Eric Sprott On The "Golden Opportunity"

Tyler Durden's picture

Submitted by Eric Sprott of Sprott Asset Management

Don't Miss this Golden Opportunity

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period.1 This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.2 What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

The chronology goes as follows:

  • November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).3
  • Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).4
  • January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.1 On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.5

Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End
Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest gold prices were on June 27th and December 19th (Figure 1).

Perfect! And perfectly obvious…

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).

Figure 2: World Gold Supply and Demand 2013, in Tonnes6

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3: Gold Price is far from its Long-Term Linear Trend
Source: Bloomberg and Sprott Estimates

Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 4: Upside Scenarios For Different Types of Gold Miners
Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014.
Source: Sprott Estimates and RBC Capital Markets. For illustrative purposes only. Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer). 

Are these gains likely to materialize? So far in 2014, the senior miners are up 27%1, while the junior miners are up 42%7. Not a bad year. But, we are only seven weeks into the year.

Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?

Again, don’t miss this Golden Opportunity!


1 NYSE Arca Gold Miners Index.
6 GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2, Q3 & Q4. Chinese mine supply comes from the China Gold Association for 2013. Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q4. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Dec. 2013. 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, Q3 & Q4 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. ETFs data comes from GFMS as well.
7 MV Junior Gold Miners Index.

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Oldwood's picture

I wish I gave a damn.

kliguy38's picture

you will.....but it'll be too late for u

BlackChicken's picture

Rather have one coin in hand than 2-bits in the bush.

dryam's picture

There's logic like that displayed by Sprott, which I happen to agree with.

However, there's also logic such as 0's & 1's which allows computers to function.  Those computers allow for electronic option exchanges which set the price of gold.  As long as those exchanges are functioning (as in being manipulated) I'm not sure if we'll ever see Sprott's logic come to fruition.  Diversify and hedge accordingly.

BlackChicken's picture

We all know the exchanges, regulators, bankers, and politicians are full of shit; that's why I have always loved metals.

One day these bastards will have their emperor is naked moment, then the real party begins. 1's and 0's can only lie so long before reality seeps out.

Scarlett's picture

"LIBOR markets are many orders of magnitude larger than the precious metals markets."  


Not for long

James_Cole's picture

Haven't seen a sprott ad on here in a while, he's finally come out of his shame-induced hiding?

So, perseus is his latest pump and dump? Duly noted. 

boogerbently's picture

Obama lied. Any repercussions ???

Banks caused recession, govt numbers for GDP, inflation, unemployment......(yada yada) all BS.

Bribery called lobbying, insider (congressional) trading deemed legal, HFT's manipulate stock market price manipulated !


Being identified WON'T change their behavior.


SilverIsKing's picture

"Precious Metals markets are not manipulated"

Says Trader Dan Norcini.

stacking12321's picture

tekoa da silva's recent interview of eric sprott on youtube (7 min):


LMAOLORI's picture




Right you are booger even Bloombergs jumped on the manipulation bandwagen now but big deal nothing will change the banks (payed) donated plenty of money to obama to see to that.


Gold Fix Study Shows Signs of Decade of Bank Manipulation

BLOTTO's picture

In July of 1924, Drs. Miethe and Stammreich announced that they had changed mercury into gold in a high-tension mercury vapor lamp. The experiment produced $1 of gold at a cost of $60,000, equivalent to over $2 million (gold then sold for $330/lb). Miethe used a potential of 170 volts applied for 20-200 hours. The lamp consumed 400-2,000 watts. A minimum potential difference is necessary. The yield of gold was minute: 0.1-0.01 mg. The mercury and the electrodes were analyzed and determined to be free of gold before the experiments. Miethe was not able to attempt to prove the production of a or b rays, hydrogen or helium. (22)


Anyway, their go some people trying to act like gods again...nice try.

James_Cole's picture


"So um how we achieve this is like.. nano tech and micro and like quantum and then the processor and like electrostatics, differential geometry, facebook and then boom cost effective. We've checked with experts, it's all legit."

BLOTTO's picture

K, lets wait for the 1st kilo they produce, watch the video of this type of production process...and we can all discuss.

James_Cole's picture

The bigger question is how long are they going to hold onto the cold fusion bullshit until they give it up? Another 30 yrs? Every few years they manage to absorb current things into their revised hypotheses. 

MeelionDollerBogus's picture

so... long tungsten,

and Fort Knox is now fully stocked, equivalent, because it's only a matter of shoving the tungsten bars into the magic masheen?

mkucstars's picture

Gold that glows... wonderful

RevRex's picture

! have 110k sitting here, do I pay of my house  or buy more silver? Decisions decisions....

thamnosma's picture

3rd choice -- send it to me.

Thadeous's picture

Being debt free is the obvious smart choice. Investing at all should come secondary.

johnQpublic's picture

no such thing as a debt free house

Rock On Roger's picture

A house is a liability.

A home is an asset.


Stack On

samcontrol's picture

can't believe nobody told you to diversify..

40k on paying down the house.
40k in silver... 10k boating accident, 10k pslv, 10k SLW , 5 k at home, 5k aGQ option.
10k the Bernanke product with a 10 percent stop loss SVXY.
10 k stash at home or usefull shit... very wide range ..weapons,fine wine, 25 year old plus whiskey, camping shit, simple home improvement (plant a tomato)..a cool mag lite or check if needed..ect ect...people here could give you a long list.

so we have 10k left ...
SPEND IT NOW, or yourself wife and/or kids..
holidays, a bimbo, some un usefull electronic bs toy..,,whatever makes you
tic.we only live once.

good luck

Kreditanstalt's picture

Sell the debtload/house and RENT.  THEN buy PMs.

LetThemEatRand's picture

Pay off the house.  Rent from yourself (pay yourself what you would pay in rent to someone else).  Use the rent money to buy PMs. In a few years you'll have both a house and a bunch of PMs, but leave some for repairs and taxes.  And learn how to fix shit in your house if you don't know already.

D-liverSil-ver's picture

If you have mortgage under 4% interest, I would buy silver.

RevRex's picture

My mortgage is 3.5%. Payment is $664, about half of what I could rent the place for. I could only rent a dump for $664 around here.

The house was appraised at 165K when I bought it. About 180K now

I got the deal for 110K, and had to borrow 116K to cover everything including closing costs. I have paid off 6K so 110K would pay it off clear.

My other option is list it this spring, slum  in a rental till the RE market bottoms, then buy another place.

zaphod's picture

Absolutely do not pay off the mortgage. A mortgage is the only form of leverage against devaluing paper money us serfs are allowed. Bankers get to borrow millions/billions at fractions of a percent, you get 100K at 3.5%

That does not mean to take the money you would have used to pay it off and buy crap. Invest that money in PMs or whatever you want. It essentially means that you are getting a zero interest loan (in real terms) to invest in real assets. Buy a basket of domestic natural gas MLPs, they will pay you around 6-7% with growing distributions. That will cover your mortage payment and in time lead to extra over your mortage that you can further invest. Buy PMs with that extra. In 30 years you'll have a lot of PMs. 

FredFlintstone's picture

Take out a HELOC and buy PMs with it. The run away to a pacific island.

PS: I agree with LTER. My house is paid for.

Braverdave's picture

Do both.

Stack precious and pay off debt. Pay off debt and stack precious.

I live in Canada. My mortgage is a fixed rate at 3.29 at my local credit union and one year to go until it is time to renew. I expect more or less the same rate this time next year.

Most (just a little over half but I like saying "most" of it belongs to me) of my home is paid for now. I make bi-weekly payments and pay an extra 20% each payment that goes directly against the principal (they will let me adjust it down if I want/need). And I have a tax-free savings account where I am piling up a little cash to make a lump sum payment too.

And I stack. Just like my Dad taught me even if he didnt think he was teaching me with his silver coin collection. When canadian silver coinage stopped being silver he already had a collection of really old stuff from 1910s and 1920s and continued to save a fair bit of 50s/60's junk silver.  He gifted me the collection a few years ago and I have bought junk silver coins too at various times. And bullion in both silver and gold. Dipped into that savings account mentioned above to grab a bit more of each a few times last year :)

Charles Nelson Reilly's picture

I would personally sit on dry powder right now & read ZH everyday to be weeks in front of the markets next move.

MeelionDollerBogus's picture

I don't think you can actually pay off your house.

You can't own a thing if it can be taken from you if you don't pay rent on it, and those property taxes are rent, for which non-payment leads to confiscation, and you can't just pick up the house and leave with it like gold or silver. Where you are, really, do you believe collapse will pass you by, or that you can endure it? If you have any doubt then paying off the house isn't nearly as smart as unloading it and renting for real (without the collateral on the line) instead of renting while pretending you're an owner (with massive debt & confiscation at-will, not your will).

I can't decide for you but I hope my commentary is a helpful reminder of the facts for anyone reading this.

Donewidit's picture

They say that there's nothing like a gold rush, i don't think we've seen a gold rush yet.

It will have 100+ days soon. Just look at the dow/gold ratio long term chart, speaks volumes.

MeelionDollerBogus's picture

hm, actually right down to it the 1's and 0's are for your benefit, the logic of the computer itself is which voltage, high or low, or ground, it will use to trigger switches or run a signal on a loop like for a latch.

It's not options or computers that set the price of gold: it's humans who believe gold is better value in someone else's hands than in their own. No matter the tools, if that collective belief inverted the entire system would be upside down. A computer is just a tool. A human who thinks gold or silver are more useful OUT of their hands... is a fucking tool.

Oldwood's picture

The whole damn thing is manipulated. Gold, sure! stocks hell yes! Interest,housing prices, fuel, food, lumber, everything. There is no real market for much of anything. If they can't control supply they will control the demand through propaganda and nonstop marketing. Why in the fuck are people still trying to game this shit and then bitching about how manipulated it is. STOP FUCKING GAMBLING! STOP FEEDING THE MONSTER! Do we really think we are going to beat JPM or Goldman and the multitude of others who run the casinos? People like Sprot are gaming this mess to maximize THEIR income, not yours. They are all the same. Trying to use our fear and greed to make money. Wouldn't it be grand to invest your money into something that actually did something, made something, provided something rather than setting on a shelf. If all of the money that has been invested into the stock markets had been invested in small and midsized business, how many jobs would have been created?

Doña K's picture

Stay nimble my friends.

Save save save and invest on things that are divisible, weigh little, defy decay, are portable, are non-taxable, can not be destroyed by fire and are easily bought and sold.

If cash is part of your stash. keep it in a good safe and wrap it in welding blankets which can withstand 2200 degrees temp.


samcontrol's picture


Que harías con un Million ?

Doña K's picture

Whatever meets the specs, makes you feel good and is neither illegal immoral or fattening and as long as it does not hurt anybody.

Leveraged Algorithm's picture

It may go so bad that nothing will have value except your pantry.

fonzannoon's picture

So this dude who was preaching, and of course selling, PM's right up until and through the smash down says it played out exactly as scripted (but he did not have a copy)...because it's clearly manipulated.... except of course when he was screaming to buy it, that was was a free market..

The he concludes by using technical analyis in a clearly manipulated market to proclaim why it will go higher...


Grande Tetons's picture

Fonz, are a smart guy...quite creative to boot. After 2 years...and still...a bag on your head avatar....what gives? 

Maybe, something like this....just a thought.


Edit. Looks like the down arrow gang from Oshkosh is looking for a brawl. 

fonzannoon's picture

I don't know man. i was fonzanoon but got put in timeout for a bit. it's longer than 2 years and feels like 20.

as for the bag, it just seems to fit. i always say i'm going to get a tatoo but can't think of anything i really want. i guess it's sort of the same idea.

Grande Tetons's picture

Get the Tyson tattoo! That takes balls the size of Jupiter. 

Have a good one. Out. 

Colonel Klink's picture

And the intelligence like the vacuum of space.

Doña K's picture

<<< So this dude who was preaching, and of course selling, PM's right up until and through the smash down says it played out exactly as scripted (but he did not have a copy)...because it's clearly manipulated.... except of course when he was screaming to buy it, that was was a free market.. >>>

What if... One of the manipulators calls a big player like this dude and says: "look we are going to push PM's down to level x and we are going re-buy on Thursday the 15th of next month."

You are now that dude. What do you do? You call the FBI? You talk to the press? You call O'Bummer's top cop? Or you dump your silver and rebuy?

Human quadrillema and all of us know the answer. 



thtmnbhndthecrtn's picture

down-manipulate MORE!

Sashko89's picture

So is he saying that there are going to be no more "price smackdowns of gold in terms of dollars"? and the bull run shall begin? Or is he just stating that it was manipulated? 



fonzannoon's picture

yes all of that. and anything else it does that he does not forsee will happen exactly as scripted.

Oldwood's picture

Nothing is certain but death and taxes, and death taxes. The system is fucked. Worrying about the price of gold is a waste of time. Our problem is a huge government that will do whatever the fuck they want and a stack of gold will not save us. It may make us a target. At least lead can be returned with some velocity.