Eric Sprott Asks: Did I Lose $10 Million From the Barclays Gold Take-Down?

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In this EXCLUSIVE, MUST LISTEN interview with The Doc, Eric Sprott dissects the fundamentals in the gold and silver markets, coverage of manipulation finally reaching the mainstream, and reveals his updated outlook on gold & silver.
Eric discusses why the precious metals options markets always expire at MAX PAIN for the customers, and why he urges all PM investors to STAY OUT of the futures options markets, and simply accumulate physical metal.
Sprott explains how PM manipulation shifted from being conducted solely by the Central banks to the dealers active daily participation that we see now, and discusses how much he personally lost when a Barclays trader manipulated gold down into the London fix.  

Regarding his price outlook for the metals, with silver trading under $20 and gold trading near $1250, is Eric still looking for new highs in 2014?
His answer might shock you.

The Doc’s full Exclusive interview with Eric Sprott of Sprott Asset Management is below:


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Doc:

Eric, lets start off with your thoughts on the state of the physical markets in both gold and silver.
I know you have that dream of taking that very last physical bar of gold and silver off the market.
We’re not seeing retail shortages and delays like we did a year ago- yet we’re still at record investment demand levels.  Silver Maple sales for Q1 were 8.2 million ounces- 24% higher than the 2013 record.
The US Mint has sold over 22 million Silver Eagles over the first 5 months of the year- on pace for a new record, and a 97 to 1 ratio to Gold Eagle sales by the way.

First, what is your take on the current state of the gold and silver markets, and second, if we are already at record investment demand levels for silver with sentiment at rock bottom, what might demand and coin sales look like if the silver market experiences another parabolic rally like it saw in 2010-2011?

 

Eric:

Well, you know Doc, I spend alot of time looking at the physical markets.  I would reference back to an article I wrote in 2012 which asked:  Do Western Central Banks Have Any Gold Left? 

My analysis suggested that boy, these guys have got to be suppressing the price of gold, and they can’t have much left.   I think they were getting very close to being out of gold, and that’s why they had the raid in 2013, they took 900 tons of gold out of the various ETF’s in the world, which was of course consumed, and it shows the amount of physical consumption vs. supply.
Supply is something like only 2700 tons from the mines, maybe 1300 tons from recycling, we had the 900 tons from the ETFs, and it all got consumed.  Of course it all got consumed by the Eastern countries. 

There are various people (myself included) who suggest that Chinese demand is equivalent to all Western mining.  Between what they produce for themselves and import, both through Hong Kong and directly into China, it just looks like they are almost consuming all of global mining production!

Which begs the question- where is the gold coming from, and where is the silver coming from?
We’ve seen data from Switzerland now that shows where the imports come from, and they come from the UK, & the US.  The UK produces no gold, so whose gold is it that the UK is exporting to Switzerland?

The US is exporting WAY BEYOND what they produce- so where’s that gold coming from? 
Of course its always been my conclusion that the Western Central Banks continue to find gold somewhere. 
We’ve had various commentators stating they must be getting down to the bottom of the vaults because the bars are backdated back to the 60’s.
Whenever I look at demand, I think man, there’s more demand than there is supply, yes you can mess around with COMEX all you want until someday somebody asks for delivery, and they’re not going to get delivery.

I’m quite impressed by the demand for the metals on all fronts, and you can even include Platinum and Palladium in there!  All the metals really look like there is a shortage, it just hasn’t been able to manifest itself because of the control of the futures markets.

We’ve seen by the Barclays example what you can do in the futures markets. 
I might point out Doc, that one of the things I find interesting is that Palladium, which doesn’t have futures trading, is within about 3% of its all-time high.  
I think if it goes to a new high, it will tell you what a non-futures market can do, and should do. 
Both Platinum and Palladium are both screaming that there has to be a shortage.  Unfortunately in Platinum there is a futures market, and the commercials have gone massively short to keep things under control.   I’ve always speculated that some day there will be that failure.

So the demand seems to be there, the reasons to own gold get better by the day, there is no economic recovery. 
The former Chairman of the ECB said that we live in a fictional financial system.  That’s what we live in!
We live in a fictional financial system!  There is no recovery!  We spent trillions and trillions of dollars buying bonds- what did we get for it?   We got hardly anything for it!

The middle class is just getting ROUTED here because of the serious inflation that they have to face- whether its education, healthcare, food costs- everything is going up.  Its not 2%, we know that, and the wages don’t go up by even 2%.

We have a very great environment for gold to go higher, it has not been allowed to go higher. 
It has not been allowed to go higher because anyone in their right mind knows that printing money is vastly irresponsible, and the irresponsibility will show up in a higher gold price.

Meanwhile we have everyone saying, oh, the market’s going up, there’s no inflation, everything’s fine, and everyone is staying calm, but the day is coming when they won’t be staying calm because of all these forces that are at work today.

There are so many things going on today that are all gold positive, but gold isn’t allowed to rise….yet.
But it will.

Doc:

Eric, you touched on the Barclays trader who manipulated the price of gold into the London fix, the mainstream financial media bent over backwards asserting that this was a one-off event, and isolated to a single trader.
As you and I know, that certainly wasn’t the case, and it appears that after years of denials and scoffing, the story is slowly leaking into the mainstream.  The Financial Times reported Tuesday that “Trading to influence gold price fix was ‘routine’ in the industry.”

I want to read a bit of the Financial Times piece for our listeners Eric, and I quote:

 

While the Financial Conduct Authority says the case appears to be a one off – the work of a single trader – some market professionals have a different view. They claim the practice of nudging a tradeable benchmark in order to protect a “digital” derivatives contract – as a Barclays employee did – was routine in the industry.

“If I was at the FCA I would be looking at all banks trading digitals. This could be the tip of the iceberg – there’s a massive issue with exotic derivatives and barriers.”

 

This was in the Financial Times Eric! Not on Zerohedge or SilverDoctors!   Has the precious metals manipulation story finally achieved a critical mass where mainstream financial media can no longer ignore the story, but are finally forced to cover it?

 

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Eric:

We do have the class-action lawsuits, we have statements that were made by CFTC Commissioners who said it looked like something illegal was going on (although nothing did eventuate from it), we have the Barclays incident…

And that Barclays incident, it was one day, for one purpose.  There are 250 trading days in a year, and each one of those days there is purpose.  The longer I’m in these markets, the more I realize that the guys who buy options are basically set up to fail by the dealers, because they’re collecting the premiums.

There’s a theory in our business that the price of a thing that trades in the options market always expires at MAX PAIN.  Max Pain is where the customer loses the most money.  We could use that analogy with the Barclays situation.  What was the Max Pain for their customer?  It was to close it at $1350 – just to inflict max pain on their customer! 

It’s symptomatic with the whole business!  Whether its FOREX trading, LIBOR trading, precious metals trading, undoubtedly stock trading- we see the same thing in stocks where they tend to close where the futures options would cause max pain, and of course the dealer scoops all the premiums off! 

These markets are pretty big, and every expiry there’s probably billions of dollars on the table, so its a routine they just go through! 

God knows now big those digitals trades are in Europe!   What a wonderful thing!  You’re sitting there as a trader thinking me and my buddies can control this price, and we can all write these tickets, and basically scoop up all the money every options expiry .

There’s no doubt that its gone on for a long while.

There have been various parties who have manipulated the price of gold.  For sure the Central banks have been involved- and announced they’re selling, just to keep the price of gold down, and that may have ended in the early 2000’s. 

Then I think the dealers figured out- hold it now…we can do this too and skim the options!   We’ve got pretty deep pockets!
So I think it transferred over to the investment dealers.
I would hate to think of how many millions of dollars are on the table.  Just think of that Barclays trader.  I wonder, how much did I lose that day?  Did I lose $5 or $10 million that day for me and my clients? 

That was only one day and one moment in time!  You can set the tape up for technical failure or disappointment, they all know it, and they play it like a violin- all to the detriment of bona fide players in the markets. 
The high frequency traders and the algo traders run the markets.  Thats why participation in the markets keeps going down, thats why the investment dealers trading revenue is down 25%- who would want to trade?

I encourage people not to trade in options in precious metals, because then there’s no dry kindling for the commercial banks to light up!   If nobody bought the options and we just concentrated on the physical metals, I think we’d have a much easier opportunity!

Every time we buy an option, we pay that premium to the dealer,  well, he’s gonna try to steal it!  Typically most precious metals buyers are long calls- there’s way more calls than puts, so the pressure’s always on the downside.  I think it’s best just to stay out of that market.

Doc:
Eric, you came out earlier in the year and stated that you thought gold would see new all-time nominal highs in 2014- I think $2400 was the number you were looking for.
With gold currently trading around the $1250 level, thats nearly a double from current valuations.

I’ve reminded alot of people lately about your 2010 call that silver would reach $50 within 6 months, when it was trading at about $18 at the time.

Do you still believe we’ll see new nominal highs in gold in 2014, and if so, how do you see that happening?

 

Eric:
It’s a great question, and obviously we’ve lost some of our time window here, but there’s nothing in the physical data that distracts me from thinking that demand is way in excess of supply.

Going forward, the supply of gold is going down! 
We haven’t done the exploration, we’re not doing the development, it’s hard to finance projects.
The average mine has about a 10 year life, and if you’re not finding and developing new things, 10 years from now there would be no gold production on average!   Obviously some mines will expire in 2 or 3 years and some will be 20 years , but the average life of a mine is less than 10 years, so I can see going forward that supply is going to be diminishing, the Chinese influence in the gold market, if we bring India back into the gold market (which it looks like they will come back into the market, and I suggest that the Indians will be buying LOTS of gold) continuing interest in the broad market of people owning gold.

There was a shortage of 900 tons last year, we know that because it came out of the ETFs and it went somewhere,  so far it looks like we will have stead state in the ETFs this year- if we actually get some momentum going in gold, we could see it reverse by the end of the year.  Imagine if people bought 900 tons instead of selling 900 tons- that would be a 40% change in the supply/demand equation! 

I’m still very optimistic, and I’m so terribly disappointed that its taken this long, and that we have to go through these events like the May options expiration where they have to bang it down to $1240 so everyone loses their money, it just is as frustrating as can be. 
We’re in a very tough environment here, nothing seems to make alot of sense fundamentally.
Retailers are coming out with terrible numbers, yet the markets at an all-time high, its mind boggling.

But it comes down to that there are forces at work in the markets which shouldn’t be in markets.  And I’m referring to the Central Banks as a whole.  I’m absolutely convinced that they’re involved in the gold market, I’m so happy to hear that the gold is just pouring out of these countries- lots of people are speculating that there is very little gold left- the UK’s exports fell off a cliff, and they can’t keep exporting 100 tons a month, they don’t even produce an ounce of gold! 

I still firmly believe that we can get there (to new all-time highs), and that we can have some stunningly fast moves here- particularly of course if a physical default was ever announced. 

 

Doc:
Substantiating that theory that London and the bullion banks are running out of gold, on Monday Bloomberg reported that Ecuador had agreed to essentially lease over half of its entire gold reserves- 466,000 oz- to the Goldman boys for 3 years in exchange for liquidity.

I think we’d both agree its a fairly safe assumption that Ecuador won’t be seeing an ounce of that back in 3 years- its probably being unloaded from a plane in Shanghai or Hong Kong as we speak-
But I’d like to hear your take Eric on the implications as far as the state of the gold vaults in the Western banking system- is this the latest indication that they have reached the absolute bottom of the barrel in regards to gold?   Have they come knocking on your door yet for the PHYS gold?

 

 

Eric:
No.  Everything’s counter-intuitive in the gold market. 
For example, today: we had the employment data and it was weak.  Gold shoots up all of $2, and probably as I’m speaking its flat on the day. 
There’s nothing that ever seems to have a direct relationship because it’s not allowed to happen! 

Anything that should be gold positive news results in the price going down because they don’t want the relationship of gold to anything.  If the trade deficit rises, we can’t have gold going up because then people will link onto that every da*n month, or if employment data is weak- you don’t want the gold price going up because then if the next month is weak, people think gold should go higher.
These people try to control it. 

Its perverse, but most people can take some comfort in the fact that there’s weird, weird things going on in the financial markets- whether its that we’re supposedly tapering, but now all of a sudden Belgium is buying all these bonds.  My guess would be that the Fed has some swap lines with the ECB and they’re buying the bonds in Brussels, and they haven’t really decreased their QE at all, they’ve just found a different route and vehicle to do it, so they can say, oh look, we’re responsible, which of course they haven’t been semi-responsible. 

I’m very hopeful our day is coming, it’s very hard to predict what’s going to happen, but I still think it has an excellent chance of doing well this year. 

 

Doc:
It’s amazing that the mainstream takes the news of Belgium suddenly buying T-bonds at face value.

 

Eric:
There is no Mainstream News-Mainstream Reports What The Guys Running the System Want Them to Write, Thats Why Sites Like Yours & ZeroHedge That Analyze The Numbers Are So Interesting- I’ve always told people that I’ll be interested in the stock market again when they stop using the expression “beat expectations”.   Just tell me what the numbers were!  Were they up or down?

 

Doc:
Before we let you go Eric, I know you’re excited about the Sprott Natural Resource Symposium in Vancouver British Columbia in July.  Its going to be an excellent opportunity for investors to learn from some of the top minds in the natural resource sector- and what better time to acquire quality resource companies than after the brutal multi-year correction gold and silver have endured?   Many of the smaller and mid-cap gold and silver miners are currently at valuations comparable to the beginning of the secular bull market!
The line-up looks like a cornicopia of experts in the energy and resource field.  Tell our listeners a little more about what they can expect from the Sprott Natural Resource Symposium Eric.

 

Eric:
Stocks are cheap, the price of gold is low, we have a very good line-up, I would encourage people to attend, it should be a fun show with lots of excellent speakers.

 

Doc:
For all our listeners interested in finding out more or signing up we’ll have a link included in the write up of our interview.

SPROTT VANCOUVER NATURAL RESOURCE SYMPOSIUM 2014

Eric, it was great to have you back on the show.

Eric:
Ok Doc, my pleasure, and keep up the great work.  I love going to your site.  All the best!

SPROTT VANCOUVER NATURAL RESOURCE SYMPOSIUM 2014