Eric Sprott



Ignoring real estate, most people invest their hard earned money in paper things. Stocks, bonds, annuities, insurance – it’s all paper, and it sits nicely in our bank accounts and shows up on our computer screens. Halfway across the world, investors in China and India have never trusted paper investments as a store of value – and they’re converting their hard earned paper money into gold and silver bullion. Not that this is anything new. It isn’t. But the scale and speed with which they are accumulating precious metals IS new, and it’s driving the fundamentals that we believe will lead to higher prices in 2011.
Demand for the metals is literally exploding in Asia, and it’s creating shortages of physical bullion around the world. The statistics are extraordinary. China, the world’s largest gold producer, now requires so much of the precious metal (in addition to what it already mines) that it imported over 209 metric tons (6.7 million oz) of gold during the first ten months of 2010. This represents a fivefold increase from the estimated 45 metric tons it imported in all of 2009.1
According to the World Gold Council, Chinese retail demand for gold increased by 70% from October 2009 to September 2010, representing a total of 153.2 tonnes of gold imports. Yet, over the same period, the demand for gold jewelry rose by only 8%.2 There is a clear trend developing for Chinese investment in gold as a monetary asset, and China is buying so much gold for investment purposes that it now threatens to supercede India as the world’s largest gold consumer. Chinese demand in 2010 is expected to reach approximately 600 tonnes, just behind India’s 800 tonnes.3 To put that in perspective, 2010 world mine production is forecasted to be 2,652 tonnes, which means China and India could collectively lock-up over half of global annual production.
Even more surprising is the increase in Chinese demand for silver. Recent statistics show that silver imports have increased fourfold from 2009 to 2010. In 2005, the Chinese exported just over 100 million oz. of silver.4 In 2010, they imported just over 120 million oz. This represents a swing of 200 million+ oz. in a market that supplied a total of 889 million oz. in 2009 – a truly tectonic shift in demand!5
We are seeing widespread evidence of major shortages of physical gold and silver bullion across the globe. The Perth Mint recently stated that: “Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars.”6 Three weeks ahead of Chinese New Year, Asian dealers were reporting premiums in mainland Chinese gold exchanges of $23 per ounce.7 Even Jim Cramer has acknowledged the current shortage in minted US gold coins, stating on his CNBC television show in December that: “As someone who tried to buy U.S. coins in December, there was a real scarcity. My dealer reportedly just couldn’t get any coins – tried to sell me Australian bullion. Said there was a shortage. Very telling.”8
While Chinese New Year celebrations typically drive gold demand in the month of January, there are stronger forces at work here. The Chinese are fighting the resurgence of inflation. To protect their wealth, the populace is turning to gold and silver as a store of value. Precious metals ownership is a relatively new phenomenon in China, where Chinese citizens have only been able to purchase gold freely within the last ten years. Ownership restrictions were lifted in 2001 when the Chinese central bank abolished its long-term government monopoly over gold. The Shanghai Gold Exchange was then created in October 2002 to replace the People’s Bank of China’s gold purchase and allocation system, thus ushering in a new era of gold investment in China.9 Investor interest in precious metals has increased dramatically since then, and new investment products are making gold more convenient to purchase and easier to own.
One such program recently caught our eye and speaks to the new era of gold investment within China. On April 1, 2010, the World Gold Council and Industrial and Commercial Bank of China (ICBC) issued a press release announcing a strategic partnership.10 Though seemingly innocuous, this press release introduced a completely new investment product for Chinese investors: The ICBC Gold Accumulation Plan (“ICBC GAP”). ICBC GAP allows investors in mainland China to accumulate gold through a daily dollar averaging program. The minimum investment required is either 200 RMB per month or 1 gram of gold per day (equivalent to approximately US$42).11 Customers may renew the contracts at maturity, convert them into cash or exchange them for physical gold. The accounts are perfect for investors who want to accumulate gold over the long-term. While gold accumulation plans exist in Japan, Switzerland and other countries, this is a first for mainland China. Kudos to the World Gold Council for their efforts in setting up and promoting the program.
The most significant fact related to the ICBC GAP program is how fast it has captured the investing public in China. One million accounts have already been opened since the program launched on April 1st, resulting in the purchase of over 10 tonnes of gold thus far. According to press releases, the ICBC GAP plan was taken up by a mere 20% of total depositors at ICBC, and was only launched in select Chinese cities during the test phase. The ICBC bank just happens to be the largest consumer bank on earth with approximately 212 million separate accounts. If we apply some realistic assumptions and arithmetic, it’s easy to imagine how large this program could potentially become.
Suppose, for example, the ICBC GAP plan were expanded to cover all ICBC depositors, and also expanded to the next four largest Chinese banks. Let’s further assume that the gold purchases within the plan enjoyed the same rate of growth as the test phase mentioned above. If we add all these numbers together, it results in gold purchases of an extra 300 tonnes of gold per year, or over 10% of the estimated 2010 global gold production.
The implications of this burgeoning Chinese demand for the gold market are immense. If these predictions prove accurate, the ICBC GAP plan could become the single largest buyer of physical gold on the planet. Considering that the program has only been launched in one Chinese bank thus far, imagine if it were extended to other institutions or other large gold consuming countries such as India, Russia or Turkey?
Speaking from Japan, the head of the World Gold Council recently commented on the early success of the ICBC GAP plan in China: “Here in Japan, it has taken over 10 years for the gold-savings account industry as a whole to reach 700,000 accounts. It is impressive that only one Chinese bank can exceed that level so easily, within one year, without PR or active marketing in-branch.” The World Gold Council does their own arithmetic on how much gold the Chinese can consume: “In 2009, per capita gold consumption in China was 0.33 grams, up from 0.17 grams in 2002.” Based on this data total Chinese gold consumption could range from 1,000 tonnes per year or more.12 This implies that the Chinese could consume almost half of the gold produced globally on an annual basis.
The ICBC Gold Accumulation Plan and other alternate methods of investing in gold have the potential to overwhelm current supply in the gold market. If a similar program were launched for silver accumulation, in the same dollar terms at current prices, it would consume over half of the silver produced each year! In Asia, only physical gold and silver will do and unlike the supply of treasury bills, bonds or paper currencies, the supply of physical gold and silver is undoubtedly finite.
We believe Asian demand for physical gold and silver is akin to a tsunami. While precious metals prices have corrected on the paper exchanges, the inflation resurgence in Asia is quietly driving new, unforeseen levels of physical demand for the metals. While the world continues to float on a sea of paper, this massive wave of physical demand silently threatens to crash into the physical gold and silver market, potentially wiping out tangible supply.
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1. Hook, Leslie. (December 2, 2010) China’s gold imports surge fivefold. Financial Times. Retrieved on January 31, 2011 from:

http://www.gold.org/download/rs_archive/WOR5797_Gold_Invest_Report_China_Web.pdf2. D’Altorio (December 30, 2010) China’s Gold Rush. Investment U. Retrieved on January 31, 2011 from: 

3. Pearson, Madelene. (January 12, 2011) Gold Imports by India Likely Reached Record, WGC Says. Bloomberg Businessweek. Retrieved on January 31, 2011 from:
4. (December 2, 2010) Gold Imports by China Soar Almost Fivefold as Inflation Spurs Investment. Bloomberg. Retrieved on January 31, 2011 from:
5. The Silver Institute. Demand and Supply in 2009. Retrieved on January 31, 2011 from:
6. Campbell, James (January 12, 2011) Unrelenting demand for gold below $1400 – Perth Mint. Retrieved on January 30, 2011 from:
7. Ash, Adrian (January 12, 2011) Shanghai Gold Premium Hits $23/Oz, China Opens 1 Million Gold-Savings Accounts. London Gold Market Report. Retrieved on January 31, 2011 from:
8. CNBC: Buy this pause in gold’s bull run, “Mad Money” host Jim Cramer advises. Retrieved on January 31, 2011 from:
9. China Gold Report: Gold in the Year of the Tiger. The World Gold Council (March 29, 2010). Retrieved on January 31, 2011 from: http://www.gold.org/download/rs_archive/WOR5797_Gold_Invest_Report_China_Web.pdf
10. World Gold Council (April 1, 2010) World Gold Council and ICBC Enter into Strategic Partnership to Promote China’€™s Gold Market. Retrieved on January 31, 2011 from: http://www.gold.org/download/pr_archive/pdf/ICBC_MOU_010410_pr.pdf
11. World Gold Council. (December 16, 2010) World Gold Council and ICBC launch first gold accumulation plan in China. Retrieved on January 31, 2011 from:
http://www.gold.org/download/pr_archive/pdf/2010-12-16_ICBC_GAP_release.pdf
12. Ash, Adrian (January 31, 2011) Gold Shorts Beware China’€™s Million-Strong Gold Savers. Forbes. Retrieved on January 2011 from:
http://blogs.forbes.com/greatspeculations/2011/01/13/gold-shorts-beware-chinas-million-strong-gold-savers/

By Barry Critchley, 
Financial Post · Saturday, Sept. 18, 2010

The price of gold is at record levels, yet investors still believe it is set to move higher. That’s the only logical interpretation to draw from the news that Sprott Physical Gold Trust, formed this year to hold bullion, has rounded up at least $280-million of new investment dollars in its latest financing. (The other interpretation: The lemmings theory is at work.)
That financing, done by way of an overnight marketed deal, was announced after the markets closed on Thursday and priced before the markets opened yesterday.
The result: The issuer sold 24.5 million trust units at $11.37 per unit. The units were sold at a 10¢ discount to the closing price the day the deal was announced. The issuer has a rule that the “net proceeds of the offering will be greater than 100% of the most recently calculated net asset value per unit of the trust prior to the pricing of the offering.”
According to its website, the fund’s NAV was $10.87, which means the units traded at a premium. The underwriters — RBC Capital Markets and Morgan Stanley — were given the option to sell another 3.675 million units. The units closed yesterday at $11.30.
That gold continues to rise is no surprise to Eric Sprott, the founder of Sprott Asset Management. Almost two years ago, he said that, “in the sea of financial assets and currencies that are being decimated the world over, the one true safe haven continues to be gold.”

So far, that view is working out. This week’s deal is the second since Sprott Physical Gold went public this year. In its IPO, the issuer raised US$442.50-million via the sale of 44.25 million units at US$10 per unit. In May, it followed up with a US$279.45-million deal via the sale of 24.84 million units at US$11.25 per unit.
Sprott isn’t the only issuer to gather up investor interest in physical gold.
In May, the Central Fund of Canada closed the sale of 25.3 million units at U.S.$14.85 per share, for gross proceeds of US$375.7-million. It too has a pricing rule: It must be non-dilutive and accretive for the existing shareholders. The issuer invested most of the proceeds “in gold and silver bullion in international banker bar denominations.” After that deal, it
owned 1.5 million fine ounces of gold and 75.2 million ounces of silver.
Last November, it raised US$230.2-million via the sale of units priced at US$13.56 a time. The units closed yesterday at US$16.14. In 2009, Central Fund completed four offerings that raised a total of US$701.6 million. Central GoldTrust has also been active. In June, it raised US$280.2-million, with all the proceeds being invested in gold bullion. (The ompany owns 604,676 fine ounces of gold bullion and 6,156 ounces in gold certificates.) As with Central Fund, the price of the units is “non-dilutive and accretive for the existing unitholders.”
In 2009, it closed two issues, one for US$38-million in January and another for US$200.2-million in May.
At the urging of GATA and Sprott Asset Management CEO Eric Sprott, Business Insider reporter Vince Veneziani recently put to the International Monetary Fund five specific questions about the IMF’s supposed gold reserves, questions similar to those put to the IMF by GATA’s Chris Powell in April 2008. (See http://www.gata.org/node/6242.)
Business Insider’s two most important questions may have been:
1) Exactly where is the IMF’s supposed gold? and
2) When the IMF sells gold, does any real gold change hands or are such sales essentially just bookkeeping transactions among central banks?
Tonight Veneziani reports that IMF spokesman Alistair Thomson replied to Business Insider’s five questions as follows: “I looked through your message; we don’t have anything more for you on this.
How’s that for accountability from an international governmental organization?
Veneziani concludes: “Certainly this unwillingness is only fodder for skeptical gold folks out there.”
Indeed, the IMF’s refusal to answer Business Insider is more evidence that the gold it has been threatening the gold market with for years is an illusion — that the IMF has no gold at all but only a tenuous claim on the gold reserves of its member nations, nations that, the ever-more-valuable CPM Group reports today, seem not at all inclined to part with it anymore:
Thus Veneziani and Business Insider have accomplished something apparently not yet accomplished by any major news organization in the world: They have put important, critical, inconvenient, and direct questions to a central banking institution. Further, Veneziani and Business Insider have been treated with contempt for doing so and have publicized the refusal to answer.
Not even The New York Times, Financial Times, and The Wall Street Journal have yet dared attempt such ordinary journalism in regard to central banking.
The Business Insider report is headlined “Five Questions About Gold the IMF Refuses to Answer” and you can find it HERE
Kevin Bambrough and David Franklin of Sprott Asset Management in Toronto argue in an essay just published that central banks no longer have any interest in maintaining the value of their currencies and that, as a result, gold is the only currency that can safeguard wealth.
Their essay is headlined “Beware Counterfeiters” and you can find it at the Sprott Internet site HERE
“The US dollar (USD) is the world’s “reserve currency”. This status is arguably the greatest privilege enjoyed by the US as an economic entity. Most people don’t appreciate its significance. As the world’s reserve currency, the USD is used by other countries across the globe to back up their own respective paper currencies. In some cases, it’s as basic as a country stockpiling US dollars in their central bank vaults. When asked what supports their Pesos, Rubles, or Yen, the powers that be simply point to their pile of US dollars as proof of value. Upon reflection, it’s quite obvious how tenuous it is to back up one’s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well…until now.”

“…We keep coming back to the numbers for the US debt, and they don’t add up. Even Alan Greenspan, former Chairman of the Federal Reserve, believes that the rising budget deficits in the United States are “unsustainable”. Because the US Government is printing dollars to fund their liabilities, it is highly unlikely that we will ever see a failed bond auction similar to that of Poland. The far more likely outcome, therefore, will be a US dollar crisis. It is for this reason that we have positioned our hedge funds and mutual funds so heavily in precious metals.
At the end of the day, when the world finally realizes what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end.
Click HERE to access Sprott Asset Management‘s assessment of the US$ position today.
Eric Sprott of Sprott Asset Management is (as always) no word mincer in his January missive “Markets at a Glance” when he writes:

The problem isn’t just the banking system anymore. The problem is the banking system and everything else. This year, the financial crisis of yesteryear is morphing into an altogether different animal. It’s morphing into a financial crisis that has an economic crisis layered on top of it. In fact, to call the current environment an economic crisis is likely understating the situation. What we really have is a global economic catastrophe. One where weakness only begets more weakness, causing a vicious circle that is proving nigh impossible to reverse in spite of all the world’s financial, economic, and political brain trust throwing everything they have, including the kitchen sink, at the problem.”

To read his report “So You Think 2008 Was Bad?..Welcome to 2009” in full technicolor pdf format please click HERE

By Stewart Bailey
Bloomberg News

NEW YORK — Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse, said the U.S. is at the beginning of an economic depression that will help gold prices more than double.

Bullion may top $2,000 an ounce in coming years amid a series of financial catastrophes, the chairman and founder of Toronto-based Sprott Asset Management Inc. said yesterday in an interview. Banks will battle to replenish capital, Treasury auctions stand the risk of failing and the moribund economy will create a dire operating outlook for many companies, he said.

“The trend is down, and there’s not one signpost that says it’s changing yet,” Sprott said yesterday from Toronto. “We’ll stand by to wait to see those, and until it does, you have to assume it gets worse.”

Sprott, who manages $4.5 billion, said in March that the world was in a “systemic financial meltdown,” a call that presaged the collapse of financial institutions including Bear Stearns & Co. and Lehman Brothers Holdings Inc. Since then, the U.S. has entered the worst economic slowdown since the Great Depression, credit markets have tightened and asset prices have dropped as companies and funds sell portfolios to raise cash.

The 81-company Standard & Poor’s 500 Financials Index has dropped 62 percent since Sprott said on March 6 he was buying bullion and gold-producers’ shares, while shorting financial-sector stocks. Gold slipped 6.3 percent during the same period.

So-called short-selling allows speculators to profit from a stock’s decline by borrowing shares, selling them to raise cash and buying them later when the price drops to repay the debt.

Sprott now favors buying more gold stocks and bullion while selling the entire equity market short. Most at risk in the current climate are banks and discretionary consumer stocks and any companies that have debt to refinance, he said.

Sprott believes there is a chance that a U.S. Treasury auction will fail as countries use their resources to quell financial turmoil in their home markets, leaving less to help finance the world’s largest economy. That outcome will have a “catastrophic” impact, he said.

“When do people stop buying the credit of the country? That’s a tough question to answer, but it’s on a lot of its own financial problem, so there’s no funding for anything external.”

Such concerns have driven investors to the gold market, propelling the metal higher as other commodities have slumped and helping gold-producers’ stocks almost double in the past three months.

Greenlight Capital Inc., a $5.1 billion New York-based hedge fund, has started investing in gold for the first time, while Federated Investors Inc.’s $1.3 billion Federated Market Opportunity Fund, which outperformed 99 percent of rivals last year, now counts Yamana Gold Inc. and Goldcorp Inc. among its largest investments.

Gold companies such as Newmont Mining Corp. and Kinross Gold Corp. have taken the opportunity to issue stock to bolster their own balance sheets.

Barrick Gold Corp. Chairman Peter Munk said last week he has been inundated with calls from wealthy investors seeking to buy gold to protect their capital.

“The window to raise money for gold stocks has blown open,” Sprott said. “The investing public has started to go to that one thing that they think it’s safe to invest in.”

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