Eric Sprott, the Founder, CEO and Senior Portfolio Manager of Sprott Asset Management and owner of Sprott Money, has made the case for silver at $1200 per fine ounce.
According to Sprott gold has done very well recently and it is becoming obvious that the precious metal is a safe investment. Events are unfolding which suggest that there is a differentiation in the market between gold stocks and general stocks.
On August the 19th, the Dow was down from 500 to 600 points and the UE Gold was up 4%. The index body was outperformed by 800 basis points in one day and this shows that there has been a change in attitudes. Although gold was down $50, the UE index remained positive. People are looking at gold very differently than has been the case in the last decade and this is making gold stocks an exciting investment at the moment (although physical gold ownership remains king).
Gold stocks have fluctuated and at times it got hammered. Recently it broke out near the 600 level before shooting back up and closing on a positive that same day. According to Sprott this is a rather common occurrence. At times gold did well and the U.S. Dollar held its position. Some days on which gold performed minimally, the UE increased.
The recent performance of the UE might signal a firm breakout after a long congestion period. Sprott says that stocks can do well and stated that he is amazed at how cheap stocks are. “I can buy stocks at two times next year’s cash flow and three times next year’s cash flow and i can buy some senior silver producers at five times next year’s cash flow. I could probably buy any stocks. It doesn’t matter that they are producing gold and silver if it was trading at those kinds of multiples and in my back pocket I have the fact that I think gold and silver are going up. Whatever I think I am paying, I am probably not paying that price when we finally get there next year. Typically, the price is going to be more than it is now,” Sprott said.
He went on to explain that people have very small percentages of their money invested in gold. The average investor’s portfolio has only around .75% invested in gold. Eric Sprott says that 80% of his money is invested in precious metals. Based on that fact, investors like him crowd out the smaller investors and that means that they have less than .75%.
The economy is heading over the proverbial cliff and the only thing that is likely to maintain its value or survive, is the precious metals market. This strengthens the case for investors to get into the precious metals market now. This is the only way to save yourself from financial despair.
Sprott beliefs that they could move 50% of stocks before the end of 2011. He says: “I definitely do. That’s my minimum target here. I think we need to get 50% of the gold stocks between now and December 31st. I don’t need gold and silver to go much higher than they are right now for that to happen.”
In recent years some of the main stream economists have started investing in gold. Sprott sees this a part of phase two of an ongoing process. The main stream investors have to become involved.
The investment demand in India and China increases in double digits all the time. The Central Bank’s buying has increased to 400 tons from net sellers of 400 tons in this 4000 ton market. Supply in the gold market has not changed much in the last decade, and this demand is explosive. People are more concerned about bank deposits, fiat currencies and sovereign debt than they were before and this can spill over into the precious metals market, affecting prices dramatically.
As a long term silver bull, Sprott uses various proxies to tell him what investors are doing with their money. The U.S. Mint’s silver and gold sales match one another nearly dollar for dollar, which means people are investing in the precious metals. Investors decide for themselves to invest as much into silver as they do into gold. At his company, Sprott Money, they sell more silver than gold. He feels that people are expressing their views in the public market in terms of their buying decisions. Although there is much more gold than silver available, people buy the metals at a 1:1 ratio. In the long term this could create a problem as some groups have lost large sums of money as the result of being short on silver stocks. On the days when silver is down, physical buyers wear down the paper pushers and silver always comes back up. This leads Sprott to the conclusion that silver will outperform gold within the next 10 years.
He is very optimistic about silver’s future, saying that instead of 16:1, he thinks that it might do as well as 10:1 as things tend to overshoot targets once they catch on. Sprott said that people should fear bank deposits instead of fearing precious metals. With precious metals the risk of counter productivity is avoided and the investor does not need to be concerned as to whether the financial institution is going to succeed or not. While there may not be enough silver, there will be plenty of gold.
Going back over the past decade since March 2000 when the bear market started, the UE gold index has gone up 1544%. The SMP has gone down 17% and Sprott believes that this is a great form of wealth redistribution.
Investors who have the right assets are prospering even though most of us are simply fighting for survival. Gold investors are prospering as a result of the gold price being so good despite rampant gold market manipulation. The right asset class is key to your investment success. Sprott encourages investors to ensure that they have as much of the right asset as possible and in his mind, precious metal is definitely the right asset, especially physical silver and gold. He suggests that 80% of investors’ portfolios be precious metals.
The word “cliff” comes to mind when Sprott thinks about the global economy and stock markets. People are losing confidence in governments, the property market and banking systems and they are no longer willing nor able to spend money. Although salaries increase in the single digits, inflation increases in double digits and people are losing purchasing power.
Global coordinated currency printing (fiat currency creation) contributes to this matter. Governments can choose to either print more non-redeemable paper notes (fiat currency) or exercise restraint. If they restrain, it becomes a nightmare as the GDP goes down and bond rates increase. Experts expect that the U.S. government will choose to print rather than be responsible with spending or anything else. There is after all no way in hell the U.S. can get out of debt except by monetizing the debt by printing more non-redeemable paper notes in order to fill the debt ‘black hole’ that has been created since 1913. Things have been allowed to get too far out of hand. The monetization of the debt will most definitely lead to hyperinflation, which will lead to the complete collapse of all fiat currencies, including the once mighty U.S. Dollar. This is why investors must get into physical silver as soon as possible, especially considering that Sprott is making the case for silver at $1200 per fine ounce.