Contrarian investor Eric Sprott of Sprott Asset Management, who, among other things, manages some of the largest precious metals exchange traded funds backed by actual physical gold and silver, says gold may have seen unprecedented growth over the last ten years, but silver is the investment of the next decade.
Since Eric Sprott is well respected in alternative wealth preservation investment management and often sits well outside of traditional economic and financial advisory circles, and the fact that he has been right so far, we recommend you pay attention to and consider his most recent views on atypical investment vehicles.
Eric Sprott interview by Patrick MontesDeOca
Patrick MontesDeOca: Mr. Sprott, can you please give us the current situation in terms of price in the silver market? What you might see in the short term as it unfolds in the next six to twelve months, what is your forecast?
Sure, I take a longer term view than six to twelve months. I’ve been involved in silver for about probably almost ten years now and of course the price of silver has done wonderful things in that time period even though recently it has come under a lot of pressure. My thesis being that even though the last decade has been the decade of gold, this decade will be the decade of silver. I can only imagine that it will go back to its historical relationship to gold of 16 to one in term of price. And as an example of 16 to one, with gold at $1600 it would suggest that the silver price should be $100. And most of the data that I look at certainly as it pertains to day to day markets, and I don’t mean the Comex, we’re not talking about that, we’re talking about the physical market for silver, and we have data points that suggest that buying for silver by the public is almost on a ratio of dollars of silver being bought to dollars of gold being bought. We can see that the U.S. Mint’s data that comes out every month, and pretty much every day, so for example, the amount of silver coins being bought through the mint’s service – they sold 50 times the number of silver to gold coins. This month it’s actually running around 70 to one. This really means people are putting as many dollars into silver as they are into gold. But there is nowhere near the amount of silver to invest in as there is gold.
P: I think a lot of people would like to know, potentially, how soon would you see this change taking place?
Well that is a very tough question to answer because there are forces at work every day, right, and you have to exhaust those forces or they have to have some reason to change their view on what’s their best interest in the paper markets. I’ve always imagined there, or hoped that some industrial user of silver will say “Oh, I can’t get the silver” and the word gets out that there is a physical shortage. Or the people just continue to buy at the rate they are buying, because you just can’t keep buying silver on a one to one ratio to gold and have the price be 50 to 1. That is mathematically impossible.
P: So there could be the possibility that we may have a lot less inventory than what appears to be told on these government reports.
E: Sure, nobody really knows how much inventory there is. We know how much is in Comex, we know how much the PSLV owns, but theoretically that shouldn’t be available, beyond that, I just don’t believe there’s huge amounts of silver and we are buyers of silver every day. We’re very often delayed on our shipments. You know we could go in and buy 2 or 300 thousand ounces and we sort of get the common “Well, you know that shipment is going to take 2 or 3 weeks”, which really means, I don’t think there is really any ready silver inventory that’s just waiting for someone to say “Ok fine, I’m going to buy” [then] “We’ll deliver it to you” because it’s not really that difficult to deliver silver.
Source: Seeking Alpha
For now, there seems to be enough silver to meet industrial demand, but there are certainly differing opinions out there about whether or not there is enough physical silver available to meet investor demand (and/or industrial demand as new technologies emerge). As Mr. Sprott points out, any number of things could cause a “run on silver.” Our view is the more likely scenario will be investor demand. In a nutshell, as we commented in Here’s What Happens Next, when Europe goes down, and it will, investors will shift their capital to US Treasuries in the (misguided) hope that the US dollar will protect them. This will begin the next phase of the crisis, as stock markets around the world would collapse in such a scenario. For a while investors will move to cash, but it will soon be realized that the US dollar is not all it’s made out to be, and as a consequence capital will flee to the safety of precious metals, which will at that point become the safe haven assets of last resort. Very few people are buyers of precious metals when compared to other asset classes. But once the media picks up on it, and your neighbors are talking about it, and the price just keeps rising, you can fully expect bubble buying to become a major force in the coming precious metals price rises.
Mr. Sprott put forth the $100 price point for silver, but it is important to remember he is basing this on the gold/silver ratio, which is running in the 50-to-1 area and has historically (depending on your historical date ranges) fluctuated from 16-to-1 up to about 25-to-1. The point is, that as gold rises, so too will silver, but the added benefit for those holding silver assets is that silver should begin to close the gold-silver ratio as well, which means silver should, in a perfect world, rise at a faster rate than gold. Thus, in our view, $100 is a somewhat low-end long-term forecast (Sprott himself knows this, but is basing his forecast on current prices and ratios). Consider what might happen in the event gold goes to $3000 and the gold-silver ratio drops to 20-to-1. At that rate we’d already be talking about $150 silver per ounce. As things heat up in the global economy, we would not be at all surprised to see silver go to these levels or higher.
It may sound crazy, but if you consider the factors that could drive silver over the next decade, including industrial demand, investor demand, the gold-silver ratio, and irrational bubble buying, it is not as unreasonable as it may sound.
Hat tip Steve Quayle