Billionaire Eric Sprott: “You Have To Be A Buyer When People Are Non-Believers"

Full Audio Recording Available Here

During a time of widespread investor desertion of the precious metals and natural resource space, Eric Sprott, Chief Executive Officer and Senior Portfolio Manager of Sprott Asset Management was kind enough to share a few comments.

Eric noted that in these periods of extremely negative market sentiment, the seeds are sown for,  “Stocks [to] go up multi ten thousands of percent in the gold and energy spaces,” during subsequent up-cycles. That volcanic performance is often caused by a combination of rising metals prices, and “everyone getting excited about discoveries,” which Eric expects will occur again.

Here are his full interview comments with Tekoa Da Silva:

Tekoa Da Silva: Eric, you comment often on the Western Central Banks, in terms of their disregard for gold as an asset class of importance, so I’d like to ask—do their actions speak otherwise or have they been letting out all their gold to Asian hands during this East/West physical transfer that we’ve seen over the last year?

Eric Sprott: Well, Tekoa I’ve written a number of articles where basically I ask the question, “Do the Western Central Banks have any gold left?” and I suspect that it is very, very limited these days and when I looked at what happened in the last decade, I can see that there was substantial net new demand for physical gold, over 2000 tons a year. You take it over a decade, and you’ve got 20,000 tons.

My understanding was they might have started the decade with 18,000 tons, but I was really debating whether they would have any left. As we’ve gotten into (particularly) this year and even last year with the Chinese coming into the market buying huge quantities of gold, it has become more and more apparent to me that the annual shortfall is probably even well beyond 2000 tons.

I speculated at the end of 2012 that the central banks probably had no gold left, and I’m not changing that speculation by the way. I think the raid on gold was orchestrated so that perhaps they could drain the ETFs, out of which they did get about 1000 tons, which helped them meet some of the demand exploding in China and many other places by the way.

So I think the central banks have been very active in the gold market. I believe in the GATA viewpoint, that the central banks have always wanted to orchestrate the price of gold. Particularly recently as the printing presses have gone crazy here and I know every one of your  readers would know that zero interest rates and printing money are irresponsible and because every one of your readers knows that, I know the guys doing it know that too.

Bernanke knows it, Abe knows it, and Draghi—they all know it. But they don’t want it to manifest itself, and where would it manifest itself? It would manifest itself in the price of gold going up.

Well, we can’t have that happen because we know our policy is ridiculous and of course it got to even higher levels this year with Japan coming in to buy an extra $65 billion a month. It’s almost surreal the amount of gold they’re buying and what’s even more surreal is to see the price of gold go down at the same time that you see these demand factors exploding. I’m more referring to the Chinese than any other side. One could almost postulate that the Chinese could buy all the gold produced (ex-China and ex-Russia who don’t sell any gold).

So that leaves the other 178 countries to buy none. Well, we know they’re buying. We know central banks are buying. We know mints are buying. So there’s no doubt that there is a serious disconnect between the physical market and the paper market, unless the central banks have somehow been able to still supply that extra gold. I suggest that they’re going to run out and that ultimately these precious metals prices will break loose.

I think most of us will be stunned to see how high they would go, and imagine how high they would go if we all found that the banks had no gold and there are clues to this. I mean the Germans asked for 300 tons back which is no big deal and they’re told it’s going to take seven years. Well, theoretically it was 4% of the US supply in gold. Why can’t you deliver 4%? Why does it take seven years to deliver 4% of the gold? I mean it just begs the question and that’s one of the reasons I think they don’t have the gold. So that’s why they orchestrated the raid.

TD: One thing I always thought was interesting Eric and I’d like to ask your thoughts on it, is that period where Gordon Brown sold Britain’s gold.

ES: Right, Brown’s bottom.

TD: Yeah, people talked about how he sold off Britain’s gold at the bottom of the market and how bad of a decision that was. That’s usually the commentary, but no one talks about who bought it. Who was on the other side of the transaction? Was it somebody in the same financial community? What are your thoughts there?

ES: Well, I suspect what was happening, back even then, many people have written articles and of course Frank Veneroso is in my mind [as being] one of the most significant [commentators] suggesting that the demand for gold even then, was above the supply…and Dmitri Speck was also involved in writing things on this, talking about the central banks interfering in the gold markets going back to 1993.

So if you can imagine that there was a shortfall of the supply of gold, that Britain coming in to sell whatever number of tons it was…would have met a ready market, because there was more demand than supply and I think that was the case back in 2000 when they finally completed their sales.

They did cause the price to go down in the process [of selling], but there were buyers and I think the buyers would have been the normal people who buy coins, bars, jewelry and the various industrial products. So I don’t think there was any particular entity that bought it but I think [rather] an agglomeration of normal consumers.

TD: Eric, when you look at gold today and when you also look at silver, as an investment case—what could go wrong and has there been any simpler case that you’ve seen in your investment career?

ES: Well, let’s ask the question. What could go wrong? Well, what could go wrong is if all of a sudden maybe you have some robust economic growth without inflation which we’ve yet to witness.

Maybe the financial authorities are all going to get responsible and say, “Well, we’re not going to print anymore,” and somehow miraculously, the economy survives it. I mean these are quite the ‘hypothecations’ we have to come up with here, but I don’t see that happening. I always said, there are probably three reasons I might sell gold one day and one is—it’s when we’re in a mania and I can clearly see it.

Two, that the central planners get responsible (which I certainly don’t see), and the third, is they just make currency convertible into gold and then I won’t have to worry about it—[but] I don’t see any of those things now.

This has been a horrendous market to have been in over the last 13 years. There’s never an easy day in the gold and silver market because the moves are [so] violent. The paper players can push the price around. We don’t get much comfort in the gold community. I can tell you that even though the gold price went up 700%, it just felt like you were in a war everyday. Everyday there’s a war in the gold market, so you hardly ever had a chance to enjoy it and there were many times when they would just hammer gold for a long time.

I think of ‘08 when the stocks went down 60% to 70% in a half a year. It’s never easy and so, it might be simple for me to say that the story of shortage and supply is easy because that’s just looking at numbers. What’s going to happen with the gold price? That’s not easy [to predict] because you have people involved who have agendas, who run the world’s money, who want their money to appear to be valuable to people, and of course, the major canary in the coal mine is the price of gold. And so for the first 11 years, they let it go up 700%.

As the printing presses really got started, then the price of gold started coming down and coming under pressure, because I think if we ever saw gold go through $2000 or $2500, [at] the same time that they’re printing, everyone [will] figure it out.

We all have it figured out anyway. We just look at the stock market and the gold market, and say, “Well, I guess maybe there’s nothing wrong with it.” That’s what we all assume. “I guess there’s nothing wrong with it.”

Well, we all know intellectually that it’s wrong and in reality, it’s wrong. It’s irresponsible, printing money and having zero interest rates.

So the unintended consequences will play out. That’s why the demand for gold and precious metals by non-participants in the Western central planners’ scheme, have picked up the baton and purchased huge amounts of gold, which are way beyond the annual production.

TD: Eric, as you talk about these items, what do you see on the faces of other people in the institutional fund management community? What’s the sentiment and what are those people saying?

ES: There’s no interest. I mean if you just want me to broadly classify institutional people, there’s no interest. Maybe 2%-3% will listen and maybe 5% of those will act. So it’s a very, very, very small world these days of people who are interested in gold. I mean it’s almost like you have the plague when you’re talking about gold, even though of course over the last 13 years it has been an awesome investment. It just hasn’t been in the last two.

Of course you seem like a conspiracy nut if you say, “Well, I can see that demand is twice supply.” Look, I’m just dealing with the data here… and the data is in the public domain.

And that’s just the way [it is], because if you like gold, you’re already considered to be close to the lunatic fringe. So the response has not been good. I think what will happen of course is the price of gold picks up here. We’ll see everyone come back into the market. We’ve just got to reverse the downtrend and we’ve had a couple of good days here, and [so] I think we saw the bottom back in June, and finally had another test of it that just completed itself last week.

All the data is very positive for gold. So there’s no way that this shortage is not going to manifest itself. We saw the gold forward rates going negative again and the last time they went negative, gold went from $1180 to $1450 in very short order.

It’s a very unusual circumstance. There are lots of signs that gold should go up here. But to answer your question, there is very little interest at the institution level.

TD: Would it make sense Eric that as the price of gold rebounds along with shares in the space, that the value of the opportunity diminishes?

ES: Well, the opportunity today is unbelievable because everything has been so sold off, and I’ve spoken many times [that] I can see stocks running up 10 and 20 times here in the next year if gold and silver hit my price targets. I mean where do you get opportunities like that?

So they’ll all come in. Once gold starts looking like, “Hold it now—maybe that secular bull market wasn’t over?” You will see all sorts of people coming in, but there’s no room for them to come in. We already have a shortage of physical gold, it’s just that no one knows it yet, and the banks have been supplying it. But as I say I think they’re probably running on fumes in terms of their supply. If they get no more drainage out of the ETFs—they’ve probably got a thousand tons coming out of the ETFs—that increases the normal mine supply that’s available for purchase by 50% and that happened in a very short time period, i.e. about six months.

So that six-month period probably doubled the supply of gold that was available for sale and it got consumed. We saw who consumed it. So that can’t carry on, we don’t have that many tons left in the ETFs. [But] that’s over and done with. Now the normal demand which is continuing to be abnormal because it’s rising, will have its day and there will be huge opportunities and people will come into it as they see that the bottom has been set here and as the stocks start to rally. We will have lots of participants in this market.

TD: Eric, if I can ask you a question or two now about wealth building—the concept of becoming wealthy—based on your experience, what are some of the characteristics that lead to becoming wealthy as an outcome?

ES: Well, you’ve got to go against the grain. You have to be a buyer when people are non-believers. You have to believe in something based on data that says you’re right when the world will tell you you’re wrong, because when the world says you’re wrong and you’re right, you know that the return will be outsized because no one is there. It’s like buying gold stocks in 2000 which I did to a very large extent. The HUI index was at 35 and it went to over 600. It went up 1700%  in eight years.

And that’s because everyone was against it. It was like a killing field for an investor to go in and buy things cheap and I really believe it’s kind of [a similar] opportunity again today, that you’re the only guy in the candy store because everyone thinks they’re selling garbage—but it’s really candy and the opportunities are unbelievable.

And you got to stick to your beliefs, that’s the other thing. I mean yes, I’ve taken some big down hits this year. But when I think of where we could go from here, and I’ve done it before, I’ve done it so many times I can’t even tell you…I might have been bullish and [everyone] thought we were in a bear market and it turns out to be a bull market. I’m going back over 40 to 50 years now. So that’s a lot of time. If you believe you’re right and the data says hold your ground, you hold your ground. Normally there’s a pretty big payday at the end.

TD: For people that are looking for other people to invest in, what do you usually look for in deciding whether or not you should invest your capital in a person, whether it be the CEO of a company or otherwise?

ES: Quite often for me it’s not the person. It’s the opportunity. For example, if the price of gold goes up, all CEOs are going to look great. It’s like all high tech CEO’s in 1999 looked wonderful because all their stocks went up.

Probably the guy who was the worst CEO, his stock probably went up the most because he lied better than anybody. So it’s not to me so much about the people, it’s the opportunity. What’s the opportunity that presents itself?

If I have a particular target on gold and I say, “OK. Well, what would this company make at this price of gold?” It almost won’t matter who the guy running it is at the time. It’s more of asking, “What’s the leverage to the upside here?” Yeah, I could lose another 20% or 30% or 40% on a gold stock, but what if I could also make 1000%? That’s not a bad risk-reward ratio. That’s one I’m prepared to take. Obviously I think the downside in lots of these stocks is de minimis, but the upside is quite large over a short period of time.

TD: So it sounds like the depth of the bear market bottom can provide somebody with a lot  of margin of safety against problems or anything that comes up along the way?

ES: Well, all will be forgotten quickly. If the price of gold is $2000 Tekoa, you would not believe what the sentiment will be. Can you imagine if everyone thinks we’re in a new bull market for gold? Oh my goodness, it will be crazy. If gold does go to $2000, most other things probably won’t be doing that well.

So you will have everyone trying to get through the same door at the same time and it could be quite stunning. I mean we’ve had other markets where stocks will go up multi ten thousands of percent in the gold and energy spaces, because not only is the price of the product going up but everyone is getting excited about discoveries and it just gets crazy.

So that’s one of the beauties of the natural resource area. The gains that can be made are so outsized versus the norm of normal investing, and that’s why I’m kind of attracted to it. I am in it for the reward and I will take that risk to get that reward.

TD: Eric, as a final question for people reading, what’s the competitive advantage they can enjoy by pooling their capital with Sprott Asset Management whether they’re an individual investor or institution?

ES: Well, we’ve had a lot of experience in resource investing, of course we’ve got investors in many, many companies. We’re involved in lending to companies. We’ve got an operation in Calgary in the gas business. We’re in private equity. We have the gold and silver trusts that trade on the NYSE, and the platinum and palladium trusts. We got funds dedicated to silver, funds dedicated to silver stocks and gold stocks. We’ve got a lot of the waterfront covered in resources, and we have many people here who are very outspoken.

The two most obvious ones are John Embry and Rick Rule who very often speak on the same topics I speak on. So we have the waterfront covered. [But] I’m more interested in people making the right decision with their investments because you don’t want to miss one of these great opportunities in life that could provide very outsized rewards versus what is the norm.

TD: Eric Sprott, Chief Executive Officer and Senior Portfolio Manager with Sprott Asset Management, thank you for sharing your comments.

ES: Okay, Tekoa. All my best to you and all your readers.

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Thanks,
Tekoa Da Silva
Bull Market Thinking