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Chris Martenson: Welcome Eric, it's a real pleasure to have you today.
Eric Sprott: Chris, good to be here and thank you for all the work you are doing in apprising your investors of what's really going on in the world.
Chris Martenson: Oh thank you. We’ve been at it many years and unfortunately much of what I think both you and I saw coming - though unfortunately not enough others along the way - is really coming to pass. If I could, let’s start with your views. You have been advocating and creating investment vehicles for people to own gold and silver for a long time. How did you get to that position and what are your views on owning gold and silver at this point?
Eric Sprott: Sure. Well it all started, Chris, with our studies back in 2001 where we were entering into a secular bear market and wondering how you deal with that. And a typical response would be to own gold and silver, which is what we decided to do. I think the one thing that really tipped us into it was an analysis of the physical supply and demand for gold and some work by Frank Veneroso that suggested things would have to change dramatically in the physical gold market because the central banks were selling four to five hundred tons a year. And as you know, here we are eleven years later and now they are buying four hundred tons a year on balance, and this is in a market where the mines supply only twenty-six hundred tons a year. So that is a huge change that had to take place that Frank identified back then. He also identified that the gold companies would stop hedging. We’ve had the ETF’s come along. So we have had a lot of dramatic changes in the physical balance between supply and demand in gold. And that is really what took us there in 2000; to get actively involved in that particular market.
Chris Martenson: And looking at it today, has anything changed in that analysis? You mentioned a secular bear market, are we still in one and also has anything changed in the fundamental supply/demand equation that has actually tipped it one way or the other, further or less, since the initial analysis you looked at?
Eric Sprott: Sure. Well I do think we are still in the secular bear market and basically what people describe with the phrase “extend and pretend”. And we had the zero interest rate policy, the housing boom, the lending boom, TARP and TALF and all those things which try to delay what naturally should happen. When I look at the headwinds for gold and silver, I really believe that we have been aided and abetted by a lot of these policies, particularly QE1 and QE2 and the various printing mechanisms of the ECB and the Japanese government and almost all governments in the world. So as much as I would not have anticipated those types of developments happening, they have happened and they provide an even stronger headwind for people realizing that currencies are not going to survive and to maintain your purchasing power you have to own precious metals.
Chris Martenson: You know, I too have been surprised by how long all of this has stretched out. If you had told me five years ago - Eric if you had said “Chris, the Federal Government in the U.S. is going to be running a $1.6 trillion dollar deficit and the Federal Reserve is going to monetizing 75% of that and the bond markets will be relatively tame and the dollar will still be roughly where it is at”; I would have said you’re nuts. But here we are. And my view on this is that what we are kicking the can down the road. We have bought some time, - which I am thankful for personally - however the risks are now increasing. And the risk that I have identified that concerns me a lot is that, sooner or later, much is happening in Greece right now where suddenly the world wakes up and says “Hey, wait a minute. They can’t possibly pay that back. And at 22% interest rates on 2-year paper, they really can’t pay that back.” So suddenly the illusion is lifted. We have collectively suddenly gone, “Greece is not solvent. Oh, that’s terrible.” And now we are grappling with that. But that same dynamic can be extended to, I think, any of the governments that you just mentioned. It varies across Europe somewhat, but in Japan and the U.S. there certainly are fundamental mismatches between current productive economic output and the levels of indebtedness. We are printing our way to that. Is there a way that you can see that this could actually be turned around where it all sort of pencils out? Is there a solution to this that does not have to pass through a fiscal crisis and possibly a currency crisis?
Eric Sprott: Well Chris, it is very hard to imagine that happening. And then I look at really what has happened over the last eleven years since we hit the high in that, we basically created a problem in the world of banking business and I always think of banks as being levered 20 to 1. And when your paper assets start to decline, of course it does not take much of a decline to get rid of all the capital. And we have seen that in so many instances whether it is Iceland or Ireland or now the Greek banks. And all the moves that have happened so far, really have been in response to the problems in the banking system. That is why you have TARP and TALF and all those things because the banks basically were losing deposits and somebody had to come in and support them. That is what happened in the UK, it happened in Iceland, it happened in Ireland, it’s happening in Greece as is transpiring right now. And I think the big fear is that you cannot let one banking system go down without an impact on all the other banking systems. So collectively everyone is trying to support the banking system and I think people see through the ruse. And the natural reaction is “Well, why have your money in a bank when you earn nothing, why not have it in something that might at least maintain it’s purchasing power?”
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Note: listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on The Screaming Fundamentals For Owning Gold And Silver, which takes a deep dive into the data behind the supply and demand imbalances in the bullion markets.
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Eric Sprott is Chief Executive Officer, Chief Investment Officer and Senior Portfolio Manager at Sprott Asset Management, LP. He manages Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Bull/Bear RSP Fund, Sprott Offshore Funds, Sprott Canadian Equity Fund, Sprott Energy Fund and Sprott Managed Accounts. He also is the Chairman of One Earth Farms Corp and a Member of the Executive Committee of Central Gold-Trust. Eric's predictions on the state of North American financial markets have been captured throughout the last several years in a monthly investment strategy article he authors titled “Markets At A Glance”. Mr. Sprott holds a Chartered Accountant designation.
Problems brought about by the recent recession, such as high unemployment, still exist in major markets like the US and Europe and this means that politicians will continue to run economies, he noted.
This will be seen by way of tighter banking regulations, restriction on capital controls and trade protectionism, for example.
“We are seeing rising political risk coming in, and markets don’t price political risk very well. So we’ll see more volatility as we see these surprise moves coming in,” he said at a roundtable session with reporters here yesterday.
Donovan, who is London-based, said investors are increasingly nervous about where to put their money amid this scenario.
