Mar 11, 2008

Sprott sees financial turmoil pushing gold to $2,000

By Stewart Bailey
Bloomberg News Service
Monday, March 10, 2008

Turmoil in global credit markets may lead to the collapse of a North American bank, pushing bullion prices up to $2,000 an ounce as investors seek a haven in gold, Eric Sprott said.

This year's decline in banking and brokerage stocks will worsen, said Sprott, 63, founder and chairman of Sprott Asset Management, which manages about $7 billion. In response, the company is short-selling financial stocks and increasing holdings in bullion and mining companies, Sprott said. He declined to name which bank he thought may collapse.

"We're in a systemic financial meltdown," Sprott said in a March 6 interview at the company's Toronto headquarters. "There are probably 10 companies that are broke that are still trading -- banks and financial institutions."

Sprott, who in 2004 foresaw uranium and crude-oil prices rising, expects that the global financial system will come under increased stress as banks, faced with slipping stock prices and capital erosion tied to subprime-mortgage loans, battle to raise money to offset losses caused by asset writedowns.

Bear Stearns Cos. dropped as much as 14 percent today on speculation the company lacks sufficient access to capital. The company, the second-biggest underwriter of mortgage-backed bonds, led Wall Street shares lower in the past six months as the world's largest banks and securities firms wrote down $188 billion of assets linked to devalued loans.

The "concentration" of Sprott's short selling is in financial stocks, housing, and consumer products, he said. Short selling involves selling borrowed stock on the expectation share prices will fall, allowing the short seller to buy the equities in the market at a lower price to repay the debt.

... 'Easiest to Short'

"The brokerage companies, the investment banks are the easiest to short," Sprott said. "Do I understand what's happening in the business? Yes, there is no business."

Sprott said his company's offshore hedge funds have increased the proportion of gold in their portfolios to about 30 percent. The company is also buying small mining stocks that have yet to "blossom," including Dynasty Metals and Mining Inc., Golden Star Resources Ltd., and MAG Silver Corp., he said.

Gold has gained for seven straight years and reached a record $995.20 an ounce in New York on March 5. The precious metal rose 16 percent this year before today, compared with a 12 percent drop in the Standard & Poor's 500 Index and a 24 percent slump in the seven-member S&P 500 Investment Banking & Brokerage Index.

... Funds double

The Sprott Gold & Precious Minerals Fund and the Sprott Canadian Equity Fund have both more than doubled in the past five years. The S&P 500 Index gained 58 percent in the same period.

Sprott says the collapse of U.K. mortgage lender Northern Rock in September precipitated some bullion purchases by skittish depositors seeking a safe investment for the money they had withdrawn from the bank. That presages the larger effect that a banking failure in North America would have on gold demand, he said, since investors will have few good alternatives.

"Government bonds are a joke at the interest they're paying," Sprott said. "You can buy gold or other real things -- gold, silver, platinum, palladium -- things that hold value."

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Blogger Panos Konstantinidis ΕΙΠΕ (SAID)...

Yet another bubble. They were saying the exact same words for the property market in UK around May/June "You will need ten times your salary to buy a house". Now prices have fallen almost 8K since August.

March 11, 2008 11:47 AM  
Blogger Chrysotheras ΕΙΠΕ (SAID)...

...yes, it will -eventually- grow into an enormous bubble, dear Pano.
...but not quite yet!

Some (like Richard Russell) see the gold price -roughly- equalling the Dow at some stage (e.g. gold=$5000 Dow=5000, and even beyod par...)

This is called the runaway phase, and I wouldn't miss it for anything!

Buy gold and is proxies while the bull is still young...

March 12, 2008 9:09 AM  
Blogger Panos Konstantinidis ΕΙΠΕ (SAID)...

How do you know not quite yet? And how do you know that the bull is still young? Actually how can you be sure that the bull is not a bear?

Gold has been going up since early '00s, the same as houses. If there is a correlation between them then I see the gold falling.

March 12, 2008 11:28 AM  
Blogger Chrysotheras ΕΙΠΕ (SAID)...

the gist of the matter is:

1. there is too much fiat (trillions and trillions) liquidity out there chasing a finite amount of commodities (e.g. wheat price has doubled since last year)

2. gold (and silver) is not just a commodity. It is also monetary metal "par excellence" and -in times of monetary turbulance- the ultimate safehaven.

3. have a look at past articles in this blog for more details. (look at the link list as well...)

...happy reading (and investing!)

March 12, 2008 12:19 PM  

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