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Default threat boosts case for gold, Sprott says

Sprott chairman Eric Sprott. Photo: Mike Cassese/Reuters

The risk of Greece defaulting on its debt may be roiling the world's financial markets, but it's good news for Eric Sprott.

Investors seeking refuge from the financial storm drove the price of gold to a record high last week, and Mr. Sprott is optimistic that demand for the precious metal will expand as fears grow that Greece and other European countries will fail to repay their massive debts.

"Greece either defaults or they print money, both of which are great for gold," said Mr. Sprott, chairman of Toronto-based Sprott Inc. , which holds $2.2-billion of gold and $900-million of silver among its $11-billion in assets.

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While acknowledging that a Greek default would lead to "a crescendo of problems" for the global financial system, he argues that it would be unambiguously positive for haven commodities such as gold. "The market has made gold the reserve currency. The market has already made that decision, that this is the safest asset when there is potential financial contagion."

Gold has risen in each of the past 10 years and is up 29 per cent this year. It reached a record $1,921.15 (U.S.) on Sept. 6. Silver, up in nine of the past 10 years, has gained 33 per cent in 2011.

Sprott Hedge LP, the money manager's flagship hedge fund, returned an average of 17.9 per cent annually in the decade ended August, more than double the returns for the S&P/TSX composite index.

Mr. Sprott is one of the investing world's best-known advocates for precious metals and he continues to be a huge believer in those commodities – although he thinks that the biggest gains ahead will lie with silver instead of gold. "Gold was the investment of the [past]decade, and I think silver will be the investment of this decade, so we're trying to position ourselves to take advantage of that."

Mr. Sprott's charitable foundation, The Sprott Foundation, recently sold two million units of its gold holdings and used the money to buy silver.

He has been touting silver's merits over the past year, investing his own money in the exchange-traded Sprott Physical Silver Trust, which buys silver bullion and stores it at the Royal Canadian Mint.

But he remains committed to gold and isn't daunted by skeptics who believe that the metal has climbed to excessive levels.

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Speculative demand from investors has pushed the gold market into a "bubble that is poised to burst," Wells Fargo & Co. said in August.

"We have seen the economic damage" of past bubbles and "feel compelled to ring the warning bells," Wells Fargo analysts led by Dean Junkans said in the report. "There could be substantial risk to gold once the fear that the world is coming to an end subsides."

Mr. Sprott argues that, if anything, the level of financial uncertainty is growing.

"Nothing has performed like gold and silver in the last 11 years," Mr. Sprott said. "I look at the supply-demand situation. It's overwhelmingly positive for the prices going up. It's gotten better every year."

Mr. Sprott said he has been selling physical gold over the past two years to buy equities related to gold and silver, emphasizing small- to mid-sized silver producers. He looks for stocks priced at no more than three times their estimated earnings two years from now, although he declined to identify specific companies.

The 66-year-old investor is unfazed that the price of gold fell from its peak last week, instead of rising as investors sought safety from tumbling stock markets and Europe's debt crisis. Central banks and others acted to lower the price, which befuddled investors seeking a simple equation for what makes gold go up, Mr. Sprott said.

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"There's great risk in owning paper assets because of what's going in the paper-asset world," Mr. Sprott said. "We have sovereign risks, we have bank risks, we have budget deficits, we have irresponsible monetary policies and fiscal policies, all of which leads you to a common conclusion: How do I protect myself?"

With files from Bloomberg News

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About the Author
Investment Reporter

Nicolas Johnson has covered global finance, markets and investing since 1998. He joined The Globe and Mail in 2011. He has worked as a reporter and editor with Bloomberg News in Paris and Tokyo, and also worked briefly in emerging-market debt at Société Générale. More

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