By Marc Davis
Silver promises to become the next big buzzword among investors in 2011 and beyond, according to one of the investment industry’s most prescient and successful experts on precious metals.
Eric Sprott is the founder of the Toronto-based investment firm, Sprott Asset Management LP. His renowned hedge fund, Sprott Hedge Fund LP, is heavily weighted in precious metals and has generated an estimated 23% annualized return over the past decade. Other similarly oriented funds under his stewardship have also been stellar performers in recent years.
He’s now so bullish on silver that he launched the $575 million Sprott Physical Silver Trust in November of last year as he believes that: “Silver will be the investment of the decade.”
“I think that silver could easily get to $50 this year,” Sprott tells BNWnews.ca.
This all bodes especially well for publicly traded companies that are already mining silver, he says. Likewise for ones that are developing primary silver deposits or gold deposits with plenty of silver as a byproduct. “If the price of silver continues to go up, silver stocks are going to perform even better,” Sprott adds.
One company that’s on the front lines of the drive to ramp-up the world’s silver supply is Vancouver-based Extorre Gold Mines (EXGMF.PK). This high flier benefits from a resource base of 27 million ounces of silver and 550,000 ounces of gold at its development-stage Cerro Morro property in southern Argentina.
Extorre Chairman Yale Simpson says that the investment appeal of his company’s gold assets are beginning to take a back seat to the value of its silver inventory.
“We’re continuing to find bonanza grade (very high grade) silver sites, including the Escondida Vein, which averages over 23 ounces per ton of silver. So if silver prices rise further, as so many industry observers forecast, the economics are in favor of this becoming a very low cost mine are enhanced very dramatically,” he says.
“This means that companies like ours no longer have to think of silver as a mere by-product to our gold mining. Instead, the silver component becomes the dominant economic driver and we could well begin quoting silver equivalent valuations, instead of the converse.”
Meanwhile, Sprott says the big catalyst for surging silver prices in the coming years will be exponentially increasing investment demand, which is already beginning to overwhelm existing silver supplies. The mining industry only produces around 800 tonnes of silver per annum. This is a relatively inelastic supply, regardless of silver prices, he adds.
As household investors are becoming increasingly jittery about the debasement of the U.S. dollar and other major currencies, they are loading up in record numbers on silver bars, coins and silver-denominated exchange traded funds, Sprott says.
However, there’s also a quantum shift in investment demand taking place among big players in the precious metals market, including India (which is aiming to increase its imports by about 77 million ounces per annum), and of course China.
China’s net imports of silver were 112 million ounces last year. In 2005, they were net exporters of 100 million ounces.
That’s a 200 million ounce shift in an 800 million ounce annual market that seldom ever grows because production hardly ever goes up. So where’s it all going to come from? We don’t know.
In fact, silver promises to outshine gold over the coming years, according to Sprott.
Silver is the poor man’s gold. Gold has had a great run for the past 11 years. But I absolutely believe that silver will outperform gold this year. Currently, there’s more investment dollars going into silver than into gold.
Such a game-changing scenario should recalibrate the gold to silver pricing ratio in silver’s favor, thereby eventually restoring it to its traditional level of about 16 to 1, he says. “It’s the easiest call of all time.”
Silver as a currency always traded in a ratio of around 16 to 1 compared to gold, when it was a currency in the U.S. and the U.K. The current ratio is 48 to 1. If we go back to a 16 to 1 ratio, the implied price for silver would be $85.62 (per ounce).
On that basis, if gold goes to $1,600, then that would value silver at $100. And we certainly think that gold is going to $1,600. In fact, I’m willing to bet that this ratio will overshoot on the downside. It might even get to 10 to one.
The only reason why silver is still trading at a 48 to 1 ratio to bullion’s spot price is that its price is being “manipulated” by big banks, Sprott says. That’s because they don’t want precious metals to become a popular alternative currency to Fiat money (currencies that are not backed by hard assets).
“Then there’s also a huge short position out there on silver,” he adds.
But time is on silver’s side, he says, as the sovereignty debt crisis deepens in Europe and a continued policy of quantitative easing in the U.S. continues to undermine the value of the greenback.
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