A 40-year, spectacularly successful veteran of the investment industry, Eric Sprott (the "Energy Guru") needs no introduction. Sprott's steady stream of strategic, entrepreneurial and global performance awards often end in the words: "of the year." Sprott's investment abilities and knack for seeing opportunities where others don't have earned him a spot among the most successful investors in the country. Managing $4.8 billion worth of hedge and mutual funds for Sprott Asset Management, the financial sage is also an esteemed art collector. Referring to his color-blindness in a recent interview, Eric Sprott said: "It's not the color that does it for me. It's probably the contrast in the colors." One might say the same of his investment strategy.
[Editor’s note: Please click here for Part 1 of this article]
TGR: Eric, you’ve been espousing the value of gold since 2000; and, in 2008, you opened up Sprott Money, which is selling both gold and silver?
ES: Yes, about three years ago I was in the fortunate position where I happened to own a lot of gold. Somebody that owned a mint asked if I’d like to convert the bars to coins. I said I would, as they’re somewhat more fungible.
Then I thought, there’s a reasonable premium on coins. We’ll make our coins available for sale and, as people buy the coins, I’ll buy a bar and, ultimately, convert it back to coins again and just facilitate people owning gold. For the reason that if there is one thing I believe in—and I’m thinking as a Canadian here—it’s that I would love people in Canada to own gold as I think it’s the safest asset they can own.
So if you can make it a little bit easier for them by breaking it down to a smaller unit, then they have a chance to get in. For us, it’s a reasonably profitable business because the premiums are quite high, as you know.
TGR: It’s pretty hard to get gold coins right now. There’s a real shortage. What’s the source of your coins, and are you experiencing the same shortages?
ES: I converted a lot of bars to coins, so I have no shortage of coins. It would take some pretty big buyers to buy me out of the coins. Obviously, as we sell them, I do buy the 400-ounce bars and, somewhere along the line I’m going to have to go to some mint and say, okay, we need to punch out more Maple Leafs. Now maybe when I go there, their capacity will all be utilized. I may not even be able to get in the queue, but there will be a time when we will somewhere. I’d prefer to sell Maple Leafs, but maybe we’ll have to find some other source.
TGR: So you’re converting bullion bars into Canadian Maple Leafs?
ES: Yes.
TGR: I thought that was only done by the government.
ES: It is. It’s done at the Royal Canadian Mint.
TGR: So you are providing them with the gold to create the Canadian Maple Leaf?
ES: This happened about three years ago. So I did that—I converted a lot of bars over to coins and sat on the coins for a couple of years. Finally, it dawned on us that there’s a market for these. I can certainly go buy the 400-ounce bars and, ultimately, convert them back. We have lots of inventory; we’re not seeing any signs that we’re going to eat through our inventory of coins. But I always do worry that I’ve got to be able to buy the bars back, too. So we’ll see. If it happens that I can’t buy the bars back, I don’t think I’ll be selling the coins.
TGR: Can you compare for us how your Sprott Money site works for buying coins, compared to Kitco, which is also selling Maple Leafs, or other online sites?
ES: Gold coin premiums are generally between 7% and 9%. In this regard we are comparable with the other online sellers. Additionally, Sprott Money Ltd. is competitive on shipping and insurance. We ship worldwide, whereas other online retailers will only ship certain bullion products to certain destinations. Lastly, we do not sell inventory we do not have; we ship right away as soon as we receive payment.
TGR: You mentioned earlier that you are also investing in silver. Can you speak briefly on your viewpoints of silver? We hear that it’s a much more volatile industrial metal and, therefore, it’s more risky.
ES: We almost own as much dollars of silver as we own in gold. I personally did not convert silver bars into coins. Our supply of silver coins is somewhat limited and, of course, the supply of silver coins in the world is very limited; the premiums that we charge are much higher than those charged on gold coins. So, in that sense, a gold coin is a better value vís a vís the premium.
And, yes, silver has the quality of being considered an industrial metal, but I think what’s most interesting about silver is that there’s not a lot of above-ground silver in the world. It wouldn’t take many buyers for there to be no silver around. We’re talking a very small amount of money.
That’s one of the unique aspects of silver. If it really catches a bid here, it can move pretty fast and I happen to be in the Ted Butler camp that—when you look at the goings on and the commodity exchange, it just looks so perverted with the size of short positions that are going on—I think the quoted values, ultimately, will not prove to be relevant.
TGR: Eric, what do you see as a potential event to be a tipping point to get investors to begin migrating to gold? We’ve seen a gradual migration, but do we need a country to go bankrupt? Do we need the State of California to go bankrupt? Is there something you can envision that would be the tipping point?
ES: Needless to say, if we had another major bank failure, or if you had some failed government auctions in the developed world, people will realize that even the government can’t get the money that they want to get and that would be very disconcerting to the financial system. The other thing, which you already referred to, is if there was some currency mishap where some currency just plunged. We already had the Icelandic króna do what it did.
TGR: Brazil.
ES: We’ve had Brazil or Argentina and Hungary and a few others. The currencies are falling sharply. If we started to see a slight unraveling in the currency business of a few countries, then you might surmise it will spread to others; they always start going up the food chain. That would be a bit of a tipoff that the real rush might be on for gold.
TGR: What’s your view of the U.S. dollar? What do you see in ’09 for the dollar?
ES: The rally in the dollar, in my mind, was totally anomalous and totally had to do with repatriation. In fact, we can even see it in global offshore funds. These offshore hedge funds, which are owned by international financial institutions, have their own issues. So there have been redemption issues in hedge funds. I can tell you from experience, if we had X dollars of redemptions in November, we have one half of X in December, .1 of X in January, and none in February. In the business we’re in, the repatriation is done.
Anything we might have had to do—in other words, sell a Canadian resource stock, convert it to U.S. —it’s over. So the worst of that might be done. The dollar really, in my mind, shouldn’t have rallied; in fact, it should have done the reverse because the obligations that the U.S. government’s taken on here have been immense and I think beyond the scope of what they obviously can pay for, even though most people haven’t gone there yet. So I don’t hold out a lot of hope for further dollar strength.
TGR: But isn’t the dollar the best of the worst?
ES: You might have a point there. It might be the best of the worst and that’s a very challenging discussion. To know what is the best of the worst—and I don’t pretend to know exactly how strong the UK economy is or the EU or the Canadian (I guess the Canadian government I have some sense of)—but for me to analyze each one of those countries and decide who’s the worst? That’s a tough thing to do and it is sort of ironic that that would be the discussion. If that’s the discussion, just buy gold and forget it.
TGR: We've heard from other newsletter writers that they think we could have a big break in the Dow mid-second quarter or third quarter of ’09, where the Dow could go to 5,000 or 6,000. Any comment on that as to how low the Dow could go or how high gold could go?
ES: I easily believe the Dow can go to those levels and I think it can go lower, obviously, because of the situation we find ourselves in, which is a credit fiasco. Depending on how they attempt to resolve it, who knows where the price of gold is going. It could go to many thousands of dollars, as we would expect it would do. But I can’t tell you the number because it really depends on how irresponsible all the governments are and that’s a tough thing to measure at this point. It certainly seems like they’re quite irresponsible, so the more irresponsible they get, the higher you expect the price of gold to go. I don’t have a specific number that I think it’s going to.
Gold has been such an incredible investment for the last eight years, including this year—we’re finally up in the year. I think it’s up by at least 25% in the Canadian currency; so it’s done exactly what we wanted it to do. Here the markets of the world on average are down about 40% and gold up substantially or flat in every currency, so it’s been perfect.
TGR: Eric, this has been very insightful and informative. We appreciate your insights.
Eric Sprott 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, which today is one of Canada's largest independently owned securities firms with offices in Toronto, Calgary and Montreal. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.
Eric's investment abilities are well represented in his track record in managing the Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Offshore Fund, Sprott Canadian Equity Fund, Sprott Energy Fund and Sprott Managed Accounts. In December 2004, the Sprott Hedge Fund L.P. was the winner of the Opportunistic Strategy Hedge Fund Award at the Canadian Investment Awards. In addition, the Sprott Offshore Fund, Ltd., won the 2006 MarHedge Annual Performance Award under the Canada-Based Manager category. Furthermore, in October 2006, Eric was the recipient of the 2006 Ernst & Young Entrepreneur of the Year Award (Financial Services) and the 2006 Ernst & Young Entrepreneur of the Year for Ontario. In December 2007, Eric was named Fund Manager of the Year by Investment Executive, a widely circulated publication for Canadian financial advisors.
Sprott Money Ltd. is one of Eric’s newest ventures. As one of Canada’s largest owners of gold and silver bullion the company’s goal is to facilitate ownership of precious metals to the general public.