James Turk, Director of The Gold Money Foundation recently interviewed Eric Sprott of Sprott Asset Management, who called silver the asset of the decade. At $44.66, Turk asked what Sprott’s forecast was of the silver price. Sprott was very optimistic about silver for a number of reasons. He said that most people would not know about the reasons for his optimism, but went on to share the reasons with Turk.
The use of paper silver in the silver market is a major factor which contributes to Sprott’s optimism. When the price was $49.80 there was approximately 8 million ounces of paper silver. Approximately 1 million ounces of physical silver are available each day for investment. “It seems when everybody talks about the speculators and so on I say well, who’s the speculator, the guy buying it or the guy selling it. Who doesn’t have a hope in hell of delivering it?” Sprott said. There is a big short position in silver and Sprott believes it will resolve very soon and possibly to the upside.
Sprott also mentioned that the US man sells more dollars of silver than of gold as opposed to the Canadian man who sells approximately a dollar and a half of gold for a dollar of silver. Gold Money and Sprott Asset Management both sell more silver than gold. Sprott says that he sees this as a decision by people to decide one versus the other and they can’t keep buying it at a one to one ratio when the price of silver and gold is 40:1. Turk felt that this distinction that the specs in silver are the paper shorts, whereas the serious players in silver are the physical longs, is interesting. He went on to ask Sprott about what is likely to happen to the paper shorts.
Sprott responded that people already got seriously burned. The silver price went from about $18 to $48, which is a massive short position. “I think there might have been 600m ounces at least, let alone what’s in the derivative business. So when you lose $30 on 600 million, you’ve lost $18 billion. That’s why the raid happened on May 1st. That drove the silver price down so that they could get off some of the shorts. But they still have a pretty good short position or they’ll go the way of fiat currency.”
When Turk asked Sprott whether he expects them to just renege on the contracts, Sprott’s answer was “Well, there’s no way that they could deliver on the contracts.” He went on to explain that there is not enough physical silver. Looking at the gold market and the silver market from 2005 to 2011, there are four or five entities that changed their demand by a total of 380 million ounces. The US government is no longer selling. They used to sell 100 million. The Chinese changed from exports to imports which affected figures by 200 million. The ETS came along and are buying 60 or 70 million ounces per year. Yet we can’t come up with 380 million ounces in a 900 million ounce market.
“Who is that person who is not buying the 380m ounces? There has been a huge change in the supply and demand in silver,” Sprott said. Upon being asked whether he is more bullish in silver now than he was in gold despite being a long-standing gold bull head, Sprott said: “The line I use is that gold is the investment of the last decade and I think silver is going to be the investment of this decade. I do believe in a thesis that silver will get back into a 16:1 ratio. The gold is over 1600 so theoretically silver could be a $100 it’s at 40:1 and change. Gold will probably go to some number that’s stratospherically higher than it is today. So that means that silver is going to have a good run. I see the buying coming in at 1:1, I see the supply of gold above 300$ as much higher than silver but the buyingis 1:1 so something’s gotta get somewhere.”
Turk asked about a time frame of when and how long this is expected to last. Sprott said that Turk was his expert in predicting gold. Sprott was very complimentary about Turk’s prediction two weeks ago about gold getting going in the second half.
Sprott continued: “You just see things developing in the market that could make it explode at any moment in time. I always think that at 3-5 years for sure it will trade at 16:1. When it actually happens, it could get parabolic at any moment. We have a financial system that’s on the edge of a cliff here, so all I know is that you can safely own it. Go to sleep and you will be a big winner at the end of a certain time period.
Turk wanted to know why or how somebody would take a short position in silver given the extremely short position given the extremely bullish fundamental system. Sprott went on to explain that the only logical explanation is that the cartel is always trying to suppress the price of gold and silver. “I’m of the opinion that knocking silver down was intended to keep the gold price week. The silver is easier to move. It’s a very small market. Keeping the price of silver down has a negative spillover effect on gold. It was not very effective last time. As you know, gold only went down 6 or 7%, but silver went down over a 3rd,” he said.
He went on to explain that you can’t create physical silver out of thin air in the same way that paper silver can be created out of thin air.
According to Sprott, another reason why gold didn’t go down that much is that there is latent physical demand for gold. The Bank of Korea just bought 25 tonnes of gold. Mexico bought 93 tonnes. “The paperboys can do what they want but when the orders come in to buy it they have to stop the game. We just raised in Sprott’s physical gold by $300 million, so we didn’t buy any gold recently. It’s all physical.”