Nervous about the silver price during the worsening global economic slowdown? Don’t be, according to Eric Sprott, CEO of Canada’s largest independently-owned securities firm Sprott Asset Management. Silver (and gold) have become de facto reserve currencies, according to him.
In the silver market, “we’re going hand to mouth these days,” Sprott told listeners of Financial Sense Newshour. And Sprott, of all people, should know; the last significant order placed in the open market by his firm in late 2010 took three months to arrive, he said, “and some of the silver that was delivered to us was manufactured after we purchased it.”
Following the massive ambushed on the silver market by Fed proxy JP Morgan during the month of May, Sprott, has noticed a radical change in the dynamics between the paper market for silver and the physical market for the white metal.
“The physical market is what I analyze more than anything else, and all I see is buyers,” Sprott said, at which point FSN host James Puplava chimed in, “That’s what the dealers are telling me.”
In the past, a Fed ‘take down’ caused demand for physical to cool significantly. Today, however, typical supply/demand norms have been righted—that is, lower prices increase demand and visa versa. In other words, the silver market has become functional through its physical market participants.
“It was very convenient for central bankers and governments, the price of gold fell off exactly as Europe hit its sort of peak in risk of the financial arena in the sovereign thing,” Sprott mused. But, this time, the Fed-led take down of silver and gold prices revealed a large crack this time in its scheme to suppress precious metals demand in the physical market.
Sprott suggested that the evidence gathered from buyer demand in physical bullion at his firm, and others he deals with, has led him to conclude that gold has finally taken on the role as the preferred reserve currency, a conclusion also drawn by Grant’s Interest Rate Observer author and publisher James Grant, World Bank President Robert Zoellick, Euro Pacific Capital’s Peter Schiff, as well as bullion experts James Sinclair and Goldmoney’s James Turk.
“The markets have made gold the reserve currency. That’s what I believe, that’s gone up 100 percent against every currency in the world,” Sprott explained. “So, it is the world’s reserve currency, as far as the markets go.” “And as an offset to that, gold is not going to be a reserve currency without silver playing a hand here.”
If an investor takes a three to five-year horizon of the silver market, according to Sprott, the historical ratio between gold and silver of approximately 15:1 (a geological observation of relative scarcity of earth deposits) will, again, be achieved as investors realize that a decision to buy precious metals to offset ongoing devaluation of fiat currencies across the globe will more likely favor the relative cheaper of the two metals to the other.
Moreover, as Sprott points out, mining production statistics throughout recent years reveal a decline in the historical ratio of availability between silver and gold ores. Today, it appears that the ratio has been stuck at approximately 10:1 for some time now, suggesting to some analysts that maybe ‘peak silver’ is upon us.
“So why should it trade to a 50:1 multiple?” posits Sprott. “Give it three to five years; we’re going to get back to ratios which are way more appropriate to the underlying fundamentals of gold and silver.”
At today’s gold price, a reversion to the historical norm calculates to a silver price of $110, or a whopping 70% discount to today’s $32 price tag, under the Sprott thesis.
As approximately 57% of the world’s GDP, that percentage, which is the combined GDP of the U.S., EU and China, appears to be collapsing—again (see IMF), a well-founded sense of gloom for a coming worse economic time has gripped global markets rather quickly, creating fear of another Lehman-like unwind of money flows out of dollar and euro-denominated assets, back into those currencies, which could, then, take down the precious metals complex.
Sprott believes that argument will ultimately prove to be a specious one, a throwback to another time when the U.S. dollar (and euro) was readily accepted as a reliable medium of exchange. Today, investors should, instead, focus upon horrendous supply constraints and mushrooming investor demand, driven by eroding faith in the both the dollar and euro. Violent short-term swings shouldn’t dissuade investors from holding silver for a three to five-year outlook, according to Sprott.
“God forbid that we actually end up with a seriously declining economy,” he said facetiously. “Because if you think it’s bad for banks, today, wait until you have to deal with a couple years of negative GDP growth and what happens to value of those paper assets that they own.”
Sprott added, “The ultimate destiny for gold and silver is that people will prefer to own those investments rather than have money in the bank. And there’s a lot of money in banks. People don’t yet perceive that gold and silver are the superior investment, but in my mind they are. Because when you have money in the bank, there is tremendous counter-party risk.”
Counter-party risk? That’s a Goldmoney’s James Turk’s theme—a theme, Turk believes will seep into investor consciousness over time, catapulting silver to phenomenal heights in the coming years. Ditto for Eric Sprott, who said in a MineWeb interview of April 5—“Silver is the investment of this decade as gold was the investment of the last decade. So we’re sitting back waiting for things to evolve here.”
Additional articles published by Beacon Equity Research can be found on their website at www.BeaconEquity.com
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