Exclusive Interview: Eric Sprott - On The World Economy And The Financial Markets, Part II

by: Patrick MontesDeOca

<< Return to Part I

By Patrick MontesDeOca

Eric Sprott
Chief Executive Officer; Chief Investment Officer; Senior Portfolio Manager

PM: I have one more question before we move into the next the next format. In your opinion Eric is the world economy headed for a depression?

Eric: Well I would say it looks that way right now. I mean I know depression is a very large word. When you start looking at statistics you know like the Spanish unemployment being 25 percent. U.S. unemployment, if you included all the discouraged workers is 22 percent.

When you look at industrial production data that comes out and every month that goes lower, investor sentiment goes lower, consumer sentiment goes lower and perhaps the most shocking data point I've seen in the last week there was a report of the Netherlands as to what the retail sales were in the month of May. They were down 10 percent year-over-year and I could hardly believe it. I actually re-read the article today to make sure I read this thing right. Because it just says that when people see a problem they can change their habits quite readily.

We saw lower retail sales in the U.S. for two months in a row on both April and May albeit only 1 percent.

These trends are likely to continue we don't have any job growth; we have these huge financial problems besetting the world. China for sure is slowing down.

Their purchasing and manufacturers index has been down 10 of the last 11 months and for the last 6 months has shown negative year-over-year industrial production in China. Negative not a choice between 8.5 percent growth and 7.5 percent growth, it's been negative.

One of the things that I sort of struggle with is as these economies are shrinking, which goes collectively, all are. What policy measures are left to stimulate the economy when you already have zero interest rates and you've already had money printing that's accomplished nothing.

If you dare started another stimulus program which of course most governments would love to do. But the bond market might make you pay for it. In other words let's say the U.S. announces, we are going to have a one trillion dollar stimulus program what would the bonds do. You know to your point, they might start going from two percent back to six percent. As people realize you are just digging a deeper hole for yourself. Of course most people realize that even the stimulus programs have failed to do anything individually or collectively. Look at Japan all the stimulus programs, they have done nothing.

PM: In your opinion what should be done in order to prevent this and move forward with some constructive no intelligent applications here?

Eric: You know Patrick, I mean it's a wonderful question and I hate my answer all the time. Because I think it's too late to do anything constructive, we tried everything you would we have all these weird policies LTRO's, QE's, TARPS, I mean the conservatorship.

PM: They have run out of bullets.

Eric: We have tried everything under the sun here for the last 12 years. To prevent this sort of contagion spreading in the financial markets. You know I go back to Minsky, when your debt is so high that you're the productive engine can't handle it, there is only one way you can deal with it is to get rid of the debt by repudiating it. Just don't pay it and of course if you get into such a situation like that where people don't pay their debts, you end up with a financial collapse the banking industry is too levered. They can't take it, can't take people saying they are not going to pay them back. Governments not paying them back. What would happen to bank balance sheets, it's just a disaster because they are too leveraged. I was asked the same question by some senior banking people here in Canada. I don't see a solution. There is no solution, it just seems to get worse every day even though we seem to have some band-aid we try to apply everyday, but it gets worse everyday.

PM: So it makes more sense that going back to thousands of years whenever we experienced this crisis and we have experienced this seven or eight times in our history that gold has become the metal of choice to survive the crisis.

Eric: You know Patrick I am always surprised at people's inability to change or sort of think through a problem. I'll go back to, for example, Iceland and you can kind of sense well before they depreciated the currency, that there was a problem. I read the information, I was out there and those people in Iceland who had their money in gold didn't lose anything and those people who left the money in Iceland Crooner lost 40 percent. I would make the same argument as we had feared this last weekend that Greek might have to go to the Drachma. Well you know you can go to the Drachma all you want, if somebody owns gold they are not going to take a loss. So I see it as a way safer vehicle in any currency in today's situation. I fear the banking systems. I would always encourage people to take money out of the bank and own gold and silver. So I am sure of that and I can't believe it's not happening in Europe today.

PM: There is a discussion going on right now about gold becoming a Tier 1 class asset in the banking system, from Tier 2. If that was the case wouldn't put a tremendous amount of liquidity in the banking system? In addition to obviously putting gold at the same level at par with the fiat currency or in essence accepting gold as a currency?

Eric: Well in fact it's, I saw the regulation that was proposed in that I read it this morning. It had cash in the first line and gold bullion in the second line. Then government debt in the third line. I think that is the appropriate way it should go. The problem with the cash is fiat currency and no government can admit it is worth nothing, but at least you can pay off depositors with it. But you know it is interesting Patrick, talk about banks perhaps owning gold because it was allowed to be a Tier 1 asset. There is no way in this Earth that many people can buy gold today not have the price go crazy. We have done lots of work in the physical, the changes in supply and demand for gold. I can look at the different in 2000 and 2012 and I can almost come up with the 3,000 ton net positive change in demand in a 4,000 ton market.

PM: yeah. That leads me to a question that, forgive me for interrupting you. One of our listeners, George Adams has questions I am most interested in your take regarding the path silver will be taking and please comment on the future ratio of silver to gold…which is pretty much what you are referring to.

Eric: Well first of all going back to the gold thing. One and a half percent of the worlds financial assets are invested in gold. Imagine if someone said that we want to take it to two and a half percent? But you had no more mine production than we have had in the last ten years. And you have all these central banks buying. Where's the gold coming from, the same thing with silver.

Silver is such a small market compared to gold. A dollars worth of gold sitting on the Earth's crust that's owned by people verses the amount of silver is probably on a ratio of, I should know the ratio, but it's probably 250 to 1. Some incredible amount probably way more than that. So if there was any move for people, it would be to own silver. As you know one of the unique things about silver that sort of manifested itself here, you can see what the public is doing with their money in terms of buying gold and silver.

When you look at the example the U.S. mint statistics for the gold coin sales and silver coin sales and last year people put as much money in the silver coins as they put money in gold coins. Which means when trading at a 56 to 1 ratio they bought 56 times more silver than gold.

In the case of our two physical trusts, the gold trust and the silver trust, we did issues in the first quarter both of them raised exactly the same amount of $349 million. We bought 56 times more silver than gold. But the amount of silver available for investment versus gold available for investment in physical terms is only a ratio about 7.5 to 1.

There is no way that people can keep buying it at 56 to 1 and not have the physical market overtake the paper markets that seem to determine the price today. Because there will be a shortage in no time if those trends continue and those are the trends of the average guy on the street.

Every time I talk to a bullion dealer in any country my favorite question is how many dollars worth of silver do you sell verses dollars worth of gold? And believe me it's not in a ratio 56 to 1. It's probably even or he sells two dollars of gold to one dollar of silver. It's numbers like that which imply that the silver price has to move closer to the former 16 to 1 ratio than today's 56 to 1.

PM: David VonZuben is asking you, how will the coming peak in gold and silver values this cycle compared to the 1980 peak, when the Dow to gold ratio reached one to one? And the Dow silver ratio one to seventeen? Thank you.

Eric: Okay I would imagine it can easily, particularly if you believe the scenario I see. A very poor set up for stocks because when you're in a recession slash depression earnings plummet of course. If we see lots of warnings on earnings, like the one we saw one today with the Procter & Gamble and we've seen FedEx warn. You could feel the heart of the economy is starting to contract and it's going to start affecting earnings.

I've always believed that the stock market is quite overvalued in today's financial situation. Of course I also believe that with the amount of money printing and the liberal financial maneuvers that are being made these days that the price of gold can go markedly higher from here. Like I don't believe two thousand is tough, somebody said to me, can it get to five thousand of course it can, can it get to ten thousand, yes it can. If we go into hyperinflation, it doesn't even matter what prices; I mean it's almost totally irrelevant what the price is if we go into hyperinflation. We'll count wealth in ounces not dollars any more and so yes it could easily go to one to one.

I know there are some people smarter than I who I listen to all the time and believe in, who have very much suggested that the Dow ratio to gold goes to one to one. I certainly expect that could easily happen.

PM: From Mr. Don Painter. Mr. Sprott, do you believe that the silver market is manipulated by a strong concentrated short position by commercial banks? If your answer is yes or probably, what event would destroy the manipulation and again restore silver to a truly free market?

Eric: That is a great question as you know that JP Morgan and HSBC are being sued in federal court in the U.S. for manipulating the price of silver in 2008. Nothing has been proven yet. There has been some great work done by Ted Butler, that shows of the concentrated short position by JP Morgan in silver. I have no reason to doubt his data and I have every reason to wonder why JP Morgan would have been short in all somewhere between 20 and 40 percent of the silver market. When I look at the axis after it hit 49.50 high and then the CME coming in with a margin rate increase. Do I think there is some collusion amongst people to try to keep the silver price under control, yes I do believe that. Who were exactly the parties to it, I'm not sure. I'm seeing discussion papers which suggest that the US government might even be behind it. So yes I think that we have every right to think that the price is being manipulated.

I found it rather fascinating that Jim Grant was on CNBC the other day and he basically said on CNBC, all markets are manipulated. Of course the one market that is manipulated is the bond market. I mean that's manipulated all the time.

I don't think it's much of an extension to think, if your going to manipulate the biggest financial market in the world why wouldn't you go after sort of a medium-size one like the stock market and a small one like the commodity market. So, I certainly leave it out there is a very strong possibility we will break the manipulation and it will happen in gold and it will happen is silver.

As people realize, see thru the Ponzi and know what's best for them and they start to accumulate silver and gold, we will find out that there's a physical shortage or there'll be a failure at one of the commodity exchanges. Some client will reveal that he can't get his gold because the bank never had the gold. That's what I suspect will happen. The physical markets will overwhelm the paper markets in due course.

PM: And our last question, from Robert Huntington. Eric if you believe as I do that a period of intense deflation will hit the U.S. over the next 8 to 14 months before the inevitable, inflation begins in earnest, by mid 2014. How low do you see gold and silver going in US per ounce for now and in 2012?

Eric: Sure, it's a great question. I've always thought there will be deflation in financial assets and yet ultimately we may end up with some kind of hyperinflation depending on what the central planners try to do to prevent deflation.

I'll go back to the banking scenario in a deflationary recession. The stress on banks becomes unbelievable because now your loan portfolio, the commercial loans, the loans against inventories, all those things that banks do; they lose support in a declining economy with deflation. I already think there's way too much stress on the banks because of various stock holdings and bond holdings and mortgage holdings that have depreciated in value. Now if we actually start questioning the commercial loan book, then I think it would just make it worse. More and more I think people realize banks are not safe place to have your money.

I hate to sound so heretical about it but the math in my mind seems so easy. So, I don't think the price of gold and silver should be here. Going back to your previous question, I think there are forces at work that try to keep the price down. I don't think it's logical when I look at the supply demand data that we look at that the prices should be here. Yes somebody might manipulate it down but that's a very difficult thing for me to call because I can't tell you how successful some manipulator is going to be.

I can tell you that the demand for metals, the more the price goes down the more people are going to buy it. We see it every time gold and silver spike down that the buying picks up again. I can't imagine were in a normal, scenario.

Should these prices go much lower? I think they hit their lows a couple months ago and as these financial events unfold in Europe and throughout the world. The interest in gold should just get stronger and stronger.

PM: Mr. Eric Sprott, from Sprott asset management thank you from our audience and for sharing your wisdom and your experience and insights until next time Eric.

Eric: OK Patrick, it's always great chatting with you and I know you have a wonderful service there and I am sure your clients or customers will appreciate all the good things that you do for them.

PM: How can our audience get in touch with you or how can they find out about your products?

Eric: Sure well if they go to Sprott.com as you know were involved in physical gold trusts, silver trusts. We have precious metals funds, pretty well anything to with precious metals and hedge funds and mutual funds. All the information is available there. All the articles that we have written. Then some of my partners, you know John Embry is a great partner of mine, whose one of the great gold Guru's in the world. All of that is available on the website, and we'd be happy to hear from any of your listeners.

PM: Thank you again Eric and until next time, take care.

Eric: OK Patrick all the best. Bye.

Disclosure: I am long PSLV, PHYS, GDX, GLD, SLV, AG. Precious metals products trading involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.