Time to move into gold, says Sprott

By Vikram Barhat | February 19, 2013 | Last updated on February 19, 2013
4 min read

People are focusing on equities, so precious metals aren’t getting much attention.

The latest data from the World Gold Council shows the demand for gold has hit its lowest mark in three years. The council’s managing director, Marcus Grubb, has gone on record saying he doesn’t expect to see a spurt in demand this year.

But gold bugs? They’re a different breed.

Not only are they quick to dismiss the talk of global economic recovery and improving macro-indicators, which serve to undermine gold’s value, they also insist there’s never been a better time to invest in the most precious of metals.

Eric Sprott, CEO of Sprott Asset Management LP, told a roundtable this month, “There is no recovery. We’re just going into a more miserable situation by the day.”

He adds, “We’ve had negative GDP; we have a 2% tax increase and 2% reduction in your paycheque [this year], causing your discretionary spending to go down by double that rate.”

As well, current gasoline prices have hit a high compared to the same period in previous years. “I don’t know how anybody could be optimistic about where we’re going.”

John Embry, Sprott’s chief investment strategist, says the alarming pace of financial decay appalls him.

“We’re in an unprecedented situation today where the sovereign governments of the world are in an absolutely unsustainable debt position,” he says. “This is leading to unprecedented money printing and essentially negative interest rates.”

These measures are punishing savers.

“You have to get more and more debt into the system for these economies to grow,” says Embry. “We are so far deep into this cycles we’re beyond repair now.”

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Sprott took a swipe at the mainstream media for playing up the U.S. economic recovery, suggesting the recent equities bull run is a smoke screen created to hide governmental failing.

“Certain financial markets are doing relatively well, stocks and bonds are doing better than they should be,” said Sprott. “This is to create the image that things are better than they are. The real economy is continuing to suffer and this will eventually reflect itself in markets.”

The duo says not even the currency market is a safe haven.

“Comparing the currencies is like [picking] the prettiest horse in the glue factory,” says Sprott. “The history of all fiat currencies [shows] they all end up being valueless.”

Every time there’s currency devaluation, “In such instances, the safety valve is gold,” he says. “It’s paying [off] as it should in Venezuela and Japan and who knows which currency is going to get weak [next].”

The reference is to the aggressive acquisition of gold by central banks globally.

Read: Why to invest in gold

Embry reminds that, in the last two years, the Chinese central bank went from selling 500 tonnes of gold per year to buying that same quantity each year. Russia, too, is one of the largest accumulators of central bank gold reserve.

“They are accumulating gold as fast as they can,” says Embry. “[China] built the world’s largest gold producing network [in addition to] importing enormous quantities of gold.”

China bought 25% of the world’s mine production in 2012.

The only fly in the ointment, Embry adds, is that Western central banks are continuing to lease considerable amounts of gold, which is keeping prices in check. However, that’s going to change.

“The central bank supply of gold is coming to a reasonably short end,” says Embry. “When you put that into the context of demand that’s going to be generated, [it becomes] a fabulous demand-supply situation.”

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Finally, it’s not just the dull economic scenario, but also gold’s own merit that makes the alternatives pale in comparison.

“Gold’s nobody else’s liability and it has no counterparty risk; that is the best advertisement for gold,” Embry says. “It’s provided protection against destruction of wealth for centuries and we’re at the cusp of another major chapter in its illustrious history.”

He goes so far as to say now might be the best buying opportunity in the whole bull market.

“[Gold’s] price has been really held back, the fundamentals have gotten better by the day,” he says. “Yet, if you look at the price, it’s been down — totally out of whack with what’s going on in the fundamentals.”

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Vikram Barhat