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This fall, Sprott was out fishing for grouper on a staffed boat somewhere warm on a Friday when he normally records his podcast. In spite of his idyllic circumstances, he sounded distinctly downtrodden when he called in to the podcast.
“I’ve had better days, you know, it’s a bit of a tough one,” he said.
As the podcast progressed, it soon became clear that gold and silver prices were both down, about four and six per cent, respectively, and options market manipulation appeared to be the reason to him.
Juan Carlos Artega, director of investment research at the World Gold Council, is skeptical that banks are having a significant effect on gold or silver prices through the futures market, but believes options do have an impact on short-term prices.
As someone who stockpiles bullion, and often gives it out as a gift, he watches the prices of silver and gold so closely it often colours his mood
“What you find is that the gold price is responding to demand-and-supply dynamics including those on the (options) market, but it’s only one component,” he said.
Artega said central bank and consumer buying, production numbers, recycling, investment in gold-backed exchange-traded funds and a host of other factors play a role in determining long-term prices.
Sprott would hear none of it, and said he’s long disagreed with the World Gold Council about many things. His skepticism of the futures market ties in to his skepticism of the financial market writ large.
“We have a weird financial system; it doesn’t make any sense to a rational thinker,” he said.
Gene McBurney, co-founder of GMP Securities LP, once a competitor of Sprott Inc. in the investment business and now a friend, said part of the key to understanding Sprott is that he enjoys entertaining other people with provocative comments.
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Fine gold coins at a bullion dealer in London. PHOTO BY CHRIS RATCLIFFE/BLOOMBERG FILES “He’s told people there’s no gold in Fort Knox; that kicks off an interesting conversation,” he said.
But McBurney added that he believes Sprott is extremely well versed in the companies in which he invests, and he has even given some of his personal money to Sprott to manage.
Peter Grosskopf, chief executive of Sprott Inc., the asset management firm Sprott founded and a mentee, said Sprott is always covered as being this “unbelievable gold bug,” but there’s a lot more to it than that.
“I mean, he’s a savant at what he does,” said Grosskopf, who added that it’s not easy to explain how Sprott does what he does.
That’s mainly because Sprott is investing in companies that have no revenue, which means standard investment metrics, such as internal rate of return, aren’t necessarily useful, never mind that he said they’re not something he would use.
He’s a savant at what he does
PETER GROSSKOPF, CHIEF EXECUTIVE OF SPROTT INC.
Instead, he attempts to value companies based on whether they are likely to discover a deposit of precious metals.
Of course, even if a company discovers a deposit, it would still need to figure out whether it makes economic sense to extract the deposit, including how much it would cost to build and operate a mine, which requires further calculations about energy costs, transportation, processing and refining, and so on.
Sprott said he focuses solely on the deposit and how big it could be. Though he has no education in geology, he said he has devised his own valuation method, which involves looking at a few variables to determine the potential size of a deposit.