DID CENTRAL BANKS COLLUDE TO SUPPRESS THE GOLD MARKET / SPROTT ASSET MANAGEMENT

August 26, 2013

Did Central Banks Collude to Suppress the Gold Market? – Eric Sprott

By Henry Bonner (hbonner@sprottglobal.com)
Sprott Global Resource Investments Ltd.

Eric Sprott founded Sprott Asset Management in 2001, and has been a steadfast proponent of owning gold and gold equities over the last decade. He recently argued that gold may rally to new highs within the next 12 months.

In an interview for Sprott Money News, he gave his views on the long-term, fundamental reasons why he still owns gold. Demand for physical metal has greatly increased in India and China, as shown by the import figures for gold in 2013 versus previous years, at the same time as the ‘paper’ markets for gold have seen record outflows.

According to Eric, we are in midst of a glaring supply crunch for physical gold, with central banks and institutions with large short books in gold, in his opinion, trying desperately to fight the tide.

Eric believes that western central banks formulated a plan at the onset of the gold supply crisis, and decided to take measures to fight demand for the yellow metal:

“A lot of it started with the Germans saying ‘We want our 330 tons back’ and the Head of the U.S. Treasury saying ‘It’ll take seven years,’ even though it only represents about four percent of the theoretical gold they own.”

“To put it into reference, China imported 100 tons last month. So, moving 300 tons doesn’t take seven years. It’s preposterous that it would take that long.”

The Fed hasn’t been the only one concerned with the demand for physical gold, says Eric: “All the commercial banks that were short gold and silver have now covered their shorts. While they advised their customers to sell, they were buying.”

Paired with the Fed’s inexplicable reluctance to return Germany’s gold, Eric believes that central banks also did what they could to stop citizens in India from obtaining gold:

“I suspect the [central banks] went to India and said ‘You’ve got to get your people to stop buying gold,’ and they said ‘Yes sir, yes sir.’” He believes the central banks are really behind the drastic increases in import taxes on gold, which went from 2% initially, to a newly announced 10%. They’ve also banned imports of gold coins and medallions and prohibited banks from lending for the purpose of buying gold.

Eric continues: “They got agreement from the jewelers that beginning on July 1st, they wouldn’t sell bars and coins through the jewelry stores. They issued some other arcane rule just recently, where if you are importing gold it has to be held in customs until you could prove that you are exporting 20 percent of it –which has almost frozen the Indian gold demand through normal channels.”
 
“Every week, there’s some new measure in India to keep people from buying, because if they ever came back into the market here, it would be unbelievable now that we know what the Chinese are doing every month. The Chinese have gone from buying 200 tons a year ago, to 1,200 tons a year. That’s 1,000 tons extra.”

Eric believes that the state of the financial world has been seriously disfigured by governments’ misuse of “printing presses” and poor management of their debts and obligations:

“It’s all just one big Ponzi scheme. We all just print money as all these major capitalist countries are doing and there’s an unintended consequence of doing it. I don’t know whether it’s going to be inflation or massive deflation, but there will be something coming out of it, because the life we’re living today isn’t normal.”

So where are gold and silver headed now?

“I think we saw the bottom on June 28th. My way of defining a bull market in a commodity is I say if a product can go up 20 percent in a reasonably short time from a declining trend, you’re in a new bull market. And silver probably has to go, I think, another 20 cents from where it is at the moment, and we’re in a new bull market. It will have risen 20 percent. We’ve had the silver stocks go up 37 percent. They’re already in a bull market.”

Eric concludes: “The fact is that demand surged for gold and silver when the price got knocked down. I personally believe we are going to see a very dramatic increase in the price of gold and silver. And when I mean dramatic, I mean they could double in a year.”


Eric Sprott founded Sprott Asset Management in 2001 and has over 40 years of experience in the investment industry. He is Chairman of Sprott Inc., which is based in Toronto, Canada.