Eric SprottAfter a long and agonizing winter which was attributed to the so-called “Polar Vortex”, we thought it would be appropriate to highlight for precious metal investors the implications of what we call the “Chinese Gold Vortex”.
While it is still early, the Chinese Gold Vortex is firing on all cylinders and data so far this year suggests that demand will far outstrip supply.
Over the past year, we have been very vocal about what we consider an aberration: the complete disconnect between gold supply and demand fundamentals and the actual price of the metal.
The stars are aligned in 2014 for a significant re-rating of the gold price.
The tailwinds are twofold for gold: the Chinese Gold Vortex is putting an undeniable pressure on the physical market, while focus on price manipulation makes it progressively harder for price manipulators to operate. The reversal of this anomalous, yet explicable market dysfunction could provide astute investors with multi-hundred per cent returns.
Do not miss this Golden Opportunity!



 

By: Eric Sprott, Markets At A Glance:

 

We have shown in February Markets at a Glance (MAAG) that, for all of 2013, demand from emerging markets, particularly China, was extremely strong, outstripping world mine supply by a fair amount. But this extreme tightness in the physical market was not reflected in gold prices. We have since then discussed many signs of manipulation in both the paper and physical gold markets (ETF flows, Indian intervention, LBMA fixings, to name a few).

This month’s Markets at a Glance presents an update on the demand dynamics in China, discussion around new evidence of manipulation and concludes with an illustrative example of the opportunity in gold equities.

Supply and Demand

While the year is still young, we have been able to gather a few data points from China and they are truly impressive. The table below shows Chinese net imports of gold for the first two months of 2014.1   So on average, each month this year, China has imported about 204 tonnes of gold, up from about 143 tonnes last year.2

maag-4-2014-table1.gif
Chinese data is taken from the Hong Kong Census and Statistics Department. Swiss data is taken from the Swiss Customs Administration, which started reporting gold exports to specific countries in 2014.

To put these numbers in perspective, for the full year 2013, total mine supply excluding China and Russia averaged 192 tonnes per month (see the February 2014 MAAG for details on the methodology).3 Basically, China is currently vacuuming, on a monthly basis, all of the world’s mine production plus an additional 10 tonnes. But that is only China; anecdotal evidence from other countries suggests that demand remains strong in other Emerging Markets, where Central Banks keep adding to their gold reserves. Moreover, whereas last year’s ETFs contributed (unsustainably) to supply, this year has so far seen net inflows into gold bullion ETFs.

What immediately comes to mind is: where does all this gold come from? As we have long argued, gold to Emerging Markets has been supplied by Western Central Banks for many years.4 Recent data substantiates this claim. A closer look at Swiss import and export data shows that it imports most of its gold from the US and the UK and exports most of it to China and Hong Kong. For example, in the first two months of 2014, the UK has exported over 233 tonnes of gold to Switzerland; this is more than half of the Chinese net imports over the same period (remember the UK doesn’t produce any gold). Similarly, the US, which has a monthly gold production of about 19 tonnes, has exported, in the month of January alone 56 tonnes, most of which went either to Switzerland or to Hong Kong directly.5 So where does all this gold come from? It is supplied by Western Central Banks, which according to our analysis have very little gold left.

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While it is still early, the Chinese Gold Vortex is firing on all cylinders and data so far this year suggests that demand will far outstrip supply.

Manipulation

The topic of gold price manipulation seems to be making its way into the mainstream. Regulators in Germany made the first foray into gold manipulation with their investigations of the London Bullion Market Association (LBMA) now infamous Gold Fixing.6 Now, we hear that the CME Group (which owns the COMEX, where paper gold trades) has been sued by three traders for allegedly selling order information to HFTs ahead of the broader market.7

Simultaneously, academic studies have found evidence of manipulation in the gold market and a consultancy (Fideres) even claims that “global gold prices may have been manipulated 50% of the time between January 2010 and December 2013”.8

We have long suspected manipulation, but it is now clear to us that both the physical and paper bullion markets have been tampered with for quite some time, to the advantage of those that are naturally short gold (i.e. the bullion banks and other gold dealers). With the increasing amount of scrutiny from the public, academia, regulators and now lawyers, manipulators should have a progressively more difficult time preventing gold from reaching fair value.

The Opportunity

The stars are aligned in 2014 for a significant re-rating of the gold price. In our opinion, the best way to participate in a return of the gold price to fundamentals is to invest in junior gold miners. The tables below show EPS estimates under various gold price scenarios and the associated stock price targets, assuming a price-to-earnings ratio of 10x, for both a major (Barrick) and a junior (Crocodile) miner. From the table, it is obvious that junior gold miners have much more leverage to the price of gold.

maag-4-2014-table2.gif
Estimates are for FY2014. Price returns assume a P/E ratio of 10x. All figures in USD.
Source: Sprott Estimates and RBC Capital Markets
For illustrative purposes only, Eric Sprott and Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above securities.

 

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In summary, the tailwinds are twofold for gold: the Chinese Gold Vortex is putting an undeniable pressure on the physical market, while focus on price manipulation makes it progressively harder for price manipulators to operate. The reversal of this anomalous, yet explicable market dysfunction could provide astute investors with multi-hundred per cent returns.

Do not miss this Golden Opportunity!

1 As a side note, we take this opportunity to reiterate that since China does not export its gold production, it is reasonable to assume that net imports into China are a good
proxy for demand.
2 Swiss exports directly to China are not available for 2013 as the Swiss Customs Administration started reporting the country specific trade data only in 2014.
3 See for more details: http://www.sprott.com/markets-at-a-glance/don’t-miss-this-golden-opportunity!/
4 See the Markets at a Glance series “Do Western Central Banks Have Any Gold Left???”.
5 US data is taken from the USGS Monthly Industry Surveys; February 2014 data is not yet available.
6 Idem
7 http://www.bloomberg.com/news/2014-04-13/cme-gave-high-frequency-traders-peek-at-market-lawsuit-claims.html
http://www.reuters.com/article/2014/04/14/us-cme-highfrequencytrading-lawsuit-idUSBREA3D16Z20140414
8 http://www.bloomberg.com/news/2014-02-28/gold-fix-study-shows-signs-of-decade-of-bank-manipulation.html
http://www.zerohedge.com/news/2014-02-25/here-fts-gold-price-manipulation-article-was-removed


  1. Thank you, Eric!  It sure must have been some sort of a vortex that just took the price of gold and silver down.  Something like downward vortex, more like – limp dick vortex.
     
    LMAO, keep fluffing, our dearest friend, Eric.  We missed you and now we know that you are back to work again.

    • I read this over at ZH yesterday, and the trolls were all over it. They always show up when things look bad. Its pretty comical to the veterans who have seen these kinds of set ups before. Good thing the FED and US govt have the printing and spending under control now so that PM’s will never be any good to buy and hold as insurance against inflation and debauchery of the currency. 
       
      Do us a favor volkssturm and go eat a bullet please…

    • EASY, Bay! 
      If he’s trolling, your IP and all that is being recorded and forwarded to NSA and congress, if that new law passes… but if he’s truly the disgruntled investor that sunk 150K or MORE into PMs, and you actually talk him into the “jump off a cliff and see if you can shoot yourself in the head and light yourself on fire before you hit the bottom”* ending, wouldn’t YOU Be Sad??? ;)
      Chin Up, volkSS!
      Better days ahead! I suffered a big loss right after I bought my first big order of ASEs. Price dropped off 15% overnight! 
      So what did I do? DOUBLED DOWN, and bought even more than the first time! I don’t assume you are thinking of buying
      more, but if you do, look to the @Ed_B strategy. He’s the Master! You used the @AGXIIK strategy, but only part of it. 
      You should really consult AGX, most likely… you can write off losses if/when you have to sell. BIG HELP!
       
      *Not necessarily in that order LOL!!!

  2. “Simultaneously, academic studies have found evidence of manipulation in the gold market and a consultancy (Fideres) even claims that “global gold prices may have been manipulated 50% of the time between January 2010 and December 2013”.8″
     
    OOOOOOOOOOOOOOOOOOOO – K
     
    when is the class action lawsuit going to be filed in regards to the obvious manipulation 
     
    in the PM’s ?
     
    Yea right …….not any time soon
     
    tribal lawyers – tribal bankers

  3. My take on this is simply china is going to make the US play right or get the shaft just like they have been doing to us all . I LOVE IT !! And we all know when gold goes up silver does too.. I have been in the fence all week on where and what to park some cash. I am a silver guy but some gold might be the ticket with this news ? All thoughts please add your 2 cents to my thinking. ..

  4. it appears that this vortex is getting stronger every second now.  even massive sloppy fluffing is not helping. 
     
    Backwardation for all you MOFO’s while you are getting massive hardon from GOFOs.
     
    PS:  I used to be a wealthy man.

  5. Another less known reason that silver in particular, could become oober valuable in the near future. Antibiotics are failing globally due to overuse and colloidal silver will take that roll as it is effective in killing over 600 different microbes whilst leaving living human cells alone…
     

    http://www.telegraph.co.uk/health/healthnews/10797764/Antibiotic-crisis-bigger-than-Aids-as-common-infections-will-kill-WHO-warns.html

    I learned how to make my own colloidal silver and I use it as a disinfectant spray, a topical antibiotic, it can be taken internally and it can be sprayed into the nose, eyes and throat for making oncoming colds head for the hills. If anyone is interested in the simple process, drop me a private message and I will share it with you.

  6. The triple bottom seems to hold in the $18.75 range. Whether they are stopping the pillaging at that price intentionally, or it’s being stopped at that price, not sure but the long drawn out bottom seems to hold there. A more tightly coiled spring there likely never was IMO. A triple bottom is a VERY good technical sign but as we all know, technical schmeclical……..

    • pst… I have secret to share with you…  there is also a triple if not quadruple secret bottom.  it is so secret that we will never know about it.  it sits somewhere around $10.  but don’t tell anyone.  I heard from a trusted guru that once it hits $10, it is sure thing and will go to $1000 overnight. 

  7. Didnt hear any mention from Eric about his  $65 Silver and $2000 plus gold.
    Must of just slipped his mind.
    There’s enough raw egg on this guy’s  face to fry a full size ham and cheese omelette with all the fizin’s.
     

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