Precious metals have had an especially tough go of it over the past month. Both gold and silver are back in price territory last seen in 2010.
Eric Sprott returns to the program to discuss the facts as we know them in this market, and what's likely to happen from here. Specifically, he explains the tremendous imbalance currently seen between global supply and demand for precious metals. In his view, prices will have to correct upwards — prodigiously — to bring the two back in alignment:
We see almost 60 tons a week being delivered on the Shanghai Gold Exchange. Well, you start annualizing 60 tons a week you’re talking 3,000 tons a year now. We saw 94 tons of gold go into India in September. We saw the Russian Central Bank buy 37 tons of gold in September. I mean I could come up with numbers that might suggest that we’ve got 400 tons a week of demand. And we only got 230 tons a week of mine supply. And I’ve only gotten to three data points. I haven’t even gone to the rest of the world.
We’ve now created a situation unfortunately in the market where between high frequency trading and algorithms and interference by the planers they can make things happen that looks like everything is OK. And it’s the "OK" part where I think we can really relate to gold not being allowed to go up. Because that's the canary in the coal mine. If gold was above $2,000 we’d all be wondering: What the hell is going on here? And so they haven’t allowed it to happen.
But by suppressing the price — and one of the great things about a price of $1,100/oz is that you can buy a lot of gold at $1,100 versus $1,900 — you can buy almost 50%-60% more gold than you could three years ago with the same amount of money. And you can buy 3x the silver. With the same amount of money!
So, they’re just making the market so small that sooner or later somebody is going to figure it out. And take it on. It’s just such a small market. Imagine if the whole inventory is only $15 billion. What the hell is $15 billion in this day and age? It’s nothing. And a lot of that inventory is already held by people like us and like-minded people where it’s not coming back on the market. So, I’m kind of very hopeful that things are going to work out for us. I know it’s just been a depressing time, in particularly for people like myself and our customers who are in the mining stocks — the miners have just been eviscerated here. But, by the same token if the market comes back to its sense and gold and silver move up from here, there’s going to be a lot of money made in precious metals equities.
I think a true price recovery has got to come from the physical market first. When the mint says they don’t have any more silver coins, that's a good sign there’s more demand than supply. Maybe folks start figuring it out then.
To me, the biggest win will be if there is a delivery failure. If somebody says we were promised some gold we didn’t get it. And that could happen — I mean we just can’t have China continue to buy 60 tons a week. That's impossible.
Click the play button below to listen to Chris' interview with Eric Sprott (38m:46s):
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. Well, gold and silver. They have been relentlessly hammered in price ever since 2011. Day after day in the paper markets gold and silver they’re sold oft times in the dead of night when thin trading volume prevails. We see massive sale orders come in and completely swamp the bids, cut through them to a new lower price. Now such moves are absolutely not about someone trying to get a best execution for their trade. They’re clearly designed to move prices around almost always to a lower price. But not always. Sometimes, very rarely of late, we see the opposite and we see massive orders blow out the asks above the current price. Now such trading is obviously of the few, by the few and for the few. And it’s the mark of very big players using their massive weight to shove things around for their own benefit. And the regulators never investigate. Nobody ever gets in trouble for such obvious market manipulations. And we have to wonder well, why not? Now, such shenanigans have simply been a part of our new normal I guess. But how much longer can this continue? To discuss this, as well as what he sees in the more important physical market, we have today legendary resource investor and philanthropist Eric Sprott of Sprott Asset Management. His experience stretches back four decades. So he’s seen it all. The highs, the low’s, the ebb’s, the flows. And most importantly the ways in which the market structure has been modified, dare I say perverted? Welcome Eric.
Eric Sprott: Hey Chris. I share your frustration. I’ve been through it all. A lot of us can predict things that happen but the trouble is we don’t know when it’s going to happen. But I think there’s lots of great things that we can talk to that might give precious metals investors a lot of comfort with things that are going on in the market right now.
Chris Martenson: Well let’s start there. Let’s start with the price of gold. In your experience, and silver too.
Eric Sprott: Sure.
Chris Martenson: In your experience what’s been the driving the price of gold and silver lower? And I’ve got to tell you I’m watching -- here’s the variable I see. The more they print, the lower gold goes. I don’t understand this relationship. But, what do you see?
Eric Sprott: Chris I’d go back to when silver was $49.50. And it was about to break to new highs, and all hell would have broken loose, okay? And you will recall that on Sunday night at 9:30 with the Chinese market close that day silver goes down $6.00/ounce and bang, the CME comes out with margin rate increases. And of course it had the perfect impact because the investor had already lost 15%, 14% of his money and bang he’s got a margin rate increase. To be followed in succession by, I think it was another seven margin rate increases.
And even at the time it was at $49.50 we traded a billion three ounces a day while we only produce 800 million ounces a year. It’s the most bizarre thing you’ve ever seen. And that was just a first sign of interference on a massive scale in the market with, as you pointed out, the complicity of the regulator, the complicity of the exchange, and they just took the silver investors to the cleaners.
In some of the more recent examples; I mean you pointed to the example where they banged it, with, I think they started hitting it at 12:30 in the evening when everyone’s kind of on lunch break. And there’s no action in the market. I debate to some extent whether these might be hedge funds who think that in a small, physical market in a way they can take advantage of it just by dumping huge amounts of paper on the market. And maybe they’ve seen the effect of central banks in there before. And said "well if we just play this game properly we can score big on this."
And I’ve always contended that there is a shortage of gold and silver. And I wrote an article in December '12 questioning whether the central banks had any gold left. And I find it very instructive and ironic that in 2013 when they did the raid on gold that the ETFs coughed up something like 800 tons of gold. The gold ETF did, okay? And that 800 tons was needed that year to supply the excess demand. And that’s where they got it. And one of the other things that tells you that, that it was engineered, is when you look at the SLV it lost nothing that year. And yet we’re all told that gold and silver are horrible things. You don’t want to own them. And they both went down about the same. Silver probably went down even more. But yet didn’t lose any tonnage. And I always love to ask people well why do you think there was no silver taken out of the silver trust? And the only answer I have is they didn’t need silver. They needed gold. They needed gold to balance off the demand from China and India. And in fact even in 2013 I’m sure that the central planners went to the bank of India and said, "you’ve got to do something about your people buying gold here." Because I think in that first month, the month of May of 2013 they bought something like 168 tons. Which is almost all the mine production in one month for one country. And of course then they came in with their 80/20 rule and with ten other rules. And by the time we got to November I think we’re down to about seven tons a month of imports. Which aided and abetted yet again. They’re manipulators. So you know the central planners are in there somewhere right?
Chris Martenson: Yeah.
Eric Sprott: And then I think that maybe some of the hedge funds get on this thing "well hey we can really knock this down and nobody’s going to complain" and it just goes on and on and on. And of course the only solution is the physical solution. And I think things are happening as we look at all the data to suggest that that should come to an end here.
Chris Martenson: Now I look at this exactly the same way. There’s hard fundamental data that we can get our hands on. I consider it -- okay let me start here. Gold is one of the most opaque markets I know about. I can’t get any information on what actually happens in the OTC market in terms of flows in London. I’ve talked to people who are in the OTC market. They don’t have insight into it. They have their own little slice. We have a little bit of information coming out of COMEX and people chew through those numbers endlessly. But the COMEX figures are tiny compared to the OTC flows that are happening in London. Which again are heavily shielded.
But we do have some information. We see what’s flowing out of the Shanghai gold exchange. We have some import numbers from India. Just those two alone we get well over 100% of mine production. And so we know that gold, to balance the accounts has to be coming from somewhere. Again, who, where, I don’t know.
But we have this softer information I’d love to get your point of view on. So we have the Bundesbank, the people of Germany said "we want our gold back." Much gnashing of teeth. Bundesbank dragged its heels. Said "okay 300 tons over seven years." Managed to move five tons in the first year. Whoo. It’s like a tiny amount. And then we see what’s happening with the Swiss referendum. Where the Swiss people have said "hey, we want to have 20% of our reserves such as we hold them in gold and we want all that gold in our country" and the Swiss National Bank is just raising a stink pretending this is going to be the hardest thing to do since raising the dead.
Eric Sprott: Sure.
Chris Martenson: And I’m just wondering, what do those indicate to you when you see those central banks acting that way?
Eric Sprott: Sure, well you know Chris I go back to some of the data that we have even from that happened from 2011 to 2013 and we see the Chinese buying an extra thousand tons. And let’s call the gold market a 4,000 ton market just for rounding. And they came in and bought an extra thousand tons. That’s 25% of the market. And I always make the point: How can anybody come in and buy 25% of any market out of nowhere and have the price go down?
And we had the same thing happen in silver last year where, because the Indians couldn’t buy gold, they started buying silver. They buy an extra 18% of the silver market, above and beyond what they were buying normally, and the price of silver goes down. And I might even point out that that 18% theoretically only half the silver is available for investment. So that 18% is really 36% of all the silver that can be bought for investment purposes. And they came in and knew and bought it. And the price went down. And it just tells you how anomalous the whole thing is and how kind of orchestrated because it makes no sense vis-a-vis the physical stuff.
You mentioned the Swiss referendum. And you know everyone is aware that PayPal shut off the payments to Yes campaign. And it just—it shows you that the powers that be will do everything they can to prevent normalcy happening in the market. I mean that’s just almost utterly unbelievable. For some reason you can’t send money to a political campaign in Switzerland. It’s just egregious.
And it’s like… There was a report on Zero Hedge not too long ago suggesting that the press was asked not to talk about Ebola. I can understand that request. I mean that’s probably why they had the Ebola czar, that was probably his first decision. Let’s not talk about it. And sure enough just before the election there was real chat about it. And I think it’s because the presidents… I mean you don’t get elected if somebody told the truth about Ebola. And so they just muzzle it.
And it’s this whole freakish things that go on to protect financial markets. To protect the seemingly powerful in politics. That just, it frustrates us and it just draws our ire. I’m kind of happy to see that people in various countries in Europe are protesting, which they should do. Middle class is getting rung out here. There’s always unintended consequences of printing money and nothing going into the economy and meanwhile at one end of the spectrum the retired people can’t get any return on the money. At the other end of the spectrum the cost of education skyrockets. Everyone has a loan. They don’t get a good job. And we have huge swaths of the population at each end that are not prospering.
It’s no wonder that new home sales are probably still 1/3rd of what they used to be eight or ten years ago. Who can possibly afford to buy a home with the credit posture that they have coming out of the university today and the type of jobs they get?
So, it’s pretty devastating what we have to live with. And it’s frustrating for someone like me who’s like you. I was all over that housing crisis. That NASDAQ crash. The financial crash of 2008. As I’ve always thought "boy if they start printing money, the price of gold will go up." And of course one of the reasons that they want the price not to go up is because you can imagine if it would have gone to $2,000 at the time and then silver would have gone through $50.00, it would have told the world that the policy of printing money is ridiculous. Which we all know it’s ridiculous. But people want to see some manifestation of the market to show it’s ridiculous and that’s why I think they have repressed it here. But the day is going to come to an end. We have a lot of positive things that we can talk about that are going on in the physical market right now. That could change this dynamic very quickly.
Chris Martenson: You touched on so many great points there Eric. I think we’ve got a recent example that sort of pulls them all together which was the Halloween Massacre that Kuroda of the Bank of Japan pulled off on Friday October 31st right? They come out with the surprise announcement—timed specifically to impact the markets the most—that Japan is really going to double down and do more to the point that the Bank of Japan is now going to be monetizing more than 100% of all new issuance of Japanese government bonds that are being issued out as they run a deficit. They are going to destroy the currency. They have basically said "we’re going to eviscerate our lower and middle classes and we’re going to take the wealth we take from them through lower purchasing power—we’re going to transfer it to our exporters. So we think that Toyota deserves the money of our people more than the people do. That’s a decision they made. It killed the yen. And of course what happened with this announcement of a surprise decision to A.) begin destroying a major currency, and B.) to print a lot more money and toss it into the markets. Gold just got slaughtered. Right? And I see that in the context of saying what if gold had gone up instead? That would have been a vote saying we don’t like what you’re doing, and the world would have received that appropriately but instead we got this thing that says the world apparently said "oh, we think that’s the least risky thing you can do. So much that we’re really going to dump on gold here." I can’t see these moves anymore through a lens of normal market reactions. I don’t understand them.
Eric Sprott: I think that what goes on in the gold market when there’s something gold friendly—I think they arrange to have the price go lower so that you can never attach a reason, a real reason, for gold doing something.
Chris Martenson: Yeah.
Eric Sprott: And that’s a perfect example. I mean here we had on Wednesday we end QE and they bomb gold. Then on Thursday we start QE over in Japan and we bomb gold. And it’s just; how do you win in this game right? It’s ridiculous. And it’s funny when you mentioned Japan I mean here we’ve had the currency go down 40%. I mean everybody in Japan should own gold.
Chris Martenson: Exactly.
Eric Sprott: Why would you own yen? With almost an indicated desire of knocking the currency down. And I haven’t seen much data from Japan, but you’d think a few people over there would figure it out and try to protect themselves. So…
Chris Martenson: Yeah.
Eric Sprott: But there are, you know I mentioned that there is a lot of physical things going on and I mean some of the recent data. For example, we see almost 60 tons a week being delivered on the Shanghai Gold Exchange. Well you start annualizing 60 tons a week you’re talking 3,000 tons a year now. We saw 94 tons of gold go into India in September. We saw the Russian central bank buy 37 tons of gold in September. I mean I could come up with numbers that might suggest that we’ve got 400 tons a week of demand, and we only got 230 tons a week of mine supply. And I’ve only gotten to three data points. I haven’t even gone to the rest of the world.
Chris Martenson: Yeah.
Eric Sprott: So, that and for example, you know there has been a lot of discussion about the open interest in silver. The December open interest in silver is about 530 million ounces. There’s about 14 more trading days, and it’s been stubbornly high. It hasn’t really reacted that much as one might normally expect to the coming expiry. And there’s people that suggest that it may be a group that will ask for delivery. And there’s 180 million ounces of COMEX inventory, and I think the dealers own something like 70 of that. And this will be very interesting to watch that and just see what the postings ultimately are. And of course I’d love nothing better than people to stand in there and take delivery and put it to the paper shorts. And there’s also a high open interest in gold going into December.
We also have the coin sales, which of course we had an announcement -- not an announcement from the US Mint, but, it’s known that they said to their distributors that we're out of 2014 coins. That's not to say they won’t produce more, but the history of the Mint is that if there’s a lot of demand and it looks excessive, they just don’t make any coins because they don’t want to stress the supply/demand relationship in silver. And the Canadian mint has already indicated—well this is two or three weeks ago—that they’re on allocation. Every dealer who sells coins have basically said we’re two to three week back orders on considerable size orders. So there is a tightness going on here. The Shanghai silver inventory has gone from 1,100 tons to under one hundred tons within the last year. The gold inventory at the COMEX has gone down from 303 tons to 250 tons in about two months. So there’s signs here that there’s a lot of physical demand.
Of course it makes sense that there would be a lot of physical demand. Anybody who’s in the business—we all realize what the hell is going on here. And maybe finding the hedge funds, the speculative hedge funds try to push it a little further than they should go. We’ve had the commercials, the banks that are basically off their short position. And the short position for the most part is now held by the hedge funds. Which—and of course I just believe in all markets, the banks who have this huge power will run any market around, anyway they want to, and they’ll break it out and everyone who wants to buy and they’ll sell it to them. And then have it break down technically then they’ll buy it back again. And I just think they can just cream these markets. It’s like clearing the table. Whether it’s gold or silver or copper; you name the commodity. Because they have such huge money power they can make it look like a certain thing is happening when it’s not happening.
And maybe that’s what’s going on in oil today. I mean we take it down from whatever it was, $110 down to $76 here. We’ve got an OPEC meeting coming up. Great timing for the election, by the way. And it will probably run right back up again because they flushed everybody out. And now they’ve probably reloaded. I don’t know for a fact that they have. But, I just think that there’s a bit of a game that you put all this stuff in your computer and say "he we can just keep doing this and run it up/run it down. Cash it out." And if you can sit there and make 5% a month doing this on various commodities hey, you’re making a lot of money.
So I’m totally distrustful of the markets. I mean I love the article by Paul Singer recently where he said "the job growth is fake. The inflation is fake. The markets are fake. The economic growth is fake." I just totally believe that. I mean we are just being fed a line of baloney here that everything is wonderful. When you look at it, it can’t be wonderful. Thank God 50 million people are on food stamps. Otherwise we would have a riot on our hands. There would have been a revolution long ago.
Chris Martenson: Yeah, and I’ve seen this same dynamic. I travel all over. I get to talk with people in all walks of life, and everybody’s very distrustful of these markets. This has to be the most hated bull market in stocks ever because people just fundamentally don’t believe in it. They know there’s something that just d doesn’t smell right. And what doesn’t smell right is their own daily experience of having to earn a paycheck and stretch that out and make that work and their own sense of job security just doesn’t match what they’re being told. And so this is all about perception management, which I think it was Paul singer of Elliot Management—his main thing was, when he says it’s all fake he’s like, "look we’re just managing the perception."
And I think the central banks, when they got in trouble in 2008 instead of saying "hey, you know want happened here was we had been increasing our total borrowing by around 8% per annum for 30 years, but our underlying income was only growing 4% per year." That would have been a great time in 2008 to say "maybe that wasn’t so smart. Maybe we shouldn’t try and borrow at twice the rate we’re earning." But instead of doing that they doubled down. Derivatives are larger than they were in 2008. Sovereign debt is higher than it used to be. Covenant lite loans are off the charts. We’ve got junk bonds trading with five handles. It’s insane. Right?
So in this insanity what do you do? And I know that the banks are running a very specific program of financial repression. They have negative real interest rates on the book. They have to make sure they have the capital controls firmed up so there’s nowhere safer to go, right? So if you’re in Europe it doesn’t really help to go to America, it doesn’t help to go into the Japanese yen. And that’s true all across the whole thing. But the third leg of that stool for them always has to be you can’t give people something like gold, which gives them a way to preserve their wealth. Because truthfully Eric, the point of all this is to specifically take the wealth of the people and transfer it to the government, but through the central bank’s financial repression. This has happened before in history though, we’ve seen it. As far as I know the only way to dodge this is to be in hard assets. It’s the only way to be on the right side of the line when the eventual reset comes. But boy it’s hard to stick to your guns when gold and silver are down so much. It really doesn’t look like the place to be, does it?
Eric Sprott: Well, I agree with you totally obviously. And having been in it for a long time, this is longer than normal though, right? I mean there’s lots of times I’ve been off side in the market. I mean I can’t tell you the number of times I’ve been off side. But I can also tell you ultimately what I have thought has always happened. We’ve now created a situation unfortunately in the market where between high frequency trading and algorithms and interference by the planers, they can make things happen that look like everything is okay. And it’s the okay part where I think we can really relate to gold not being allowed to go up. Because that is the canary in the coal mine. If gold was above $2,000 we’d all be wondering what the hell is going on here? There’s inflation, or financial crisis or whatever. And so they haven’t allowed it to happen.
But by suppressing the price—and one of the great thing about a price of $1,100 is that you can buy a lot of gold at $1,100 versus $1,900. You can buy almost 50%, 60% more gold than you could four years ago, or three years ago, with the same amount of money. And you can buy three times the silver with the same amount of money. So for example I was a buyer here of silver this week. In the $15’s I’m thinking "Oh my God, I can buy a lot of ounces here." I probably was a buyer at $30; well the same money buys me twice as many ounces now. So, they’re just making the market so small that sooner or later somebody is going to figure it out and take it on. It’s just such a small market. Imagine if the whole inventory is only $15 billion. What the hell is $15 billion in this day and age? It’s nothing. And a lot of that inventory is already held by people like us and like-minded people where it’s not coming back on the market.
So, I’m kind of very hopeful that things are going to work out for us. I know it’s just been a devastating time, particularly for people like myself and our customers who are in the mining stocks. I mean that has just been eviscerated here. But, by the same token if it comes back to its senses and gold and silver move up here, there’s going to be a lot of money made in precious metals equities.
Chris Martenson: Let’s talk about those miners quickly. I was talking with the CEO of one of the largest silver mines in the world last week. And he was saying that his all-in costs were in the $17’s. Here we are in the $15’s for silver. How long can -- first of all, obviously, there’s going to be some wipeouts that are going to happen as a consequence of this. But, where do you see the all-in cash costs of the industry versus how long can the industry persist with silver below their all-in cash costs?
Eric Sprott: Sure. Well one of the things that people do is, when you have this kind of situation, a miner will try to high-grade. So there are ways of "okay fine. I’m just going to bypass this low-grade stuff; if I just do the high-grade stuff, I can actually get my cost down." We’re seeing some of that happen. They can also—you know if you have an open mine you’re supposed to strip it, in order to stay ahead of the game. You might just decide "well I’m not going to strip it and maybe I could mine it for a year. With no money spent on stripping. Now, I know I’m going to have a problem 12 months in, but I’ve got to get there." And people do that too. So they can hang in there.
I think the more likely place that something more immediate could happen is really in South Africa. Because you’re mining a bed that just goes on and on and on. There’s not really development costs. And their costs are so high that at some point they’re really loosing 200 or 300 an ounce. What’s the point of trying to produce the stuff? So, we haven’t seen much on that front yet. But even if you take a long-term approach, the decline in exploration, the decline in development—where are we going to be in 2016, 2017 and 2018? Because the average mine life is something like—I think it’s less than ten years. So, if you’re not looking for new mines, the production has to come down. It’s just like oil. It just depletes itself. It doesn’t deplete as fast as oil, but none the less it does deplete. So, there will be a day, if you can take a longer term view, there’s no doubt that supply going forward has got to come down.
Chris Martenson: Well absolutely. And you mentioned oil. We saw early in 2014 with Brent sitting at about $115/barrel all of the world’s oil majors said that they were either freezing or trimming their CAPEX because they couldn’t explore for oil at $115 and do that as well as return shareholder value in dividends. So they had to pick. Right? So they said "well I guess we’ll just cut CAPEX and focus on dividends for a while." And that was at an oil price a lot higher. So I can only imagine the carnage that’s happened to a variety of drill plans and exploration plans that are out there obviously. And it will take time to work its way through. But I think anybody that looks forward two or three years can say "that supply is not going to be coming online. And where are we going to get that from?"
Eric Sprott: Sure. You know, when I’m buying silver at $15 this week and I bought it at $16 probably two weeks ago, I just think, I know what has to happen here. The price has to go up. And quite frankly I would much rather own a physical asset than a paper asset when we describe all these Ponzi type things that are going on. I mean it’s not fun while it’s going down. But, you’re pretty darn certain that you’re going to be in the right camp or the winning camp when it’s all over.
Chris Martenson: Yeah, well I bought silver this past weekend. It was just over $16 and I knew it was a good purchase because I hated doing it. So that’s my personal metric.
Eric Sprott: [Laughs] Yeah, sometimes you’ve got to gut it up. I mean if the guys can’t really produce it for $15 that’s pretty solid. Plus if you understand the fundamentals of the business you realize hey, there’s some great things going on in silver. Man, I just think this whole solar thing is going to blow out here. I mean you can just see it becoming almost universally accepted. And it consumes a lot of silver. And of course there’s al the medical uses and the various other things. So I think we’re probably, even the silver institutes last year said there was a shortfall of 100 million ounces, which—I don’t know where it came from.
Chris Martenson: Well, you know back to that fundamental part. When you’re noting that you can add up to 400 tons of monthly demand in a world that’s only producing 260. So you can’t know for sure but this is the fun thing about gold; it’s solid. And it’s a physical substance. So that extra 140 ton gap had to come from somewhere. That came from real vaults. It came from somewhere. And GLD has coughed up what it can. It’s much more grudgingly coughing up maybe ten tons here or there. But it’s certainly not releasing 140 tons. In your mind where is that coming from? Whose gold is that?
Eric Sprott: There’s just no doubt in my mind that it’s all orchestrated by the central planners. It’s coming out of the central banks. I mean that’s just so obvious to me. I mean we talk about the Germans not getting their gold. And now the Swiss asking for their gold. I mean there’s obviously a sentiment there, and as I believe, there is no gold there. And the raid last year—luckily they were able to pump out an extra 800 tons from frightening people out of the market, but it’s got to be coming from central banks. I believe that they’ve got to be down to their last vestiges of deliverable gold here. Particularly when you start annualizing these rates of demand; they’ve never been higher. They have never been higher. It’s incredible. So, the day's coming when somebody is going to look in the cupboard and say "we’ve lost this and what’s the point?"
Chris Martenson: Now do you ever talk with refiners who mention…
Eric Sprott: Not too often. I do indirectly talk to people who deal with refineries. But I don’t often talk to refineries. Although one of the things that I find interesting, which is sort of related to refineries: I can’t believe the number of vaults being built.
Chris Martenson: Right.
Eric Sprott: We‘ve got probably 4,000 tons of vaultage built every year, but theoretically we’re only mining an extra 2,700 tons. Which is also a statement about what’s going on in the real world.
Chris Martenson: Yeah, absolutely. I was talking with a guy who talks with refiners and mentioned that there is one refiner in Switzerland which has a bounty up. If anybody sees a Chinese marked bar come through for refining, there’s a reward out. Because the idea is that China refines 400 tons a year from their domestic supply and they put their stamp of it. And none of it is showing up in the market anywhere. So we’re reasonably certain that China’s domestic production stays in-house. And so that adds to their stockpile. But also they were noting that they’re starting to see bars which have numbers on them that indicate they were created back in the 60’s. So they’re starting to see what they consider to be old dusty stuff—bottom of the vault kind of stuff—coming out. And it’s coming through. And so these are just the little clues that somebody somewhere is scraping into their vaults to make sure there’s something in the market.
Eric Sprott: I can tell you that about five years ago, or maybe four years ago, I was discussing with a processer of gold that he was going to get melt bars—U.S. melt bars—made available to him. And of course these melt bars are when they confiscated the gold in the 30’s. And of course you don’t go there because obviously it’s at the bottom of the heap right? And it’s of course your lowest quality gold. And that was quite a while ago. And of course I think that, as I thought in '12 that they can’t have much gold left here. Because I went into gold in 2000 because I was reading this Frank Venerorso book where he suggested that central banks said they had -- I think it was 35,000 tons. And he thought they only had 18. And I sat there and I think demand has exceeded supply by 2,000 tons a year for last ten years. How much can they have left? And I sort of find it interesting that the next year they had to raid the GLD. To get an extra 850 tons. It just kind of fits in, right?
Chris Martenson: Right.
Eric Sprott: And of course they had to get the Indians not to buy. Well of course the Indians are buying again. So I think we’ve got things going our way here in gold and silver. Notwithstanding what’s going on in the paper markets.
Chris Martenson: Yeah, and it’s certainly been frustrating. So if you’re looking for a turnaround, do you think we see the turnaround in the paper markets first as this comes through? Or do you think there’s some dislocation in the physical market that then has to wag the tail over in the COMEX market?
Eric Sprott: Well I think it’s got to come from the physical market first. And of course when the mints say they don’t have any more silver coins, hey, you’re short silver. There’s more demand than supply. Maybe you start figuring it out right? And you see the Chinese inventory went down by 1,000 tons, from 1,100 to 100, and you say "okay, how long can I keep playing in this game?" Maybe I should be reversing myself. Maybe in fact we’ve had enough of a retracement that there’s some speculators come in there and take fresh positions. And all of a sudden it’s turned around.
But to me the biggest win will be if there is a failure. If somebody says "we were promised some gold; we didn’t get it." And that could happen with these expiries coming up at the end of this month. It could happen—I mean we just can’t have China continue to buy 60 tons a week. That is impossible that that could possibly be supplied unless they’re just down to the last vestiges. Or if somebody does a deal where they borrow it from some existing holder and non-transparently pay them some big interest rate. I mean that could happen too, right? People in power will do anything to make sure that what they want tries to manifest itself in the market. And even going to the Swiss referendum. Even if the Yes vote wins, I will guarantee you there will be so many reasons to delay the Swiss National Bank doing everything that nothing will manifest itself.
Chris Martenson: Well let’s talk about those in power real quickly. Because this is a concern I’ve heard voiced. So let’s imagine hypothetically that gold is being suppressed because there is a larger set of policies being run. They can’t have gold being the canary in the coal mine or crying foul around. So gold is held down. But here’s the problem with gold. It’s a real commodity and it has money-like characteristics and so there’s this relationship between supply and demand and price. And so as the price has been pushed down, all the supply has been headed from west to east. At some point -- here’s the concern: The guardians of the gold in the west say "we can’t have any more going east." And they have two options. One is to let the price rise to normalize that flow so it stops flowing. And the second is to do something like just more around the idea of capital controls—making it illegal, freezing it, otherwise being dictatorial around the response and doing whatever. Making it illegal or something like that.
Where do you fall on that? When this finally erupts do you really think that a price will be the moderating factor or do you think they will try other, less honest means?
Eric Sprott: Well I don’t really see -- I don’t know that the powers, the central powers, the western governments can do much about it. I mean if you don’t have any gold, what are you going to do, right? And maybe they could try to confiscate everybody’s gold. Most people who have gold are of course trying to find safe jurisdictions to have that gold in, where it won’t be affected by the western governments. Whether it’s in your home or whether it’s in Singapore or some other place where you think it’s away from the grubby hands of the central banker. But I think if they announce that, I mean what would happen to the price of metal even in the paper markets? It might go crazy. So it would be really funny if the paper markets started going up and everybody lost their gold. I mean that would just be the worst of all developments for us. But I think the physical is going to win the day here, there’s just no doubt about it.
Chris Martenson: Well fantastic. So with that I see we’ve used up our time for today. I really want to thank you for your insights on this. And I’ve got to tell you this has been a long, hard run for me because I’m a rational guy. I’ve been adding up all the numbers and I know what should be happening and what should be happening is not what’s actually happening right now. And boy I find that frustrating and for two reasons. One, it’s just intellectually frustrating. But secondarily on a more visceral level, I’m of the mind that the longer they string this out the worse the eventual correction is going to be. We’ve stretched this rubber band way past its snapping point and boy I think it’s going to be a hell of a snap when it breaks. And that bothers me as a citizen of a world in a country I care about.
Eric Sprott: Yeah, well it’s the same thing for me. I mean you wake up every morning, I hardly even watch the television anymore. What’s the point of this? I mean whatever is going to happen in the market to some extent is predetermined by someone who -- there’s no relationship to the fundamentals. And the same thing in the gold market. And of course what you have, the only thing that we can hope is that the physical appetite changes things, right? That there are unintended consequences of these things. And I love the fact that people can buy so much of these products today versus the price three years ago. I mean to think you can buy three times more silver at the same amount of money. That’s phenomenal. It takes 1/3rd of the amount of money to take out the inventory today versus three years ago. So it’s going to happen here. There’s no doubt about it. It’s only a question of time.
And this economy is so loosey-goosey here. There is no recovery going on. They can paint all the data they want and tell us that inflation is only 2%. We all know it’s not 2%.
It’s funny I was with a guy who ran a mining company. He says "well I guess gold is down because there’s no inflation." I said "well why is it that the cost of production has gone up 8% a year for the last 13 years, yet you say there’s no inflation?" And he put it off to maybe lower grades increased the cost. I said to him, "well you had a project that you were going to start in 2000 that was going to cost X for capital expenditures, now it’s going to cost 8 times X. What does that tell you about inflation?" We see so many examples of it in real life. And then we’re all told that inflation is 2% a year. I mean it’s just hogwash.
Chris Martenson: It’s like that old Richard Pryor quote: “Who are you going to believe, me or your lying eyes?”
Eric Sprott: Yes exactly. So I share your frustration. It’s very difficult when you’ve been in these markets for so long and most of the things you imagine happen, happen in a reasonable time. It might be frustrating that you’ve got to wait a year or so. But to wait three years for this, and maybe five years if you think about QE to play out. Oh my God it’s been very trying on all of us. But hopefully our day will come here.
Chris Martenson: Absolutely. Well Eric Sprott thank you so much for your time today. And I hope we can do this again.
Eric Sprott: Okay Chris keep up the good work.
Chris Martenson: Thank you. You too.
Eric Sprott: All the best, bye.
Chris Martenson: Bye.