Eric Sprott recently answered a number of questions on the minds of gold and silver investors, and we hope you’ll find his insights valuable.
1. How did we miss the top of the market, in 2011? Why wasn’t someone ‘pounding the table’ to sell precious metals and precious metals equities?
Eric Sprott: With the benefit of hindsight, anyone can say that we all should have been selling in ’11. But we stayed in because the facts at the time seemed indicative of more growth, not a peak and subsequent decline.
Back then, it was suggested that the Fed might exit QE 2. Some might have interpreted this as a reason to sell gold, much as suggestions of ‘tapering’ recently were interpreted in that way. They launched QE 3 instead, which we expected to be bullish for gold.
So they did not exit QE; they added more stimulus instead. In addition, the Chinese entered the market, buying at least 1,000 tons more in 2012 than in 2011. Despite these facts, gold has continued to founder.
Disregarding China and Russia, since that gold is consumed domestically before entering the global market, the yearly mine supply is roughly 2,100 tons of gold. It surprises me how China can enter the market and buy 50% of available mine supply, or an additional 25% of the total supply, and yet the price of gold declines.
Where is the supply of gold coming from? I have publicly claimed that I believe gold ETFs are seeing their physical holdings go to China. In my view, this is where the 700 tons of physical gold that were redeemed during the first six months of ’13 ended up.
Meanwhile, the world’s largest consumer of physical gold – India – has been stifled. Government has imposed some very draconian measures to stop people from buying imported gold, and this has worked. Officially reported gold import numbers declined very severely, and premiums jumped for domestic gold sales.
So despite this bear market for gold, I view people who are willing to sell gold here as extremely short-sighted. For now, the Chinese demand for gold is (I believe) being supplied by gold draining out of ETFs, and the fact that Indians cannot get their hands on the stuff legally. How much longer can this current situation hold?
All of these factors stopped me from telling investors to sell gold and other precious metals in 2011.
Add to this the fact that QE keeps increasing and that ‘tapering’ has been thrown out by the Fed. There is a very solid case for continuing to own gold and other precious metals equities right now.
2. What will it take for precious metals and precious metals equities to turn around?
It has to be the precious metals prices themselves. The stocks are probably 99% correlated to the price of the underlying metals being produced or explored for, and they typically go up two or three times faster than the precious metals prices.
Going forward, I believe we will begin to view the levels we saw this summer – with the lowest low on June 28 – as the bottom for the price of gold. For the stocks, it will all be about metals prices.
3. How much of your portfolio is devoted to precious metals stocks and bullion?
Between shares in mining companies and physical bullion, I have at least 80% of my total portfolio invested in gold and silver. This is similar to the amount in the public accounts I run such as the mutual funds. I have been happy to remain there. It was a wonderful trade since 2000, and, of course, an awful trade since the 2011 peak.
Breaking it down further, the amount of bullion that I hold has been going down – to probably 15 percent of my total portfolio right now. It was as high as 35 or 40 percent.
This year, I am selling bullion to buy stocks because the leverage is so much higher in the equities than in the physical bullion. We decided to move into stocks, and we have participated in a number of private placements in the past 3 or 4 months in companies that are highly leveraged to the price of the metals going up.
I am putting my money down on the price of gold going up, and seeing a quantum increase in the precious metals equities.
