Interviewed by Louis James, Editor, International Speculator
At the Casey Research/Sprott Summit When Money Dies, Louis James spoke with Sprott Inc. founder Eric Sprott on the risk involved in holding money in banks, and the likely future of precious metals stocks.
[Even if you weren't able to attend the sold-out Summit, you can hear every presentation… get every stock recommendation… and learn how to prepare yourself to not just survive, but thrive during the coming turmoil. Order your set of audio recordings – available in both CD and MP3 format – today.]
Louis James: We are sitting here this afternoon with Eric Sprott at the Casey conference – When Money Dies conference – and he's just delivered an interesting talk, as he always does. Welcome, Eric.
Eric Sprott: Thank you.
Louis: Thanks for being here.
Eric: Happy to be here.
Louis: So a quick recap for the people who weren’t here, major talking points. What are you focused on now and why?
Eric: Sure. Well, the key theme to me – and one that most people I don’t think understand or don’t take the time to look at – is the potential weakness in the commercial banking system. And we see it manifesting itself in France today with these shares that are all down between 60% and 80%, which tells you that there's risk that they can't dispose of the assets that backstop the loans and the loans are leaving, and we've seen much evidence of that, so I think it's been risky for a long time. It's not just this year. I would have said the same thing 10 years ago that when you're dealing with a levered financial institution in a time of crisis, there are no assets you can sell, and therefore there's great risk that somebody has to come in and kind of bail out that bank, which is what we've seen happen for the last 10 years, or they take them into conservatorship or something has to happen because the money is leaving and there's no asset to sell, so that’s the key risk. The next topic –
Louis: I’m sorry, so you're now thinking that’s imminent, that something's got to –
Eric: Well, we're very close in the sense that – I mean, Europe is a sort of a bit of a tinderbox here that you just don’t know – can they come up with a big enough fund to keep people believing that the banking system is okay? There has been a lot of confidence broken. There was a lot of confidence broken here in the US in '08 when, of course, all the bank stocks came under severe pressure, and it was stated at the time that the banking system was within hours of closing. And I never like people to forget that, that we are in a situation where that can happen, so it has not gotten better any day; it gets worse almost every day, and you have to be cognizant of the fact that when you have money in a bank, you have a risky investment. Most people don’t think of it that way, but certainly I do.
Louis: Money in the bank. That’s not a positive any more the way it once was.
Eric: No it's not a positive.
Louis: And your answer is "go physical. " You want to talk a little bit about that?
Eric: Yes. Well, I think there are very few things that you can buy in the kind of financial and economic setup we have, and we've talked about the financially economic setup, I mean, are we going into a recession? Are we going into a depression? How do you survive in a situation like that? And the most obvious thing is to own precious-metals-related investments, whether it's physical bullion or gold and silver stocks. I mean, people can make a case for owning productive farmland, things like that, things that are absolutely necessary in the kind of economic environment we see, so that’s why it's easier for people to invest in gold and silver and that's why I push people to do that.
Louis: Now we saw in 2008 a big upset, a lot of fear. You'd think that gold would spike because there was panic in the streets, but gold dropped because relating to what you've said before, you can't sell anything. Where's the asset you can sell? People sold gold. Do you think that the potential for that to happen is there again? Can we see gold and silver drop even when they should go up? Will we or have we already washed that out of the system? Where are we at now?
Eric: Sure. Well, as you know, we see it all the time. We see it just recently in the silver and gold prices, and I believe that because the powers that be – the central banks and governments try to keep people believing in the framework, the economic framework they have – I believe they are active in these markets from time to time, so you can never draw a correlation that gold went up because of this, and so whenever it gets a little bit closer to the ultimate crisis, I actually believe that forces are put at work that can move the prices down, and it's been talked to that this is what's happened recently. I believe it totally because the situation just gets worse every day but the price of gold goes down. It absolutely makes no sense.
Are we going to have an '08 repeat in terms of the share prices? The one unusual thing that happened in '08 was that the silver price really crashed. It went from $21 to something like $9. As you know, there are ongoing lawsuits against various firms: J.P. Morgan with HSBC being involved in a manipulation of the price of silver down. I would expect that if there was a proper investigation, they might determine if that was the case. Had that not happened, I think the market would have acted very differently.
Two, even though the market went down dramatically in share prices, within 15 months they came barreling back, and of course gold was up that year. Gold was up every year subsequently. The reason to own gold never changed. So I think having seen it once, I don’t think we will see that same play out that we had then. There's been recent evidence of a difference in the market, and I forget the date, but I think it's something like August 10 when the Dow was down 500 points and the UE Gold Index went up 4%. So we had something like a 900 basis points difference between the two and I thought, "Oh my god it's like in a eureka moment where the gold stocks disassociated themselves from the stock market." We had another example of that this last Friday where the market was down something like 230 points and the UE Index went up. And we see more and more examples of it all the time where finally people are realizing that gold stocks are different from regular stocks. So I don’t think we'll see the same carnage, although we always see raids on the gold and silver prices by the paper sellers – that far outnumber the real buyers, the physical buyers – but if you wait it out and the physical buyers come through, which it looks like they're going to come through here, then everything will revert to norm again.
Louis: Okay. You said this morning that the last decade, 2000 to 2010, was a decade of gold and the upcoming one is a decade of silver. Could you tell us a little bit more about that?
Louis: If all these things happen, gold should still go up.
Eric: Oh yes. I have no doubt that gold is going up. Don’t get me wrong; I think it's going up. I just think based on the evidence that we all see of the massive amount of silver buying, vis-à-vis gold, where people are almost putting as many dollars into silver as putting into gold, but the price is, you know, 50 times different, but the same amount of money is going in, and the availability for investment is in a ratio of about – there's 20 times more gold in dollars to buy than there is in silver dollars to buy for investment, yet the money is going at 1:1. Well, I know as kind of a mathematician or logician that cannot carry on. Something's going to give here, so that’s why I think that silver price in the next decade will do better.
Not something I spoke to in the talk, but something that people should have in the back of their minds, I believe that gold – the market has determined that gold is the reserve currency today. It's outperformed everything by a wide, wide margin, not even close to being comparable to anything. And people do talk about backing currencies with gold. Well, if they back currencies with gold, you need a monetary item that is in smaller quantities, which has to be silver, and can you imagine the physical demand for silver if we had to reintroduce silver as a currency? It would be unbelievable, so I think that’s another more macro, long-term thing that would suggest that in this decade should we ultimately collapse the financial system and say, "We've got to back the currency with something real," that then silver would have value.
Louis: That’s pretty interesting. A lot of people like to talk about the gold-silver ratio and how it's out of whack, but you're not talking about ratios, you're just looking at the facts of reality facing the supply and demand.
Eric: Just the buying, I mean, and I would say, you know, nobody is making these people buy. They're just buying it, and if people want to keep buying it on a one-to-one ratio, the price will not stay at a 50:1 ratio; there's no way.
Louis: And owning the stocks versus owning the metals… There's a perception out there that, "Wow, we have these ETFs now and so, you know, maybe the stocks aren’t going to do it this time around, this market will be different; if people just buy the ETFs, it's easy. " Do you subscribe to that or do you think the stocks will still give leverage to the properties?
Eric: I would say right now I am in the camp that believes that the previous metal stocks are getting so cheap that they should outperform the metals here. Like they are incredibly inexpensive on any metric you want to use, and compared to any industry you want to compare to. Where the outlook for gold and silver is likely that the price goes up, the outlook for almost any other commodities is that the price goes down; and yet we're trading at very low multiples of earnings. We haven’t seen the earning power of these companies at these prices yet because there haven’t been that many reporting periods, so personally I've sold gold to buy gold stocks and silver stocks.
Eric: I've not yet sold silver to buy silver stocks, but I think the precious metal stocks are in a way better situation today than they were before, because the market has not discounted gold having gone up to $1,600 or $1,900, which it was recently. I think there's better value in the stocks.
Louis: All right, well, any other final parting thoughts or –
Eric: Well, I guess the final thought that I would give to your listeners is that I think there's a great wealth redistribution going on here. Those who have owned gold and silver for the last decade have been the beneficiaries of this massive outperformance of other assets, and I think that's likely to continue until we have some resolution to the financial crisis. And I suspect the resolution won't be pretty, and you want to be in a safe investment, so I think that we will continue to see a huge wealth redistribution to those who are involved in precious metals versus other things.
Louis: Somebody brought up the theme, and it sounds like what you're saying, simply "When money dies, your money doesn’t have to die."
Eric: That’s a good point, you know, I mean, just the caption for the conference, "when money dies." I mean most of us think – history has proven that paper money always ends up being zero value, and I would say based on every economic fact we look at, there is even more reason to believe it today than there was at any time in history, so I think we're going in the right direction.
Louis: Okay, well thank you very much.
Eric: Okay, my pleasure.