In his most explosive interview with SD ever, CEO of Sprott Asset Management Eric Sprott discussed his thoughts on the Fed’s no-taper, why he believes the cartel took down gold this spring, the evidence that a bail-in is coming to the US and Canada, and the US fiscal debt crisis.
Sprott stated the Fed could not taper QE because it has lost control of the bond market!
“We have never printed on a daily basis more than we are printing right now, and all the while, interest rates doubled! Just the talk of tapering moved the rates significantly higher. I happen to believe that they have lost control of the bond market. Just by talking the talk the rates doubled and if they walked the walk, I think we would see a dramatic increase in rates here and severe carnage in the bond market. ”
Sprott went on to claim that the paper gold market was crushed by the Western Central banks this spring in order to free up gold supply from the ETFs as a massive gold shortage threatened the banking system, and that this is a battle the Western Central banks are doomed to lose as global physical demand will soon overwhelm Central bank supply.
Eric Sprott’s EXPLOSIVE INTERVIEW with The Doc covering tapering, the motive behind the PM take-down, and much more is below:
The Doc asked Eric how much longer until the Fed loses credibility among the mainstream, such that jawboning fails to move markets, and what does it mean for the Fed when a move in the 10 year from 1.4% to 3% forces the Fed to re-nig on even a modest $10 or $15 billion reduction in Quantitative Easing?
When you look back to recent history, the Fed doesn’t have alot of credibility in terms of walking the walk. They were talking about an exit plan in 2009, and then they threw up this trial balloon of tapering, and everyone kind of went there- all the major investment houses suggested there would be tapering. I personally didn’t think there would be any tapering because already just the talk of tapering moved the rates significantly higher. I happen to believe that they have lost control of the bond market. I was somewhat shocked that Chairman Bernanke at the last Senate hearing said he was puzzled by the move in interest rates.
I thought, the Chairman of the Federal Reserve is puzzled by an increase in interest rates? I think it was obviously a disingenuous answer. Obviously the market has had various things going on which has caused rates to go higher, and I just don’t think he wanted to go there.
So in my mind the Fed never had much credibility, and I think the fact of the non-taper just makes that ever more apparent to everyone. I think the one thing we would look at for a confirmation and it has confirmed it is the weakness in the US dollar, because I think more and more the non-Western central banks would be viewing whats going on in the US as essentially a Ponzi Scheme- zero interest rates – a target of zero, and the massive printing of money. I just don’t think they can turn the tap off because just by talking the talk the rates doubled and if they walked the walk, I think we would see a dramatic increase in rates here and severe carnage in the bond market.
The Fed is way more concerned about interest rates than even the stock market for that matter, because interest rates kill governments, and they kill the economy too. We’re already seeing the impact of that in housing and auto sales.
To me the increase in the interest rates was a fact of what’s going on in the debt markets. In July we saw some very large selling by China and Japan, and there must be many, many other governments who are selling US treasuries because the cost of taper caused all their currencies to weaken, and in order to support their currencies they were sellers of US bonds to convert into their own currencies, so there must have been alot of selling.
So if it wasn’t for the Japanese in August, who were the purchasers of something like $50 billion in bonds for the month (via their own Quantitative Easing), rates would have already moved well through 3%. As you and all your listeners I’m sure would appreciate- this co-operation amongst all the Central Banks is just overwhelming, whether its the Fed supporting Europe through loans to its European banks or The Fed going up to Japan and saying, We’ve got to have someone buying the bonds, which of course they dutifully responded to (and of course the opposite thing will happen in Japan if rates get out of control, the Fed will get involved). I think the important thing to keep in mind is that we have never printed on a daily basis more than we are printing right now, and all the while, interest rates doubled!
If anybody ever attempts to pull back on QE, it might be shocking to see what truly could happen to interest rates if they ever reverted to the mean, and if we ever reverted to the mean, the economic consequences would be dire, the effect on the US deficits would be very, very meaningful, and according to GAAP, in my mind the US is already insolvent! They just haven’t faced the day of reckoning yet, but the day of reckoning is coming!
When asked whether we’ve seen a bottom in gold and silver at $1179 and $18 and what the implications of last week’s no-taper will be for the metals, Eric responded:
Well Doc, I go back to what I believe is truly happening here. We are seeing a huge increase in demand for gold. I wrote 3 articles asking whether Central Banks had any gold left. I thought it was getting pretty extreme back in 2012. I think that’s why these things that happened all of a sudden manifested themselves in the beginning of the year.
The first thing was Germany asking for their gold back, and I think its going to take 7 years to get back 300 tons. I mean China imports 100 tons a month from Hong Kong! Other signs of stress in the market with it be ABN Amro failing or the COMEX inventories declining , the GOFO rate going negative- these are all signs of shortages of gold!
I think they released this trap door in the paper markets (which was very effective by the way) in pulling 700 tons of gold out of the various trusts and ETFs. If you put that in perspective, 700 tons in 6 months is 1,400 tons annually! We only sell on the open markets 2200 tons from mine supply. That’s fully a 2/3rds increase in mine supply, and I think that was meant to happen. That’s why they slammed gold, so they could drain the ETFs.
The other side of what’s going on is India where the central planners have said to the Bank of India, You’ve got to stop your people from buying gold because we have a shortage! Had the Indians continued to buy the roughly 100 tons a month they were buying in April and May, we would have had a combination of China and India buying more than global mine production each month- just China and India! So I think that’s why we’ve had these rather draconian moves in India, because we have a shortage, and it would just be manifested that much quicker if the Indians were allowed in the markets!
There’s hardly a week that goes by, including last week when they increased the tax from 10 to 15% that the Indians don’t keep putting pressure on their gold market. If things ever got back to normal we would find out that between China and India, they’re buying over 100% of all the gold that’s produced, which would open up the questions- where is all this gold coming from?
Of course, the answer is its coming from the Western Central banks who are leasing it into the gold market, and sooner or later they’re going to realize that they’re going to fail on this because this demand is not going away. Demand will increase, and I think the non-taper announcement will cause it to increase. The fact that the US and Europe are not really recovering will make it increase. The volatility of the currencies of the developing markets would make their people want to own gold. The decline of the Rupee would make people want to own gold. There’s so many examples of why people should be coming into this market and owning gold in the present environment- above and beyond the fact that we’ve already got more demand than supply.
I think you correctly state, we saw the bottom on June 28th, I think the price is going to rise dramatically here as everyone realizes yet again that these QEs don’t work, that they don’t create any economic growth whatsoever, the middle class is getting poorer and poorer as inflation is well beyond what is stated and there’s no increase in income.
I think the outlook for both metals is great, and of course I think that the outlook for silver is greater than that for gold.
This was just the first portion of The Doc’s explosive interview with Eric Sprott, check back Wednesday for the rest of this important interview, in which Eric also discusses the Cyprus bail-in and whether he believes a full banking system bail-in collapse is in store for the US and Canada, as well as how gold, silver, and the bond market will react to the coming debt ceiling crisis!