Eric Sprott on the Silver Take-Down and Why Silver is Set to Explode

Eric Sprott joins Jim to offer his views on silver manipulation and the opportunities ahead

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Eric Sprott

Jim welcomes Eric Sprott, Founder of Sprott Asset Management back to Financial Sense Newshour and discusses silver manipulation, and why he sees silver as the investment for the next decade.

Eric has accumulated 35 years of experience in the investment industry. After earning his designation as a chartered accountant, Eric entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada's largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.


Jim Puplava:    Eric Sprott of Sprott Asset Management joins us on the program next. And, Eric, I’ve been investing and advising my listeners to buy silver and precious metals over the decade and in that decade we’ve seen the price of silver go from four dollars to over forty dollars; a tenfold increase. However, some professionals feel that the price of silver is still being controlled. Do you agree with that assertion?

Eric Sprott:      Well, I certainly would put myself in that camp and when we analyze some of the data that’s available to us it certainly would appear that way. Perhaps I know that a lot of people are concerned and we’ve written about the manipulation that took place on May 1st, which I’m happy to get into but maybe before I do that I would just suggest that up to the point where silver got to close to fifty dollars the amount of trading in silver to investment vehicles was approaching eight hundred million ounces a day. And, when you realize that the amount of silver available in a year is nine hundred million ounces you can see that how ridiculous it is that we would trade that. And, who is trading it because obviously they have no vested interest in physical silver.

Much as people suggest that the speculators were driving the price up, I always like to put the shoe on the other foot and ask myself, well, what were the guys doing that were shorting essentially eight hundred million ounces of physical silver when they had absolutely no possible means of delivering it against a trade? And, knowing that a short is an open ended loss and an unlimited loss of which they’d already experienced a loss when this price went from eighteen to forty-eight of a hundred and fifty percent; what were they thinking? And so I don’t think that it’s the speculators that were driving it up. I think it was the short – the people who were short that were caught. They were losing gargantuan amounts of money and therefore, they initiated the attack on May 1st.

Jim Puplava:    Now today Eric, we find that the government is intervening in all aspects of our economy and markets. For example, the fed manipulates interest rates, they also intervene in the credit markets, and even some would suggest the stock market. And, government, through bailouts and stimulus tries to affect the economy. They use tax laws to favor, say, one group of business over another. Isn’t this more, in many ways, a policy of – a macro policy trying to influence market and economic outcomes?

Eric Sprott:      Well, in a general basis it is for sure and I believe that the government, maybe not directly, but certainly indirectly, is involved in the stock market. I sort of put it down to if you’re going to support the economy and markets by buying whatever it was, two trillion in a bond and running deficits of a trillion and a half per year for a number of years now, wouldn’t you also think of putting some money in the stock markets when Mr. Bernanke always points to the stock market as his great accomplishment with the QE2. So I can hardly imagine that they don’t watch the stock market with eagle eyes and, of course, would love it to go up to kind of authenticate the policies which I don’t think they can take much credit for those policies having done that when we see what the failures of these policies have been overall.

Jim Puplava:    More recently as commodity prices rose, and especially silver, the CME raised margin requirements on silver, oil, in the agricultural sector. The assertion was that they were trying to temper speculative inflows, not just silver, but also in the energy space as well as agriculture.

Eric Sprott:      Well, I mean when I look at the SPR announcement together with the IEA releasing another thirty million from overseas sources as an obvious interference in the market, it was a tremendous failure in the sense that the price of oil, I think at the time, might have been ninety-six and it went to ninety-one and now we’re back to almost a hundred and we’ve used a bullet. And, we’ve probably alienated some oil producers who would like the market to be left alone to seek its own level. So there’s no question that they get involved and I – you know, it’s been a thesis of ours – when I say ours I think of John Embry and myself, that central banks have for eleven years now and longer been very much aware of the gold price and have always tried to keep it under control. That’s why there seems to be very little volatility in gold even though it should be the most emotional commodity out there because they have supplied initially a physical gold in the market. I think now they supply paper gold and silver to the market and I want to go back for one second Jim and when I talked about eight hundred million ounces of paper silver trading in a day, I can tell you that only about a million ounces a day are available for physical investment because a lot of its used for industrial purposes, so, I mean we have an eight hundred to one ratio of people pressing buttons selling something versus what can honesty be delivered. So I mean I just look at that data and thing there are hands at work that are trying to keep the silver price down.

Jim Puplava:    This reminds me of something that Richard Russell has often said and he has said you can manipulate markets in the short run but not in the long run. And, if we take a look at silver and gold, silver’s up more than tenfold, gold is up more than six fold. Do you believe that to be a fair statement?

Eric Sprott:      Well, I have no doubt that they’ve had a hand in it. As I said, we believe that is part of the fundamental thesis. I think James Turk expressed it best when he said it’s just an organized retreat in the case of gold. It’s gone up every year for eleven years. It’s never gone up that much but, as you know, it’s been cumulatively incredibly rewarding, and that’s why it’s never as volatile as one might imagine. I also believe that, and we can tell from the raid on May 1st, that a certain financial institutions that are short silver, I think orchestrated the takedown on May 1st and then bang, bang, bang we get four margin rate increases after that and there had been one before it. It just reeks of somebody making sure that they just pound the silver speculators.

In the article we wrote a speculator hedge fund, for example, was long a million ounces on the Comex before the price declined on May 1st; he had two and a half million dollars up to protect his contract. And, at the end of it after the rate increase and the price decline he had to put up seventeen and a half million. So obviously it had the effect of making all those people cover. One of the things that’s accepted in our business is never meet a margin call. So all the speculators were basically forced to sell their longs and, of course, the shorts covered them and it was just orchestrated. So I have every belief that there are always hands in the market whose best interests are not those of investors and the industry.

Jim Puplava:    Many of the critics of the government and investment banks have been – the relationship, as you pointed out, of paper to physical markets were eight hundred million ounces of silver trades, one million ounces of available for delivery, but we have a situation, as you pointed out, where paper markets dwarf the physical markets. How much of this, Eric, has to do with the fact that metals, precious metals especially, like treasuries are financial assets because even in the treasury market there are many times the amount of paper treasuries that are traded than actual bond sales?

Eric Sprott:      Right. Well, I totally agree with the thesis that anybody with money can affect any market. If you got a lot of money where there’s no physical delivery is demanded, and that’s why you can trade eight hundred million ounces a day, which is, in that case, is like thirty-two billion dollars worth of silver, which is a ridiculous amount of money to trade in silver. But you can affect the pricing with that kind of money behind you. So there’s no question that it’s done. There’s no question that it will be a losing battle as Richard Russell has stated and as you look at the Comex silver inventories going down. You know, the day’s going to come when they’re not going to be there and I can probably identify five hundred different groups or institutions or people all of whom would have the capacity of buying those twenty-six million ounces that are in the Comex that are eligible for delivery today. So someday it’s going to happen.

Jim Puplava:    Now, this amount of paper trading that we’re seeing occur not only in the precious metals market but also even in treasuries, is this related to some extent, Eric, to the amount of liquidity in our financial markets? I mean there are many hedge funds and investors who simply don’t want the hassles of investing in the physical assets so they’re just as happy to trade the paper derivative versus the physical. For example, George Soros…

Eric Sprott:      Yeah. Well, I’m always surprised when people, for example, buy the GLD and the SLV, and the SLV is the easier one for me to explain at all the silver can’t be there and its more the work that Ted Butler does in that there’s a big short position in SLVs. So when the shorter sells the certificate the guy buying it thinks he’s got a claim on silver. Well, obviously, he doesn’t. So all the cumulative, either people who own SLV, as Ted explained, is probably only eighty-nine percent of the silver is even available if the short position is correct. Half the time you have people shorting nakedly who aren’t reporting it anyway. So I would venture to bet that the short interest is substantially higher than the reported short interest is.

Now, again, it’s the paper interfering with the real market. I have no doubt and to answer your question bluntly it’s in the interest of governments and central banks not to have gold move up sharply in a day  because if we all walked in tomorrow and we saw the price of gold up a hundred dollars we’d all be scratching our heads, well, what happened. Did war break out? Is there a financial crisis? Obviously, something’s wrong. We’re going into hyperinflation and that’s why it’s never allowed to do that. I’ve actually been surprised that in some of these days when we have market weakness that they’ve allowed the price of gold to go up because I think the one link is they don’t want people to make is weak stocks, strong gold, but that’s exactly the thesis that we believe in and should happen.

Jim Puplava:    I want to go back that piece that you talked about the amount of silver trading eight hundred million ounces on the Comex versus the deliverable silver. You mentioned that the amount of available silver on the Comex you could probably name numerous funds that could, in one simple trade, take all that silver. What do you think, and I’ve often wondered this over the last ten years because there was a period of time when silver would get down to four, the shorts would cover it, it would go back up to five, and the shorts would go back on – what prevented them from doing it? Was it the hassles that they gave Warren Buffet? In other words, what would prevent, I don’t know, some large hedge fund like Paulson to say, you know what, silver looks promising to me. I’m going to take delivery of all that silver.

Eric Sprott:      Right. Well, quite frankly, there’s nothing to stop anybody from doing it. I think they might be surprised when they actually put in their notice for physical delivery, that the Comex would say, well, you know, we can actually solve that delivery with paper, which I think is possible under the Comex rules. In fact, they can settle the silver on Comex with SLV shares. So they’ve kind of rigged it that there’s not – even though it’s supposedly a physical market, which is what it started doing, it’s evolved into something that bares no relationship to the physical whatsoever.

Jim Puplava:    I want to come back to this dropdown on May 1st where you saw within, what, fifteen minutes the price of silver went down thirteen percent. That was followed in the ensuing two weeks by five margin raises on silver. During that period of time the commercials retired approximately about forty-three million ounces in a three week period of time of their short position. It seems like, and I’ve seen this and I’ve read Ted Butlers work as well, that for the longest period of time, as long as I can remember, almost a decade, you have had four large entities that have basically made up the short position on the Comex. Why is that not disclosed or certainly the government is against monopolies on one entity trying to control a particular commodity. Why did they not disclose in a reverse position one or two or three entities trying to short a particular commodity?

Eric Sprott:      Well, of course, that’s one of the things Dodd-Frank is trying to change. Mind you, Dodd-Frank doesn’t seem to be making a lot of progress and the CME keeps delaying all the time when they’re going to come out with their new rules in silver and also when this investigation, which started two years ago or two and a half years ago now into manipulation, when there’s going to be some results on that. So it’s been a stall job – Lately, I’ve actually thought to myself that I think that gold is the more important thing to watch from sort of an economic perspective of what’s going on in the world. And I sort of think that – and I do believe that the central banks and governments want to keep gold under control but they can’t keep it under control very much anymore because there are big buyers consistently in the market. There’s Russia, China, Mexico, the ETS, etcetera so it’s very difficult to move gold around today. I honestly think they might use silver as sort of a proxy to create some weakness in gold because you know and silver goes down a dollar or two in a day. I don’t see too many people stomaching buying gold. So I think it’s now used as a bit of a pawn to try to control the gold price.

Jim Puplava:    Last year, right about this time or close to it, you raised about a half a billion dollars for the Sprott Physical Silver Trust. Eric, why did you choose silver? Why not, let’s say copper, gold, or even platinum?

Eric Sprott:      Right. We do have a physical gold trust and we actually have had four issues of that trust now and I think cumulative we might have raised a billion two. We did the gold trust first then we did the silver trust. You know, I’ve sort of made the decision probably going on eighteen months ago now that I thought silver would be the more interesting precious metal from a price performance perspective in this next decade and that’s why the timing of the silver trust, once it came out in the fall of last year. We did miss some of the rally from eighteen to roughly twenty-two before we got it off the ground. I could sense then that silver was likely to go back to fifty bucks as a starter and so that’s why we did that issue at the time. I should point out Jim when we did the first gold trust we raised four hundred and forty million. When we did the silver trust we raised five hundred fifty million.

When the Mint, the U.S. Mint, sells coins and so far this month, for example, they’ve sold about a hundred million dollars worth of silver coins and they’ve sold approximately fifty-five million worth of gold coins. I use those as proxies as how people want to invest their money and you can’t invest your money one to one into gold and silver when the price – and have the prices stay at a forty to one ratio when the availability of gold and dollars is probably over a hundred times more available in dollars than it is in silver. So these are some proxies I used to tell me that the silver price is very, very likely to go higher.

Jim Puplava:    I heard you speak last October, Eric, at the Casey Conference and I think I remember the audience asked you a question. Why you raised money for the silver trust – why didn’t you raise that money and put it into, let’s say, silver equities? And I think as I recall if I recall correctly, you stated that if you were to raise that kind of money and put it into silver equities you would have a hard time finding enough silver equities to put that money to work in.

Eric Sprott:      Yeah. Well, for us I would because, of course, our style is to buy small to mid cap stocks and I, at the time, was trying to buy silver stocks for our own existing hedge funds and mutual funds. It was very difficult to get companies to agree to do issues. So I can’t imagine having a five hundred and fifty million dollar deep pocket and going out and trying to invest that money without having to buy the biggest of the big, which is not my style. I like to buy sort of small to mid caps that people haven’t appreciated what the true potential is yet. So that’s – and, of course, we had the gold trust public so it was logical that we should have a silver trust. It just all made sense at the time even though the silver stocks have outperformed silver we’re not crying about the fact that silver’s gone from eighteen to forty here over that time period so it’s been good for everybody.

Jim Puplava:    Over the last couple of years you’ve seen the price of bullion, and whether its gold or silver, outperform the equities. In your opinion, what accounts for that outperformance?

Eric Sprott:      Well, part of the problem is, quite frankly, people like me and GLD and SLV where a lot of money goes into those things, which would otherwise go into public equities and in a way I’m a winner and in a way I’m a loser because I would own way more equities than I would in these particular trusts for our own accounts. I think that’s one reason. I think the other reason is that it’s perceived or imagined or people suggest that gold and silver are in a bubble that’s about to break and therefore, you know, it’s not an area you should go to. Of course, the stocks have run up a lot from the bottom in 2000 and I think those in combination have sort of prevented the stocks from really going where they were. And, a third factor is most of the mining company analysts have these very dower views of where the price of gold and silver are going. I mean I read an article this morning where some guys toting his gold stock but his long term forecast is a thousand dollars. Well, who’s going to buy a gold stock if you really think the price is going to a thousand dollars? So the analysts just don’t get in line. The managements of the company, the mining companies, don’t seem to imagine prices going higher. So we have all this interference that, I think, keeps people from going there but I think since our bottom recently in the gold and silver stocks you can see that the moneys coming back in and as the price of the metals go higher the stocks will outperform the metals ultimately.

Jim Puplava:    You know at times in the metals markets, Eric, I’ve seen it especially when it comes to silver where we see huge premium prices along with delays in delivery occasionally surface. I can remember in the fall of 2008 in the Lehman crisis I bought a lot of silver but it took me three or four months to get delivery. Last fall and winter there were certain problems getting delivery whether it was coins or it was one hundred ounce bars; in your estimate, is that a production problem or is it a supply problem?

Eric Sprott:      Well, it’s an inventory problem. I mean if the inventory – and we experienced the same thing Jim when we did our silver trust. We raised – we had to buy in the open market something like fifteen million ounces of silver and it took us three months to get delivery and some of that silver was produced after we made the commitment to buy it. So obviously, there’s no supply of silver hanging around in some warehouse which is waiting for us to come along and buy it. It’s not there otherwise we would have got immediate delivery but we didn’t. So I don’t think the silver inventory that people imagine is there is there. It’s in short supply. Most big purchases are delayed settlement and that’s just symptomatic of scarcity.

Jim Puplava:    The one thing that strikes me in this metals market, we’ve seen gold prices rise eleven consecutive years, silver’s up more than tenfold, and I recently had the chance to interview Dr. Mark Faber. As Dr. Faber speaks around the globe I’m always amazed when he asks his investment audience, and you would think somebody coming to see Faber would be, let’s say, a metals investor, very few hands are raised when it comes to precious metals ownership. The point I’d like to get, do you foresee the day when a small fraction, let’s say, even a five percent of the total amount allocated to investments whether that’s commodities, stocks, or bonds. If that went into bullion Eric, do you see a day where you’re not going to be able to get bullion?

Eric Sprott:      Totally – for example, I think the actual data is there might be, in terms of bullion, there’s only 1.5% – no, I’m sorry – 0.75% of the world’s total financial assets is invested in bullion by people other than central banks, 0.75%! And, as you know, almost all gold produced is still around. So we’re including all the gold that’s ever been taken from the earth’s crust. So to imagine it would go from 0.75% to 5% I mean that means people got to buy six times more gold. Well, there can’t be six times more gold because all the gold we have has been produced over two thousand years. So we don’t add much to the gold supply every year. I think we add about – let’s see if we do – we have net production from mines of about twenty-six hundred tons and we have about, I think it’s about a hundred and sixty thousand ounces already exists. So we’re only adding one and a half percent a year to the gold supply. So there’s no way that people can put that kind of money in gold without, of course, the price of gold going up. I could imagine that if, yeah, you want to go to five – everyone has five percent. Well, then the price of gold will just go up by six times and that’s how we’ll get there.

Jim Puplava:    You know, I began this discussion talking about over the last decade we’ve seen a tenfold increase in silver over the last, let’s say, ten years. We talked about short term manipulation but in the long run I think it’s difficult for governments to manipulate and control markets because the markets are so much bigger than governments. I think that’s what we’re seeing in gold right now. Eric, one final question – if you were to only make one investment for the next ten years and you could not touch that investment, you had to lock it away, maybe it was in a pension fund, and you couldn’t change it; what investment would that be?

Eric Sprott:      Well, I would certainly make that investment in silver and I don’t mind making ten year investments. I mean I was in gold for ten years. I hope to be in silver for ten years. I just can’t imagine that we won’t look back ten years from now and see the silver price many, many, many, multiples higher than where it is today. So and it’s already been a wonderful investment as I use the term it’ll be the investment of this decade. It’s already up a hundred percent in this decade and I think it’s only the beginning of things. So that’s where I’d put my money; something to do with silver.

Jim Puplava:    Well, all right. I’d like to thank you Eric for joining us on the Financial Sense News Hour. We’ve been speaking with Eric Sprott. He’s head of Sprott Asset Management. If you’d like to find out more about Eric’s company you can go to Eric, I want to thank you for joining us on the program.

Eric Sprott:      Jim, always a pleasure; all the best to you and your listeners.

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About James J Puplava CFP