Sprott on Gold vs. Silver after the Selloff

New York Hard Assets Investment Conference 2011 Online Review

Last week's monumental silver selloff presents a sterling opportunity, according to Eric Sprott, who characterized gold, by comparison, as the investment of the last decade - rather than the one we're in.

"There are a lot of great things about silver going down," Sprott said in a keynote presentation at the Hard Assets Investment Conference Monday. "We're starting up a (new) silver fund tomorrow - available only in Canada. A week ago we could have bought 1 million oz. of silver and now we'll be able to buy 1.3 million (oz.) for the same money," he added.

Sprott, who is CEO of Sprott Asset Management LP, has long been a proponent of silver. But his fund took a significant hit when the metal tumbled on May 2, falling $6/oz. in 13 minutes at one point that day. It was the worst week in at least 30 years for silver bulls.

"Have I seen this before? Yes, I have," Sprott said, adding that it happened the day after a holiday on low volume "in the thinnest market you could possibly find." Without elaborating, he briefly suggested that manipulation may have been a factor.

Sprott's fund recently held as much as 41.8 million oz. of silver, with only two major ETFs and the Central Fund of Canada being larger holders, according to information in his presentation.

Gold, on the other hand, is often erroneously described as a safe haven, Sprott suggested. People think that governments, because they buy and hold the metal, will back it up, he said but asked: "Who trusts the government?"

Sprott also questioned the popular conception that gold has become scarce. Most of the gold ever produced is currently above ground and still available in some form, while silver tends to be consumed rather than accumulating as a store of wealth. Anyone who wants to buy gold can get it today, he noted, adding: "There's so much more gold above ground than there is silver."

Some market observers point to the smaller volume in silver investment compared with that of gold, but Sprott countered that people who buy bullion coins spend as much on silver as on gold coins.

The gold price nevertheless will go to $2,000/oz., Sprott said. (His estimate, in fact, was on the low end of forecasts by other speakers at the conference.) And as gold goes higher, silver will follow, he added.

Historically, silver has always traded at a 16:1 ratio to gold. But there is much greater availability of gold to silver (above ground) at any given point - as much as 80 times more, Sprott said. If gold were to go to $3,000-5,000/oz., as some are projecting, we could see silver at $250/oz., he suggested.

Still, Sprott said, he had gauged institutional interest in buying silver and found that hardly any exists. But this won't always be the case, he indicated.

"Silver will be a currency, just as it always has been - just as much as gold," Sprott insisted, adding: "There will be silver shortage. ... It is logical to suppose that silver will go higher."

"They talk about not speculating in silver. ... but who's taking more risk, the guy buying or the guy selling? Sprott asked, noting that silver had already begun to rebound this week.

Chris Munford researches and writes about commodities, with an emphasis on metals and energy. He is based in the New York area and is a new contributor to ResourceInvestor.com.

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