Eric Sprott, chief executive officer of Sprott Asset Management, recently sat down with CNBC at the SALT conference in Las Vegas to discuss gold and silver. When asked about gold's recent price struggles, Sprott pointed to the fundamentals remaining intact. He explained, "We have some wonderful statistics on physical gold purchases that argue very strongly for the price of gold to go up." He added, "There was a data point that came out yesterday where the exports of gold from Hong Kong into mainland China went up 600% year-over-year in the month of March." Sprott's investment firm has $9 billion in assets under management and has returned 17.1% on an annualized basis since 2002 by identifying the gold bull market early.
The data Sprott refers to comes from the Census and Statistics Department of the Hong Kong government. It showed that gold shipments from Hong Kong to mainland China surged to 135,529 kilograms (135.5 tonnes) in Q1/12, compared to only 19,729 kilograms (19.7 tonnes) in the same period last year. Shipments in March alone increased 59% from February. "We're looking at another solid year for Chinese demand based on these early numbers," said Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group, according to Bloomberg. "While it's largely related to price, negative real interest rates should keep demand strong." The strong start to the year also places China in a likely position to overtake India as the world's largest gold purchaser. The World Gold Council's most recent annual report showed that Chinese demand for gold jewelry and investment was almost 770 tonnes in 2011, not too far behind India’s 933 tonnes.
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With the global financial system over leveraged and struggling to maintain the status quo, it is not surprising that countries like China are buying massive amounts of gold to protect themselves from fiat currency turmoil. Earlier this week, Gao Xiqing, president of China Investment Corp., said the nation's sovereign wealth fund has stopped buying European government debt because of the financial conditions in the region. Xiqing explained, "What is happening in Europe right now is of course of concern. We still have our people looking at opportunities in Europe, even though we don't want to buy any government bonds. Two or three years ago we started moving gradually from Europe and North America to Asia and Latin America," according to Bloomberg.
Sprott also addressed the critical comments that came from Bill Gates, Warren Buffett and Charlie Munger this week regarding gold. He said, "Gold was the investment of the last decade. It blew away any investment you could make, including Microsoft and Berkshire Hathaway, probably by a factor of 500%. In other words, they missed the trade big time. I don't know that I should respect their opinion at this point in time."
Although gold and silver have been in a "funk" lately, as Sprott points out, the year is not over and the reasons for holding precious metals have not changed. He also predicts that silver will be the investment of the next decade. By the end of the year, he expects gold and silver to trade over $2,000 and $50/oz, respectively. Those are some lofty price targets and both metals will need to find support before climbing higher.
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Eric McWhinnie
Wall St. Cheat Sheet
