Banker Suppression will cause Surge in Investment Gold Demand

Listen to Eric Sprott share his views on the surge in Asian investment gold demand, the positive movement in physical gold demand around the world, and the possible impact of the Swiss Referendum on the physical gold market.

- Source, Sprott Money

The Biggest Win Will be if There is a Gold Delivery Failure

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.

- Source, Eric Sprott via Peak Prosperity

Global Gold Demand Is Overwhelming Supply

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.

- Source, Peak Prosperity

Gold Demand, The Economy & Precious Metals Open Interest

Listen to Eric Sprott share his views on gold demand in China and India, a waning global economy despite US economic data, an update on the Ebola crisis, and the open interest in the precious metals market.

- Source, Sprott Money

The Swiss Referendum & The $1.5 Billion Dump of Gold Futures

Listen to Eric Sprott share his views on the current shortage of coins, outstanding gold and silver contracts on the Comex, the dump of gold futures this week, the Swiss Referendum, and the gross demand of gold from India and China.

- Source, Sprott Money

Carnage in the PM Market & Economic Illusions

Listen to Eric Sprott share his view in the drastic slump of gold and silver, the contrived positive economic outlook of non- recovery, and an update on the spread of the Ebola virus.

- Source, Sprott Money

Swiss No Vote on Gold Referendum is License to Print Money

People own physical gold and silver as a hedge against the ongoing global debasement of fiat paper currencies in the world. However, for people that own paper gold and silver, they will be settled in cash at the very time they will need this protection.

I believe this inflection point is rapidly approaching and it may explain to some extent the recent bizarre price action in gold and silver. Part of the reason for the extreme downdraft in the metals was related to the failed Swiss Gold Initiative. The Western central planners wanted to do everything they could to ensure that would not pass.

I gave that initiative zero chance of passing from the outset, and I said as much in my article several days before the vote took place. I think the Swiss vote was very telling in that it was so overwhelming. The Swiss gave license to the Swiss National Bank to continue to debase the currency.

Outside of the Germans, the Swiss from a historical perspective stand for financial rectitude. And if the Swiss are ‘all-in’ in favor of more debasement, I think this is a very powerful signal that we are headed for hyperinflation on a global basis in the not-too distant future.

- John Embry of Sprott Asset Management via King World News

This Paper Ponzi Scheme is Now in Serious Trouble

The mauling that gold and silver experienced on Friday represents criminal activity in my opinion. The Friday after Thanksgiving is traditionally one of the quietest trading days of year, and yet on that day the HUI declined nearly 8 percent. Gold and silver equities remain the least expensive equities on the planet.

For gold and silver and the shares to be blasted like that post-holiday was very telling. That action was preposterous. To me it reveals that the Western central banks and their bullion bank accomplices are in deep trouble when it comes to gold and silver.

Western inventories have been sharply depleted as supplies continue to migrate to the East. The end of the Indian restrictions is also another major development. This will mean even more gold heading from West to East, putting additional pressure on the central planners to release the price of gold.

This will create enormous trouble for Western planners in the paper gold and silver markets. There are arguably more than 100 paper claims on each remaining ounce of gold and silver in the West. This paper Ponzi scheme is now in serious trouble.

- Source, John Embry of Sprott Asset Management via King World News

Economic Slump in all Economies & Disingenuous PM Markets

Listen to Eric Sprott Share his Views on Ebola, the Economic Slump Around the World and the Disingenuousness in the Precious Metals Markets.

Gold and Silver Fundamentals Will Take Hold

Crisis-induced asset price weakness puts a terrible strain on the banking system and takes us back to 2008 when people realized they were better off putting money in gold and silver than propping up the banks. As a precious metals investor, my biggest concern is what happened to the banking business during that crisis. The Federal Reserve bailed out the banks, but never fixed the problem. The banks are still overleveraged and negative real interest rates aren't giving account holders a reason to keep their money there. When people come to that realization en masse is when gold and silver prices will return to where they should already be based on the fundamentals.

In this environment, the royalty companies seem to have done the best. They essentially have almost zero cost. All they have is revenue. Now, the revenue goes down because the price of gold and silver goes down, but you're not going to go broke.

However people invest in precious metals I would like to stress what I said in the roundtable: People need to stay the course. I think the returns can be very large if what should happen is allowed to happen in the physical market. I think it will happen very shortly.

- Source, Eric Sprott via Market Oracle

Disease Could Cause a Financial Armageddon

Unfortunately, recent events have suggested that travel protocols, monitoring programs and hospital procedures are not working. It's a mess of incompetence, and it goes back to central planners focusing on the economy and the stock markets and bond yields. They forget about people and their response is wholly ineffective. When Doctors Without Borders was screaming months ago that it needed more help, nothing happened. No one understood the simple equation of numbers that if you let this thing go, you've lost control. We have certainly lost control in Sierra Leone and Liberia. The Ebola virus doesn't know where the border is and the likelihood of it spreading to Ivory Coast and Ghana is very high. The jury is still out on how the developed counties will do.

Fear of travel and business disruption is definitely going to have an impact on a fragile economy already weakened by recessions in Europe and Japan. An event like this could have serious negative repercussions because it changes people's behaviors. If people worried about the security of bank deposits start pulling their money out, they would logically want to shift to gold and silver. All of a sudden, investors would come back into these markets and push the price up. No one is considering that. The natural Armageddon of disease could cause a financial Armageddon and precious metals are the natural comfort play.

- Eric Sprott via Market Oracle

Closing Mines in Africa due to Ebola Could Cause Gold and Silver to Move Rocket Higher

There is already a shortage of gold and silver in the markets without a corresponding increase in the price. I wrote an open letter to the World Gold Council questioning its data on China. If you believe the Shanghai Gold Exchange data, China consumes more than 2,000 tons (2 Kt). In 2011, it consumed only about 1 Kt. In the last two years, China has bought an extra 1 Kt gold—25% of a 4 Kt market. If any country came in and bought 25% of the oil market, the wheat market or the orange juice market, the commodity price would not go down. Obviously, the physical gold market is not manifesting itself in the price changes.

We also see that in silver. Last year, Indians bought an extra 18% of the silver market, yet the silver price declined. That's because the price is being run by someone who has avoided the physicality of the market. I hope the U.S. Mint will announce that it has to stop selling 2014 silver because the demand has picked up so much. That's what I expect the Mint to do if it's running out of silver. It would be interesting if some of these futures players were to stand up and demand delivery, because I don't think the Mint could deliver.

Closing mines in Africa would just exacerbate the supply problem and cause things to finally change dramatically to the upside in prices as people publicly acknowledge the fundamentals.

I'm really focusing on the impact of Ebola on the demand side. The numbers suggest that Ebola will be difficult to contain. The death rate is incredibly high and it is highly contagious. It has already spread to Spain and the U.S. Unfortunately, the powers that be at the Centers for Disease Control (CDC) and the World Health Organization (WHO) have totally misunderstood and understated what's going on. Four weeks ago the U.S. government magnanimously announced it will spend $22 million to build a 25-bed facility in Liberia. What would 25 beds possibly do in Liberia? Sierra Leone has already given up trying to treat people in hospitals. The country could have 100,000 cases in just a few months. The CDC estimated that we could see between 550,000 and 1.4 million cases by Jan. 20 in just those two countries. There aren't enough hospitals or healthcare workers there to deal with those numbers.

Eric Sprott via The Gold Report

Why Billionaire Eric Sprott Thinks Ebola Will Cause Gold and Silver to Skyrocket

In an interview earlier this week, billionaire Eric Sprott was interviewed by The Gold Reporton why he is betting so heavily on gold and silver. Why is he such a believer? Below, we take a look at a couple of reasons, then reveal the best ways to make this bet.

The Ebola Outbreak

First of all, it’s important to make one thing clear: Gold is not really a hedge on inflation. Recent data has proved as much. Rather, the metal is a hedge on the fear of inflation. That’s why crises such as the Ebola outbreak prompt spikes in the gold price — investors speculate that economies will be hurt, prompting central banks to print more money, which leads to greater inflation. So investors snap up gold, prompting the price to rise.

And the Ebola outbreak could get much worse. To make things clear, no one is hoping for such an outcome, and Mr. Sprott said as much as well. But Sierra Leone and Liberia have proved incapable of handling the epidemic. Worse still, the virus could easily spread into countries like Cote D’Ivoire and Ghana. From there, it will only be harder to contain.

The virus could also have an impact on supply — for example, Ghana is the world’s 10th largest gold producer. Mali and Burkina Faso are also significant producers in West Africa.

Supply and Demand

If you look at the world supply of gold, it’s in serious trouble. Mining companies are cutting exploration budgets, junior explorers can’t get funding, and mines are being depleted. So in just a few years, global mine supply will fall, under practically any gold price scenario. A similar case can be made for silver.

Meanwhile, China has been buying ever-increasing amounts of gold. In fact its gold consumption has doubled since 2011. As Mr. Sprott put it, “Obviously, the physical gold market is not manifesting itself in the price changes.” There’s a similar story going on in the silver market. Last year, India bought an extra 18% of the silver market, yet prices somehow went down. Over the longer term, especially with depleting mine supply, this could cause prices to skyrocket.

So how do you profit?

Mr. Sprott and his team offer an ETF of gold companies, and he screens for two items in particular: revenue growth and a lean balance sheet. Revenue growth is important because it signifies growing production. Meanwhile a clean balance sheet is important because high debt levels increase risk, take a bite out of profitability, and also make a company less flexible.

With that in mind, two companies stand out: Franco-Nevada Corporation (TSX: FNV)(NYSE: FNV) and Silver Wheaton Corp. (TSX: SLW)(NYSE: SLW). These companies don’t operate existing mines, but rather sign royalty agreements with other miners. This helps them grow revenue more consistently. The companies also have pristine balance sheets.

If you’re insistent on buying a miner, you should consider Goldcorp Inc. (TSX: G)(NYSE: GG). The company has been a very responsible actor, and as a result, it has less than $1 billion in net debt. Better yet, it is still growing production.

- Source, Motley Fool

Sprott Precious Metals Roundtable Webcast

A Round Table Discussion with Eric Sprott, Rick Rule and John Embry.

The Fed Has Lost Control of the Bond Market!

Eric Sprott: There's No Real Markets Anymore

Jason Burack of Wall St for Main St had the opportunity to interview former top hedge fund manager, entrepreneur, investor, founder and Chairman of the Board of Sprott Asset Management, Eric Sprott.

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

Rick Rule: Newmont & Barrick – This Merger Has To Happen

Into our third week of Palisade Radio's relaunch, we're bringing on none other than Rick Rule, CEO of Sprott US Holdings. Rick Rule is a well known speculator and investor in the natural resource sector, and as he himself puts it, he has dedicated his entire adult life to natural resource investing. We brought Rick on to discuss the current state of the natural resource sector, and how investors can reap extreme gains from it's cyclical upturn. Rick discusses the importance of the merger talks between the world's two largest gold companies and why it must happen!

John Embry- Something Seriously Wrong With Financial System

John Embry, Chief Investment Strategist at Sprott Asset Management, thinks gold price suppression is a key factor in global monetary policy. Embry contends, “If the gold price truly reflected what is really going on in monetary policy today, I think real interest rates would rise quite significantly. Given the amount of debt that is polluting the world banking system, to me, this is the end game, and that’s why it’s so vicious in terms of suppression right now. When this turns, it is going to change a lot of things. That’s why they are being so aggressive on maintaining pressure on the gold and silver prices. Silver is especially suppressed. I don’t think you can dig it out of the ground for less than $25 per ounce. It’s not like gold. There is not a huge above ground inventory.” Embry adds, “I have never seen it any more intense in terms of pressure in the paper market, which indicates we are near the end, and there is something seriously wrong with the system.”

Ask The Expert - Jeff Berwick Sprott Money News

Jeff Berwick is the founder of the Dollar Vigilante. He’s also the CEO of TDV Media & Services and host of the popular video podcast Anarchast. Jeff is known to be an anarchal capitalist activist and has written extensively about the impending collapse of the U.S. dollar-based financial system.

India and China Have Put a Floor in the Gold Price

We had four to six sigma events in the gold price last year, which are only supposed to happen once every 40,000 years. I have no doubt that, in my mind, there’s a distinct possibility that they acted in concert on that.

These thousand dollar price projections around, I think, the most famous one was from Goldman Sachs. I believe that this last week they raised their price to $1200, maybe on the way to much higher prices. It seems obvious to anyone involved that if the price got that low it would be the demand from India and China and many, many other countries would rise very dramatically here.

So I don’t think that’s a reasonable assumption. I think that the supply-demand data that we analyze all the time suggests there’s a shortage, and that the paper markets will be overrun here, and we have to see much higher prices.

- Eric Sprott via an Ask The Expert interview

The Miners and Future Gold Production

We have somebody like Barrick selling off all sorts of mines. We have lots of producers that have decided to high grade and try to become more efficient in their existing mines, which of course means you’re leaving behind some of the gold that you would otherwise produce in order to try to hold it together with this low price environment. And all of those factors, of course, will lead to lesser production in the future, because once you bypass some ore it’s very difficult to get back at it, because in the case of an underground mine you filled it in and you don’t have access to it any more.

So I think that we will see production going down here. We know that exploration expenditures have fallen dramatically. We know that developments have fallen dramatically. We’ve seen lots of big developments postponed.

So the outlook on the supply side is, you know, we have not increased supply in the last 14 years. It’s been about the same every year, 2700 tons of gold for 14 years. And I suspect that as we go into even the latter part of this year, into ’15, ’16, ’17, there’s no way that production can go up if prices stay at these levels.

I mean, some of them may go out of business as well. We’ve had lots of mines shut down, but I wouldn’t particularly say that the large guys will go out of business. I think at $1300 gold, most people can hold on here. But holding on is one thing, increasing production is another one. And to the question, I think, the real impact will be on future production.

- Eric Sprott via Ask The Expert

The Money Printing Will Show Up in Inflation

We saw in the first two months of this year a 40% rise in the gold stocks. It then retreated. We’ve seen about a 30% rise recently in the gold stocks. It just shows you how the market can react quickly. And this is with gold still trading $1300 to $1400. Imagine if it started going back up to $1400, $1500, $1600. It’s going to bring a world of investment into the market and, of course, people will buy those stocks.

And I would say conversely that people should realize that the general stock market, in my mind, is at great risk here, because it’s sort of followed along with the degree of money printing, and you just can’t keep doing this forever. The money printing will show up in inflation. We’re seeing higher inflation data now.

I think that the risk of owning stocks which have risen so dramatically since ’09, while basically GDP has done nothing, sales revenues have hardly done anything. Miraculously, earnings go up, but I can guarantee you that if your sales don’t go up you have a very difficult time having earnings go up, unless you’re causing your suppliers, most particularly labor, to take lower wages.

- Eric Sprott via Ask The Expert

All Fiat Currencies Are Flawed

The Canadian dollar should be one of the stronger currencies, but all currencies are flawed, and they’re flawed in the sense that by having created this zero interest rate environment, the cost of government’s borrowing money is as negligible as you can get it. So, therefore, the willingness to keep increasing deficit spending is quite significant and to keep ignoring the increasing obligations.

And I always turn to the US in which they publish every year what the present value of their future liabilities is, and every year it goes up by about $5 trillion. Well, the GDP is $17 trillion. The government has revenue of $3 trillion. They spend $4 trillion. And, they’ve got an extra $5 trillion of obligations at the end of each year. Those obligations are pushing towards $80 trillion now. And any thinking person would know that this organization that has $3 trillion in revenue cannot meet these obligations.

It’s not just the US. I’m sure it’s Japan and England and the various European countries. They all keep making promises that they know they can’t keep. And, therefore, it’s another reason not to believe in currencies, because someday they’re going to default on their promises. There’s no doubt they will default on their promises or they’ll just keep printing money, and the money that they pay to these people who have these claims will be worth very, very little, because in reality the economies can’t afford it.

- Eric Sprott via Ask the Expert

Global and US Economic Recovery & Weakness in the European Commercial Banking System

Eric Sprott shares his views on global and US economic recovery, weakness in the European Commercial banking system, and action in the precious metals market.

GoldSeek Radio: Eric Sprott, James Turk, Dr. Stephen Leeb

Billionaire-entrepreneur and founder of Sprott Asset Management, CEO Eric Sprott says the official economic numbers are bogus; most people realize they are paying more for life's necessities than reported. Even after spending trillions of taxpayer dollars, the Fed has accomplished little other than put the US further into debtor's prison. Last week, the EU put savings accounts with over 100,000 Euros at risk of confiscation - Eric Sprott says that investors across the pond should be bracing for something similar, unless of course savings are held in physical bullion, coins and bars. But tarry not, according to his research physical demand for gold exceeds global mining output; one nation (China) is consuming all of the gold produced in the entire Western world. Bank trading desks combine their financial clout with the leverage facilitated by paper contracts to manipulate the precious metals markets with impunity. He shares a recent headline story of a homeowner who found a container of gold coins in the backyard worth $30,000 when buried, now worth $10 million, illustrating the safe haven qualities of the yellow metal.

You Get Nothing for Having Your Money in the Bank

If there’s no ability to pay back debt, then these very, very leveraged banks suffer catastrophic losses, because it takes so little decline in asset value the way that their capital. We’ve already seen a number of instances – we have the one in Portugal, I think we had one in Bulgaria, and there’s talk of some banks in Austria being in trouble – because of all the economic weakness that prevails pretty well throughout the world here.

So that’s why I keep looking at economics to affect the banking industry. Then people realize that you get nothing for having your money in a bank and when you put your money in a bank you’re a creditor.

- Eric Sprott via Ask the Expert

Manipulation in the COMEX and LBMA

I don’t really think you need a fix, quite frankly. Most of these markets are 24-hour markets. I mean somebody might argue that you need it for pricing at a specific time for some contracts that are out there, but I suppose one could just say, “Well here’s where silver was trading, let’s say 10:00 a.m. London time this day, and make that the price for contracts to settle.”

But, there seems to be no doubt that the LBMA fix was fixed, and of course we’ve seen examples of manipulation where Barclay’s was fined, I think it was 40-odd million dollars, for manipulating the price back in 2013. As I’ve said before, you see these weird trades on COMEX when options expire. I mean it’s a game that the boys with the money can play and move things around.

I wish they would’ve disbanded the fix, well, they have disbanded the fix, particularly when it manifested itself, because they had five traders sitting on the phone for five minutes deciding where things would go, and of course, in the meantime, they are placing orders to make their books look more attractive to them and/or participating in the market before the fix was made.

So there’s no doubt that it’s outdated. It shouldn’t be used and will not be used, but the fact that we’ve got the CME back in there is somewhat distressing to most of us precious metals holders who want to deal on the physical market.

- Eric Sprott via Ask the Expert

The COMEX Data is Corrupted

I might argue that the COMEX data is tainted, that they’ll just say whatever they want to say.

In fact, I find it very interesting that there was a lawsuit just filed against the CME and one of their principals for facilitating high-frequency trading in the CME – Chicago Mercantile Exchange, and giving priority to certain high frequency traders. The suit was just filed, I think, yesterday, Thursday, or maybe on Wednesday. It’s probably available to the public. I haven’t specifically looked at it yet.

I just think that the COMEX data is corrupted. It’s very hard to make any sense of it all. The fact that there’s no deliveries from the dealers is incredible. You’d think there’d be some change in the inventory. I don’t care whether it’s up or down, but at least you’d think there’d be some change.

- Eric Sprott via Ask the Expert

Turmoil in Ukraine, Iraq, Israel, Palestine & US Recovery

With MH17 being shot down in Ukraine yesterday, geopolitical unrest is widespread around the world. Janet Yellen also testified before the Senate Banking, Housing and Urban Affairs Committee about US economic recovery this week. How does all these affect the gold and silver markets? Listen to what Eric Sprott has to say.

Lots of Investigations into the Manipulation of the Gold Market

I think the central banks are a part of it. There’s no doubt about that. There’s a great book written by Dimitri Speck called ‘The Gold Cartel.’ And he indicated that gold manipulation started on August 5th, 1993, basically led by central banks for the purpose of maintaining credibility of their currencies. They had this theory that if they keep gold down no one will be concerned about owning fiat money.

But I think laterally it’s the manipulation has obviously been amongst the commercial banks. I think they figured out that with their very deep pockets that they can kind of overrun the natural buyers of paper gold and force the price to do what they wanted. And I’ve discussed many times I think they play this game in the options market where they cause their customers who are long options to lose the premiums constantly, and every option expiry the price of gold goes down. So I think it’s transferred itself over to the commercial banks.

Luckily, we have a number of investigations going on, whether it’s in Britain, or Germany, not so much the US. But there’s lots of investigations into manipulation of the gold market.

So today I think it’s a combination of both the central banks and the commercial banks perhaps working in cahoots. Because let’s face it, the central banks by their zero interest rate policy and printing of money have kept the banking industry in a profitable position much to the detriment, of course, of the public and savers, because you can’t get any return on your money any more.

- Eric Sprott via a recent Ask The Expert interview

US Economic Data & Weakness in Gold and Silver Options Expiry

Eric Sprott shares his thoughts on the upcoming gold and silver options expiry, US housing starts data, and recently released Indian silver data. Listen to Eric's perspective on how these issues will unfold in the future.

Geopolitical Tensions Make Gold a Must Have Asset

There’s no doubt that with all the tension in the world the average person would have a higher inclination to wanting a physical asset. And anyone in the Middle East or in Europe could see that this tension can spread from one place to another. None of these situations have been resolved. They’re ongoing. They’re kind of flaring up. We even have the Ukraine prime minister resigning yesterday, and it looks like their parliament might dissolve.

So there’s lots of reasons for people to consider owning precious metals. We also have a situation in Asia, where there’s lots of tension between China and Vietnam, China and Japan, even China and the US, which could be explosive. I’ve never been one to use that as a factor for necessarily owning gold, although it is one, but it’s not my primary reason to suggest that people should own precious metals.

My primary reason is just simply an excess of demand over supply. Obviously, I believe that the paper markets where they have an unlimited supply of paper gold have restrained prices, and ultimately we’re going to win that war. I’ve written many articles about the central banks possibly having no gold left, and I think there’s very, very much evidence of that.

Of course, the people at GATA have done a great job of explaining that. We see some very odd data that the UK is a huge exporter of gold. Well, they don’t produce any gold. The US exports more gold than they produce, and you’ve got to wonder where is this gold coming from. If you don’t produce it, where is it coming from? Of course, the assumption I would make is it’s coming from the central banks, and they’re totally non-transparent about their transactions. In fact, there is way more demand than supply, and sooner or later this will play out in the markets.

- Eric Sprott via a recent Ask the Expert interview:

http://www.sprottmoney.com/news/ask-the-expert-eric-sprott-july-2014

The Silver Fix and Manipulation

In this month's Ask the Expert, Eric Sprott answers questions from our followers regarding the impact of geopolitical events, supply and demand data, manipulation, and the silver fix on precious metals prices.

The Gold Price Should be $5,000 or $10,000 and It Will be

Hopefully the commercials find that the game is getting less and less profitable, and ultimately we let the physical surplus of demand over supply determine the price. This would be very exciting because it’s not hard to imagine the price easily getting to $2,000. Of course there has been lots analysis done out there, whether it’s money supply or real inflation, on what the price of gold should be, and you get to $5,000 and $10,000, and I think that will all play out.

You know I look back and gold bonds used to be issued in the 1800s. And I saw an example of a gold bond that was issued in 1888. It had a 6 percent coupon, payable in gold. And I did the calculations of compounding the interest rate, compounding of the price of gold that has risen, and that $1,000 bond was worth $60 million today.

And I thought, you know what? That’s the story of gold -- that it protects you in (dangerous) environments, and it gives you this huge, outsized return, not withstanding these massively violent, brutal attacks, where everyone is trying to get you to stand away from the market. I hope all your (readers and) listeners have resilience, stay the course, and continue to buy as I will be buying, and I look forward to some wonderful returns going forward.

- Source, Eric Sprott via King World News

Where is the Supply of Gold Coming From?

I’m going to be knocked off my socks if something doesn’t happen with gold, but last year it was reported that we lost 700 tons in the GLD, which is physical gold that was sold into the market....

And here we are in 2014 and so far we are up about 12 tons (in GLD), so it’s no big deal. Maybe we will do 20 tons by the end of the year, but if you look at the dynamic of having 700 tons (of gold) not come to the market, and the GLD actually buying tonnage, you have a metric where you could see an 800 ton delta just in the GLD, in a 4,000 ton market.

Who is supplying this? Because supply is not going up. So I think that there are many, many reasons from a physical perspective that the gold market will be shockingly great this year, and that ultimately (with) the paper guys, there is going to be some problem that manifests itself here. Whether it’s taking delivery on the Comex, or the Chinese not receiving their gold, something like that has to happen with the kind of metrics we have.

- Eric Sprott via King World News

The Banking Industry is Way to Levered

A lot of the policy to keep the gold price suppressed is not going to work. How could anybody honestly believe that inflation is only 2 percent? It’s so ridiculous, and even the public is now realizing it’s ridiculous. The central planners have played a game that hasn’t worked, and there will be a price to pay.

When you see a bank goes down, what’s the first thing you think about? ‘I want my money out of the bank. Where am I going to put it all? I better put it into something real.’ We keep hearing that the bad loan problems are getting worse, the trading volumes for the commercial banks are going down, the spreads are narrowing. And I would never have my money in a bank. They are so levered and risky.

It’s funny that it doesn't strike people as being risky, but when you put your deposit into a bank, you've lent your money to the bank. If the money is lent to someone else who is not going to repay it, you are going to be on the hook for it. We just had the German government approve of bail-ins in that country. So we are all set up for it. Everybody knows there is going to be a problem in the banking industry because it’s just way too levered based on any normalcy in banking. So our day will come.

- Eric Sprott via King World News

Gold and Silver Prices Reek of Suppression

It’s hard for me not to think it’s imminent. When I got into the gold market back in 2000 I read Frank Veneroso’s gold book. He suggested that the central banks, who said they had 35,000 tons of gold, probably only had 18,000 tons.

And I see data every year that suggests demand might exceed supply by 2,000 tons. So the metal can come from only one place -- (Western) central banks. That’s why I wrote the article in 2012, ‘Do They Have Any Gold Left?’ Then you see data points out of the U.S., where the U.S. is exporting 40 tons of gold one month, and the U.K. is exporting 112 tons to Switzerland one month, and the U.K. doesn’t even produce any gold -- so where is this gold coming from?

These numbers all reek of the suppression of the gold price and tell you the game will have an end date. I think we might be very close to that end date now. I know lots of your readers and listeners will have seen a comment by some reporter from Bloomberg who suggested that the Bank of England's vaults were empty now. [LAUGHTER.]

And I suspect that is very close to the truth -- that the supply is dwindling, and someday they just give up on it. Like they should be giving up on the policy of money printing. They accomplished nothing. We’re so misguided on all this stuff. It’s not working. All we’re doing is piling on the debt. Well, there is a cost to debt and that cost gets bigger all the time.

- Eric Sprott via a recent King World News interview

Failure to Deliver Will Send Gold Higher

We have the Chinese coming in and buying an extra 1,500 tons (of gold). We will have a GLD metric that could be as much as 1,000 tons just this year, year over year. The Indians haven’t changed the laws yet but I think that will be forthcoming, and they can get back into normal buying mode....

We know that production is likely to fall off because of the lack of financing, the difficulty of getting projects approved, the unwillingness to go into projects, and the massive decline in exploration.

So if you look at it from a longer-term perspective, you can see that all the catalysts are in place. In terms of the immediacy of something, it’s going to be a failure to deliver. I don’t know where it’s going to occur, but it will be a failure to deliver somewhere.

- Eric Sprott via a recent King World News interview

Financial Sell Offs Should be Taken Advantage of by Investors

Sprott's Market Strategist David Franklin explains why investors should take advantage of current opportunities in the markets. Taped in Vancouver at Cambridge.

James West interviews Rick Rule, Chairman/Founder of Sprott Global Resource Investments

James West, the CEO of Midas Letter Financial Group, sat down with Rick Rule, the Chairman and Founder of Sprott Global Resource Investments to discuss the future of the Resource and Mining marketing, the stewardship of capital, and the LNG Export Rush occurring in Canada and the US.

The West Will Regret All Its Financial Policies Someday Soon Sprott

Video Podcast interview with Eric Sprott; by Lars Schall on behalf of Matterhorn Asset Management, Switzerland.

Are You Swayed or Afraid? A lecture by Sprott's Michael Kosowan

Sprott's Michael Kosowan ( delivers his lecture, Gold Stock Opportunities: Are You Swayed or Afraid? Taped at Cambridge Ho.

David Franklin, the Chief Market Strategist from Sprott Asset Management discusses the short-term future for gold. Solid information for investors here. Stay.

Join us at an upcoming event! Goldseek's Peter Spina ( talks about legendary investor George So.

Chairman of Sprott Global Resource Investments Rick Rule ( pulls back the curtain on 3 companies he's buying now.

The Physical Buyers Will Overwhelm The Paper Sellers

In this SNNLive Wall Street View, our host spoke with Eric Sprott, Chairman of Sprott Money Ltd. at the Silver Summit Conference in Spokane, WA.

Silver Will Go to $100 This Decade

In this SNNLive Wall Street View, our host spoke with Eric Sprott, Sprott Asset Management at the Hard Assets Conference in New York City.

Eric Sprott to sell 25 million shares in money management firm Sprott Inc

Eric Sprott, a former analyst who formed a brokerage firm before setting up his own money management firm two decades back and who is generally regarded as one of the country’s legendary precious metals’ investors, is reducing his stake in the company. He announced Tuesday he was selling at least 25 million shares in Sprott Inc. at $3 a share.

Of the 25 million shares being sold, 20 million come from a Sprott-controlled company and will be sold to the public via a bought deal. The balance will also come from a Sprott-controlled company and will be sold to the company’s employee profit sharing plan. If both stock sales are completed then Mr. Sprott will have reduced his stake in the company to 53.2 million shares, which makes him the largest shareholder in the company that was taken public in early 2008 at $10 a share.

Given Mr. Sprott’s age, the stock sales should not come as a complete surprise given his intention to reduce his role at the company. But he is not going too far as most of the proceeds from the sales will be reinvested in Sprott funds.

But the equity sales are noteworthy because they mark the first time that Mr. Sprott has sold shares to the public since going public in the spring of 2008. He has given some of his holdings to new executives who were hired (including, its understood, Kevin Bambrough and Peter Grosskopf) and to the employees profit share plan. Sprott, the company, has issued shares for acquisitions...

- Source, Financial Post, read the full article here.

What NOT to Do When Investing in Miners

By Eric Angeli, Investment Executive, Sprott Global Resource Investments

Precious metals miners are the most volatile stocks on earth. They're so volatile that investors often forget that underneath those whipsawing stock prices lie real businesses. But even many of those who consider themselves old pros in natural-resource investing tend to get one thing wrong. Eric Angeli, an investment executive with Sprott Global Resources and protégé of legendary resource broker Rick Rule, explains how not to fall into the "top-down" trap…

If the past two years have taught us anything, it's that trying to predict short-term moves in the gold price can be a road to ruin. Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it's even tougher when you consider that oftentimes, market-moving news, such as a central bank trade, isn't reported until after the fact.

In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.

Method #1—Top-Down Approach

You may have heard this method referred to as “Directional Investing.”

A directional investor decides that gold prices will increase in the long run. That's the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.

If an investor can get the timing right, this can be a lucrative strategy. There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.

In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top-down approach.

That's why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount.

This mindset leads to the herd mentality and, frankly, gives us our best bull markets.

I prefer method #2.

Method #2—Fundamental Approach

Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.

Fundamental investors want to know: which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom-up” method, however, does require a lot more homework.

Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.

While I do believe in higher gold prices eventually—and inevitably—I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move—which we can never know—we focus on picking quality companies.

Why Hasn’t the Top-Down Approach Been Working?

You might say: because the price of gold hasn’t gone up! That's true, but there’s more to the story.

Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners' operating costs rose faster than the price of gold. Investors didn't expect that.

Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?

Top-down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price—but they ignored underlying cost factors.

The Top 7 Things to Look For

This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:

1. Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better. 
2. Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock. 
3. Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices. 
4. The company's mine should remain profitable even if gold drops to $1,000 per ounce. It could happen. 
5. Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough. 
6. Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn't really a tier-one asset. You don't want to get caught in the middle of a government dangling final permits above managements’ heads. 
7. Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside? 

Don't Let Fear Make You Miss Out

Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That's why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard-earned capital.

Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge.

I'll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don't let emotion cloud your judgment.

On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas.

My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest-quality tier-one companies, you could miss out on one of the biggest bull market moves of your investing life.

Eric Angeli is an investment executive at Sprott Global Resources. You can reach him at eangeli@sprottglobal.com or by calling 1.800.477.7853.

Read Eric's—and other experts'—pertinent investment advice every day in the free e-letter, Casey Daily Dispatch. Click here to sign up now.

The article What NOT to Do When Investing in Miners was originally published at caseyresearch.com.

Physical Shortage Applies to Platinum and Palladium

I find the case for platinum and palladium even more compelling than anything else right now. When you think that the top supplier of these metals is Russia, and that the second biggest is South Africa, which is on strike, I find it surprising that the price of platinum and palladium has not exploded.

I also see what goes on in the paper markets, however. The commercials are taking on an increasing short position in both of these metals, which is pushing the metals lower. A recovery in platinum and palladium would certainly help all precious metals move higher, including gold and silver.

I think that there’s a great case to be made in platinum and palladium.

- Source, Eric Sprott via Sprott Money

Gold and Silver Will Move Higher, Regardless of What Happens

Well, I imagine that people in the area – in countries like Romania or Bulgaria, or in the Ukraine itself – would be thinking about putting some of their money in gold right now. Obviously it does bring people into the gold market.

I prefer not to fall back on these sorts of possibilities as reasons to own gold. These are ‘black swans’ for gold. I prefer to focus on the physical shortage argument for owning gold, because I believe the case there is black and white. The means and motive for suppressing the price of gold are well-known. And the physical will win the day.

Now, gold will benefit from black swans – a war, governments going broke or the recession getting worse. These could happen, but things are changing in the precious metals markets regardless of these events.

 - Source, Eric Sprott via Sprott Money

Why the Resource Supercycle Is Still Intact

By Rick Rule, Chairman and Founder, Sprott Global Resource Investments Ltd.

Natural-resource-based industries are very capital intensive, and hence extremely cyclical. It is not unreasonable to say that as a natural-resource investor, you are either contrarian or you will be a victim. These markets are risky and volatile!

Why cyclicality?

Let's talk about cyclicality first. Some of the cyclicality of these industries is a function of their being extraordinarily capital intensive. This lengthens the companies' response times to market cycles. Strengthening copper prices, for example, do not immediately result in increased copper production in many market cycles, because the production cycle requires new deposits to be discovered, financed, and constructed—a process that can consume a decade.

Price declines—even declines below the industry's total production costs—do not immediately cause massive production cuts. The "sunk capital" involved in discovery and construction of mining projects and attendant infrastructure (such as smelters, railways, and ports) causes the industry to produce down to, and sometimes below, their cash costs of production.

Producers often engage in a "last man standing" contest, to drive others to mothball productive assets, citing the high cost of shutdown and restart. They fail to mention their conflicts of interest as managers, whose compensation is linked to running operational mines.

Interest-rate cycles can raise or lower the cost and availability of capital, and the accompanying business cycles certainly influence demand. Given the "trapped" nature of the industry's productive assets, local political and fiscal cycles can also influence outcomes in natural-resource investments.

Today, I believe that we are still in a resource "supercycle," a long-term period of increasing commodity prices in both nominal and real terms. The market conditions of the past two years have made many observers doubt this assertion. But I believe the current cyclical decline is a normal and healthy part of the ongoing secular bull market.

Has this happened in the past?

The most striking analogy to the current situation occurred in the epic gold bull market in the 1970s. Many of you will recall that in that bull market, gold prices advanced from US$35 per ounce to $850 per ounce over the course of a decade. Fewer of you will recall that in the middle of that bull market, in 1975 and 1976, a cyclical decline saw the price of gold decline by 50%, from about $200 per ounce down to about $100 per ounce. It then rebounded over the next six years to $850 per ounce.

Investors who lacked the conviction to maintain their positions missed an 850% move over six short years. The current gold bull market, since its inception in 2000, has experienced eight declines of 10% or greater, and three declines—including the present one—of more than 20%.

This volatility need not threaten the investor who has the intellectual and financial resources to exploit it.

The natural-resources bull market lives…

The supercycle is a direct result of several factors. The most important of these is, ironically, the deep resource bear markets which lasted for almost two decades, commencing in 1982.

This period critically constrained investment in a capital-intensive industry where assets are depleted over time.

Productive capacity declined in every category; very little exploration took place; few new mines or oilfields replenished reserves; infrastructure and processing assets deteriorated. Critical human-resource capabilities suffered as well; as workers retired or got laid off, replacements were neither trained nor hired.

National oil companies (NOCs) exacerbated this decline in many nations by milking their oil and gas industries to subsidize domestic spending programs for political gain. This was done at the expense of sustaining capital investments. The worst examples are Mexico, Venezuela, Ecuador, Peru, Indonesia, and Iran. I believe 25% of world export crude capacity may be at risk from failure of NOCs to maintain and expand their productive assets.

Demands for social contributions in the form of taxes, royalties, carried equity interests, social or infrastructure contributions, and the like have increased. Voters are not concerned that producers need real returns to recover from two decades of underinvestment or to fund capital investments to offset depletion. Today this is actively constraining investment, and hence supply.

Poor people getting richer…

The supercycle is also driven by globalization and the social and political liberalization of emerging and frontier markets. As people become freer, they tend to become richer.

As poor countries become less poor, their purchases tend to be very commodity-centric, especially compared to Western consumers. For the 3.5 billion people at the bottom of the economic pyramid, the goods that provide the most utility are material goods and consumables, rather than the information services or "high value-added" goods.

A poor or very poor household is likely to increase its aggregate calorie consumption—both by eating more food and more energy-dense food like meat. They will likely consume more electrical power and motor fuel and upgrade their home from adobe or thatch to higher-quality building materials. As people's incomes increase in developing and frontier markets, the goods they buy are commodity-intensive, which drives up demand per capita. And we are talking billions of "capitas."

Rising incomes and savings among certain cultures in the Middle East, South Asia, and East Asia—places with a strong cultural affinity for bullion—have increased the demand for gold, silver, platinum, and palladium bullion. Bullion has been a store of value in these regions for generations, and rising incomes have generated physical bullion demand that has surprised many Western-centric analysts.

Competitive devaluation

The third important driver in this cycle has been the depreciation of currencies and the impact that has had on nominal pricing for resources and precious metals.

Most developed economies have consumed and borrowed at worrying levels. The United States federal government has on-balance-sheet liabilities of over $16 trillion, and off-balance-sheet liabilities estimated at around $70 trillion.

These numbers do not include state and local government liabilities, nor the likely liabilities from underfunded private pensions. Not to mention increased costs associated with more comprehensive health care and an aging population!

Many analysts are even more concerned about the debts and liabilities of other developed economies—Europe and Japan. In both places, debt-to-GDP ratios are greater than in the US. Europe and Japan are financing themselves through a combination of artificially low interest rates and more borrowing and money printing. This drives down the value of their currencies, helping their exports.

But which nations' leaders will stand firm and allow their export industries to wither as their domestic producers suffer from cheap competing foreign goods? If Japan's Abe is successful at increasing his country's exports at the expense of its competitors like Taiwan, Korea, or China, then his policies could lead to competitive devaluation. And how will the European community react, for that matter?

Loss of purchasing power in fiat currencies increases the nominal pricing of commodities and drives demand for bullion as a preferred savings vehicle.

The factors that have driven this resource supercycle have not changed. Demand is increasing. Supplies are constrained. Currencies are weakening. Thus I believe we remain in a secular bull market for natural resources and precious metals.

With that in mind, I would call the current market for bullion and resource equities a sale.

Where to invest?

Let's talk about a type of company most of us follow: mineral exploration companies, or "juniors." We often confuse the minerals exploration business with an asset-based business. I would argue that is a mistake.

Entities that explore for minerals are actually more similar to "the research and development" space of the mining industry. They are knowledge-based businesses.

When I was in university, I learned that one in 3,000 "mineralized anomalies" (exploration targets) ended up becoming a mine. I doubt those odds have improved much in 40 years. So investors take a 1-in-3,000 chance in order to receive a 10-to-1 return.

These are not good odds. But understanding the industry improves them substantially.

Exploration companies are similar to outsourcing companies. Major mining companies today conduct relatively little exploration. Their competitive advantage lies in scale, financial stability, and engineering and construction expertise. Similar to how big companies in other sectors outsource certain tasks to smaller, more specialized shops, the big miners let the juniors take on exploration risk and reward the successful ones via acquisitions.

Major companies are punished rather than rewarded for exploration activities in the short term. Majors therefore tend to focus on the acquisition of successful juniors as a growth strategy.

Today, the junior model is broken. Many public exploration companies spend a majority of their capital on general and administrative expenses, including fundraising. Overlay a hefty administrative load on an activity with a slim probability of success, and these challenges become even more severe.

One response from the exploration and financial community has been to put less emphasis on exploration success and focus instead on "market success." In this model, rather than "turning rocks into money," the process becomes "turning rocks into paper, and paper into money."

One manifestation of that is the juniors' habit of recycling exploration targets that have failed repeatedly in the past but can be counted on to yield decent confirmation holes, and the tendency to acquire hyper-marginal deposits and promote the value of resources underground without mentioning the cost of actually extracting them.

The industry has been quite successful, during bull markets, at causing "sophisticated" investors to focus on exciting but meaningless criteria.

Being successful in natural-resource investing requires you to make choices. If your broker convinces you to buy the sector as a whole, they will have lived up to their moniker—you will become "broker" and "broker."

We have already said that exploration is a knowledge-based business. The truth is that a small number of people involved in the sector generate the overwhelming majority of the successes. This realization is key to improving our odds of success.

"Pareto's law" is the social scientists' term for the so-called "80-20 rule," which holds that 80% of the work is accomplished by 20% of the participants.

A substantial body of evidence exists that it is roughly true across a variety of disciplines. In a large enough sample, this remains true within that top 20%—meaning 20% of the top 20%, or 4% of the population, contributes in excess of 60% of the utility.

The key as investors is to judge management teams by their past success. I believe this is usually much more relevant than their current exploration project.

It is important as well that their past successes are directly relevant to the task at hand. A mining entrepreneur might have past success operating a gold mine in French-speaking Quebec. Very impressive, except that this same promoter now proposes to explore for copper, in young volcanic rocks, in Peru!

In my experience, more than half of the management teams you interview will have no history of success that shows that they are apt at executing their current project.

Management must be able to identify the most important unanswered question that can make or break the project. They must be able to say how that question or thesis was identified, explain the process by which the question will be answered, the time required to answer the question, how much money it will take. They also need to know how to recognize when they have answered the question. Many of the management teams you interview will be unable to address this sequence of questions, and therefore will have a very difficult time adding value.

The resource sector is capital intensive and highly cyclical, and we expect that the current pullback is a cyclical decline from an overheated bull market. The fundamental reasons to own natural resource and precious metals have not changed. Warren Buffett says, "Be brave when others are afraid, be afraid when others are brave." We are still "gold bugs." And even "gold bulls."

Rick Rule is the chairman and founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. He has dedicated his entire adult life to different aspects of natural-resource investing and has a worldwide network of contacts in the natural-resource and finance worlds.

Watch Rick and an all-star cast of natural-resource and investment experts—including Frank Giustra, Doug Casey, John Mauldin, and Ross Beaty—in the must-see video "Upturn Millionaires," and discover how to play the turning tides in junior mining stocks, for potentially life-changing gains. Click here to watch.


The article Why the Resource Supercycle Is Still Intact was originally published at caseyresearch.com

Did I Lose $10 Million From the Barclays Gold Take Down?

In this EXCLUSIVE, MUST LISTEN interview with The Doc, Eric Sprott dissects the fundamentals in the gold and silver markets, coverage of manipulation finally reaching the mainstream, and reveals his updated outlook on gold & silver.

Eric discusses why the precious metals options markets always expire at MAX PAIN for the customers, and why he urges all PM investors to STAY OUT of the futures options markets, and simply accumulate physical metal.

Sprott explains how PM manipulation shifted from being conducted solely by the Central banks to the dealers active daily participation that we see now, and discusses how much he personally lost when a Barclays trader manipulated gold down into the London fix.

Regarding his price outlook for the metals, with silver trading under $20 and gold trading near $1250, is Eric still looking for new highs in 2014?

His answer might shock you.

- Source, Silver Doctors

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