Patrick MontesDeOca: Mr. Sprott, can you please give us the current situation in terms of price in the silver market? What you might see in the short term as it unfolds in the next six to twelve months, what is your forecast?
Eric Sprott: Sure, I take a longer term view than six to twelve months. I’ve been involved in silver for about probably almost ten years now and of course the price of silver has done wonderful things in that time period even though recently it has come under a lot of pressure. My thesis being that even though the last decade has been the decade of gold, this decade will be the decade of silver. I can only imagine that it will go back to its historical relationship to gold of 16 to one in term of price. And as an example of 16 to one, with gold at $1600 it would suggest that the silver price should be $100. And most of the data that I look at certainly as it pertains to day to day markets, and I don’t mean the Comex, we're not talking about that, we're talking about the physical market for silver, and we have data points that suggest that buying for silver by the public is almost on a ratio of dollars of silver being bought to dollars of gold being bought. We can see that the U.S. Mint’s data that comes out every month, and pretty much every day, so for example, the amount of silver coins being bought through the mint’s service - they sold 50 times the number of silver to gold coins. This month it’s actually running around 70 to one. This really means people are putting as many dollars into silver as they are into gold. But there is nowhere near the amount of silver to invest in as there is gold.
P: So do you attribute this correction we saw recently to the correction we saw in the beginning of April?
E: Sure, well, I think both corrections were orchestrated by people who are massively short silver. When the price went from 20 to 50 roughly, I mean, those shorts had lost about 20 billion dollars. If silver had broken through $50, things would have gone absolutely crazy. Like when gold went to 850, it doubled shortly thereafter, which would have created great stress on those people who were short. And unfortunately in the Comex market, which is mostly a paper market, those who have huge amounts of money can force the price down, and as you may have recalled Patrick, there was a Sunday night around 9:30 when the price went down $6.
P: And it’s usually over the weekend that this happens.
E: Exactly, when nobody was trading. And that particular day the Chinese market was closed and the UK market was going to be closed that day. And of course, everyone comes into work at the New York time and the price of silver is down $6, they already have the margin call. Then the CME raised margins 4 times in the next week which put the long holders of silver contracts under tremendous duress, so they had to sell them. So a lot of the short position has been covered here, I’m not saying there won’t be further raids. There was a raid recently where they recently knocked it down to $27, and that is what happens in the paper markets. Paper markets can trade up to a billion ounces a day, while we only produce 900 million ounces a year. And looking at the physical markets, which I spend most of my time looking at, I can identify something like a 380 million ounce change in supply and demand just in the past five years in a 900 million ounce market. I believe that sooner or later we are going to run into a shortage in physical silver and the physical silver price will then determine the Comex price.
P: I think a lot of people would like to know, potentially, how soon would you see this change taking place?
E: Well that is a very tough question to answer because there are forces at work every day, right, and you have to exhaust those forces or they have to have some reason to change their view on what’s their best interest in the paper markets. I’ve always imagined there, or hoped that some industrial user of silver will say “Oh, I can’t get the silver” and the word gets out that there is a physical shortage. Or the people just continue to buy at the rate they are buying, because you just can’t keep buying silver on a one to one ratio to gold and have the price be 50 to 1. That is mathematically impossible.
P: I know that you like silver very much, but let’s talk about gold for a minute and please tell me your opinion about Venezuela, Chavez repatriating the gold that they had on deposit with English banks. Is this possibly or potentially the beginning of a new trend of realizing the inventory of real gold by these countries or institutions.
E: Sure, well, I think it is one step in the process. One other thing that has happened is we’ve now seen that central banks are buying gold; while they used to be sellers of physical gold, now they are buyers of physical gold. The GFMS this year suggested that central banks may buy as many at 500 tons of gold, whereas they were sellers last year. And this is in a 4000 ton a year market. And I think Venezuela’s statement is “We want to have our physical gold in our physical possession.” Is it going to make a difference? I can’t tell you the answer yet because of course Venezuela doesn’t have their gold yet. And I’m surprised it’s taken, theoretically, until the middle of November for them to get their gold because it was on deposit you wouldn’t think the logistics of transferring that amount of gold, I think its 93 tons or 110 tons, that’s not a lot of gold is it in terms of physical size; because it is so dense.
P: You experienced the same kind of reaction I believe when you recently wanted to purchase some silver. Where it took a little longer than what one would think to be normal.
E: Well, when we started the Silver Chest, we had to go into the market and buy 15 million ounces. This was about exactly a year ago. And 15 million ounces at the time, [an ounce] was probably $20, was like 300 million worth of silver, which is not a lot of silver. And you would think people advertise it as a billion ounces of silver and you want to buy 15, you’d get pretty speedy delivery. It took us 3 months for us to get the silver and some of that silver that was delivered to us was manufactured after we had made the purchase agreement. Which really means, in my mind, there wasn’t a tremendous amount of silver lying around waiting to be delivered.
P: So there could be the possibility that we may have a lot less inventory than what appears to be told on these government reports.
E: Sure, nobody really knows how much inventory there is. We know how much is in Comex, we know how much the PSLV owns, but theoretically that shouldn’t be available, beyond that, I just don’t believe there’s huge amounts of silver and we are buyers of silver every day. We’re very often delayed on our shipments. You know we could go in and buy 2 or 300 thousand ounces and we sort of get the common “Well, you know that shipment is going to take 2 or 3 weeks”, which really means, I don’t think there is really any ready silver inventory that’s just waiting for someone to say “Ok fine, I’m going to buy” [then] “We’ll deliver it to you” because it’s not really that difficult to deliver silver.
P: Let’s talk a little bit about the European crisis, Eurozone crisis, the banking crisis. How do you see that effecting the silver price short term, intermediate, or even long term?
E: Well, I think, Patrick, it depends on how it gets resolved. I mean if it gets resolved simply by printing money, I would think it would be incredibly positive for gold and silver. Because people would realize that felt currencies are being debased through those actions. I think the fact that gold and silver are where they are is very much a result of people more and more realizing that the powers that be seem to care less about how much they print and therefore if that is the solution; that we just print I think it would be very optimistic. But there is one other choice. The choice is: they don’t solve the problem, which as you know has become a banking problem and if there was a banking problem that erupted, it could be even more positive to silver because people will realize “If I can’t have my money in a bank, what are my choices”, and as we all know, very limited. And most of us that are believers in silver and gold, believe we don’t want a counter party and we’d much rather own the physical, so we aren’t relying on someone else to fulfill the promise.
P: According to Arabian Money they commented that the Arabian banks have isolated themselves from what they believe to be an economic crash of the western world. How do they fit into this equation in terms of the demand for precious metals?
E: I don’t have a lot of data on Arabian banks. I truly don’t. I mean, we watch the gold sales in Dubai and places like that and we’re very aware that the Arabs, the whole Arabian community is a believer in gold and they like trading physical things for physical things, but I must confess, I am not enough of a student of what’s actually happening in that area to tell you one way or another what the flows are. We did see a data point about a years ago where Saudi Arabia said “Oh, our reserves were supposed to be this but they are really 60% higher” and it came out of nowhere. I mean, I would certainly imagine if I was there, and I were selling goods to the world I might very well want to have my cash invested in silver and/or gold.
P: I’m going to ask you to stick your neck out here and try to do some kind of a forecast for our audience. What do you see, I would say; let’s say within 2012, in terms of the mint picture, the crisis in Europe and essentially trying to resolve this issue and finding some kind of resolution? If these economic world leaders are able to come and put together an intelligent plan, what do you feel the price of silver could do?
E: Well, I have to beg to differ with the word ‘intelligent plan’, because I don’t think there is an intelligent plan. In fact I think we all now know that most plans have not worked and created a very difficult situation for the average person in the world and has exacerbated the problem in the banking world. So, they’re going to come up with a plan, it won’t be an intelligent plan. I don’t think solving a debt problem is solved by more debt and leveraging, which is what’s being discussed in Europe today. But either way, as I said before, I don’t think the impetus will be for precious metal prices to rise, if I had to predict, I certainly would believe that silver would be above $50 next year and that gold certainly would be above $2000 and it could be substantially higher than that. It’s a question of how irresponsible governments are and maybe we will find out there is a Eurpoean plan, and then 3 or 4 months later, there is an American plan where we get QE3. It’s hard to know where it’s going to go because we don’t know how irresponsible the governments are going to be, but they are tending to be irresponsible, therefore you would think there would be lots of impetus for higher prices.
P: Eric, I would like to thank you once again for taking this time to spend with us and answer some of these questions for our audience. Thank you so very much.
E: Patrick, My pleasure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Interview conducted at the Silver Summit Convention. Met Eric Sprott and he agreed to answer a few questions about the current state of silver and the future trends in price.
This article was written by