Eric Sprott: I Think We Are In For A Shortage Of Physical Gold
December 24, 2012
Eric Sprott, Chief Executive Officer; Chief Investment Officer; Senior Portfolio Manager
Billionaire 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.
Patrick MontesDeOca [PM]: In an interview we did last year, we touched upon Venezuela’s President Hugo Chavez’s request to repatriate Venezuela’s gold on deposit from British banks. You commented in King World News recently that we’re beginning to see the same requests coming from the more advanced economies such as Germany, Austria and the Netherlands; and now, according to The Financial Times, Latin American central banks are buying gold. They are estimating they will buy 500 tonnes, if not more. For the benefit of our audience, can you expand on what it could mean in terms of supply and where the price could be headed, if we see more countries making the same requests.
Eric Sprott [ES]: Patrick, all the compliments of the season to you and your listeners. Thank you for trying to get your audience on the right path of surviving the financial crisis we have been in for a long time now which never seems to want to end, and I might suggest, will always be. I also think it’s going to end badly because I don’t think the world will countenance printing money ad nauseum, which has been going on in the Western Central Bank
But to answer your question, I’ve written articles answering your question; do the Western central banks have any gold left, because as you’ve pointed out, we have seen that non Western central banks have been the most aggressive people in terms of buying gold, and I’m referring to Russia, China, Mexico, S Korea, Latin American banks. If they are doing it, one of the countries, was it Peru that bought gold recently? I always try to put myself, if I was looking in on what the Western central banks are doing, and I’m referring to the Bank of Japan, the Bank of England, The European Central Bank [ECB] and the Fed, and you’re looking at what is happening and presuming that you are not a money printer, I think you would be thinking there is only one result that can happen from this money printing, and that is the value of the currency will go down.
I think that is why you are seeing the type of activity we have where I’m pretty sure the number will be at least 500 tonnes of Central Bank buying, and interestingly that contrasts with, they used to sell 400 tonnes a year, which is a 900 tonne change in what central banks are doing per year in a 4,000 ton market. Who is not buying the gold that’s been buying it all along, because the supply has never increased in the past 12 years, and I’ve argued that there’s at least a 2,400 tonne shortage a year of physical gold and that the Western central banks have to be supplying that gold, because the physical things you can count, the paper stuff who knows what is going on in the paper markets?
When you look at the new entrance or the changes in things like how many coins the mint now sells in 2012 versus 2000, the fact that we didn’t even have ETFs in 2000, and now I’ve got ETFs today, and how much more gold they’re buying and how much more gold India’s buying and China’s buying, and there are all sorts of data points that just tell you with no increase in supply, how are all these people getting all their gold?
As you pointed out now Germany, the Netherlands, and Austria are all saying, ‘Well, where’s our gold?’, and they all find out that the gold is not in the country and it is supposedly at the Bank of England, and even the Austrian central bank is saying, ‘We are making income on that gold.’ Of course there is only one way to make income on gold and that is if it is leased out, and leasing out means you sold the physical gold to a bullion dealer and that bullion dealer sold it to someone else, and that someone else is not someone who is likely to give it back, It’s not going to come back.
I found it rather amusing that Germany, which supposedly has over 2,000 tons in New York and London, said we’ll get 50 tonnes a year back for 3 years. That is the most muted response to an issue that you can ever imagine. I think if they said we want 500 tons back it would set the cat among the pigeons here, because I really do question how much gold the Western central banks have.
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