Sprott Asset management, CEO, Eric Sprott says that silver producers are being hurt by the volatility in the paper silver market and need to help ensure that the physical market rules the price
Interviewer: Geoff Candy
Posted: Tuesday , 06 Dec 2011
Posted: Tuesday , 06 Dec 2011
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Metals Weekly podcast - joining me on the line is the chief executive officer at Sprott Asset Management, Eric Sprott. Eric you recently issued a "call to action" letter that was published online, on King World News basically asking that silver producers invest a portion of their cash holdings effectively in the silver that they're producing. Why do you think that's a good idea?
ERIC SPROTT: Sure - we have to go back and one of the things that most people don't appreciate although I'm surprised they haven't with all that's happened in the last three or four years - there's a lot of instances where having money in a bank is a very unwise investment. As you know - and I could give you a list of banks probably 20, 30 or 50 that have failed. Now in almost every instance, some government comes to take them over or inject funds and we should ask ourselves "why do they fail". They fail because they're over levered and with a little decline in the value of paper assets that they own, their equity comes under stress. Obviously as we looked over in Europe recently, we had stock markets down 25% and the sovereign bond market was probably down 15% to 20% and when banks are levered 20:1 it means they only have 5% of their equity supporting 100% of their assets. Well if the assets go down by 10% or 15% there is no equity there and there was a lot of discussion last week before the central banks came in to support things, there were a number of banks at risk. And I just think that the leveraging in the banking system would suggest that all banks are at risk because they've just got so levered that putting your money in there and earning no returns, is not a very good reward for the risk you're taking. So that's the fundamental start - that if you have cash in the bank - you as an individual or company should be worried about that. And yes, the FDIC guarantees whatever the number is - I don't care what the number is but the FDIC has no money. Basically it's the government of the United States backing it, and they have no money and of course most people wouldn't appreciate that either, but there's a lot of data to support that. It starts with what I call the weakness in the banking system.
Number two, the silver producers have been massively and adversely affected by the volatility in the silver market which, for the most part, is caused by people transacting in paper silver - because most of the transactions on the LBMA and the Comex are all paper transactions. So for example, when silver hits $49.50 between the various paper markets, there was something like one billion ounces of paper silver sold that day - and purchased of course. And we only produce about 900 million ounces a year. People - some may say well just think of all the speculating that was going on with people buying silver. I was saying well what do you think of the guys who were selling a billion ounces of silver who didn't have a hope in hell of providing that silver. It's not a real physical market, and yet those - and of course together with the sell-downs and the CME coming along and raising margins on paper silver, it ultimately negatively impacts what the producer is receiving and he needs to understand that he is in essence being held hostage to the paper silver market and that's why I'm suggesting that for the reason you should fear banks and for the reason that you want to end the paper markets determining the price, you want the physical market to determine the price. From the all evidence we see, there's tremendous demand for silver but yet these prices gyrate daily because of things that go on in the paper market.
GEOFF CANDY: Now why would the notion of the silver producers holding say 20% of their holdings in physical silver - how would that alleviate that volatility?
ERIC SPROTT: What it does is it takes physical silver off the physical market and ultimately it would become apparent to people that there really is an imbalance in the physical silver market. It's a pretty fine line right now whether they can meet all the demand on a day-to-day basis, if by putting 20% of their cash into - I think we use 25% of the cash into silver - it might have the effect of decreasing the supply by around 10 percentage points... I believe 10 percentage points would be enough to make a difference.
GEOFF CANDY: Because that's one of that's one of the problems of the silver market as it stands, is that it's very difficult to gauge whether it's almost in supply or deficit given the current metrics used to measure that demand and supply.
ERIC SPROTT: Using the current metrics that we have?
GEOFF CANDY: Well indeed if we look at just the uses for silver - industrial demand, photography, etcetera and jewellery for example - that gap where a lot of the investment comes in is difficult to measure and it's difficult to gauge where that is.
ERIC SPROTT: Yes, and the other point I'm making, and I'm in total agreement with you - when the two groups that report the silver demand reported, the funny thing is that every year supply equals demand. If you look at the standardly accepted numbers supply always equals demand - because the last number is a plug number. They just say well the rest was the change in investment demand - there's a net number because we know what equals... well we've done lots of work that suggests that it doesn't equal and that the demand is greater than the supply on a year-to-year basis, but some might still be coming off various holdings to make up the difference or where we've worked inventories down to almost nothing and someday it's my expectation that we will see a physical shortage manifest itself. I guess I'm very frustrated by what's going on in the paper silver market. I just find it unbelievable that you can have silver go down $6 in 13 minutes one time when the markets weren't really open and then you get four margin rate increases the next week - four... It smells like a set up to me and of course we've had some huge short interest in silver, and as you know Geoff two groups have been sued for manipulating the price of silver in 20087 - those being JP Morgan and HSBC. The lawsuits are available for people to read - what happened, how it happened - so those of us in the silver industry have to be very sceptical that the markets act like normal markets.
GEOFF CANDY: If we look at the silver market slightly more broadly, we are seeing strong physical demand, at least anecdotally it seems like people are buying physical silver particularly the retail investor - where do you see demand going from here, given what we're seeing at a macroeconomic level?
ERIC SPROTT: Well I can't imagine that anything is happening at a macroeconomic level, it wouldn't stir people to own silver, and of course the best situation - the European situation - they all have certain things they can do. One, they can print money which just looks like they might be opting for that which is a debasement of currency, so anybody in Europe who doesn't want the value of their money debased, they should think about it. If they go to deflationary model a-la supposedly the Italian decision over the weekend which I've yet to see the details of, therefore I don't know how deflationary it will be - but if you end up in a deflationary type environment, in my mind the stresses on the bank get worse because now you end up with economic infraction which is exactly what happened in Portugal, Spain and Greece. So if you end up with the economic infraction it's not good for all the credits that banks have lent to because of course some of them will come upon more difficult times, and we see instances of that every day. and then there's some talk about certain parts of the euro being segregated - well if you were in one of the countries that was going to be segregated wouldn't you want to move your money into something that might hold its value more than - you ending up one day owning the euro and it gets changed to Greek drachma. You know what's going to happen - the drachma if that happened. So everything I see suggests that there are more and more reasons to own precious metals and we're seeing central banks very involved in buying precious metals - so there's nothing in the macroeconomic environment that's detracting from precious metals ownership.
GEOFF CANDY: Do you tend at the moment to be following what's going on with the gold-silver ratio - is that a ratio that's becoming increasingly important, or not really given what's been going on?
ERIC SPROTT: I have a longer term view on it - whenever it was a currency and in my mind the market has made gold the reserve currency - the market has. I don't care what the central banks have or governments have, but the markets made it the reserve currency and that, quite frankly as I said, central banks have been aiding and abetting that process - they're almost making it the reserve currency by their actions, not by their statements and when it was a reserve currency silver traded at a ratio of 15 to 16:1 of the price of gold. And ultimately at the end of this kind of Ponzi monetary system that we have here that in order to keep people calm, you have to back your currencies with something legitimate other than a government promise. And that would be gold and silver, and that they would revert to the normal relationship. But that's taking it - how long that takes to play out, I don't know. In the shorter term, I look at things like proxies that tell me what the demand for silver is versus the demand for gold in the investment arena and when I see people like gold money sell as many dollars of silver, as gold. When I see the US Mint sell as many dollars of silver as gold which by the way implies in both instances, 50 times more physical than gold. And when we did the IPO for Gold Trust we made $440 million. When we did the IPO for the Silver Trust we made $550 million. And I use those as a kind of guide posts - it seems to be that the demand for this product is equal to the dollars that want to go into gold amongst investors. Well how can the price be 50:1 when the money is going in 1:1?
GEOFF CANDY: How much of that do you think has to do with the fact that perhaps people are looking at gold and saying "I'd like to own gold, but clearly I can't afford an ounce of gold, but I'd feel much better with the volume of silver that I could buy for my money".
ERIC SPROTT: Well some of it is that, but I also think there's a group of people who understand the dynamics of the silver market. One of the beauties of silver is that half the silver is used in industry so only half is available for investment whereas in gold most is available for investment. So there are more and more people that understand what's going on in the supply and demand situation in silver, than what's going on - most of those people believe that the price of gold is restricted, and I happen to be one of those, that believe that there are structures in place that keep gold under control and my friends start to describe that they have a managed retreat - and it's been quite managed - my gold never goes up much - it's pretty steady. So if gold goes up, silver is going to go up, I think. Yes there's a bit of a poor man's gold - a view there that you can actually feel something tangible in your hands without having spent a lot of money. But you see it amongst big time players and little time players, so it's not just poor man's gold, I think its people realising that the fundamentals for silver are pretty interesting these days.
GEOFF CANDY: Just quickly, two questions to close off with - I know you're on record saying it was very difficult or at least it took a long time to get hold of the physical silver that you needed for the Sprott Silver Trust. How has that process gone since then and how much physical silver does Sprott now have on its books?
ERIC SPROTT: Sure - ours is a closed end trust - we've only done the one issue. So we own the same number of ounces today that we did a year ago which is around 22 million ounces odd - in that particular trust. If and when we do another tranche of the trust, we'll undoubtedly face the same issue - buying that amount of silver can be somewhat disruptive to the market, but we'll get to that bridge when we have to get to it. We're not there yet and we haven't made any decision on issuing more units of the trust at this time.
GEOFF CANDY: And finally, what is your view of what silver is likely to do and indeed gold is likely to do in 2012?
ERIC SPROTT: I think gold will continue its standard at least 20% gain this coming year. That would certainly take us up - I would guess into the 2200 to 2500 area as a minimum. I suspect that silver will certainly go back through 50 and one of the things that like to say in answer to those questions - I'm a little less concerned about the near term although I'm sure all of our clients are concerned about the near term - and you can't give a response to the long term because you don't know how irresponsible central banks are going to be. But it certainly would appear that central banks and governments don't have a high degree of responsibility, they sell what we see happening every day. So the more they print the higher value of the precious metals will be - and there are lots of people who have looked at the money supplies and various data like that, and of course the conclusion is if you want to back the currency, gold has got to go over $10,000 an ounce, which ultimately with my belief that yes it will be the reserve currency, that is going to be a longer term target.
GEOFF CANDY: Have you had any response to your call for action letter from the silver producers?
ERIC SPROTT: I've seen a couple of comments that were made - one by Coeur d'Alene who said that they were considering it and one by Silver Wheaten who said that they had investigated it. I wish I had the exact words in front of me, because I just don't have the exact words so I don't want it to be taken out of context. But I am literally going over these transcripts - literally as I'm speaking with you, I'm having it written down so I don't misinform anyone. But there's a sentiment - I wish the silver producers would finally realise what the paper boys did to them in 2008 - they nearly bankrupted them all and yet they haven't got involved in these lawsuits which I find troubling. And that's why I'm urging them to do something about it like you just can't sit here and have these guys run roughshod over you. So there's a groundswell of interest, which I'm happy to see and I don't think that I've ever been able to say that I've heard comments to that effect before, but I've now heard some comments to that effect.
GEOFF CANDY: Well we'll have to wait and see what happens...
Source: Mineweb
