Will There be Another Gold Rush?

“I do believe this will happen. Even though the amount of dollars is going up, eventually debt will be wrung out of the system. This causes deflation, which is very bullish for gold. In deflation, both creditors and debtors are in dire straits. They’re facing enormous pressure. People tend to turn towards stores of value like gold.

“We saw this happen in the 1930s’. When the stock market bubble collapsed, capital flowed into gold instead. Gold production in Canada rose from 1,928,308 fine oz. in 1929 to 5,311,145 fine oz. in 1940, which amounted to a 175% increase.1There were 100 new gold mines started during that time, and world gold production increased by over 100%. That happened because capital was going into gold.”

- Eric Sprott via a recent Proactive Investors interview

Do these ‘long wave’ economic patterns explain today’s bear market for gold?

“Well, they didn’t predict this – but they can help explain why it’s happening. Over the course of one entire ‘long wave’ economic cycle, covering a full expansion and subsequent contraction, you have what I call four ‘seasons.’ Winter is the period where debt is wiped out of the economy. It happened after 1929, which caused the US banking system to collapse. During the 1920’s, there had been a big build-up in consumer and corporate debt, as well as sovereign debt.

“During the Great Depression and the previous depression of 1873, we were on a gold standard system, so the ability to create money was limited. This time around, we are in a pure credit-based system, so the ability to create money withstands the ravages of the winter. Effectively, governments have been creating more debt. This will ultimately cause a more horrendous economic decline than in either 1929 or 1873, as debt levels are far greater today – and because the world is much more inter-connected financially.”

- Eric Sprott via Proactive Investors

The Gold Held by the FED May Not be There

I like that metaphor. Eric Sprott did an analysis that suggested that a fair amount of the gold putatively held by the Federal Reserve may not actually be in its vaults. Footnotes in the Fed's records indicate possession of about 8,000 tons but also suggest that some of that might have been loaned out. We don't know how much, but supply-and-demand numbers suggest it could be a very significant amount. I believe that the gold exchange-trade funds [ETFs] were raided because gold could not be found where it was supposedly held, so it was taken from the ETFs instead.

- Charles Oliver of Sprott Assets via Seeking Alpha

Gold is Just as Valuable Today as it was 100 Years Ago

Gold is just as valuable today as it was 100 years ago. There was an orchestrated takedown of gold in April 2013. It has since traded between $1,200/oz and $1,400/oz, and this flies in the face of the conditions you mentioned.

We're going to have to be patient. We have gone through a bottoming process. We've had similar conditions before. In 1974, after the oil embargo, U.S. inflation was increasing dramatically, yet gold fell from about $200/oz to about $100/oz in 1976. Then over the next four years gold subsequently rallied to over $800/oz. In this decade, gold has fallen from $1,921/oz to $1,180/oz, but the fundamentals remain intact, and gold will regain its reputation as a unique store of value.

- Charles Oliver of Sprott Assets via Seeking Alpha

Eric Sprotts Current Outlook for Gold

The most important factor right now is the physical shortage of gold. The declining amounts of gold in Shanghai storage suggest we are getting close. So I expect something to happen in the physical gold markets soon.

There are lots of people who are willing to support the Fed – to play along with it. But of course, they’re all looking at the exits if the game changes. I don’t really think there are that many people who sincerely believe there is some strong recovery, or that there is some plan that’s going to solve the financial crisis.

The central banks continue to pile on debt without delivering results. I think that most people understand that. We’re seeing stocks going higher while volumes are going down. Well, when you hit new records in the S&P, the Dow and the NASDAQ, you’re supposed to be seeing higher volume, not lower volume. That doesn’t seem to make sense.

When people finally decide they want to buy gold, there probably won’t be any gold. I’m happy to own it and I’m happy to keep buying it.

- Eric Sprott via Gold Investing News

Gold Demand From Asia is STILL Strong

As for gold, my thesis has been – going back to 2010 – that there was more demand for gold than there was supply. Central banks were surreptitiously making up for the shortage by supplying the market.

Demand from Asia is still strong. Trading on the Shanghai precious metals exchange is very robust, even if it’s been a little weaker lately. We also have India sitting in the wings. They have this restrictive policy that is still impeding what would be huge amounts of imports.

China has increased its purchases of gold by 1,000 tons per year over the last 5 years. This represents an extra 25% of demand in a 4,000-ton gold market. So why isn’t the price of gold going up? That to me is about as bizarre as you can get. China also bought 18% of the silver supply. Despite this new demand, the price of silver went down.

Last year, the ETFs made up for the shortfall, with around 900 tons of physical holdings leaving the ETFs. The market is only about 4,000 tons so that’s over 20% of the market. This year, contributions from the ETFs are nearly zero, so if demand stays the same, someone has to come up with the 900 additional tons of gold.

A lot of people agree the central banks have a major hand in this.

- Eric Sprott via Gold Investing News

The Banking System is NOT Safe, Get Your Money OUT!

Since before the crash of ’00, I have thought the banking system was susceptible to pressure. I didn’t want to have my money in a bank because I thought the banks could go broke very quickly.

Fast forward to 2008 — all the banks were essentially broke, as far as I could tell. The Fed came in to support the banking system, which they’ve now been doing for the past six years. And yet, there has been essentially no improvement in capital ratios at the banks and the risk of putting money there. In fact, you now lose money when you put it in the bank because of negative real interest rates – and you still take on the risks associated with the bank. To me, it’s just totally ludicrous to put yourself in that position when you realize how levered the banks are.

A lot of people would contend that ‘things aren’t that risky’ because we have this ‘wonderful economic recovery going on.’ I think that’s mostly bunk — there is no real recovery. We’ve spent trillions and trillions of dollars buying bonds and we’ve taken interest rates to zero, but we have very little to show for it. Certainly not any great recovery. I look at economic data like Caterpillar’s sales and McDonald’s sales which have been stagnant. Consumer confidence as reported by Gallup has been flat for 2 or 3 years.

90% of the US population hardly gets any wage growth and we have significant inflation. A great portion of that inflation comes from what we call ‘shrink-flation.’ You go to the store and buy a box of cereal, but your box has 20 percent less cereal than it used to have. The price may be the same, but the fact is that for the same value, your costs are up 20 percent. There’s also the price of beef, chicken, or pork or any kind of commodity that you want to talk about. They’ve all risen dramatically. The consumer is not better off; in fact, he’s way worse off today.

And I don’t even know if he has felt the true impact of the healthcare costs, with the rate increases from various states. They always seem to be double-digit increases. When your healthcare is already 20 percent of your expenses and you’ve got double-digit increases in your healthcare cost, that’s significant inflation. It’s your whole wage increase, if you have any.

Then you also have a big problem in America with student loans. You have these huge handouts that people regard as free money but ultimately results in a cost. It sustains an entire industry relating to education because the students keep taking on 50 or 100 billion a year in new student loans. But you borrow and eventually you have to pay off those debts. That’s why you hear all these stories about people who have to pay off these student debts but are in no position to pay them. This isn’t good for the economy.

Why do I talk so much about the economy? Because if the economy doesn’t turn around and we end up with either a slow economic contraction, or if a black swan comes along and makes that contraction faster, it weakens the assets of the banking system. If you have a 5 percent decline in your assets and you’re highly levered, it means you’ll get wiped out. A 5% decline in the stock market is not an unreasonable assumption. We have cracks in the housing market here — and not just in North America. You have all these subprime and auto loans that will come back to haunt us. Those loans are on the books of financial institutions.

There is a large list of potential black swans out there, whether it’s geopolitical stuff in the Ukraine, in China and Japan, or India and Pakistan. Some government could find that it can’t pay its bills and renege on its debts. There is also this whole Ebola thing in Africa. This disease is described as out-of-control. The prime minister of Liberia had to sack some of his ministers because they all left the country. If you were in Liberia, you would be leaving too. Many end up exporting the disease when they leave. If it starts showing up in Western countries, the implications for the economy could be hugely negative.

Going back to the original thesis, I was concerned in 2008 with people having their money in banks and was saying they should own gold and silver.

- Eric Sprott via Gold Investing News

Where is Eric Sprott Putting His Money?

I’ve recently bought some gold and silver funds up here in Canada.

I probably have 70 or 80 percent of my portfolio in precious metals right now, and I believe that’s the right amount to have. Time will tell whether I’m right or not.

Sprott stands for precious metals in a great way – a large part of the value of our company depends on precious metals, and I’m totally committed to that.

Much as I find it unsettling what gold and silver prices do on a day-to-day basis, I am absolutely confident that precious metals will prove the right choice in the longer term.

The moves that you can see in the stocks are almost unimaginable in other assets. We’ve already had gold and silver stocks that have put on three-digit moves this year. It feels like more of these moves could be coming.

- Eric Sprott via Gold Investing News