Friday, April 27, 2012

Eric Sprott: When (Gold) Fundamentals No Longer Apply, Review the Fundamentals

Sprott Asset Management published their monthly newsletter Market at Glance (April 2012) entitled "When Fundamentals No Longer Apply, Review the Fundamentals".

Eric Sprott and David Baker explain they still don't see a recovery:
  • US housing situation is still a bust with both existing and new home sales well below the highs reached in 2006.
  • Unemployment is still high, and despite all the news cheer-leading, the most recent numbers show week data. and the same is true for jobless claims numbers.
  • US tax receipts are only up 2% over a year (lower than inflation at 2.7%)
  • ECRI Weekly Leading Indicator (WLI) has started to trend down again in April
  • US Durable Goods Orders have dropped 4.2% in March, representing the largest decline since January 2009.
  • China's most recent Purchasing Managers Index (PMI) indicates that China's manufacturing activity has now been in contraction for six months in a row.
  • The situation in Europe continues to worsen: Spain is a complete disaster, Italy prospects do not look good either, and German PMI shows a decline in economic activity with the fastest rate of contraction since July 2009.
All those bad numbers guarantee that central banks will print money again, and 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. BRIC countries are irritated by these actions and their lack of voting power in this institution.

Possibly to counter this issue, BRICs have planned to start their own financial institution at the last BRIC summit and reports seem to indicate a 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" might be created.

China has also been importing a lot of Gold via Hong Kong recently. In February, China imported 40 tons of Gold via Hong Kong, 13 times more compared to the same month last year and other emerging countries also follow suite, with 12 countries increasing their Gold reserves by more than 58 tons in March (that's 696 tons annualized). There is so much Gold bought by central banks, that Merk and Baker wonder where they'll find that Gold for delivery.

Eric Sprott concludes as follows:

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.
The full version of the newsletter is available at,-review-the-fundamentals/

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