Eric Sprott's Open Letter To The World Gold Council

Tyler Durden's picture

Authored by Eric Sprott of Sprott Global Resources,

Dear World Gold Council Executives;

As you very well know, the business environment for gold producers has been extremely challenging over the past few years. While demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.

In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading. It is not the first time that GFMS (and World Gold Council) statistics come under pressure from the investment community. In his now celebrated “The 1998 Gold Book Annual”, Frank Veneroso demonstrated the inconsistencies in GFMS gold demand data and proceeded to show how they grossly underestimated demand. The tremendous increase in the price of gold over the following years vindicated his conclusions.

For very different reasons, we are now at a similar pivotal point for gold. Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People’s Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers.1 In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions.2 Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.3

But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

To illustrate my point, Table 1 below contrasts mine production with demand from some of the world’s largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.

But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they “consume”, on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, “core” annualized demand is approximately 3,000 tonnes more than mine supply.

TABLE 1: WORLD GOLD SUPPLY AND DEMAND 2013, IN TONNES
open-letter-table1.gif

Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1 & Q2. Chinese mine supply comes from the China Gold Association and is up to August 2013, the annualized number is a Sprott estimate.5 Russian mine supply comes from the WBMS (Bloomberg ticker WBMGOPRU Index) and is for 2012, 2013 statistics are still unavailable. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Aug. 2013 and is annualized to account for the 4 missing months to the year. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1 & Q2 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1 & Q2. ETFs data comes from Bloomberg’s ETFGTOTL Index.

However, these figures also exclude what the GFMS dubs “OTC investment and stock flows”, which is a name for a simple plug because no one really knows what is traded in the OTC market. Also, to remain conservative and avoid possible double counting, I exclude the category “technology” from my demand estimate, which the WGC/GFMS estimates to be about 400 tonnes a year.6 Certainly, some of this demand is captured by the demand numbers for China, Turkey, India or Thailand, but it is near impossible to disentangle them. Nonetheless, it should be kept in mind that my demand estimate is conservative and probably understated by a few hundred tonnes.

Of course, another important source of supply is gold recycling, which the GFMS estimates at about 1,300 tonnes for the year. However, this number is questionable at best as gold recycling is hard to estimate. But, most importantly, a large share of it is probably done in India and China, which as mentioned before do not re-export their gold. In the context of my analysis, recycling from those countries should therefore be excluded from the total supply number.

The real incremental source of supply this year has been the flows out of ETFs. According to data compiled by Bloomberg, and as shown at the bottom of Table 1, ETFs have seen outflows of approximately 724 tonnes year-to-date. On an annualized basis, this represents an additional supply of 917 tonnes. But, this incremental supply is only temporary. As shown in Figure 1 below, ETF holdings of gold seem to have stabilized at around 1,900 tonnes after a rapid decline in the first few months of 2013.

The evidence presented here is clear, demand for physical gold is extremely strong and, in reality, without the massive outflows from ETFs (half of world mine supply), it is hard to imagine how this demand would have been met. Since ETFs have a finite size (about 1,900 tonnes left), these outflows cannot continue for much longer (see our article on the topic).7 All these observations point to a considerable imbalance between supply and demand (unless Western Central Banks decide to fill this void with what is left of their reserves). If recycling was reduced by one half (China, India and Russia) and the temporary sales from ETFs were excluded, demand could be as high as 5,185 tonnes versus supply of 2,140 tonnes. The supply-demand imbalance is obvious to all.

FIGURE 1:TONNES OF GOLD IN ETFS
open-letter-chart1.gif
Source: Bloomberg

As was the case when Frank Veneroso first published his book in 1998, the GFMS methodology understates demand and the World Gold Council, by using data from the GFMS, misleads the market place.

To conclude, I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold. This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment. Gold has been one of the best performing asset classes since 2000, and the World Gold Council should be promoting it accordingly.

Regards,
eric-sig.png

Eric Sprott

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synergize's picture

Anybody who believes the WGC has gold's interests in mind is kidding themselves.  GATA is an organization truly dedicated to justice - the WGC is a joke.

-------------

If you are fed up with whats happening with the government - it all stems from one major thing: the government's control of our money.  We have placed in our government the ability to control the money supply and dish out new money to whomever they please (usually their cronies and the banks) and to spend and create that money in infinite amounts to SUPPRESS we, the People.

To break this system we have to bring back real money and thus limit government control over money and our lives.  We can break the system by overwhelming the physical markets and give a no-vote to their control over money - they key is the small silver market.

Join the Silver Pledge - an effort to change the system by having investors join up and buy physical silver - together we can break this market and take back our government.

You can read more here:

http://www.communitysynergy.com/subscribe/silver_pledge_site.html

If you dont like it dont sign up - but for people who are sick of sitting and doing nothing at least lets work together to BREAK this silver market

jbvtme's picture

local currencies local production equals freedom. gold is the hedge

Lewshine's picture

While we debate this useless article, the manipulators are doing their usual knee-breaking destruction on yesterday's up move...LIKE CLOCKWORK!!

Everything else is just noise!!!

boogerbently's picture

Fixing Mining:

1) Miners increase their prices.

2) The rest of the supply chain adjusts.

 

.......next.

TwoShortPlanks's picture

Dear Mr Sprott,
Nice letter.
Please ensure to travel in your own private aircraft, operated and serviced by reliable and trustworthy professionals.
If you cast your mind back you will remember a certain Mr Obama whom had a close call with the "accidental mid-air deployment" of an emergency escape slide (Tail Section no less and "coincidentally"), prior to US Elections.
Kind Regards,
TwoShortPlanks

BLOTTO's picture

Its hard to implement anything when these fucks have total control of whatever else it is they put in its re-place. Just a deception, yet again, and again and again...slowly drip by drop. 1000s of years...

.

No use picking off the poisoned pineapple chunks and sickly anchovies off the pizza if the dough is rotten to the core.

TheInformed's picture

I don't get the hostility.

 

I remember when the Nintendo Wii was almost impossible to purchase for 2 years.  That actually seems like Demand outpacing supply 2:1.  

 

Gold on the other hand, I can buy some right now, from dozens of different websites.  Coins or jewelry, whatever I want!

 

I feel like Sprott has HIS own interests at heart in this letter, not the 'gold community'.   

 

His stats are bullcrap.

 

SpykerSpeed's picture

Or maybe the demand for precious metals is less than you think and the supply is greater than you think.

That's what happened with silver.  It turned out that while Sprott and others like him were trumpeting it as "going to $500 because of supply/demand imbalance", it was actually going to $23.

Yes, manipulation is possible.  But not for years on end.  And if silver really is worth $500, then you'd think the market would have baked SOME of that information into the price.  It hasn't.  It's not even halfway to $50.

Guys.  She's just not that into you.  Sorry.

DirkDiggler11's picture

One question Spyker - For how many years did the banks rig the LIBOR rate ?

Professorlocknload's picture

"One question Spyker - For how many years did the banks rig the LIBOR rate ?"

 

When did they stop?

SpykerSpeed's picture

The same number of years they've had access to the Federal overnight window at 0% interest, which is to say:  forever.

It's easy to rig the interest rates on a fiat currency.  But we're talking about silver, here, which is a physical commodity with supply and demand.  How do the banks rig that for years on end?  Even with all you silver bugs buying up the physical?

Bay of Pigs's picture

How do they "rig it"? Seriously? Its been explained here hundreds of times before. And seeing you've been here over 3 years you should know how it is done.

GTFO clown.

zhandax's picture

So herr SS, IOW, shut up and die?  Don't think so.  I will agree that the banker pirates can paper over the gold market until the cows come home, but I smell cowshit through the window now, pal.  You have an encore?

Keyser's picture

Did you even read the letter? When production is lower than demand for any comodity and TPTB refuse to state such in their official reports, they are misrepresenting the truth. How simple can it be? PM's are being manipulated lower to keep people from fleeing the USD to PM's. All you have to do is review the charts for evidence. 

 

 

 

CHX's picture

What you seem to miss, SS, is that currently >99% of all Ag and Au traded are soiey paper claims. PAPER CLAIMS, not physical metal. As long as that's the case, THEY set the price where they want it. If every buyer bought the physical metal (and not some highly leveraged contract / paper vehical designed to win/lose some bucks quickly) then you'd get true price discovery. THAT day will come, someday. Good day to you. 

buyingsterling's picture

Any commodity market that isn't cash and carry and which allows cash settlement in fiat which is available at 0% rates can be manipulated relentlessly, the only real barrier being production costs.

kralizec's picture

Credit multiplier, fantastic tool for manipulators.

SpykerSpeed's picture

Then if silver and gold are so easily manipulated, isnt that a weakness of silver and gold?  How do you expect these things to become money if nobody cares to have the physical?

quasimodo's picture

I can see where it's a hard concept to grasp when you are so seduced by the safety and assurance of BTC never losing any value.

dark pools of soros's picture

And gold and silver haven't?

Silver to 200! Is all we heard, yet it can't crack 50 and BTC has seen 200 twice now

Gold to 5000! But can't crack 2000. BTC will hit 2000 before gold ever will.

You bugs are wishing for unicorns when you could have a pony. BTC is real and doing everything you little girls every dreamed a currency can do

Babies, all ya bugs are crying babies

superflex's picture

and out comes the Bitcoin trollolololol

 

Nothing but the truth.'s picture

Wasn't Spyker a failed high performance car maker from the Netherlands ?

Element's picture

Like every other metal, when price rises sharply the older uneconomic mines, that closed at the end of the last boom (think 1983), re-open and ramp production to make a killing on the price surge. Naturally production then shoots up faster than anyone can track, so price comes down until the least economic gold miners fail, the mines are mothballed, production falls, and thus price better reflects demand again (paper of course distorts that massively).

This will continue until mines run out of economically recoverable gold, then prices will go higher if demand remains high, until a more economically viable means of extraction kicks-in to supply even more gold from lower grade ores, or previously mined tailings.

The key point is there's ALWAYS more lower-grade resource than high-grade (several times more), so we're not going to see gold go out of production if price spikes to $2,500. Just the reverse, there would be a deluge of gold production to follow, and price would quickly soften again.

Every shovel of garden soil has some gold in it, as does every bucket of sea water, the question is, can you economically recover it at the current market price and make a profit? If the price is high enough for long enough you can.

Gold is not 'currency' kids, and it does not have magic powers, it's a metallic atom and that's all.

All the rest of the Gold blurb is the psychology of myths, lies and con games.

 

Now go press the red button.

Professorlocknload's picture

Got a feeling if the dollar spikes back to $800 gold, Ol' Yeller will find a much cheaper supply of paper and ink. Just wood fiber and indelible dye.

Seeking Aphids's picture

The increasing scarcity of attainable gold combined with increasing consumption should result in higher prices going forward.....the idea that there is gold everywhere so we will see cycles of price increasing/decreasing with supply being brought on tap/reduced as a function of price does not take into account the fact that increasing scarcity/cost of production will force prices into an upwards spiral......no new 'cheap' gold will likely be discovered and global demand will not dimish....

Element's picture

What? Are you equating this with peak-oil? If the price is high enough gold gets produced. It's not a theory. The past 150 years of extraction is a story of improving technologies that incrementally recovered gold more efficiently, at lower and lower grade. There are often decades in between price surges, so mining tech moves along in giant bounds between the price surges.

There is no end in sight to this, and anyone simplistically telling you "they ain't making any more of it", as though that's meaningful and truthy, or implying there will be a supply constraint any time soon, is either lying, powerfully deluded, or do not understand a damn thing about gold, its ores, and its geological abundance.

The ocean floors are known to be covered in very large areas in high-grade metal ores, and these include gold and silver, and there's many times more of it in the oceans than has been mined on land. So put the price up high enough for long enough and someone will develop the technology infrastructure and the processes to go and get it, and flood the market (and vaults) with new gold product.

foxenburg's picture

But surely, if gold is ever trading at $50k an ounce it means that fiat currencies have crashed inversely. So miners will be paying $50k a week for labourers and £5k a barrel for oil. You're never going to be able to get your hands on future gold at todays price. 

Element's picture

$1,300 to $50,000, what, in a nano second, or over 50 years?

You realise you've asked a completely rediculous and inapplicable hypothetical?

There is a sub-discipline specialisation in geology called "Economic Geology", which involves initial planning of mine sites, extraction processing, transport linkages, refiners, etc., to determin if an identified resource is mineable at current and/or projected market price. Numerous mineral and energy resources exist, that have been known about for well over a century, that have still not been mined, due to lower production prices, and market competion, that makes them uneconomic.

It can take literally centuries for market prices to rise high enough (due to falling production rates or rising demand) to where it makes an ore economic to finally mine it.

If prices rises, production follows, because a lot more of the resource base then becomes economic to mine. As production surges, oversupply occurs, demand drops, prices fall, so marginal and uneconomic mines close (even if they still have a stack of gold in them, and there's absolutely nothing wrong with them).

Formerly economic mines thus become uneconomic. But say a new road or train track is built near to a closed or else undeveloped mine proposal, and suddenly transport is cheaper to markets, and the mine becomes economic, with no change to price.

Gold deposits are identified and roughy mapped out in grade decades in advance, (so the owners can then tell if and when it'll become economic to extract), so miners then wait for the periodic price ramping cycles, in order to develop such mines, then mothball them again, fast, when price falls away again.

Ramp the price to $2,000 and sustain it, and production will rise to a new all-time production level in short order, until demand and price softens again, and some mines will the close again, but not because they don't have lots of gold in them.

So why are you asking bogus hypotheticals when they tells you zip the matters about intervening currency, economics and mining cycles in gold between $1,300 and $50,000? Then you finish up this hypothetical with a pure absurdity;

"You're never going to be able to get your hands on future gold at todays price."

You're asserting here that like US houses gold always goes up. I hate to break it to you but 'future gold' can be priced much lower than $50, if no one needs or wants it.

buyingsterling's picture

Sounds easy, but it's not that elastic. Or did I miss a giant production spike while gold was trading at $1500 and up?

Element's picture

Mining investments are very long term, while gold spikes are very short term. It's why I said raise the price high enough for long enough and you'll get a ramp of gold production. The past ten years of ramping price has basicly done that, so production expanded.

People don't invest in mines on the basis of an effing bubble though, especially one powered by fear of global depression from a GFC, they are in mines long-term on the basis of projected long-term returns, on a very large investment, from a very large economcially extractable resource, within a price range.

Which is why it's an extremely bad idea to game bubbles, higher and lower, in wild commodities swings. If you destroy the mining industry, via doing that, it takes many years to re-establish itself (just look at recent rare-earth production lead times, in the US and Australia, and mine-development time-table).

Ghordius's picture

element, you are missing a few forests while dissecting this "element" Au

 

- monetary systems go beyond the "money" and "currency" paradigms. then at the end, it's all about international trade

- gold has very often been used as a monetary metal because of it's high stock-to-flow ratio. even if you increase the new discoveries, there is still a huge amount already in stock. or, as Keynesians like to say, there will be never enough of it

- the whole discussion about gold is still about the aftermath of the Bretton Woods agreements. 1874, 1944, 1971. if you don't see it in the historic perspective of those three dates, I'm sorry but you will not understand what's all about this element

Element's picture

 

 

"All the rest of the Gold blurb is the psychology of myths, lies and con games."

 

Pretty clearly stated, even for you I would have thought, but I shouldn't underestimate you in that regard.

lasvegaspersona's picture

element said: 'gold  is not a  currency'

actually...it is treated like a currency

http://fofoa.blogspot.com/2013/10/gold-as-forex-currency.html

Element's picture

Not to be rude, but no shit Sherlock? It's a metal, I'm sorry if someone programmed you to think otherwise. The rest of it is the global con-game;

"All the rest of the Gold blurb is the psychology of myths, lies and con games."

This may be difficult to digest for some (though it really isn't people are just stuck in a mental trench) but gold is not magical, it does not have any special status, it is not anyone's savior. At best gold's an exchangeable physical asset, of questionable value (whatever you can get for it at the time) much like RE. Best you can say is gold does not depreciate physically like other assets. The system that was built on a 'special' status myth, is defunct, but the con lingers on, and despite claims to the contrary, this is not hard at all to grasp.

Too many people are wrapped psychologically in this bogus notion that gold is going to save the system or save individuals. It can't any more than the rock under you left foot.

The system will be rebooted by the actions of desperate people in combination with the resources and energy available at that time in those conditions. Chances are essentials will be so important to everyone that gold's value will be highly doubtful in purchasing access to resources, as for one thing, demand will be almost non-existent. Some will say it's not meant for petty exchange, that it's a store of wealth (i.e. access to tradeable future resources), assuming a gold market emerges again. OK, that's worth a risk.

But no good if you die in the interim and someone takes it.

It's much more likely resources will be the obvious (so bleeding obvious it goes unstated) mark of great wealth, and of 'backing' in trades, and this also acts as the thing that 'buys' or gains the resources owner access to other resource flows.

In which case gold will not be tradeable, except at appallingly high discounts. Because needs and must have resources, but no one needs or must have gold. Thus the fiat situation since 1971 is based on resources and cred. And given the US had just walked on the moon in 1969, their skills, science, materials and capacities cred were all very high. This is no longer so evident, but it is still quite high, and is why the US will still bounce back from currency collapse, to a lower level, sans the petro-dollar printing endless debt option.

People so heavily invested the gold psychologically, and in the lingering smorgasbord of myths have trouble facing this fairly obvious thing. It's scarey and disheartening. Boo-hoo - get over it. As Faber said a couple of weeks back there are no safe havens, get over the con-game, and diversify, because if you're in too deep with gold, you're going to wish you did, and at just the wrong time. 

What do you think it actually means when people say, "the longer this goes on the worse the collapse will become."? 

 

Answer the question

F22's picture

This is an excellent blog post.... It points out that gold in the form XAU/USD trades $240B per day on the forex.

It seems to me that this in and of itself is the reason for the seeming disconnect with the physical market.

Agstacker's picture

"Like every other metal, when price rises sharply the older uneconomic mines, that closed at the end of the last boom"

 

And it costs more and more to get less and less gold.

Element's picture

Not so, gold price progressively ramped and gold production recovered (with the usual development lag) and ramped also, and price went soft. If there was more demand than supply since 2011, gold price would not be softening. CB's in Asia are buying it prolifically, but no more steady rise. So there's no supply constraint. Instead mines that can produce have closed because price slumped too low. i.e. too much supply capacity was developed to quickly.

As recoverable grade falls the quantity and diversity of ores available for extraction exponentially rises. And it's quite an assumption to state costs will necessarily rise when cumulative mine technology consistently pushed price down, even as volume increased from lower-grades of ore. Look at the first graph in this link, and at its long-term trend.

http://www.numbersleuth.org/worlds-gold/

Today and in the recent past gold is produced at rates higher than at any other time. If people want gold it's there to be mined, and the potential extractable resource is many times larger than what we've already extracted. The only question is do we want it - not can we get it? Because we can definitely get it if there's a significant price ramp and profit to go after it.

Notarocketscientist's picture

Suggest you read the first 18 pages of Grant Williams comprehensive explanation of how gold is manipulated https://d21uq3hx4esec9.cloudfront.net/images/uploads/ttmygh/6701/15_Jul_...

Sorry it can't be conveyed in a Tweet .... but if you are too busy watching Dancing with Stars then NM.... just continue on in your delusional world lead by nose by the people in the MSM

Come on - you know you want to say it.................. Say it...........

YOU CAN'T EAT GOLD!   Feels better ya?

bozzy's picture

Spyker man - just saw your little hickey contribution after watching the pigs flying past the condo windows ... Put up the numbers please if you want to troll seriously - otherwise you are as entitiled to your own opinioin as much as my dog, but yours will count for less.

greatbeard's picture

>> demand for precious metals is less than you think

I seem to recall you having a hissy fit about folks dissin' bitcoin.  A bit of the old pot/kettle/black, wouldn't you say?

exartizo's picture

Good point SS.

Sprott has his own axe to grind and his numbers look just as shady as any I see coming out of COMEX.

Cheers for having some balls buddy.

whirlybird rules's picture

Sorry guy...no room for a free market in the new normal.

Blackfox's picture

Loo paper made of 22-carat GOLD goes on sale at £825k for those who fancy throwing their money straight down the toilet
http://www.dailymail.co.uk/femail/article-2471446/Loo-paper-22-carat-GOLD-goes-sale-825k.html

 

 And check out this...For those looking to take their obsession with bling to the next level; boxes of 24kt gold pills that promise to 'turn your innermost parts into chambers of wealth'.

The sparkling capsules, measuring 2cm long, can be found on the Citizen:Citizen website priced at $425 (around £262).

After digesting the three gold-leaf tablets, shefinds.com claims consumers will find flakes of pure precious metal decorating their excrement.

Now thats throwing money down the toilet.