New From Sprott: "Don't Miss This Golden Opportunity"

For February’s issue of Markets at a Glance, Eric Sprott discusses BaFin’s statement that precious metals prices were manipulated worse than LIBOR. He breaks it down how obvious the manipulation has been in physical gold markets in 2013, where demand far exceeded mine supply. Now that silver and gold have broken its downtrends, what does this mean for the market?

Don't Miss This Golden Opportunity,

By Eric Sprott

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period.1 This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.2 What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

The chronology goes as follows:

- November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).3
- Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).4
- January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.1 On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.5

Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End

Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest gold prices were on June 27th and December 19th (Figure 1).

Perfect! And perfectly obvious…

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).

Figure 2: World Gold Supply and Demand 2013, in Tonnes6

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3: Gold Price is far from its Long-Term Linear Trend

Source: Bloomberg and Sprott Estimates

Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 4: Upside Scenarios For Different Types of Gold Miners

Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014. Source: Sprott Estimates and RBC Capital Markets. lllustrative purposes only, Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer).

Are these gains likely to materialize? So far in 2014, the senior miners are up 27%1, while the junior miners are up 42%7. Not a bad year. But, we are only seven weeks into the year.

Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?

Again, don’t miss this Golden Opportunity!

1    NYSE Arca Gold Miners Index.
2    http://www.bloomberg.com/news/2014-01-16/metals-currency-rigging-worse-than-libor-bafin-s-koenig-says.html
3    http://www.bloomberg.com/news/2013-11-27/bafin-reviews-gold-silver-pricing-as-part-of-libor-review.html
4    http://www.ft.com/intl/cms/s/0/b386aa16-6358-11e3-886f-00144feabdc0.html#axzz2thaFxIiG
5    http://online.wsj.com/news/articles/SB10001424052702304603704579326202725433242
6    GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2, Q3 & Q4. Chinese mine supply comes from the China Gold Association for 2013. Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q4. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Dec. 2013. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2, Q3 & Q4 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013. ETFs data comes from GFMS as well.
7    MV Junior Gold Miners Index.

61 Comments

Magpie's picture

First!

And no, I didn't read it....yet.blush

benque's picture

2nd and I did!

Ha!

silver66's picture

Thurd and repost from Cheery Tuesday

Caught the end of the last tread with this link

Eric Sprott and Rick Rule are doing a webcast March 4th. Registration is open to public

https://event.on24.com/eventRegistration/EventLobbyServlet?target=registration.jsp&eventid=757080&sessionid=1&key=EFAA44A917190DC15B11A9EA51317F72&partnerref=sam&sourcepage=register

Silver66

​Hope to see Turdites represented there

dgstage's picture

Perspective

Syria's starving hordes: In a biblical picture of suffering, crowd stretching for as far as the eye can see gathers amid the rubble of Damascus for UN food hand-outs

Read more: http://www.dailymail.co.uk/news/article-2568251/UN-calls-Syrian-warring-sides-allow-aid-flow.html#ixzz2uSKWsL52 

Follow us: @MailOnline on Twitter | DailyMail on Facebookhttp://www.dailymail.co.uk/news/article-2568251/UN-calls-Syrian-warring-sides-allow-aid-flow.html

Cleburne61's picture

Hey Turd

Will the good folks at Coghlan capital be conducting any future charting seminars?

Pseudozero's picture

very timely.

dgstage's picture

And Jim Willie from Previous Thread

argentus maximus's picture

As it appears to me the trend

As it appears to me the trend in Fig 3 is not linear, it's exponential.

Assuming the scale on the left is correct, and the relative smallness of the last 3 years range suggests it is, then the legend on the chart saying "linear" is incorrect.

Turd Ferguson's picture

And this is a brand new

MODERATOR

And this is a brand new interview of Mr Sprott, too:

 

ancientmoney's picture

Why now for this revelation?

"Eric Sprott discusses BaFin’s statement that precious metals prices were manipulated worse than LIBOR."

--------------------------------------------------------------------

Why did BaFin wait til November 2013 to look into this?

Why not MayDay 2011? Or any other opportune time, when it was plain even to my one-eyed scraggly mutt that gold and silver are the most manipulated commodities on earth? Surely BaFin saw all this for years and years before 11/13.

Are they afraid that Germany will never get its gold back? Are they looking for scapegoats now?

Will Germany rethink its alliances? Russia provides lots of energy to Europe, some of which must make its way to Germany. Without energy, Germany, like everyone else, is nothing.

Russia and China appear to be readying for a new, "gold is money" era.  Like, if you want our energy, I want your gold (or silver, food, copper, etc.)

There is likely a whole lot of shakin' goin' on behind the scenes, which our ever-vigilant MSM never seems to think we are fit enough to see.

Silver_investor's picture

Tekoa Da Silva

Is Tekoa working for Sprott now?  

Turd Ferguson's picture

Yes. I met him in Vegas last

MODERATOR

Yes. I met him in Vegas last weekend. Very good guy.

Response to: Tekoa Da Silva
Silver_investor's picture

Tekoa

That's great. He's a sharp young man, and he's very well-spoken. 

Motley Fool's picture

pity

That sprott does not seem to do his own independent research and keeps with the goldbug narrative.

"BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR."

They did not say this.

For those that actually care about such things as facts( I know, such a antiquated concern) , here is the original source : http://www.bafin.de/SharedDocs/Reden/DE/re_140116_neujahrspresseempfang_p.html

ancientmoney's picture

@Motley re: facts . . .

It seems to me that the translated statement could indeed be understood exactly as Bloomberg and Sprott indicated:

"These allegations are particularly serious, because such reference values ​​are based - unlike LIBOR and Euribor - typically on actual transactions in liquid markets and not on estimates of the banks."

The allegations mentioned were manipulations of the currencies and PM markets.

Hawkman's picture

@Fool

Is your contention that manipulation is not occurring?

Just wondering - or are you simply parroting the marching orders you were given?

Snowplow

Motley Fool's picture

snowplow

Nope.

But it is my contention that we should reason based on fact. I agree with Sprott for example that buying gold is a good idea, but I refuse to use spurious arguments or hearsay for my case.

@ancientmoney

Ask any german speaker to translate accurately for you. The best we can get from that is that there are suspicions of wrongdoings in other markets(and this would be with very very generous interpretation)...which isn't exactly newsworthy. You can interpret anything to fit your preconceived bias. I will not, as far as I am able to guard against such.

foggyroad's picture

Sprott

What I like about Sprott is all his Funds are run by smart people, he picks the best and brightest.

He attracts this talent with his compensation model, these guys get paid according to how well the Funds they head do.

The Funds do well, the guys running them get paid well. 

Simple concept, Pay for performance.

Thanks, TF.

Big Buffalo's picture

mini-correction time

man...what i wouldn't pay to be able to read the rest of that message..

chocolatechiphorses's picture

SILVER: 4 Cycles in 12 Years

http://www.deviantinvestor.com/5087/5087/

This is from Oct 2013 but I found it interesting.

SILVER: 4 Cycles in 12 Years

Posted by Deviant Investor on October 16th, 2013

During the past 12 years silver prices have bottomed, rallied sharply, collapsed, and then languished for a year or more. The patterns are not identical, but there are obvious similarities as shown in the following chart. (Note that it is a weekly line chart, from close to close, log scale, with high and low bars not shown. For example, silver might have bottomed on a Wednesday but only the Friday close is plotted.)

Click on image to enlarge.

Crash Lows:

11/23/2001, 5/7/2004, 6/16/2006, 10/24/2008, 7/5/2013

Launch Lows:

3/21/2002, 8/26/2005, 8/17/2007, 2/5/2010

Breakouts:

5/2/2003, 10/14/2005, 9/21/2007, 4/16/2010

Highs:

4/2/2004, 5/12/2006, 3/14/2008, 4/29/2011

Since the bottom in November 2001 at a weekly close of $4.03, silver has had four launch lows, breakouts, highs, and crash lows. We await the next launch low, subsequent breakout and a new high in the 5th cycle.

Based on the chart, the high in April 2011 was quite high, the subsequent low in July 2013 was an unusually deep correction and substantially delayed compared to previous cycles. I interpret this extended and deep low as a reaction to the huge rally from about $18 in mid-2010 to nearly $50 in April 2011. High Frequency Trading and massive intervention since the crash of 2008 have pushed the prices for gold and silver much higher and much lower than in previous cycles. They have also made the timing projections less reliable, but certain parallels are clear.

The last four cycles from crash low to high have taken from 1.75 to 2.5 years. That suggests an upcoming high sometime in 2015 – 2016. The last four cycles from crash low to launch low have taken 1.0 to 1.3 years. That suggests an upcoming launch low sometime in 2014. Following the launch lows, highs occurred approximately 0.5 to 1.2 years later. That suggests a high sometime in 2015 or 2016. We will wait and see.

But what if the market has fundamentally changed and the April 2011 high near $50 was a long term top that might not be repeated for another decade or so? I doubt it, but reputable forecasters such as Harry Dent believe that gold will drop to about $750 during the long term commodity bear market that he sees this decade. To address the possibility, consider this table:

Year 2001                            Year 2013

U.S. official debt

$5,800 Billion                          $16,700 Billion

U.S. unfunded liabilities

perhaps $40,000 Billion        perhaps $200,000 Billion

Gold price

around $275                                  around $1,300

Silver price

$4-$5                                               around $22

Dow Industrial Average

11,000                                            15,000

U.S. dollar status

undisputed leader                             shaky and increasingly replaced for trading

Reputation of Congress

so-so                                                     corrupt and unpopular

War expenses

some                                                     many wars, all expensive

Quantitative Easing

not needed                                           utterly necessary

U.S. national debt

slowly increasing                                rapidly increasing

U.S. economy

strong and optimistic                        five years of weakness and recession

We could add many more rows to this table, but they would tell essentially the same story: increasing debt, increasing money supply, weaker economy, and QE-forever that is necessary to enable government deficit spending. We don’t foresee declining gold and silver prices unless we fall into a deflationary collapse. The Fed has made it clear – no deflation! The US congress and the President have made it clear; they want to spend, spend, spend! Accidents do happen, but “Don’t Fight The Fed.” Expect money printing, inflation, increased debt, and higher prices.

Conclusions:

Since 2001 the silver and gold markets have gone up substantially as a reaction to the 20 year precious metals bear market from 1980 – 2000, massive increases in military spending, weakening global economies that REQUIRE Quantitative Easing to avoid deflation, the rise of competing currencies that weaken the dollar’s trading status, excessive debts in Europe, Japan, the United Kingdom, and the United States, and so much more.

We should also learn from the past 12 years of silver cycles: a high, crash low, launch low, and breakout, will repeat until the global monetary system fundamentally changes from unbacked debt based paper money and returns to some form of a gold backed currency, whether it is the dollar, an IMF currency, or another hybrid currency.

Unless the world jumps off a cliff into a deflationary collapse that fundamentally changes our world, we should expect more government expenses, more QE, increasing debt, higher consumer prices, more expensive wars, and higher precious metals prices. We should expect an upcoming launch low, breakout, and high in the silver (and gold) market. The “gravy train” of government expenditures must continue rolling – powerful vested interests are everywhere and cannot be ignored – and few, if any, government programs will be reduced unless such reductions are forced by absolute necessity.

If this view is more or less accurate, precious metals, and silver in particular, will perform better than bonds, stocks, and most other investments available to those outside the upper 1% – the financial and political elite.

Crash Lows:

11/23/2001,         5/7/2004,                6/16/2006,             10/24/2008,         7/5/2013

Launch Lows:

3/21/2002,           8/26/2005,               8/17/2007,               2/5/2010

Breakouts:

5/2/2003,             10/14/2005,             9/21/2007,              4/16/2010

Highs:

4/2/2004,              5/12/2006,              3/14/2008,              4/29/2011

We may be skeptical of price projections for silver, but projections for national debt are quite believable. Since the correlation is very close, future silver prices can be projected, assuming continuing deficit spending, QE, and other macroeconomic influences. A dollar crash or an unexpected bout of congressional fiscal responsibility could accelerate or delay the date silver trades at $100, but the projection is reasonable and sensible.

Silver increased from $4.01 (November 2001) to over $48 (April 2011).

A silver price of $48 seemed nearly impossible in 2001, yet it happened.

An increase from about $20 (December 2013) to $100 (perhaps in 2018 – 2019) seems much easier to believe, especially after Bernanke’s recent announcement of QE4-Ever.

$4 - $20        2000 - 2010

$20 - $100   2010 - 2020    Seems possible to me

JY896's picture

Motley

Your line of reasoning might be valid if there weren't already overwhelming evidence that both international benchmark rates (LIBOR et al) AND precious metals prices are in fact being manipulated.

Also, the realistic view might be that the very fact that a BaFin annual address which dedicates several paragraphs to the serious concerns over allegations of manipulation IS a newsworthy and potentially 'trendmaking' event in itself. Like all other central regulators and CB-affiliated entities, the UTTERANCES of said entities carry as much weight as their actions (see MOPE, see 'forward guidance', see the careers of Greenspan, Bernanke, et al).

"It is the financial economy is dependent on the confidence of the general public that it is powerful and it makes honest work. The central reference values ​​seemed beyond doubt - and now the suspicion is in the air, they had been manipulated. [...]
The manipulation allegations have brought an industry into disrepute, whose reputation was already damaged, which more than any other is dependent, however, that you trusted her. Comprehensive regulation and effective control will help build that trust again. But with mere rule and legal obligations - you can also use the buzz word "compliance" - it's not done. Not everything that is legal is also legitimate. I do not believe in a comprehensive moral brutalization, but we need a return to certain ethical values ​​which are obviously come in parts of the financial sector in the boom times out of fashion."
(autotranslation of the original BaFin address)

You are technically right, but substantively wrong, and splitting hairs here.

"Indeed, expectations matter so much that a central bank may be able to help make policy more effective by working to shape those expectations. [..]

Fortunately, as I discussed earlier, the degree of accommodation provided by monetary policy depends not just on the current value of the policy rate, but on public expectations of future settings of that rate. The Committee accordingly realized that it could ease policy further--and reduce uncertainty about future policy--by assuring the public and markets that it intended to keep the policy rate low for some time, and for a longer period than the public initially expected."

Chairman Ben S. Bernanke -- At the National Economists Club Annual Dinner, Herbert Stein Memorial Lecture, Washington, D.C., November 19, 2013
Communication and Monetary Policy

ancientmoney's picture

@Motley re: German translation . . .

I believe that the translation provided is accurate.  What is your version, word for word, of the German statement?

Do you also believe that the Bundesbank and the Germans are satisfied with the amount of gold it has so far been able to bring back to its homeland vault from U.S. shores?

NW VIEW's picture

Golder Opportunity?

It appears to me that different groupings of people get stuck with their mind sets and nothing will change their direction.   I was filling some glass jars with artesian  water last week in the city and there are always homeless people sitting around the pipe.  I have talked to many of them, especially the youth, about coming out of poverty and moving on in their lives.  Well that grouping seem to become philosophers of life and "think" they have obtained great wisdom and insight as to how things really work.  THEY ARE STUCK and it not because there are not any jobs.  I started out in the same area in 1968.  Worked my way through high school and Jr. college.  Moved to the city, broke/homeless and only knew two people in the entire county.   BUT I obtained a job and made it through the first month and never looked back.  They do not want to hear my story, they are stuck and eating at the Salvation Army.

When we are around the students from Evergreen State  college "greeners" they are stuck in "social justice" at any cost.  It is a mind set, believing they are the educated "enlightened ones" who will fix the ills of mankind. 

The country seems to be stuck on "gay rights" these days and law suits are popping up everywhere.  Much energy is spent on both sides of the aisle, hand wringing, and both unhappy.  Stuck in the bent.

We have politicians across the globe pulling the strings to have "their" ways and programs.  The people suffer and there is no relief.  MADNESS and never any peace.http://www.dailymail.co.uk/news/article-2568251/UN-calls-Syrian-warring-sides-allow-aid-flow.html

If one is stuck, there may still be time to "look out upon your neighbor" and see the needs while there is still supply.  When you get much older, one begins to see things through the past history and the near future agenda.  These are the "golden opportunities" laid before us or are we stuck?

Motley Fool's picture

jy

"You are technically right, but substantively wrong, and splitting hairs here."

I disagree. My issue is that the 'statement' is being used to argue from authority.

This is a side issue from authority based forward guidance, which is a legitimate thing and something to consider here given that the words 'precious metals' was even used in the communique.

"Another issue holding us into the new year, the fidelity: the accusations of manipulation around important reference rates. Were initially LIBOR , Euribor & Co. in focus, also allegations were later loudly in the determination of reference values ​​for currency and precious metals markets, it was not received with the right things. These allegations are particularly serious, because such reference values ​​are based - unlike LIBOR and Euribor - typically on actual transactions in liquid markets and not on estimates of the banks."

Google translated quote from that article, relevant paragraph.

So...she is talking about accusations of rigging in eg. gold lease rates being potentially worrisome. This is a far cry from the soundbites being presented here.

I do think there is manipulation, and it is worrisome, but that is besides the point.

Motley Fool's picture

ancientmoney

I do not have at my disposal an exacting german translation, though I could obtain such if this were a serious enough issue that I wanted one. I have however spoken to a few german native speakers who have read it and paraphrased for me.

"Do you also believe that the Bundesbank and the Germans are satisfied with the amount of gold it has so far been able to bring back to its homeland vault from U.S. shores?"

As to this, I do not like speculating on the unknowable. From what I know the repatriation schedule was set by Germany, not dictated by the Fed (again contrary to goldbug rhethoric). And officially at least they do not seem worried by the pace of repatriation.

What this means is another question.

Perhaps they are in fact happy.

From what I have discerned there is no distrust between BuBa and the Fed as regards the Fed having their gold, and that this action was mostly in order to pacify 'public' demands for gold repatriation, which was made without any authority and could easily have been disregarded.

Maybe they are not, but if that is they case it is not something they can admit without detrimental consequences to themselves.

I conclude it is unknowable and as such speculation is futile...unless one wants to promote a specific agenda.

So. Do you? A goldbug one perhaps? ;)

HeirHelmut's picture

Sprott is pushing again

Motley,
you are indeed correct. The BaFin-statement does not at all allow such an interpretation.

"Diese Vorwürfe wiegen besonders schwer, denn solche Referenzwerte basieren – anders als LIBOR und Euribor – typischerweise auf realen Transaktionen in liquiden Märkten und nicht auf Schätzungen der Banken."

"These accusations are extraordinary severe BECAUSE - contrary to LIBOR and Euribor - they usually affect REAL transactions in liquid markets and are not based on the (subjective) estimations of banks."

There is no way to interpret this as
1. manipulations have been proven
2. they are more severe than the LIBOR manipulations

I liked Tekoa, because he was the only one I know of, who asked sometimes hard and critical questions instead of leading questions.
It's shocking to see how he has lost his souvereignity and is now reading off leading questions. Everyone has his price...

The problem for goldbugs is, that most of them are trapped in binary thinking like 95%. The one pushing gold is good, the one who calls the pusher therefore must be paid by banksters.
That Sprott is talking his own book just like Goldman Sachs or JPM only very few goldbugs recognize and accept.

What I find especially problematic in this interview - not only the misrepresentation of the BAFIN-statement - but especially the suggestion to go for tenbaggers.
IMO this is the perfect way to ruin, because it even amplifies the natural greed of investors, while a good recommendation would be, to take profits. The one who is waiting for 1000% will end with a loss, because he didn't realize the 30%, 50%, 100% profits.
And he will end at a loss, because he has not the information and not the technical expertise funds can afford to buy.
Be greedy, go for tenbaggers! Incredible.

GOLDDOC's picture

@MOTLEY FOOL REGARDING MANIPULATION

Manipulation in the gold and silver market is so self evident that to not believe Eric Sprott and his assessment is shocking.  A preconceived bias and the truth hitting you in the face are not the same.  The gold and silver market are manipulated or not. This reminds me of the women who is only a little pregnant!!!!

Bollocks's picture

Any German turdites here?

Google translate is pretty poor, in my experience. Some backup to what MF is saying would help this discussion methinks.

 

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