Friday, August 30, 2013

Smoke and Mirrors

It was smoke and mirrors since day one. In fact, in the back of my mind, I suspect they might even have used the taper talk as a reason to hammer gold. Of course, they didn't realize that interest rates would go up. When Dr. Bernanke was asked that at one of the latest hearings, he said he was very puzzled by interest rates going up. This is the Chairman of the Federal Reserve Bank, puzzled by rates going up. That seems like an incongruous kind of situation that he’d be puzzled.

But I think he scared the hell out of people, because everyone was assuming they’d just print, print, print. The minute they said they may not print, of course, who’s the biggest loser out of it all? Gold. I think it was meant as part of the whole policy of keeping gold under control, which I think is a major problem that these central banks have in gold today. That’s why it was part of the process of getting the price of gold down.

- Source:

Wednesday, August 28, 2013

Patience Will be Rewarded

I have always believed that I am right and that markets are wrong, but throughout the years, I have had to endure situations like this. It happened in 1998 and 2008, but my funds have always rebounded. In due course, the markets will realize their failure. After this short pause, the gold bull market will continue and those that have been patient will be rewarded.

- Source, The Globe Investor:

Monday, August 26, 2013

Economic Data is Very Punk These Days

I don’t see the taper happening. The minute he mentioned taper and it was this negative reaction in the bond market, negative reaction to stock market, as you and your listeners would know there was recant after recant the next day. “Oh, well, people misunderstood Dr. Bernanke. He didn't really say that,” and of course, subsequently he said, “Well, you know, we could taper. We could also increase buying of bonds depending on the economical data.”

In my mind, the economic data is very punk these days. I mean, retail sales were up 0.2 percent last month. They were up 0.1 percent the month before. The labor numbers were awful for the last month. Not only did we not have many jobs, the average hourly earnings went down. The average work week went down.

It was one of the most brutal reports I've ever seen in my life. My own analysis of what’s going on is we have created a situation in the States where we’re replacing full time employees with part-time employees, and pretending that it’s a job gain. But the reality is that the total income of workers is not going up at all. So, I don’t see taper happening.

If they did taper, I think we've seen the worst in gold from the taper talk. Now, gold’s going to live its own life here, based on other fundamentals that are going on. Then, of course, you and I can talk about those fundamentals. So, I think it’s going to have its own determination based on things other than taper talk, or buying extra, fewer than 10 billion bonds in a month.

I don’t see that as having any impact. I think the biggest impact might be if they actually tapered. They said they were going to do it, that rates might just keep going up here, and, of course, that would be an awful economic development for everyone. The stock markets would come under pressure, and the bond market, of course, would come under even more pressure than the crash that we've already had in the bond market.

Saturday, August 24, 2013

Money Printing Can Hide Financial Problems for a While

I think that the Fed will remain accommodative for a very long period of time. However, the official debt is only the tip of the iceberg and, as we discussed in the most recent Markets at a Glance, longer-term benefits such as social security and medical care will have to be cut as well. The promises made by governments are too generous and cannot be kept. Not just for the average Joe but for everyone, I think we should expect less from the government and prepare to fend more for ourselves. Money printing can hide financial problems for a while, but it can’t provide tangible services to citizens.

- Source, The Globe and Mail:

Friday, August 23, 2013

Many More Detroit's Coming!

I had the great honour of interviewing Eric Sprott in our latest episode of Ask the Expert. Eric Sprott is Chairman of Sprott Money Ltd. Additionally, he is CEO, CIO and Senior Portfolio Manager of Sprott Asset Management LP and Chairman of Sprott Inc. Eric has accumulated over 40 years of experience in the investment industry and has earned a recognized standing not only as one of the world’s premier gold and silver investors, but also as an expert in the precious metals industry.

During the course of this interview we were able to delve into some of the most important topics currently afflicting the precious metals market. Shown below are a sample of the questions I was able to ask Eric Sprott:
  • Do you see a possibility of the Fed tapering? If the Fed does taper, how will this affect the price of gold? How will it affect interest rates?
  • Do you foresee many more Detroits coming in the future?
  • In the gold and silver community, there’s a vicious attack that began in April. Do you believe this was a coordinated effort by central banks to stop the flow of gold? Do Western central banks have the gold they claim to have?
  • When the next big correction occurs, what do you see in store for Canada? Do you see Canada being dragged down with the rest of the western world, or do you see Canada weathering the storm?
  • Do you believe that the worst is behind us? Do you believe gold and silver have begun the next leg up in this bull market?
As you will learn throughout the course of this interview, Eric believes that the worst is behind us. The central banks have fired their shots and failed. The FED can’t taper according to Eric. They have no choice but to keep printing. The question is, how long can they keep this house of cards together?

- Source, Sprott Money:

Monday, August 19, 2013

Explosive Gains in Junior Gold Miners

Billionaire Eric Sprott, the chairman of Sprott Asset Management, not only thinks the gold bull market is far from being over, but also says he expects to see junior gold mining stocks “higher by many hundreds of per cents,” soon.

Answering to Globe and Mail readers’ questions, the famed gold bug reiterated he thinks the market hit rock bottom on June 28th and that the price for the precious metal will be around $2,400 per ounce by mid-2014.

He added there is strong evidence that Central Banks worldwide have covertly conspired with bullion banks to sell their gold in the market.

- Source,

Saturday, August 17, 2013

Continuation of the Gold Bull Market

The continuation of the gold bull market will lead the junior gold mining stocks higher by many hundreds of per cents, just like it did during the 2008 recovery. By the way, since hitting the bottom on June 28, gold has rebounded by 12 per cent while gold miners have gone up by about 25 per cent.

- Source, The Globe Investor:

Thursday, August 15, 2013

Gold Should Double

I firmly believe that we reached the bottom on June 28th and that gold should double from that bottom within the next 12 months. So by next summer, I think that the price of gold will have made new highs and stand around $2,400 per ounce.

- Source, The Globe and Mail:

Monday, August 12, 2013

We Are All Detroit

Unfortunately if you think Detroit is an aberration, Eric Sprott is out to prove you wrong. A recent survey found that state and municipal pension plans were underfunded to the tune of one trillion dollars. Makes Detroit seem rather insignificant when you start throwing around the word trillion.

Sprott focuses on a report done by Boston University Professor Laurence Kotlikoff. He says to fix the funding shortfall in Social Security alone, the US would have to raise the FICA tax by 32% to 16.4% or slash benefits by 22%. Good luck getting either of those through Congress.

As for the Federal Budget as a whole, the professor says we are operating at a $222 trillion shortfall according to Sprott. To wipe it out, we would have to increase taxes by 64% or slash all expenditures by 40%.

Sprott concludes with the simple statement. We live in an age of a demographic time bomb. Every level government has promised too much and is now faced with the dilemma of how to walk back those promises.

What remains at the heart of the issue for Eric Sprott, is how much pain we will have to endure? Eventually the system will have to be fixed. Either we can endure a short term pain now, are a long hard slog later. Sprott concludes with this: “Over time, politicians from all stripes have proven adept at cognitive dissonance, but these increases in taxes and cuts to benefits will have to happen, one way or another; it is just a matter of time.”

- Source, Trade the News Room:

Saturday, August 10, 2013

Largest Municipal Bankruptcy in US History

Eric Sprott sees the Detroit bankruptcy filing as just the first of many dominoes that will inevitably fall in the coming years. At $18 billion, it represented the largest municipal bankruptcy in US history.

Inside the bankruptcy plan resides the issue of the chronically underfunded pensions. The city’ government made promises o its workers that it now cannot keep. The gap right now stands at $3.5 billion. Additionally, the gap of other unfunded post-employment benefits such as life insurance and health care stands at $5.7 billion.

Totalling the two out, the Detroit pension system faces a $9.2 billion shortfall. Under the bankruptcy restructuring plan, the $35 billion will be wiped out, while the $5.7 billion will undergo a 90% haircut. Essentially wiping it out in the process.

Pensioners would stand to lose $8,6 billion of future benefits or 41% of the value of ll their benefits of the proceedings go forward as planned. Obviously, the pensioners and unions will fight this in court, but Sprott out how predictable this issue was and how shocking it was the leaders did very little to mitigate the damage until it was too late.

- Source, Trade the News Room, read the full article here:

Thursday, August 8, 2013

Ask Eric Sprott His Latest views on the Gold Market

This week at Inside the Market, we’re inviting you to ask Eric Sprott for his latest views on the gold market. In his July commentary to clients, which you can see here, the CEO of Sprott Asset Management stands firm in his belief that the bull market isn't over and the precious metal will make a comeback after its recent downfall.

Mr. Sprott, one of the market’s best-known gold bugs, thinks that central banks are getting close to the end of their supplies and that the physical market for gold is becoming increasingly tight.

You can probe Mr. Sprott further by submitting a question by filling out the form below. We’ll select some questions for Mr. Sprott to answer, and publish his responses next week at Inside the Market.

- Source, Globe Investor, submit your questions here:

Sunday, August 4, 2013

The Detroit Template

By: Eric Sprott and Etienne Bordeleau

On July 18 2013, the city of Detroit officially filed for bankruptcy under Chapter 9. At $18 billion, this is the largest municipal bankruptcy in U.S. history.1 According to the current “proposal to creditors”2, the city’s pension plans have been chronically underfunded and the gap between the plan’s assets and liabilities now stands at approximately $3.5 billion. Additionally, the value of unfunded “other post-employment benefits” (OPEB) such as life insurance, health care, etc., now reaches $5.7 billion. There is thus a $9.2 billion gap between the total assets and the liabilities of Detroit’s pension and benefits system (Table 1 below).

According to the restructuring plan, the city intends to write off the entirety of the $3.5 billion pension deficit and give the OPEB liabilities (which are basically not funded at all) the same treatment as bondholders – a 90% haircut. The net result is that pensioners could lose $8.6 billion of future benefits, or 41% of the value of all the benefits (pension plus OPEB) they were entitled to before the city’s bankruptcy filing. Obviously, such a large clawback will have a profound effect on the livelihoods of the pensioners. Doubtless, this will have repercussions that will also affect the economic activity of the communities in which they live. What still puzzles us is how predictable Detroit’s problems were and how little was done to fix them before it was too late.



Source: City of Detroit – Proposal to Creditors, June 14 2013

Unfortunately, Detroit’s case is far from unique. A recent report by Standard & Poor’s highlights that, for 2012, the total deficit of S&P 500 companies’ pension plans and OPEBs amounted to $452 billion and $235 billion, respectively.3 Another report by the Boston College Center for Retirement Research surveyed 126 state and municipal pension plans and found that, for 2011, they were underfunded by approximately $1 trillion.4 Unfortunately, the report does not provide numbers for OPEB liabilities, but another report by the Pew Charitable Trust reports that for the 30 largest American cities, the average funding status for OPEB obligations is 5%.5 This suggests that this is a much bigger problem than what has been publicly reported.

While these numbers appear imposing, in reality, they are just the tip of the iceberg. The promises made by the U.S. Federal Government to its citizens are even more unmanageable. Every year since 2003, the U.S. Treasury reports the net present value of its future obligations for a 75-year horizon (the fiscal gap). This represents (almost) the real debt load of future generations. This metric, by the way, is almost always ignored by the mainstream media.

As of the end of the last fiscal year, the reported total Federal Obligations were approximately $85.4 trillion, an increase of $4.5 trillion from the prior year.6 However, those numbers do not fully reflect the total obligations of the government towards its citizens, since it does not take into account any obligations past the 75-year window.

Economist and Boston University Professor Laurence Kotlikoff has long been recognized as an expert on government finances.7 Based on the 2013 Trustees Report on Social Security’s longrun finances, he finds that the “infinite horizon” fiscal gap for social security alone (the difference between the present value of all future promised benefits and tax revenues) is around $23.1 trillion. To put these numbers into context, the U.S. GDP for this year is forecasted to be a bit more than $16 trillion.

Professor Kotlikoff calculates that to fully eliminate the shortfall in Social Security funding, the government would need to either cut all present and future social security benefits by 22%, or increase the Federal Insurance Contributions Act tax (FICA) by 32% (from 12.4% to 16.4%). But this is just to fix Social Security!

For the U.S. Federal Government as a whole, Kotlikoff estimates the fiscal gap to be around $222 trillion! This is many orders of magnitude larger than GDP. In order to wipe out this gap, the Federal Government would need to permanently increase all taxes by 64% or reduce all expenditures (with the exception of debt servicing) by a whopping 40%.

The problem is clear; every level of government has promised too much and is now faced with the politically unappealing prospect of either drastically increasing taxes for the working age population or significantly reducing benefits for the retired (or future retired). As evidenced by the Detroit bankruptcy, the longer we wait, the worse it will get. The greater the delay, the more pain and suffering citizens will face when the benefits and safety nets they have come to expect from the government suddenly disappear. Of course, the U.S. Federal Government is very unlikely to default in the same fashion as Detroit, but we should not be surprised if the “Detroit Template” of balancing the books predominantly by cuts to pensions and OPEB benefits is adopted by others. However, given that the Federal government would need to cut all expenses by 40% to balance the books (according to Kotlikoff), it is not hard to imagine that Social Security, Medicare and Medicaid would suffer haircuts in excess of those experienced by the Detroit pensioners.

Over time, politicians from all stripes have proven adept at cognitive dissonance, but these increases in taxes and cuts to benefits will have to happen, one way or another; it is just a matter of time.

- Source, Sprott Global:

Friday, August 2, 2013

There is a Shortage of Physical Gold

"It’s not going to work. Backwardation is telling you that people are unwilling to sell their gold at a price today where they can buy it in the futures market at a lower price, and get the use of the money for three months, and they are not prepared to do it. That’s what backwardation tells you -- that there is a shortage of physical gold today and that people aren’t willing to speculate that they are going to get delivery in the future. So all of the signs point to extreme tightness in the market.

You mentioned silver (earlier), which I think will outperform gold. Even when I look at this month’s sales of coins by the U.S. Mint, they have sold 100 times more silver coins than gold coins. Yet we only produce 11 times more silver than gold, and most silver is not available for investment, yet we see this huge investment demand for silver.
So I continue to believe that silver is going to be the investment of this decade. I see wonderful statistics out of India on silver. You can just imagine that if they can’t buy gold bars and coins, maybe they will start buying silver. Well, that would just be a monstrous amount of silver that the Indians would need and there is no way that the world can supply it."

- Source, Eric Sprott via King World News, read the full interview here: