In this exclusive interview, Eric Sprott answers questions from our followers regarding the impact of geopolitical events, supply and demand data, manipulation, and the silver fix on precious metals prices.
*Recorded July 25, 2014
Sprott Money News (SMN): Hello, and welcome back to Ask the Expert here on Sprott Money News. Iím your host, Geoff Rutherford, and on the line with me today we have our Chairman, Mr. Eric Sprott. Of course, many of you know who Eric is. He speaks to us each week here on the Weekly Wrap Up.
Eric Sprott is the Chairman of Sprott Money Ltd. as well as Sprott, Inc. With more than 40 years of experience in the investment industry, Eric has earned a recognized standing not only as one of the worldís premier gold and silver investors but also as an expert in the precious metal industry. And at that, weíd like to welcome Mr. Eric Sprott. Good morning, Eric.
Eric Sprott: Hey, Geoff, good to be here.
SMN: Thank you for joining us. So, Eric, again we have a number of questions here from our listeners. Letís take a look at one of them first of all here. Itís widely understood about precious metals that it performs well when there is economic or global upheaval. With multiple crises going on simultaneously such as the Russia-USA-Ukraine situation, as well as the Israel-Palestine conflict, do you see precious metals rising very soon?
Eric Sprott: Well, Geoff, thereís no doubt that with all the tension in the world the average person would have a higher inclination to wanting a physical asset. And anyone in the Middle East or in Europe could see that this tension can spread from one place to another. None of these situations have been resolved. Theyíre ongoing. Theyíre kind of flaring up. We even have the Ukraine prime minister resigning yesterday, and it looks like their parliament might dissolve.
So thereís lots of reasons for people to consider owning precious metals. We also have a situation in Asia where thereís lots of tension between China and Vietnam, China and Japan, even China and the US, which could be explosive. Iíve never been one to use that as a factor for necessarily owning gold, although it is one, but itís not my primary reason to suggest that people should own precious metals.
My primary reason is just simply an excess of demand over supply. Obviously, I believe that the paper markets where they have unlimited supply of paper gold have restrained prices, and ultimately weíre going to win that war. Iíve written many articles about the central banks possibly having no gold left, and I think thereís very, very much evidence of that.
Of course, the people at GATA have done a great job of explaining that. We see some very odd data that the UK is a huge exporter of gold. Well, they donít produce any gold. The US exports more gold than they produce, and youíve got to wonder where is this gold coming from. If you donít produce it, where is it coming from? Of course, the assumption I would make is itís coming from the central banks, and theyíre totally non-transparent about their transactions. In fact, there is way more demand than supply, and sooner or later this will play out in the markets.
SMN: Thereís been a lot of speculation as to where the manipulation of precious metals are coming from. Do you still believe it is the Fed manipulating these markets, or could it be the Chinese?
Eric Sprott: Well, first of all, I think the central banks are a part of it. Thereís no doubt about that. Thereís a great book written by Dimitri Speck called ĎThe Gold Cartel.í And he indicated that gold manipulation started on August 5th, 1993, basically led by central banks for the purpose of maintaining credibility of their currencies. They had this theory that if they keep gold down no one will be concerned about owning fiat money.
But I think laterally itís the manipulation has obviously been amongst the commercial banks. I think they figured out that with their very deep pockets that they can kind of overrun the natural buyers of paper gold and force the price to do what they wanted. And Iíve discussed many times I think they play this game in the options market where they cause their customers who are long options to lose the premiums constantly, and every option expiry the price of gold goes down. So I think itís transferred itself over to the commercial banks.
Luckily, we have a number of investigations going on whether itís in Britain, or Germany, not so much the US. But thereís lots of investigations into manipulation of the gold market.
So today I think itís a combination of both the central banks and the commercial banks perhaps working in cahoots. Because letís face it, the central banks by their zero interest rate policy and printing of money have kept the banking industry in a profitable position much to the detriment, of course, of the public and savers, because you canít get any return on your money any more.
Eric Sprott: But the intent of everything was to make sure the banks were profitable, because post-Lehman effectively they were all broke and they needed to open up the spread so they could make their interest margin and have their bond portfolios go up. So they had to work hand in hand, and I would not be surprised to believe that in the gold and silver markets they worked hand in hand as well.
SMN: Right. Now, letís also take a look here. Alternatively, source data shows that there is a significant worldwide demand that exists for physical precious metals. However, COMEX deliveries in the past year paint a different picture. Why is there such a huge discrepancy between what COMEX deliveries are telling us and what non-mainstream data sources are telling us?
Eric Sprott: Sure. Well, you know, itís interesting. I mean I look at the COMEX data every day, and when I look at the position of the inventories of the commercial dealers it had stayed the same for so long, day after day after day. I think the number is 23.117 tons. It never, never changes.
Eric Sprott: I mean itís just impossible that that could be the case, so I might argue that the COMEX data is tainted, that theyíll just say whatever they want to say.
In fact, I find it very interesting that there was a lawsuit just filed against the CME and one of their principals for facilitating high-frequency trading in the CME Ė Chicago Mercantile Exchange, and giving priority to certain high frequency traders. The suit was just filed, I think, yesterday, Thursday, or maybe on Wednesday. Itís probably available to the public. I havenít specifically looked at it yet.
I just think that the COMEX data is corrupted. Itís very hard to make any sense of it all. The fact that thereís no deliveries from the dealers is incredible. Youíd think thereíd be some change in the inventory. I donít care whether itís up or down, but at least youíd think thereíd be some change.
Eric Sprott: How can we trade, like, two and three hundred million ounces a year, which is, sorry, a day, which is 25% to 30% of the worldís production on a yearly basis. We trade it every day, yet thereís never a change in the dealer inventory? Itís just beyond belief, and therefore I tend not to believe in the COMEX data.
SMN: Kind of sticking with the idea of the CME, letís take a look, Eric. They recently announced that the CME will be taking over the daily silver fix in August. So can you explain why we need a silver fix in the first place, Eric. There isnít a separate fixing body for other commodities. Is a silver one essential? How do you see this affecting your predictions on the price of silver?
Eric Sprott: I donít really think you need a fix, quite frankly. Most of these markets are 24-hour markets. I mean somebody might argue that you need it for pricing at a specific time for some contracts that are out there, but I suppose one could just say, ďWell hereís where silver was trading, letís say 10:00 a.m. London time this day, and make that the price for contracts to settle.Ē
But, there seems to be no doubt that the LBMA fix was fixed, and of course weíve seen examples of manipulation where Barclayís was fined, I think it was 40-odd million dollars, for manipulating the price back in 2013. As Iíve said before, you see these weird trades on COMEX when options expire. I mean itís a game that the boys with the money can play and move things around.
I wish they wouldíve disbanded the fix, well, they have disbanded the fix, particularly when it manifested itself, because they had five traders sitting on the phone for five minutes deciding where things would go, and of course, in the meantime they are placing orders to make their books look more attractive to them and/or participating in the market before the fix was made.
So thereís no doubt that itís outdated. It shouldnít be used and will not be used, but the fact that weíve got the CME back in there is somewhat distressing to most of us precious metals holders who want to deal on the physical market.
SMN: Right. Now, again, kind of sticking with the idea of the silver fix now. With the silver fix changing and talks of implementing the reforms to the gold fix and transitioning to an electronic platform, what effects do you see occurring, and will it affect price movements?
Eric Sprott: Well, thatís something we donít know, because who knows whatís really happening in any fix. I mean some group of people have to come together and say this is the fix. You know, If they have a predisposition towards the price wanting to be one way or another, I mean, one of those three members can affect that price.
So I just think we have a nice 24/7 market. We donít need a fixing price. I wish that people who have, in my mind, have proven that theyíre not reliable in terms of data and the proper markets and their regulation of those markets are now part of this process. So Iím not going to be big on fix. I really donít think itís going to make any difference.
I think the thing thatíll make a difference in the precious metals market is a regulator who wants to step up and challenge these traders. Iím more thinking of the regulator in Germany, whoís asked for trade information from the various banks that are involved in trading gold in Germany, will come out with some kind of resolution that in fact the banks were moving the prices so their option books would make them more money than otherwise would be the case.
Thatís the sort of thing that I think would kind of upset the apple cart in the paper markets. Either that, or we just find out that thereís some physical shortage, whether itís Chinese or Indian, where somebody goes to buy gold and finds out that in reality, based on our own analysis, that the central banks are running on empty here, and sooner or later just the whole thing skyrockets and people lose confidence in currencies and economic recoveries. I mean thereís so much data that itís impossible to have a recovery.
Of course, one of the reasons you keep going to economics is that thereís no recovery. The effect on the banking business is very bad, because people and corporations canít repay debt.
Eric Sprott: Thatís why I keep talking about the economy, because if thereís no ability to pay back debt then these very, very leveraged banks suffer catastrophic losses, because it takes so little decline in asset value the way that theyíre capital. Weíve already seen a number of instances Ė we have the one in Portugal, I think we had one in Bulgaria, and thereís talk of some banks in Austria being in trouble Ė because of all the economic weakness that prevails pretty well throughout the world here.
So thatís why I keep looking at economics to affect the banking industry. Then people realize that you get nothing for having your money in a bank and when you put your money in a bank youíre a creditor.
Eric Sprott: When youíre a creditor you can get bailed in. Whatís the point of making 0.1% return when your chance in getting bailed in on some bank failure is that you could lose 20%, 30%, 40%, 50% of your money? It just doesnít make any sense. So, to me, people having money out of the banking system and in real assets is exactly what people should be doing these days.
SMN: Kind of, again, sticking with the whole idea of currencies now. So we hear so much about US currency and other currencies like the Euro, and the Yen, and these upcoming crises that youíve kind of described. So how do you see the Canadian dollar and the economyís reaction to the global economic crisis?
Eric Sprott: Well, I mean the Canadian dollar should be one of the stronger currencies, but all currencies are flawed, and theyíre flawed in the sense that by having created this zero interest rate environment, the cost of governmentís borrowing money is as negligible as you can get it. So, therefore, the willingness to keep increasing deficit spending is quite significant and to keep ignoring the increasing obligations.
And I always turn to the US in which they publish every year what the present value of their future liabilities is, and every year it goes up by about $5 trillion. Well, the GDP is $17 trillion. The government has revenue of $3 trillion. They spend $4 trillion. And, theyíve got an extra $5 trillion of obligations at the end of each year. Those obligations are pushing towards $80 trillion now. And any thinking person would know that this organization that has $3 trillion in revenue cannot meet these obligations.
Itís not just the US. Iím sure itís Japan and England and the various European countries. They all keep making promises that they know they canít keep. And, therefore, itís another reason not to believe in currencies, because someday theyíre going to default on their promises. Thereís no doubt they will default on their promises or theyíll just keep printing money, and the money that they pay to these people who have these claims will be worth very, very little, because in reality the economies canít afford it.
SMN: Well, Eric, letís take a look at something thatís been quite the hot topic in the last few weeks or the few months for that matter. Thereís been rising concern about fraudulent gold bars coming out of China. What can an average investor do to protect themselves and their investments? How would you recommend Canada or the Royal Canadian Mint solve this rising phenomenon?
Eric Sprott: Well, you have to deal with reputable people. Thereís no doubt, for example, when we buy bars we buy them from regulated institutions who will stand behind the product. You have to know that whoever it is thatís selling you the gold is selling you bona fide gold.
I donít know that itís been proven that thereís a lot of fake gold. I know there are stories of some fake gold for sure, but the scale on which itís been done I have no idea, because weíve only had a few instances of 10-kilo bars and the odd 400-kilo bar where someone had suggested that there were substitutes for the gold in there.
I think if people stick to, whether itís buying from the Royal Canadian Mint or Sprott Money, or the reputable dealers whose business would just absolutely disappear if people found out they were selling fraudulent products, thatís who you have to deal with. Itís quite obvious who those people are, and most of them have been around a long time. And those are the people that customers should deal with.
SMN: Now, someoneís asked a question more or less about a previous Ask the Expert guest. In a past Jim Willie interview on Ask the Expert, Dr. Willie advised against mining stocks saying that theyíre going to go into reverse and under extreme risk. What are your thoughts on mining stocks, Eric?
Eric Sprott: Well, I donít agree with that thesis. I obviously believe the price of gold and silver will rise dramatically before the end of this year. I still stick with that, okay. And in that environment you will see a massive increase in the valuation of gold stocks.
Eric Sprott: We saw in the first two months of this year a 40% rise in the gold stocks. It then retreated. Weíve seen about a 30% rise recently in the gold stocks. It just shows you how the market can react quickly. And this is with gold still trading $1300 to $1400. Imagine if it started going back up to $1400, $1500, $1600. Itís going to bring a world of investment into the market and, of course, people will buy those stocks.
And I would say conversely that people should realize that the general stock market, in my mind, is at great risk here, because itís sort of followed along with the degree of money printing, and you just canít keep doing this forever. The money printing will show up in inflation. Weíre seeing higher inflation data now.
I think that the risk of owning stocks which have risen so dramatically since í09, while basically GDP has done nothing, sales revenues have hardly done anything. Miraculously, earnings go up, but I can guarantee you that if your sales donít go up you have a very difficult time having earnings go up, unless youíre causing your suppliers, most particularly labor, to take lower wages.
Eric Sprott: Well, lower wages implies declining GDP, and this is kind of what weíre seeing manifested in the US where we get all these part-time workers. The full-time jobs disappear. We say that the unemployment claims are down by whatever. But the fact is that the way itís worked out in the US, most employers, particularly very huge employers, want to employ somebody for 29 and a half hours, i.e. below the 30 hours it would cause them to have to make payments in pensions and other benefits. So that worker, in order to have the same income, needs one and one third jobs.
Eric Sprott: So we get jobs created, but thereís no extra income being generated. And thatís the problem with looking at labor data which isnít showing you the effect on the average person.
We did a recent report thatís on sprott.com showing that the bottom 40% every year, theyíre spending more than they make, and if it wasnít for government handouts, particularly in the form of food stamps, they wouldíve been going hugely backward, because their wages are under pressure, their hours are under pressure. So thatís a huge element that people should be concerned with here.
SMN: As well, I mean, thereís been a lot of questions about gold production, kind of sticking with the mining idea. So since gold production costs have increased substantially in the past ten years, is there a possibility that these higher costs will drive large gold producers out of business given the current market prices?
Eric Sprott: Well, thereís no doubt that itís causing some companies today to alter their strategies. We have somebody like Barrick selling off all sorts of mines. We have lots of producers that have decided to high grade and try to become more efficient in their existing mines, which of course means youíre leaving behind some of the gold that you would otherwise produce in order to try to hold it together with this low price environment. And all of those factors, of course, will lead to lesser production in the future, because once you bypass some ore itís very difficult to get back at it, because in the case of an underground mine you filled it in and you donít have access to it any more.
So I think that we will see production going down here. We know that exploration expenditures have fallen dramatically. We know that developments have fallen dramatically. Weíve seen lots of big developments postponed.
So the outlook on the supply side is, you know, we have not increased supply in the last 14 years. Itís been about the same every year, 2700 tons of gold for 14 years. And I suspect that as we go into even the latter part of this year, into í15, í16, í17, thereís no way that production can go up if prices stay at these levels.
I mean, some of them may go out of business as well. Weíve had lots of mines shut down, but I wouldnít particularly say that the large guys will go out of business. I think at $1300 gold, most people can hold on here. But holding on is one thing, increasing production is another one. And to the question, I think, the real impact will be on future production.
SMN: You kind of talked about what your thoughts are as far as gold prices towards the end of the year. One of our guests wants to know. Many are predicting gold prices are going to correct itself down to $1100. Where do you see gold and silver prices going?
Eric Sprott: I might point out that these experts are all commercial banks, all of whom have profited immensely on the decline in the price of gold. We had four to six sigma events in the gold price last year, which are only supposed to happen once every 40,000 years. I have no doubt that, in my mind, thereís a distinct possibility that they acted in concert on that.
These thousand dollar price projections around, I think, the most famous one was from Goldman Sachs. I believe that this last week they raised their price to $1200, maybe on the way to much higher prices. It seems obvious to anyone involved that if the price got that low it would be the demand from India and China and many, many other countries would rise very dramatically here.
So I donít think thatís a reasonable assumption. I think that the supply-demand data that we analyze all the time suggests thereís a shortage, and that the paper markets will be overrun here, and we have to see much higher prices.
SMN: Excellent, Eric. Well, Eric, weíd like to thank you for joining us today on Ask the Expert. Again, itís been a while since weíve spoken to you and we look forward to speaking to you again on our program.
Eric Sprott: Geoff, thank you, and to all your listeners, I think staying the course is the appropriate thing. It could be a very exciting time here in the next six months. So all the best to all your investors.
SMN: Thank you very much. And to our listeners, thank you for listening. Please go to sprottmoney.com for more information.
For Ask the Expert here on Sprott Money News, Iím Geoff Rutherford. Thank you for listening and have a great day.
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