Eric Sprott: I Think We Are In For A Shortage Of Physical Gold

Source: www.seekingalpha.com
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.
PM: Is it possible that, according to what the recent central bank data indicates, that central banks have purchased more than last year's record 457 tons by the end of 2012, and that they do not have the gold to meet the latest requests, so they had to go to the market to replace the missing gold?
ES: I think that the central banks that bought the gold were all non Western central banks-okay, non developed countries, as defined okay? And because they are looking at the Western countries and looking at the folly of what's happened to the financial system, and it's got to be clear to anybody who puts two and two together that if you just keep printing money, which all of those central banks are doing, I don't want to own the money. I don't want to own the debt. I'd much rather own something tangible, so it's the contrast between the non Western central banks and the Western central banks, and I think the Western central banks continue to sell but don't report it.
PM: In other words, are we in for a short squeeze in the paper market for gold and silver?
ES: I think we are in for a shortage of physical gold. I mean the data I look at, one just wonders how long can these Western central banks keep doing this. Sooner or later you run out of gold. They only have so much gold, and it was estimated they had as little as 18,000 tonnes back in 2000, I would think they might be running on fumes these days.
PM: GATA found some documents going back as far as 2009 in which they confirmed the leasing of the gold and they estimate that they have maybe 50% less than what they are reporting.
ES: I think the document you are referring to is from the IMF in 1999, when they were debating how are we going to account for gold leases right?
PM: Correct.
ES: Whether it was going to be separate accounting for them, which would have told us all the answers, but what they decided was, no we're all going to put it on one line on the balance sheet and it will be called gold and gold receivables. Therefore, you don't know how much is physical and how much has been leased. And that's the way they like it. They don't want people to know.
PM: This is an important question, do you still feel silver is the best investment of this decade?
ES: I absolutely do, and the one thing that most strikes me when I look at, for example, the US Mint web site, and I look at the dollar value of gold sold and the dollar value of silver sold, and I see that investors bought as many dollars of silver as gold, which means they bought 50 times more physical silver than they bought gold because the price is over 50 to 1. But when we look at production of silver, there is about 11 times more production of silver than there is gold, but half of silver's production goes to industrial production, whereas almost all gold production is for savers, which then takes a ratio of about 6 and a half ounces of silver you can buy every year for investment versus one ounce of gold but people are buying it 50 to 1.
When we did the last (PSLV) (Sprott Physical Silver Trust ETF) issue, we raised $320 million. We did the last gold PHYS issue and we did $349 million. For all intents and purposes, almost the same amount. Okay, we almost bought about 50 times more silver than gold. How can investors buy silver in a ratio of 50 to 1 when it is only available at six and a half to one? That cannot last. So that's why I think, you give it time and you take the paper guys out of the market, the Comex and all this ridiculous trading of paper silver that goes on, the physical story will win out and we will go back to a more normal ratio, such as 16 to 1. If we go to 16 to 1, silver will triple the performance of gold, and gold will have a great performance as well. It is a super-charged story.
PM: What's wrong with the mining stocks?
ES: They have all had their own issues. I mean it is always difficult to increase production, grades are going down and costs are going up, but I would say generally, when you look at the stock market performance, gold stocks only do well when the momentum in gold is positive. So when we went from 1550 to 1750 we had a bit of a surge in the price of gold and the stocks tripled. The 10% or 12% increase in the price of gold now in the last whatever number of weeks, 6 to 8 weeks, gold has been going down or trading sideways and the minute it goes down everyone loses confidence in the gold stocks. But I would argue that if gold turns around here and it starts heading towards 1800, everyone will look at it differently; it's like people viewing it half empty or half full.
PM: They have come down on an average of more than 50% retracement.
ES: If the price looked like it was going back to 1800, I think everyone would reverse field again and away go the stocks. But you're not going to get stocks going up when the price of gold is going down and then unfortunately the price of gold going down you get triple impacted on the stock and again vice versa when it goes up you get triple impact on the stock. So I think we need a sustained move in the price of gold there through 1800 and the investors will come back in.
PM: What do we need for the mining stocks to take off?
ES: I think even if it popped through 1750 here in the shorter term, people would start becoming more positive again. But if we ever went through 1800 then the next thing you've got is the all time high, then you might get a lot of optimism coming back again which is fully justified.
PM: What is the best way to play silver going forward?
ES: Other than just owning physical silver; lots of people can own physical silver although it is a bit bulky to store, particularly if you are a wealthy investor. Our PSLV is a very inexpensive way to own it. There are other web sites such as Gold Money that sells silver online. We have a little company called Sprott Money that sells gold and silver coins, but there are lots of vehicles out there. I think if one is thinking of doing something in size then our Silver Trust, which is getting quite large-I think it is up to around a billion and eight now-is a wonderful vehicle. I never like recommending the SLV and the GLD because there is always that question, 'Is the gold and silver really there?', which I think is a bonafide question to ask. When you have to ask questions like that I don't think you put 100% confidence in the fact that all the gold and silver is there. So find some vehicle where you know the gold and silver are there.
PM: What about platinum? Isn't it highly unusual for platinum to be below the price of gold for this long?
ES: You know Patrick, I probably can't comment on platinum right now and I'll tell you why. We are in the process of filing a statement to raise a platinum and palladium fund, so I think I'm precluded from making a statement right now.
PM: Is silver a better investment than gold, platinum or copper? Strike platinum out of the question.
ES: I think silver being 100% regarded as a precious metal which it is, as is gold. Platinum is a little bit more industrial than silver, so I think if you are looking to protect against the debasement of currencies, silver can provide you the most upside as a precious metal.
PM: Last month, Thomson Reuters GFMS reported that investment demand will likely be the prime driver of silver prices this year. Do you see that moving forward into 2013 and beyond?
EW: Sure. It's funny, I rarely look at industrial demand in silver and the reason I don't look at it that much is it is very hard to predict who knows what the industrial demand is going to be, but I think it is much easier to follow investment demand. I see us issuing shares of our trust. I see the SLV (SLV) gaining size. You get the US Mint coins, so you can see tangible evidence of people coming into the investment market for silver, and you can see all the economic goings on which would push you there. You even now have main street advisors such as Bill Gross of Pimco, Ray Dally of Bridgewater, and the Ned Davis Research all coming out saying precious metals should have a part in your portfolio. I can guarantee you, nobody said that 5 years ago. There's a whole sea change now, where everyone's suggesting you should and for an obvious reason: everyone's printing money.
PM: Could this be a sign of the shift in demand that's been the missing factor in gold and silver, and the basis of support for the next leg of the long-term secular bull market in metals?
EW: As an example, I wouldn't want to use just this one data point, but I think the sale of gold coins through the US Mint in November tripled the number last year and silver sales were up something like 150%. I'm kind of hoping that the trend continues. I think the reason that it all of a sudden came together is that you have to spend almost monthly doing quantitative easing, the ECB gave 39 billion Euros to Greece just yesterday and had to bail out Cyprus, and now we have whatever we are going to call it....QE4. It must seem obvious to the few people who want to listen or look that currencies cannot sustain their value versus real things such as gold and silver.
PM: What is your forecast for the world economy and the price of gold and silver as we enter 2013?
ES: The $64 million question right!!
I must admit that for the longest time, and for many years now, I have always asked how long can this system hold together? I never would have imagined that the market would buy into printing money, but I guess the market bought into printing money as some great salvation, even though it's caused nothing to happen economically. Here we are in 2012, and we might very well have a worldwide recession after years and years of money printing. So it is very difficult to forecast where it is going to go. Some of the people that I rely on suggest that you're either going to have hyper-inflation or defaults. It's going to be tough to imagine defaults if the central banks just say, 'Well, we'll basically buy everything out there,' which means the more likely thing you're going to end up with will be some kind of hyper-inflation.
Some of the people I rely on suggest there is about a 40% chance of hyper-inflation starting in 2013 and about a 90% of it starting in 2014, so that's what I would imagine happens. We have all this silly printing and supporting of financial markets, and then we are going to find out that there is inflation in the system where gold and silver will be the telling of it. Once it gets ingrained that the currency is being devalued, then I think that precious metals will just continue to move forward. Stocks can go up in a hyper-inflationary environment, but it certainly wouldn't be your first priority. The first priority would be to own gold and silver. I think we will see signs of that next year. I don't necessarily see any great economic strength because everything it's done so far has been to support the financial system, not the economy. I think we are looking for lethargic growth next year and the biggest element yet again will be the action in the precious metals.
PM: Eric Sprott, once again thank you so much for you time and until next time my friend Happy New Year and the best of holidays to you.
EW: Ok Patrick, all the best to you and all your listeners!