Sprott Asset Management

Recent outflows from physical gold exchange traded products have been interpreted by the financial press as a sign of weakness in the demand for gold as an investment vehicle. However, a closer look at the evidence suggests otherwise - the evidence presented here suggests that, contrary to what has been stated in the financial press, the flows out of the SPDR Gold Trust may have been generated by the bullion banks to take advantage of an arbitrage opportunity in the physical market. This arbitrage opportunity occurred because of the intense demand for gold stemming from Asia and the inability of traditional suppliers to provide this gold (hence the large Shanghai premium). We believe that this activity further supports our hypothesis that there is a lack of availability of physical gold and an obvious dislocation between the physical and paper gold markets.

With the financial experts claiming, some gleefully, that gold has "lost its safe haven status" in the aftermath of its biggest tumble in 30 years, many commentators thought (hoped?) that the dramatic price drop would steer people away from gold ownership. To my eyes, the past week has all the earmarks of a high-gloss propaganda campaign complete with well-placed anti-gold stories in the media and the careful use of language aimed at sowing doubt about gold's ability to be a store of wealth. But for those who consider gold a store of value, the recent gold slam is a gift: an invitation to purchase more sound money with fewer units of paper currency. In other words, a sweet deal.  Gold and silver on sale and the world is taking advantage.

Société Générale (“SocGen”) recently published a special report entitled “The end of the gold era” that garnered far more attention than we think it deserved.  The majority of the report focused on SocGen’s “crash scenario” for gold wherein they suggest that gold could fall well below their 2013 target of US$1,375/oz. It also included a classic criticism that we’ve heard so many times before: that the gold price is in “bubble territory”. We have problems with both suggestions.

Eric Sprott's findings support the growing meme that there is a massive bullion transfer from West to East. This should particularly concern those in the U.S., EU and Canada as his suspicion is that, increasingly, it's monetary gold that is being sold. "We are well into the financial crisis. Everyone’s trying to keep it together, even though it would appear from the reading of the economy things are not going well at all here. And everyone's ignoring things. But I think, in their hearts, the Central Bankers must know what they’re doing is totally irresponsible. And the tell of that irresponsibility – which is the debasing of the currencies – is the fact that real things will go up in value. This should be reflected in the price of gold and silver." For precious metals holders licking their wounds from the carnage of the past several months , this note offers both new insights and sound reminders of the long-term reasons for owning gold and silver.

If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titled Navigating the Politicized Economy, you could say "The situation is hopeless but not serious." More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.

Beware: "Allocated" Gold May Not Really Be There

When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.  Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise? Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?

Sprott strategist John Embry has never been a fan of the existing financial system. Today, he makes that once again quite clear in this interview with Egon von Grayerz' Matterhorn Asset Management in which he says: "I think that the current financial system, as we know it, will be totally destroyed, probably sooner rather than later. The next system will require gold backing to have any legitimacy. This has happened many times in history." Needless to say, he proceeds to explain why a monetary system based on gold, one in which one, gasp, lives according to one's means, is better. Logically, he also explains why the status quo, whose insolvent welfare world has nearly a third of a quadrillion in the form of unfunded future liabilities, will never let this happen. Much more inside.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion topics include the choices between austerity and increasing stimulus and how both will bring on a meltdown, whether bankruptcy or hyperinflation brought on by money printing. They talk about the huge leverage in the banking system and the risk inherent in the system. People are only now starting to understand counterparty risk. They explain that 20-to-1 and even higher leverage is common in the banking system. Lastly, the two talk about the short-term focus of political decisions and the bad omens for the dollar as a world reserve currency. Kicking the can down the road is increasingly not an option for bankrupt governments, as even the bond markets are increasingly uncooperative with new stimulus efforts. As an example the recent failed attempt by the EFSF to raise 3 billion. They talk about the IMF creating $280 Billion SDRs out of thin air and ask whether that will keep the party going a bit longer.

On its way to becoming the world’s greatest superpower, the United States pulled off some truly remarkable trades.  Two notable transactions come to mind and were both outstanding bargains: 1) The Louisiana Purchase (purchased from the French); 2) Alaska (purchased from the Russians). For a mere $15 million, America instantly doubled its size with the 1803 purchase of the Louisiana territory.1 Sixty-fouryears later, oil-and mineral-rich Alaska was obtained for a paltry $7.2 million.2  Even adjusting for inflation, the combined value of these deals in today’s dollars would be very small. However, these two transactions pale in comparison to the greatest trade of all time, one which remains ongoing. This particular trade has allowed the US to exchange more than $8 trillion worth of paper for an unbelievably enormous amount of real goods and services over 36 straight years. We’re referring, of course, to the United States trade deficit. As Chart 1 shows, imports have exceeded exports every year since 1975. For much of the past decade, America’s annual trade deficit has soared past the $600 billion mark, while the accumulated trade deficit has moved relentlessly higher.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, talk about how there isn't enough silver in the silver market to back existing "paper silver" commitments. While there is much in the attached interview, the bottom line is that Sprott thinks that "silver will be the investment of this decade". And with 3 out of 5 central banks having just embarked on monetization, and two more imminents, he will almost certainly be right.

As was announced before, Sprott's PHYS fund (which previously had not disclosed terms of its offering) has just priced 19 million units at $14.00/unit for a total raise of $266 million, all of which will go to removing another 5 tonnes of physical gold out of the broader lendable circulation.

The Trust will use the net proceeds of this Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to this Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the offering.

"I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that." So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets - specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).

And another major source of physical demand in the already very undersupplied silver market appears. Just released from Sprott Asset Management, who recently added to the perfect storm in silver by cashing out on the record PSLV premium and converting proceeds to miner stocks: "The Sprott Silver Bullion Fund is an innovative offering, being the
first mutual fund in Canada to invest primarily in unencumbered, fully
allocated silver bullion. The Fund's objective is to seek to provide a
secure and liquid investment for investors seeking exposure to silver
bullion without the inconvenience associated with direct investment." We can't wait to discover how many tons of silver this mutual fund will soak up imminently, and where the always exciting adventure of "COMEX registered silver" takes us next...