The stars are aligned in 2014 for a significant re-rating of the gold price. This article presents an update on the demand dynamics in China, discussion around new evidence of manipulation and an illustrative example of the opportunity in gold equities.
So says Eric Sprott (sprottglobal.com) in edited excerpts from his original article* entitled The Chinese Gold Vortex.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Sprott goes on to say in further edited excerpts:
Over the past year, we have been very vocal about what we consider an aberration – the complete disconnect between gold supply and demand fundamentals and the actual price of the metal – and this month’s Markets at a Glance presents an update on the demand dynamics in China, discussion around new evidence of manipulation and concludes with an illustrative example of the opportunity in gold equities.
Supply and Demand
While the year is still young, we have been able to gather a few data points from China and they are truly impressive. The table below shows Chinese net imports of gold for the first two months of 2014. So on average, each month this year, China has imported about 204 tonnes of gold, up from about 143 tonnes last year.
(Chinese data is taken from the Hong Kong Census and Statistics Department. Swiss data is taken from the Swiss Customs Administration, which started reporting gold exports to specific countries in 2014.)
To put these numbers in perspective, for the full year 2013 total mine supply, excluding China and Russia, averaged 192 tonnes per month…[As such,] China is currently vacuuming, on a monthly basis, all of the world’s mine production plus an additional 10 tonnes…[and it] is supplied by Western Central Banks, which according to our analysis have very little gold left.
- Swiss import and export data shows that it imports most of its gold from the US and the UK and exports most of it to China and Hong Kong…
- Similarly, the US…exported…mostly…either to Switzerland or to Hong Kong directly.
While it is still early, the Chinese Gold Vortex is firing on all cylinders and data so far this year suggests that demand will far outstrip supply. (As a side note, we take this opportunity to reiterate that since China does not export its gold production, it is reasonable to assume that net imports into China are a good proxy for demand.)
…We have long suspected manipulation, but it is clear to us that both the physical and paper bullion markets have been tampered with for quite some time, to the advantage of those that are naturally short gold (i.e. the bullion banks and other gold dealers). With the increasing amount of scrutiny from the public, academia, regulators and now lawyers, manipulators should have a progressively more difficult time preventing gold from reaching fair value.
The stars are aligned in 2014 for a significant re-rating of the gold price. In our opinion, the best way to participate in a return of the gold price to fundamentals is to invest in junior gold miners.
The tables below show EPS estimates under various gold price scenarios and the associated stock price targets, assuming a price-to-earnings ratio of 10x, for both a major (Barrick) and a junior (Crocodile) miner. From the table, it is obvious that junior gold miners have much more leverage to the price of gold.
(Estimates are for FY2014. Price returns assume a P/E ratio of 10x. All figures in USD. Source: Sprott Estimates and RBC Capital Markets. For illustrative purposes only, Eric Sprott and 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 securities.)
In summary, the tailwinds are twofold for gold:
- the Chinese Gold Vortex is putting an undeniable pressure on the physical market,
- the focus on price manipulation makes it progressively harder for price manipulators to operate.
The reversal of this anomalous, yet explicable, market dysfunction could provide astute investors with multi-hundred per cent returns. Do not miss this Golden Opportunity!
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.sprott.com/markets-at-a-glance/the-chinese-gold-vortex/ (© Sprott Asset Management LP 2014)
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