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Gold’s Lower Price Is a Ruse: Eric Sprott

By Sprott's Thoughts / July 4, 2013

Eric Sprott founded Sprott Asset Management in 2001, and has been recognized as one of the most influential investors in the precious metals sector over the last 10 years. A broadcast released June 25, 2013 by Casey Research shed some light on the picture for gold from a panel of gold experts including Eric Sprott.

“It was my feeling that during the first quarter of the year, up until April 15th, there were many signs that there was going to be a shortage of gold. We wrote an article about a year ago, titled ‘Do Western Central Banks have any gold left?’ where we quantified that there’s been probably an extra 2,300 tonnes of demand every year since 2000, and yet gold production has not gone up in that timeframe.”

But instead of a demand squeeze, driving prices higher, gold has declined from nearly $1,700 at the start of the year to lows of around $1,200 now. How could the price decline if there truly was a shortage?

Mr. Sprott continues: “I put the slam down to the people who are short gold – it’s been very well-documented that certain parties had very large short positions in gold. Shorters who were expected to deliver gold that was not deliverable could have created this downdraft in order to cause gold to come into the market.”

“But it totally backfired,” says Mr. Sprott. The sudden drop in price led to extreme levels of demand for physical metal even as “paper gold” sold off heavily, says Mr. Sprott, citing record demand for physical metal, particularly out of India and China.

“I would venture to say, at the kind of rates of consumption we have now, we might have a 4,000-ton shortage in a 4000-ton market.” So how could the market bridge the gap?

Mr. Sprott continues: “I suspect that the Western Central Banks have surreptitiously been supplying the market. We’ve seen COMEX inventories plunge from 11 million ounces to around 7.6 million ounces in the last few months, and it seems to me that people are finally taking their gold out of the system.”

Mr. Sprott says it’s the paper markets that have determined the pricing of gold – and these markets are often disconnected from the physical metal. “There’s been a lot written about how a very small percentage of paper gold – for instance in the COMEX – is delivered physically. These paper products have determined the price.”

“I’m a huge believer that you should own physical,” says Mr. Sprott. “I don’t like the fact that someone with a lot of money can affect the price in the short term with money when I see the fundamentals for physical gold as very positive.”

Will people who own gold now get the “last laugh?”

“I think they will,” says Mr. Sprott, reminding that even after the gold sell-off this year, gold is up nearly 500% since the beginning of the last decade, whereas the Dow Jones, for instance — which was at around 11,800 in 2000, versus an average of around 14,500 for 2013 – only rose by around 23% over the same timeframe.

“It’s been a great ride already. Where do we go from here? Some people think it’s going lower. I happen to think it’s going higher. I think we will see gold at substantially higher prices.”

Ask yourself two fundamental questions, he says: “Do we believe in zero interest rates, and do we believe in printing money?”

“Going back to my theory that there was no gold left to sell, one of the things you could do is to knock the price of gold down and start redeeming the ETF, because that’s an inventory of physical gold. And that gold was leaving the GLD throughout the whole part of 2013.”

So people who need gold for physical delivery, or want to own physical could have used ETFs as a means to that end: “I take the partial draining of the GLD as an extremely positive event that’s transpired and really tells you about the physical shortage that’s going on.”

Is Eric Sprott buying gold or gold shares?

“I’m buying gold shares. The last time gold got whacked in ’08, the shares went up by 250% in 9 months. I think we’ll see the same type of action – where the shares may double or triple the performance of gold.”

About the author

Sprott's Thoughts

The Sprott Group offers a wide range of investment products and services to U.S, Canadian and International Investors. Sprott Thoughts is an email letter written by Sprott advisors such as Eric Sprott, David Franklin, Henry Bonner and others. They have graciously given Wealth.net permission to reprint their observations here.

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