The Doc sat down with Sprott Asset Management’s Eric Sprott this weekend to discuss the European debt contagion, the latest gold and silver massacre, the massive rush into physical metals, and his outlook on gold and silver for the rest of 2012 and beyond.
In this timely and explosive interview, Eric warns listeners that any weekend deals to bailout Spanish banks will not cure the problem as the problem is WAY BIGGER THAN CENTRAL BANKS OR GOVERNMENTS CAN DEAL WITH, the contagion will spread, the situation is untenable, THERE WILL BE NO RECOVERY, and that gold is the canary in the coal-mine indicating the seriousness of the crisis.
Sprott believes as the deleveraging crisis intensifies the trickle of bond fund managers such as Bill Gross starting to look at gold for protection will quickly become a groundswell, and states that THERE IS NO GOLD TO BUY!!
Sprott also discusses concerns that GLD’s gold has been rehypothecated, analyzes the cartel’s recent change of tactics in raiding metals during Bernanke’s speeches (Sprott says ALL markets are manipulated), and gives his outlook on gold and silver over the near-term.
Eric Sprott: THERE’S NOT GOING TO BE A RECOVERY, & THERE IS NO GOLD TO BUY!!!
Full article and audio interview now available below:
Part 1: THE SILVER CARTELS HAVE CHANGED THEIR M.O.
Part 2: THERE IS NO GOLD TO BUY!!!
When asked by The Doc about The Fed’s failure to announce additional QE on Thursday Eric replied:
As most people know, there HAS to be a stimulus. There’s going to be this meeting of the EU people over the weekend. There’s been some wonderful work done about the size of the bank runs in Europe, and they’re just monstrous in size. I’m sure that the shortfall in the Spanish banking system is going to be very AIG-like where one day the AIG losses were $40b, and the next day it was $60b, and the next day it was $100b, and three days later it was $185 billion and who knows how much it really was.
I was sitting there and I asked someone, how many mortgages do they have? And they said, they have about a trillion. I told them, well the hole will be about $400 Billion then because I’m sure all those things are 40% underwater!
So this $100 billion suggestion (for Spain) is WAY below the number! Of course it doesn’t matter what the capital deficiency is, how much of the money is leaving the banks? When money leaves a bank, the asset theoretically, well, they’ve got to write a check, but how do you write a check when you can’t sell an asset? That’s why they have to keep getting bailed out.
It wouldn’t matter whether they had all of the capital in the world. If every deposit leaves, the check they have to write is unbelievable.
So there’s a HUGE problem going on there (in Europe), and for the life of me I can’t see why it hasn’t moved gold a lot sooner than it has, but then again I’m in the camp that all markets are manipulated, particularly the precious metals market, but we all know that the bond market is massively manipulated.
I suspect that the stock market being the headline thing that everyone looks at has a very big hand of governments who realize they have this awful financial system, and how can we make it look better?
If you can get the market to rally 288 points in a day, it looks like things are under control, but I can assure you, they’re not!
When asked whether central banks were in danger of falling behind the curve, and will need to announce massive new stimulus to stop the deflationary momentum, Eric responded:
The ECB is WAY behind the curve here. Because the Euro area is quite dysfunctional and you can’t get agreement among 17 groups and of course there is different interests of the stronger countries vs. the weaker countries- I think they’ve been way behind the curve in dealing with the problem that they have.
Fortunately in the US where there’s one central bank and one huge printing operation it’s easier for them to deal with the problem because they can literally do whatever they want- as we’ve seen them do on many other occasions. The Fed getting behind the curve may be them getting Europe to solve it’s problems. There have been Americans that went over to Europe to try to encourage them within the last week, and Obama was on the phone to encourage them to deal with the problems, and here we have the weekend meetings, and undoubtedly they’ll come up with some promise of something, whether or not it alleviates the ongoing bank run we’ll have to wait and see.
The problem is WAY BIGGER than central banks can deal with, and its way bigger than governments can deal with– the whole banking community is massively larger than countries. The countries of course have no excess funds anyways because they’re all running deficits, so it’s very difficult for the countries to lean in there and bail them out when their own credit is under attack!
Spain just got downgraded by 3 notches by Fitch, so what are they going to do? They can’t go in and say we’re going to put €100 billion in our banks- their bonds would probably go through 10% so fast you wouldn’t know what happened!
It’s a mess, everyone’s behind the curve, and I don’t think they’ll get in front of the curve quite frankly. Extending and pretending, program after program, and when the program ends, the markets always go down. Then they come out with another program, the market goes up, and everyone is anticipating we’re going to have stimulus, the market’s going to go up…but ultimately, there’s NO IMPACT ON THE ECONOMY, BECAUSE THEY KEEP BAILING OUT THE FINANCIAL SYSTEM, NOT THE ECONOMY!!
It’s the economy that’s languishing here.
When asked whether the European contagion will play out as a slow domino-like collapse through Spain, Portugal, and Italy before reaching France, the UK, and the US, or whether at some point the entire Western system will simply snap, Eric responded:
There’s lots of countries that are worse off than Spain! Spain’s not one of the worst ones, but unfortunately it happens to be in Europe and they CAN’T PRINT THEIR OWN MONEY!
As far as I’m concerned the US is bankrupt, Japan is bankrupt, I’m sure England’s bankrupt, they all have HUGE percentages of debt to GDP. They are all WAY PAST their Minsky Moments- imagine if interest rates were normal and not abnormal! What would the cost of government be of having a normal interest rate environment? It’s an untenable situation that is not going to be resolved in any normal kind of manner.
The things they’ve done in the last 5 years- NONE HAVE BEEN NORMAL, whether it’s QE, LTRO’s, unlimited swap lines, maybe we’ll get some new bank guarantees over the weekend- THESE THINGS ARENT NORMAL!!
We’re dealing with an abnormal situation with abnormal responses which NEVER accomplish anything. Again, I reiterate that the economy continues to weaken. Why does it weaken? Because the 99% are not making any headway on their income gains, if there is a global income gain as unemployment’s going up in the world. When your costs are going up and your income isn’t, things get tough.
I rather suspect that the 1% is now starting to feel it and if you are living in Europe and are part of the 1%, there’s no way you’re not being impacted today. I would even say with the recent market sell-off in North America that the 1% is starting to feel it here. Particularly the financial 1% are going to start feeling it here. There’s been no solution for the economy here and if there’s no economy then you shouldn’t have a stock market.
When asked whether Thursday’s gold and silver raid coinciding with Bernanke’s testimony to Congress felt like Deja-Vu to the Leap Day Massacre Eric responded:
It might be that the silver cartels have changed their MO. The MO used to be that whenever the jobs number came out they’d go to work , which let them take a shot at the markets once a month.
The last jobs report backfired, and of course the jobs reports have been so poor. I think the key thing for the cartel is to time it, and to know when to do it. Three or four guys acting together can have a bigger impact if you all know exactly what second we’re going to do something.
Of course Bernanke releasing his comments at exactly 10am is the perfect time. Ok, let’s knock gold and silver down. It theoretically make’s Ben’s remarks seem all the more important, although you see the action in the market before anyone’s even had a chance to read his comments, but it sort of reinforces it.
I would not be surprised that the MO has changed, and now we do these things when Bernanke speaks or when the Fed announcements come out at 2:15 on June 20th next, that’s when they’ll act. They like to know when they have a common time when they can all go into shorting mode.
To me, there’s been no reason for precious metals to be weak here. All of the data is incredibly positive for precious metals. I focus on gold because the silver data is so poor that we get, but when you see China buying 100 tons of gold in April, Iran’s buying, Turkey’s buying…Kazakhstan announces they’re going to go from 12% of reserves in gold to 15%- all of the data speaks to HUGE VOLUMES OF PHYSICAL GOLD BEING CONSUMED…way beyond the ability of the miners to provide that gold. Which makes me think the central banks are continuing to lease or to supply the gold into the market somehow…normally through leasing because then they don’t have to sold it.
All of the physical data says that gold is a buy. All of the financial goings on suggest that gold is a buy, but for some odd reason, and of course to me the odd reason is the central planners of the world don’t like the price of gold going up. The central planners to their demise think they know how to run the world. They’ve proven in the last five years THEY DON’T, because they can never solve a problem!
Of course gold and particularly silver being in such short supply will be massive beneficiaries when all of a sudden people realize that there’s not as much gold around as people think. Of course the silver supply would disappear in a nanosecond because it’s a very small amount of money.
When asked whether he expected the CFTC to take action against the manipulators upon the conclusion of their 4 year silver investigation which Bart Chilton stated would conclude within the next 2-3 months Eric replied:
I think everyone has been a little surprised at the inefficacy of the SEC & CFTC, you and I have been through this where we see these smashes and nobody really investigates anything, so it’s hard for me to see that they would come out with any stunning revelation.
Most times financial institutions have done something that was inappropriate they always just pay some meager little fine- never having to admit that there was any guilt- they just pay the meager fine and it goes off into the sunset.
I would imagine that MO would stay the course here and we’re not going to get much out of it.
Ted Butler wrote about that this week suggesting that we’re really not going to see anything.
They might find a way maybe because JP Morgan finally got their book down to some size which is below someone’s guidelines, then the CFTC can come out and say ‘Our current analysis of the market suggests that there aren’t any over-leveraged short positions’, and away we go. I’m not keeping my fingers crossed- it’s going to be up to the physical markets both in gold and silver to deal with the paper markets.
Regarding whether the silver/ gold ratio can stay near 55 to 1 with total US silver eagle sales nearly equal to US Mint gold eagle sales for 2012 at $460 million to $470 million Eric stated:
That’s always been my argument. Even in 2011 the silver sales exceeded the gold sales in dollars.
Which means when the ratio is as it is today, 56 to 1, it means people are buying 56 times the physical volume of silver as gold. When you analyze the availability of gold and silver in a physical sense, we know that there’s about 70 million ounces of gold per year available for investment. ..very little is used in industry.
I would argue that at the extreme there are 450 million ounces of available silver, using 900 million ounces as the total mining output, and I’m saying there’s 450 million available for investment (and I’m even including jewelry and things like that). The ratio for 450 to 70 means that there’s 6.5 times more physical silver available to buy for investment vs gold. Yet people are buying in 56 to 1!!
In the case of our gold trust and our silver trust, we raised exactly the same amount of dollars in the issues we had in the 1stquarter- so we bought more than 50 times more silver than gold!
People can’t keep doing that, ok? This is people voting with their money! If people are going to continue voting with their money and purchase as much silver as gold, the price is not going to stay in a 56 to 1 ratio.
When asked about his recent statement on CNBC that ‘gold was the investment of the last decade, it blew away Berkshire and Microsoft by over 500%, they (Buffet, Gates, & Munger) missed the trade big time’ and that gold and silver would trade at new highs over $2,000 and $50 by year end Eric explained:
I hadn’t even read what Warren Buffet wrote, but I wondered, why is this man writing about gold? Why do you put in your annual report that you don’t like gold? Why don’t you spend your whole annual report writing about the 99% of things that you don’t like? It seemed so perverse to me, and then to have other people who are considered financial icons coming out and bad-mouthing gold, it seemed so extreme to me and possibly organized in order to keep the system together.
Gold is the canary in the coal mine, and if people go there, the pressure on the central planners becomes extreme. In the last two letters PIMCO’s Bill Gross wrote, he is going more and more to hard assets and he mentioned gold in the last letter. I just think of it this way. Ok Bill, you’re the bond king.
Here’s the bond king saying maybe you should go to gold. How long will it take the mainstream investors, who have so much money in bonds, to try to put it into gold? If they do, the price would go crazy. As you know, we’re already in a shortage of supply vs. demand in these markets.
Well that means that theoretically, the last guy can’t get in! If all of a sudden the world’s bond fund managers and balance fund managers and even mainstream managers decide to get into gold, it will just be a fiasco! There is no gold to buy!
Just think of the dilemma a pension fund manager is in. Just imagine today the Japanese pension fund manager. His stock market has done nothing for 25 years! His bonds have yielded nothing for 20 years!
He has no return! One fund by the way recently announced that they’re going to put 25% of their money into gold and I thought ‘well thank goodness 25 years later you finally figured it out!’
Imagine in Germany today where 2 year bonds yield zero, and the stock market will probably provide a negative return this year. How do you pay your pensioners? You have to buy something that can go up in value rather than something that goes down in value!
It’s just a matter of time before this shift gains some momentum! We are now seeing some early stage guys, mostly in the hedge fund business and of course the University of Texas fund and a few others, but it’s a groundswell that is just going to pick up speed given time.
Knowing what the physical demand/supply is, they’re not going to get in without prices going a lot higher!
In terms of believing that gold can go to a new high and that silver can go to a new high I simply go to: if you watch the financial chaos that’s going on, if you watch the volatility of the market- I watched a stock market that rallied 100% because we’re going to have some sort of economic recovery, which in February we said The Recovery Has No Clothes. Of course now we find out that the recovery has no clothes! There’s not going to be a recovery! We get warning after warning after warning now that the outlook going forward is not as cheery as we all thought it was.
We have a desperate financial situation already, let alone that Europe’s in a recession, China’s industrial activity is in a recession, the US is probably in a recession, how do you keep this thing going here?
I just continue to believe that the safest path is to own gold and silver. Any additional investment in the area by the powers that be is going to have a dramatic impact on the price of these products, so I obviously think that they should be above their old highs.
As you might believe and as I believe, as silver was about to break $50 and all hell would have broken loose, I believe it was orchestrated to be knocked down. We’ll be back there again, and we’ll go above it in my opinion.
When asked what it will take to improve sentiment and start the next major rally in gold and silver, Eric stated:
I can’t imagine that Europeans are not buying gold and silver. I can’t imagine that the Chinese aren’t buying gold and silver when they realize the change in affairs over there. Plus you see all these central banks buying and now Kazakhstan says we’re just changing our reserves in gold from 12% to 15%- I mean that’s a pretty bold statement! Imagine if every central bank said that! There’s just no way in this earth that the gold is available!
Throughout the whole bull market, I always thought of it as a supply and demand thing in the physical markets. Yes, Central banks would stop selling. Yes, they would become buyers, which they have. The hedgers would stop hedging, which they have. The EFT’s came into existence, which they weren’t.
It’s all been a physical market all the way!
The only people who associate gold with the financial markets are people who keep saying that everything’s stable and fine and that gold shouldn’t go up. The fact is that the physical demand for gold far exceeds the supply, and I’m sure that the G6 central banks have been supplying the gold.
Now we have the tailwinds behind us of the total folly of the monetary people with the QE1’s and QE2’s and LTRO’s and unlimited swaps and all the other was of ingeniously keeping the system from doing what it would naturally do, WHICH IS DE-LEVERAGE! Of course de-leveraging is devastating to a banking system.
Ultimately the real purpose for gold is that you own gold because you don’t want your money with a levered financial counter-party. All of the financial counter-parties in the world are highly levered.
That’s why they disappear overnight like Dexia got taken out over a weekend. Like Bankia, one day you pass a stress test and three weeks later you’re broke! That’s how fast it happens!
We don’t have to wait for QE3, they likely won’t even call it QE3, they’ll come up with a new acronym for what it really is, printing money. We don’t need to wait for that (to see gold and silver move). You can look at all the data, and the data is overwhelmingly in favor of people buying gold and silver.
When asked about his thoughts regarding Harvey Organ’s recent allegations that GLD’s gold has been rehypothecated from the Bank of England and Arab investors, Eric replied:
Well Doc, that’s why we came up with our own trust where the gold is held at the Royal Canadian Mint, and if you have enough, you can take physical delivery- I forget what the minimums are now, but the gold is there to be purchased. We’re not going to lever anything, and of course I’ve been a huge proponent of owning physical gold and silver for the last 12 years, and that’s the only way to do it.
Always remember that there’s always counter-party risk unless you hold it, and these counter-parties, you can be shocked at how quickly you find out that they’re not financially solvent- as we might find out this weekend how insolvent the whole Spanish banking system is.
Eric Sprott is the Billionaire CEO of Sprott Asset Management, as well as the Chairman of Sprott Money & Sprott Incorporated, and author of the monthly public financial newsletter ‘Markets at a Glance’.
Eric is one of the pre-eminent gold and silver commentators in the market today, and has called silver the investment of the next decade.
Investors can sign up for his free newsletter and learn more about the Sprott family of companies at Sprott.com.or by contacting [email protected]
For your physical gold and bullion needs, please visit Sprott Money Ltd. at www.sprottmoney.com