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.