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					                                           Markets at a Glance
FEBRUARY 2013




                            Do Western Central Banks
                            Have Any Gold Left???
                            Part II
                            By: Eric Sprott & Shree Kargutkar


    Follow us on            The past few months have been difficult for the gold investor as selling pressure in the
    Twitter                 gold futures market has set a decidedly negative direction for the price of the yellow
                            metal. As fundamental investors, we always pay special attention to the supply and
                            demand dynamics of gold and, recently, we have found it very difficult to reconcile
                            lower prices with continued strong demand for physical gold.
                            While the supply of gold has remained largely static, we have seen a steady increase in
                            demand for the yellow metal. India and China have emerged as strong buyers, consuming
                            over half of the mine supply in recent years. Central banks have switched from being
                            sellers of gold to being net buyers, with their gold purchases in 2012 increasing by 17%
                            to almost 535 tonnes. Exchange traded products (ETPs) around the world have continued
                            to add to their gold hoards, as have institutions and private investors. Furthermore,
                            central banks, such as South Korea and Russia, have added to their bullion reserves
                            early in 2013, which points to sustained strength in demand. These facts are important
                            because, over the past decade, the annual supply of gold has stayed flat at approximately
                            4,000 tonnes.
                            Much ado has been made about the recent sell-off in the yellow metal forcing certain
                            ETPs to liquidate, adding a supply of gold into the market in the process. Our work
                            reveals that the previous ETP sell-offs, (which occurred in January 2011, December 2011,
                            May 2012 and July 2012) have all coincided with gold finding strong price support and
                            rallying higher.
                            In our September 2012 MAAG, titled, “Do Western Central Banks Have Any Gold Left???”,
                            we reconciled the annual change in demand for gold between 2000 and 2012 to be
                            almost 2,300 tonnes. We went on to hypothesize that given the massive change in
                            demand, the only suppliers large enough to fill the gap between supply and demand
                            were the Central Banks. Now, our long search for the “smoking gun” to prove our
                            hypothesis appears to have finally materialized.



      www.sprott.com |   do western central banks have any gold left???, part ii   |   FEBRUARY 2013                    1
Sprott Asset Management LP                                                                                                                  Markets at a Glance
A H I S T O R Y O F O U T P E R F O R M A N C E TM




Every month, the US Census Bureau releases                                                         For our analysis of supply and demand, we have
the FT900 document, which outlines US                                                              very robust statistics as far as mine production,
International Trade Data. Going through this                                                       import-export data, coin sales and ETP demand
document, we were intrigued to see that in                                                         from GFMS2, the US Census Bureau3, the US Mint4
December 2012 the US exported over $4B worth                                                       and Bloomberg5, respectively. We have good data
of gold and imported around $1.5B worth of gold,                                                   on gold recycling, jewelry sales and gold use in
representing a net export of $2.5B or almost 50                                                    electronics and industrial applications from the
tonnes1. This surprising number led us to look at                                                  CPM Group6.
the previous releases of US International Trade
                                                                                                   Table 2 lays out our analysis for 2012 using the
Data which go as far back as 1991 – what we
                                                                                                   supply and demand framework.
found was truly shocking. Not only has the US
been consistently exporting large quantities of gold                                               TABLE 2
on a net basis, the amount of gold the US has been                                                                  Sources of US Gold Supply and Demand
exporting is above and beyond what the US should
                                                                                                       Supply (tonnes)                                     FY 2012
be capable of exporting.
                                                                                                       Imports                                                 333
The gold market is fairly simple to understand                                                         US gold production                                      230
from a supply and demand perspective. Since you                                                        Recycling                                                44
cannot fabricate gold out of thin air, supply comes
                                                                                                       Private sales                                       unknown
from new mine production, scrap gold recycling
                                                                                                       Total Supply                                            607
and investor disposition of bullion. Demand comes
from many sources including investment demand,                                                         Demand (tonnes)
electronics, dental and industrial uses to name a
                                                                                                       Exports                                                 677
few. There can be short-term aberrations between
                                                                                                       GLD ETF demand    5
                                                                                                                                                                96
supply and demand where the market can be
oversupplied, or demand can outstrip supply,                                                           Jewelry                                                  41
however, over a longer period, supply should equal                                                     Coins sales                                              23
demand with the price acting as the equalizer.                                                         Electronics                                              21
Under this assumption, the amount of gold that                                                         Dental                                                   18
the US is exporting should equate to the amount                                                        Industrial                                                9
of gold that the US is not consuming over a long                                                       Private purchases                                   unknown
enough time frame.
                                                                                                       Total Demand                                            885
Table 1 lays out our framework for analyzing the
US gold supply and demand.                                                                             US supply - deficit                                   (278)

TABLE 1
                                                                                                       We used this framework to analyze supply and
            Sources of Supply                                 Sources of Demand                        demand in the US going all the way back to 1991,
      •   Mine production                                •   Jewelry                                   which is as far back as the FT900 documents go.
      •   Scrap gold recycling                           •   Electronics                               Over the span of 22 years, the total amount of gold
      •   Gold imports                                   •   Industrial                                that the US has exported – above and beyond its
      •   Private investor                                                                             supply capability – is almost 4,500 tonnes! A truly
                                                         •   Exchange traded products                  stunning figure. (See Table 3).
          bullion disposition
                                                         •   Coin sales                                Admittedly there is an unknown in our analysis, that
                                                         •   Private investor                          being gold bullion acquisition and disposition by
                                                             bullion demand                            private investors. However, strong demand in ETPs


www.sprott.com |                         do western central banks have any gold left???, part ii   |   FEBRUARY 2013                                                 2
Sprott Asset Management LP                                                                                                                          Markets at a Glance
A H I S T O R Y O F O U T P E R F O R M A N C E TM




TABLE 3: US GOLD MARKET, CUMULATIVE SUPPLY DEMAND 1991-2012 (IN TONNES)




                                                               -                                                           =
                        US Supply                                                      US Demand                                           Surplus Available for Export
              Production                        6,416
                                                                                  All Uses                 6,517
              Recycling                         1,116                                                                                           Total                  1,014
              Total                             7,532                             Total                    6,517



   Actual US                                  Actual US                     US Net                 that the export ‘gap’ could in fact be significantly


                                 -                             =
  Gold Exports                               Gold Imports                   Exports                larger if earlier numbers were included or the real
                                                                                                   private investor demand for gold was known.
       11, 223                                       5,719                   5,504
                                                                                                   We are currently in an environment where policy
                                                                                                   makers are intent on devaluing their currencies
                                                                                                   in an effort to create growth. Real rates continue
       Surplus                                       Actual              Unexplained
      Available                                      Exports               Export
                                                                                                   to stay negative in most of the developed world.
      for Export                                                            Gap                    Every marginal dollar of debt that is created is


                                 -                             =
                                                                                                   producing lower and lower amounts of growth.
         1,014                                       5,504                  (4,490)                In a world overwhelmed by mountains of debt
                                                                                                   and economic growth which is sub-par at best,
                                                                                                   precious metals and real assets can act as insurance
such as GLD and PHYS and demand for gold coins                                                     against the stupidity of policy makers. The evidence
provide strong evidence that the private investor                                                  pointing towards the suppression of the gold price
has been a net buyer over the years. The inclusion                                                 is becoming increasingly apparent. Don’t be the last
of the private investor on the demand side would                                                   person to figure this out! The current sell-off in gold
in fact skew the ‘gap’ of 4,500 tonnes higher                                                      should be viewed not with extreme trepidation but
to a figure that would lie somewhere between                                                       as an unbelievable opportunity to buy the metal at
4,500 tonnes and 11,200 tonnes, which represents                                                   an artificially low value.
the gross exports out of the US. The only US
seller that would be capable of supplying such an                                                  ENDNOTES
astonishing amount of gold is the US Government,                                                   1 Import Export Stats – US Census Foreign trade:
                                                                                                      http://www.census.gov/foreign-trade/index.html
with a reported gold holding of 8,300 tonnes.                                                      2 GFMS – http://www.gfms.co.uk/
The US Government gold holdings have not been                                                      3 Import Export Stats – US Census Foreign trade:
                                                                                                      http://www.census.gov/foreign-trade/index.html
audited or verified in more than four decades.                                                     4 Coin sales from US Mint: http://www.usmint.gov/
The US trade data defines the export of non-                                                       5 Bloomberg
monetary gold as a sale of gold from a private                                                     6 Jewelry, recycling, dental, electronics and industrial from CPM Gold Yearbook

seller within the US to an official agency. In
September 2012, we espoused that the Western
Central Banks have been surreptitiously selling/
leasing their gold through private channels in an
effort to increase the available supply and in turn                                                    To learn more about: Sprott Asset Management’s
suppress prices. This new analysis using official                                                      investment insights and award-winning investment
US agency numbers seems to provide the strongest                                                       capabilities, please visit www.sprott.com.
validation of our hypothesis to date. It is worth
noting that our data only covers two decades and



www.sprott.com |                         do western central banks have any gold left???, part ii   |   FEBRUARY 2013                                                                 3
Sprott at a Glance
With a history going back to 1981, Sprott Inc. offers a collection of investment managers, united by one common goal: delivering outstanding
long-term returns to our investors. Sprott has a team of best-in-class portfolio managers, market strategists, technical experts and analysts that
is widely-recognized for its investment expertise, performance results and unique investment approach. Our Investment Team pursues a deeper
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we invest decisively and with conviction. We also co-invest our own capital to align our interests with our investors.


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  Sprott Asset Management LP is the investment manager of                       brokerage firm, specializes in natural resource investments in
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  For more information, please visit www.sprott.com                             Led by renowned resource investors Eric Sprott and Rick Rule,
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