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Eric Sprott Is Now The Silver Bull

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Eric Sprott has gained a reputation as an implacable bear. In fact, that has not always been the case. Back in the 1980s, he was bullish on the stock market. But that's ancient history. Since 1999, he has been Canada's highest-profile doomsayer. The markets are in long-term decline and everything is going to hell.

He was in his usual end-of-the-financial world-as-we-know-it form when he spoke to an audience of financial professionals in Toronto last week at the kick-off of his company's annual national road show. In a presentation titled "Mania. Manipulation. Meltdown." Mr. Sprott predicted the collapse of almost everything.

"There is nothing positive in Europe," he intoned, noting that the continent's banking system is only being kept afloat by massive 1% loans from the European Central Bank.

China has shown negative manufacturing growth for five months in a row, which has not happened in recent memory. A hard landing could be in the cards.

The U.S. is weighed down by an impossible debt burden of $100 trillion in present value terms when Social Security, Medicare, and public sector pensions are factored in. He quoted a recent report that predicts a U.S. recession by mid-year.

As for the stock market, he points out it went up in the first quarter on decreasing volume. "It's a BS rally," he tells the audience, who would like to believe it's anything but.

"We have a system that is breaking down," he concludes.

What's the answer for the investor who, after listening to all this, is in a state of near-panic? Surprisingly, not gold. "It was the investment of the last decade," he says dismissively.

The answer is silver. Eric Sprott has become Canada's Silver Bull. And he says his conviction has nothing to do with a new fund his company is launching, the Sprott Silver Equities Class. He's a true believer. "It's the investment of the decade," he proclaims.

Why? Let us count the reasons.

1. Demand exceeds supply. Annual production is about 900 million ounces per year, including recycling. Industrial usage alone will rise to 660 million ounces by 2015. That leaves only 240 million ounces for coinage, central bank purchases, and investment. The latter category is huge; as of 2010 holdings of physical silver to back up exchange-traded funds was 577 million ounces.

2. Silver is undervalued compared to gold. The historic silver to gold ratio is 16 to one. The geological silver-gold in situ reserve ratio is 17.5 to one. The current silver-gold ratio is 51 to one. The implied price if silver reverts to its historic ratio with gold at US$1,600 an ounce is US$100 an ounce. The actual closing price on Thursday was US$31.73.

3. The silver price is artificially low. There has been speculation for some time that the price of silver has been kept deliberately low by market manipulation.

Historically, silver has a bad reputation in this regard. In the late 1970s and early 1980s, the Hunt Brothers (Nelson and William) borrowed heavily to buy silver futures and at one point held the rights to more than one-third the world's non-governmental supply. During that time, the price of the metal rose from US$6 an ounce to almost US$50 an ounce in January 1980. The bold move prompted drastic changes in margin rules. When the Hunts were unable to meet a margin call for $1.7 billion, panic set in and the price of silver fell 50% in four days. When it was all over, the Hunts lost more than $1 billion and several years later were found guilty of conspiracy in a civil case and slapped with a $134 million penalty. They declared bankruptcy.

We haven't seen anything that dramatic in the current market but Mr. Sprott pointed out that a huge short position of 250 million ounces in early 2011 exposed some powerful institutional investors to big losses if the price of silver rose. Those positions are being unwound and recently stood at 75 million ounces. However, he believes the manipulation is still going on, pointing to the sale of 137,000 ounces of silver in a one-hour period on Feb. 29, which resulted in a drop of 5.2% in the price. A further unwinding of short positions is needed to free the metal to rise in value.

Although the rationale is persuasive, I view predictions like this with scepticism, mainly because I have heard it all before. But if you want to make a bet on silver, one way to do it is by investing in some shares of Silver Wheaton (SLW) which is on our Recommended List. It finished the week at C$31.04, US$31.19. BMO projects a three-year increase of 75% in the company's earnings per share, based on an average silver price of US$33 an ounce. It's one of the stocks held in the new Sprott fund.

Another stock that Mr. Spott likes right now is First Majestic Silver (AG) which operates three mines in Mexico and is projected to have an EPS growth of 110% over three years. A more speculative position is SilverCrest Mines Inc. (TSX-V: SVL), a small company with positive cash flow and plans to increase production.

Alternatively, you can buy units in the new Sprott fund, which will focus on equities, or in any of the silver bullion ETFs that are available.

About the author:

Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

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The problem is the manipulation and how long the likes of JP Morgan can keep doing this.

If you bought Silver Wheaton when it was over $40 CAD (I believe in the last year) you'd be a bit peeved looking at it value now. IIRC it's been as low as $28 in the past few months (at which point I bought in, then sold again at about $32 as I got spooked). As a long term investment it might be great, but how "long term" are we talking exactly?

As for silver miners, these are always risky. The trick is probably to diversify, but you're going to need a lot of capital to make this worthwhile. Investing in one or two could prove fatal. All you need is an explosion, threat of government nationalisation or just a discovery that output isn't going to be quite as good as hoped and you could be 50%+ down.

So funds might be the best route? Although not exactly risk free!

Personally, I simply don't have enough money I can afford to lose to go heavily into silver and I'm not looking more than a couple of years into the future to take any profits.

I've got a bit of physical silver though, so the more silver ramping articles like this I see the better :)

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Government nationalisation is a good point, funny because 1 week after I invested in one particular mining company the government announce it wanted ownership within 10 years.

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Government nationalisation is a good point, funny because 1 week after I invested in one particular mining company the government announce it wanted ownership within 10 years.

Kind of like opposite to the UK where the logic would be. When the mine turns a profit then sell it to your wealthy friends along with the road network. ;)

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"There is nothing positive in Europe"

2. Silver is undervalued compared to gold. The historic silver to gold ratio is 16 to one. The geological silver-gold in situ reserve ratio is 17.5 to one. The current silver-gold ratio is 51 to one. The implied price if silver reverts to its historic ratio with gold at US$1,600 an ounce is US$100 an ounce. The actual closing price on Thursday was US$31.73.

Is there any correlation between the Euro and Silver? Didn't silver perform well when when the LTRO's were announced?

There is another way of looking at his number 2.

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Government nationalisation is a good point, funny because 1 week after I invested in one particular mining company the government announce it wanted ownership within 10 years.

You still can't get round the VAT thingy. Makes silver a no-go for me.

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You still can't get round the VAT thingy. Makes silver a no-go for me.

The thing with VAT is:

If you buy 1 kilo @ £800 inc vat you will get £800 back if you sell it on eBay or alike.

You do not lose the VAT. The only way VAT will affect your purchase is if it VAT gets lowered.

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The thing with VAT is:

If you buy 1 kilo @ £800 inc vat you will get £800 back if you sell it on eBay or alike.

You do not lose the VAT. The only way VAT will affect your purchase is if it VAT gets lowered.

Ahhhh I remember the good old days when the govt lowered vat , & an ounce from jersey was vat free .

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You still can't get round the VAT thingy. Makes silver a no-go for me.

There's plenty of legal ways to get round the vat thingy

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do share..

1) buy silver at GM

2) buy non-numismatic 'scrap' silver coinage; check out ebay for .925 (pre 1920) and .500 (pre 1947) 'scrap' lots (UK) or foreign 'scrap' lots such as US pre 1965 etc. I am consistently buying lots a fraction under spot (esp. foreign mixed) and many of the coins are far better than scrap.

3) buy scrap sterling in the form of jewelery, mirror backs, watch cases, solid spoons, knife handles, ash-trays, tea-urns etc. again with a bit of looking most of this can be bought a fraction under spot. and with this option you can opt to melt big lots and get bars cast using the Birmingham Assay Office who will give you an assay cert for the bar (reasonable cost)

all the above do not incur VAT

and to those who suggest that they must have their silver .99+ pure, i would say that you are a poor student of history

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1) buy silver at GM

2) buy non-numismatic 'scrap' silver coinage; check out ebay for .925 (pre 1920) and .500 (pre 1947) 'scrap' lots (UK) or foreign 'scrap' lots such as US pre 1965 etc. I am consistently buying lots a fraction under spot (esp. foreign mixed) and many of the coins are far better than scrap.

3) buy scrap sterling in the form of jewelery, mirror backs, watch cases, solid spoons, knife handles, ash-trays, tea-urns etc. again with a bit of looking most of this can be bought a fraction under spot. and with this option you can opt to melt big lots and get bars cast using the Birmingham Assay Office who will give you an assay cert for the bar (reasonable cost)

all the above do not incur VAT

and to those who suggest that they must have their silver .99+ pure, i would say that you are a poor student of history

thanks for the very useful info!

Could you clarify what you mean by GM? im new to this...

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thanks for the very useful info!

Could you clarify what you mean by GM? im new to this...

hi - no problem

GM = goldmoney

you buy physical and pay a smallish annual fee to GM to hold it for you in a secure vault - this can be done outside of the VAT parameters

pros - quick and easy traded, secure, physical (not paper) holding

cons - you don't get to touch it unless you ask for delivery (at which point you should have to pay the VAT, however, sometimes err.......... well i let you ponder on that!

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Where does this 16 to 1 silver/gold ratio figure come from? I keep seeing it being bandied about, but then when I look at the graphs I see this:

545720-127471910861369-Matthew-Green_origin.jpg

It looks like there's three relatively short term dips down to that area, but calling 16/1 a 'historic' ratio seems to me to be stretching it a bit. Perhaps if you go back a bit further than that graph it might cast some light on it, but much further back than that and people were probably digging the stuff out of the ground with their bare hands.

One of the other points you post, he mentions gold being last decades investment, but then goes on to estimate the price of silver at this 16/1 ratio based upon the current gold price (if everyone gets out of gold because it's "last decades investment" then surely that would bring down the gold price, which would then influence his $100 target figure).

I have a lot of time for Eric Sprott and have enjoyed reading about him and watching some of his videos, but unless I'm missing something, there appear to be a few things that don't add up to my eyes.

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P.P.S. Something else I don't get is:

"The geological silver-gold in situ reserve ratio is 17.5 to one"

This doesn't seem to take into account the mining process. From what I can gather the sliver in the ground is currently easier/cheaper to extract than gold (often being a by product of other mining operations for Lead etc). This seems quite different from gold mining (which is a much more expensive operation).

I'm not saying that Eric Sprott is wrong. I have a feeling silver will go up too. I just don't like being taken for a fool and some of the things he comes out with appear to have the potential to be a bit misleading, particularly for anyone who doesn't do their own homework.

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Where does this 16 to 1 silver/gold ratio figure come from? I keep seeing it being bandied about, but then when I look at the graphs I see this:

545720-127471910861369-Matthew-Green_origin.jpg

It looks like there's three relatively short term dips down to that area, but calling 16/1 a 'historic' ratio seems to me to be stretching it a bit. Perhaps if you go back a bit further than that graph it might cast some light on it, but much further back than that and people were probably digging the stuff out of the ground with their bare hands.

One of the other points you post, he mentions gold being last decades investment, but then goes on to estimate the price of silver at this 16/1 ratio based upon the current gold price (if everyone gets out of gold because it's "last decades investment" then surely that would bring down the gold price, which would then influence his $100 target figure).

I have a lot of time for Eric Sprott and have enjoyed reading about him and watching some of his videos, but unless I'm missing something, there appear to be a few things that don't add up to my eyes.

exactly my thoughts !

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1) buy silver at GM

2) buy non-numismatic 'scrap' silver coinage; check out ebay for .925 (pre 1920) and .500 (pre 1947) 'scrap' lots (UK) or foreign 'scrap' lots such as US pre 1965 etc. I am consistently buying lots a fraction under spot (esp. foreign mixed) and many of the coins are far better than scrap.

3) buy scrap sterling in the form of jewelery, mirror backs, watch cases, solid spoons, knife handles, ash-trays, tea-urns etc. again with a bit of looking most of this can be bought a fraction under spot. and with this option you can opt to melt big lots and get bars cast using the Birmingham Assay Office who will give you an assay cert for the bar (reasonable cost)

all the above do not incur VAT

and to those who suggest that they must have their silver .99+ pure, i would say that you are a poor student of history

Even simpler buy scrap sterling from your local gold buyer at 53p or whatever they are scrapping at per gram, alternatively use ebay or other methods to buy scrap. Then take it to a LARGE gold buyer in london or birmingham and swap it for .999 pure without any cash transaction.

i.e take £690 pounds worth of scrap sterling to a LARGE gold buyer and swap it for 1kg .999 silver bar kerching NO VAT ! please phone LARGE gold buyer to make sure bars are in stock (£690 being roughly the price of 1kg bar from bairds excluding vat)

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