Sprott Inc. Chairman Eric Sprott Discusses Europe, Gold, Silver and the World Economy on Midas Letter Money
Sprott Inc. (TSX:SII) Chairman Eric Sprott talks with James West, host of Midas Letter Money, about the European debt crisis, credit default swaps, and how its bullish for precious metals going forward.
Eric articulates succinctly the process whereby major institutions abuse the futures markets for profit, and how the regulatory process in the United States has failed to enforce an equitable and transparent marketplace.
James West: Hi, I’m James West. This is Midas Letter Money. My guest today is Eric Sprott. He’s the Chairman of Sprott Inc. Eric, thank you for joining us today.
Eric Sprott: James, I’m glad to be here.
James West: Eric, let’s talk first a bit about the situation you’re up and how it’s affecting markets. What do you see happening?
Eric Sprott: Well, it’s very difficult to know exactly what’s going to happen. We have various choices here that the agreement with the Greek lenders may not go through. If it doesn’t go through, I think the big question is, does the International Swap Dealers call it a default? If they call it a default, then you’ll start the whole domino effect of — well okay, now, Greece has gone down. Who’s next? I suspect the bond vigilantes who will go after Portugal or Spain something like that next because they sort of sense that there’s a weakness.
If the Swap Dealers says it’s not a default even though 99.9% of the people in the world know it’s a default, then you have a very different outcome because all the credit-defaults swaps that are now withstanding — everyone questions their merit. You know, you’re supposed to buy these to ensure against default when you lose 70% on the dollar, you’re supposed to recover it through the credit-default swap.
James West: Sure. Do they have the money though? That’s the question.
Eric Sprott: Do they have the money. So, if they say it’s not a default then all of a sudden you’ve got credit-default swaps on Italian paper, Spanish paper, what do those guys do? That could be more catastrophic than a default, quite frankly.
James West: Okay. So now in terms of the equities markets that is primarily responsible for the weakness proceeding recently?
Eric Sprott: I think so. I think the fact that it looks like there is resistance to this deal, the Greek deal, there’s enough people that can block it, that there’s a suspicion that it’s not going to go through and the evidence comes out. Looking at the Spanish Credit-Default Swaps which have gone up to something like 76 hitting a new high which means people are putting value on those credit-default swaps, i.e. they think there’s going to be a default. So that’s what’s I think concerning about it. The thing we’re all not assertive is what happens out of this. What spirals into this? What are all the unintended consequences of the default?
James West: Sure. Do you think the general situation should be bullish for precious metals?
Eric Sprott: Well of course it should be. I mean reading everyday that the world, the financial world does whatever it’s doing is really more and more beneficial to precious metals all the time, notwithstanding the fact that it comes down from time to time but they can continue all the basement, the government programs, the central bank interference, all of it is positive for precious metals.
James West: So how do you explain $100 takedown in the price of gold in a phase of such bullish news for gold?
Eric Sprott: Well typically, gold and silver are not allowed to react as they should to events that go on. So that was the day of the LTRO $750 billion injection into the European banking system.
When you look at what transpired that day, for example, in the silver market, within a space of an hour, there are 225 million ounces of paper silver that were sold and as you point it out to your viewers, there’s a big difference in physical and paper.
Two hundred and twenty-five million ounces would represent about 1 quarter of a year’s production of silver and it was sold in one hour and that determines the price of silver. Unfortunately, it’s not really relevant to the physical market but it takes a little while to digest that sort of thing and I think there’s — I happen to be one of those people that believe that the precious metals are manipulated. Even through the LTRO really should have been positive for gold because there are just continual debates about the currencies. It gets knocked down that day and kind of sets the precious metal guys back a notch.
James West: Okay. Let’s zero in on that. You asked all our interest in the mainstream American financial press predominantly categorized the idea that the gold market is manipulated, the future’s market as conspiracy theory. How do you address that?
Eric Sprott: Well, I mean I just look at the actual data. Now for example, when silver was at 4950. We traded a billion ounces of silver those days in the paper markets which there is no relationship to the physical market. What are these people doing? Who’s trading a billion ounces? It has nothing to do with somebody who says, “I’m going to deliver you some silver.” It’s just people abusing a paper market, knows what deep pockets, deep financial pockets can affect the price.
James West: So, why don’t you explain exactly how that happens for example, first of all, what motivates a financial entity to manipulate gold and silver and exactly what are the mechanics of that process?
Eric Sprott: All right, okay. It is easier to explain in the silver market because in the silver market, when we went from $20 to $50, there were some big financial participants who are short silver. They were probably short 500 million ounce of silver. Price of silver goes up to $30 or down 15 billion, they’re down 15 billion, silver is about to break out. If it ever breaks to 50, how much are we going to be down then? So why don’t we organize it, we’ll get it to go down. So as you may remember back in the spring of last year, on a Sunday night, 9:30 Eastern time, the price of silver falls $6 in 13 minutes.
Then in the next eight trading days, the CME raises the margins on silver. So that the guy who was, let’s say hedge fund who is long in million ounces of silver going into it, he had to put up something like a million and a half dollars. Two weeks later, I had to put up $17.5 million to maintain this position. Well, nobody is going to do that, okay, so they’re forced to sell. Money can make that happen.
James West: Sure. Would you say that this process is facilitated by a breakdown in the regulatory process that permits this or would you even go so far as to say that the regulators are in collusion with the financial entities that run this enterprise? What do you think about that?
Eric Sprott: Well, my view would be this, how would the Chicago Mercantile Exchange explain that we need to trade a billion ounces of silver in a day when the total annual production is 900 million? I mean there must be people trading it who have no vested interest in the physical product of silver.
They care about the paper product of silver. There’s been an ongoing investigations of the silver manipulation issue or I know they are not aware, there’s been lawsuits filing as J.P. Morgan and HSBC accusing them of manipulating the price of silver down in 2008. It’s in the public records anybody can go and view that lawsuit.
There has been an ongoing investigation at the CME which is now in its fourth year, about ongoing manipulation of silver without any result. So, a lot of people would speculate that the CME has been laggard because the guys who run the CME tend to be the dealers. It’s almost like the example of the International Swaps Dealers are so shaking, deciding no default on grace(ph). Well those are the banks who are ready to credit-default swaps.
James West: True.
Eric Sprott: So as a group they agree it was not a default. Well, it’s a bias.
James West: So how can we advocate for the accumulation of gold and silver as reserve assets when these markets are arbitrarily manipulated for somebody else’s program. I mean, how can you tell somebody, “This is a safe investment,” when you’ve got these manipulators driving the price back and forth?
Eric Sprott: Well, I always look at the physical supply and demand for gold and silver. If I use the silver example from 2005 to 2010, I can identify about seven sources of change in demand and supply that add up to about a net positive change in demand of 380 million in a 900 million ounce market.
I keep thinking, “How do you inject an extra 380 million of purchases in there and not have the price go crazy?” But it has gone crazy as you know, I mean, having gone to $49.50 was a pretty good move for silver. I think ultimately the physical buyers are going to win the day. Someday, one of those people who short the paper is going to get a call for delivery. By the way, there are a lot of calls for delivery today on the CME. Everyday, we get calls for silver which is very unusual. I suspect that someday the physical buyers will win the day.
James West: Sure. Okay, now let’s talk a bit about the U.S. dollar and the quantity of U.S. dollars. Surely as you measure an ounce of gold in U.S. dollars in an increasing quantity of U.S. dollars dictates a higher price for gold. So where does this end for the United States? In Europe and in Greece we’re seeing a default, technically or philosophically, whichever it is. But for the United States it seems they are able to perpetuate the idea of debt without any sort of reconciliation. Where is the reconciliation inflection point?
Eric Sprott: Well, essentially you’re looking at Greece, and I always say that people would just imagine the year, a Greek citizen who has a fair amount of money in the bank. What would you be doing with your money? I’m sure that the good news is nobody’s going to leave their money in a Greek bank. You have so many other choices, move your Euros anywhere else or change them to dollars and move them anywhere else and all the data supports, that’s exactly what’s happening.
We so far, have been able to tone down the fear of U.S. banks having financial problems. We did it by having TARPs and TALF and QE1s and QE2s in various unlimited lending against a questionable collateral in the banking system. I’ve always been of the belief that the banking system all over the world is way too levered and it takes a very little decline in asset values before that capital is gone.
I think the reason they brought out the LTRO on November 30 — I guess, it was October 29th or 30th when the G6 banks that will give unlimited loan, is because banks were going to go down, because the deposits were leaving. There’s only one reason that you need the LTRO. Why did banks need $750 billion? I mean, the bank only needs money for one reason, somebody’s asking for his money back.
Because if you just left it the way it was, buying the bank’s got us loan outstanding, he’s generating interest. He doesn’t need money. He doesn’t have to make another loan. But the fact is the deposits were leaving and the bondholders who own the bank bonds had some redemptions coming up. But where are we going to get the money without selling an asset into the market and that’s I think — this not allowing a liquidity event is really what the LTRO is all about. Because if the banks had to sell their sovereign bonds or their domestic stocks or whatever, I think it would bring chaos in the financial market.
James West: Okay. Eric, fascinating conversation as usual. Thank you for joining us today.
Eric Sprott: James, my pleasure.
James West: If you like to learn more about Sprott, visit sprott.com and if you’d like to learn more about companies like Sprott, visit midasletter.com. I’m James West, this is Midas Letter Money.
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