“The whole precept that printing money is good…that somehow zero interest rates and negative interest rates are good, is totally fallacious…It’s so unimaginable and yet somehow the investment public has bought into it…Things are unstable here…
In less than 10 years we will see physical assets backing currency. Of course, the most likely physical asset is gold.”
Submitted by Tekoa da Silva, Sprott’s Thoughts:
During a time of currency volatility and returning strength in precious metals, Eric Sprott, Chairman of Sprott Inc. was kind enough to share a few comments.
Regarding currencies, Eric noted that “I’m kind of shocked that the most volatile sector of the financial market right now is the currencies… it really should be bonds or stocks, but it now seems to be currencies.”
Higher risks within global currency markets buttress, “An awesome outlook for gold,” Eric added. “Last year, 84% of the world’s population would have made money owning gold because of various currency moves—even though gold in US dollars was down approximately 1%.”
Commenting on the root cause of growing currency gyrations, Eric noted that, “The whole precept that printing money is good…that somehow zero interest rates and negative interest rates are good, is totally fallacious…It’s so unimaginable and yet somehow the investment public has bought into it…Things are unstable here…So I imagine probably in less than 10 years we will see physical assets backing currency. Of course, the most likely physical asset is gold.”
Here are his full interview comments with Sprott Global Resource Investment’s Tekoa Da Silva:
Tekoa Da Silva: Eric, we recently saw a move in gold from about $1150 oz. to $1300 oz. in US dollars with a backdrop of some pretty interesting currency gyrations around the world. What goes through your mind here as you look at gold?
Eric Sprott: Well, I think your comment about currency gyration is probably the most significant thing because I’m kind of shocked that the most volatile sector of the financial market right now is the currencies, which goes against the grain of what should be happening. It really should be bonds or stocks that are most volatile, but it now seems to be currencies.
Of course this all leads to an awesome outlook for gold. Last year, 84% of the world’s population would have made money owning gold because of various currency moves even though gold in US dollars was down approximately 1%.
As we sit here this year, I think it’s now the strongest currency on the planet and you can see that the volatility of the currencies is causing stronger interest in gold, and we’ve seen that manifest in a number of ways. One, the GLD (SPDR Gold Trust) added something like 40 tons last month, which is a stunning number when you realize it’s only a 4000-ton market.
If you ever did 40 tons consecutively for 12 months, you would have an extra 500 tons of demand in a 4000-ton market. You can also see interest in the gold stocks picking up. In Toronto recently there were five new financings announced that totaled half a billion dollars, and they all sold out.
So we’re seeing money going into the gold trust. We see the coin sales; the mints are strong. We see the money coming into the stocks – all the technical signs are there like breaking through the 200-day moving average, and the HUI index breaking out. Lots of stocks have had major moves already. It’s very reminiscent of how we started 2014. Now I sure hope it doesn’t end the way we started 2014.
But I think the reasons to own gold with the kind of volatility we’ve had just could not be better than they are right now.
TD: Eric, what are your thoughts on the financial institutions and money-center banks, and their impact on the economy, amid the currency turmoil we’re seeing?
I’ve read that leverage can be taken out at 100-200 times the amount of capital that you have on board in some forex markets. Based on your experience in running financial organizations, what are your thoughts on that?
ES: Well, Tekoa, one of the reasons I got into gold way back in 2000 was the realization that the financial system was way over-levered. I mean, we had banks levered at 30 to 1, which by definition means if your assets decline by three and a third percent, you’ve lost all your equity. That’s exactly what happened in 2008 and the banks effectively all went broke, and the various central banks and governments came in to rescue them via TARPs, TALFs, QEs and so on.
We have the same situation again today. Most of the banks have had very poor results. We hear stories about Citigroup reportedly losing $150 million when the Franc was revalued and some of these hedge funds that went broke overnight.
There’s a lot of carnage going on out there. I’m always fascinated when I think about the quadrillion of derivatives on who-knows-what; oil, the ruble, the yen, the Canadian dollar–or something going the wrong way against the US dollar. It’s hard to imagine that somebody is not losing a lot of money here because 1% of a quadrillion is ten trillion. The volatility in these currency markets is way beyond 1% per day, so goodness knows what’s going on behind the scenes, but it can’t be pretty.
TD: Eric, do you have any memories of friends or possibly anecdotal stories in which an individual may have shorted something that was extremely overvalued but due to counterparty risk was unable to enjoy the profits of their speculation?
ES: Well, shorting is a dangerous game in the best of times and I’ve done a lot of it in my day, and of course with shorting, your loss potential is unlimited. You never know how high something can go and I personally experienced times when I was short of stock. I can remember being short Fannie Mae. I think it is was in 2008, in the middle of the crisis, and Fannie had already gone from $60 down to $6, and in two weeks it went to $18—just because of a squeeze. So it went up 200% in a matter of weeks because of the squeeze.
It’s hard as a short seller to hold on, but probably four months later, it was at $1.00. So it’s a very volatile situation when you have things that are ultimately terminating. We all went through that in 2001, 2002. In 2008, there were so many stocks that went down to a dollar; General Motors, Ford, Fannie, Freddie, Citigroup, and thankfully, some of them have transitioned. Others have gone off into conservatorship. Markets can be incredibly volatile and people better make sure they’re on the right side of the call.
TD: Continuing on the idea of currencies, do you feel what we’ve seen so far in the Russian Ruble and the Swiss Franc is going to roll from one country to the next, over the next 10 to 15 years?
ES: Well, it certainly looks that way. Just this week the Canadian dollar was down 2.5%. I believe (and I haven’t seen it yet because I’ve been tied up in meetings) but I believe the euro was down 1.5% today.
The Danes had to go to negative interest rates to protect their currency. That was a week or two ago. So the currency wars are in full bloom, and maybe the central bankers have finally lost control. A lot of money can slosh around asking the question, “What’s the next weak currency going to be or what’s the next strong currency going to be?”
So the countries with strong currencies have to worry about their currencies getting pushed up and the weak ones have to worry that speculators might push it down. So it’s hard to protect your wealth in an environment where your own currency is more volatile than any other measurable financial instrument and that’s what we’re going through right now.
TD: Eric, I’ve had the opportunity to speak with you in the past about aggressive investment strategies in precious metals and mining stocks. I’d like to ask you now about core strategies; physical bullion and personal ownership. As an organization, we’ve created The Sprott Physical Bullion Trusts—but what are some additional core strategies a person can take to help insulate their lifestyles?
ES: Well, as you know, I’m a huge proponent of owning gold and anything related to precious metals. I know there have been lots of studies done about how much gold one should have and various studies suggest 5%-10% of your portfolio. I’m way more invested in precious metals than that, because I believe we are in a financial Ponzi scheme that has been perpetuated by the printing of money, zero interest rates, and now negative interest rates.
It’s inexplicable that the markets can sustain these monetary circumstances and that economies can function with no return to savers (which negative interest rates imply). Now, with all the currency volatility on top of it—imagine if you were the owner of a German bond and you’re already losing .5%. Then the euro goes down 1.5% in a day. Not only do you lose on the interest, now you lose on the currency. How do you deal with this very odd situation that we’re in?
For quite a while I’ve invested 80% of my money in precious metals and, notwithstanding the carnage we’ve gone through here in the last three years, all the data of the movements of physical gold tell me there’s more demand than supply.
I’m quite prepared to stand in there, notwithstanding the paper markets, suggesting that “an end is near,” and I fully expect we end up seeing new highs in all the metals here.
TD: Eric, I’d like to ask you about the marginal producer strategy we’ve talked about in the past, in terms of the magnitude of return one can find amid a strong move up in the price of gold. Could you talk a little bit about the mathematics of that—i.e., how many companies do you need to own? What can go wrong?
ES: Well, it depends on your appetite. Let’s just imagine that some of these companies’ costs are $1000 per oz. gold, and the price is $1200 oz. gold. So you’re working with $200 a margin. At an assumed gold price of $2000 oz., you have five times that margin, which by implication suggests the stock could go up by five times.
Imagine a marginal producer with an $1100 oz. cost and only making $100 oz. Under a $2000 oz. gold assumption, now he’s making $900 oz. That stock can theoretically go up nine times based on the earnings multiple.
It takes a little intestinal fortitude to be there because you can suffer the risk of the price of gold going back down. But as you know, I’ve invested in lots of these types of investments. I did it before in the year 2000 when no one cared. At that time, I think the HUI gold index went up 1700% percent in about 8 to 10 years. So it was just a wonderful time to own gold.
I think we might be in the same type of environment today because they’ve been so sold off. Everybody suggested the bull market was over but obviously it wasn’t over. The thesis for gold and silver are totally apparent to anyone who wants to think about it, and opportunities are going to present themselves in the miners as well as to the owners of the precious metals themselves.
TD: Eric, I’ve heard George Soros often looks for commonly held precepts that are wrong, and bets against them. Using that general idea, outside of gold and silver, are there any commonly held precepts around the world today that are absolutely wrong in your opinion?
ES: Well, the whole precept that printing money is good is totally fallacious. The concept that somehow zero interest rates and negative interest rates are good is totally fallacious, because the whole saving segment of the world can’t earn a return.
It’s like saying you have a million dollars in a pension fund. What did you earn on it? Well, it didn’t earn anything. It lost .5% a year. How do we get progress out of that when you have such low and sometimes negative interest rates? So that’s a fallacy.
I think another fallacy is when we went into 2012 that it was going to be a great year for the economy. 2013 is going to be a great year. 2014 is going to be a great year. This is always at the beginning of the year, right? Then you get to the end of the year and it’s never great. In 2015, people are again suggesting that maybe the US economy is going to be strong. I don’t think there is any serious growth that’s going on in the economy.
We have people making decisions to allow more and more unqualified home buyers buy houses and more cars they can’t afford to own. We have a US dollar that’s strong which cannot be good for the economy. The same strength we see in the Franc that’s so bad for the Swiss economy also holds true for the dollar not being good for the US economy.
As a Canadian, I can tell you we are already seeing a shift where some of the auto production starts moving up to Canada because the Canadian dollar is trading for less than $.82 cents to the U.S. dollar. So car companies shift the production up here. That’s why strong currencies don’t lead to strength in the economies and that’s why you have this currency war where everyone wants to have the worst currency. It’s a fight to see whose the worst is.
So that’s another thing that I don’t think people understand. There’s no real growth. Money printing is not going to work and zero interest rate policy is not going to work.
TD: Eric, in winding down—any other thoughts you think we may have missed?
ES: Well, I think the theme is the same, but we haven’t really talked about the “physical-ness” of gold. I woke up this morning and read that the Chinese delivered 61 tons in the Shanghai exchange this week. I love to work with numbers. Sixty tons a week is 240 tons a month. Well, we only mine 180 tons a month.
So here we have more deliveries on the Shanghai gold exchange than we mine in a month. That’s just one country. I’ve been so pleased by the demand out of both India and China. It looks like India might cut the import tariff. You can sort of sense that’s going to happen.
I think it’s interesting that the ECB is going to start printing money in March, which was just announced recently and I suspect the Japanese are going to stop printing at the end of February and we’re just going to pass the baton along. A day after the US stopped QE 3, Japan started their QE. It’s very ironic that one would happen right after the other because I think they need to have somebody buying these bonds. Otherwise these rates will go straight through the roof.
So there are all sorts of interesting things going on that I think lead to the conclusion that the true safest asset is precious metals. That would be my summary.
TD: As a final question for you Eric, how do you expect the world might look in 20-30 years, currency-wise?
ES: Well, if I was to bet, in less than 20 or 30 years we will have to have a gold-backed currency. It has just got to happen. There’s no way governments can keep spending the money they spend and printing the money they print. It’s so unimaginable and yet somehow the investment public has bought into it. But you will never read about printing money in an economics textbook because it never happened before. You will never hear about negative interest rates in an economic textbook because it never happened before.
I think to your audience, those words, “it has never happened before,” should awaken them, too. Things are unstable here. We are fighting a natural decline of the economy that should be taking place and the powers that be won’t let it happen and the more they delay it, the worse it will get.
So I imagine probably in less than 10 years we will see physical assets backing currency. Of course the most likely physical asset is gold.
TD: Eric Sprott, Chairman of Sprott Inc., thanks for sharing your comments.
ES: Tekoa, my pleasure. All the best to you.
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