Podcast

Eric Sprott - Paper Markets Are a Joke: Prepare for Bullion Prices to Go Supernova

Tuesday, July 5, 2011, 5:49 PM

"I think that the prices will continue higher. I mean, the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: Just keep dollar-averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400 and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that."

So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim), and the true value of gold and silver (very underpriced; particularly silver).  

Eric sees the current "extend and pretend" intervention by world governments and central banks to prop up a fundamentally flawed banking system, particularly the vast moneyprinting efforts of the past few years, as a ruse that is losing it's influence. Once enough people ask "Why have your money in a bank earning nothing? Why not have it in something that might at least maintain its purchasing power?” The capital flows into the precious metals will dwarf current levels, sending bullion prices much higher.

Those interested in hearing Eric's insights on:

  • Why we're in a global secular bear market for most assets classes
  • What the safest investment options are
  • How much precious metals exposure investors should have
  • The key factors that will drive PM prices much higher
  • The mindboggling supply shortage and manipulation within the silver market
  • Why there may eventually be two prices for bullion: one for paper and (a much higher one) for physical, & how high Eric thinks prices could go

....should click the play button below to listen to Chris' interview with Eric Sprott (runtime 38m:01s):

You are missing some Flash content that should appear here! Perhaps your browser cannot display it, or maybe it did not initialize correctly.

Download/Play the Podcast
Report a Problem Playing the Podcast

Or start reading the transcript below:

Chris Martenson:  Welcome, Eric; it's a real pleasure to have you today.

Eric Sprott:  Chris, good to be here, and thank you for all the work you are doing in apprising your investors of what's really going on in the world.

Chris Martenson:  Oh, thank you. We’ve been at it many years and unfortunately much of what I think both you and I saw coming – though unfortunately not enough others along the way – is really coming to pass. If I could, let’s start with your views. You have been advocating and creating investment vehicles for people to own gold and silver for a long time. How did you get to that position and what are your views on owning gold and silver at this point?

Eric Sprott:  Sure. Well it all started, Chris, with our studies back in 2001 where we were entering into a secular bear market and wondering how you deal with that. And a typical response would be to own gold and silver, which is what we decided to do. I think the one thing that really tipped us into it was an analysis of the physical supply and demand for gold and some work by Frank Veneroso that suggested things would have to change dramatically in the physical gold market because the central banks were selling four to five hundred tons a year. And as you know, here we are eleven years later and now they are buying four hundred tons a year on balance, and this is in a market where the mines supply only twenty-six hundred tons a year. So that is a huge change that had to take place that Frank identified back then. He also identified that the gold companies would stop hedging. We’ve had the ETF’s come along. So we have had a lot of dramatic changes in the physical balance between supply and demand in gold. And that is really what took us there in 2000; to get actively involved in that particular market.

Chris Martenson:  And looking at it today, has anything changed in that analysis? You mentioned a secular bear market, are we still in one and also has anything changed in the fundamental supply/demand equation that has actually tipped it one way or the other, further or less, since the initial analysis you looked at?

Eric Sprott:  Sure. Well, I do think we are still in the secular bear market and basically what people describe with the phrase “extend and pretend”. And we had the zero interest rate policy, the housing boom, the lending boom, TARP and TALF and all those things which try to delay what naturally should happen. When I look at the headwinds for gold and silver, I really believe that we have been aided and abetted by a lot of these policies, particularly QE1 and QE2 and the various printing mechanisms of the ECB and the Japanese government and almost all governments in the world. So as much as I would not have anticipated those types of developments happening, they have happened and they provide an even stronger headwind for people realizing that currencies are not going to survive and to maintain your purchasing power you have to own precious metals.

Chris Martenson:  You know, I too have been surprised by how long all of this has stretched out. If you had told me five years ago – Eric if you had said “Chris, the Federal Government in the U.S. is going to be running a $1.6 trillion dollar deficit and the Federal Reserve is going to monetizing 75% of that and the bond markets will be relatively tame and the dollar will still be roughly where it is at”; I would have said you’re nuts. But here we are. And my view on this is that what we are kicking the can down the road. We have bought some time, – which I am thankful for personally – however the risks are now increasing. And the risk that I have identified that concerns me a lot is that, sooner or later, much is happening in Greece right now where suddenly the world wakes up and says “Hey, wait a minute. They can’t possibly pay that back. And at 22% interest rates on 2-year paper, they really can’t pay that back.” So suddenly the illusion is lifted. We have collectively suddenly gone, “Greece is not solvent. Oh, that’s terrible.” And now we are grappling with that. But that same dynamic can be extended to, I think, any of the governments that you just mentioned. It varies across Europe somewhat, but in Japan and the U.S. there certainly are fundamental mismatches between current productive economic output and the levels of indebtedness. We are printing our way to that. Is there a way that you can see that this could actually be turned around where it all sort of pencils out? Is there a solution to this that does not have to pass through a fiscal crisis and possibly a currency crisis?

Eric Sprott:  Well Chris, it is very hard to imagine that happening. And then I look at really what has happened over the last eleven years since we hit the high in that, we basically created a problem in the world of banking business and I always think of banks as being levered 20 to 1. And when your paper assets start to decline, of course it does not take much of a decline to get rid of all the capital. And we have seen that in so many instances whether it is Iceland or Ireland or now the Greek banks. And all the moves that have happened so far really have been in response to the problems in the banking system. That is why you have TARP and TALF and all those things because the banks basically were losing deposits and somebody had to come in and support them. That is what happened in the UK, it happened in Iceland, it happened in Ireland, it’s happening in Greece as is transpiring right now. And I think the big fear is that you cannot let one banking system go down without an impact on all the other banking systems. So collectively everyone is trying to support the banking system and I think people see through the ruse. And the natural reaction is “Well, why have your money in a bank when you earn nothing, why not have it in something that might at least maintain its purchasing power?”

Click here to read the rest of the transcript.

Note: listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on The Screaming Fundamentals For Owning Gold And Silver, which takes a deep dive into the data behind the supply and demand imbalances in the bullion markets.


Eric Sprott is Chief Executive Officer, Chief Investment Officer and Senior Portfolio Manager at Sprott Asset Management, LP. He manages Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Bull/Bear RSP Fund, Sprott Offshore Funds, Sprott Canadian Equity Fund, Sprott Energy Fund and Sprott Managed Accounts. He also is the Chairman of One Earth Farms Corp and a Member of the Executive Committee of Central Gold-Trust. Eric's predictions on the state of North American financial markets have been captured throughout the last several years in a monthly investment strategy article he authors titled “Markets At A Glance”. Mr. Sprott holds a Chartered Accountant designation.


Our series of podcast interviews with notable minds includes:

Related content

15 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2346
Poof, all gone

And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid.

To my exaulted ignorance of economic theory this means Deflation.

Brainless's picture
Brainless
Status: Silver Member (Offline)
Joined: Dec 9 2008
Posts: 149
Interest rates

One of the main causes for high gold and silver prices is the interest rate.

It is the only thing why i am hesitant to buy more gold. Silver is less vunerable i think.

The probability of interest rates going to 10,15,20% is not as low as we think. It has been done before so it is a trick that is already been tried. And it even worked (for a while!), which makes it even more plausible to happen.

Gold prices would crash when that happens.

Who in the US decides interest rates. Is it a just a small group( connected to who?), does it have to go through congress? If someone can elaborate on the process of how interest rates are set i hope i can assess the risks of that happening better than now.

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2115
I may be mistaken but...

Brainless wrote:

One of the main causes for high gold and silver prices is the interest rate.

It is the only thing why i am hesitant to buy more gold. Silver is less vunerable i think.

The probability of interest rates going to 10,15,20% is not as low as we think. It has been done before so it is a trick that is already been tried. And it even worked (for a while!), which makes it even more plausible to happen.

Gold prices would crash when that happens.

Who in the US decides interest rates. Is it a just a small group( connected to who?), does it have to go through congress? If someone can elaborate on the process of how interest rates are set i hope i can assess the risks of that happening better than now.

...interest rates at 10% and up would quickly lead to USGov default on the debt. We can hardly afford our debt load at near-zero interest rates. In a default scenario, gold & silver would be fine.

Viva -- Sager

Thomas's picture
Thomas
Status: Member (Offline)
Joined: Aug 24 2008
Posts: 20
Less Clear

To describe the complex phenomena using a simple binary language (inflation and deflation) is probably not possible. I have decided there is only one definition of inflation that I care about: inflation is rampant when the items I have to buy with my own money go up. Plummeting prices of condos in Vegas may be deflationary but not in my world. I suspect that things you own will drop in price and things you need will go up. What do you call that?

Regards

Thomas

(aka David Collum)

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1840
Biflation Or Stagflation And A What-If?

Thomas wrote:

I suspect that things you own will drop in price and things you need will go up. What do you call that?

Biflation Or Stagflation
I would probably call it biflation or stagflation, similar to what one might see as an economically depressed area progresses further into a downward spiral. Wages decrease, jobs are few and depend even more on connections, prices of necessities rise.

Further complicating the mess, suppose someone files bankruptcy and discharges all their debts while still keeping their house. Or, suppose someone stays in a house but foreclosure is kept at bay - the banks just haven't had time to get to that particular house yet. Both household examples now have money to spend. They don't have to pinch pennies anymore. Taco Tuesday at El Torito.

Suppose someone loses their job. Outsourcing, technology, bad economy, whatever. They have savings. But now they're pinching every penny. Rice and beans at home every night.

And How's This For a Kicker?
Suppose the Fed just prints money to buy the entire national debt currently extant, and states clearly that this is a one-time-only situation. Voila! No national debt! Would the bond markets become roiled because the value of the dollar suddenly decreased due to all the money printing? Or would the bond markets be happy to buy U.S. Treasuries now that the government can actually afford to pay the money back?

Or will the bond market keep in mind that no one who makes $2.1 trillion while spending $3.5 trillion could possibly ever cut expenses to be in line with income - even a tax-increased income - nor be able to repay the loans? But if the bond market was actually that smart, how come the bond market is not currently that smart right now and interest on Treasuries are still so low?

Poet

rhare's picture
rhare
Status: Diamond Member (Offline)
Joined: Mar 30 2009
Posts: 1271
The is no market pricing for bonds right now...

Poet wrote:

But if the bond market was actually that smart, how come the bond market is not currently that smart right now and interest on Treasuries are still so low?

The bond market is not a market right now.  The price of bonds and thus interest rates are not being set by the market as Chris has pointed out in quite a few articles.  The Fed is buying directly (QE) or the primary dealers are buying up a huge portion of treasury bonds.  The primary dealers buy them and them flip them back to the Fed within days or weeks (POMO).  Also, we have seen the Feds buying up all kinds of assets (loans) via TARP, TALF, ???.  This keeps interest rates artificially low.

When we get real market pricing we will see much higher interest rates.   Just think how much you personally would require in interest to make a loan to someone if you have to cover your risk of loss and inflation?   How much of a down payment would you require and what type of collateral? I bet it's quite a bit above zero! Wink

Edited to add:

Poet wrote:

Suppose the Fed just prints money to buy the entire national debt

I don't think the Fed can buy the national debt, it's not an asset, it's a liability of the government.  They could monitize it - which means essentially printing money to pay it off (giving money to existing bond holders).  Or they can just keep buying new debt, which is the same of printing money and handing it to the government if you never expect to be paid back.

Remember when you default on a debt, or a debt is forgiven by a bank or central bank, that is inflationary because the money is already in circulation and can not be pulled back from the system. Where a loan creates money, paying back a loan destroys it.

Outcast 19's picture
Outcast 19
Status: Bronze Member (Offline)
Joined: Mar 23 2011
Posts: 46
Who sets the interest rates?

With regard to the observation by Brainless, it's one thing for the Fed to raise rates during times of economic overheating.  It's entirely a different matter when the market forces rates higher during times of economic instability.

Debt is money.  Higher rates tend to reduce borrowing (at least in the private sector).  We are already seeing the impact of reduced borrowing in the form of slow or no growth and high unemployment.  If bank rates rise in this environment (and they would if Treasury rates increase), there will be less private borrowing which will lead to even slower growth and more unemployment.  That's why the Fed is doing all it can to keep rates low through various purchases of debt.

No matter what moniker we put on it, we are in an economic predicament of enormous proportions.  Fiat money is failing. How it all shakes out in the end remains to be seen.  Meanwhile, I'm hedging against multiple outcomes with primary wealth first, followed closely with gold and silver.

And I'm certainly open to learning about other ways to hedge, so keep the ideas coming.

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2115
Sure would be nice...

...to know who is driving the price action in PMs the last few days. Nervous Europeans? Central banks frontrunning remonetization? Or is it the folks who read/listened to this piece?

plato1965's picture
plato1965
Status: Platinum Member (Offline)
Joined: Feb 18 2009
Posts: 615
maslowflation ?

Thomas, maslowflation perhaps ?

Hitting resource limits means rationing of the necessary commodities by price, or by ration card.. or force..

Perhaps the Bernank is busily preparing his "starvation - making sure IT doesn't happen here" paper... ?

Maybe he's stuck on the:

"Fortunately the government has a technology called ...." <- hmm ... err...

line.

hint for the bernank, try to do better than Marie Antoinette's suggestion *facepalm*

sundarb's picture
sundarb
Status: Bronze Member (Offline)
Joined: Jan 10 2011
Posts: 72
PIIGS crisis

SagerXX wrote:
...to know who is driving the price action in PMs the last few days. Nervous Europeans? Central banks frontrunning remonetization? Or is it the folks who read/listened to this piece?

European crisis is my bet. Moody's just downgraded Portugal. Greece is already defaulted in my book, they just haven't openly declared that they have defaulted. Interest rate on 2-yr Greek bond is 26%. If that doesn't spell default, I don't know what does.

I think next in line are biggies - Italy and Spain. 

I think that this whole monetization / q-easing a.k.a money printing charade can go on for a while and we are in for quite a ride :)

tictawk's picture
tictawk
Status: Member (Offline)
Joined: Aug 25 2008
Posts: 10
Mirage

DEBT is money we DON'T HAVE.  It is money that we have yet to earn.  We have leveraged our future and are having trouble meeting the payments today.   Total debt out there is in the hundreds of trillions.   Any serious attempt to monetize bad debt will lead to a contraction in lending and the availability of credit.  That spells DEFLATION.   Credit is the lifeblood of the system. Holders of debt will dump en masse and interest rates will go sky high and force all debtors to default especially those tied to variable interest rates.  It seems to me that people who claim that the dollar is going to collapse are only looking at how to relieve debtors without any pain and the ignore that the Fed cannot control everything and is NOT the whole market. 

Pushing the dollar lower only postpones the inevitable.  The only way to resolve this is to DEFAULT on our obligations and those who get hurt will be the ones who took on more debt than they could manage and have a cash flow problem. 

KennethPollinger's picture
KennethPollinger
Status: Silver Member (Offline)
Joined: Sep 22 2010
Posts: 173
Necessity of land purchase

Being new to this great discussion the only thought I'd like to add at this point is that LAND IS crucial

to our future, as has been spelled out here.  It seems to me that COMMUNITY needs to fill out the picture.

Land AND community!  To view my attempts in this endeavor, please review www.AwarenessCenters.com

where I own pieces in the Catskills of New York and in Costa Rica.  Would love to have like-minded folks

share with me.  Many thanks to you all for enlightening thoughts.

KFS's picture
KFS
Status: Member (Offline)
Joined: Jul 16 2011
Posts: 1
safety of gold?

Even if we purchase gold - what is going to stop the government from confiscating it all back when they want to?? Another Executive Order 6102!

SingleSpeak's picture
SingleSpeak
Status: Gold Member (Offline)
Joined: Dec 1 2008
Posts: 428
That Was Easy

KFS wrote:

Even if we purchase gold - what is going to stop the government from confiscating it all back when they want to?? Another Executive Order 6102!

Me.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments