Monday, February 27, 2012

Eric Sprott:The Crisis is Out of Control

We have completed transcribing Eric Sprott's recent radio interview with The Doc for future reference for our readers.
In our explosive interview, Eric discussed how he first became involved in precious metals, why he is more bullish on silver than gold, the recent follow-on offering of the PSLV, his efforts to encourage silver mining companies to believe in and invest in their own product, the Greece/ Eurozone crisis, and MUCH MORE!
Full transcript available below:

Copyright © 2012  All Rights Reserved. 

This is The Doc with We’re privileged to have Eric Sprott, CEO of Sprott Asset Management with us today to discuss the fundamentals of the silver market, the Euro debt crisis, and the recent follow-on offering of the PSLV.
Thanks for joining us today Eric, it’s really a pleasure having you on the show.

Eric: Well Doc, it’s great to be here, and I think you have a wonderful site and I would encourage your listeners and readers to pay a lot of attention to what you say, I think you’ve made a big addition to the silver world because there aren’t many people who talk to silver, and I very much welcome and enjoy reading your site every day.

Doc: Well thanks Eric. I’d like to start off by asking you just a little bit of background- at point did you first become interested in silver, and I guess what peaked your interest in it?

Eric: Sure. Well, I basically got involved in precious metals in a real serious way as a manic investment when the NASDAQ crash occurred. We had anticipated it and you know I had been writing columns on the market and I sort of foresaw that the market might break, and so we had to do some research on what are we going to do if we go into a secular bear market- we run a lot of money, and how are we going to survive this thing? And I always use that word survive. And there was some great work done by a guy named Frank Veneroso who did a gold book in 1998 that basically said you know the central banks and the gold mining companies are selling gold they shouldn’t be selling and it’s a negative factor on the supply of gold and ultimately, they’re going to have to change what they do. So from a supply/ demand point of view one realized that there would be a secular bull market in gold. And that’s kind of what took me there, because gold stocks were the only thing that did well in the depression and I figured they would do well as we headed into this secular bear market. In terms of silver, my first studies were in gold, but there were always silver companies coming through here. I got serious about silver I’m going to say maybe 30 months ago when I kind of figured out that the supply/ demand situation of silver was very much in favor of the price going higher, and that the price was being suppressed as I suspect the price of gold is being suppressed and that when we could finally win the battle against the paper short sellers that silver would by far outperform gold. That’s kind of what took me there.

Doc: It sound like you got in with pretty good timing- about the best possible if it was around 1998 that you first got into gold.

Eric: We’ve had a wonderful run with gold and you know the HUI gold index was down at 35 then and I think it’s probably 520 today or something like that. It’s been a wonderful, wonderful place to be for the last decade and even into this decade, but as I look forward I think silver will outperform gold- notwithstanding the fact that I’m a big bull on gold as well.

Doc: I know that personally, myself speaking, I’m a lot more bullish on silver today than even when I first entered the market in 2001 at somewhere around $4.70 or $4.75 an ounce. I know that you’ve often stated that this will be the decade for silver, so I imagine that you feel the same way about silver today vs. even a few years ago Eric?

Eric: Well I’m kind of a data guy, and I love the data points on silver. You know, you’ve spent a lot of time looking at what’s going on in the paper silver markets as have I- I mean it’s kind of ridiculous that we can on days trade a billion ounces of paper silver, when on a daily basis we probably only have a billion ounces available for investment, and probably not even that. I mean if I literally took the GFMS data I think they said last year there’s something like 178 million ounces were available for investment, so that’s not even half a million ounces per day, so the fact that we trade a billion ounces of paper makes absolutely no sense whatsoever. I think the thing that most people don’t question is why would anybody sell a billion ounces of silver when they don’t have a hope in hell of producing it? So it sure begs the question who is in the market and why are they in the market? And you know, there’s been lawsuits over silver manipulation in 2008, and we all remember what happened back in April/ May when the price fell all of a sudden and you get these margin rate increases which just seemed so staged that- and you know of course the shorters were losing BIG TIME money. They probably lost $20 Billion at that point where the price was up to $50 so I think they were getting kind of desperate to find a way to reduce their short position which of course they’ve done until the last three weeks when I think they’ve increased their short position pretty markedly.

Doc: I couldn’t agree more with you on that. That last week of April I remember we documented that it appeared to more of a panic of the bullion banks and a short squeeze than any sort of general investors rushing into silver. The average person on the street was not involved in silver at all, so just the idea that silver was in a bubble last April when you consider what a bubble actually is- it’s almost humorous.

Eric: It’s an incredibly small market, the silver market. You know I’ve been involved in the gold market and spoken to most of the people who are big players in gold, and most of them, and I’m talking at the institutional level now, I mean I don’t think they’ve even considered silver! Which always shocks me that guys who can put billions into gold really haven’t looked at silver at all. And I think that the fundamentals are much more compelling for silver right now than they are for gold.

Doc: Ok Eric, well I wanted to ask you about Sprott’s big news here: your three new precious metals funds that Sprott Asset Management will be launching on Feb 28th, the Sprott Silver Equities Class, the Sprott Silver Bullion Class- which if I’m correct will be the first silver bullion fund to be offering within a mutual fund structure, as well as the Sprott Gold Bullion Class. Can you tell us a little more about these funds?

Eric: Well really, two of those funds already exist in Canada, but they’re mutual funds, and they don’t have a certain structure which lets you trade from one fund to the other, so in a sense, two of them are not new. We have a silver bullion fund up here which has been operating for over a year now, it typically gets in maybe half a million bucks a day, and its set up for Canadians, because we can’t sell mutual funds to non-Canadian customers. I’m just going to see…that fund has about $182 million dollars in it today. And it just keeps growing, and it’s a great vehicle for Canadians to participate in the bullion space, because it trades at net asset value, which I think is the deal of the century, because as I think you well know, our PSLV trades at a premium to its net asset value, but it has certain tax characteristics and ownership characteristics which probably make it a lot better than the SLV, in our view. So those two aren’t new, but the silver equities fund is something that we hope to launch here real soon, which will simply invest in silver equities, and will have the option of owning bullion, and we might even have some silver backed notes that we buy from miners. Anything connected with silver that falls within the purview of what comes through here. I just want to make something specifically available that people can focus in on the silver market.

Doc: That’s great news and I see only becoming more and more in demand as the bull market progresses here.
I’d like to ask you about your recent PSLV offering, and kind of take you back a little bit- I believe it was October of 2010 that your last big follow-on offering, I think it was 50 million additional units you offered: it’s been well documented the difficulties you faced sourcing that silver. About that same time I remember that you predicted silver would hit $50 within 6 months, and if I remember correctly, silver was trading at about $21 or $22 at the time, and no one else was predicting that silver would make this type of move. That proved to be one of the best calls of the bull market so far as we saw silver hit $49.73 in late April/ early May. I’m not going to ask for another prediction here, but I’m interested in if that prediction you made in 2010 was just based on overall market fundamentals, or did your PSLV offering weigh heavily on that prediction?

Eric: Not really. Like I didn’t think it would go to $50 because we were doing this issue, although I was very pleased with the size of that issue- it was a very successful offering. One of the interesting things about the IPO of the silver trust I think we raised $550 million. When we did our IPO of the gold trust we raised $440 million. Recently when we did our latest silver tranche we raised $350 million. When we did the latest gold tranche- so far, and it’s still in distribution by the way, so I can’t really speak much about it, but its raised I think $303 million before the exercise of a green shoe which I think has not been exercised yet. But the point I always like to make is that the people buying this are making up their own minds and they’re willing to put as much money into silver as into gold. Which means, they’re buying 50 times more physical volume of silver than they are gold. And when you go to the US Mint site, they sell the same number of dollars of silver as gold. Which means people are buying 50 times the volume of silver than gold. But when you look at what’s available to buy- you know we produce 80 million ounces of gold a year, and maybe 70 million of that is available for investment, and we produce 900 million ounces of silver, and theoretically let’s say 200 million ounces are available for investment, well that means you can only buy 3 times more silver than gold for investment purposes. But we see so many instances where the ratio is 50 to 1! And GoldMoney’s the same thing. Almost every time I talk to a metals dealer my favorite question- How much silver do you sell vs. gold? And every time, I get the same answer: We sell as many dollars of silver as gold. Well, that’s impossible. It’s just impossible that people can keep buying at that rate, and we not end up with some type of shortage. It’s those data points that make me so optimistic about silver.

Doc: The shorts can continue to throw on paper up to a point, but when the actual physical data indicates 1 to 1 flows into gold and silver, like you said, that just can’t continue forever.

Eric: And you know one other thing that’s happening recently that I’ve kind of noticed, Harvey Organ has a wonderful website that details the flows of metal in and out of the COMEX. I am absolutely stunned at the amount of silver that is asked for delivery every month now, and every day almost. Normally you see that when they’re expiring a lot of people settle for cash, but man, these people just keep piling in there and taking the silver! That is quite a dramatic change from where I would think it was just 6 months ago. Almost every day now you can find in an expiring month like this month the open interest goes UP! Which means that some guy’s going in there to get physical delivery. So it’s certainly taking hold here, and we’ve had a pretty good rally in the price of silver since year-end. It’s probably due for a little pause here- I don’t want to say a correction. But we are so close to breaking out of the big down-trend in silver that there could be a lot of fireworks with all the demand we’re seeing.

Doc: And I think that your fund probably could play into that a little bit. As most of our listeners are probably aware, your trust recently announced another what was it $250-$350 million follow-on offering in January?

Eric: Yeah, we raised $350 million. We raised $350 million…or $349 million, something like that. And by the way I should tell you that we didn’t have any trouble buying the silver. In the first issue, we had trouble buying the silver, and it took a long time to get delivery. I’m sort of disappointed that the delivery was as easy as it was, by the way. One of my aims in life is to do a silver issue and find out that I can’t buy the last bar. That hasn’t happened yet, but if people keep up their interest in silver like they are I have no doubt that that can happen.
One of the stunning developments in gold is that the Chinese seem to be buying a lot of gold these days and I sort of wonder who’s buying it, I suspect that it might be the People’s Bank of China. I may do a little work of trying to see what kind of silver is going over to China. There’s a huge appetite for precious metals in China and India. You keep reading these double digit trends of increase in demand whether it’s even industrial or investment- how can you have double digit increase in physical demand when the amount of silver that’s available every year only goes up 3-5%? It’s an impossibility.

Doc: Right. And that’s quite a lofty goal you have there of trying to have a day where you aren’t able to receive delivery of your last bar!

Eric: I think all of your readers are hoping for that too! We’re all on the same page that way.

Doc: I’m sure they are. You definitely answered that question- I was wanting to ask about your sourcing of the silver this time whether you had seen any delivery delays as with the previous offering.

Eric: I don’t think that we’ve had any. I don’t think that we have everything yet, but silver’s kind of bulky so it’s not that easy to move around, so you can sometimes expect it can take 3-4 weeks with the kind of size that we deliver but you know last time there was actually silver that was manufactured after the date that we had committed to buy it, so in my mind it wasn’t as though it was sitting around in some inventory somewhere and you can load up a truck and ship it. There was I think a bit of a shortfall at the time.

Doc: Well I believe you approved by the SEC for $1.5 billion, so you’ll have a few more chances.

Eric: Well the one thing that I would really like to do is get some institutions interested in silver. Lots of institutions, we can name the names- have bought billions of dollars worth of gold, and if we could get some institutions to see the reasons why silver should outperform gold and get them to take down part of the PSLV offering, that’s really what I’m hoping to do. It’s a bit of a struggle. It’s even a struggle, I’ve been down to see pension fund advisers and try to convince them that they should finally recommend precious metals for pension funds, and it’s a battle! We haven’t won them all over yet. But the minute we do, we all know that there’s only about 1% of the financial assets in the world invested in precious metals, and that obviously can go a lot higher. There’s been some studies put out that even low risk portfolios should have a 2-3% weighting in precious metals, so if the pension guys ever come through it could be quite exciting for all the metals.

Doc: I definitely agree. I want to go back and touch on one thing that was pretty interesting, and from what I’ve read you’ve had decent response to: prior to the most recent follow-on offering to the PSLV Eric, you sent a letter to silver mining companies requesting that they keep their savings in physical silver rather than paper assets such as say cash or treasuries. At the time in the back of my mind I wondered whether you were preparing to begin sourcing silver directly from these mines. That kind of speaks to me that the paper futures markets such as the COMEX is in danger of fading into irrelevance rather than facing an outright hard default. Are those some of the reasons you sent the letter, or what prompted the letter?

Eric: Sure. I think we have a bit of a voice in the silver market, and the reason for the letter was just the simple analysis that the paper traders were determining the price…and why should you physical silver producers let that happen? Most miners are not students of silver or gold unfortunately, they’re not. There’s the odd CEO who’s totally into understanding what the true value of precious metals is. But they seem to be few and far between, because most of them are interested in tons and grades and recoveries and things like that and they haven’t been students of their own product! And that was the primary thing- would you guys please think about what’s happening in your silver market! Plus the fact that it got bombed last year, and are you just going to sit back and lose $25 an ounce that you might otherwise be making, or are you ready to take a stand here? The other very easy argument for me, is when you have your money in a bank, you get no return. You essentially have no return. In fact I think it was expressed very well by the gentleman that runs UC Resources that you actually get a negative return at the end of the year because inflation’s higher than the return you’re getting on your money! I happen to be of the view that having money in the bank is a dangerous thing! And you know they keep bailing out the banks all the time such as the recent G6 announcement we’ll give unlimited loans to banks: well, they had to give unlimited loans to banks, because there were some banks that were on the brink! That tells you that it’s risky having money in a bank! So not only do you have to accept the risk, you get a negative return, why don’t you believe in your own product that also has been a currency and also will become a currency. That’s really why I went there. I thought that if we could just tip a few of these silver producers around to thinking about what’s going on in the market, and who’s determining the price, maybe we’ll let the physical markets determine the price instead of the paper markets determining the price.

Doc: That’s a whole world of difference- if you actually had the physical market determining the price the whole game would be over!

Eric: Right, right. And I should tell you as a follow-up to that, we’ve seen some good responses. I was sort of shocked that out of nowhere UC Resources said they bought a million dollars of the silver trust because I had not specifically spoken to them about it. But I can tell you that First Majestic did buy $10 million of our issue. Keith Neumeyer who runs First Majestic is a very pro silver guy- as you know he makes silver available on his website: First Majestic coins, and he was very helpful in that regard. And I would also point out that Endeavor Silver at the end of last quarter when they produced 1.2 million ounces only sold 400,000. And why did they not sell the other 800,000 ounces? Because they thought, and explained that this price is not appropriately priced at the end of the quarter down around $27, and kudos to them, here the price is now $33, they’ve made 30% more than they might have otherwise made, and I’m glad to see people taking a stand that the paper price shouldn’t determine where you’re selling things! We’re building a little momentum there, and I would hope that in time (and I have a lot of other things to do here other than going to see each mining company) but in due course I hope we’ll convince others to do the same thing.

Doc: I think you’re well on your way to achieving that goal.
If we can, let’s talk a little bit about the European debt crisis Eric. We’re definitely reaching a pivotal point here. Up to this point it’s been continual coin kicking, and I’ve kind of coined and added to Jim Sinclair’s phrase QE to Infinity…AND BEYOND, but it appears here for the first time that Germany’s getting wet feet, and they’re getting tired of bailing out Greece. Do you think it’s possible we’ll actually see a Greek default, or do you see The Fed stepping up to the plate at the last minute.

Eric: Well, I mean it’s a hopeless situation for Greece. I just can’t even imagine even thinking of writing a check for $130 Billion to Greece. I mean, how irresponsible is that? And I don’t know what specifically is going to happen in the Greek situation, but when you look at the whole crisis that’s unfolding here, our government, the Bank of Canada said we’re at a Minksy moment- and a Minsky moment is where you’re at a point where you have so much debt that has grown so large that your GDP can’t service it! And we have so many countries that have 100% debt to GDP, thank God we have a zero interest rate policy, otherwise everyone wouldn’t be able to pay their interest. There’s no way that we can continue to service these things. We’re going to end up with some unintended consequences (the LTRO that the Europeans have where they’ll lend as much money as any bank wants)- I think the greatest unintended consequence is if you put yourself in the shoes of the Chinese, or some non G6 nation and you’re looking in, and you think What the hell’s going on there? They just lent 750 Billion last month, and maybe it’s a trillion this month- obviously somebody’s taking on an obligation here that one would guess they won’t be able to repay. And I sense now (and I’m trying to do some work on this) that the Chinese have probably altered their investment posture, as with most of the non-European countries, why would you buy European debt? Why would you buy American debt? Why would you buy Japanese debt? Why would you buy English debt? All these central banks just keep printing money! If you took those 4 investment classes out of your portfolio, what is left? As I mentioned earlier, the gold exports out of Hong Kong into China have SKYROCKETED the last 4-5 months of the year- serious dollars here! We might be talking probably $12-$15 billion in 5 months! That’s not chicken feed! And I suspect that when you look around the landscape that there aren’t too many things left to invest in that I’m likely to get repaid, or repaid fairly! So I think that the crisis is essentially out of control. Most countries cannot support their debt. Obviously some can, but most can’t, and I don’t know how it all ends, but every day we come in and there’s some new rule in the economics rule book. Yesterday it was Japan with a hundred billion print, and 2 days before that it was England with a 50 billion pound print, and at the end of the month there will be another 500 billion to a trillion in the LTRO in Europe, and in my mind, it’s just totally out of control. It gives me much comfort to think that if you own gold and silver you’re probably in much safer hands these days.

Doc: 500 billion here, 750 billion there, a trillion there…pretty soon you’re talking real money!
I totally agree with you, I mean where else is there to turn? I’ve felt that way for probably 7 or 8 years just with my own personal holdings. You can see the writing on the wall, do you want to be in a money market account when each economy is printing a 30% shortfall of their deficit?

Eric: It’s incredible. We’re in a surreal kind of world. It’s amazing that everything’s held together here, and I’m always a little shocked when I see the market going up and even the markets today are going up, and I don’t know why they’re going up, but they just are, and we had that mysterious rally at the end of yesterday. It’s just mind-boggling that anyone could think things are going well because they aren’t going well! There was some great analysis done by Zerohedge on yesterday’s retail sales. On a real basis, counting real numbers, sales in January were ABYSMAL! But with the seasonal adjustment, all of a sudden they were up whatever the number was, I think it was 0.4%- I mean it was a joke! And the same thing of course with the employment data which is all garbage. We keep getting these data points saying everything is wonderful when it’s not wonderful. So all the more reason to fear that if there’s a continual economic slow-down that it’s going to continue to lean on the banking system and create more and more sovereign risk. All the more reason to own precious metals.

Doc: Right. I would say probably the only US government economic data that is even remotely accurate is tax withholdings- they don’t adjust that. And that’s in a severe down-trend, we have the Baltic Dry Index, that’s been collapsing, all the real economic indicators are not looking good.

Eric: No. Well, it’s not too hard..if you just stand back and say, well how much are wages going up? And what is the real employment growth, and what are costs going up by? Here we have oil back over a hundred, and I think we had a record high gasoline price in January in the US, and that’s obviously going to go higher, so how can anyone imagine that people’s disposable income is going up? It’s not going up, it’s going down! So how do you buy more when your disposable income’s going down? It just doesn’t work. And we can all have these wonderful thoughts that we’re going to have a recovery here, but unless people get paid more money, there’s no way they can buy more.

Doc: Right. I kind of wanted to follow this thought through to the end game in the currency debasement- everyone fears a German Weimar type hyper-inflationary event: one thing I’ve always contemplated and wracked through my mind and I just wondered what your thoughts would be- Say for the end game we do devolve into a hyper-inflationary collapse in the West, are any equities unless you own the actual paper certificates- the average Joe is going to be locked into those assets during massive inflation or hyper-inflation because it takes 3 days for the sale to clear, another couple days to get the funds from your account, physical gold and silver may be the Average Joe’s only source of liquidity in a crisis like that, he may have to just sit on his shares until it’s all over with.

Eric: Well I think it’s the safest route to go. I mean there’s no doubt that people can make a case for stocks going up, because in a hyper-inflationary environment, they’ll go up. But I think you can make a much stronger case that precious metals will go up the most, precious metals stocks will probably outperform precious metals, so I think that’s the place to be. I just think that it’s a very safe place to be. I think it’s a safe place to be in a deflationary environment, I think it’s a safe place to be in an inflationary or a hyper-inflationary environment. If you could imagine that a lot of those non G6 countries decide to invest in real things rather than paper, that’s how you’ll get your hyper-inflation. And I sort of look at copper and oil prices, and I think maybe we’re seeing the first signs of this- we don’t have a strong economy in the world, but some of the commodity sensitive products are going up. Maybe it’s just that people have changed their investment stance already.

Doc: We’ve definitely seen that with a lot of different physical commodities.
Well Eric, I know I could talk to you all day about silver, but out of respect for your time we’ll wrap up here. It was definitely a pleasure to speak with you and to hear your thoughts about silver and I hope we’re able to speak again soon Eric.

Eric: Sure, Doc. Well I tell ya, I really appreciate your site, I look at it every day. You add a different perspective to the silver market, and as a fellow silver bull I think that what you’re doing for the silver community is great so keep up the great work and I’m happy to talk any time.

Doc: Thanks Eric.