Gold Shines Brightly
By Staff News & Analysis - April 29, 2010

Sprott Asset Management CEO Eric Sprott is very long on gold and not very optimistic about cyclical metals like copper. "Gold looks better today than it ever did before," Sprott says, because of ongoing sovereign debt concerns in Greece and other "PIIGS" nations – Portugal, Italy, Ireland, Greece and Spain – as well as easy monetary policies across the globe. "Some of the smartest investors in the world" are bullish on gold, the Canadian hedge fund manager says. Tuesday, Gold for June delivery jumped $8.20 to settle at $1,162.20 an ounce on the Comex division of the New York Mercantile Exchange. Meanwhile, "I still have a deep, deep concern over leverage in the banking system," Sprott said, noting the inability of governments who are spending vast amounts of money to generate much growth in GDP. "There's been some excellent work done on how the marginal value of a government dollar spent is now negative," Sprott told CNBC. "We're not getting much bang for our buck, but we still own the buck at the end of the year." Sprott says his hedge fund's newly launched physical gold trust ETF (which trades under the ticker symbol PHYS) is superior to other gold funds because investors can redeem their shares for physical gold. Also, the counterparty for the PHYS is the Royal Canadian mint, rather than a "levered financial institution" and capital gains are taxed at 15 percent because it is considered a collectible. – MoneyNews

Dominant Social Theme: Gold is good.

Free-Market Analysis: We agree with Eric Sprott about gold, or at least as his comments are reported in the above excerpted article. And of course we take into account that his optimism is colored by his launch of a gold hedge fund with a perceived superiority because investors can redeem their shares for physical gold. We would only point out that one might think of buying physical gold to begin with and taking delivery – thus short-circuiting the necessity of buying an ETF at all.

But let us focus on his comments rather than the product. In fact, the value of this article, and Sprott's metals opinion from our perspective, is that it reinforces yet again a point of view that is becoming clearer as the 2000s evolve. The perspective, certainly one taken by hard-money free-market thinking types, is that Western countries, in extremis when it comes to the economy, don't seem all that concerned institutionally with cutting public expenditures. Yes, certainly we've heard a lot of talk from Europe about it, and Britain and America, too. But it doesn't seem to be happening.

We have our doubts, in fact, that Europe is going to be able to impose any sort of stringent cost-cutting on Greece, Spain, Italy, etc. The people in these countries have figured out how to live and prosper within a fiat-money environment by spreading the pain. The public sector, and portions of the private sector as well, are advantaged by public largesse. When the profligacy gets too great, a devaluation occurs, which spreads the pain to all, especially large creditors, and the dance continues. But without the ability (in the EU, anyway) to devalue, the PIG countries may face considerable unrest.

We tend to question the shape the West is in generally, however. The lynchpin consumer, America, is not buying anymore, or not the way it was. Europe's pre-eminent exporter, Germany, exports to the PIGs among others, but as the PIGs go through their crises, one wonders where Germany will find the markets to keep up the pace. The same question could be asked of China and Japan. China's leaders have indicated that China will look inward for increased consumerism. We wonder where Japan will look.

We keep bumping up against the same issue over and over. Where is the growth going to come from? Western analysts of the fiat-money variety tend to see the "sovereign crisis" as part two of the ongoing financial crisis, but we see it as a continuum, not in parts. As we have written before, the current fiat money system virtually collapsed two years ago of its own weight. The economic malformation of Western economies was so great that the system could not take it anymore. Instead of allowing economies to shed the mal-investments, central bankers have simply printed more money and papered over the problem. This may well have terrible results in the future.

What's coming on down the line? We think that, unlike the 1970s, leaders of Western economies may not have the will or the political capital to launch severe cost-cutting campaigns. This means that the monetary inflation in the system would inevitably turn into price inflation sooner or later, and even price hyper-inflation. If this takes place, gold will indeed be a bright sector to turn to, as Sprott forsees.

Where we may differ from Sprott is on how to handle the purchase of gold. If price inflation becomes severe and the price of gold continues to rocket upwards, we can see that various nation-states will eye ways that they can control both the price of gold and the physical metal itself. Is outright confiscation a possibility? Even months ago, we would have predicted confiscation was not a likely measure. But in the past year, Western economies and their leaders have shown an astonishing level of mendacity and desperation. We wouldn't put anything past the Western bureaucracy at this moment in time.

After Thoughts

Sometime within the next few years, inflation will become a problem, maybe a big problem. At that point, gold will likely make even more progress than it has now in terms of the upward push of its price. We certainly don't know if ETFs, which are basically paper gold, are the best place to be in such circumstances. In fact, short of buying gold and burying it on your own property, or buying gold in a place such as Switzerland – which has a reputation for fair-dealing and has never confiscated a single ounce of gold so far as we know – we are not sure what will prove most effective in the near future. Physical delivery certainly seems attractive in such situations, but perhaps it is the flexibility to take physical delivery that is more important, as long as the gold is located within a stable and proven safe haven, like Switzerland. We agree with Sprott on the future of gold. We are a bit more dubious about the prospects of ETFs, generally speaking anyway and would seek Swiss based solutions with a convertibility feature. Perhaps we can suggest such a solution in due course.

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