Some people may look at the stock market and see economic recovery. Eric Sprott of Sprott Asset Management and Sprott Money looks at myriad other economic indicators and sees an economy still in decline. Despite his suspicions that central banks are keeping gold prices artificially low, he tells The Gold Report that he favors gold, platinum, palladium and especially silver, over the near and long term.
The Gold Report: The price of gold has dipped under $1,600/ounce ($1,600/oz); silver is below $30/oz. Is this a case of living by the sword and dying by the sword, where precious metals prices only go up in a bad economy and are doomed to languish when things go well?
Eric Sprott: That is an interesting question because I do not know what it means to go well these days. I see things going from bad to worse economically, and so do many others. Walmart just announced that January 2013 was a lousy month and its start to February was its worst in years. Apple’s iPhone manufacturer Foxconn just announced a hiring freeze in China because of a decline in iPhone production. Italian industrial production new orders were down 15%. You can feel the recessionary malaise setting in.
Weakness begets weakness, and there are only two ways to stop weakness: Fiscal policy and monetary policy.
No one has any room for aggressive fiscal policy anymore. The U.S. is looking at sequestration. We just had a 2% tax increase. There is nothing left in the cupboard for fiscal stimulation. On the monetary side, we are at 0% interest rates, and we are printing money nonstop.
We are entering a period of steady decline in economic well-being, notwithstanding the suggestions of central planners that H2/13 will be great. They always say the second half will be great because they know the first half will not be.
TGR: In your opinion, what are the most important indicators of what is really happening in the economy?
ES: There are many indicators: Rail car loadings, car sales, personal income, consumer sentiment, to name a few.
Granted, most of the consumer sentiment numbers have been OK, but a lot of those numbers follow in line with the stock market. Anyone who thinks that 70% of the population is better off has to be mistaken. The 2% increase in withholdings on someone’s salary implies a much bigger impact on his or her discretionary spending because a lot of spending is dedicated to things that do not change: Mortgage payments, insurance costs, the cable bill. When you knock 2% off the top, it could affect discretionary spending by 4–5%.
The one indicator you do not want to watch is the stock market because it is part of the financial fabric that the central planners are desperately trying to hold together. Not a week goes by without a crisis. Four weeks ago, it was Banco Monte dei Paschi. Three weeks ago, the third largest bank in the Netherlands had to be bailed out. Last week, Peugeot had to get a loan from the European Central Bank. Now the largest homebuilder in Spain has declared bankruptcy.
TGR: Which takes us back to the first question: If there is no recovery and the economy is still languishing, why did gold and silver both drop last week?
ES: This will sound like a conspiracy theory, but unusual things are happening in the gold and silver markets.
For example, on Feb. 19, nearly an entire year’s supply of gold traded on the Comex in a single day. The same volume of silver trading happened on the commodities exchange. You and I both know that the people selling that much metal cannot deliver it because it is just not available. Yet somehow they are out there, pounding down these contracts and keeping the price suppressed.
I would hypothesize that the central bankers know their policy of printing money is the most irresponsible thing imaginable, and they are suppressing gold and silver prices to hide their irresponsibility. When one is printing that much money, gold and silver prices are the first things you would expect to rise. If we saw gold going to $2,000/oz, the price of oil would probably go to a new high and the price of agricultural commodities would go up. Then you would have a huge inflation problem on your hands.
Based on my research, I believe the Western central banks have been surreptitiously supplying gold to the market. I say this because the demands I see for physical gold are way beyond the supply of gold. The annual gold supply has not changed in 12 years, and demand just keeps increasing from China, India, the U.S. Mint and silver and gold coin sales; even the non-Western central banks are buying gold. Where is this gold coming from? I think the Western central banks are selling gold to keep the lid on the price so everyone thinks their monetary policies are benign. Nothing could be farther from the truth.