Eric Sprott is more bearish now than he was a decade ago, when the Toronto-based investor started his first hedge fund to offer investors protection from what he believed would be a protracted market downturn.
Back then, the bursting of the technology bubble was painful, but the global financial system is now in even worse shape because of bailouts like Ireland’s new rescue package, says the 66-year-old founder of fund company Sprott Inc.
“You've had the housing crisis, the lending mania and now you have a sovereign [debt] crisis ... No one has really accomplished anything in terms of getting their house in order here.”
It is “entirely possible” for markets to fall back to the lows of March, 2009, Mr. Sprott warned. “I might even use the word ‘likely’ notwithstanding the Federal Reserve [with its stimulus measures]. Everyone says ‘don’t fight the Fed.’ Well, the bond market forgot to listen to that in the last three weeks because rates are going up.”
Mr. Sprott’s contrarian bets have paid off over the past decade. His precious-metals-heavy Sprott Hedge LP has garnered an estimated 23-per-cent annualized return over the 10 years ended Nov. 26 compared with a 5.4-per-cent decline for the S&P 500 index in Canadian dollars.
And its U.S. version, Sprott Private Capital Fund LP, was recently named Fund of the Year at the 2010 Absolute Return Awards, which is part of Hedge Fund Intelligence, a provider of hedge fund data.
We asked Mr. Sprott to talk about how he succeeded over the past decade and where he sees opportunity today.
Why did you become bearish just before the Nasdaq stock market imploded in 2000?
We had an 18-year bull market from 1982 to 2000. This is about the average length. You could tell from the almost insanity of the market at the time that it had to be over … We were valuing stocks at 100 times sales in the Internet boom. It was ridiculous.
How long do you expect a bear market will last?
I have always thought it would be a long bear market – about 15 to 18 years. It started in 2000, but it might even be longer this time because the powers-that-be keep manipulating the financial market. Having a zero interest rate policy is manipulation. Having quantitative easing is manipulation of what the market would otherwise do. …They are delaying the liquidation phase of a bear market. Almost all governments keep bailing out their financial systems.
You have been a bull on gold from the get-go. Is its price over $1,350 (U.S.) unfolding as you expected?
It’s been the investment of the decade. When I bought gold, I was buying gold to hold [as a long-term investment]. As it turned out, it quintupled. I didn’t think it would go that far because no none would have imagined that the central banks and governments would get themselves in a position where they are printing money.
The printing of money makes gold more valuable. You don’t have to be a genius to figure this out. The Johnny-come-latelies – the Paulsons, Einhorns and Soros – all figured out, when [the Fed announced the first round of quantitative easing], that they should own gold. It becomes more obvious every day as you see these financial challenges that we have in Europe.
How high will gold go?
I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver .
Why are you more bullish on that metal?
Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed.
Do you like base metal stocks because of China’s growing demand?
I wouldn’t be a buyer today. If interest rates go up in Europe and you have these policies of contraction, how much can China bear? I don't believe in the growth of the developed countries, and China needs the developed countries to buy goods.
Sprott Canadian Equity, your mutual fund, has an impressive 20-per-cent annualized return over the same 10 years as your hedge fund. Why is that?
It was hard for me to imagine that it was possible. As it turned out, I was wrong. You can prosper in a bear market in a long-only fund. It has done very well because we just decided to keep pushing into precious metals … Whatever I own in my long-only fund is exactly the longs that I own in the same proportion as my hedge fund. It’s only the shorts that are different. [The shorts] are all in U.S. stocks with a focus on financials, including major U.S. banks and brokers, consumer discretionary and housing.
How much of your wealth outside of Sprott Inc. shares are in bullion and precious metals stocks?
I only own funds and gold and silver. I am probably 90 per cent in precious metals personally. And I don’t lose sleep over it.
This interview has been edited and condensed.
Sprott Hedge LP does not reveal its positions monthly, but it holds the same long-only stocks as Sprott Canadian Equity, also managed by Eric Sprott. Here were the top 10 holdings in the mutual fund at Oct. 31.
Cash and short-term investments
Gold Wheaton Gold Corp.
Yukon-Nevada Gold Corp.
East Asia Minerals Corp.
Corridor Resources Inc.
Sterling Resources Ltd.
CGA Mining Ltd.
Timmins Gold Corp.