Recent Interview With Eric Sprott on SilverI take Warren’s Buffett view when it comes to commodities. Warren Buffett stated:

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

However many great investors including David Einhorn think gold will go up. Einhorn views gold as a currency just like the dollar. Silver is another asset that has risen a lot in price recently. I personally have no opinion on the future prices of gold or silver. I thought they were a bubble in 08,09,10, but the price has risen. The tech bubble lasted a few years, but gold has gone up for close to ten years already, so it is either a gigantic bubble, or not a bubble. That said I have no holdings in gold or silver.

Eric Sprott is considered by many even in the value circles to be the expert on Silver. He has made some nice money off of it:

Sprott’s wealth is estimated by Bloomberg at “at least $1.3-billion (U.S.),” based mostly on his publicly disclosed holdings in Sprott Inc. (SII-T8.71-0.08-0.91%) and some other Sprott-related companies, including Sprott Physical Gold Trust, stakes that have both hugely benefited from the run in gold. There may be more wealth in other private holdings, acknowledged Matthew Miller, Bloomberg’s new billionaire reporter.

Here is a brief profile of Sprott:

Eric Sprott has accumulated 35 years of experience in the investment industry. After earning his designation as a chartered accountant, Eric entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada’s largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.

Eric’s investment abilities are well represented in his track record in managing the Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Bull/Bear RSP Fund, Sprott Offshore Funds, Sprott Canadian Equity Fund, Sprott Energy Fund and Sprott Managed Accounts. In December 2004, the Sprott Hedge Fund L.P. was awarded the Opportunistic Strategy Hedge Fund Award at the Canadian Investment Awards. In addition, the Sprott Offshore Fund Ltd. won the 2006 MarHedge Annual Performance Award under the Canada-Based Manager category. Furthermore, in October 2006, Eric was the recipient of the 2006 Ernst & Young Entrepreneur of the Year Award (Financial Services) and the 2006 Ernst & Young Entrepreneur of the Year for Ontario. In December 2007, Eric was named Fund Manager of the Year by Investment Executive, a widely circulated publication for Canadian financial advisors. In October 2008, the Sprott Offshore Fund Ltd. won the award for the Best Long/Short Hedge Fund globally by HFM Week, a leading publication for the global hedge fund industry.

Eric’s predictions on the state of the North American financial markets have been captured throughout the last several years in an investment strategy article that he authors titled “Markets At A Glance”.

In the video below, Eric Sprott (www.sprott.com) and James Turk, Director of the GoldMoney Foundation, talk about how there isn’t enough silver in the silver market to back existing “paper silver” commitments. Sprott thinks that “silver will be the investment of this decade”.

They talk about the dynamics of the gold market and how it has entered the second phase of its bull market. They look at ETF, central bank and coin demand. They also look at the huge paper-to-physical mismatch. Eric calculates that only 0.75% of financial assets are currently in gold.

They discuss the importance of owning physical, not paper gold, and keeping it yourself or with a trustworthy company that gives you direct access to it. They talk about GATA and the significance of the work they do. They also talk about Sprott PHYS and PSLV and how they allow holders the option to redeem their physical metal, unlike most other ETFs.

They talk about fiat currencies and their flaws. The dollar, the euro and how bank leverage has built up since the Fed was established in 1913, setting the stage for a huge crash. Eric talks about bank failure Friday, the numbers released by the FDIC and all the signs pointing to the coming train wreck.

They talk about the attempts to prevent liquidation of bad assets and how governments are throwing good money after bad. Eric then talks about the 3 conditions that he thinks are necessary to see gold as overvalued, and how we are very far from that point at this stage. Both James and Eric see gold as reaching a parabolic phase before the bull market runs its course. They also comment on how little confidence most mining companies have in gold. This interview was recorded on August 4 2011 in London.

Eric Sprott is a shareholder of GoldMoney.

The video contains  33 minutes of Sprott’s view on gold. Below is the video followed by the full transcript:

James Turk: I’m James Turk. I’m a director of the Gold Money Foundation. I’m here with Eric Sprott, the founder and chairman of Sprott Asset Management.

Eric, I want to start off right away with silver. You’ve called silver the asset of the decade. We’re at $41.66 as we speak. What are you seeing here?

Eric Sprott: Well obviously, I’m very optimistic about silver for a number of reasons. Reasons that most people wouldn’t know about are the use of paper money in the silver market. At the peak when it was $49.80 or so, there was something like 800 million ounces of paper money trading.

We know that there’s about a million ounces of physical silver available each day for investment. So this preponderance of sellers just seemed unbelievable. Whenever anybody talks about the speculators in silver, I always say, “Well, who’s the speculator? The guy buying it or the guy selling it who doesn’t have a hope in hell of delivering it?” And so, we have this big short position in silver, and I’m sure it’s going to resolve very positively to the upside.

One other thing I should say about silver is I look at the sales of silver versus gold. The U.S. mint sells more dollars of silver than gold. The Canadian mint sells about a dollar and a half of gold to a dollar of silver. I know Gold Money probably sells more silver in dollars than gold.

James: That’s right.

Eric: Sprott Money does the same thing. So I see this as a decision by people to decide one versus the other. They can’t keep buying at a 1:1 ratio when the price of silver to gold’s 40:1. So I’m sure it’s going to resolve to the upside.

James: That’s an interesting distinction that you’re making, that the specs in silver are the paper shorts, whereas the serious players in silver are the physical longs. I haven’t really heard that before. That’s really an important distinction. What’s likely to happen to the paper shorts?

Eric: Well, they already got seriously burned. We had the price of silver go from $18 to $48. There was this massive short position, I think it might have been 600 million ounces, at least, let alone what’s in the derivative business. When you lose $30 on 600 million, you’ve lost $18 billion. That’s why I think the raid happened on May 1 that drove the silver price down, so they could get off some of these shorts. But they still have a pretty good short position. Ultimately they’re going to go the way of fiat currency, I guess.

James: Do you expect to force majeure? That they’re just going to renege on the contracts?

Eric: There’s no way that they can deliver to the contracts. We know that. There’s not enough silver…

James: There’s not enough physical available.

Eric: There’s not enough physical silver. We’ve done analysis of the silver market. My point of view on the silver market is go from ’05 to 2011. I can see four or five entities that changed their demand by a total of 380 million ounces. Lack of U.S. government selling. Chinese going from exports to imports, which changed by 200 million. The U.S. used to sell 100 million. The ETF coming along, which are buying something like 60 or 70 million ounces a year.

You add all those up. We can come up with 380 million ounces in a 900 million ounce market. I always go back to, “Well, who was buying it in 2005 that can’t buy it in 2011? Who is that person that’s not buying the 380 million?” Huge change in the supply/demand situation in silver.

James: So you’re more bullish on silver than you are in gold? I mean, you’re a long standing gold bull. It’s well known that you’re very bullish on the metal of kings, but you’re even more bullish, is it fair to say, on silver?

Eric: The line I use is that gold was the investment of the last decade. I think silver’s going to be the investment of this decade. I do believe in the thesis that silver will get back into a 16:1 ratio to gold. So gold’s over $1600, so theoretically silver could be $100. It’s at $41 and change.

Gold probably goes to some number that’s stratospherically higher than it is today, so that means that silver’s going to have a great mobility. The historical relation of 16:1, I see the buying coming in at 1:1. I see the supply of gold above ground in dollars is approximately 100 times greater than silver, but the buying’s 1:1 so something’s got to give somewhere.

James: How long is this going to play out? Are we talking months here? Are we talking years?

Eric: My expert for predicting the price of silver is you. By the way, great call just a few weeks ago when you said the second half is going to get going. I really do commend you on that. It’s a great call.

James: Thank you.

Eric: You just see things developing in the market that could make it explode at any moment in time. I always think in three to five years for sure it will trade at 16:1. When it actually happens, I don’t know. It could get parabolic at any moment. We have a financial system that’s on the edge of a cliff here.

All I know is that you can safely own it. Go to sleep at night and you’ll be a winner at the end of a certain time period. You’ll be a big winner at the end of that time period.

James: I try to conceive why or how somebody would take a short position in silver here, given the extremely bullish and positive fundamentals. Is there any logical thing?

Eric: It boggles the mind. The only logical thing, and that’s what GATA’s been after, is that the cartel is always trying to suppress the price of gold and silver. And in fact, I’m of the opinion, laterally, that knocking silver down was intended to keep the gold price weak. Silver’s easier to move. It’s a very small market. Somebody with money and the printing press or the electronic button can keep the price of silver down, which has a negative spillover effect on gold.

It wasn’t very effective this last time. As you know, gold only went down six or seven per cent. Silver went down over a third, I guess. And, of course, just stormed right back here again.

James: That’s because the good physical demand under the market. You can’t create physical silver out of thin air like you can create paper out of thin air.

Eric: And I think, quite frankly, one of the reasons gold didn’t go down that much is there’s latent physical demand for gold. We just saw the Bank of Korea announce that they bought 25 tonnes. Mexico bought 93 tonnes.

The paper boys can do all they want, but when the orders come in to buy it, they have to stop the game. We just raised, in Sprott Physical Gold, another $300 million. We’ve been a buyer of gold recently.

James: OK, Eric. Let’s get into gold a little bit. You did this offering. Timing was part of the factor behind it?

Eric: Well, we had a good premium. There was an interest in it. We thought it wouldn’t disturb the market.

James: This is for PHYS, Sprott Physical.

Eric: The gold trust, yes. We raised about… I think it was $320 million gross. Something like that. Of course, you’ve got to take underwriting fees, so it would be a little less than $300 million to us. For the most part we purchased all the gold. We may have another 20 or 30 million dollars to buy, but it’s not a disturbing number in the gold market. As you know, I think South Korea, what did they spend? $1.7 billion on gold in the last two months.

I think gold’s going to be incredibly strong here. I do the same thing with gold I did with silver except I use my starting year as 2000 compared to 2010 and look at the dynamics of change in the market. This is basically a 4,000 tonnes-a-year market with mine supply hardly having increased in a decade.

You look at some of the big macros that happened. Central banks are sellers at 400 tonnes. It looks to me like they’ll be buyers at 400 tonnes. There’s an 800 tonne shift in a 4,000 tonne market. You have the ETF that’s started in, I think it was ’04. I don’t have the number at the top of my head, but I think on average they buy something like 60 or 70 tonnes a year. I look at coin sales from the various mints. I compare 2000 to 2010. They’re up by factors of eight and 900 per cent.

I actually came up with a total. I will discuss this at the GATA conference here. We can identify 1,900 tonnes of positive change in the fundamentals for gold, other things being equal in a 4,000-tonne market. I keep scratch my head. Where’s the gold coming from? Who’s not buying it in 2010 that was buying it in 2000? It never makes any sense to me that there’s so much demand and supply’s almost constant.

So I just got to believe that we’re going to overrun the paper shorts. And in fact, we’ll probably have a physical shortage in due course.

James: So there’s so much paper gold out there, but only so much physical gold and ultimately that’s the driver.

Eric: When you see these central banks… I find it very instructive that the Bank of Korea bought 25 tonnes in the last two months. All I can think of is, “What are the other 30 central banks around the world thinking?” They see Mexico buying. They see South Korea buying. I think Thailand bought. Sooner or later you’re going to get other central banks to say, “Well, we’ve got to get in this game here.”

I think there’ll be a physical shortage, for sure. We don’t see much increase in gold production. Most major mining companies are stumbling with production, so we’re not going to get much of an increase this year.

James: Given that the spot market is both a function of the physical market as well as the paper market for gold… I wanted to ask you, because one of the things I follow very, very closely is backwardation. Whether gold is in a normal contango or whether the front month, the spot month, is above the futures month. And so far, it’s remained in normal contango, spot and then working on up.

But if you look at a fund like PHYS, it’s always trading at a premium to spot. Isn’t that a form of backwardation in a sense that you’re much closer to physical metal than a lot of the spot market is because there’s a lot of paper involved in the spot market?

Eric: I think that a lot of people have a distrust of both the SPDR Gold Trust and the Silver Trust, the SLV. They’re willing to pay these premiums where they trust people to have the metal there. In particular, that they can have access to it, which in the case of our Sprott physical gold trust and the silver trust, they can get access to it.

James: PHYS for the gold and PSLV for the silver.

Eric: Yeah, and the silver premium…

James: Getting access meaning that they can actually take the shares and redeem it for physical metal, if they choose to.

Eric: If they choose to. And as you know, the one time people might choose to is when things go extremely haywire. You might say, “Hey, I want this physical precious metal in my possession rather than a piece of paper.”

So I see our PHYS competing with the GLD. I think it’s a better instrument. When I look through those numbers and wonder how could all this physical gold be showing up, it makes you wonder, maybe the GLD doesn’t get the gold they’re talking about.

Now I don’t pretend to be an expert on the GLD, but I always wonder about the mismatch of supply and demand and how that’s working out in the system.

James: Well, there are different buyers of gold. There’s some people who actually want the tangible asset, so that they have everything that that tangible asset brings to the table. And there are other people who are just happy to have exposure to the gold price, the professional traders and the speculators.

To get that exposure to the gold price, they might buy a futures contract or an options contract, or maybe GLD. Because with GLD you don’t really own gold, you own shares in a fund that’s supposedly backed by gold.

Eric: And of course the number of people that are willing to buy things electronically, as I pointed out in the silver example. It’s a ratio of 800 to one in the sense of the trading versus the physical availability. I don’t even know what the ratio is in gold, but it must be some incredible number of times the physical amount that’s available that trades every day.

And I always say, well, what are the sellers thinking? What are they thinking? They know they can’t deliver.

James: Yeah. But is that not a sign of times, though? A lot of speculation, a lot of paper. As we work our way through this financial bust, we’re ultimately moving back to basics. And gold being money for 5,000 years is one of the most basic of them all.

Eric: Sure. And by the way, James, I give you credit all the time for explaining best. You used the words it’s a “managed retreat.” And that’s what I think it is. There’s a shortage of gold. You can’t let it get too emotional or parabolic.

So, for example, I was very surprised to see the two percent day on, I guess it was Tuesday. It was very uncommon. Even gold should be the most emotional commodity out there, it’s the least emotion in terms of price. I happen to be in the camp that believes that there are hands out there trying to keep it under control. They lost the battle, but they’re willing to fight lots of little wars on a daily or weekly or monthly basis.

James: I’m going to be actually talking about this “managed retreat” in my presentation tomorrow at the GATA conference here, and explain a little bit about it. But the fundamental thing is, I’m going to explain that even though the price is high, gold still remains very, very undervalued, by all historical measures.

Eric: I think the best chart, and I will show this in my presentation, is that the world has $200 trillion in financial assets, and the gold market is worth $3 trillion. Theoretically the central banks own half of that which is $1.5 trillion, which means that investors own another $1.5 trillion. Which is 0.75 percent of all the financial assets are in gold.

Well, as you well know, there have been many times when people recommended five per cent of 10 per cent interest in gold. Somebody like me, I have almost all my money in gold. Someone like you probably has by far the best part of your…

James: But a lot less in the aggregate. [laughs]

Eric: Yeah. But the fact is, nobody’s in it. And if you look at the pool of financial assets, it probably hasn’t even grown in the last 10 years, in the sense that’s the stock market’s done nothing. Gold’s gone up over six time. What was the weighting 10 years ago?

James: The percentage has risen slightly, but that’s because gold’s price has gone up, not because there’s that much more money coming into the sector. So it’s 0.75 percent now. What is the historical norm?

Eric: I don’t even know what the historical norm is. I know that many people talk about five or 10. In fact I don’t even think history will mean anything when people all realise they have a problem with their money in a bank or owning some government note. I mean, the demand for gold could just be overwhelming.

As you’ve predicted, and many others, it could be parabolic all of the sudden. They just realise that this fiat currency is not worth what it’s made out to be. I always think of fiat currency as “trust the government.” [laughs] I always wonder why would history tell us to trust government?

James: Given the record.

Eric: [laughs] It would tell you the opposite.

James: Even from a diversification point of view, to mitigate risk you need to own some gold, you have to have some silver. You need to have a tangible asset for your monetary asset, rather than just fiat based on nothing except politicians” and government rhetoric.

Eric: Right. You have to own it yourself or have access to it. You have to own it through trustworthy people like yourself, like ourselves. People who have pledged themselves to try to get people to get into precious metals for all the right reasons for the last 10 or 11 years, or even longer, for that matter.

I love to coming to conferences like this. I’d like to be more of a spokesperson for silver and gold. I’m always trying to encourage Canadians to own it. We’ve created lots of different funds that they can invest in.

It’s shocking that it’s been the best asset for the last 11 years and we can still hardly muster up a real surge of common interest in. But it’s coming.

James: But you’ve reached out beyond Canada. Your PHYS and PSLV are listed on the New York Stock Exchange. So people all over the world can participate in your funds.

Eric: They can. And I’ll tell you one of the latent things in silver. When we sold the silver trust, we raised $550 million. When we sold the gold trust, we raised $440 million. So again, it’s another example of people being more willing to buy silver rather than gold.

And I would say, if I was willing to sacrifice the premium on PSILV – which I’m not – compared to the 300 we just raised in gold, I could do multiples of that in silver.

James: If the physical silver were available?

Eric: If it was available and if I was willing to sacrifice the premium. I’m not willing to sacrifice the premium. And I have to find ways of doing it without sacrificing the premium. But I know the demand is there.

James: Yeah. Is it retail or is it institutional or both?

Eric: I would say it’s mostly retail. Both times when I’ve done this circuit trying to sell these issues, certainly on the IPOs, it’s probably been 80 per cent to 90 per cent retail. I was very much shocked that when I tried to tell the silver, that I wasn’t getting much resonance with institutions whatsoever. In fact, very few of them had even looked at it. People that had invested in gold already hadn’t even looked at silver.

So I kind of know that that’s coming. It’s like you recommending gold in 2000 and some people coming along in ’08, such as John Paulson and David Einhorn, buying gold and everyone, “Oh, my god, it must be a good investment!” But they’re eight years late to the party, right?

James: But still early in terms of where the bull market’s going to go.

Eric: Oh, early enough. They’ve done very by it and they will do well, of course, going forward. But it takes that kind of time period for people to latch onto it.

James: It’s interesting, the point you raise about silver. I think I may have an answer as to why the lack of interest is there. Every bull market has three stages. In that first stage you see apathy and neglect and disbelief. Silver’s still in stage one.

It’s been my point that we’re not going to stage two until we’re over $50, which was the January, 1980, high. And I think that’s likely to happen here in the not-to-distant future. Once that happens, then that’s going to go onto people’s radar screens and you go into the second stage of silver’s bull market.

So maybe in a year’s time when you make that circuit, you’re going to get a lot more interest than you get at the present.

Eric: I can feel the difference already. I mean, it was a year ago, almost a year ago we did the…

James: Yeah, who thought $50 silver a year ago was possible, other than a couple people like ourselves?

Eric: It was quite predictable. I thought anyway.

[laughter]

James: When it comes to markets, nothing’s predictable, but it was an easy call.

Eric: Right. It was easier than most. Because if you looked at the history, oh, my god, if this thing goes back to 24, it’s going to 50 almost automatically. And it did. And it did it almost in the time frame that you would have imagined.

So when I was on the road and said if it goes to 24, it’s probably going to 50 in like four months. Well, I think it took six. But who’s going to argue over a couple of months, right?

James: Yeah. Particularly given the double price.

Eric: Yeah, exactly. I think the investors are coming around to it. I was actually in a little dismay when I was listening to the bubble-vision. And like every third guy likes gold now, and is willing to admit that maybe you got to have gold in portfolio.

Which was disturbing, having gone through the 11 years when no one would even mention it, or said it was a barbarous relic or whatever. So I kind of monitor now how many people talk about silver. It’s not many, but you can see it creeping into the conversation.

James: But gold is into the second stage of its bull market, since it went over a $1,000. So likely you can expect to have more people talking about it.

But the question is not talk, but whether they’re doing it. And given the fact that this percentage of assets is still 0.75 per cent, which I keep coming back to, it shows that is an under-owned asset compared to, say, the U.S. dollar, which is an over-owned asset.

Eric: Yeah. They’re going to come back. Having dealt with large institutions and pension fund, they’re so rigid in their programmes that they can hardly consider owning something physical. It’s so against the grain of what their advisors are telling them.

But gold having gone up by whatever it is, 700 per cent here, the advisors are coming around. And of course seeing silver go up and all the other commodities going up, they’re finally giving some credence to investing in that area.

And it’ll be slow. We saw the first of example of, I think it was Texas Teachers, buy close to a billion.

James: I was going to ask you about that. Was that sort of a watershed event and that sort of added some legitimacy to the sector and the institutional investor side?

Eric: Well, I think John Paulson going into GLD, David Einhorn buying physical. The Texas Teachers buying physical. Those are huge eye-openers. And some of the central banks stepping in to buy gold, are sea changes in what’s going on out there. And it makes it more acceptable for the mainstream to come in, who never even considered it before.

James: OK.

Eric: But it’s still a tough, tough sell. I can’t tell you how difficult it is.

James: Let’s go back to something you just mentioned a couple of minutes ago, about gold going up $32 in one day, beyond the two per cent. Which GATA had contended that you have certain mechanisms where the intervention occurs at either one per cent or two per cent. This is the first two per cent day this year.

Is it an indication in your view that maybe the people who have been trying to keep the gold price suppressed are just losing control?

Eric: Yeah. I’ve noted that they are losing control. Particularly when you have these people like Mexico and South Korea and us raising $300 million. We’re all coming into the physical market, and so the paper market can’t deal with it. I mean, we have not an increase in mine production hardly in the last 11 years.

And I know that they’re expecting an increase this year, but when you look at some of the semi-annual reports, these gold companies are having a tough time increasing production. They’re starting to miss their estimates.

So I think it’s a sign that they’re losing battle. And I don’t know how the managed retreat is going to be. I’m sure you’ll explain that to us.

James: Well eventually, the managed retreat turns into a total shambles and they just run for cover. First man is the one who’s going to be saved.

Eric: It’s sort of interesting, James, when you think back to… You were on board when gold was its low of $250. Just think of a $32 price change in a $250 item. It’s a staggeringly large gain if you just would stay the course. That’s how the investment becomes exponential after a while. $1.20 move in silver to someone who bought it at $5. That’s 24 percent in a day.

As Bill Murphy would say, it’s probably just jacks for openers, right?

James: I’m very bullish on both the metals going forward as you are, but the other side of that coin is it’s really being dollar bearish or fiat currency bearish, because that’s the issue.

Eric: It’s a fight of the curses to see which is the worst or which is going to be the first one to collapse.

James: Let’s talk about that a little bit. Some big picture analysis. Move away from the markets and move away as to the way things are moving and evolving. How do you see the financial system changing? Let’s be honest here. Most banks are insolvent. They’re way too overleveraged. I don’t think there are enough government resources to bail out banks if there’s another Lehman collapse. But any one of a number of potential candidates, including countries, could be the next Lehman.

How do you see this evolving?

Eric: I’ve always believed, and I believe this as a chartered accountant. How can you be levered 20:1? You have five cents of capital supporting a dollar of paper assets. Everybody knows that any paper asset can move two or three per cent in a day. Anything. It can be a government bond. It could be a Spanish bond or an Italian bond, which will move two and three percent negative in a day.

It could be a mortgage security. It could be the stock market. It could be a commodity. Why would you ever let yourself be levered 20:1?

I just think that we grew into this. We created the Fed in 1913. Banks found ways that they get comfortable with the system, found ways of leveraging themselves and keep increasing the leverage all the time, always on the understanding that the situation would remain normal.

Well, the situation isn’t normal anymore. We have had violent upheavals in the credit markets as we went through the lending crisis in ’08. I see now that whenever you think of the bank’s strongest asset, it used to be mortgages and sovereign risk. Well, those might be the weakest assets these days, particularly as I think about a European bank owning sovereign risk.

The banks kept expanding because they wanted to have this great return on capital. The only way to get more return on capital is to use more leverage. We just wrote an article on it today. What do you think people in Italy and Spain are doing with the money in their banks? As what they did in Greece, Iceland, Ireland. It’s all well documented. They took the money out of the banks.

Governments have to come in and fund the banks. It’s happened all over the world. The best example I can give to, for example, Americans or people who think their banking system is secure. Every Friday night in the U.S. we have bank failure night. I look at one statistic. I look at the deposits that each of these banks that failed has and how much the FDIC had to pony up to get someone to buy it.

We already know they lost the first five cents, otherwise they wouldn’t be bankrupt.

James: Assuming only a 20:1 leverage. A lot of these banks were much higher than that.

Eric: They might be a lot higher than that.

And then the FDIC typically has to come in with 25 cents on the dollar of the deposits. I just say, “Oh my God, they lost their capital six times over.” It’s a staggering number and it happens week after week after week. The same kind of reference of numbers, of the losses versus the deposits.

James: It’s interesting you’re talking about the FDIC covering these losses, 25 per cent of the assets missing. You mentioned about looking at it from a chartered accountant point of view. I’m not a chartered accountant, but I’m a trained banker. I learned banking in the 1960s from a big New York bank. I was taught by guys who’d lived and worked through the Great Depression.

Back in the ’60s, if a bank was leveraged at six or seven times – eight at most – that was considered prudent and normal. In 2007, I did an analysis of Citibank. It was leveraged at 40:1 and that didn’t include its off balance sheet special purpose vehicles and that, which maybe doubled it to 80:1.

We have central banks around the world leveraged at 50:1 or higher. It’s a train wreck coming.

Eric: It’s a train wreck coming. There’s no way of stopping it.

The funny thing that’s happened in the last, well since ’08 for sure, is that every step along the way – I think – the purpose of central banks and governments getting in is to prevent liquidation. Nothing’s ever liquidated. The FDIC takes it or the ECB bails out somebody. The Icelandic government goes and takes over the Icelandic banks. The U.K. buys big interest in their banks. The Irish fund their banks.

So there’s never been a liquidation. What are values in liquidation versus a value on a balance sheet at some quarter end? A liquidation value would be considerably smaller. In fact, there would be no market.

James: But you always run the risk of throwing good money after bad. Isn’t that what governments are doing?

Eric: Totally, but they’re caught between a rock and a hard place. They think, “Well, the system’s going to collapse if I don’t do something.” And they’re right. It will collapse if they don’t do something, so they do something.

And then, of course, now the governments are going to collapse, just as the Greek government’s done. The Icelandic government, the Irish government.

James: And maybe Italy or Spain or the U.K.

Eric: Governments will go down because who’s really funding all this thing?

James: Then what happens?

Eric: I have no idea. It’s not even interesting to think about what really happens in the real world if the banking system shuts down. That is not an outcome that you want to contemplate. I don’t think the government’s coming and saying, “Oh, trust us. We’ll take care of the banks.” That’s what is over anyway, because we no longer do trust them. That’s why they’re going to go down.

Are the ATM machines going to work? Is commercial trading going to work when there’s no finance mechanism? I don’t have any idea. I don’t spend too much time on that. All I know is that people, to protect themselves against that happening, have to own some physical precious metals. Because it will be something that will be usable, no matter what the situation is.

James: At some future date, will gold become overvalued in your view?

Eric: People just ask me the question in a different way. They say, “What are the things that would make you sell it?”

I say, “There are three possibilities. One is if I see a mania in the market. Just somehow I see crazy, crazy things happening. OK, fine. This reminds me of NASDAQ 2000. And maybe I’ll get off the train.”

The other one would be if governments became responsible. Governments and central banks became responsible would be the second reason. Luckily, we don’t see that reason at all. The third reason that you might think it’s time to get out is where they would make it the reserve currency. Then you don’t need to own gold and silver because you can trade for it at any time you want. Maybe you could then consider investing in other things knowing that it was backed by gold and silver.

James: Would you care to assign any probabilities to those three possible events?

Eric: I think the probability of a mania is very high. You could feel it coming. You could feel the interest building in gold all around the world. You see it. I see it. You see it in GoldMoney. I see it in Sprott Money. I see it in our ability to raise $300 million overnight in the Sprott Physical Gold Trust. I can see it in the latent demand for the physical silver trust. I can see it in what the central banks are doing. You kind of see it in the misunderstanding of the market by the gold producers. There’s hardly a gold producer around who really believes the price is what is, let alone that it’s going to stay there. There’s this huge scepticism in the industry about the gold price.

I think it will go parabolic here. I’m going to rely on you to tell me when it’s going parabolic, James, because you’re the expert, OK.

James: I don’t know. Getting into a market is one thing. Getting out of a market is something different. But what I always say is that gold will become overvalued. Not when you’re going to sell it, but when you’re going to spend it. In other words, I firmly believe that gold’s going to be circulating again as currency in some form. Maybe digital through GoldMoney or other alternatives.

But given the fact that gold’s been money for 5,000 years, and we’ve been experimenting with a money substitute called fiat currency for 40 years. And given the fact that this experiment with fiat currency seems to be going horribly wrong, it seems inevitable that we’re going to come back to gold in one way or another.

Eric: I would think so. That’s the ultimate thing that’s going to happen. You need something to back the currencies. It’s got to be something physical. So gold’s got to play a big part. Silver’s going to play a big part. Maybe other commodities do. I have no idea, but those would be the two key ones that are usable, fungible in everyday use.

That’s another reason why I think silver could be caught in this. Imagine if we actually had to go to a real currency that we use in our hands. That’s a lot of physical currency we’ve got to create, having created all this paper that might disappear.

I had a very interesting thing. I was talking to a guy who ran a mint. He said, “There are people buying copper coins.” I thought that seemed really odd to me. I said, “Maybe the guy’s really farsighted and he can see it coming back as a currency because you need the lower denominations to have everyday currency exchange.”

James: Interesting. Eric, this video’s going to be seen by thousands of people throughout the world. Are there any last comments that you’d like to leave, in terms of things that you see important?

Eric: Well, I still believe that an investment in silver is a very safe investment today. When we look at the data points, they scream at us that it’s undervalued. When you look at the history of what’s happened in both the silver and gold market, I happen to believe in what GATA believes, that there’s these hands from the outside keeping things restricted and they’re going to lose control.

People have to be in precious metals if they want to protect themselves. There aren’t many other investments that you could consider. Agricultural investments. But those are the key things in my mind that will protect one.

James: And that’s a specialised area, whereas buying gold and silver are quite simple as opposed to the complexities of agricultural investments.

Eric: Yes, it’s by far the easiest. Everyone who’s an investor has money. They have it invested in some paper instrument. They should take part of it and own some gold and silver.

James: Eric Sprott, founder and chairman of Sprott Asset Management. Thank you very, very much for being with us today.

Eric: It’s been my pleasure.