Sprott Asset Management CEO Eric Sprott on Gold and the Correction in Silver

Benzinga recently caught up with Eric Sprott, CEO of Sprott Asset Management. Sprott is a long-time proponent of owning both gold and silver. He spoke with us about his outlook for the metals and his thoughts on the gold-to-silver price ratio. We also discussed how he's handling the current correction in silver as well as his views on quantitative easing and the state of the U.S. housing market. Here's what he had to say.

On the night of Sunday, May 1 silver sell-off:

- "I think there were a number of shorts with very, very large positions that were finding the increase in the price of silver unbelievable, and obviously incredibly punishing."

- "It makes you wonder whether this was a bit of a set-up to cool the interest in silver."

- "One of my ongoing assumptions when I first got involved in precious metals in 2000 is that certainly central banks want to keep the price of metals down, and it's just an inbred thing that they do because they don't want there to appear to be either a financial crisis or inflation -- or anything like that -- and any time that those situations seem apparent, there's even more pressure brought on precious metals. I think this is exactly one of those."

On the sheer structure of the silver market:

- "On a daily basis, the trade amounts to over a billion ounces of silver [in worldwide markets]. We produce 2.5 million ounces a day, but we trade a billion."

- "It begs the question from the sell-side: who would commit to sell a billion ounces a day in a market that produces 2.5 million a day?"

- "The mine has a contract to sell [part of that production] to industrial producers, so we probably have a million a day available for investment, and yet we get trade of over a billion ounces a day."

On the relationship between central banks and the precious metals markets:

- "The need to make it look like there is no inflation is a huge thing."

- "When they [at the Fed] sit down at the end of each day, probably the first thing they're asking is, 'What's the price of oil? What's the price of gold? What's the price of silver? What's the price of food products?' Because if it gets out of hand, the word is out to everyone that we have an inflation problem, which works very much against central bank policy."

On the gold-to-silver ratio:

- "I think it goes to 16/1. It might very well overshoot that."

- "I look at the dollar value of the trading in the SLV versus the GLD and they're about the same dollars. How can the price be 42/1 when the money is going in at the same rate?"

- "In the U.S. mint, the amount of dollars of silver coins sold this year is the same -- if not more than -- the dollars of gold coins sold this year. You can't keep having that happen all the time and have the price be at a ratio of 42/1. It doesn't work because there's not that much available."

On the current correction:

- "When you have markets where you think there might be some outside influence affecting it, I don't know that the technicals really are quite as strong as in a free market."

- "Much as that control happens in [the bond market], i'm guessing it's not that far of an extension to think that might happen in these markets, and therefore the technicals aren't always as critical as the fundamentals are."

- "I've seen a lot of corrections [in precious metals], and they all hurt. But the beauty of [gold and silver] is that the physical demand will overwhelm the physical supply, and the prices will go higher. I see it for sure in silver."

- "The real market that will ultimately affect the pricing is the physical market because there is going to be a shortage due to all of the interest that has been evolving here."

On price targets for gold and silver:

- "Two years from now, would I be surprised to see gold trading at $2000, which means silver could go to a hundred and a quarter? That seems like a very reasonable prospect in my mind."

- "It should carry through the fifty dollar price when we get there the next time, which will look spectacular on the chart, by the way."

- "What it will take to break through [the massive short positions] is when the physical market just doesn't react to the paper markets, because somebody needs to buy it. If Kodak comes in to buy silver and it's not there, they're going to have to pay up for it… the price will go higher, and that will start determining the paper price. Ultimately, it will be the physical market that determines the price, not the paper market."

On institutional activity in precious metals:

- "Now you see a more broadly-based, fundamentally-inclined institution taking a piece, so it's not going to be that much more difficult to suggest that, you know what, you could own some precious metals in your fund."

On the idea of a gold and silver bubble:

- "It's not a bubble."

- "Something like 0.8% of all investments are in precious metals today versus something like 0.2% in 2000. Because the price quadrupled between 2000 and today, that's what gets you to 0.8%. Not much new money has gone in. Yes, the portfolios have appreciated, but not that much new money has gone into the gold market."

On the major risks to a long-silver, long-gold position:

- "The major risk is maybe that the powers that be keep pressing on it. Maybe we take the margins to 100%. That could happen."

- "Number #2 is when governments and central banks start acting responsible. We've seen none of that."

On the end of QE2:

- "Something has to give here. It's hard to imagine that for the month of June, there's no buyers, and all of the sudden on July 1, everyone is going to be a buyer."

- "Rates are either going to go up or you're going to get QE3, one or the other. Both of which are phenomenal for gold."

On the U.S. housing market:

- "It's a disaster for the banks and it's a disaster for the homeowners."

- "I don't think it's going to get any better. There's just too much inventory for sale, too many people under water, too many people with higher expenses and not much more income. It's just a bad formula, so I'm not optimistic for the housing market."

- If rates rise after June 30, owning government bonds is not going to be a very pleasant place to be in the next 6 months, and those are big assets that banks have. The only reason I'm concerned is because they're levered 20-to-1."

- "The asset that the bank has is losing sustaining power for the repayment of the loans. It's not looking good."

Be sure to check out the audio of the interview in its entirety: Sprott Asset Management CEO Eric Sprott on gold and the correction in silver

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