SPROTT ON BANKS, GOLD AND SILVER -- MANIA, MANIPULATION AND MELTDOWN / MINEWEB

Sprott on banks, gold and silver – mania, manipulation and meltdown

Eric Sprott may have surprised a new audience with some very pessimistic views on banks and the global economy, but spoke very positively on the investment merits of gold – and particularly of silver.

Author: Lawrence Williams

Posted: Wednesday , 20 Mar 2013

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Hong Kong (Mineweb) - In introducing his talk to the audience at the first full day of Mines & Money Hong Kong (Conference and Exhibition) mega precious metals bull Eric Sprott opened by explaining why he titled his presentation Mania, manipulation and meltdown – although those who follow him will already be pretty well aware of his views, and his strong track record. The bulk of his talk was taken up by examining the politico-economic aspects of what is going on in the world today with the main theme that government debt has become so big – and is continuing to grow – that it has passed its Minsky Moment – the point at which debt has become so large that it can never be paid off.

In many respects, according to Sprott, this is because the banking system has become too large so that, in many cases it is bigger in value than the country in which it is domiciled. Following the Lehmann Brothers collapse nearly bringing down the entire global banking system, banks are just being bailed out at ever increasing cost if they become totally illiquid for fear of the first domino falling and bringing down the rest of the system – they are just getting too big to fail at whatever cost, but eventually the dam could burst.


‘Think of bank, think of risk’ is one of Sprott’s mantras and his overt view is that it is foolish to keep one’s money in the banking system as other options are far safer – notably precious metals.


Bank deposits can still be subject to currency devaluations – even if the banking system itself is not allowed to fail whereas safe haven assets like gold tend to keep, or even increase, their value despite efforts by the central planners to control the precious metals prices.


He has long stated that gold was the investment of the past decade – and a long term chart he showed demonstrated that the HUI ‘gold bugs index’ in the U.S. has hugely outperformed the various general stock market indices over the past 10-12 years.


Coming back to gold, Sprott questions how supply can possibly be keeping up with demand given that new mine supply has been virtually static at around 4,000 tonnes a year, Central Banks, which had been selling around 400 tonnes a year are now buying around 500 tonnes a year (a net turnaround equivalent to nearly a quarter of total gold production), a huge increase in demand in China and continuing high demand levels from India).


His attested viewpoint is that this supply can only be coming from leased gold from the Central Banks entering the market through the bullion banks – which then begs the question of how much gold the Central Banks actually have left – and how long this situation can continue.


As we have ourselves in these columns before, he questions the fact that it is taking Germany 7 years to receive back the 350 tonnes of gold it is clawing back from its holdings stored at the New York Fed – a point further emphasised in how much gold is being imported into China via Hong Kong in a single month which suggests there is no problem in moving large amounts of the precious metal in a short space of time.


But Sprott’s main focus is on silver as potentially being a far better investment even than gold. As he has stated before he reckons silver is the investment of the current decade. He follows the mathematics of silver supply and notes that there is around 11 times more silver produced in the world than gold of which a high proportion is taken up by the investment sector leaving only about three times more silver than gold being available for investment – yet, going by U.S. Mint gold and silver coins sales, and his own experience in Canada, that 55x more silver than gold is being purchased by bullion investors. This, he feels has to lead to a severe shortage of supply for the investment sector, sooner rather than later. He has often stated, although not actually on this occasion, that he expects the gold:silver ratio (GSR) to return to its historic level of around 16:1 and although we do not necessarily expect this to occur, there could well be a big fall in the GSR from its current level of around 55:1 which would indeed make silver a better investment choice than gold in pure value terms.


On global economic recovery, Sprott is more than a little sceptical about the political spin suggesting we are coming out of recession. ‘We are all being conned’ he says. Economic crisis follows economic crisis – Cyprus being just the latest.


In a media briefing following his presentation, Sprott puts some more meat on his predictions. He feels that silver returns will be around three times higher than that of gold – and that gold will move substantially higher as, some day, Central Banks will lose the battle to keep precious metals prices under control which they try to do to convince the world that financial propriety reigns – which it doesn’t!


Overall Sprott’s message is as follows: There is more reason to own gold than ever before; Silver will be an even better investment than gold; Don’t invest in bonds – they can ultimately be worth zero if banks and countries default; Don’t hold your money in banks – banks may eventually be allowed to fail – and in any case as today’s fiat currencies are debilitated through monetary expansion policies they will devalue against precious metals. (Indeed he said as an aside that he wouldn’t be caught dead with his money in the bank!). Sprott’s financial acumen has made him a billionaire – maybe he has a point.