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.

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

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Gold Running in Short Supply: An Interview with Eric Sprott

By Eric Jackson, Senior Contributor06/09/10 - 06:30 AM EDT

Stock quotes in this article: PHYS , GLD

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.

First of two parts

EJ: You've been one of the biggest gold proponents. Where's the price per ounce of gold going?

ES: I don't have a good price target. We get involved in themes that play out for a long time. Interest ratesand reported inflation started going down in the 1980s. No one dreamed of buying gold in 2000. You were an idiot talking about it. I was initially attracted to it because I thought there was a physical shortage then. There still is.

Central governments were selling gold 10 years ago. This put a burden on a very small market. Today, central governments are buying, the miners are unhedged, you have big gold ETFs, you have coin sales going crazy. Some central banks are even telling their people to buy gold.

I've got to believe that a physical shortage will manifest itself somewhere soon. There's only 162,000 tons of it out there -- and I don't know anyone selling it. Someone's going to try to buy a bar of gold sometime and it won't be there.

My partner, John Embry, went into gold many years ago because he thought it would become a substitute for fiat currencies. Governments are printing money and, sooner or later, people will realize that it's better to own gold than any bank deposits. This theme is obviously massively playing out as we speak. You look at the quantitative easing (QE) programs, budget deficits. The global fiscal irresponsibility plays into the hands of the gold owner. More people will figure it out and they'll go there.

We now have large investors -- John Paulson, to name one -- putting their money into gold. If everyone started putting 5% of their portfolios in gold, there wouldn't be enough. I'm convinced the upside for gold is still quite positive. When I see some projections for $2,000, $3,000, or $5,000 per ounce, none of them bothers me. We don't know where the price will go but it will be the inverse of QE. The more they print, the more it will go up.

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

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Gold's Appeal, Even in Deflationary Times

By Eric Jackson
RealMoney Contributor
6/7/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

Last week, I met up with Eric Sprott, a hedge-fund manager who has been a pronounced gold bull and market bear since the 2000 Nasdaq bubble burst. I will post a full interview with him later this week inTheStreet. In the meantime, I want to lay out some of his arguments concerning gold for you to consider.

Gold is seen by some investors as a useless yellow rock. You can't eat it, this line of thinking goes. It was something that people clung to centuries ago, but it has no use today -- especially when there are so many compelling stocks to invest in. Besides, the thinking also goes, if you want safety, you can buy U.S. Treasuries. People who pooh-pooh gold also tend to characterize the gold bulls as kooky, end-of-the-world types.

It was anti-gold thinking like this that drove down the price of gold 10 years ago to $250 per ounce. That drop in the price of the metal also coincided with the ultra-high-risk appetite that investors had at the time for tech stocks.

Many non-followers of gold assume that what drives the value of the metal is inflation. But we've seen the value of gold quintuple over the last decade in a period of deflation -- not inflation. And many are of the view that deflation will be with us for the foreseeable future.

Sprott's view of gold is that the metal is -- and will be -- driven by two fundamental factors: (1) limited supply of the metal and (2) a view that the metal will become increasingly seen as a safe and alternative currency vs. other fiat currencies.

On the first factor, physical scarcity, you might not realize that there are only 162,000 tons of gold in the world today. And all the miners of the world are only extracting another 2,500 tons annually. If suddenly all central banks and investors decided that they wanted to allocate 5% of their portfolio to gold, there would not be enough to go around.

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[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

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Gold Rush

By Eric Jackson
RealMoney Contributor
5/6/2010 2:00 PM EDT
Click here for more stories by Eric Jackson

With the concerns about Europe and sovereign debt swirling around the capital markets, gold has risen to a recent high of $1,184 an ounce. Gold bulls like Eric Sprott have made outspoken calls that the price of the commodity is going to spike in the coming months in response to fear of overleveraged governments grappling with new fiscal constraints and diminished purchasing power of their currencies. In a seemingly contradictory turn, though, now may be a perfect time to position yourself for some consolidation in the space.

Investors have been interested in gold as an investment since Lehman's bankruptcy. The price of gold jumped to $900 an ounce in the days following the Lehman filing and AIG (AIG - commentary - Trade Now) bailout. In the weeks the followed, though, the price of gold collapsed amid an immediate deleveraging of all types of assets, stocks and commodities alike -- by November 2008, the commodity dropped to close to $700 an ounce.

At that time, many large gold producers and junior miners saw their stocks hit significant low points. In fact, if you go back and study the charts for the gold stocks, their low point came not in March 2009 but in early December 2008. Since then, they've had a steady upward climb.

You might have thought larger companies like Barrick Gold (ABX - commentary - Trade Now), Newmont Mining (NEM - commentary - Trade Now) and Goldcorp (GG - commentary - Trade Now) would have been scooping up junior miners at that low point because of the low prices. Like most of corporate America, however, they were hesitant to pull the trigger on any deals with so much uncertainty in the air.

With most observers expecting further price inflation and potential debt uncertainty ahead, many hedge fund managers are betting that gold prices will keep rising. If management teams of gold companies agree, they are likely considering how to grow their reserves. Using their higher stock prices and healthy cash balances will likely prove tempting in grabbing some smaller, valuable companies before other competitors do.

So, with the price of gold now much higher -- and the stock prices of these major players largely recovered (Barrick's market capitalization is over $44 billion) -- the sector seems poised for consolidation. What is the best way to play this? Simple -- look for the junior miners with the most attractive assets from a major producer's perspective.

I am a long holder of Seabridge Gold (SA - commentary - Trade Now), a company I wrote about back in February. Seabridge owns the rights to the KSM project in Canada; it's not developing the property, which is estimated to have 50 million in gold deposits, but looking to partner or be acquired by a larger producer.

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Hey Fed, What's Going On?

By Eric Jackson

12/30/09 - 06:05 AM EST

Stock quotes in this article: WFC , C

Last week, Canadian hedge fund manager Eric Sprott published a white paper titled, "Is it all just a Ponzi scheme?" . The document digs into who is actually purchasing the recent Federal Reserve U.S. Treasury auctions and concludes that the biggest new buyer this year vs. last year is actually the U.S. government. Hence the Ponzi scheme allusion: One arm of the federal government is running huge deficits and quantitative easing programs that are being financed in part by another arm of that government. How can this story not get more attention from others in the press, in politics, or in the market?

Sprott is an unapologetic bear. He and David Rosenberg must hang out in the same coffee shops of Toronto and share notes. Therefore, his views regularly get dismissed by some with a rosier view of life. At some point, if you're a relentless bear -- like Roubini, Rogers, Rosenberg, Abelson, and probably Whitney now -- people stop listening to your content.

"This is the 'end-of-the-world' guy again," you think, "I know what he's about and don't have to listen." Yet, Sprott is also Canada's most successful hedge fund manager and clearly someone who does his homework. Here's his argument about what's gone on with the Fed and Treasury purchases this year.

In order to fund bigger deficits, the U.S. government in 2009 has had to sell three times the amount of debt it issued in 2008. That amounts to an extra $1.89 trillion in debt sales as of December, according to the U.S. Treasury.

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

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