Eric Sprott

Regular Markets at a Glance readers may have wondered why we remained so silent on the subject of silver over the last several months. Considering the significant exposure we have to silver as a firm, we can assure you that it wasn’t for lack of desire to share our views, but rather due to strict solicitation restrictions imposed on us by the cross-border listing of Sprott Physical Silver Trust (PSLV) this past October. It therefore gives us great pleasure to finally share our views on silver with you. We have included two separate articles in this issue of Markets at a Glance: the first was written back in June 2010, and contains the information we used in the prospectus for the PSLV. The second is an update article written this past month that discusses new developments in the silver market and confirms our views on the metal. We urge you to read them both in order to understand our investment thesis for silver, and we hope they compel you to take a much closer look at silver as a long-term investment. Silver’s dramatic rise over the last two months is no fluke - it’s the result of a compelling supply/demand dynamic within a unique market structure. We hope the following articles convey our enthusiasm for "the other shiny metal" as an exceptional investment opportunity.

As silver attempts to break $30/oz yet again after the LBMA woke up and rejected an earlier attempt to take out the critical barrier, it is appropriate to present the most recent interview with Eric Sprott (by the Globe and Mail): the man who one of few, and very much against the conventional wisdom grain, called the move in precious metals many years ago, and so far, has been spot on. The summary on why the much maligned PM bubble is not even close yet: "I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver." And on silver: "Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed."

Now is the time to own gold stocks. Most gold companies will report their Q3 earnings at the end of October. Due to a higher year-over-year average spot gold price (which has increased 27.8% to $1,228/oz in Q3 2010 vs. $961/oz in Q3 2009), virtually every precious metal company is forecast to exhibit substantial net income growth. These fantastic net income results will be augmented by higher by-product prices (average silver, copper, and zinc prices were up 28.7%, 24.2%, and 14.8% year-over-year), which should set the stage for banner year-over-year earnings increases. One of the best axioms for investing is painfully obvious, but so often forgotten by seasoned investors: it’s all about earnings. Earnings are what drive stock prices over the long term. Investors seek out earnings growth wherever they can find it, and we can’t think of a single equity sector that exhibits better year-over-year earnings growth potential than the gold producers. We expect that to change over the next two quarters as investors realize how much stronger gold producers’ earnings will be at $1,350 gold. As countries decide to burn their currencies in the devaluation race, gold has responded, and now it’s the producers turn to perform. We’ll gladly take the earnings. - Eric Sprott

A couple of insightful interviews, brought to you by King World News. In the first one Art Cashin goes off on a astrological tangent, discussing how the autumnal equinox may or may not impact the critical 1,130 resistance level. According to the cocktail napkins things may get heated... or not. In other words prepare for a market that may surge... or plunge. Elsewhere, Eric King discusses the drop in the NAV premium on the PHYS (quite relevant in light of the recent second follow on offering for the physical gold ETF), gold common stocks, and the imminent rush for M&A in gold small and mid cap companies. Indeed, all that borbadment about cash on the sidelines in other sectors leading to a renaissance in acquisitions is more than relevant for the gold sector: look for some material moves higher as expectations of consolidation in the precious metal space spread like wildfire through the market.

Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally. - Eric Sprott

King World News presents another great interview, this time with innovative hedge fund manager, and financial skeptic, Eric Sprott, best known recently for bringing an alternative to the GLD and SLV paper domination, with his innovative gold and silver physical ETFs. In the below interview, Sprott shares a wealth of insight into Keynesianism, on the staggering and rising debt load, on the collapse in every single economic metric and the imminent arrival of the double dip (sorry Apple fans, iPad sales are not a leading indicator; at best they serve as a delinquent mortgage tracker), on QE1 and the upcoming QE2. Sprott's view that "nobody has a solution here, nor should they have a solution here: I think we need to rid ourselves of the theory we need to keep adding debt all the time to keep growing." Sprott agrees with the Zero Hedge principle, that when dealing with broken Keynesian economics, you need to shock the system - "you need to hit bottom." As Sprott says: "You need to really shake the system in order for the system to change, and so far there has been absolutely no change in the system." And, of course, Sprott discusses gold, gold manipulation, and paper gold. 30 minutes of must hear observations.

There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back. But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain? We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. - Eric Sprott

Eric Sprott's Physical Gold Trust (PHYS) has just announced it is issuing a follow-on offering of 18 million trust units, with an overallottment option of another 2.7 million, for a total, including the greenshoe, of 20.7 million new units. The proceeds, as expected, will be used to purchase physical gold bullion to satisfy unprecedented investor demand for a safe haven away from the central bank printing press madness. At a post-announcement per unit price of $11.40, this means Sprott will buy $235 million worth of gold in the open market. At today's gold price of $1,200 this translates into 195,833 troy ounces of gold to be acquired, or roughly 6 metric tonnes. Somehow, we don't think the LBMA will be too thrilled with this extraction of physical gold out of the controlled synthetic precious metal ponzi system.

A must watch two part interview of Eric Sprott by BNN, in which the Canadian asset manager shares his views on the economy, financial markets, sovereign overleverage, industrial commodities, and, of course, gold. The man who created the PHYS index to invest in physical gold, is, not surprisingly, not too excited about perspectives for stocks, and markets in general, which he qualifies as a "financial farce." Sprott is, and has been for a while, confident we will retest the March 2009 666 lows in the S&P. Slowly, more and more "experts" are moving to his camp. He also gives an advance glimpse of the topic of his upcoming May missive for all you Sprott groupies.

"In the depths of the 2008 crisis it was the governments that stepped in to provide a guarantee on financial assets. It was the governments that backed our savings accounts, money market funds, day-to-day business banking accounts, as well as debt issued by US banks. But what happens when confidence in the government guarantee begins to erode? We’ve seen what happened to Greece. Leverage inherent in the banking system elevated a bank run, equivalent to a mere 3.6 percent of deposits, into another full blown banking crisis. In our view it’s time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold. " Eric Sprott

King World News interviews Eric Sprott, who effectively melts the wires with the heat of his pessimism. Alarmingly, it is fairly hard to argue with his reasoning.

"As an individual I have my money in gold and I have my money in silver and I have my money in our hedge fund and it, of course, has most of its money in gold and silver."

Eric Sprott Interview on King World News (39:01 minute .mp3)

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott