Streetwise

Think gold may lose some lustre? Eric Sprott sees a silver lining

The Globe and Mail

Eric Sprott (Charla Jones)

Eric Sprott, the perennial gold enthusiast, has his sights set on a new precious metal.

Mr. Sprott’s charitable organization, The Sprott Foundation, is selling two million units of its gold holdings and using the money to buy silver.

The move comes as gold veers close to $1,800 (U.S.) per ounce, and less than a week after Mr. Sprott had declared the metal “the investment of the last decade” in an interview with GoldMoney Foundation. “I think silver is going to be the investment of this decade.”

Story continues below ad

Since the commodity boom kicked into high gear last fall, Mr. Sprott has been touting silver’s merits. To demonstrate his conviction, he set up and invested his own money in the exchange-traded Sprott Physical Silver Trust , which buys silver bullion and stores it at the Royal Canadian Mint. Investors in the trust can cash in their units, or take delivery of silver in physical form if they wish.

He also launched a Silver Bullion Fund that enables investors to speculate on the metal’s market price, but without the physical redemption option.

Until Wednesday, though, Mr. Sprott was still committed to gold, as its price rose to new highs. It could be that he is simply cashing in on a rapid rise in the price of Sprott Physical Gold Trust units, which are up 21 per cent since July 1, and of which he personally holds six million units, separate from the foundation’s holdings.

On Wednesday, Mr. Sprott said his comment about silver does not mean he is abandoning gold altogether. “Anything I said about it being the resource of the last decade was not to suggest that it wasn’t going to do well this decade,” he said. “It’s just I think silver will do better.”

He bases that conviction on supply constraints: The amount of gold already mined is about 100 times greater than silver, yet for each dollar invested in gold, another dollar is currently being invested in silver. “By definition, you can’t keep buying it at 1-to-1 and have the price stay the same” when the supplies are so different, he said.

Moreover, the price of gold is trading about 45 times the price of silver. Historically, the ratio has been about 16 times and Mr. Sprott thinks the two metals will move back in line with that ratio.

But not all silver assets are on equal footing. Mr. Sprott has been selling some of his own units in the Physical Silver Trust. In the past month, Sprott-related funds have sold about $23-million of his Silver Trust units, and earlier this spring they sold $34-million. Mr. Sprott said he is simply taking advantage of the trust unit’s 20-per-cent premium to the fund’s net asset value. (The premium has shot up since the fund was introduced last fall because of heavy retail demand, which means investors are paying more than the underlying metal’s value per unit.) He is reinvesting the proceeds in other silver investments, including the Silver Bullion Fund.

Asked if investors in the Physical Silver Trust should be alarmed that he’s cashing in, Mr. Sprott said “Anybody can do it any time they want to,” and added that his sales are “all in the public domain,” because he must report them to the U.S. Securities and Exchange Commission.

He also doesn’t apologize for shifting more of his attention to silver, and is still touting his gold trust to retail investors who think economic turmoil will send bullion prices higher. “I think silver will outperform gold this decade, so why wouldn’t I position myself, position our accounts, that way?”

Although the foundation announced that it would reinvest its money in the silver sector, it is interesting that it did not specifically say where it would invest, either in Sprott Physical Silver Trust , or the metal itself. But if you look at Sprott’s recent selling activity, it’s clear that money will go into the metal. In the past month or so, Sprott has sold about $23-million of the Silver Trust units. That comes on the heels of sales this spring worth about $34-million of the trust’s units.

The sales have been pointed out by blogger ‘ kid dynamite.’ While he acknowledges that Sprott is reinvesting the money back into silver, he points out that the Silver Physical Trust currently trades at about a 20 per cent premium to the net asset value. By exiting, Sprott captures that premium and then buys the metal at fair value.

Buying the metal ties back to Mr. Sprott’s recent comments about being bullish on silver. In the GoldMoney interview, he pointed out that the physical amount of gold above ground is about 100 times greater than silver, yet people are buying the two metals on a 1-to-1 basis. That means the price of silver has to go up, he argues.

Plus, gold is trading at about 45 times the price of silver. Historically, the ratio has been about 16 times and Mr. Sprott thinks we will get back in line with that number.

But he isn’t sure of the timing. “When it actually happens, I don’t know,” he said in the interview.

Follow on Twitter: @timkiladze

Companies & investments Mentioned In This Article (2)

Company Price Change Volume
Sprott Physical Silver Trust
PHS.U-T
6.56 0.768 % 4,018
Sprott Physical Gold Trust
PHY.U-T
9.91 0.711 % 2,657