In his keynote presentation to last week's New York Hard Assets Investment Conference, Eric Sprott, as usual as a precious metals believer, gave an upbeat presentation on the long term prospects for gold and silver.
He opened his address by pointing to a big change in the markets since he presented at the same event a year earlier when, as he pointed out, the silver price was around $49.50 "until they bombed it" and gold was shortly to see $1900 plus. But overall he pointed to the huge sea change in the precious metals markets over the past 12 years and that the 12 month correction we are currently seeing is a temporary phenomenon and that he reckons the physical market in gold and silver is actually still in great shape.
He sees markets in general being distorted by manipulation by governments - examples being homeowner tax credits, cash for clunkers, TARP, QE1, QE2, LTROs, unlimited swap lines, etc. A veritable litany of stimuli to prevent what should be happening from happening. He quoted a recent interview with Jim Grant - the highly respected economic commentator - who stated that "all markets are manipulated". Sprott pointed in particular to interest rates "which for sure are manipulated" and gave credit too to GATA who came out with the statement that markets were being manipulated long before the theme has been picked up by a number of commentators including Jim Grant. He very strongly concurs with this view pointing out that government stimuli have been designed to try and elicit some strength in stock markets and a degree of suppression in the precious metals markets which they do not want to go up as this indicates the relative weakness in fiat currencies.
Sprott touched on a number of facets affecting the markets at the moment - JP Morgan and its big derivatives losses, financial repression, Sovereign debt - describing the latter as being in a Minsky Moment who said "If you continue to expand your economy by increasing the amount of debt, there comes a time when the productive capacity cannot handle the debt". Greece is seen as a great example of this, He sees Spain as the next one on the list, although Portugal is probably in an even worse position. He sees this as the dominoes which are going to fall one after the other and, in his mind, there is no question that they will fall.
The potential effects on the banking system are drastic. He reminded the audience that at the peak of the 2008 financial collapse Treasury Secretary Paulson said that he was within hours of shutting the banking system down! "Please never forget those words" said Sprott. The system is vulnerable and has got close to this several times since.
For gold he feels that as people realise how vulnerable, flawed and over-levered and risky the banking system is they will want to withdraw their money and put it somewhere which they will see as keeping its value.
There are a number of other factors he sees as being particularly positive for the gold market. These include:
- The zero interest rate policy
- China's dramatic increase in gold imports
- Chinese and Russian mined gold (two of the world's major producers) never gets to the free market
- Central Bank buying seemingly increasing
This effectively means a large percentage of global gold supply is being taken off the market. "If these trends persist", said Sprott," the price of gold will not stay down".
The physical market supply thus has Sprott asking "Where is the gold coming from". The only source which he sees as likely is that Central Banks are selling gold surreptitiously, perhaps by leasing it so that any decline does not show on their books.
Silver: When it reached $49.50 there was suddenly 1 billion ounces of ‘paper' silver released onto the market. Sprott is convinced that certain people in the market with very big short positions manipulated the price down. "We see very strange things happening in the silver market" said Sprott.
He couldn't understand also why people in Europe were not buying gold given their financial system is collapsing around them.
Why does Sprott like silver so much? People buy 50 times more silver than gold and while paper silver may be ruling the market, the day of physical will come. "When currencies fail" said Sprott "gold will become a part of the official reserve currency and silver will have a very, very major role again."
Sprott concluded by saying while he loves gold, loves the data, that silver will still be the investment of the decade. "Stay the course" he said. Even though Central Banks et al may be working against you gold and silver will ultimately prevail as fiat currencies continue to decline in value.