'We've gone over a cliff,' says Sprott CEO
Joanne Paulson
The StarPhoenix
Tuesday, November 04, 2008
Eric Sprott might as well have thrown a pail of cold water over the room.
Spirits were high after a humour-laced speech by Lawrence Joseph, chief of the Federation of Saskatchewan Indian Nations, at the Canadian Aboriginal Minerals Association (CAMA) conference Monday.
But Sprott's view of the global financial situation brought attendees back to Earth with a thud.
"We've gone over a cliff," said Sprott.
The chair and CEO of Sprott Asset Management, who called the global financial system "a farce" in October 2007 -- a year before the meltdown -- does not think it's over for the crashing markets and commodities.
"It's been a very difficult time for everybody. It may . . . get a lot worse."
Sprott seems to have had second sight in his predictions. In January, he welcomed people to the meltdown of 2008; and last November, he described U.S. lending institutions such as Freddie Mac and Fannie Mae as "dead men walking."
Today, he says, "we do not have a financial system." This is because banks continued to expand their balance sheets based on very little capital and had perhaps five per cent equity on the books. After the crash, he believes bank equity is zero.
Every time Sprott hears a finance minister, anywhere in the world, say the banks are sound, he thinks, "you're a liar. Your banks are not sound."
No wonder no one is lending any money. And that's bad news for resource companies trying to explore or expand -- or even continue producing, he said.
"There is no lending. So, for example, all the expenditures in the oilpatch will be cash flow from production, less bank payments."
Only three things have held their value, said Sprott: Cash, treasury bills and gold. When he got to Saskatchewan, he realized potash is also holding on; but no banks own potash, he said.
Surviving this market won't be easy, he warned. "Think carefully about where you have your money," he advised the First Nations representatives in the room -- and everyone in general.
Gold is one of the few places to hide some resources, he said -- and when Sprott means gold, he means real gold, such as coins and bars of it. So many people are hoarding bullion that sales of wall safes have skyrocketed.
"We have had such a massive printing of money, it would augur well for gold to hold its value," said Sprott.
He also hopes after today's U.S. election, "oil will go back to where it should be."
Sprott believes oil prices are low and the fundamentals of the market support a higher price. Production is dropping at a number of big oil plays, while the less-developed world will increase its demand.
"We need to replace a Kuwait or Nigeria with these declines," said Sprott.
Because of the declines and the inherent demand, Sprott believes the "natural price" of oil is "north of $100," or $100 US per barrel.
© The StarPhoenix (Saskatoon) 2008
