Gold: The Only Asset Worth Owning - Part II of Eric Sprott Interview

By Eric Jackson, Senior Contributor

06/10/10 - 06:00 AM EDT

Stock quotes in this article: FNM , FRE

Eric Sprott founded Sprott Asset Management in 2001 and has over $5 billion in assets under management. He has been an outspoken gold bull since 2000 and warned that the bursting of the Nasdaq bubble was the start of a long-term deflationary trend that is playing out. I met him last week in Toronto for an interview.

Second of two parts

EJ: You've loved gold for a long time but, when the crisis hit in 2008, gold and junior miners got killed like everyone else. How do you explain that?

ES: I treat what happened to gold stocks in 2008 as anomalous. Now, two years later, gold's at a record price and gold stocks have come back from an absolute pasting.

I'm not convinced the market is always right. The market can be very wrong for a certain time period. I remember in 2006 when homebuilder stocks rallied 60% because people thought housing was turning.

We love gold and silver stocks. I'm still bullish on my prior stock picks of junior miners. [At the May ValueInvesting Congress, Sprott recommended OceanaGold Corp., which is listed in Toronto under OGC, Avion Gold (AVGC.PK), and East Asia Minerals (EAIAF.PK).] Why? Because there could be times in the life of investing when people only buy one thing. That's what happened in the mid-1930s. They only bought gold stocks. So much so, there were 80,000 gold mines in the States then because they could get financing.

I just get the feeling that that could easily happen again. When you look at a system that's in trouble, you think: what's the one thing I could do to get through it? You're thinking survival, because it's not going to befun. By owning gold, you can survive it because it will have its purchasing power vs. anything out there. If we're still eating food and trading things, you will be able to use gold to buy those things.

EJ: So you see us staying in a deflationary environment?

ES: I do, certainly for paper assets. I think you might end up getting necessary inflation in food, energy, precious metals, where there could end up being real shortages.

EJ: Is that why you like energy?

ES: Yes. Unfortunately, one of the things that could happen if the whole financial system has a problem is that your whole ability to produce things goes down. If you can't borrow money in the energy business and you can't drill, your production is going down this year... immediately.

The same thing happens in agriculture. When they had the credit crisis, the farmers couldn't buy fertilizer -- just as little as a year ago. The shortages could develop quickly because of financial problems. So prices will initially drop due to a lack of demand, but then supply plummets.

........

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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