Eric Sprott

A few days ago, Eric Sprott decided to take advantage of the record premium over NAV of his physical silver fund PSLV (or for some other arbitrary reason) and to issue a $300MM follow-on offering, whose proceeds would be used to buy up silver to add to PSLV's existing physical holdings. Naturally, as soon as the news broke, the premium dropped to about 10%, making PSLV holders unhappy. This is not the first time that Sprott has done this: as a reminder after his April 2011 follow on offering in PHYS, we were fully expecting a comparable physical sequestration to occur via PSLV, to wit: "It appears to have already had an impact on silver, which jumped by $20 cents to another 31 year high on the news, as the market now likely expects a follow on offering in PSLV as well imminently." About 10 months later, it finally happened. As was to be expected, any short-term gains focused investors obviously became angry that by collapsing the premium, which we speculated was shortage driven, they have suffered a hit to their P&L (expressed in dollars of course, which as a reminder to the holders, should be largely irrelevant, especially to those who believe a PM-based barter system is imminent). Yet they forget the flip side to the equation: the money taken out of the premium, would be promptly used to take silver out of (hyper hypothecated) circulation, in other words, in the closed system, the drop in Premium would translate in a rising price in the underlying. Which according to UBS is precisely what has happened, and why silver moved as much as it did. Quoting from FMX Connect: "Today’s incredible move was the culmination of a comment made by UBS analyst Edel Tully. He stated that hedge fund manager Eric Sprott may be in the market buying spot futures in a private letter to his clients." And even as the premium dropped, the price of spot silver increased by over 5%, on the speculation of silver being taken out of the market and delivered to Sprott.

2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore. Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.

In what is likely the most logical follow up to our post of the day, namely the news of the lawsuit between HSBC and MF Global over double-counted gold, or physical - not paper - that was "commingled" via rehypothecating or otherwise, we present readers with the monthly note by Eric Sprott titled "Silver Producers: A Call to Action" in which the Canadian commodities asset manager has had enough of what he perceives as subtle and/or not so subtle manipulation of the precious metal market, and in not so many words calls the silver miners of the world "to spring to action" and effectively establish supply controls to silver extraction to counteract paper market manipulation in the paper realm by treating their product as a currency and retaining it as "cash". To wit: "instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today." And the math: "If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011. If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?" And there you go: Sprott 'reputable' entity to propose to fight manipulation with what is effectively collusion, which in the grand scheme of things is perfectly normal - after all, all is fair in love and war over a dying monetary model. Who could have thought that the jump from "proletariats" to "silver miners" would be so short.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion topics include the choices between austerity and increasing stimulus and how both will bring on a meltdown, whether bankruptcy or hyperinflation brought on by money printing. They talk about the huge leverage in the banking system and the risk inherent in the system. People are only now starting to understand counterparty risk. They explain that 20-to-1 and even higher leverage is common in the banking system. Lastly, the two talk about the short-term focus of political decisions and the bad omens for the dollar as a world reserve currency. Kicking the can down the road is increasingly not an option for bankrupt governments, as even the bond markets are increasingly uncooperative with new stimulus efforts. As an example the recent failed attempt by the EFSF to raise 3 billion. They talk about the IMF creating $280 Billion SDRs out of thin air and ask whether that will keep the party going a bit longer.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, talk about how there isn't enough silver in the silver market to back existing "paper silver" commitments. While there is much in the attached interview, the bottom line is that Sprott thinks that "silver will be the investment of this decade". And with 3 out of 5 central banks having just embarked on monetization, and two more imminents, he will almost certainly be right.

Eric Sprott writes: "We believe a growing number of European depositors are transferring their money out of EU banks, and many of them are reinvesting their capital into gold and silver for safety. It does not surprise us to see gold hitting all-time highs in euros and dollars. It’s worthwhile to acknowledge that those investors in Iceland and Ireland who had the foresight to convert their cash to gold before their countries’ respective bank runs have all fared extremely well in both nominal and real terms. We believe that gold and silver are the ultimate alternative for a chequing account in a vulnerable banking jurisdiction, and whether the ECB prints more euros or eventually defaults, both outcomes will continue to support a robust demand for precious metals as an alternative currency."

"I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that." So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets - specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger. And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity. With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices? Let the Seller Beware!

Eric Sprott, who according to some catalyzed the initial move lower in silver following his sale of PSLV units, to be followed by a bullish clarification that he transferred all proceeds into other silver holdings, was on Max Keiser late last week in an interview that anyone interested in the silver market should listen to. Among the key summary highlights: "I will be a buyer of silver today. I will be a buyer of silver tomorrow. We have not lost any faith in what has happened to silver." As for what happened with that instantaneous $6 dollar drop in silver on May 1: "In my mind it was just one of those raids that we experience from time to time. There was no particular reason for it. And then we end up with 5 margin rate increases. It just reeks of someone manipulating the price of silver down. I have no fear of silver here. Yes it will be parabolic, but it's going to be way more parabolic than what we have today... I believe that gold today is the de facto reserve currency. It's outperformed everything for 11 years. Silver has always been a currency, people are now treating it as a currency, and it's a very, very small market. There is no way that with roughly $50 billion of silver inventory around that we can make it a currency, so I see the price going much higher." And on the ridiculous recent trading volume in silver: "One of the things we should look at is the trading of silver in the paper markets, I mean the Comex and the SLV. Last week it averaged 1.2 billion ounces per day. There is only 700 million ounces mined in a year. There is only 33 million ounces of physical silver that is available for delivery by the commercial shorters. If something like 3% of the people that were trading silver in one day demanded physical delivery, there would be no silver on the Comex.... The key market is the physical market. I don't think this raid is going to work." Much more on Sprott's views of the silver raid and the silver market in general in the full interview.

Eric Sprott making headlines in Vegas:

• SPROTT SAYS GOLD IS NOW THE WORLD'S RESERVE CURRENCY
• SPROTT SAYS SILVER WAS `MANIPULATED' DOWN IN PRICE
• SPROTT SAYS PEOPLE IN IRELAND, GREECE ALREADY FLEEING BANKS
• SPROTT SAYS SAVERS WILL FLEE BANKS TO PUT MONEY INTO GOLD

Naturally he will be called a nutjob and a tin foil-hat wearing moron, until he is, of course, proven right, at which point the conspiracy theory becomes non-conspiracy fact.

What the so-called silver ‘experts’ neglect to account for in their models and projections is that the fiat money experiment has failed. And in this context, we believe the Market has assigned world reserve currency status to gold - not USD, not EUR, and not JPY. In our opinion, gold’s continued appreciation vis-à-vis every currency is assured because the great flight from fiat has only just begun. Like gold, silver also has a long monetary history, and as such, investors are now also buying silver as protection from the ravages of fiat currency debasement. Yet, when compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.

Gold’s continuous ten-year rise hasn’t sheltered it from controversy. Despite producing consistent returns in virtually all currencies year after year, some market pundits still question its validity as an asset class. It’s true that gold doesn’t pay any interest, and it’s also true that much of the gold produced throughout history still exists in some form today. But these characteristics shouldn’t inhibit it from performing as a monetary asset. Cash, after all, doesn’t pay real interest either, and there is more fiat money in existence today than ever before. So why does gold still receive such harsh criticism?

We believe much of it stems from a widely held misconception that gold is forming a financial bubble. It’s a fairly straightforward view – that gold buyers are merely foolhardy speculators buying on a whim with no rationale other than to sell to the ‘greater fool’ at higher prices in the future. It’s a view that assumes that gold has no intrinsic value and is simply a speculative asset that has captured investors’ imaginations.

We don’t take these views on gold lightly. We’ve seen bubbles before and fully know how they end. We have no interest whatsoever in participating in some sort of speculative frenzy – that’s a recipe for disaster in the investment business. Thankfully, however, our gold investments present no such risk. As our analysis has revealed, gold is actually a surprisingly under-owned asset class – and one that has generated far more attention in the media than it probably deserves. While its exemplary performance since 2000 is certainly worthy of discussion, gold simply hasn’t commanded enough investment to warrant the bubble fears it seems to have aroused among market pundits and business commentators. The truth about gold is that most people simply don’t own it…yet.

Eric Sprott made an appearance at Casey Research Gold and Resource Summit where in addition to providing a succinct summary of all his monthly letters from the past year, whose forecasts are all gradually panning out, he spoke about the prospects for gold, and particularly silver. We will leave it to readers to parse through the brief must watch clip, but here is the punchling for those wondering why increasingly more distributors are reporting indefinite lack of physical silver inventory: "There's $22 billion of silver available in the world, of which the ETFs already own half, and between you guys and us we probably own the other half... Which means there's nothing left."

Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.

Ignoring real estate, most people invest their hard earned money in paper things. Stocks, bonds, annuities, insurance - it’s all paper, and it sits nicely in our bank accounts and shows up on our computer screens. Halfway across the world, investors in China and India have never trusted paper investments as a store of value - and they’re converting their hard earned paper money into gold and silver bullion. Not that this is anything new. It isn’t. But the scale and speed with which they are accumulating precious metals IS new, and it’s driving the fundamentals that we believe will lead to higher prices in 2011. - Sprott Asset Management