JT Long of The Gold Report (3/4/13)
Some people may look at the stock market and see economic recovery.
Eric Sprott of Sprott Asset Management and Sprott Money looks at myriad
other economic indicators and sees an economy still in decline. Despite
his suspicions that central banks are keeping gold prices artificially
low, he tells The Gold Report that he favors gold, platinum, palladium and especially silver, over the near and long term.
The Gold Report: The price of gold has dipped under
$1,600/ounce ($1,600/oz); silver is below $30/oz. Is this a case of
living by the sword and dying by the sword, where precious metals prices
only go up in a bad economy and are doomed to languish when things go
well?
Eric Sprott: That is an interesting question because I do not
know what it means to go well these days. I see things going from bad to
worse economically, and so do many others. Walmart just announced that
January 2013 was a lousy month and its start to February was its worst
in years. Apple’s iPhone manufacturer Foxconn just announced a hiring
freeze in China because of a decline in iPhone production. Italian
industrial production new orders were down 15%. You can feel the
recessionary malaise setting in.
Weakness begets weakness, and there are only two ways to stop weakness: fiscal policy and monetary policy.
No one has any room for aggressive fiscal policy anymore. The U.S. is
looking at sequestration. We just had a 2% tax increase. There is
nothing left in the cupboard for fiscal stimulation. On the monetary
side, we are at 0% interest rates, and we are printing money nonstop.
We are entering a period of steady decline in economic well-being,
notwithstanding the suggestions of central planners that H2/13 will be
great. They always say the second half will be great because they know
the first half will not be.
TGR: In your opinion, what are the most important indicators of what is really happening in the economy?
ES: There are many indicators: rail car loadings, car sales, personal income, consumer sentiment, to name a few.
Granted, most of the consumer sentiment numbers have been OK, but a
lot of those numbers follow in line with the stock market. Anyone who
thinks that 70% of the population is better off has to be mistaken. The
2% increase in withholdings on someone’s salary implies a much bigger
impact on his or her discretionary spending because a lot of spending is
dedicated to things that do not change: mortgage payments, insurance
costs, the cable bill. When you knock 2% off the top, it could affect
discretionary spending by 4–5%.
The one indicator you do not want to watch is the stock market
because it is part of the financial fabric that the central planners are
desperately trying to hold together. Not a week goes by without a
crisis. Four weeks ago, it was Banco Monte dei Paschi. Three weeks ago,
the third largest bank in the Netherlands had to be bailed out. Last
week, Peugeot had to get a loan from the European Central Bank. Now the
largest homebuilder in Spain has declared bankruptcy.
TGR: Which takes us back to the first question: If there is no
recovery and the economy is still languishing, why did gold and silver
both drop last week?
ES: This will sound like a conspiracy theory, but unusual things are happening in the gold and silver markets.
For example, on Feb. 19, nearly an entire year’s supply of gold
traded on the Comex in a single day. The same volume of silver trading
happened on the commodities exchange. You and I both know that the
people selling that much metal cannot deliver it because it is just not
available. Yet somehow they are out there, pounding down these contracts
and keeping the price suppressed.
I would hypothesize that the central bankers know their policy of
printing money is the most irresponsible thing imaginable, and they are
suppressing gold and silver prices to hide their irresponsibility. When
one is printing that much money, gold and silver prices are the first
things you would expect to rise. If we saw gold going to $2,000/oz, the
price of oil would probably go to a new high and the price of
agricultural commodities would go up. Then you would have a huge
inflation problem on your hands.
Based on my research, I believe the Western central banks have been
surreptitiously supplying gold to the market. I say this because the
demands I see for physical gold are way beyond the supply of gold. The
annual gold supply has not changed in 12 years, and demand just keeps
increasing from China, India, the U.S. Mint and silver and gold coin
sales; even the non-Western central banks are buying gold. Where is this
gold coming from? I think the Western central banks are selling gold to
keep the lid on the price so everyone thinks their monetary policies
are benign. Nothing could be farther from the truth.
TGR: But wasn’t Feb. 15′s volume blamed in part on reports of a
few large fund managers selling their gold exchange-traded funds
(ETFs).
ES: That may very well have happened. A lot of these paper
things trade together, and the gold in the ETFs is paper gold at best. I
have serious reservations about whether there is actual physical gold
in the gold ETFs.
When I see China buying 95 tons of gold in a month and I know that
the world’s monthly production is only 180 tons, that represents half
the gold. India bought 100 tons in January, more than 50% of the gold
supply. Between China and India, they bought 100% of the available gold.
So, where did the gold bought by the rest of the world come from? From
the Western central banks, as far as I’m concerned.
TGR: Does this policy of suppressing the price of precious
metals hold for silver, platinum and palladium as well and how is it
affecting supply and demand in those metals?
ES: The monetary authorities have never really focused on
platinum and palladium because they are more industrial metals and very
few people watch their prices. We watch them now because we have a
public platinum and palladium trust.
The platinum price has gone up and the paper markets are starting to
get involved. I suspect that is because there are shortages of platinum
and palladium. If their prices skyrocket, it might kick over into silver
and gold. There are people willing to sell contracts for platinum and
palladium, even though there will be shortages of both this year. It
seems ridiculous to be shorting platinum and palladium, but these
misplaced bets were probably placed for a reason: they do not want
metals to look as if they could knock the cover off the ball and reveal
what the real money printing has caused.
TGR: But would you not expect platinum and palladium to track
with the economy and go up in a recovery, while gold would not do as
well?
ES: Gold is more of an investment vehicle. About 90% of all
gold produced each year is used for investment. And, yes, a lot of
platinum and palladium are used for industrial purposes. The same is
true of silver. When there is not very much available for investment,
the investment demand for silver, platinum and palladium will make the
difference.
In my view of the economy, industrial demand might decrease. But if
that happens, we would go right back to the unresolved problem of all
this outstanding debt. In a weak economy, people start questioning the
value of the credits of the outstanding loans. We go back into the same
banking crisis that we had in 2008, in which the banks would have failed
had the government not stepped in. Now, government intervention is a
regular occurrence.
TGR: You invest in equities and physical metals through your
various funds and trusts. What do you consider to be a balanced
portfolio in today’s world?
ES: You must have, at a minimum, 10% in gold and silver. I
probably have 80% of my money in gold and silver. For my funds, I have
80% in gold and silver and equities.
Did you know that gold and gold shares represent 1% of all financial
assets today? Some very mainstream people have come out in favor of gold
recently: Bill Gross at PIMCO, Ray Dalio at Bridgewater Associates and
Ned Davis Research, for example.
TGR: How do you adjust your portfolio based on what is happening in the world?
ES: I do not adjust my portfolio. I take a long-term view of
gold and silver. When I first got in the gold and silver markets, I
could see that there should be a supply shortage. I never dreamed of the
tailwinds provided by money printing and bank runs.
Your readers should ask themselves if, in a weakened economy, they
would rather own a U.S. bond that yields 2%, a stock trading at a
multiple of 15 or gold and silver, which are in bull markets already and
undoubtedly will be up at the end of the year? The answer should be
obvious.
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