Gold and silver heading north


Transcription of Finance News Network with Sprott Asset Management Chairman and CEO, Eric Sprott.

Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network. Joining me today at The Gold Symposium in Sydney, all the way from Canada is Chairman and CEO of Sprott Asset Management, Mr Eric Sprott. Eric, welcome to FNN.

Eric Sprott: Lelde, great to be here.

Lelde Smits: Now you’ve just given a presentation on investing in a financial crisis and talked about the importance of gold and silver. So just to recap, why should investors be looking at gold and silver?

Eric Sprott: Well as I mentioned in the speech, my initial interest in this gold and silver is because I thought there would be a physical shortage of gold, because central banks have been selling gold, mining companies have been hedging gold, investment demand was weak. So back in 2000 you could kind of sense that that was about to change. That the miners would stop hedging at those low prices; mines were going to go out of production because the price was too low, and that likely there would be a change in investor sentiment in gold. And that the physicalness of gold would make it appealing.As I mentioned in the speech, I was kind of blessed that we have central banks and governments who then decided they should act irresponsibly, because the economy was under pressure. So they come up with these ridiculous policies of printing money and TARPs (Troubled Asset Relief Program) and TALFs (Term Asset-Backed Securities Loan Facility) and budget programmes and so on. All of which was to sort of demise their own currencies which again gave I think, gold a much bigger push than even I might of imagined back in 2000. So those are the fundamental backdrops to our interest.

Lelde Smits: So with this sort of interest, how high do you think the price of precious metals will go?

Eric Sprott: Well that’s everyone’s favourite question and it’s a very difficult question to answer, because you don’t know how irresponsible governments are likely to be. So for example we don’t have QE3 yet in the US, but if we got a QE3 (Quantitative Easing) I think it would be a huge stimulus to the price of gold. Some people suspect we’ll get QE3 and QE4 and QE5, and I think probably the most sound measure where gold would go, is some relationship to the amount of money that exists. And today the amount of money that exists per ounce of gold is around $10,000. So it’s not hard for me to imagine it would go to those levels. But if we keep printing at the rate we are printing and of course we can go much higher than that. So suffice it to say that anyone who buys it here will not be disappointed with the performance. And even if it only goes up, you know its very simple 21% a year that it’s done for the last ten years, I think everyone would be very happy, including me.

Lelde Smits: So to gold, where do you see its price in six months’ time?

Eric Sprott: Well I suspect it’ll be north of $2,000. You know I think probably with this little rally we’re in now, we’ll probably break through the old highs and I won’t be surprised to see it easily get to $2,000.

Lelde Smits: And how about five years from now?

Eric Sprott: Hmmm, well five is tough because I don’t know how many QEs we’re going to have but I’m sure it will be substantially higher. You know if somebody said well do you think it can get to $5,000? Of course it can get to $5,000. Will it get to $5,000? I don’t know - it doesn’t have to get to $5,000 for somebody to like it at $1,800. Well particularly when you put it up against all other forms of investment - government bonds, stocks and so on which have not been performing well. So on a relative basis I think it’s going to be your best investment opportunity.

Lelde Smits: Okay and to silver, what price would you put on it in six months’ time?

Eric Sprott: Well six months, it probably can get through its old high which is $50; it’s at $35 today. I think the correction it had, which might have been induced by people who were caught short and wanted to knock the price down. I think it’s going to get over that and I’m not going to be surprised to see it over $50 in six months’ time.

Lelde Smits: And how about in five years’ time?

Eric Sprott: Well, I mean here’s the way I would answer the question. I think silver will trade at a 16:1 ratio to gold. So if gold was $1,600 I can imagine that silver can easily go to $100. If gold goes to $3,200 I think silver can go to $200. So it’s more that 16:1 ratio, that given a three to five year time horizon I think it can get to 16:1.

Lelde Smits: So what about the other precious metals, platinum and palladium. Are they also on the way up?

Eric Sprott: I’m not a student of those two metals and one of the reasons is there are not too many things to buy in the public domain, that have to do with platinum and palladium. They’re not as precious as silver and gold are because they’re used for industrial uses. So I haven’t really invested a lot in those, but I would think they would be carried along. But I wouldn’t possibly have any price forecast for you in those two metals.

Lelde Smits: Now you’ve mentioned you’re a fan of physical assets rather than paper securities due to counterparty risk. But is this really a concern when companies such as Perth Mint in Australia only sell certificates over gold in their vaults?

Eric Sprott: Well I think you have to own the physical. I mean there’s no sense for example, in buying some ETF (Exchange Traded Fund) certificate when you can’t get access to the gold. I think it’s very important to make sure you have access to the physical. But having said that, I’m still a believer in gold equities, I think if the price goes up, the equities will probably outperform gold for that matter. So I’m not totally a physical advocate, there’s a place for gold and silver stocks in one’s portfolio.

Lelde Smits: Now in your presentation you mentioned central banks are leasing gold. What evidence do you have of this?

Eric Sprott: Well Lelde, what I said was that they’re surreptitiously leasing gold. It’s not official that they’re leasing gold, but when I look at the demand and supply data, I see more demand than there is supply and I wonder well, how are we saving this physical demand? And I have to believe that the central banks are still surreptitiously selling gold through leasing it to bullion dealers, who sell the physical gold. But the central bank still gets to say it’s on their balance sheet because they have a claim on the bullion dealer, but there is no physical gold there. So, I think there’s been probably about a ten or even longer time period where central banks want the price of gold to stay calm. And that’s why it’s been steady, slow steady progress, never anything too violent on a daily basis. But I think that they’ve sort of kept a becalming influence on the price of gold.

Lelde Smits: And what are the implications for investors?

Eric Sprott: Well I think the implication is that gold will continue to rise slow and steady. But even slow and steady, you know the average has been something like 20% a year, I mean that’s a pretty good return compared to a lot of assets. So that’s what I would imagine carrying on here. 

Lelde Smits: Okay, but for those who wish to hold positions in equities, what do you look for in gold and silver stocks?

Eric Sprott: Well it depends, there’re two kinds of gold and silver stocks, one is an explorer and one is a producer. So in the case of a producer I tend to look at two years down the line, what are you likely to produce? I use today’s assumption for the price of gold; say well, how inexpensive is that going to be on a price earnings ratio? And if it’s terribly inexpensive I’ll buy it.
In the case of an explorer, it’s a little more difficult because you don’t know what an explorer is going to find, because he hasn’t found it yet. But if it’s cheap enough and what he’s found already, and there’s some expectation that it could increase somewhat exponentially or significantly and therefore the value can go up, then you’ll make an investment in a company like that.

Lelde Smits: So among the Australian gold and silver stocks, which ones have caught your eye?

Eric Sprott: Well we’re invested in quite a few stocks. I mean we’re a big shareholder of Ramelius Resources Limited (ASX:RMS), we’re a big shareholder of Silver Lake Resources Limited (ASX:SLR), we’re into Gold Fields Limited (ASX:NGF) . We’re into South Boulder Mines Limited (ASX:STB)  which happens to be a potash, not producer but an explorer in Eritrea. We have a number of them but we have 300 stocks.

Lelde Smits: Now to global affairs, markets around the world really have been belted of late. How long do you believe this volatility will last, and what impact will it have on the price of gold and silver?

Eric Sprott: Well I think the volatility is going to last until they make gold and silver the reserve currencies. I mean people are losing confidence in governments for sure, people are losing confidence in currencies for sure, and do we see some change in trend in that? I don’t think we see a change in trend, in fact we might see sort of a more momentum towards gold and silver and out of fiat currencies. It’s seems obvious to me that that’s where the world’s going, so I think that trend is going to continue.

Lelde Smits: Well I guess that means we should be buying up.

Eric Sprott: You should.

Lelde Smits: Eric Sprott, thanks so much for your time.

Eric Sprott: All my best.