Gold price set for greater gains

Expert Eric Sprott explains that he is still bullish on gold and silver. Gold and silver are an alternative to paper currencies and Eric Sprott explains why having these metals in your portfolio is important as the value of currencies are falling.

November 01, 2011 12:05 PM
Transcription of Finance News Network Interview with Sprott Asset Management CEO and chief investment officer, Eric Sprott.
Finance News Network

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network. Joining us today from Canada, ahead of appearing at The Gold Symposium in Sydney, to explain why he’s bullish on gold and silver is CEO and chief investment officer of Sprott Asset Management, Mr. Eric Sprott. Eric, welcome to FNN. Now you speak about the importance of owning physical commodities, in particular gold and silver. When did you first start aggressively buying up precious metals?

Eric Sprott: We started in 2000 when the NASDAQ obviously was rolling over and we sort of determined that in order to survive a long secular bear market, we had to be involved in gold and silver. So we would have been the buyers of gold at probably as low as $265 and silver around $5, so it’s been quite a while.

Lelde Smits: Why are you still committed to gold and silver even at these elevated prices?

Eric Sprott: Sure, well when I started, I really bought gold and silver because I thought there’d be a physical shortage of those metals. And I know others have suggested one of the reasons you should be involved in gold and silver is because of our alternative perceived currency, and both have worked incredibly well. I think there is physical shortage of gold and silver and of course as we got to ’08 and we had the financial collapse, and you had the you know, printing of money, the QE1/QE2, what’s going on in Europe a year ago, what’s going on in Europe today. It would seem that gold and silver as an alternative to paper currencies, looks like it should win the day here. So we’re certainly staying the course on both.

Lelde Smits: Now you’ve just mentioned gold and silver as an alternative to paper currencies and you’ve mentioned before you prefer investing in the physical commodities, rather than the paper market. Could you explain what you mean by the paper market and why you favour investing in the alternative?

Eric Sprott: Yeah. Well a lot of people buy certificates that say they own gold but there’s a counterpart to that certificate, right and most of those counterparts are financial institutions. And you know, the history over the last few years is financial institutions can be here one day and gone the next. I mean the most recent is the Dexia example over in Europe which you know, three months ago was considered one of the highest rated banks in terms of the stress test, but three months later was taken over by various government levels because of issues that were going on here. So the beauty of physical is you don’t have a counterparty, you own it or you have something where you trust that it is there. And I think owning the physical is a lot more important than owning a piece of paper, where the counterparty may or may not have that physical bullion.

Lelde Smits: So Eric what are the main differences between investing in gold and silver?

Eric Sprott: Sure. Well I published a little publication of the things we wrote about gold in the last decade and we called it ‘Gold Investment of the Decade’, which it certainly was. It outperformed any other asset in the world quite frankly. And this decade that we’re now a year and a half or a year and three quarters into, I think that silver is likely to be the investment of this decade, because historically it traded at 16-to-1 ratio to gold when they were both currencies. My own view is that the market has made gold the reserve currency already. Whether or not the central banks or governments want to admit it, the fact that it’s so far outperformed every currency is quite a stunning development. And I think that historically accredited at 16-to-1, when I look at the sort of demand for silver these days and all the uses for silver, I think it might go back to 16-to-1. Today it’s probably trading at 50-to-1. So that’s a lot of outperformance of silver versus gold going forward and that’s what we expect to happen.

Lelde Smits: Right so you expect silver to outperform gold but availability must be a consideration, as you’ve mentioned before. So how much physical gold and silver is there in stock?

Eric Sprott: Well you know that’s another very interesting question, because the amount of gold that’s available to buy and the unique thing about gold is, almost every ounce of gold ever produced is still around because it’s so valuable. Even the Egyptians, who let’s say tried to bury it, somehow it finds its way back to the surface right, because it’s so valuable. And there’s very little silver in stock, I mean I would guess that the amount of silver that one could buy, might cost less than $30 billion. But the amount of gold that’s around is probably something like $2 trillion. So that’s another reason that if silver catches a bid here and people have an interest in, which we certainly see it manifesting, that there’s not much silver and I think that’s why we think the price will go a lot higher, relative to gold.

Lelde Smits: And how long will this last based on current demand?

Eric Sprott: Well that’s a great question - and it’s hard to give the answer because we don’t know how irresponsible central banks and governments will be. I mean if they want to be irresponsible for a long period of time and we all kind of skate through this problem, then I think you know, gold and silver price will go up for a long time. If there’s a sudden development in the financial world, for example let’s say the European crisis doesn’t fade; things could happen a lot faster, that people are worried about having their money in banks and you know, the price of gold could reflect it. There’s a great study done recently by James Turk who compared the price of gold to all the money that’s in the world. And basically what its conclusion was is that, you know, with all the money there, gold should really be worth 10,000 an ounce – so. And I think it’s a reasonable thing that gold is money, paper currency is considered money as well, but when you look at the ratio of the two, gold has a long way to go from here.

Lelde Smits: So how much higher do you see the price of gold climbing?

Eric Sprott: Well I think that it could be going a lot higher. I mean I have seen evidence, as I mentioned James Turk at 10,000, I’ve seen another really great trader suggesting it could go to 12,000. But I don’t even think that those commentators or experts can really know for sure how long it’s going to go, because we don’t know what governments are going to do to try to keep their economies going, while they all seem to be sputtering here. So it depends on the level of irresponsibility as to how high it can go.

Lelde Smits: So Eric looking closer at that level of irresponsibility as you call it, what do you believe are the big factors currently impacting the precious metals market?

Eric Sprott: Sure, well Lelde, it’s a great question because I mean there’s some very, very strange things going on. I mean those of us who, you know, took Economics 101, we’d never heard of zero interest rate policies or quantitative easing, or you know the plans to leverage funds and all these things that are going on. So there are so many things that change day to day, particularly in the financial area that will impact the precious metal price. And as I say, one can’t specifically say that this advance should do it, but there’s big concern in the banking business particularly in Europe. But there should also be concern in North America; I mean we see banks fail every week here in North America. And I think the ultimate destination of gold is a function of peoples’ confidence in the banking system. If they lose confidence in the banking system, there aren’t many places to turn to and of course, once you turn to physical things and to be a little more specific, you turn to physical things that can act as money. So that’s why we think gold and silver will win the day here.

Lelde Smits: Now Eric you’re evidently keen on buying up, but what do you believe is the best way for investors to get their hands on gold and silver?

Eric Sprott: Well I mean they can buy coins and they can buy bars and things like that, and store them themselves or store them in a bank. I would almost prefer they store them themselves. There are lots of different vehicles you can use where you know that the gold is there and I don’t always recommend – no maybe I should correct that – I don’t recommend some of the ETFs (Exchange Traded Funds). They traded the US market and I’m not sure whether you have a specific ETF in Australia. But there are Funds such as our physical trust and our gold trust that trade on the New York Stock Exchange and Toronto Stock Exchange, where everyone knows we have the gold. And you want to own an instrument where you know they have the gold and you can have access to the gold. And I think that’s the key, they don’t buy or take an instrument that’s guaranteed by some counterparty, where that counterparty could go the way of Lehman, sort of overnight.

Lelde Smits: Eric thank you so much for your insights today and looking forward to seeing you in Australia soon.

Eric Sprott: Myself as well Lelde, I’m really looking forward to being there.

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