Guest post by Henry Bonner (firstname.lastname@example.org)
Sprott Global Resource Investments Ltd.
Sprott Global Chairman and Founder Rick Rule recently spoke on a
conference call to clients. He answered questions from clients on the
current market environment for gold and silver.
What’s going to happen with gold and silver?
They’re going to be extremely volatile. But these are
the sort of times where gold and silver have done very well over time.
Remember, as my friend John Mauldin puts it, “We want to own things
central bankers can’t print.” They can’t print gold and silver.
Right now, we’re seeing a classic move from one set of
hands to another. For the last 10 years, the pricing of gold and silver
has been determined by the futures markets -- not the physical markets.
Futures markets are highly leveraged and momentum-driven. Currently,
long leveraged carry trades by institutions are unwinding. The buyers
are unleveraged individuals purchasing record amounts of physical gold
and silver around the world. A number of central banks in developing
countries are also adding to their gold bullion reserves.
The Reserve Bank of India is doing everything it can
to constrain purchases by individuals of physical gold and silver.
Government in India has historically done everything it can to impede
access to legal gold and silver. The citizens themselves happily go into
real markets that smuggle gold. I believe the government’s efforts will
What's your outlook on gold and silver if the
Federal Reserve succeeds in putting an end to QE without triggering
I don’t know, but lower. I have substantial suspicions about the
ability of the Federal Reserve to exit QE, however. What they are doing
is liquefying the banks and issuing more debt than they can sell. Right
now, new aggregate on-balance liabilities on the Federal level is $1.5
trillion per year. They finance that by selling $750 billion of debt,
and by printing up $750 billion of debt which they use to buy existing
bonds. The off-balance-sheet liabilities of the Treasury exceed $60
trillion and grow by about $4 trillion a year.
The idea that we are going to get through this without either defaulting
on our obligations or inflating them away defies any rational analysis
of the problem.
From my point of view you’re safer with gold in your portfolio.
Experts who follow the market closely, including Eric Sprott, but also
Morgan Stanley and the big bullion banks, say that the ‘anti-gold’ –
what you consider in place of gold – is the U.S. 10-year Treasury.
Mainstream institutional investors say that gold is ‘risk-on’ and the
10-year Treasury is ‘risk-off,’ but I think that the world has it
exactly confused. The U.S. Treasury -- the ‘anti-gold’ -- pays a 1.75%
interest rate, which is well below the rate of inflation and assumes
that there is no credit risk with regards to U.S. obligations. If
nothing else, the lower interest rate lowers the cost – in terms of
avoided cost – of owning gold.
Are you concerned that the government will put in place price controls or confiscate gold at some point in the future?
I think that the risk of that is relatively low given the
transportability of wealthy today. They would have to put currency
controls in place first, in which case we would all have greater
concerns than the price of gold or gold equities. You can buy
certificated instruments that hold gold outside the U.S., which may help
protect you depending on how the law was enacted.
Will investors continue to look to the U.S. as
a safe-haven for investments? Where should I invest if the U.S. is no
The US dollar is the worst currency in the world –
except all the others. The US dollar is the most liquid currency on the
planet. As bad as we are in the US, we started off from a very good
place. Compared to the Euro or to the Yen, we’re in pretty good shape.
But the ultimate outlook for the dollar remains bleak.
The Western World is going to have a very difficult time with the debt
burden that we have taken on to sustain our standard of living over the
last 30 years, and that is going to have dire consequences for the
What types of investments make sense? I think you have
to have some cash, despite the fact that your purchasing power will
decline every year. You need to have bullion to hedge your cash. I think
those of you who can afford to speculate will get some extraordinary
bargains in the next 6 months, and I suspect that the very volatility
that I see in the next 6 months will give investors a once in 20-year
opportunity to buy high quality natural resource and infrastructure
stocks at once in 20-year style prices.
Are any gold or silver miners stockpiling
their production until precious metals prices go up? Why don’t more gold
and silver miners do this?
Sadly, most gold and silver mining managers don’t
believe in their product. They do not necessarily believe that gold and
silver are money. Eric Sprott tried to convince many mining companies to
hold their working capital in precious metals without success.
In my opinion, the 20-year bear market in mining from
1982 to 2002 did not attract the best and brightest management teams.
That’s not to say that there aren’t bright minds. But when gold goes
from $250 per ounce to $1,250 per ounce and per-share cash flow goes
down, the bulk of the businesses may be management-challenged.
What should I be buying now? Bullion or mining shares?
If you think that the metals prices are going up, own the metal – not the miners. Own the miners because you think that
there is something intrinsic to them that will take them higher. So, to
begin with, own cash and the metals. Buy the miners if you can
withstand -- financially and psychologically -- the risks and the
volatility of the sector. Take particular attention, if you’re an
accredited investor, to the private placements and the full warrants
that should someday be coming to us.
founded Global Resource Investments in 1994. Global provides brokerage
and investment banking services to high net worth individuals,
institutional investors, and corporate entities worldwide. In 2011,
Global was acquired by Sprott, Inc., a public company based in Toronto,
Canada, which has in excess of $9 billion in assets under administration
in the resource and commodity sectors.