Eric Sprott and James Fox give their view on the true state of the economy, from a Canadian perspective, and which investment routes in their opinions offer the most solid bridges to financial security to once again. In your opinion, what is the true state of the financial system? Do you have faith in the central banks and governments handling it?
Eric Sprott (ES): As I see it, the current banking system is overleveraged. At a minimum, banks are levered 20 to 1, so they have five cents of capital for every dollar of paper assets they own. If the value of those paper assets declines by 5% – they have no capital left. Imagine a Greek bank today: their government's bonds are down 50% and the stocks are probably down 30-40%. There is no way that they have any capital left. And bank deposits are leaving as a result. The same is true in Portugal and Spain, now moving over to Italy and of course everyone knows it. Therefore the sovereigns have to stand in and either buy something from the banks or provide exceptional lending to them. This has been going on now since 2008. When Iceland's banks went broke, their government got involved. UK, Greek, US banks went broke, their governments all got involved. So now you've transferred what should have been the private risk to sovereign risk – and of course people are starting to question the sovereign risk because there is no buyer. That to me is the fundamental problem that we are facing today. If it does not solve itself, we will suffer a major financial crisis which would likely end up in a depression. In terms of investment strategies, what are the most viable opportunities for investors at present?
ES: Well, back in 2000 we realized there was going to be a crash in the Nasdaq because there was a mania. I did a little soul searching, and asked myself 'how do we survive a secular bear market that is going to last a long time?' And I thought it would last 15-18 years back in 2000. We are still in such a market as far as I am concerned. And history has proven that the only assets that really survive a bear market are tangible things that are fungible. That's what led me to precious metals and perhaps agricultural land and other things where demand is relatively inelastic. So I am of the opinion that people have to have a hugely disproportionate amount of their portfolios in precious metals. As an example, of all the funds that I have run, at least 75% are in precious metals. And I don't lose any sleep over it. In any metric you look at, the data keeps telling you to move into precious metals. So we have been seriously involved in both the bullion and the stocks. I'm kind of favouring the stocks now more than bullion because the stocks haven't reacted as well as bullion. This gives us huge opportunities to prosper in the gold and silver equity areas. I prefer silver to gold as I feel silver will outperform gold. I have very often made the comment that gold is the investment of the last decade, which it certainly was, and silver will be the investment of this decade. I disfavour anything related to financials. I did a chart the other day where I compared the performance of gold stocks versus bank stocks in the US. For the first seven weeks of the quarter the outperformance was 49%. In seven weeks.
The entire interview is here.