TD: Eric, you said precious metals reached an inflection point about six weeks ago. What signs are you seeing now to back your conviction?
ES: The most interesting fact is that the equivalent to the SEC in Germany, BaFin, came out on January 17th saying that precious metals are possibly manipulated worse than LIBOR. That word “worse” is a very significant in my mind.
When you think about the chronology of events, BaFin announced in the middle of November that they were going to investigate the possible fixing of gold prices or manipulating of gold prices on the London gold fix.
[The London spot price of gold is set twice daily by a consortium of five fixing members currently presided by Vincent Domien of Société Générale.
In the middle of December, they were said to have gone into Deutsche Bank’s offices to review their trading records. On January 17th, the head of that regulator declared that the price fix may be manipulated worse than LIBOR; the next day, Deutsche Bank removed itself from being a member of the fixing of the London bullion market.
What must have happened? My own feeling is that the regulator went back to Deutsche Bank having looked at their records and said, “Do you know what your boys in London have been doing here?” And of course the next day they quit the LBMA.
If you think about manipulation, there’s only one reason in my mind that bankers manipulate prices. They don’t manipulate them for the bank to make money. They manipulate them for the employees to make bonuses.
When are bonuses determined? They’re determined in June and December, at the end of the month. When did the gold price hit its lows last year? Around the last trading day of June and the last trading day of December.
“It has been discovered, so maybe they won’t manipulate anymore,” you might think. And you might be right to a degree. What if this kind of repressive force on the gold price has taken a blow?
I think we could see a massive run up in the price of silver and gold, both to new highs; of course the impact on stocks would be incredibly dramatic.
The flows of physical metals have suggested to us that there’s so much buying of physical metals that the central banks must be active in this market on the sell side, only not declaring their sales. I think that demand for gold is actually twice the annual mine supply.
TD: Eric, as a matter of record, you sold some bullion recently from the Sprott funds and reallocated the proceeds into the producers. Can you explain that strategy? Why now?
ES: Well, I’ve always believed that the price was manipulated down. We know that the producers got massacred in 2013 and were already weak in 2012 as a result. In some cases their stocks fell to $.10 cents on the dollar or less from their highs. In fact I think I bought a stock at $.12 cents that had been as high as $5.00 when the price of gold was $1920. It’s a producer, and I have a simple formula.
Let’s assume the price of gold goes to $2000 and the average gold producer probably has a cost of production all-in of $1000. They’d be making roughly $1,000 per ounce.
So you take its production, and in the case of this $.12 cent company, it had about 85,000 ounces of production. Again, make $1000 an ounce. You would be making $85 million. I think the market cap at $.12 cents was something like $30 million.
Well, if you can make pretax $85 million, ($60 million after tax) and you trade at 10 times earnings, you become a $600 million market cap company that was trading for $30 million.
So that’s why I was a seller of metals to buy the stocks.
Eric Sprott has more than 40 years of experience in the investment industry. After earning his designation as a chartered accountant, Eric entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada’s largest independently owned securities firms. In 2001, Eric established Sprott Asset Management Inc. He is Chairman and President of Sprott Inc., a publicly-traded company based in Toronto, Canada with over $7 billion in assets under management.