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Tekoa Da Silva

Why Rick Rule and Eric Sprott Own Gold and Silver -- Through Sprott’s Physical Metals Trusts

RR And ES For Trusts

>>Precious Metals Update – Rick Rule & Eric Sprott (MP3)

Believe in owning gold and silver now?

Don’t own just any investment in physical bullion, say Eric Sprott and Rick Rule, who prefer the Sprott Physical Bullion Trusts. Shares in these trusts are backed by physical precious metals.

As Rick Rule puts it, “the Sprott products were designed by consumers -- in particular Eric Sprott himself -- and they came with some fairly user-friendly features like the efficient US tax treatment, physical redemption which limits the discount to NAV associated with them, and of course the liquidity that the Sprott products enjoy.”

Rick reminds that a deal is on the table if you own CentralGold Trust (GTU) or Silver Bullion Trust (SBT). You can exchange your shares based on the value of the bullion backing your shares. That means you can “lock in” a gain, as GTU and SBT tend to trade at a discount – even though both trusts are theoretically backed by bullion.

As Eric Sprott, founder of Sprott Inc., explains, he was involved with CentralGold Trust early on, but believes the Sprott trusts offer a better alternative. “I was the founding director of the Central Gold Trust,” he says, “and we parted company along the way because we thought we could create a better product.”

The tender offer expires September 18th – that’s next Wednesday.

Read on for Tekoa’s full discussion with Eric Sprott and Rick Rule. When you’re ready, you can tender your shares of CentralGold Trust and Silver Bullion Trust in exchange for shares of the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV).

Click here for complete information on the Sprott offer. To participate, simply contact Kingsdale Shareholder Services by phone at 1-888-518-6805 (or 1-416-867-2272 outside North America) or by e-mail at contactus@kingsdaleshareholder.com.

Rick and Eric also discuss their reasons for owning precious metals, including strong demand for physical gold and silver worldwide.

Rick believes that gold is under-represented in investors’ portfolios compared to historical norms.

If investors simply revert to their average percentage holdings of gold in their portfolios, “that will be very good for the gold price,” says Rick.

Tekoa Da Silva: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m joined here today by Rick Rule, Chairman of Sprott US Holdings, and Eric Sprott, Chairman of Sprott Inc. for an updated discussion on the precious metals markets.

To start with, we’ve seen continual weakness in gold and silver prices in US dollar terms since 2011 and in 2015, a number of events have occurred which many expected to cause the price of the metals to move up in US dollar terms—but they haven’t.

So the first question I have for you gentlemen is—What do you think is going to be the catalyst to cause these metals to resume their bull market in US dollar terms or in all global currencies?

Eric Sprott: Well, Tekoa, it has been very frustrating over the last four years with all the world and financial events we’ve witnessed. I have tended to suggest that gold should be a safe haven. I saw a great podcast by a fellow named JS Kim who noted that we’ve had these 6-7 standard deviation moves in lots of things like the US stock market, currencies, gold, and these things happen once every 333 million lifetimes, and yet we’ve experienced all these. He further noted that the central banks want things to happen the way they want them to happen so that people believe they have control of things. Certainly Rick, John Embry and myself have always believed that there is a mandate to keep precious metal prices low.

There have been many statements from central bankers before -- Paul Volcker for one, who noted in 1980 that they lost control of the gold price. So I totally put it down to interference from central planners and, of course, the solution in my mind is that the physical demand (which I already believe is outstripping the normal supply) has to also get rid of that excess supply that central banks provide to the market in a very non-transparent manner.

We see lots of statistics that say that can happen -- finding out, for instance, that the Chinese are admitting to buying about 19 tons of gold last month. The Russians are buying. Coin sales I think were up 459 percent in the US in August versus August of last year.

Just look at the currency turmoil going on in the world. Would Canadians be better off owning gold with their dollar going down by 15%? Or Brazilians, with their currency down something like 40%? Or Venezuelans or Greeks who can’t even get their money out of the bank?

So there are so many people that would be better off owning gold. It stuns me the price hasn’t been allowed to go up. It also doesn’t surprise me in the sense that central planners don’t want it to go up because they want us to believe in the recovery which of course I’ve never been a believer in anyway.

Rick Rule: I think Eric makes some good points. The first is that with the exception of the US dollar, gold has been in a bull market for 15 or 16 months and hasn’t done poorly in US dollar terms either, particularly compared with S&P 500 in the last four or five weeks.

The second thing to take into account is whether or not the current confidence in the system is justified. In other words, do the underlying economic conditions reflect the conditions of global equity and debt markets? I would suggest no. I would suggest that the strength in the bond market and the equities markets isn’t a reflection of the economic strength but rather a reflection of low competing interest rates on deposit products.

But probably the most important point for this audience to consider is whether or not gold has done what it is supposed to do in people’s portfolios over time. People have been taught in the last two or three decades to expect immediate gratification. But one of the examples that I like to point out with regards to gold is the ‘gold-to-Motel 6’ index.

When I was your age, Tekoa, a room at Motel 6 cost $6. That’s why they called it Motel 6. An ounce of gold would buy you five or six room nights at Motel 6. Today, with the gold price having fallen 30%-40% in the last four or five years, gold will buy you 15 room nights at Motel 6, which is to suggest that over decades, gold (which is simultaneously a medium of exchange but also a store of value) has done precisely what it has been expected to do.

In my own portfolio, gold is my investment and security while gold stocks are my speculative or alpha hedge. For me, perversely, I like this period of low gold prices because although I’m now in my 60s, I’m still trying to gain wealth, and you gain wealth by buying low and selling high. Having the opportunity to buy an asset that I personally value at prices that are lower than I thought I would have the opportunity to avail myself of, is a very good situation.

Tekoa Da Silva: Rick, I spoke with a major physical bullion dealer in the US yesterday and he indicated to me that he’s seeing record-breaking volumes of metal being purchased from his business, with various mints running out of certain retail products and coin premiums surging.

What do you make of the paper to physical disconnect? And when you hear this kind of commentary, does it relate to the truism I’ve heard you note that, ‘the cure for low prices is low prices?’

Rick Rule: Well, I think Eric alluded to that. I think we’ve been in a market for the last 10 years where the paper market has driven the physical market. But I suspect that in periods of turmoil it will change. I don’t know what Eric’s experience has been as a physical dealer but I’ve noted in my own context with the investment community exactly what you’ve noticed, which is that physical demand has responded to lower prices and demand for physical products is extremely strong. With regards to the futures product, I think it’s worthy to note that the futures are an institutional and a leverage-driven product, and the drivers in that institutional market are more momentum and quarterly cash bonus-driven. So I think you’re seeing a shift in leadership from the sort of hot money orientation in the futures market to the more traditional orientation.

I would also point out, as Eric does, that all markets are manipulated. Witness LIBOR; a market many times larger than the gold market. And of course the futures market because of the inherent leverage and because the opacity of that market is much easier to manipulate than the physicals market.

Tekoa Da Silva: Eric, when I look at the Sprott Physical Gold Trust and the Sprott Physical Silver Trust, I see there’s about 1.1 million ounces of gold there (roughly) and about 49 million ounces of silver (roughly). The net asset value of those two products is about $2 billion at today’s prices. What was the story behind putting those trusts together and what was your experience like finding and obtaining all that metal?

Eric Sprott: Well, of course, I had been quite a believer in gold and silver for some time. I was looking for a vehicle where investors could feel confident that they could have access to the gold. So for example, in the GLD and even the “Central Funds”—Central Gold Trust and Silver Trust -- you can’t get access to the gold. So we thought we would create a product where you could get access to the gold. That was the first thing.

The second thing was to have the gold held at a non-financial counterparty -- in other words, not at a bank. So the gold is held by the Royal Canadian Mint. They are our counterparty, and they are not a levered financial institution. In happenstance, we were able to identify a vehicle which allowed American citizens to not experience the same tax rates they were experiencing with other products where gold was considered a collectible and taxed at twice the capital gains rate, according to my understanding.

So in that sense, it fulfills that goal and of course the main goal is to get people to convert money into precious metals because how else do you protect yourself? I would think that it shouldn’t take much of a leap of faith to understand what the value of gold is; and you can see that a lot of people had bought into that in the sense that the comments you made about the dealers and their record volumes of gold and silver selling. And for example, huge amounts of silver -- way beyond what the world can ship there on a consistent basis -- are now going into India. I think they might buy as many as 9,000 or 10,000 tons this year. We only produce 28,000. They only used to consume something under 3,000 tons. So, they now consume an extra 25% of the market versus three or four years ago and the price of silver is down. It almost impossible to imagine that could happen.

So, very strange things happen in the markets. Rick has alluded to it. I have alluded to the whole need to keep gold and silver at bay to keep people calm who don’t know what’s going on. But I think the time to be calm is ending here as we see the carnage going on in the various currency and stock markets around the world.

Tekoa Da Silva: Rick, the Sprott team in Toronto recently launched an exchange offer for two competing bullion products that trade on the market -- the Central Gold Trust and the Silver Bullion Trust. The ticker symbols are GTU and SBT. Where do those transactions stand for any of our listeners that might be unit holders there?

Rick Rule: Well, we’re pleased with how the transactions are proceeding and, of course, we look forward to providing GTU and SBT unit holders with the opportunity to own the superior Sprott products that more accurately track the asset values that people buy these products for.

Remember, as Eric described, that the Sprott products were designed by consumers -- in particular Eric Sprott himself -- and they came with some fairly user-friendly features like the efficient US tax treatment, physical redemption which limits the discount to NAV associated with them, and of course the liquidity that the Sprott products enjoy.

The largest institutional unit holders of the GTU and the SBT believe that investors deserve the opportunity to hold professionally-managed and investor-friendly products like the Sprott products, which have better liquidity.

In addition, of course, the exchange offers are being made on a NAV to NAV basis which would provide GTU and SBT investors with a significant premium to the prices that the units are currently trading at.

It’s worth noting that GTU and the SBT have persistently traded at enormous discounts to NAV while Sprott products have traded at, near, or above NAV during the same period of time. And the management teams associated with the GTU and the SBT have had a decade to correct the failings with regards to those products. I think it’s indicative of the fact that the largest institutional shareholders associated with their products have already agreed to support our offer.

Tekoa Da Silva: And if I can ask the question to both of you -- Eric, starting with you -- when it comes to your own portfolio management. When you’re thinking about how much physical bullion to allocate to gold or silver, what do you look towards, understanding that your suitability is different than those of most people?

Eric Sprott: Well, Tekoa, for a long time, I’ve been deeply, deeply involved in precious metals whether owning the physical or owning the shares. I’m probably deeper in involvement today than I’ve ever been, as Rick pointed out. With the share prices acting the way they have, the values have become quite incredible. Particularly if one could imagine that the price is massively discounted from its true value in a free market.

So myself, I’m probably 80% into precious metals. I’m not recommending that to all people but I feel very confident that given the development of events as we see them unfolding here, people will lose confidence in the ability of central banks to theoretically control things. There’s no doubt that every day they’re in there supporting markets and we’ve seen what has happened in China where they just come right out to say they support the market and they’re buying stuff. The same thing was done in Japan -- the government was buying stock. What has happened to the stocks? They crashed.

So people should not continue to believe that there’s this huge power that the central planners have over asset prices. I don’t think they do and we start seeing more and more cracks in it all the time, whether it’s the Brazilian market, the Japanese market, the Chinese market -- you name it. There are cracks in the dam all over the place. So I just think the thesis will prove out that even though we had to wait a duly long time for this to manifest itself, our day is quickly approaching.

Tekoa Da Silva: Rick, what are your thoughts there?

Rick Rule: Well, I would agree with most of that. I think that gold has a place in every portfolio. I would note (but I cannot recall the source) that at the top of gold’s popularity, physical precious metals and precious metals-related equities accounted for about 8% of investable assets in the United States and the same figure today is about .30%, against a median and a mean over the last three decades of about 1.5% or 2%.

I’m not suggesting, Tekoa, that people think that gold or precious metals will replace the US dollar, as an example, as a store of value. But I am suggesting that gold (and precious metals investments) will lose the war less badly, going from its current .30% up to its historical median and mean, and I think that that will be very good for the gold price.

Tekoa Da Silva: Rick, Eric, -- in winding down --are there any items you think we may have missed?

Rick Rule: Well, I think one of the things that we should note is that for those people who are listening to the call who are GTU and SBT shareholders, the tender deadline is September 18th, which is coming along rather rapidly and people who would prefer to enjoy a premium to the trading price that they’re penalized with now and own a superior product would consider tendering their units by the 15th in order to participate in those offers.

Eric Sprott: And, Tekoa, maybe I would just follow up by saying I think we designed a better product from day one. I was the founding director of the Central Gold Trust and we parted company along the way because we thought we could create a better product. And I think the performance of our units has proven that. I think those shareholders who own the Central Gold Trust, the GTU and the SBT would be wise to consider our offer because I think it’s in the best interest of the unitholders.

Tekoa Da Silva: Rick Rule, Chairman of Sprott US Holdings and Eric Sprott, Chairman of Sprott Inc., thank you very much for sharing your comments with us.

P.S.: Remember – the deadline to tender your shares in GTU and SBT is September 18th, 2015. To get the full details on how to participate, click here.

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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