A Gold Shortage Is Coming Says Eric Sprott

Eric Sprott, with more than 40 years of experience in the investment industry, has been speculating since late 2012 that Western central banks could be running out of gold. He attributes the sell-off in gold and silver in 2013 to the fact that the Western banks needed a way to generate physical gold supplies. The metals prices were going down while there was a lot of liquidation of gold which increased the supply by an estimated 900 tonnes last year.

Driven by data, Eric Sprott explains in this article the case for a gold shortage. The basic figures are centered around the following:

  • The annual supply of gold is around 4,300 tonnes.
  • 3,000 tonnes come from mining and the other 1,300 tonnes or so from recycled material2.
  • In 2013, an additional 900 tonnes came onto the market from ETFs that were being liquidated – a supply increase of around 21%.

Looking back to the price smash of April 2013, it resulted in a tsunami of buying:

  • India bought 336 tonnes from April to June of 20133.
  • Chinese started buying record amounts of gold.
  • The mine supply, excluding China and Russia which tend not to export any gold, is only around 190 tonnes per month. You had Indians buying 50 tonnes and China buying 90 tonnes – that does not leave much left over for the rest of the world. Blogger Koos Jansen, from In Gold We Trust, says that Chinese demand alone last year was 2,000 tonnes. So demand has far outstripped supply.
  • There is also interesting news coming from Dubai concerning this supply/demand imbalance. A group there is building a gold refinery that can process 1,400 tonnes of gold per year6. Well, the current refining capacity in the world is around 6,000 tonnes. Somebody is going to add another 20 percent of capacity. The supply falls far short of that at only 4,300 tonnes. Why is this refining capacity so much higher than the official supply of gold?

Sprott believes that the volume of gold being exchanged must be much higher than the official number of 4,300. Being one of the pieces of the puzzle, it all points to central banks surreptitiously supplying gold to China. Gold from central banks, held in LBMA-sized bars, is being recast into kilogram-sized bars, which are preferred in Asia.

It all points to this: gold is flooding out of central banks in the West and into Asia’s coffers.

Another piece to the puzzle is Germany’s current effort to repatriate its gold supposedly held by the U.S. So far, it has only received 5 tonnes back from the U.S. Treasury. They’ve asked for 300 tonnes back over 7 years. That would imply around 3.6 tonnes per month. It’s worth noting that the U.S. is supposedly the largest holder of physical gold in the world. Its books should contain 1,500 tonnes held for Germany and 8,100 metric tonnes of its own. So why have they only delivered 5 tonnes over the last year?

We now get monthly data from Switzerland about where its gold imports come from. In February, 114 metric tonnes came from the UK10 – a country which does not produce any gold. So where did that gold come from? Who did it belong to? The most obvious answer would be the Bank of England, or ETF holdings.

Data from the U.S. offers a similar problem. The U.S. Geological Survey showed that the U.S. exported 80 tonnes of gold in January11. The U.S. only mines 20 tonnes a month12, and imports another 20. So where did the extra 40 tonnes of exports come from? Who supplied it? The answer is most likely the U.S. Treasury.

The whole reason for Western central banks, particularly the U.S. to supply gold to Asia is to suppress the price of physical gold. Most people realize that low interest rates and printing money will eventually be very bad for the U.S. dollar. One thing that would tip people off to imminent danger to the U.S. dollar would be a much higher gold price. Keeping gold’s price low is just part of the financial policy.

All this money printing is designed to help the U.S. address its massive obligations, which include its current debts and off-balance sheet obligations of around 80 trillion dollars. Their annual revenues are only around 2.8 trillion dollars and their expenditures are 3.5 trillion. Everyone knows there’s no way they can afford to keep going and cover their obligations. This leaves money printing to cover the gap.

Ultimately, we will find out the extent of manipulation in the gold market when someone finally fails – most probably the U.S. running out of gold to supply the market. And I don’t think we are far off here.

Eric Sprott on the argument that other sources of gold exist that could explain how so much gold is being delivered to China:

Well, I don’t think that is likely. The Chinese government controls all exports of gold and since they are a net buyer, they probably would not allow any exports.

The amounts of gold involved are so large that clandestine sources seem unlikely. There is only one government in the world that even owns 4,000 tonnes – that’s the U.S., supposedly.

I think it comes down to the powers that be simply trying to keep things under control. The dollar is coming under extreme pressure here, and it looks to have broken down here, in fact. That should have people going into gold.

The U.S. GDP growth, which was expected to be around 0.1%, will probably be revised even lower for the first quarter of 201414. I do not believe that any economic recovery is really occurring, because the middle class is simply being routed. We are seeing no real wage gains and inflation is well beyond reported CPI numbers, which are just a joke. In the real world, we all know inflation is much higher.

There’s no rational explanation, in my opinion, of where the gold is coming from apart from central banks.

The impact of the situation in the Ukraine on gold:

Well, I imagine that people in the area – in countries like Romania or Bulgaria, or in the Ukraine itself – would be thinking about putting some of their money in gold right now. Obviously it does bring people into the gold market.

I prefer not to fall back on these sorts of possibilities as reasons to own gold. These are ‘black swans’ for gold. I prefer to focus on the physical shortage argument for owning gold, because I believe the case there is black and white. The means and motive for suppressing the price of gold are well-known. And the physical will win the day.

Now, gold will benefit from black swans – a war, governments going broke or the recession getting worse. These could happen, but things are changing in the precious metals markets regardless of these events.

Sprott on the physical shortage argument applied to platinum and palladium:

Absolutely. In fact, I find the case for platinum and palladium even more compelling than anything else right now. When you think that the top supplier of these metals is Russia, and that the second biggest is South Africa, which is on strike, I find it surprising that the price of platinum and palladium has not exploded.

I also see what goes on in the paper markets, however. The commercials are taking on an increasing short position in both of these metals, which is pushing the metals lower. A recovery in platinum and palladium would certainly help all precious metals move higher, including gold and silver.

I think that there’s a great case to be made in platinum and palladium.

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