterious entity that issues banking guidelines for the world’s largest financial institutions. It is part of the Bank of International Settlements (BIS) and is often referred to as the Central Banks’ central bank. Ever since the financial meltdown four years ago, the Basel Committee has been hard at work devising new international regulatory rules designed to minimize the potential for another large-scale financial meltdown. The Committee’s latest ‘framework’, as they call it, is referred to as “Basel III”, and involves tougher capital rules that will force all banks to more than triple the amount of core capital they hold from 2% to 7% in order to avoid future taxpayer bailouts. It doesn’t sound like much of an increase, and according to the Basel group’s own survey, the 100 largest global banks will only require approximately €370 billion in additional reserves to comply with the new regulations by 2019.1 Given that the Spanish banks alone are believed to need well over €100 billion today simply to keep their capital ratios in check, it is hard to believe €370 billion will be enough protect the world’s “too-big-to-fail” banks from future crises, but it is indeed a step in the right direction.

Read the full article on: http://www.sprottasset.com/markets-at-a-glance/gold-solution-to-the-banking-crisis/

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Ellis Martin Report with Sprott Money’s CEO Eric Sprott

noreply@blogger.com (Ili) — Wed, 28 Nov 2012 22:10:00 +0000

Eric Sprott Video: There is a Shortage of Gold

noreply@blogger.com (Ili) — Fri, 23 Nov 2012 13:18:00 +0000

Eric Sprott views on gold's recent upward move

noreply@blogger.com (Ili) — Wed, 14 Nov 2012 18:41:00 +0000

Eric Sprott: A Huge Tailwind for Gold

noreply@blogger.com (Ili) — Tue, 06 Nov 2012 15:23:00 +0000

"I never would've imagined when I got involved in gold that I would have the benefit of kind of irresponsible money printing, bank runs that are ongoing as we witnessed in the various countries in Europe, and those two ingredients along with the QE3 which has been announced I think will be a huge tailwind for gold and other precious metals to go higher." - Eric Sprott via a recent CNBC interview

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott: Silver is the Investment of this Decade

noreply@blogger.com (Ili) — Wed, 31 Oct 2012 12:39:00 +0000

Eric Sprott: Austerity and Monetary Easing

noreply@blogger.com (Ili) — Fri, 26 Oct 2012 12:07:00 +0000

Eric Sprott Video: "Who Is Not Getting The Silver?"

noreply@blogger.com (Ili) — Sat, 06 Oct 2012 21:47:00 +0000

Eric Sprott is a Canadian hedge fund manager Sand founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.

Eric Sprott & David Baker - Do Western Central Banks Have Any Gold Left?

noreply@blogger.com (Ili) — Wed, 03 Oct 2012 11:50:00 +0000

From Eric Sprott and David Baker of Sprott Asset Management:

"Do Western Central Banks Have Any Gold Left???

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim. The gold bars are part of their respective foreign currency reserves, which include all the usual fiat currencies like the dollar, the pound, the yen and the euro.

Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it’s stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it’s all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.

Twelve years ago, few would have cared what central banks did with their gold. Gold had suffered a twenty year bear cycle and didn’t engender much excitement at $255 per ounce. It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s. The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’ kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned.

You may be interested to know that central bank gold sales were actually the crux of the original investment thesis that first got us interested in the gold space back in 2000. We were introduced to it through the work of Frank Veneroso, who published an outstanding report on the gold market in 1998 aptly titled, “The 1998 Gold Book Annual”. In it, Mr. Veneroso inferred that central bank gold sales had artificially suppressed the full extent of gold demand to the tune of approximately 1,600 tonnes per year (in an approximately 4,000 tonne market of annual supply). Of the 35,000 tonnes that the central banks were officially stated to own at the time, Mr. Veneroso estimated that they were already down to 18,000 tonnes of actual physical. Once the central banks ran out of gold to sell, he surmised, the gold market would be poised for a powerful bull market… and he turned out to be completely right – although central banks did continue to be net sellers of gold for many years to come.

As the gold bull market developed throughout the 2000’s, central banks didn’t become net buyers of physical gold until 2009, which coincided with gold’s final break-out above US$1,000 per ounce. The entirety of this buying was performed by central banks in the non-Western world, however, by countries like Russia, Turkey, Kazakhstan, Ukraine and the Philippines… and they have continued buying gold ever since. According to Thomson Reuters GFMS, a precious metals research agency, non-Western central banks purchased 457 tonnes of gold in 2011, and are expected to purchase another 493 tonnes of gold this year as they expand their reserves.1 Our estimates suggest they will likely purchase even more than that.2 The Western central banks, meanwhile, have essentially remained silent on the topic of gold, and have not publicly disclosed any sales or purchases of gold at all over the past three years. Although there is a “Central Bank Gold Agreement” currently in place that covers the gold sales of the Eurosystem central banks, Sweden and Switzerland, there has been no mention of gold sales by the very entities that are purported to own the largest stockpiles of the precious metal.3 The silence is telling.

Over the past several years, we’ve collected data on physical demand for gold as it has developed over time. The consistent annual growth in demand for physical gold bullion has increasingly puzzled us with regard to supply. Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn’t been any large, publicly-disclosed seller of physical gold in the market for almost two years.4Given the significant increase in physical demand that we’ve seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere.

To give you a sense of how much the demand for physical gold has increased over the past decade, we’ve listed a select number of physical gold buyers and calculated their net change in annual demand in tonnes from 2000 to 2012 (see Chart A)."

CHART A

Numbers quoted in metric tonnes.
† Source: CBGA1, CBGA2, CBGA3, International Monetary Fund Statistics, Sprott Estimates.
†† Source: Royal Canadian Mint and United States Mint.
††† Includes closed-end funds such as Sprott Physical Gold Trust and Central Fund of Canada.
^ Source: World Gold Council, Sprott Estimates.
^^ Source: World Gold Council, Sprott Estimates.
^^^ Refers to annualized increase over the past eight years.

"As can be seen, the mere combination of only five separate sources of demand results in a 2,268 tonne net change in physical demand for gold over the past twelve years – meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago. According to the CPM Group, one of the main purveyors of gold statistics, the total annual gold supply is estimated to be roughly 3,700 tonnes of gold this year. Of that, the World Gold Council estimates that only 2,687 tonnes are expected to come from actual mine production, while the rest is attributed to recycled scrap gold, mainly from old jewelry.5 (See footnote 5). The reporting agencies have a tendency to insist that total physical demand perfectly matches physical supply every year, and use the “Net Private Investment” as a plug to shore up the difference between the demand they attribute to industry, jewelry and ‘official transactions’ by central banks versus their annual supply estimate (which is relatively verifiable). Their “Net Private Investment” figures are implied, however, and do not measure the actual investment demand purchases that take place every year. If more accurate data was ever incorporated into their market summary for demand, it would reveal a huge discrepancy, with the demand side vastly exceeding their estimation of annual supply. In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer.

Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold, not ETF’s or gold ‘certificates’. They require real, physical gold bars to be delivered to the buyer. So once we acknowledge how big the discrepancy is between the actual true level of physical gold demand versus the annual “supply”, the obvious questions present themselves: who are the sellers delivering the gold to match the enormous increase in physical demand? What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from?

There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked. They are also the very entities whose actions have driven investors back into gold in the first place. Gold is, after all, a hedge against their collective irresponsibility – and they have showcased their capacity in that regard quite enthusiastically over the past decade, especially since 2008.

If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.”6 (Emphasis theirs). Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else. The fact that they do not differentiate between the two is astounding, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back."

CHART B

Sources:
1) http://www.bankofengland.co.uk/statistics/Documents/reserves/2012/Aug/tempoutput.pdf
2) http://www.treasury.gov/resource-center/data-chart-center/IR-Position/Pages/08312012.aspx
3) http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html
4) http://www.boj.or.jp/en/about/account/zai1205a.pdf
5) http://www.imf.org/external/np/exr/facts/gold.htm
6) http://www.snb.ch/en/mmr/reference/annrep_2011_komplett/source

Notes:
ECB Data as of July 2012. Bank of Japan data as of March 31, 2012.

* European Central Bank reserves is composed of reserves held by the ECB, Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
** Bank of Japan only lists its gold reserves in Yen at book value.

"Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.

Notwithstanding the recent conversions of PIMCO’s Bill Gross, Bridegwater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. As a general rule of common sense, when one embarks on an unlimited quantitative easing program targeted at the employment rate (see QE3), one had better make sure to have something in the vault as backup in case the ‘unlimited’ part actually ends up really meaning unlimited. We hope that it does not, for the sake of our monetary system, but given our analysis of the physical gold market, we’ll stick with our gold bars and take comfort as they collect more dust in our vaults, untouched."

1 http://www.bloomberg.com/news/2012-09-04/central-bank-gold-buying-seen-reaching-493-tons-in-2012-by-gfms.html
2 See notes in Chart A.
3 http://www.gold.org/government_affairs/reserve_asset_management/central_bank_gold_agreements/
4 http://www.imf.org/external/np/exr/faq/goldfaqs.htm
5 Mine supply estimate supplied by World Gold Council; YTD gold mine production data suggests that total 2012 gold mine supply will come in lower around 2,300 tonnes, ex Russia and China production. In addition, Frank Veneroso has recently published a new report that warns that the supply of recycled scrap gold could drop significantly going forward due to the depletion ofthe inventories of industrial scrap and long held jewelry over the past decade.
6 http://www.ecb.int/pub/pdf/other/statintreservesen.pdf