Eric Sprott On How Central Banks Are Setting The Stage For The Next Big Move In Gold

Tyler Durden's picture

A brief look at the contentious gold/central bank history as it is about to rhyme all over again:

The Federal Reserve System was created in 1913 on a promise of stabilizing the banking system. What followed instead was an unprecedented growth in fractional reserve banking, as well as the money supply, which helped fuel the roaring 20’s. The aggressive money printing created inflated values in bonds and stocks, which peaked in 1929. When the market began its precipitous slide, and the public began to realize that stock and bond values were artificially high, the populace began to convert its cash holdings into gold. The government lacked the ability to satisfy that demand and was thus forced to renege on the currency’s founding promise of gold convertibility. It’s important to point out that without this original promise of convertibility for citizens, the currency may never have been adopted.

In 1933, The Gold Reserve Act was passed by Congress and formalized into law the breaking of the gold standard. This law provided for a controlled-currency issue through the Federal Reserve System which was non-redeemable in gold. Although the link to anything tangible had been broken, the citizens had little choice but to continue using these non-redeemable dollars as a medium of exchange. The currency had already been broadly accepted, proven convenient and a perception of safety had already become entrenched.

After forty years of continued dollar printing, in August, 1971, President Nixon effectively declared the US dollar to be a completely “fiat” currency by refusing to allow foreign governments to convert their US dollar holdings into gold. The right of conversion which had been granted under the post World War II, Bretton Woods agreement could not be honoured because of decades of money supply expansion. The original ‘promise’, which had vaulted US dollar to its status as a global reserve currency and a stable store of value, was now completely broken.

These historical events resulted in a world in which all currencies are fiat; they are not backed by gold or any other tangible asset. The supply is infinite. In fact, the production of today’s newly created paper money in relation to historical commodity-based money is akin to counterfeiting. A US dollar printed today has no ties to anything tangible and as a result carries only four cents of the equivalent purchasing power of a gold-backed dollar of 1913. It is ironic that in a poor choice of wording on Wikipedia, the definition of counterfeiting states that “it is usually pursued aggressively by all governments.” It is only because the evolution of money has occurred slowly over generations that the obvious flaw with fiat currency is not widely understood.

Why Gold, as a consequence of 90 years of paper debasement, will be the next big thing.

We are gold investors because we have made a specific and calculated bet against paper money. Simply put, we are betting against paper money as a store of value. We believe its supply will continue to increase. We do not believe that the world’s major governments have any stake left in protecting it. Government debt loads have grown so massive that printing them away has become obligatory - there is no longer any other feasible option left. In our view, the savers of the world should already be outraged by the dilution they have been forced to suffer at the hands of the Central Banks. Are we to infer that the limited reaction of savers to the combination of zero interest rates and debasement of currency is a result of “learned helplessness”?

In our opinion, the lack of overt inflation to date due to the "successful" implementation of globalization, aka exporting inflation to China and anyone else who needs to purchase US securities, is the sole reason why there has not been an explosion in fiat-denominated prices to date. Yet as Zero Hedge has been pointing out for several months, the global trade picture is now dramatically changed, and China will need to look inward rather than outward. This means, that sooner or later exporting inflation as a fiat policy will fail. When pundits finally comprehend this and start blaring about it every day on CNBC, that is when the rush to gold (plated) safety will finally become acute.

And since in a fiat-debased world, everyone wonders where gold will hit (which in principle is the wrong question, as monetary representation of value will very likely cease should Central Banks finally lose control over the infinite dilution mechanism), here is what Sprott believes:

We also wanted to prepare our readers and clients for the next leg of the gold bull market as it will prove to be extremely volatile. Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not.

Read the full note here.


And when you are done, here is another just released note from Sprott's John Embry, in which he expects gold to go up by 30% in the near-term.

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Mr Lennon Hendrix's picture

Gold fears not the fire of the furnace.

Keyser Soze's picture

Sure, but neither do most resources. I'd still rather have one that has more of a supply-demand characteristic. Like Jim Rogers said aeons ago "I don't know what tomorrow's inflation hedge will be".


Last year, when the world tanked, what happened to gold? Everyone went to the dollar! If people are dumb enough to do that, then they're dumb enough to make the same mistake again.

Nout Wellink's picture

The world tanked because of huge deflationary forces. A total deflationary collapse was threatened. In such a case cash = king. All other assets will be smashed. Including gold.

Anonymous's picture

Then why the US, Germany, France and Italy still holding huge amounts of Gold and now India and other on the race?.

Not to mention the Chinese Gold is not allowed to get out of the country and the same happening with the Russians...

Recall what Grenspan said back in September 2009:

I don't care if you like or not Greenspan but he is the real insider of the FED and he's more powerful today than when he was heding the FED as he can freely says what he think...

The $300 to $1'100 move we have seen in 9 years is nothing in comparaison of what we can see in the coming weeks...

Deflation it's an invention while inflation will wipe out everybody. No choices left: 1) write-off all debts outstanding, 2) revalue Gold

Anonymous's picture

How would you even know whether US, Germany, France, or Italy has had been leasing their gold out to misdirect economists about inflation?

1984's picture

Last year everyone went to the dollar not because they're in love with it, but because it was a margin call of epic proportions.  You need dollars to pay back debt.  The stupidity happened earlier when they all leveraged up.


Anonymous's picture

I have been saying for two years now that corn is the new gold standard.

Anonymous's picture

The days of people running towards sovereign debt as a safe haven are coming to an end. The massive bailouts of 2008-2009 cannot be repeated, and they have consequences.

Anonymous's picture

agree totally, so what can happen next as a result?

Anonymous's picture

the 'world tanked' because the rest of the world was not involved! The 'World" was the investment banks, funds etc totally liquidating everything they could.........No one knew what was going to happen. The went to cash in everthing, bonds, gold, stocks, commods...pretty smart people were taking duffles out of the bank over those weeks!

DoChenRollingBearing's picture

Sprott is very respected in the gold community.  Thanks for posting this!

MarketTruth's picture

Agreed, Sprott is highly regarded worldwide. Many thanks ZH for posting this valuable info.

StuntPope's picture

It's not that Sprott is well respected in the "gold community", Sprott and his team are among the most successful investors and money managers Canada has ever produced. And they happen to be very bullish on gold. (In other words, they aren't goldbugs for the sake of being goldbugs - they're extremely successful money managers who have come to the conclusion that gold is going up - in fiat currency terms)

SNAFU's picture

Even JPMorgan projects AU to be at $1400 2qtr 2010; but then declining.

Segestan's picture

With all the huge effort being made to discredit Gold , nice to read a realistic , honest analysis.

Doc Brown's picture

Please keep in mind when a CB is diversifying

it's portfolio into gold don't assume it's in

the open market. Ru bought gold last year from it's own producers. China is one of the largest producers of gold again they

will add to their position from their own mines first. Canada is a commodities based economy gold being one of them. Jewelry

demand is down 32% which usually represents 70% of worldwide demand for gold. Total demand for all uses including ETF's is down

36%. Outlook Dollar your call. In sum there are a mosaic of considerations that must be weighed from the perspective of what type of buyer and seller

you are

when considering buying gold.  From a pure supply/demand presently there

is plenty around from a multiple of sources if you need to have it yesterday.

Rusty_Shackleford's picture

Gold and silver are to be bought.

Anonymous's picture

I've got something more important than gold right now-guns and plenty of ammo. I'll get gold later.

Al Gorerhythm's picture

You'll have to rely on your guns and ammo to get it. He who procrastinates......

ToNYC's picture

Have you considered when and how you will be able to sleep after you actually begin to use your guns n' ammo?  The Army is in Fort Knox not to protect the Gold which maybe wrapped like Chanukkah gelt, but to protect the status-quo. Media of exchange are hard to come by, but locally and within your club or tribe, and Gold doesn't cut the mustard when you factor in the security necessary to use it more than once or twice and the likes of Fred C. Dobbs.

Crime of the Century's picture

Not all of us are as fortunate as you to live in NYC. (Been there, done that, refused the t-shirt). You are constantly on these threads like a moth/flame, spreading your Kunstlerian FUD. I, on the other hand have better spent my time reading history with my fiction. Argentina wasn't even that long ago, and contemporary analysis says "PMs are insurance, ignore at you own peril". Home defense of the crime of home invasion is still legal in this country. I, for one, have no problem with that.

Anonymous's picture

Silver has come down nicely for those looking to make an entry into that market.

Thanks for the information, "Tyler"!

Stevm30's picture

Personally, I don't understand why there is not more discussion of silver.  The amount of silver mined in history relative to gold is about 10:1... Historically silver traded at a ratio of about 15:1 (silver to gold)... now it's what 65:1?  But when commodies begin to be used again as money, silver will be critical.  Even with gold at 1100/oz, it much too valuable to be used for everyday transactions... Silver, not so much.  I predict that the demand for silver will skyrocket when we come off this bizarre fiat currency system - as people look for something of value to trade... the essential qualities of silver (and gold) will rise again and the same reasons they were valued in the past will ressurect them.

Observer's picture

Silver also has other neccesary uses apart from being an ornament unlike gold so it's valuation has a broader basis.

Stevm30's picture

double post - sorry

Anonymous's picture

Looks like gold has put in a bear flag. I'm wondering how low it will go....a drop to 1055? 998? It bears watching closely for the next few days/weeks.

this post is an eye opener, read down to the bit about the bank of China.

Crime of the Century's picture

I don't know about the "Beijing Put", but India's CB bought a not insignificant 200mt at approx $1045, so I would expect that range to draw considerable interest again should it be reached.

Anonymous's picture

Fiat money insanity! There will come a time when no amount of dollars will get you gold. Like Marc Faber says, "we are doomed!" Then he chuckles. You would chuckle too if you are prepared.

Read articles by Robert Schoon

Antal Fekete, of the Gold Standard Institute:

Anonymous's picture

Excellent post. He makes a rather convincing case. Although I wonder, when ALL the world's currencies are fiat, does the pig with the most lipstick (or the biggest nuke arsenal) win?

Anonymous's picture


The gold bug argument is that the Central Banks have control, but are losing control.

Which is true.

But it also rests on the assumption that the types of controls remain the same. They will not.

CB power is growing at an exponential rate, and exerting ever greater effect. This phenomenon is happening in every nation simultaneously.

To assume that central banks will (and must) lose control of the money supply, is to also assume that the trend of rising CB authority will reverse and begin to wane.

This we have not seen -- at all.

Those who study history fall into two camps:

1) All fiat currencies must trend to zero. (This is historically true).

2) All democracies give way to tyranny. (This is also historically true).

Assuming that (1) will happen before (2) is a common hypothesis, but I personally give it a 50% chance.

The powers that be will always and forever, go down swinging.

Stevm30's picture

Great post.


"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." Lord Acton

dumpster's picture

tyler thanks for the sprott article and opinion on gold


it seems like the opinions about gold from many on this board are based on nothing but brain washing and growing up in world of harvard and keynesian economics.. look out the window see whats happening .. lol








Creative Destruction Engineering's picture

There will come a time when nobody will accept paper money for their gold.  Only then will the masses understand the nature of fiat currency.

In the words of Marc Faber, "We are doomed."  Then he chuckles.  You would chuckle too, if you are prepared.

dumpster's picture

and the time is coming gold can not be bought for any price .


silver will then be the common mans purchase of choice .. but most will wait .  as they are in the vortex of mass ignorance on the nature of money.   nobodys debt, no counter party risk .  


can not be dreamed into existence . 

but sadly even here . most will not get it. lol


Anonymous's picture

Paper money is worth nothing, always has been. What is valuable is the "full faith and credit" of people who have power and wealth. The more the more power and wealth they have, the more their "full faith and credit" is worth.

Conversely, gold (or paper money, or any form of currency) is only as valuable as the full faith and credit of the persons trading it. Two homeless, starving guys in the middle of the desert who stumbled on a treasure chest of gold wouldn't feel any richer. On the other hand, two wealthy and powerful people can exchange their rights to an entire lifetime of wealth by putting ink to a piece of paper. The means they use to exchange that wealth and power is virtually irrelivant.

Finally, stop talking about "paper money." I haven't used paper money for anything but buying food and gas in about a decade. Human economic interaction has moved way beyond any physicallmaterial method of exchange, and it's never going back.

Holding physical gold is useful, in small quantities, for an emergency. So is paper money. But it's certainly not something that will ever be the solution to the economic problems humans have.

Oracle of Kypseli's picture

When governments devalue money, the only wealth preservation is precious metals, agri-land and non-perishable goods that can be traded. Digital or paper dollars are okay for daily consumption. As you get paid, you spend, when you have extra, you buy gold.
You will never be sorry. Yes you may not have the artificial and temporary stock/bond market gains (taxable)during boom cycles, but you will never loose.

Gold 25%-50% of your assets depending on the economic conditions.

Gold bullion is not reportable (taxable) if you sell less than 25-30 oz or so each time. 

Observer's picture

very sensible observation although I wouldn't invest all my extra money in gold. probably silver and stock as well

Anonymous's picture

(((I haven't used paper money for anything but buying food and gas in about a decade. Human economic interaction has moved way beyond any physicallmaterial method of exchange, and it's never going back)))

How about an implanted chip

It's all about power --- they made owning gold illegal in the 30's ----they will do so again

Rev 13:16-17
He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, 17 so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.

boooyaaaah's picture

I too use paper money for candy bars, lunch at subway, tips, and junk

I use plastic cards for everything else including gas

I pay bills on line

If big government was big enough in the 30's to prohibit ownership of gold --- they are big enough now

What will be the future of currency?

Try an implanted computer chip

If your government is corrupt and you think owning gold will save you, then you are like an ostrich with your head in a bag of gold.

The only salvation in this world is to change the government while we still have a vote

Eventually even that remedy will be gone

Rev 13:16-17
 He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, 17 so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.




Observer's picture

I agree. very incisive observation

Anonymous's picture

well goldman definitely needs a new source for bonus money, in 07, 08 it was oil, in 09 it was dah gubment and copper, yeah, imho, gs was all over copper, and now that it has cracked definitively, they need something new

so, how will it go, well i guess it depends on how bad ben wants it kept down, and how much mr. dimon will co-operate

when paulson, and einhorn bang the drum, albeit slowly, you know they just turned the heat on low

price and time

right now we got a dollar rally that needs to crack first and them i'm in

dumpster's picture

sprott remarks

However, despite my consistent enthusiasm for the yellow metal once termed a "barbarous relic" by Lord Keynes, I still have the strong feeling that the vast majority of investors outside this room still haven’t got a clue about gold and they are certainly not aware that gold is experiencing a historic bull market with much, much further to go. What we have seen to date is merely a prelude, and the appreciation we are going to see in future years is going to greatly exceed what we have seen to date. This opinion is based on a number of factors I will expand on, but the predominant theme is that gold is re-establishing itself as money

dumpster's picture


sinclairs site


has some more sprott stuff ..

yy's picture

Before you guys go out and convert your wealth to Gold,a few points

1. If it gives you peace of mind than have some.

2. No matter what the monetary medium is (paper, gold, whatever), the key is its use in commerce. Gold is simply hard to use. In fact  paper money is soon to be gone, it is just electrons we have! And they seem to be just fine at enabling people to barter goods and services (no matter what the medium is).

3. No matter what happens to the fake world of central banks, energy, metals, agricultural commodities and their assoicates will have DEMAND and SUPPLY balances that one rather observe to preserve wealth.


4. Preserving wealth even in the 21st century can be had through old fashioned things like real-estate, farm land, barrels of oil (or ethanol of you wish), bushels of wheat etc. If you own your house, then you don't care about the monetary medium, gold and dead Zimbabwe dollars are alike, you can prices it as 500 OZ of gold or 10 Giga trillion Zim Dollars, or 8000 barrels of oil...


5. Bottom line, gold shines, but rational observation of human needs and wants is really what counts.

Anonymous's picture

Bingo! But bubble-makers and the financial community always have the need to profit in some way, so they issue press releases about the "things we should invest in" to drive up their own holding value. It's the Amerikan way.

Anybody do any research into some of Sprott's previous calls? If you did, you'd see this guy has cost his clients dearly since 2008. I'd be careful about jumping in with both feet on Sprott's advice.

Anonymous's picture

I'm curious, what was his advice last year that cost his clients dearly?

Gold...Bitches's picture

boy, there are a bunch of things that you have wrong, but the most simple one is your assertion that its just too cumbersome.  You then say that its soon to be all electronic.  Well, so what?  The electrons are still representative of some amount of FRN's whenever they do try and go all electronic.  

Ever heard of Goldmoney? or Egold?  You see, they do this fascinating thing with physical gold where they hold it and then, heres the crazy part, they credit your electronic account with a dollar balance that is backed by gold.  I know, wayyy out there, huh?  So you see, there already is electronic gold.


Your fallacy is in equating any electronic payment or transfer of FRN's to be the only basis upon which a dollar denominated market can exist.  The whole question has always and always will be "What is the dollar backed by - the full faith of the govt (cough), or some commodity?"  And if it is some commodity, the world population, not some elites in Davos, have always chosen gold as the medium of exchange.  And as to charges that the total value isnt enough to do that now... well, a new revaluation to some number 1,000's higher than today gets the paper and real money back into relation. 

Observer's picture

All true but still means we have to 'trust' someone to hold the gold that backs our egold. who's going to do that in large numbers; governments? central banks or banks maybe? currency exists to facilitate commerce. otherwise it is worthless. gold has no industrial use. we just fancy it. so we need a currency that derives it's value from the commerce it generates, maybe one backed by a combination of stocks and bonds which generate earnings based on commercial activity as pointed out by mikla in his post on a new currency

Al Gorerhythm's picture

Sprott was right! Confusion reigns supreme. Dear oh dear.