Monday, February 20, 2012

Eric Sprott: Silver Will Become a Currency Again

With the Greek crisis nearing a climax, The Doc spoke with Eric Sprott of Sprott Asset Management this week to discuss the Euro debt crisis, silver fundamentals, and the recent PSLV follow-on offering.

When asked about his recent efforts to convince silver mining companies to save in silver rather than cash or treasuries Eric responded:
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?
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 that 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.

When asked about the response he's received from mining company executives Eric responded:

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!

When asked about the fundamentals of silver vs. gold Eric responded:

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.

Eric's full interview with The Doc also covered how he first became interested in gold and silver, the Euro debt crisis, silver supply and demand, hyperinflation, the sourcing of silver for Sprott Asset Management's recent PSLV follow-on offering, and much more. 

Eric Sprott's full radio interview with The Doc is now available.  Click here for all 3-parts!