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eric sprott and supply

  • Thu, Oct 24, 2013 - 06:55am

    #5

    davefairtex

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    eric sprott and supply

I've always found the gold supply arguments by Sprott to be pretty interesting.  I do not think it is a useful trading/timing tool, but if the supply/demand situation remains the way it is, the situation must be resolved by increasing prices at some point in the future.  That's just how markets work.

The problem with timing is the sheer amount of aboveground supply for gold – it is measured in decades.  An estimated 170k tons of gold exists, against a 5k ton per year demand.  How much gold has already been leased by central banks, how much gold remains available to be leased, it is a world with zero transparency, and that lack of information doesn't seem to be an accident.  Its enough to make one a conspiracy theorist.  If we knew those numbers, we could forecast when a price break would be likely to happen, but we don't – so we can't.

As people in China and India grow more prosperous, they will buy more gold – same with Thailand and Vietnam.  And a much higher percentage of gold buys in asia are physical.  Culturally, trust in government is low, and the virtues of portable stores of wealth independent of inflating national currencies is particularly attractive.  I see demand only accelerating in asia, as long as increasing prosperity trends remain in place.

If we use GLD's holdings as a proxy, the resolution to this might be a year or two in the future.  That's well within the timeframe of the buy-and-hold physical gold buyer.  As long as no massive deflationary collapse occurs, based on current production prices and demand levels and trends, the price at these levels seems pretty reasonable.

And if something happens to get western investment/hedge fund money back into the picture, things would look very positive.

And if GLD turns out not to have as much gold as they claim, resolution could happen more quickly than we expect.  My indicator for this situation would be if premiums in Shanghai expand, and yet the gold inside GLD stops dropping – and perhaps the gold inside the Sprott funds starts to drop, and the premium on the Sprott funds starts to increase.  If nobody in the marketplace is taking advantage of the GLD/Shanghai arbitrage, it will be because they can't.