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Hedge fund manager Eric Sprott on Friday, November 25, 2010.

Darren Calabrese/The Globe and Mail

Globe editors have posted this research report with permission of Sprott Asset Management. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following text is excerpted from the report:

Recent dramatic declines in gold prices and strong redemptions from physical ETFs (such as the GLD) have been interpreted by the financial press as indicating the end of the gold bull market. Conversely, our analysis of the supply and demand dynamics underlying the gold market does not support this interpretation. Many major buyers of gold are adding to their stocks, while at the same time supply is flat or even decreasing, compounding an already vast imbalance.

For example, central banks from the rest of the world (i.e. non-Western central banks) have been increasing their holdings of gold at a very rapid pace, going from 6,300 tonnes in the first quarter of 2009 to more than 8,200 tonnes at the end of the first quarter of 2013. At the same time, physical inventories have declined rapidly since the beginning of 2013 (or have been raided....) and physical demand from large and small scale buyers remains solid.

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As we have shown in previous articles, the past decade has seen a large discrepancy between the available gold supply and sales. The conclusion we have reached is that this gold has been supplied by central banks, who have replaced their holdings of physical gold with claims on gold (paper gold).

Many recent events suggest that the central banks are getting close to the end of their supplies and that the physical market for gold is becoming increasingly tight.

Read the full report here.

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