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Sprott Money executives Eric Sprott
(chairman) and Larisa Sprott (president), sing the
praises of the "poor man's gold" in this exclusive interview with The Gold
Report. "All the data supports the thesis that silver is undervalued,"
says Eric—who serves as chairman of Sprott
Inc., as well as CEO, CIO and senior portfolio manager of Sprott
Asset Management LP. "We'll certainly see a three-digit price," he
adds. Larisa explains how the company's business model differs from others in
the space and reveals plans to open Sprott Money
USA within the year.
The Gold Report: Your Markets
at a Glance commentary last November said it seemed
unlikely that silver would stay under $30 for long. Four months later, the
spot price is about $35. Are you surprised by how quickly your prediction
came true?
Eric Sprott: Not really.
Based on fundamental evidence, technical evidence and other things going on
in the markets, I thought silver would be explosive this year. I've probably
fallen a little short of my targets, but I think it's going higher. Silver
doesn't have to hit $50 for everyone who's involved with it to make outsized
returns, but I thought it could reach $50 within the first half of this year.
All the data supports the thesis that silver is undervalued.
TGR: Are you seeing $50 as a top price, or a new
baseline?
ES: Lots of things may happen in the short term that have no bearing on the long term. Silver now
trades at a price ratio of about 40:1 to gold. In other words, it takes 40
ounces of silver price to equal one ounce of gold. The historical ratio is
more like 16:1. My view is that we will go back to 16:1 within two to five
years. To put that in perspective, a $1,600 gold price would imply $100 for
silver. I happen to believe that gold will go much higher than $1,600;
therefore, given time and letting this ratio play out, I think we'll
certainly see a three-digit price for silver.
TGR: So, $50 may even become the floor.
ES: It's a step on the way. It may come faster or
it may take a little longer; but when it happens, silver will outperform gold
3:1. That's a shockingly large difference and good reason to get a little
more involved in silver.
TGR: You've said that silver will be this decade's
gold.
ES: We assembled the gold articles we wrote over
the last decade into a compendium called Gold the Investment of the Decade
and these are also archived and available on our website. Now that
we're in the second year of another decade, I'd say silver will be the
investment of this decade. Gold essentially blew everything away in the last
decade. There was no contest whatsoever with any currency or stock market. I
think we'll all look back 10 years from now and say silver was the investment
of this decade, because it might triple the performance of gold—and I
think gold will continue to outperform all other currencies and stock
markets. So I think silver's really an area where people should focus very
heavily.
TGR: This performance you're describing can't be
based primarily on manufacturing demand. How much do you anticipate in the
way of investment demand?
ES: There are two parts to the silver story. One is
industrial demand and one is investment demand. Industrial demand has been
quite strong, but the thing that's been very unusual in the last year or two
has been the marked increase in investment demand. There are many ways of
viewing investment demand, and it's obvious we're going to experience some
serious growth here. Judging from the data points that we look at, and as
Larisa would mention, when we look at our sales of gold and silver bullion,
we're actually selling about five times more dollars of silver than we are
dollars of gold. That means we're selling 200 times more silver bullion than
gold bullion. The U.S. Mint is selling as many dollars of silver coins as
dollars of gold coins. GoldMoney.com, an online precious metals bank, also
has sales of silver and gold that are about equal.
I want to emphasize that we're dealing with the flow of
money here. The price difference is 40:1; but with that kind of money flowing
into this commodity versus that commodity, you also have to look at the
availability of one versus the other. In this case, believe it or not, that's
1:87—there's $1 of silver available in the world for every $87 worth of
gold. The number of coins is explosively larger than the dollar figure.
Something has to give when you have the same amount of money going into two
products that are priced 40:1.
TGR: Perhaps Larisa could tell us a little bit
about what's happening with Sprott Money, including
a comparison to other precious metal investment alternatives.
Larisa Sprott: Sprott Money buys and sells
gold and silver bullion, which includes coins, bars and wafers. We either
physically deliver it or store it. Our storage depository is located in the
State of Delaware. Within the next 6–12 months, we will be opening a
facility in Canada.
Precious metal investment alternatives include exchange
traded funds (ETFs), certificates and trusts; for instance, iShares is listed on an exchange—you get a piece of
paper saying you own the commodity, but you don't have access to it. As my
father mentioned, GoldMoney offers gold holdings,
whereas Sprott Money allows you product choice and
physical delivery of the gold and silver.
TGR: If you choose to have it delivered.
LS: I'd venture to say that 90% of our clients have
their gold and silver delivered to them. They store it in a bank vault or at
home—they have the peace of mind of knowing where it is. And 10% of our
clients choose to store it in our depository.
TGR: And you're thinking about adding a storage
facility in Canada, so there would be a choice?
LS: There's been huge demand from both Canadian and
American clients to store in Canada. The impression I get is that they fear
that what happened back in 1933, when the U.S. government seized the gold in
people's safe deposit boxes, could happen again. So, clients might feel safer
or more confident storing in Canada.
TGR: Would an additional value to an American
investor storing bullion in Canada be the ability to convert it into Canadian
dollars?
LS: Yes, and that's a good point. Anything we sell
to clients, we will buy back.
ES: We can deal in either Canadian or U.S.
currency.
TGR: At this point, are your customers Americans or
Canadians primarily?
LS: About 70% Canadian, 30% American. That's a good
segue actually, because in the next six months, we're going to open Sprott Money USA with an office in New York City to break
into the U.S. market a bit more.
TGR: Regardless of where these metals are stored,
the common view is to hold them in your portfolio as insurance against
economic or currency crisis. Eric, you've recommended that Sprott clients hold 60%–70% of their net worth in
precious metals, whether in vehicles such as Sprott
Money or another. Because that proportion seems higher than what's
appropriate for insurance purposes, to what extent do you look at precious
metals as investments versus insurance?
ES: It's a bit of a semantic argument in a way, but
I guess I would start with the view that I have a large distrust of the
financial system. I really worry that we could have some kind of collapse. It
sounds extreme to say, but we nearly had one in '08 and we nearly had one
Europe last year. We still live in a very over-levered financial system. The
banking issues just don't seem to go away. We bail out Iceland or Ireland or
Greece, and now we've got to bail out Egypt or Tunisia or wherever else is going to have some fiscal difficulties. Ultimately, I
just don't think there's enough tangible support for these systems when
people want to extricate themselves and take their money out of the banks.
Unfortunately, bankers can't get rid of the asset on the
other side of their balance sheet. So I think people will realize sooner or
later that having their assets in physical metal is better than a bank
deposit. I say that on a universal basis. To get back to whether it's
insurance or an investment, I certainly can look at it as insurance because
it's the one asset that should maintain its purchasing power. In some kind of
financial collapse, all assets other than real assets will go down in value,
so in that sense it's insurance.
It's also relatively proven to be an aggressive
investment. Gold's gone up for 11 years; I think it's 17% a year and silver's
gone up even more. I think it's all due to the debasement of the currencies
and it's relative to the currencies. So I think it's both. I don't have any
trouble investing on behalf of our clients to the tune of 70% to 80% in
precious metals. We've had a very high weighting in those areas for a long
time. Of course, it has been the right place to be—and I think it will
continue to be the right place to be.
TGR: The silver market is so small it lends itself
to being held down artificially. What measures might free up the market
movement?
ES: As you probably know, all sort of lawsuits
accused HSBC and JP Morgan of manipulating the price of silver in 2008 when
it went down. In that situation, quite frankly, I was the most surprised and
disappointed person in the world to see that in the middle of a financial
collapse, the price of silver—and even gold—didn't rally. It
seemed so unlikely that that should've happened. In my mind, that
consequentially suggested forces might have been at work that weren't normal
in those markets. But the manipulation will end, if there was manipulation.
I'll explain why.
On commodity exchanges, the majority of transactions never
settle in physical delivery. Just as an example, of the 800 million ounces
(Moz.) of silver produced in a year, there are days when the commodities
markets will trade 500 Moz. Well, obviously, nobody is settling this stuff
because you can't have an 800 Moz. annual market and trade 500 Moz./day. These are just people pressing buttons on
computers—you know with their algorithms or whatever—but they're
not taking physical delivery. Manipulation takes place when a person who has
more money than another person can drive the price of a product up or down,
and it's easy to manipulate a market wherein all you need is fiat currency.
Manipulation will end when enough people say, "You
know what? I'll take delivery of that product." I think that's what's
happening in silver. More and more people are taking delivery. The dealers
who are short something like 400–500 Moz. have like 42 Moz. in storage.
Our organization alone owns more than 42 million ounces. That's not a lot of
silver to cover a short bet of 400–500 million ounces. With every
delivery period, those inventories keep going down. They're going to go down
to the point where everyone realizes there is no silver left. As a matter of
fact, for all intents and purposes, I think there might be no silver
available today, as some mints are no longer taking silver coin orders
because they just can't provide them. So, it's obvious to me that this
supposed silver inventory doesn't exist anymore and that ends
the manipulation.
LS: Speaking of inventories, I'd like to rewind a
bit and make a point. There are so many competitors out there, but what sets Sprott Money apart from all of them is that our business
model is a lot different in that we don't sell what we don't have in stock.
I've heard stories from clients who say they've placed orders with our
competitors and had to wait six months for delivery. Sprott
Money has reserves and a lot in stock.
TGR: Currently, the aboveground silver remaining is
somewhere around one billion ounces. At $35/oz., that's $35 billion for the
entire sector—and seven entities hold 50% of it at this time. That seems
so concentrated that these entities could manipulate the price, as the Hunt
Brothers did back in the '70s.
ES: Most of those entities represent an
agglomeration of individuals' interests; for example, I don't know how many
accounts GoldMoney has, but it would all be in
individual accounts. In the case of our Silver Trust, Sprott Physical Silver Trust (NYSE.A:PSLV), it's whatever money we can raise
from various sources that enable us to go and buy the 22 Moz. we bought. I
don't know how many shareholders it has, but it trades millions and millions
and millions of shares a day. So, really none of these entities are
organizations doing anything—they are groups of investors acting through
various vehicles. I don't think anybody's tried to corner the market here.
TGR: So, we have far more investors in the silver
sector than in previous decades.
ES: Absolutely. I think the phrase that probably
captures silver's behavior, to which it's always been referred, is "poor
man's gold." I think those who haven't bought gold are, to some extent,
seeking refuge in silver. But anybody who's been a student of the silver
market, as I myself might qualify, realizes we have a very tight situation here.
And as this momentum builds to participate in the silver market, the shorts
are just going to get overrun and the price could get excessively explosive.
TGR: Explosive silver prices could bode well for
companies in that space, too. Could we segue to the participation in the
silver market through equities, mining companies that have silver assets?
ES: We do own a lot of silver shares, as well as
gold mining shares. We must own 40 or so different silver stocks. For the
purpose of this discussion, I'll focus in on bigger vehicles available to the
public at large. They're way more liquid and we don't have a strategic
position in them. Relative to gold, there aren't a lot of silver vehicles,
but we continue to like stocks, such as Silver Wheaton Corp. (NYSE:SLW;
TSX:SLW), First Majestic Silver Corp.
(TSX:FR; NYSE:AG; Fkft:FMV; OTCQX:FRMSF) and Hecla Mining Co. (NYSE:HL). On a little
lesser scale, Bear Creek
Mining Corp. (TSX.V:BCM) and on a
really lesser scale is Aurcana
Corporation (TSX.V:AUN). With some of the smaller companies, we have
strategic positions like 10% or 20% and I don't want to be pushing our own
book here.
TGR: Most of the stocks you mentioned have assets
located in either Mexico or Idaho—areas where Sprott
portfolio managers seem comfortable in terms of the companies' ability to
continue growing and performing.
ES: There's no doubt about a comfort level with
operations in North or Central America, but we also have investments in
Peru—where Bear Creek Mining is focused—and Argentina. We have no
particular issues with those areas. The market, of course, always discounts
whatever country it is—whether it be China, Russia, Kurdistan, the
Congo or wherever—based on the political risk there. Typically, it's
built into the stock price and sometimes at a deeper discount than the
situation warrants. As a result, some opportunities to make investments in
places away from North and Central America can pay off.
TGR: Suppose an investor wants to take $100,000
from his nest egg and put it into precious metals because he's nervous about
currency markets. Would you recommend putting 70%–80% of that into
bullion and the other 20%–25% in mining equities? Or, would you suggest
diversifying outside of the precious metals arena?
ES: Just to clarify, I'm not recommending that
people have 80% of their money in physical (though I can tell you I don't see
any problem with that). When I say we have 80% invested in PMs, the physical
component is 30%–35% and the stock component 45%–50%. That's the
way we have played it.
As a portfolio manager, of course we want to get a little
more action out of the shares than we can get out of precious metals because
of the leverage factor. I'm personally invested at that rate, I invest for
clients at that rate and I think it's the wise thing to do. I'm not a great
believer in diversification for the sake of diversification. Make a stand on
what you believe is going to happen and participate in it. Just trust that
you're going to be right. If you're going to be right, you'll get an outsized
return. So, that's our call and we're sticking with it. It's proven very
rewarding over the last decade. And of course, it's been very rewarding to be
in silver in this decade—it's been phenomenal. Maybe I should've had
100% of my money in silver.
TGR: Given that silver's the play of the decade, is
your organization shifting from gold equities into silver equities more
heavily?
ES: Since the end of '08, I've been selling gold
bullion. Initially, it was to buy gold shares because the gold shares got
absolutely massacred in '08. As the year wore on and into 2010, I got more
and more fascinated by silver equities, so I've also been selling gold
bullion to buy silver equities. I haven't yet sold silver bullion to buy
silver equities, which may be the next thing I do—again, because the
equities are a little more levered. Obviously, silver on its own has had
superior performance, particularly in the last nine months. It's been a
phenomenal performer. Mind you, the silver stocks have way outperformed it,
so we'll see going forward.
TGR: It's great to understand your rationale. Thank
both of you so much for your time and insights.
Eric Sprott is chairman of Sprott Inc., CEO, CIO
and senior portfolio manager of Sprott Asset
Management LP and chairman of Sprott Money Ltd. He
has accumulated more than 40 years of experience in the investment industry.
After earning his designation as a chartered accountant, he entered the
investment industry as a research analyst at Merrill Lynch. In 1981, he
founded Sprott Securities. After establishing Sprott Asset Management Inc. as a separate entity in December
2001, Eric divested his entire ownership of Sprott
Securities to its employees. Eric has been stunningly accurate in his
predictions, including foreseeing the current financial crisis. He chronicled
the dangers of excessive leverage and the bubbles the Fed was creating, while
correctly forecasting the tragic collapse of the housing and financial
markets in 2008. Eric's predictions on the state of the North American
financial markets, as well as macroeconomic analysis have been presented in
Markets at a Glance, a monthly investment strategy newsletter.
Larisa Sprott joined Sprott Money Ltd. in the role of president in December
2009. As one of Canada's largest owners of gold and silver bullion, the
company's goal is to facilitate ownership of precious metals to the general
public. Larisa has more than 15 years of experience in the financial
industry, having worked at Sprott Securities Inc.
(now Cormark Securities) first as an office
administrator in the Vancouver office, followed by roles in both research and
corporate finance at Toronto headquarters. Larisa then spent five years with Sprott Asset Management in the capacity of client
services, sales and marketing. In November 2007, she became an investment
advisor responsible for servicing and managing high net-worth clients.
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DISCLOSURE:
1) Karen Roche and Sally Lowder
of The Gold Report conducted this interview. They personally and/or
their families own the following companies mentioned in this interview: None.
2) The following company mentioned in the interview is a
sponsor of The Gold Report: None.
3) Eric Sprott: I personally
and/or my family own shares of the following companies mentioned in this
interview: Sprott Physical Silver Trust. I
personally and/or my family am paid by the following
companies mentioned in this interview: None.
4) Larisa Sprott: I personally
and/or my family own shares of the following companies mentioned in this
interview: Sprott Physical Silver Trust. I
personally and/or my family am paid by the following
companies mentioned in this interview: None.
The Gold
Report
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