Its Time To Invest In Physical Gold, Says Eric Sprott

In an article on TheStreet.com, Eric Sprott, founder of Sprott Asset Management, who has been an outspoken gold bull since 2000, addressed several issues related to the stock market and the precious metal.

On being one of the staunchest supporters of gold and the current trend of gold prices

“I don't have a good price target. We get involved in themes that play out for a long time. Interest rates and reported inflation started going down in the 1980s. No one dreamed of buying gold in 2000. You were an idiot talking about it. I was initially attracted to it because I thought there was a physical shortage then. There still is,” said Sprott.

The founder believes that ‘a physical shortage will manifest itself somewhere soon.’ A mere 162,000 tons of gold is present and he says that no one is selling it. According to him, a day will arrive when there will be no gold to buy. “The all-time high of 1980 in today's numbers is something like $2,300, but our world is different today. They didn't print money as irresponsibly then as we do now. They didn't have deficits as a percentage of GDP as large as we have today. And there's 162,000 tons of gold in the world. That's it.”

On coming out with Sprott Physical Gold Trust (NYSE: PHYS), which is a NYSE-listed ETF for holding physical gold and on the importance of holding physical gold over a more famous gold ETF like the SPDR Gold (NYSE: GLD).

Sprott says that he has always believed in physical gold and all the gold owned by him is physical. He is not going to buy a piece of paper or have a ‘financial counter-party’ between him and the gold.

“Back in September 2008, the whole financial system was about to collapse. Then, five weekends ago, Europe was about to collapse. We know the vulnerability of the financial system because of its over-leveraged nature. Therefore, whenever you take on a financial counter-party, you're assuming the risk that that counter-party will be around. All these counter-parties are levered operators. That's just who they are. If suddenly everyone has to write down European bonds, they would be hit.”

So, PHYS is better in two regards, one it is physical gold held in Canada, the Royal Canadian Mint is the counter-party that will not go anywhere as it is a Crown Corporation of the Canadian government. Second, being a common equity, the tax rate on PHYS is 18%, as compared to 28% on physical gold and GLD.

On being asked, “If things are going to get to the point where we need to walk around with gold bars, are you planning on living in a guarded compound with months of food and fuel supplies. Will there be riots, fires, and looting? The financial system will grind to a halt?”

Sprott said that he is expecting a crisis to happen. According to him two crises have already occurred, just that they didn't quite manifest themselves. It happened twice that the financial system was on the verge of collapsing. And now it has gone to a whole new level, the level of sovereign risk. “If people turn their backs on sovereign bonds, where are we going? You won't be able to fund your deficits. Rates will sky-rocket,” he said.

“I find the Greek example so instructive. They have massive deficits, their rates go higher, so their deficits go even higher, and their rates must go higher still. And now you're in the vicious circle. You cannot get out, unless someone from outside comes in -- or you default. So, yeah, do I see a day when it all grinds to a halt? That's not difficult to imagine.”

On a financial nuclear winter.

“Yeah. We're already in it.”

On how long he thinks it will last and the things on the other side.

“In my view, we're going into 20 years of hard times. It should have started in 2000 but it keeps getting pushed off. The price you pay is that the inevitable reckoning just keeps getting worse. Think of the obligations of the U.S. government in 2010 vs. 2000. It's probably gone up three or four times. I don't think the system will totally stop but I believe the underlying value of "things" and "paper" will differentiate themselves. Things will retain their value. Paper will not.”

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