Eric Sprott (artist's rendering)

Eric Sprott (artist’s rendering)

Sprott Asset Managers is a Canadian based wealth management firm with close to $10B under management. They have mutual funds and hedge funds in most sectors of the market, but they’re best known as precious resource managers.

Founder Eric Sprott is a well known gold bull, and has been for years. And for a while there, he was proven right, especially between 2005 and 2011. Money flowed into his gold funds, as investors clamored to join one of the best known gold bulls. Together they’d ride the price of gold to the moon, or Venus, or somewhere very high. And then fiat currency all around us would crumble and they can finally use their bomb shelter filled with Twinkies and toilet paper, dammit. This new world will be sweeeeeeeet.

But alas, it was not to be, as gold fell close to 50% from its 2011 highs. It has recovered slightly in 2014 so far, but is still a long way from those 2011 highs and euphoric times. There are many reasons why gold suffered such a decline. The worldwide economy started to stabilize, and investor fears of hyperinflation due to central bank stimulus started to ease. More supply entered the market as gold miners were looking to cash in on the good times. And so on.

Or, if you believe Eric Sprott, it was all because the big, bad banks were keeping the price of gold down. Those bastards! From some thing he wrote:

We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.

More like “we start out with words that agree with our thesis, and are therefore right.” Come on Eric. You’re a smart guy. There’s no need to fall into the confirmation bias vortex.

Also, this seems a bit crazy, no? Things happened last year that were outside of some traders at Deutsche Bank. Maybe those are the reasons why gold went down. When you’ve got investors speculating in futures, sometimes prices overcorrect.

Sprott goes on to put up a chart on the price of gold, and points out that the price happened to bottom out on June 30th and December 31st, right when investment banks tally up their results and figure out bonuses. OH SNAP WE’VE GOT OURSELVES A NICE CONSPIRACY THEORY. Quick, someone ask Sprott what he thinks really happened on 9/11.

Okay, apparently we’ve determined that THE MAN is keeping scrappy little underdog Eric Sprott down. But good news, gold investors. Things are looking up. What does Sprott think the price of gold will do in 2014?

Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end.

(spits out water)

Wow. That’s, uh, ambitious. Way to swing for the fences, Eric ol’ buddy.

He goes on to look at how such an increase in the price of gold would affect the prices of gold stocks. Barrick Gold (TSX:ABX) would triple, Detour Gold (TSX:DGC) would almost quadruple, and so on. These are some ambitious price targets, but Sprott is right about one thing, and that’s a large increase in the price of gold would translate into huge increases in gold company share prices. Gold companies used to enter into contracts which set the price they’d get per ounce mined but have largely stopped since a few got caught on the wrong end of a price increase a few years ago.

I’m not a long term believer in gold. Like when I talked about Bitcoin, I don’t buy all the conspiracy theories about central banks printing enough money to turn America into 1920s Germany. However, I’m also a believer that you can make money buying distressed stocks in just about any sector, even sectors which I don’t care for, like airlines or precious metals.

Remember, the market isn’t efficient. Stocks that get beat up will often get beat up beyond where their fundamentals indicate. This is your chance, fellow value investor. Gold isn’t nearly there yet. And remember, Eric Sprott is crazy about gold. Which is probably why you shouldn’t listen to anything he has to say about it.

 

Tell everyone, yo!