Eric Sprott: One More Sign of Manipulation in the Gold Market

sprottAs demonstrated in our Open Letter to the World Gold Council, there was a large supply-demand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market.
However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.  Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force.
Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the below analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.

 

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By Eric Sprott, Markets At A Glance:

Introduction

As we very well know, 2013 was a difficult but also puzzling year for precious metals investors. The price of gold, silver and their related equities declined by a significant amount while demand for physical bullion from emerging markets and their Central Banks was exceptionally strong.

A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 is of investors’ disenchantment with precious metals, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. Proponents of this theory point to the large declines in the total holdings of those ETFs as evidence of investors fleeing the precious metal trade. As shown in Figure 1, the price of both gold and silver suffered very significant declines throughout 2013. Therefore, if this explanation is correct, one would expect the total ETF holdings of both metals to be lower as well.

However, this is not the case. As shown in Figure 2 gold ETFs suffered large redemptions whereas silver ETFs saw their holdings remain more or less constant throughout the year, and this without any observable change in trading patterns in the two largest ETFs; GLD and SLV (Figure 3 shows the ratio of the trading values in the ETFs over time). If redemptions are a symptom of investors’ disenchantment with precious metals as an investment, shouldn’t silver have suffered the same fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem. As we have argued before, the raiding of gold ETFs is bullish for gold because it reflects an imbalance in the physical market.1

Figure 1: Gold and Silver prices declined significantly in 2013
maag-01-2014-1.gif
Source: Bloomberg

Figure 2: ETF Holdings – Troy oz (millions)
maag-01-2014-2.gif
Source: Bloomberg, tickers ETSITOTL & ETFGTOTL

In this article, we further argue that the April raid on gold and gold ETFs almost backfired by creating a tsunami of buying in India and increased demand to unsustainable levels. In May 2013 alone, Indians imported 162 tonnes2 of gold in a market where monthly global mine production is about 182 tonnes. A continuation of this trend, coupled with strong buying from other Emerging Markets and their Central Banks, would have been overwhelming. But, the response was swift. We suspect that, at the behest of Western Central Banks, the Reserve Bank of India reacted by enacting, in incremental steps, restrictive measures to prevent gold imports (See Figure 4 for a timeline of the major changes made by the Indian Government).3

Figure 3: Traded Value – Ratio of SLV to GLD
maag-01-2014-3.gif
Source: Bloomberg. Traded Value is calculated by taking the total trading volume for a quarter and multiplying it by the average price over that quarter. A ratio of 1 indicates that SLV traded as much, in $ terms, as GLD.

Figure 4: Efforts to Curb Indian Gold Imports
maag-01-2014-4.gif
Source: Bloomberg, Economic Times

 

Supply and Demand Imbalances: The Indian Effect 

We have already discussed at length the supply and demand imbalance in an Open Letter to the World Gold Council, asking them to revise their methodology because it grossly understates the amount of demand coming from emerging markets.4 Our gold supply and demand table (Table 1) reflects the latest available data (2013 Q3 in most cases). World mine production, excluding Chinese and Russian production still stands at about 2,100 tonnes a year. Chinese net imports most likely exceeded 1,700 tonnes for 2013 (81% of world mine production) and demand from the rest of the world is rather stable.5

The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes.6 However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes.

This incredible loss of momentum for “official” gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the “official” justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian’s taste for gold and the corresponding imports worsens the country’s trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee.

But, without going into too many details, the classification of gold as a “good” in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not “consumable” per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account. Indeed, Switzerland, which is a large net importer of gold, reports its trade balance “without precious metals, precious stones and gems as well as art and antiques” to reflect fact that those are “investments” rather than consumption goods.9 In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring.

So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate.

Table 1: World Gold Supply and Demand 2013, in Tonnes
maag-01-2014-5.gif
Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2 & Q3. Chinese mine supply comes from the China Gold Association and is up to October 2013, the annualized number is a Sprott estimate.8 Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q3. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Nov. 2013 and is annualized to account for the missing month. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2 & Q3 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1, Q2 & Q3. ETFs data comes from GFMS as well.

 

Conclusion and Outlook for 2014

As demonstrated in our Open Letter to the World Gold Council, there was a large supply-demand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market.

However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.10 Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force.

Besides, mine production is unlikely to grow, as reflected by the significant decrease in capital expenditures expected for the major gold producers (Figure 5).

Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the above analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.

Figure 5: Capital Expenditures ($mm) – XAU Index Members
maag-01-2014-6.gif
Source: Bloomberg. Consensus analyst estimates are used for years 2013-2015.

 

P.S. Due to recent developments, we would also like to highlight some related media stories

Jan. 17, 2014: Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal

Jan. 17, 2014: Deutsche quits gold price-setting as regulators investigate fix (Did the regulators ask them to?)

Dec. 13, 2013: Bafin Said to Interview Deutsche Bank Staff in Gold Probe

Nov. 26, 2013: U.K., German Regulators Scrutinize Gold, Silver Pricing

Sept. 9, 2013: Sprott Thoughts: A Leaky Fix

 

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1 See, for example, “Redemptions in the GLD are, oddly enough, Bullish for Gold”.
2 http://in.reuters.com/article/2013/06/03/gold-india-imports-idINDEE95207H20130603
3 See “Do the Western Central Banks have any gold left?”. Sprott Asset Management LP, Markets at a Glance May 2013.
4 See the full article at: http://www.sprott.com/markets-at-a-glance/open-letter-to-the-world-gold-council/
5 As a reminder, because of our methodology which uses net imports as a proxy for total demand in countries that do not re-export gold, we exclude the “total industrial demand” estimate from the GFMS to avoid double counting. Thus, we underestimate total gold demand because we do not include industrial demand from the countries other than China, India, Turkey and Thailand.
6 As reported by the UN Comtrade Statistics. We use the total dollar amount reported and average quarterly prices to infer the total amount of gold imported and exported.
7 This is calculated by taking the total consumer demand for jewellery, coins and bars for 2013 Q1 & Q2 from table 10 of the WGC’s “Gold Demand Trends” and subtracting from it demand from the individual countries we have listed in the table (China/Hong Kong, India, Turkey, Russia and Thailand).
8 http://translate.google.ca/translate?hl=en&sl=zh-CN&u=http://www.cngold.org/&prev=/search%3Fq%3Dcngold.%26client%3Dsafari%26rls%3Den
9 See the Swiss Customs Administration website: http://www.ezv.admin.ch/themen/04096/04101/index.html?lang=en
10 See, for example: http://www.thestar.com/business/economy/2013/12/27/insatiable_appetite_for_gold_fuels_indias_smuggling_industry.html http://in.reuters.com/article/2013/12/03/india-gold-smuggling-idINDEE9B20HY20131203 http://articles.timesofindia.indiatimes.com/2013-12-29/chennai/45674552_1_airline-staff-gold-smuggling-flight-attendant

Comments

  1. Rick Rule said a measly 2 Billion dollar BUY could ,put a Silver Dagger i the Greedy Wicked hearts of the luciferians..Just do it!

  2. We know there’s Manipulation but heck nothing is being done about it because they (The Elite) don’t want anything done about it.  They (The paid off Politicians and Bureaucrats ) will receive their just rewards in the future and it won’t be financial. Keep Stacking

  3. Here’s a very interesting article that explains the upcoming Great Reset and why the Chinese just bought the Chase Manhattan Plaza.  Quite an interesting take on everything and where we’re headed.
    http://www.ingoldwetrust.ch/the-big-reset-part-1
     

    • Great article@ PowerBall and I also read the introduction on his new book “The Reset” where he say’s, ” A system reset seems imminent. The world’s financial system will need to find a new anchor before the year 2020.” I believe it’s going to happen sooner, like in the next month. Lol But what the hell, I’m only a dreamer. Lol until then, Keep Stacking

  4. I very much like and admire Mr. Sprott. The data and supporting information he and his team of assistants put into discourse is unarguably among the top of what comes to us. Even moreso, I find him special because he argues for resumption of Honest Money.

    As long as Peoples suffer these obnoxious banknotes to set value of gold … and in turn, for gold to set the value of silver … humankind will be kept in economic and financial bondage. This is why I relentlessly and vociferously rail for re-institution of the full poly-metallic monetary scheme … with or without the acquiescence of ‘official’ facilitation  The indispensable inclusion of copper at the fundamental base of the scheme brings the ‘Will of The People’ into competition against those of merchants/manufacturers and their financiers, By sheer ‘force of numbers’ the vast swathe of ordinary folks across the world, through their daily choices in consumption of available goods, exert resulting rationality as the proper valuation onto silver and thus on to gold. All the while, those sectors too press back against excessive expectations from The Peoples, until balances are struck and maintained. Absent this structure, all else is hubris and self-delusion.

    This present arrangement has devolved Social Order back to Mercantilism, with perfectly obvious trending still further, into Feudalism again. The cabal of politicians, bankers and monopoly industrialists perpetuate this criminal Combination to carry out plunder of … our commerce. There is no logical or even practical compulsion underlying the assertion of these elites that commerce is their exclusive purview to control in their benefit against the General Welfare. It is only too plainly ‘Crime against Humanity’.

    • “The indispensable inclusion of copper at the fundamental base of the scheme brings the ‘Will of The People’ into competition against those of merchants/manufacturers and their financiers, By sheer ‘force of numbers’ the vast swathe of ordinary folks across the world, through their daily choices in consumption of available goods, exert resulting rationality as the proper valuation onto silver and thus on to gold.”
       
      But, then again, the sheep always outnumber the shepherds.  Yes, numbers matter… but so do wealth, firepower, and organization.

  5. Pat Fields  Paper rots, coin does not
    Paper delusions give way to gold and silver inclusions.

  6. In spite of the complaints about PM prices in 2013, was it not an extraordinarily good time to be stacking?  :-)

    • It was amazing Ed, and the longer it continues, the better off silver will be. It will regain it’s lost glory and power sooner, and stronger, if we get to stack hard for longer. 
      Right now, so close to bottoms, waiting for new hatches to break open so it can fall even lower, no-one new (except super smart money) is getting into silver. So us die hards are pretty much all the investment demand. We stack as hard as wel can by modest means, and thus at lower prices, we haul in more. Perhaps even free up more fiat for it. A lot of this is in very accessible coin and bar form of course, but when demand kicks in, there is no way fresh bullion can keep up. Premiums must then shoot up, certainly for right-now delivery. 
      But it wouldn’t hurt if somehow big money could be gotten to join in. If we slacked one minute, stockpiles could replenish and we’re back to square one.

    • I agree.  Silver is biding its time right now, maybe even holding its breath, perhaps for a huge move upwards.  Hard to say but one thing we can say that PMs are definitely what one should buy when they are ON SALE.  I’ve been doing that and quite a few others here have too.  This is a good thing.  Everyone who holds real wealth in their own hands will not be bailed in, devalued, or left holding worthless paper if worse comes to worst.
       
      You know… it occurs to me that there is a way to prevent a flood of dollars returning to the US from causing inflation or even hyper-inflation… and that would be for the US Gov to use up those dollars rebuilding the national gold and silver hoards.  That way, they don’t enter into the economy and cause nasty inflation and the vaults are refilled with something of real value.  Yeah, assuming that they could even get enough PMs from the marketplace to make this work.  Perhaps allowing the prices to float would encourage that, as they would have no shortage of currency to spend on PMs.  Not that this WILL happen, of course, but it COULD happen.  Keynesians are in charge now and they view gold and silver with all the joy of Count Dracula viewing a silver crucifix.  I just hope that it does not come down to either this or a massive economic crash, as they are likely to choose poorly.
       

  7. XC Skater 
    I’d wager that the stackers, small medium and large are good for 200,000,000 ounces of silver a year.  A good chunk of it’s probably coming from old stacks being sold to new stackers who will tuck it away for years, maybe even decades.This would not deplete present day production however, since the people in the US and other countries are becoming poorer and forced to liquidate their personal stocks to pay the bills.  I read that there is about 2,500,000,000 in silver stocks that are not already embedded in products that are not economically feasible to recover or recycle.
     If it is true that in-ground stocks of silver are being depleted due to declining ore yields with the proposition that silver is becoming a rare earth  and with a limited number of years of producing metal in the ground, the extraction costs of declining ore grades could, for no other reason, make silver into something like Platinum.  Rare and hard to extract   And $1,456 an ounce.  It could happen and happen quickly.  Or it could take 10 years.  I have time and patience to wait out the price increase, whatever the reason
    The movie is always enjoyable

    • @AGXIIK
       
      “If it is true that in-ground stocks of silver are being depleted due to declining ore yields with the proposition that silver is becoming a rare earth  and with a limited number of years of producing metal in the ground, the extraction costs of declining ore grades could, for no other reason, make silver into something like Platinum.  Rare and hard to extract   And $1,456 an ounce.”
       
      Yikes, AG, don’t tease me like that!  The mere thought of moving up into the multi-millionaire class is intoxicating.  ;-)
       




  8. The video cannot be shown at the moment. Please try again later.

    • SilverDagger
       
      You want to know how this works? I’ll explain it.

      All business ‘corporations’ exist exclusively under the independent jurisdiction of the District of Columbia city-state (formed in 1871) wherein no Constitutional limits apply; ironically enough, according to the very ‘Constitution’ it (partly) adopted (at Art. IV, Sec. 3, cl. 2). Jurisprudence in the DC city-state is Civil, Maritime and International Process … not … Common Law Due Process.

      “The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.” – Art. IV, Sec. 3, cl. 2

      At Common Law, there is a Tort of ‘Combination’, whereby a group of collaborators who agree to un-naturally influence commerce for their benefit, at the detriment of a litigant demonstrating damages, may be prosecuted. Since such collusion harms the welfare of the general community, it’s classified a ‘Crime Against Humanity’.

      Contrary to the political ‘left’ slant alluded to in the example video, the whole ‘Congress’ has been guilty of enabling this avoidance of Common Law Tort of Combination, by technical ‘immunity’ through ‘INcorporation’ under its jurisdiction, for a very long time. And, for the same purpose of evading Common Law, every State body of governance has ALSO shifted their activities under the foreign jurisdiction of the DC city-state (i.e. to use Bills of Credit).

      “The United States Government is a foreign (PF: Municipal) corporation with respect to a state.” Volume 20: Corpus Juris Secundum, (P 1785: NY re: Merriam 36 N.E. 505 1441 S.Ct. 1973, 41 L. Ed. 287)

  9. I think the comment section of Zerohedge’s same article does a good job of dismantling Sprott’s disingenuous ways…..

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