Eric Sprott: "When Fundamentals No Longer Apply, Review the Fundamentals"

Tyler Durden's picture

By Eric Sprott And David Baker of Sprott Asset Management

When Fundamentals No Longer Apply, Review the Fundamentals

This may not come as a surprise, but we're still not seeing it. We're not seeing a US recovery.

Here we are, well into 2012, and the fact remains that the US housing situation is still a bust. There is simply no housing recovery happening in the United States. US New Home Sales fell for the fourth time in a row month-overmonth in March, representing a seasonally-adjusted annual rate of 328,000, down from 353,000 in February.1 Do you know what the annual rate of New Home Sales was back in 2006? About 1.21 million.2 No recovery there.

Same goes for US Existing Home Sales, which fell unexpectedly by 2.6% in March to an annual rate of 4.48 million units.3 Again - would you care to know where they were in the same month back in 2006, before the financial system fell apart? Approximately 6.92 million units.4 No recovery there either.

Then there's unemployment. Judging by all the recent earnings-release cheerleading, March's jobs numbers seem to have been forgotten, but they were plainly weak. The US Labor Department showed US hiring slowing to a mere 120,000 new jobs in March, below expectations of 200,000+.5 That's not a recovery. That's simply weak data.

Same goes for the most recent jobless claims numbers, which have been running above 380,000 for the last two weeks, above the 375,000 threshold that supposedly signals future unemployment increases.6 Again - this is not positive data, this is weak data. How high will it have to go before the economists admit that it's weak? 400,000? 425,000? We're asking - we'd like to know.

Then there are US tax receipts, which continue to point in the same direction. If the US is recovering so strongly, then why are employment tax receipts only up 2%? ($484 billion fiscal year-to-date as of March 2012 vs. $475 billion over the same period to March 2011).7 A 2% increase is explainable by inflation alone, which was last reported running at 2.7% according to the Bureau of Labour Stastics.8 Shouldn't the tax receipts be much higher than that? Wasn't unemployment down so far this year? As the Associated Press plainly states, "The unemployment rate has fallen to 8.2% in March [2012] from 9.1% in August [2011]. Part of the drop was because people gave up looking for work. People who are out of work but not looking for jobs aren't counted among the unemployed."9 Oh! Sorry,… now the numbers make more sense. There hasn't been any net new employment at all. Question: if everyone "gives up" looking for work next week, will the US unemployment rate go to zero? We're asking - we'd like to know.

Other economic indicators exhibit the same downward momentum that the pundits are loath to acknowledge. For example, the Economic Cycle Research Institute's (ECRI) Weekly Leading Indicator index, which had been rising from its 2011 lows earlier this year, has resumed its downtrend in April.10 More recently, US Durable Goods Orders were revealed to have dropped 4.2% in March, representing the largest decline since January 2009.11 To top it all off, China's most recent Purchasing Managers Index (PMI) indicated that China's manufacturing activity has now been in contraction for six months in a row.12

1999 - FEB 2012


Note: Deposits of domestic ex credit institutions in Spanish MFIs. Eurosystem borrowing Eurosystem funding via Open Market Operations Source: Bank of Spain, ECB and Citi Investment Research and Analysis

Meanwhile, the situation in Europe continues to worsen. There's no point in mincing words: Spain is a complete disaster. This past week, the Spanish government managed to pull off two separate bond auctions, only to have the yield on their 10-year government bond shoot right back up the moment the second auction closed. Everyone's nervous because the Spanish banking system is up to its eyeballs in approximately €143.8 billion worth of delinquent loans, and the private sector is unwilling to lend Spanish banks the money to weather the potential write-downs.13 As we've seen before, the real culprit plaguing the Spanish banks is customer deposit withdrawals. It is estimated that €65 billion of deposits left Spanish banks this past March alone.14 People are taking their money out of the Spanish banking system, and without the help of the generous European Central Bank (ECB), the Spanish banks would likely be in a full collapse today (see Figure 1).15 As it stands, the Spanish banks have now borrowed a massive €316.3 billion from the ECB in order to meet the withdrawals and maintain the illusion of solvency.

Perhaps it's Euro-crisis fatigue, or maybe just plain denial, but the equity markets appear unwilling to acknowledge how close we are now to yet another round of Eurozone upheaval. Spain's economy is almost five times that of Greece. Spain also has over four times the amount of externally-held nominal debt outstanding.16 If the bond vigilantes choose to punish the Spanish 10-year bond (currently trading precariously close to a 6% yield), we could soon be back where we were this past September, only with a problem four times as large.

The rest of Europe isn't looking so hot either. Italy's bond market is in a similar situation to that of Spain, with the Italian 10-year bond trading perilously close to the 6%-yield threshold. Recent data showed the European Purchasing Managers Index (PMI) falling to 47.4 in March, well below the 50 mark which signals growth in industrial activity.17 German PMI recently confirmed this move with its April release of 46.3, down from 48.4 in March, representing the fastest rate of contraction since July 2009.18 These declines in economic activity, combined with the austerity measures most Euro countries are currently attempting to impose, almost guarantee more printed money will be pumped into the European bond markets before the year is over. It's simply a matter of time.

As expected, the powers that be are busy parading around in preparation for the next round of Eurozone panic, with the IMF using the renewed concerns as an opportunity to re-establish its relevance as a firewall provider. The IMF most recently secured $430 billion worth of new "pledges" from various G20 member countries to increase its potential lending capacity to $700 billion in the event of further problems in the Eurozone.19 Not unsurprisingly, the BRICS countries have expressed irritation at the disproportionate voting power held by Western powers within the IMF at the expense of themselves and the other developing nations. In prepared remarks at an IMF press conference, Brazil's finance minister criticized the skewed quotas that dictate voting power, stating that, "The calculated quota share of Luxembourg is larger than the one of Argentina or South Africa… The quota share of Belgium is larger than that of Indonesia and roughly three times that of Nigeria. And the quota of Spain, amazing as it may seem, is larger than the sum total of the quotas of all 44 sub-Saharan African countries."20 This unbalance used to make sense when the IMF was designed to help fund ailing third world and developing countries through economic crisis. But that is clearly no longer the IMF's main purpose.

It must be difficult for the BRICS countries today. On one hand, they continue to jockey for respect among the Western powers, insisting on participating in quasi-European bailout funds like the IMF. On the other hand, they are also clearly aware of the Western nations' continuing efforts to surreptitiously devalue their domestic currencies, and the pernicious effect that has had on them as exporters and as lenders of capital. In that vein, it was interesting to note that during the latest BRICS Summit held this past March in New Delhi, the main topic of discussion centered on the creation of the group's first official institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Although not openly discussed, reports suggest what they were really talking about was creating a type of BRICS central bank - an institution that could facilitate their ability to "do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations…"21 Given the incredible scale of western central bank intervention over the past six months, the BRICS' increasing frustration with their printing efforts should be a given by now. The real question is what they're doing about it, and what assets they're accumulating to protect themselves from the inevitable, which brings us to gold.

Although the paper gold price has been range-bound over the past month, the physical gold market has been undergoing staggering change. Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year (see Figure 2).22 40 tonnes annualized equates to 480 tonnes per year - a massive number in a market that only produced 2,810 tonnes of mine supply in 2011.23

Source: Hong Kong Census and Statistic Dept, Reuters
Reuters graphic/Catherine Trevethan, Rujun Shen 11/04/12

If there's one thing we now know for certain, it's the fact that the market has completely missed the importance of the demand-side changes currently taking place in the physical gold market. China has now imported 436 tonnes of gold through Hong Kong over the past eight months.24 This compares to imports of a mere 57 tonnes over the same eight month-period a year earlier (July 2010 - February 2011). The net new demand implied by this increase is 379 tonnes, which when annualized equates to 568 tonnes of new demand in a market that supplies 2,810 tonnes per year in mine production. These are astounding numbers. Recent IMF data also shows that at least 12 countries increased their physical gold reserves by 58 tonnes in the month of March, with Mexico, Turkey, Russia and Kazakhstan making sizeable purchases.25 58 tonnes annualized equates to 696 tonnes of demand per year. We know that central banks bought 439.7 tonnes of gold in 2011, and if the pace of recent central bank purchases continues, it will equate to another 256 tonnes of net new change in the physical gold market.

The significance of this demand shift is striking. If we combine China's implied net change of 568 tonnes with the central banks' net change of 256 tonnes, we're left with a demand shift of over 824 tonnes vs. an annual mine supply of 2,810 tonnes. That represents close to a 30% net change in the physical gold market in 2012. If we remove the portion of global gold production produced by China and the other non-G6 central bank gold buyers (like Russia and Mexico - because we know they're not sellers), we're now dealing with over 824 tonnes of demand change hitting an annual global mine supply of a mere 2,170 tonnes - representing a 38% shift.26 Although we have been continually reminded that 'fundamentals don't matter' in today's marketplace, there isn't a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last ten years. Even if we incorporate the estimated 1,600 tonnes of "recycled gold" that the World Gold Council insists on including in its annual gold supply estimates, the numbers above still suggest a net change of 19%.27 Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don't actually know.

We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum - there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

1 Cooper, Stephen and Mayo, Raemeka (April 24, 2012) "New Residential Sales in March 2012". U.S. Department of Housing and Urban Development. Retrieved April 24, 2012 from
2 Isidore, Chris (April 27, 2006) " New Home Sales Soar". CNN Money. Retrieved April 20, 2012 from
3 Reuters (April 19, 2012) "U.S. existing home sales fall 2.6% in March". Montreal Gazette. Retrieved April 20, 2012 from
4 Molony, Walter (April 25, 2006) "Existing-Home Sales Rise Again in March". National Association of Realtors. Retrieved on April 20, 2012 from:
5 Fletcher, Michael A. (April 6, 2012) "U.S. hiring slowed sharply in March; unemployment fell to 8.2%". The Washington Post. Retrieved April 19, 2012 from
6 Gibbons, Scott and Sznoluch, Tony (April 26, 2012) "Unemployment Insurance Weekly Claims Data". United States Department of Labor. Retrieved on April 26, 2012 from 
7 Department of the Treasury (March 31 1, 2012) "Monthly Treasury Statement". U.S. Treasury. Retrieved April 15, 2012 from (see pg 34)
8 Associated Press (April 13, 2012) "U.S. inflation rate cools in March". CBC News. Retrieved April 20, 2012 from
9 Rugaber, Christopher S. (April 19, 2012) "US unemployment claims signal slower hiring". Associated Press. Retrieved April 19, 2012 from
10 Short, Doug (April 20, 2012) "ECRI Weekly Leading Indicator: The Growth Index Slips". Advisor Perspectives. Retrieved on April 20, 2012 from
11 Reuters (April 25, 2012) "Durable Goods Orders Show The Sharpest Drop in 3 Years". New York Times. Retrieved on April 25, 2012 from
12 Kazer, William and Li, Liu (April 22, 2012) "Initial HSBC China PMI Gains In April But Still In Contractionary Range". The Wall Street Journal. Retrieved on April 24, 2012 from:
13 Bjork, Christopher and Roman, David (April 18, 2012) "Spanish Banks' Bad Omen". The Wall Street Journal. Retrieved April 19, 2012 from
14 Bloomberg Editors (April 12, 2012) "Europe's Capital Flight Betrays Currency's Fragility". Bloomberg. Retrieved April 15, 2012 from
15 Foxman, Simone (April 17, 2012) "Chart of the Day: The Run On Spain". Business Insider. Retrieved April 19, 2012 from
16 World Factbook (April 13, 2012) "Spain Section" Central Intelligence Agency. Retreived April 19, 2012 from
17 Billington, Ilona (April 24, 2012) "Euro-Zone's Private Sector Shrinking Fast". The Wall Street Journal. Retrieved on April 24, 2012 from
18 Baghdjian, Alice (April 23, 2012) "German manufacturing shrinks at fastest pace since 2009 - PMI" Reuters. Retrieved on April 24, 2012 from
19 Lowrey, Annie (April 20, 2012) "I.M.F. Adds $430 Billion in emergency Lending Ability". New York Times. Retrieved April 20, 2012 from
20 Ibid.
21 Associated Press (March 29, 2012) "India endorses BRICS bank". CBC News. Retrieved April 15, 2012 from
22 Thomson Reuters (April 10, 2012) "Hong Kong February Gold Flow to China up 20%". CNBC. Retrieved April 15, 2012 from
23 World Gold Council (April 2012) "Demand and Supply Statistics". World Gold Council. Retireved April 25, 2012 from
24 Reuters (April 11, 2012) "Chinese Gold Imports From Hong Kong Rise Nearly 13 Fold - PBOC Likely Buying Dip Again". Goldcore. Retrieved April 15, 2012 from
25 Williams, Lawrence (April 24, 2012) "Twelve countries increase their gold reserves in March - some significantly". Mineweb. Retrieved April 25, 2012 from
26 George, Michael (January 2012) "Gold". U.S. Geological Survey. Retireved April 25, 2012 from
27 World Gold Council (April 2012) "Demand and Supply Statistics". World Gold Council. Retireved April 25, 2012 from

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I think I need to buy a gun's picture

i've been reviewing the fundamentals for 8 fuckin years now,,,,,,,and they've been fucked up

AldousHuxley's picture

because in the real world fundamentals don't matter.


It is all about how much Fed prints...unemployment, stocks, executive salaries, bankster bonuses, home price "appreciation", etc.


FED is in control. + trade agreements


US does not have capitalism. it is a mixed economy heavily dependent on government subsidies in all industries.

US does not have democracy. Constitutional republic for plantation owners.

Most of the world has military and children of revolutionaries in power.


If you believed in the fundamentals, you are under control.

It is fucked up because those in control want it that way.


across the rubicon's picture

Right on brother!

Buy when no one wants to, and sell when everyone wants to buy.

But then, common sense isnt so common.

100% in agreement with you that '32 vs 300+ comments' interpretation that it marks a bottom in enthusiasm.

weather its the absolute bottom i dont know, but were pretty much there.

however, in markets, mob mentality prevails. afterall, humans are creatures of emotion, who only use logic to justify their emotional decisions.

keep up your GREAT work with SBST.

im just glad to know that because of your wisdome, you and your beloved will still be standing tall when the dust of this economic tsunami has settled.

Vendetta's picture

Enjoy all your silver vids.  I particularly like your comparisons to pay rates in roman times, it is fascinating.  I have been buying and watching Ag since 2005.

BidnessMan's picture

Why the Gold and Silver stocks are languishing - fewer people believe in that paper either. And it's gone......

Peter Pan's picture

Fundamentals can be subverted only for a time until they reassert themselves due to the impossibility of aberrant behaviour continuing forever.

The only exception is when there is a paradigm shift such as (for example) when passenger ship travel made way for airline travel.

When it comes to debt and deficit spending there can never be a paradigm shift. Eventually the system buckles in every instance as the market vomits the excesses and re-establishes some semblance of normality.

jaffa's picture

A number of shrimpers likely face bankruptcy, according to the Oil Spill Task Force. Southern Shrimp Alliance Executive Director Jon Williams sums it up It could take one year, two years or 40 years before the Gulf shrimp population is fully restored. Thanks.
signs of diabetes in children

jaffa's picture

A number of shrimpers likely face bankruptcy, according to the Oil Spill Task Force. Southern Shrimp Alliance Executive Director Jon Williams sums it up It could take one year, two years or 40 years before the Gulf shrimp population is fully restored. Thanks.
signs of diabetes in children

LawsofPhysics's picture

Fundamentally, humanity is fucked.

AldousHuxley's picture

every human is an offspring of some fundamental fucking.


fancy clothes, titles, status symbols don't matter. everyone came out from their mother gross.

humanity is gross.

those that deceive others the most of denying this fact get wealthy.

Reese Bobby's picture

Your desire to have sex with your mother has made you a whining blow-hard.  Not a pretty sight.


Life is not a bowl of cherries.  Find a job doing something you are interested in and show up and work hard every day.  And try not to irritate everyone.


My analysis and advice are absolutely free.

JW n FL's picture




line the top 400 up and enjoy their 93% share of the Profits!

after all!

It is 400 People Verse at Least 299,999,600 of us!


The 400 Stole 93% of ALL! Profits Last Year!!


Think about it.. $0.93 of EVERY! Dollar of Profit! Went into the pockets of 400 People!


And 299,999,600 of us got to split 7% of the Profits!


Think about it.. $0.07 of EVERY! Dollar of Profit! Was Split by over 299 Million People in America!


How very civilized of them! The WAR!! The CLASS! WAR!! Has been going on for 40 PLUS Years Already! It is not starting now because the RICH! Should pay what the rest of us Pay! We pay 30% and so should they! Period! And then!! America has enough money to pay its debts and still send children to school and not ROB Grandma’s Social Security!


There is PLENTY OF MONEY!! But the Rich DO!! NOT!!! Pay what everyone else Pays!


And we Pay MORE!! On our $0.07 of EVERY Dollar of Profit!










America!! We can take the 400 Down! and the System that has provided them protection!


WE! Outnumber them! 299 Million PLUS! of US! Verse 400 of them!!


Peter Pan's picture

It is a pity that all you could really see was !!
Maybe the writer laboured the use of !! but hidden in there is the barbarous truth that a small section of the population have gone too far. Metaphorically speaking, building more silos to store your excess wheat while others go hungry is a sign that we have moved on from greed to evil.

Jack Sheet's picture

".....China has now imported 436 tonnes of gold through Hong Kong over the past eight months....... The net new demand implied by this increase is 379 tonnes...... Recent IMF data also shows that at least 12 countries increased their physical gold reserves by 58 tonnes in the month of March, with Mexico, Turkey, Russia and Kazakhstan making sizeable purchases....... We know that central banks bought 439.7 tonnes of gold in 2011...."
Sprott admits that he does not know where future supply will come from to meet future demand, but who WAS the seller to the above supposedly physical buyers?

Uchtdorf's picture

They're getting it from the "We Buy Gold" shops in the strip centers all across the fruited plain.

BidnessMan's picture

With an increasing number of hippie dudes standing on the sidewalk spinning signs to attract attention. The effort level to buy "scrap" gold is increasing by the month.

Reese Bobby's picture

"Dealing with corrupt buyers, parasitic accounting and law firms, and watching Wall Street take most of the profits while doing none of the actual work."


I know lawyers and bankers are parasites.  But I don't understand the "corrupt buyers" unless it is the Government.  And accountants are too scared these days to commit fraud for all but their biggest clients, no?


Sincere good luck to you.

Reese Bobby's picture

I would guess the US & EU.  Once TPTB commit to printing ANY amount of money they might decide to meet physical gold demand since they have already decided buying time is worth ultimate insolvency.  There is nothing half-way about the Global Bank Cartel and their CB bitches.

Bunga Bunga's picture

Hey, the mines are still producing and you get them at a hefty discount these days ... of course as long as they don't get nationalized by bitchez.


zerotohero's picture

ZH members put the F U in Fundamentals

oh also its not FUN but DA its MENTAL

suckerfishzilla's picture

China's PMI has been contracting because of their natural talent for importing raw materials turning them into garbage and then exporting them at a profit.

davhay's picture

Got to love you fucking bitchez!!!!!!

WhiteNight123129's picture

Eric Sprott´s mind is wired very hard in data and logic with an absolute 100% teflon bullshit protected armor.

_underscore's picture

Assuming the figures & statistics in the above article are correct (esp. the gold buying/production numbers) it points to a bleeding out of 'correct' money from west to east - them Chinese ain't silly, with 3K years of centralised bureaucracy & planning under their silken belts. The old adage holds: look at what they do, not what they say.

fonzannoon's picture

Bernank is going to be reduced to having to call a special meeting where he says "We have decided that at no point at all will there be future QE". 2 minutes later when gold is down 100 bucks and oil is $95 he will come back to the mic and say "Ha just kidding now that inflation has abated It's QE time bitches!"

orangegeek's picture

Fundamentals are another indicator.


Elliott wave is another story.  Nothing's perfect, but EW makes sense when nothing else seems to.

rlouis's picture

If the BRICs start their own non-dollar based central bank does that mean we have to declare war on them?

Is there more gold like Libya's in need of liberating?

Mark123's picture

I wonder what the Roman's talked about as their corrupted empire crumbled around them?  There are lots of barbarians moving into my neighborhood....

Osmium's picture

Cornholing young boys?

Why Not's picture

Funny, but auto sales should be ~14M this year, up from ~9M in 2009.

razorthin's picture

I've fukking had it.  If real income has been declining since 2000 and there's no real job growth, and if real unemployment is near 20%, then how the fukk can there be good (or even any) earnings growth.  Someone is fukking lying!

fockewulf190's picture

I hope you haven't just recognized this, because if so, that probably means you have not been stacking Phyzz and building your own financial defences against the EE. Fortunatly, it's not too late to start. If you have been stacking the last few years already, which form of media have you been getting your information from? ZeroHedge has been pointing out the extreme bullshit and lies being pumped out by the legions of talking heads, diplodinks and big-club members for years now.

q99x2's picture

Corporatism kills

StychoKiller's picture

900,000 Tons of Steel...

"She wasn't built to travel at the speed a rumour flies..."

youngman's picture

How can there be earnings growth...inflation baby....

yes in the end ...the east will have the hard metal..and the west will have the paper over...

matt_chart's picture

Technicals are one the best best ways to make good trades. Here are some tutorials I did up. Enojoy!


Support and Resistance

Understanding Trends

Stock Volume As Reverse Indicator

Using The MACD Indicator

Using The RSI

The Disappointed's picture

To paraphrase Oscar Wilde:

I know the value of metal, and the price of nothing.

Au's picture

Eric has been great at calling the trend/problem, often early when positioning (i.e. shorting banks, long silver stock). Not a problem from my perspective. Better early than late. Good read as usual.