There aren't a lot of interviews that I'm willing to sit through and hang on every word. But when Eric Sprott or his partner John Embry of Sprott Physical Gold (PHYS) and Sprott Physical Silver (PSLV) give an interview, I'm all ears.
Recently, at the Casey Research/Sprott Summit, When Money Dies, Louis James spoke with Sprott Inc. founder Eric Sprott on the risk involved in holding money in banks, and the likely future of precious metals stocks.
As the comparative chart below clearly demonstrates, these three bank stocks alone have dropped between 20% and 55% just since the end of July 2011 (less than 3 months ago).
Although I think the carnage on BAC and C might be overdone, we clearly see that investor confidence has been sorely shaken in the banking and financial sector.
Here are a couple of excerpts from the interview with Eric Sprott. I've inserted a few comments and sample stock suggestions to make the interview more useable.
To see or hear the entire Casey Research interview with Mr. Sprott, click here.
Well, we're very close in the sense that – I mean, Europe is a sort of a bit of a tinderbox here that you just don’t know – can they come up with a big enough fund to keep people believing that the banking system is okay? There has been a lot of confidence broken. There was a lot of confidence broken here in the US in '08 when, of course, all the bank stocks came under severe pressure, and it was stated at the time that the banking system was within hours of closing. And I never like people to forget that, that we are in a situation where that can happen, so it has not gotten better any day; it gets worse almost every day, and you have to be cognizant of the fact that when you have money in a bank, you have a risky investment. Most people don’t think of it that way, but certainly I do.
Louis James: "Money in the bank. That’s not a positive any more the way it once was.
Eric Sprott: "No it's not a positive."
Then Mr. James asked Mr. Sprott about the reason to own gold and whether it might now be better to own the precious metal stocks instead of the physical metals.
Mr. Sprott answered:
The reason to own gold never changed. So I think having seen it once, I don’t think we will see that same play out that we had then. There's been recent evidence of a difference in the market, and I forget the date, but I think it's something like August 10 when the Dow was down 500 points and the UE Gold Index went up 4%.
So we had something like a 900 basis points difference between the two and I thought, 'Oh my god it's like in a eureka moment where the gold stocks disassociated themselves from the stock market.'
Mr. Sprott seems to believe (at least as recently as the middle of October) that we are seeing more and more examples of people finally realizing that gold stocks are different from regular stocks.
Even if the financial crisis in Europe gets worse and the worldwide economy slows down, Mr. Sprott evidently does not think we'll see the same carnage in precious metals prices.
Mr. Sprott did opine that:
although we always see raids on the gold and silver prices by the paper sellers – that far outnumber the real buyers, the physical buyers – but if you wait it out and the physical buyers come through, which it looks like they're going to come through here, then everything will revert to norm again.
Silver Has a Long Way to Catch Up to Gold....The Gold-to-Silver Ratio
Mr. Sprott noted that people around the world are almost putting as many dollars into silver as they are into gold, but the price of silver is 1/52nd of the price of gold.
That means that the ratio of the price of silver to gold is 52-to-1 (50:1)...yes, an ounce of gold is 52 times more expensive than an ounce of silver.
Yet, as he keenly pointed out, the same amount of money is going into silver as is going into gold, yet the availability for each of these precious metals "... is in a ratio of about – there's 20 times more gold in dollars to buy than there is in silver dollars to buy for investment, yet the money is going at 1:1."
As many of us know, the historic price ratio of an ounce of silver to an ounce of gold is more like 20:1 or 30:1, and one of the reasons why Mr. Sprott believes that the price of silver in the next decade will do better than the price of gold.
As Mr. Sprott phrased it, "They're [people] just buying it, and if people want to keep buying it on a one-to-one ratio, the price will not stay at a 50:1 ratio; there's no way".
Towards the end of the interview, Louis James popped the "big question" and Eric Sprott was not shy about answering:
And owning the stocks versus owning the metals… There's a perception out there that, 'Wow, we have these ETFs now and so, you know, maybe the stocks aren’t going to do it this time around, this market will be different; if people just buy the ETFs, it's easy.' Do you subscribe to that or do you think the stocks will still give leverage to the properties?
I would say right now I am in the camp that believes that the precious metal stocks are getting so cheap that they should outperform the metals here. Like they are incredibly inexpensive on any metric you want to use, and compared to any industry you want to compare to.
It's helpful to remember that in the past I've learned from my own research that Mr. Sprott has owned a host of both junior and senior precious metals companies.
It's likely in the opinion of many of the gold and silver experts I've read about (Pierre LaSonde, James Turk,Ted Butler, Jim Rogers and Frank Holmes to name a few) that the outlook for gold and silver is that the prices will keep going up. That's in stark contrast to the outlook for almost any other of the commodities, yet the gold and silver stocks are trading at very low multiples of earnings.
As Mr. Sprott pointed out in the interview,
We haven’t seen the earning power of these companies at these prices yet because there haven’t been that many reporting periods, so personally I've sold gold to buy gold stocks and silver stocks.
You'll see if you read the entire interview that at the conclusion Mr. James asked Mr. Sprott whether he had sold his physical silver yet to buy silver stocks.
I've not yet sold silver to buy silver stocks, but I think the precious metal stocks are in a way better situation today than they were before, because the market has not discounted gold having gone up to $1,600 or $1,900, which it was recently. I think there's better value in the stocks.
That last comment by Eric Sprott needs our full attention. If it is as accurate as I think it is, it means there's still time to take advantage of the remarkable upside potential for silver stocks as well as gold stocks. Remember, Mr. Sprott became a billionaire by spotting the opportunities that most people don't see and acting upon them decisively.
Can you imagine how an investor would be feeling right now if they'd picked up some shares of RoyalGold (RGLD) back when gold hit $1,000 an ounce. They'd have better than 100% gains on RGLD, and it's still not too late to profit there. RoyalGold is a leveraged, clever and profitable way to potentially outperform the movement of the price of gold.
Legendary investor Jim Rogers said something like, "I just wait till what I want is sitting in the corner and all I have to do is walk over and pick it up". He also reportedly said,“In bull markets, everything makes an all-time high, and silver is going to do so again in the next 10, 15 years.”
With all the uncertainty going on around the world, and since "Europe is a sort of a bit of a tinderbox here that you just don’t know – can they come up with a big enough fund...?", as Eric Sprott opined - precious metals stocks and especially some of the silver stocks could be the biggest winners in the investment game going forward.
As Jim Rogers might agree, now is starting to look like the time that silver and gold stocks are "sitting in the corner" and waiting for smart investors to "walk over and pick it [them] up".
Additional Disclosure: I am also long Franco-Nevada Corp. (FNV).