Eric Sprott: Financial Train Wreck Coming Soon! Got Gold? Better Yet, Got Silver? (+2K Views)

James Turk: You’ve called silver the asset of the decade… What are you seeing here?

Eric Sprott: At the peak [recently,] when silver was $49.80 or so, there was something like 800 million ounces of paper money trading [but] there was only about a million ounces of physical silver available each day for investment. So this preponderance of sellers just seemed unbelievable. Whenever anybody talks about the speculators in silver, I always say, “Well, who’s the speculator? The guy buying it or the guy selling it who doesn’t have a hope in hell of delivering it?” [As such,] we have this big short position in silver, and I’m sure it’s going to resolve very positively to the upside.

One other thing I should say about silver is that when I look at the sales of silver versus gold I see that the U.S. mint sells more dollars of silver than gold, the Canadian mint sells about a dollar and a half of gold to a dollar of silver, Gold Money probably sells more silver in dollars than gold and Sprott Money does the same thing. As such, I see this as a decision by people to decide in favour of one versus the other. They can’t keep buying at a 1:1 ratio when the price of silver to gold is 40:1 so I’m sure it’s going to resolve to the upside.

James: That’s an interesting distinction that you’re making, that the specs in silver are the paper shorts, whereas the serious players in silver are the physical longs. I haven’t really heard that before. That’s really an important distinction. What’s likely to happen to the paper shorts?

Eric: Well, they already got seriously burned. We had the price of silver go from $18 to $48. There was this massive short position, I think it might have been 600 million ounces, at least, let alone what’s in the derivative business. When you lose $30 on 600 million, you’ve lost $18 billion and that’s why I think the raid happened that drove the silver price down, so they could get off some of these shorts. They still have a pretty good short position, however, and ultimately they’re going to go the way of fiat currency, I guess.

James: Do you expect they are just going to renege on the contracts?

Eric: There’s no way that they can deliver to the contracts. We know that. There’s not enough physical silver…

James: So you’re more bullish on silver than you are in gold? I mean, you’re a long standing gold bull…but you’re even more bullish, is it fair to say, on silver?

Eric: The line I use is that gold was the investment of the last decade. I think silver’s going to be the investment of this decade. I do believe in the thesis that silver will get back into a 16:1 ratio to gold…Gold probably goes to some number that’s stratospherically higher than it is today, so that means that silver’s going to have a great mobility. The historical relation of 16:1, I see the buying coming in at 1:1. I see the supply of gold above ground in dollars is approximately 100 times greater than silver, but the buying’s 1:1 so something’s got to give somewhere.

James: How long is this going to play out? Are we talking months here? Are we talking years?

Eric: I always think in three to five years for sure it will trade at 16:1. When it actually happens, I don’t know. It could get parabolic at any moment. We have a financial system that’s on the edge of a cliff here. All I know is that you can safely own it. Go to sleep at night and you’ll be a big winner at the end of that time period.

James: I try to conceive why or how somebody would take a short position in silver here, given the extremely bullish and positive fundamentals. Is there any logical [reason why]?

Eric: It boggles the mind. The only logical thing, and that’s what GATA’s been after, is that the cartel is always trying to suppress the price of gold and silver. In fact, I’m of the opinion, laterally, that knocking silver down was intended to keep the gold price weak. Silver’s easier to move. It’s a very small market. Somebody with money and the printing press or the electronic button can keep the price of silver down, which has a negative spillover effect on gold. It wasn’t very effective this last time. Gold only went down 6-7% and while silver went down over a third… it stormed right back here again…I think, quite frankly, one of the reasons gold didn’t go down that much is there’s latent physical demand for gold. We just saw the Bank of Korea announce that they bought 25 tonnes. Mexico bought 93 tonnes.

The paper boys can do all they want, but when the orders come in to buy gold, they have to stop the game. We just raised, in Sprott Physical Gold, another $300 million. We’ve been a buyer of gold recently.

James: OK, Eric. Let’s get into gold a little bit. When you did your Sprott Physical [PHYS] gold trust offering was timing part of the factor behind it?

Eric: Yes, we had a good premium. There was an interest in it. We thought it wouldn’t disturb the market. We raised about $320 million gross, or $300 million net of underwriting fees, and only have another 20 or 30 million dollars more to buy, but it’s not a disturbing number in the gold market. As you know, South Korea spent $1.7 billion on gold in the last two months.

I think gold’s going to be incredibly strong here. I do the same thing with gold I did with silver except I use my starting year as 2000 compared to 2010 and look at the dynamics of change in the market. This is basically a 4,000 tonnes-a-year market with mine supply hardly having increased in a decade…

We can identify 1,900 tonnes of positive change in the fundamentals for gold, other things being equal, in a 4,000-tonne market. I keep scratching my head [wondering] where the gold is coming from and who is not buying it in 2010 that was buying it in 2000? It never makes any sense to me that there’s so much demand and supply’s almost constant so I have just got to believe that we’re going to overrun the paper shorts. In fact, as I see it, we’ll probably have a physical shortage in due course…All I can think of is, “What are the other 30 central banks around the world thinking?” They see Mexico buying. They see South Korea buying. I think Thailand bought. Sooner or later you’re going to get other central banks to say, “Well, we’ve got to get in this game here.”

I think there will be a physical shortage, for sure. We don’t see much increase in gold production. Most major mining companies are stumbling with production, so we’re not going to get much of an increase this year.

James: If you look at a fund like PHYS, it’s always trading at a premium to spot. Isn’t that a form of backwardation in a sense that you’re much closer to physical metal than a lot of the spot market is because there’s a lot of paper involved in the spot market?

Eric: I think that a lot of people have a distrust of both the SPDR Gold Trust [GLD] and the Silver Trust, the SLV. People are willing to pay these premiums where they trust people to have the metal there…and to have access to it, which in the case of our Sprott physical gold trust [PHYS] and the silver trust [PSLV].

James: Getting access meaning that they can actually take the shares and redeem it for physical metal, if they choose to?

Eric: Yes, if they choose to and, as you know, the one time people might choose to is when things go extremely haywire. They might say, “Hey, I want this physical precious metal in my possession rather than a piece of paper” so I see our PHYS competing with the GLD. I think it’s a better instrument. When I look through those numbers and wonder how could all this physical gold be showing up, it makes you wonder, maybe the GLD doesn’t get the gold they’re talking about. Now I don’t pretend to be an expert on the GLD, but I always wonder about the mismatch of supply and demand and how that’s working out in the system.

James: Well, there are different buyers of gold. There’s some people who actually want the tangible asset, so that they have everything that that tangible asset brings to the table and there are other people who are just happy to have exposure to the gold price, the professional traders and the speculators. To get that exposure to the gold price, they might buy a futures contract or an options contract, or maybe GLD because with GLD you don’t really own gold, you own shares in a fund that’s supposedly backed by gold.

Eric: [In addition, there are] the number of people that are willing to buy things electronically, as I pointed out in the silver example. It’s a ratio of 800 to one in the sense of the trading versus the physical availability. I don’t even know what the ratio is in gold, but it must be some incredible number of times the physical amount that’s available that trades every day. I always say, well, what are the sellers thinking? What are they thinking? They know they can’t deliver.

James: Yeah, but is that not a sign of times, though? A lot of speculation, a lot of paper. As we work our way through this financial bust, we’re ultimately moving back to basics and gold, being money for 5,000 years, is one of the most basic of them all.

Eric: Sure, and by the way, James, I give you credit all the time for explaining it best. You used the words it’s a “managed retreat” and that’s what I think it is. There’s a shortage of gold… Gold should be the most emotional commodity out there, but it’s the least emotional in terms of price. I happen to be in the camp that believes that there are hands out there trying to keep it under control. They lost the battle, but they’re willing to fight lots of little wars on a daily or weekly or monthly basis.

James: Even though the price is high, gold still remains very, very undervalued, by all historical measures.

Eric: [Absolutely,]…the world has $200 trillion in financial assets, and the gold market is worth $3 trillion. Theoretically, the central banks own half of that, which is $1.5 trillion, which means that investors own another $1.5 trillion, which is 0.75 percent of all the financial assets are in gold.

Well, as you well know, there have been many times when people recommended 5% – 10% interest in gold but the fact is, nobody’s in it and if you look at the pool of financial assets, it probably hasn’t even grown in the last 10 years, in the sense that’s the stock market’s done nothing while gold has gone up over six times…

I don’t think history will mean anything when people all realise they have a problem with their money in a bank or owning some government note. I mean, the demand for gold could just be overwhelming! It could be parabolic all of a sudden. They just realise that this fiat currency is not worth what it’s made out to be. I always think of fiat currency as “trust the government.” [laughs] I always wonder why would history tell us to trust government? [laughs] It would tell you the opposite.

James: Even from a diversification point of view, to mitigate risk you need to own some gold, you have to have some silver. You need to have a tangible asset for your monetary asset, rather than just fiat based on nothing except the rheteric of politicians and government.

Eric: Right. You have to own it yourself or have access to it. You have to own it through trustworthy people like yourself, like ourselves, like people who have tried to persuade people to get into precious metals for all the right reasons for the last 10 or 11 years, or even longer, for that matter…It’s shocking that it’s been the best asset for the last 11 years and we can still hardly muster up a real surge of common interest in – but it’s coming.

When we sold the silver trust, we raised $550 million. When we sold the gold trust, we raised $440 million. So again, it’s another example of people being more willing to buy silver rather than gold and I would say, if I was willing to sacrifice the premium on PSILV – which I’m not – compared to the 300 we just raised in gold, I could do multiples of that in silver if it was available…I know the demand is there.

James: Yeah. Is it retail, or is it institutional, or both?

Eric: I would say it’s mostly retail. Both times when I’ve done this circuit trying to sell these issues, certainly on the IPOs, it’s probably been 80-90% retail. I was shocked…that I didn’t get much resonance with institutions whatsoever. In fact, very few of them had even looked at it. People that had invested in gold, already, hadn’t even looked at silver so I kind of know that that’s coming. It’s like you recommending gold in 2000 and some people coming along in ’08, such as John Paulson and David Einhorn, buying gold and everyone saying, “Oh, my god, it must be a good investment!”  – but they’re eight years late to the party, right?

James: But still early in terms of where the bull market’s going to go.

Eric: Oh, early enough. They’ve done very well by it and they will do well, of course, going forward, but it takes that kind of time period for people to latch on to it.

James: It’s interesting, the point you raise about silver. I think I may have an answer as to why the lack of interest is there. Every bull market has three stages. In that first stage you see apathy and neglect and disbelief. Silver is still in stage one.

It’s been my point that we’re not going to stage two until we are over $50, which was the January, 1980, high and I think that’s likely to happen here in the not-to-distant future. Once that happens, then that’s going to go onto people’s radar screens and you go into the second stage of silver’s bull market so maybe in a year’s time when you make that circuit, you’re going to get a lot more interest than you get at the present.

Eric: I can feel the difference already. I mean, it was a year ago, almost a year ago we did the…

James: Yeah, who thought $50 silver a year ago was possible, other than a couple people like ourselves?

Eric: It was quite predictable. I thought so anyway. [laughter]

James: When it comes to markets, nothing’s predictable, but it was an easy call.

Eric: Right. It was easier than most because if you looked at the history [you knew that] if this thing goes back to 24, it’s going to 50 almost automatically, and it did, and it did it almost in the time frame that you would have imagined…

I think investors are coming around to it…Every third guy likes gold now, and is willing to admit that maybe you got to have gold in portfolio. I found that disturbing, however, having gone through the 11 years when no one would even mention it, or said it was a barbarous relic or whatever. [Because of that] I now monitor how many people talk about silver. It’s not many, but you can see it creeping into the conversation.

James: Gold has been in the second stage of its bull market since it went over a $1,000 so you likely can expect to have more people talking about it but the question is not talk, but whether they’re buying it. Given the fact that this percentage of assets is still 0.75 per cent, which I keep coming back to, it shows that is an under-owned asset compared to, say, the U.S. dollar, which is an over-owned asset.

Eric: Yeah. They’re going to come back. Having dealt with large institutions and pension fund, they’re so rigid in their programmes that they can hardly consider owning something physical. It’s so against the grain of what their advisors are telling them but gold having gone up by whatever it is, 700 per cent here, the advisors are coming around. Of course, seeing silver go up and all the other commodities going up, they’re finally giving some credence to investing in that area but it will be slow. We saw the first example of that move when Texas Teachers bought close to a billion dollars worth.

James: I was going to ask you about that. Was that sort of a watershed event and that sort of added some legitimacy to the sector and the institutional investor side?

Eric: Well, I think John Paulson going into GLD, David Einhorn buying physical, the Texas Teachers buying physical, are huge eye-openers. Some of the central banks stepping in to buy gold are sea changes in what’s going on out there. It makes it all more acceptable for the mainstream, who never even considered it before, to come in but it’s still a tough, tough sell. I can’t tell you how difficult it is…

James: I’m very bullish on both the metals going forward, as you are, but the other side of that coin is that it’s really being dollar bearish or fiat currency bearish, because that’s the issue.

Eric: [Yes,] it’s a fight of the curses to see which is the worst or which is going to be the first one to collapse.

James: Let’s talk about that a little bit. Some big picture analysis…How do you see the financial system changing? Let’s be honest here. Most banks are insolvent. They’re way too overleveraged…any one of a number of potential candidates, including countries, could be the next Lehman. How do you see this evolving?

Eric: I’ve always believed, and I believe this as a chartered accountant, that you can not be levered 20:1 – that is only five cents of capital supporting a dollar of paper assets. Everybody knows that any paper asset can move two or three per cent in a day, be it a government bond, a Spanish bond, an Italian bond, a mortgage security, the stock market or a commodity. Why would you ever let yourself be levered 20:1?

I just think that we grew into this. We created the Fed in 1913. Banks found ways that they get comfortable with the system, found ways of leveraging themselves and increasing the leverage all the time, always on the understanding that the situation would remain normal. Well, the situation isn’t normal anymore. We have had violent upheavals in the credit markets as we went through the lending crisis in ’08. I see now that whenever you think of the bank’s strongest asset – it used to be mortgages and sovereign risk – they might well be the weakest assets these days, particularly as I think about a European bank owning sovereign risk.

The banks kept expanding because they wanted to have this great return on capital. The only way to get more return on capital is to use more leverage…[As such,] people in Italy and Spain, Greece, Iceland and Ireland took their money out of the banks. Governments had to come in and fund the banks. It’s happened all over the world. The best example I can give to Americans or people who think their banking system is secure [is to imagine that] every Friday night in the U.S. there is a bank failure and then look at the deposits that each of these banks that failed has and how much the FDIC has to pony up to get someone to buy it… We already know they lost the first five cents, otherwise they wouldn’t be bankrupt. The FDIC typically has to come in with 25 cents on the dollar of the deposits. I just say, “Oh my God, they lost their capital six times over.” It’s a staggering number and it happens week after week after week. The same kind of reference of numbers, of the losses versus the deposits.

James: It’s interesting you’re talking about the FDIC covering these losses, 25 per cent of the assets missing…We have central banks around the world leveraged at 50:1 or higher. It’s a train wreck coming.

Eric: It’s a train wreck coming. There’s no way of stopping it. The funny thing that has happened since ’08 for sure, is that every step along the way – I think – the purpose of central banks and governments getting in is to prevent liquidation. Nothing is ever liquidated. The FDIC takes it or the ECB bails out somebody, the Icelandic government goes and takes over the Icelandic banks, the U.K. buys big interest in their banks, the Irish fund their banks, so there’s never been a liquidation. What are values in liquidation versus a value on a balance sheet at some quarter end? A liquidation value would be considerably smaller. In fact, there would be no market.

James: You always run the risk of throwing good money after bad, though. Isn’t that what governments are doing?

Eric: Totally, but they’re caught between a rock and a hard place. They think, “Well, the system’s going to collapse if I don’t do something” and they are right. It will collapse if they don’t do something, so they do something and then, of course, now the governments are going to collapse, just as the Greek government, the Icelandic government and the Irish government have done…

James: Then what happens?

Eric: I have no idea…All I know is that people, to protect themselves against that happening, have to own some physical precious metals because it will be something that will be usable, no matter what the situation is.

James: At some future date, will gold become overvalued in your view?

Eric: People just ask me the question in a different way. They say, “What are the things that would make you sell it?” and I say, “There are three possibilities:

1. if I see a mania in the market. Just somehow I see crazy, crazy things happening, OK, fine, maybe I’ll get off the train,
2. if governments and central banks became responsible. Luckily, we don’t see that happening,
3. if they would make it the reserve currency. Then you don’t need to own gold and silver because you can trade for it at any time you want. Maybe you could then consider investing in other things knowing that it was backed by gold and silver.

James: Would you care to assign any probabilities to those three possible events?

Eric: I think the probability of a mania is very high. You can feel it coming. You can feel the interest building in gold all around the world. You see it. I see it. You see it in GoldMoney. I see it in Sprott Money. I see it in our ability to raise $300 million overnight in the Sprott Physical Gold Trust. I can see it in the latent demand for the physical silver trust. I can see it in what the central banks are doing. You kind of see it in the misunderstanding of the market by the gold producers. There’s hardly a gold producer around who really believes the price is what it is, let alone that it’s going to stay there. There’s this huge scepticism in the industry about the gold price. I think it will go parabolic here. I’m going to rely on you to tell me when it’s going parabolic, James, because you’re the expert, OK.

James: I don’t know. Getting into a market is one thing. Getting out of a market is something different but what I always say is that gold will become overvalued. Not when you’re going to sell it, but when you’re going to spend it. In other words, I firmly believe that gold’s going to be circulating again as currency in some form. Maybe digital through GoldMoney or other alternatives but given the fact that gold’s been money for 5,000 years, and we’ve been experimenting with a money substitute called fiat currency for 40 years, and given the fact that this experiment with fiat currency seems to be going horribly wrong, it seems inevitable that we’re going to come back to gold in one way or another.

Eric: I would think so. That’s the ultimate thing that’s going to happen. You need something to back the currencies. It has got to be something physical. So gold has got to play a big part. Silver’s going to play a big part. Maybe other commodities too. I have no idea, but those would be the two key ones that are usable, fungible in everyday use.

That’s another reason why I think silver could be caught in this. Imagine if we actually had to go to a real currency that we use in our hands. That’s a lot of physical currency we’ve got to create, having created all this paper that might disappear.

I had a very interesting thing. I was talking to a guy who ran a mint. He said, “There are people buying copper coins.” I thought that seemed really odd to me. I said, “Maybe the guy’s really farsighted and he can see it coming back as a currency because you need the lower denominations to have everyday currency exchange.”

James: Interesting. Eric, are there any last comments that you would like to leave, in terms of things that you see important?

Eric:

I still believe that an investment in silver is a very safe investment today. When we look at the data points, they scream at us that it’s undervalued. When you look at the history of what has happened in both the silver and gold market, I happen to believe…that there are these hands from the outside keeping things restricted and they’re going to lose control.

People have to be in precious metals if they want to protect themselves. There aren’t many other investments that you could consider (maybe agricultural investments) but those are the key things in my mind that will protect one…Everyone who is an investor has money. They have it invested in some paper instrument. They should take part of it and own some gold and silver.

*http://www.goldmoney.com/video/sprott-turk-interview.html

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