Silver the investment of the decade - Eric Sprott

Silver’s performance over the next three to five years is likely to treble that of gold, says Sprott Asset Management Chairman, Eric Sprott, and he is still bullish on gold as well

GEOFF CANDY:  Welcome to this week’s edition of Mineweb.com’s Metals Weekly podcast.  Joining me on the line on the day that silver prices hit their highest since February 1980 is Eric Sprott – he’s the CEO of Sprott Asset Management.  Eric you’ve been rather vocal about the prospects for the silver price – perhaps to ease into the discussion, why exactly are you so bullish on silver at the moment?

eric sprott:  Sure – we’re students of gold and silver here and we’ve been huge proponents of gold over the last 11 years, and we’ve been involved in silver over that same time period but beginning about a year ago it became extremely evident to us that the investment demand for silver was massively understated and as you look at the data – in terms of what people are doing with their money, there are certain things that are transpiring which tell you that silver couldn’t stay at that price and it was likely to ultimately get back to a more appropriate relevant level to gold of something like 16:1 in terms of pricing – where it has been for most of its history and only recently in the last 20 or 30 years has it been way above that level.  So our view is that it will probably go back to 16:1 and the easiest way to imagine that is that if gold was $1,600, silver would be $100 – so that’s essentially the theory that we’re espousing.  Just to back it up by giving you some relevant data – if one looked at the silver and gold sales as an example of the US Mint, so far this year, people have put the same dollars into silver as they’ve put into gold – which can’t carry on with the price being 38:1 – you just can’t have the same amount of money going in.  We see the same thing in the ETFs – the silver ETFs have been growing while the gold ETFs so far this year, have declined.  So you can see the investment money is going to silver.

GEOFF CANDY:  How much of this has got to do with people that are potentially concerned – and I may have pre-empted this answer – but potentially concerned with what’s going on with Fiat currencies but don’t really want to put all their money into gold because it is relatively expensive?

eric sprott:  What’s happening here – I personally believe that today, gold is the reserve currency – it’s been proven over 11 years now that it’s the one asset that has gone up the most and you can see that people all over the world are moving to gold in lieu of currencies – that’s what makes the investors go there.  Silver has always been a currency as well although it hasn’t been thought of that way recently, but what people reflect on and what’s likely to happen, if the market says gold is a reserve currency, the market will say silver will be a reserve currency and ultimately there’s not much room for people to invest in the silver market because it’s so small – theoretically there might be a billion ounces available although I highly question that number.  But even a billion ounces is only $38billion which is hardly much when you think it could act as a currency.  So that’s essentially why people are going there – it’s always been referred to as the poor man’s gold and the flight from paper currencies to hard currencies.

GEOFF CANDY:  You’ve gone into providing a service for people through the Silver Trust that Sprott launched – how has that been received?

eric sprott:  Oh it’s been received incredibly well.  I wouldn’t have imagined that it would trade at a 20% premium when we launched it although I certainly imagined that it could have traded easily at a 10% premium.  As it represents one of the only ways to purchase a contract in a way on silver, and get physical delivery, is why it has that premium.  It may also be trading at that premium because some people might know that silver has got a long way to go here because maybe they’re short and it probably represents a pretty interesting purchasing level for them if they know exactly what their own situation is.  And I’m referring to the theory that some major banks are short silver in very large quantities and if I was those banks, I’d be buying the PSLV (physical silver).

GEOFF CANDY:  What do you think is likely to happen over the longer term, especially if we look at the relationship between gold and silver which seems to have been – whatever moves in gold happen, get magnified in the silver market, and if gold goes up silver tends to go up more – and vice versa as well.  If we see a decline in the gold price, are we likely to see a significant decline in silver – do you think that’s on the horizon at all?

eric sprott:  The fundamentals for the two metals are entirely different.  There is huge industrial demand for silver, there’s not much industrial demand for gold.  It’s interesting when you look at how many dollars of gold are produced in a year and what’s available for saving, and how many ounces of silver are produced per year, and how many of those ounces are available for investment, the ratio is something like there are 10 times more gold available for investment in dollars every year, than there is silver.  So if the guy is just as happy to own silver as gold, the fundamentals are going to diverge markedly here, and that’s essentially what we believe – that silver’s performance would treble that of gold over the next three to five years.  And by the way, we remain very bullish on gold, needless to say…

GEOFF CANDY:  That’s exactly what I was going to ask… Looking at the industrial side of things, one of the commentators that we have on the show relatively regularly was talking about the fact that given where silver is being used in an industrial terms at the moment – in things like cell phones and other high tech devices – it’s almost becoming more of a need than a want with regard to an industry – would you go along with that?

eric sprott:  Silver is never the critical element in the production costs of anything that it goes into because it’s used in such minute amounts.  The critical thing for silver is that its uses are being way more appreciated today.  Say for example it’s going into these PV (photovoltaic) cells which have great growth in front of them – it’s going into all sorts of health uses – it goes into bandages and clothing and burn treatments and things like that because of the anti-bacterial qualities of silver.  So the uses for silver seem to be very much in serious growth mode going forward here, and I don’t see much reason for that to change because in every case the dollar value of the silver is almost immaterial to the total cost of the product.

GEOFF CANDY:  In terms of what we’re likely to see going forward – in 2008 when prices came off somewhat, the gold market came off a little bit and then carried on a bit.  Silver prices seem to have slumped considerably before taking their time to get back up to where they are now – if there are any hiccups on the horizon how do you see the markets reacting?

eric sprott:  Sure – there are law suits concerning the manipulation of the silver price in 2008 by two major banks.  Those named in the law suits are JP Morgan and HSBC.  It will be interesting for me as a guy who studies silver to see if in fact something has happened there because the thing I found most surprising in 2008 was that here we’re on the verge of a financial collapse and the two items that should have been most in need – silver and gold – really one was a massive under performer that’s silver and gold wasn’t much of a performer which really went against the grain of what was happening in the world in the financial system.  Most people have now understood what might have happened in 2008 – most students of the Silver Market realise that there is a severe shortage of physical silver and they’re not going to be deterred.  They’re aware of some of the tactics that might have been used to deal with the silver prices in 2008, and they almost stand waiting for someone’s selloff as we had a selloff on last Friday for example when the job numbers came out and classically silver shows down for some bizarre reason.  Everyone just stood by and they knocked it down 70c and it ended up going right back again.  You’ve got to wonder what are these people doing or selling it down – and then one day later it’s a record price.  So I think the markets are aware of some of the skulduggery that’s going on on the Comex Exchange and they’re reacting to it and the buyers stand ready any time there’s a selloff.

GEOFF CANDY:  Two final questions.  If we move from the demand side to the supply side – the two best performers – one is Silver Wheaton which is a royalty company rather than a miner for most part of its business – and the other is Fresnillo – where is the supply of silver going to be coming from given that it’s predominantly a by-product metal?

eric sprott:  Well there are some ore bodies that are coming on but when you look at the possible interest in owning silver as a currency, the numbers could quite frankly be mind boggling in terms of the amount of money that might want to go there, and as you know a lot of the mines are difficult to start up – particularly the … – the ones that are narrow veins and you can never have massive production from them.  But there are some companies who have pretty interesting resources and in due course they’ll bring them on, but the demand will certainly overwhelm the supply side because you could just feel the money coming into the area.

GEOFF CANDY:  So is now a potentially good time to looking at silver equities as well as the commodity itself?

eric sprott:  Of course because the equities will by far out perform silver although over all that hasn’t been the case this year – I guess they’re a little better but you know, every dollar gained here is almost a dollar profit so you’ve got to think that the silver equities are certainly the place to go.  I know in the last year we’ve almost entirely focused on trying to acquire silver equities, so they’re something that can carry a lot further.

GEOFF CANDY:  Given all the positivity, are there any downsides – do you see any clouds on the horizon or any possible hiccups on the road?

eric sprott:  People always ask that question both with respect to gold and to silver and I guess my response will be – there are a couple of things that might cause me to change my mind.  The first one would be fiscal and monetary responsibility by governments and central banks – we don’t see it.  The other would be some kind of massive mania type blow off which you have to take your best guesses of when something like that might end – I don’t see it as being anywhere near that stage at this point.  Now the other one would be if ultimately gold and silver in fact are named reserve currencies – then we will all have accomplished what we’re after and you may or may not need a … because it’s now money.  So those are the things that I look for, and certainly the first one – the fiscal and monetary responsibility is certainly not evident – in fact I would say ever since we had QE1, the reason to own gold and silver has just changed materially here because of the irresponsibility of the central banks in the world.

GEOFF CANDY:  Just finally, can you put a price on where we’re likely to see the metal by year end?

eric sprott:  I’ve always thought that silver would move quickly to $50 and it would move to $50 this year – I thought it would get to $50 before year end.  If you ask me in the three to five year time frame, obviously I think it’s going to go north of $100 simply because we’ll get that 16:1 ratio and I certainly see gold going a lot higher, so that’s my outlook here and therefore the rewards for owning silver and the equities will be quite outstanding.  Silver is the investment of this decade as gold was the investment of the last decade.  So we’re sitting back waiting for things to evolve here…