Eric Sprott: Do Western Central Banks Have Any Gold Left??? Part II

sprottWe are currently in an environment where policy makers are intent on devaluing their currencies in an effort to create growth. Real rates continue to stay negative in most of the developed world. Every marginal dollar of debt that is created is producing lower and lower amounts of growth. In a world overwhelmed by mountains of debt and economic growth which is sub-par at best, precious metals and real assets can act as insurance against the stupidity of policy makers. The evidence pointing towards the suppression of the gold price is becoming increasingly apparent. Don’t be the last person to figure this out! The current sell-off in gold should be viewed not with extreme trepidation but as an unbelievable opportunity to buy the metal at an artificially low value.

For those who missed Part 1, it is a MUST READ and can be found Here:

By: Eric Sprott & Shree Kargutkar, Sprott Asset Management

The past few months have been difficult for the gold investor as selling pressure in the gold futures market has set a decidedly negative direction for the price of the yellow metal. As fundamental investors, we always pay special attention to the supply and demand dynamics of gold and, recently, we have found it very difficult to reconcile lower prices with continued strong demand for physical gold.

While the supply of gold has remained largely static, we have seen a steady increase in demand for the yellow metal. India and China have emerged as strong buyers, consuming over half of the mine supply in recent years. Central banks have switched from being sellers of gold to being net buyers, with their gold purchases in 2012 increasing by 17% to almost 535 tonnes. Exchange traded products (ETPs) around the world have continued to add to their gold hoards, as have institutions and private investors. Furthermore, central banks, such as South Korea and Russia, have added to their bullion reserves early in 2013, which points to sustained strength in demand. These facts are important because, over the past decade, the annual supply of gold has stayed flat at approximately 4,000 tonnes.

Much ado has been made about the recent sell-off in the yellow metal forcing certain ETPs to liquidate, adding a supply of gold into the market in the process. Our work reveals that the previous ETP sell-offs, (which occurred in January 2011, December 2011, May 2012 and July 2012) have all coincided with gold finding strong price support and rallying higher.

In our September 2012 MAAG, titled, “Do Western Central Banks Have Any Gold Left???”, we reconciled the annual change in demand for gold between 2000 and 2012 to be almost 2,300 tonnes. We went on to hypothesize that given the massive change in demand, the only suppliers large enough to fill the gap between supply and demand were the Central Banks. Now, our long search for the “smoking gun” to prove our hypothesis appears to have finally materialized.

Every month, the US Census Bureau releases the FT900 document, which outlines US International Trade Data. Going through this document, we were intrigued to see that in December 2012 the US exported over $4B worth of gold and imported around $1.5B worth of gold, representing a net export of $2.5B or almost 50 tonnes1. This surprising number led us to look at the previous releases of US International Trade Data which go as far back as 1991 – what we found was truly shocking. Not only has the US been consistently exporting large quantities of gold on a net basis, the amount of gold the US has been exporting is above and beyond what the US should be capable of exporting.

The gold market is fairly simple to understand from a supply and demand perspective. Since you cannot fabricate gold out of thin air, supply comes from new mine production, scrap gold recycling and investor disposition of bullion. Demand comes from many sources including investment demand, electronics, dental and industrial uses to name a few. There can be short-term aberrations between supply and demand where the market can be oversupplied, or demand can outstrip supply, however, over a longer period, supply should equal demand with the price acting as the equalizer. Under this assumption, the amount of gold that the US is exporting should equate to the amount of gold that the US is not consuming over a long enough time frame.

Table 1 lays out our framework for analyzing the US gold supply and demand.

Table 1
maag-3-2013-table-1.gif

For our analysis of supply and demand, we have very robust statistics as far as mine production, import-export data, coin sales and ETP demand from GFMS2, the US Census Bureau3, the US Mint4 and Bloomberg5, respectively. We have good data on gold recycling, jewelry sales and gold use in electronics and industrial applications from the CPM Group6.

Table 2 lays out our analysis for 2012 using the supply and demand framework.

Table 2
maag-3-2013-table-2.gif

We used this framework to analyze supply and demand in the US going all the way back to 1991, which is as far back as the FT900 documents go. Over the span of 22 years, the total amount of gold that the US has exported – above and beyond its supply capability – is almost 4,500 tonnes! A truly stunning figure. (See Table 3).

TABLE 3: US GOLD MARKET, CUMULATIVE SUPPLY DEMAND 1991-2012 (IN TONNES)
maag-3-2013-table-3.gif

maag-3-2013-table-3-2.gif

Admittedly there is an unknown in our analysis, that being gold bullion acquisition and disposition by private investors. However, strong demand in ETPs such as GLD and PHYS and demand for gold coins provide strong evidence that the private investor has been a net buyer over the years. The inclusion of the private investor on the demand side would in fact skew the ‘gap’ of 4,500 tonnes higher to a figure that would lie somewhere between 4,500 tonnes and 11,200 tonnes, which represents the gross exports out of the US. The only US seller that would be capable of supplying such an astonishing amount of gold is the US Government, with a reported gold holding of 8,300 tonnes. The US Government gold holdings have not been audited or verified in more than four decades. The US trade data defines the export of nonmonetary gold as a sale of gold from a private seller within the US to an official agency. In September 2012, we espoused that the Western Central Banks have been surreptitiously selling/ leasing their gold through private channels in an effort to increase the available supply and in turn suppress prices. This new analysis using official US agency numbers seems to provide the strongest validation of our hypothesis to date. It is worth noting that our data only covers two decades and that the export ‘gap’ could in fact be significantly larger if earlier numbers were included or the real private investor demand for gold was known.

We are currently in an environment where policy makers are intent on devaluing their currencies in an effort to create growth. Real rates continue to stay negative in most of the developed world. Every marginal dollar of debt that is created is producing lower and lower amounts of growth. In a world overwhelmed by mountains of debt and economic growth which is sub-par at best, precious metals and real assets can act as insurance against the stupidity of policy makers. The evidence pointing towards the suppression of the gold price is becoming increasingly apparent. Don’t be the last person to figure this out! The current sell-off in gold should be viewed not with extreme trepidation but as an unbelievable opportunity to buy the metal at an artificially low value.

1 Import Export Stats – US Census Foreign trade: http://www.census.gov/foreign-trade/index.html
2 GFMS – http://www.gfms.co.uk/
3 Import Export Stats – US Census Foreign trade: http://www.census.gov/foreign-trade/index.html
4 Coin sales from US Mint: http://www.usmint.gov/
5 Bloomberg
6 Jewelry, recycling, dental, electronics and industrial from CPM Gold Yearbook

 

 

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Comments

  1. There are a few things that jump out at me, which I do not agree with.  Near the end, it is written that the central banks are printing money in order to create growth in their economies.
     Wrong. It is counterfeiting, pure and simple, it is theft of peoples savings, pure and simple, and the negative interest rates are stealing the life savings of everyone.
     There is no economic growth possible by simply printing up money. Quite to the contrary, due to massive misallocation of assets, the money printing is killing everyone. (And you can take that both figuratively and literally.)
     The premise of this article is that politicians have somehow “screwed things up”, when in actuality, this is a carefully orchestrated and preplanned economic collapse.
     I’m sure there are some politicians working for the powers that be that are merely useful idiots, and most certainly a whole lot of useful idiots voting for them,
     but the absolutely unavoidable economic collapse that is imminent, has been planned for decades, and will unfold exactly as it was intended to.
     Hopefully, the forces of good will one day defeat the evil that has caused this mess.

  2. Sprott’s point is gold is flowing out of the U.S Treasury at an alarming rate and asks the question where is all this gold coming from. FOFOA just released a great piece titled ‘Checkmate 2′ that details the outflows in U.S. gold in the  1960′s and 1970′s complete with old newspaper clippings. Very interesting how they used to talk openly about physical gold and the introduction of the paper gold system.

  3. Outstanding Fix~

  4. If all other gold sources are accounted for, and more gold is leaving the country than is being imported and produced, then the difference MUST be coming from the national gold hoard because there is no other source.
     
    Furthermore, the level of corruption that exists in the US Gov and Fed these days is absolutely astounding.  The Fed AND the US gold hoard both need to be independently audited via GAAP techniques and in a completely transparent way.  But this is not happening and likely for a VERY good reason.  Most Americans would be horrified at the results, whether or not they are into stacking or prepping.  Those who are responsible for the loss of the US gold hoard are well aware that they could be hung as traitors for their efforts if this news were to get loose, so they make certain that there are no real audits.  They will, from time to time, issue statements that they have run a self audit and all is well but only a fool would listen to or believe such blatantly self-serving comments.
     

    • Most of that hoard is not even national in nature…this has WWIII written all over it. 
      Is it hard to imagine the WWIII allies will be Europe, Middle East, Russia, and all of Asia. Africa, Australia, Canada and South America try to remain neutral. All against the USA. The stolen against the thieves. How can justice be avoided until eternity?
      Germany has a tiny incentive to wait another 7 years. But really, can the rest be as patient, not getting any gold back?

    • Well, that’s just it XCS.  Without an independent audit, there is no way to know what the nature of the US gold hoard is or even if there is any left!
       
      Clearly, there is not the 1534 tons that the Germans requested or it would have been handed over to them to quell any comments made about the US Fed Bank in NY actually having it.  Now that they have refused immediate repatriation or even a physical view and counting of the bars, it is pretty clear that our worst thoughts about this are likely correct.
       
      Germany had best not wait any longer than they absolutely must.  IMHO, they should bring suit in the world court to force this issue to a head.  True, doing that might result in them not getting their gold but they might not get it anyway.  The US has a lot of natural gas and Germany needs that for heating and electricity generation.  If we do not have their gold, then they are entitled to an equal value of something else that we do have and that they need and want.  No, this is not a perfect settlement but it would be an effort to make good on US promises.  The same should be offered to all others who have sent gold to the US but now cannot get it back.  Not that they would be forced to accept this offer but it should be made rather than continuing to play this ridiculous disappearing-gold game.
       
       

  5. No, Western central banks don’t have any more gold left in their reserves because they were all sold in the gold market to keep its price low. But, Asian countries have bought them all by getting rid of their US dollars and Euros.

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