The eternal pessimist

You’ve heard of eternal optimists? Well, Eric Sprott is the eternal pessimist!
I’ve been following his investment commentaries for several years and the message
has always been the same: the financial system is rotten, we’re in a secular bear
market that will last for many years, and the only things worth owning are precious
metals and energy.

The irritating thing to those who dismiss his predictions as extreme is that
for the most past he has been right. His flagship Sprott Canadian Equity Fund
has had a rough ride recently but over the 10 years to Aug. 31 it boasts an
average annual compound rate of return of 32 per cent. Every investor would be thrilled
to do as well as that.

Recently, Sprott was as bearish as ever as he spoke to hundreds of financial
advisors at a breakfast meeting in Toronto. “We are in a systemic financial
meltdown,” he said. The markets are “in a state of chaos”. There
is “panic” in Geneva with people lining up to withdraw money from
banks. “There will be no new mines, no new anything because no one can
borrow money or raise equity.” As for Warren Buffett’s investment in Goldman
Sachs, which was being portrayed in the media as a signal that the banking crisis
is ending, Sprott dismissed it with a wave saying: “Warren just doesn’t
get it.”

Sprott is a very persuasive speaker — there wasn’t even a cough in the
vast room as he spun his tale of doom. And he sprinkles his comments with some
black humour. “I call this an Owl Market,” he said. “That’s because
when bankers are told to sell some of their assets, the reply is ‘To whooo,
to whooo?'”

Fine. We all know we’re in a mess (although he acknowledged Canada’s
mess is nowhere near as bad as that of the U.S.) What do we do about it?

His answer is to buy gold, silver, and anything related to energy. The Sprott
team predicts gold will soar to US$2,000 an ounce within four years while silver
will rise to US$40 an ounce. As for oil, it can only go up in price. We’ve already
passed the peak in world output. It is unlikely we will be able to replace the
production that is lost each year and finding new oil will be increasingly costly.

As for the future, the eternal pessimist said: “They’re going to be trying
times.” No one ever accused Eric Sprott of being inconsistent!

As for his flagship Sprott Canadian Equity Fund, investors can only hope that
the prediction for big jumps in the prices of gold and silver materialize soon.
As of the end of August, 23 per cent of the fund’s assets were being held in bullion.
That big bet on precious metals hasn’t paid off yet but Sprott’s chief investment
officer, John Embry, says it will soon. The drop in the price of gold over the
summer was “orchestrated” by shadowy forces, he says, and it’s now
extremely undervalued.

“It’s a remarkable buying opportunity,” he told the advisors. “If
you don’t take advantage of it, you’ll rue the day.”

For his part, Eric Sprott predicted that the fund’s large stake in Timminco
Ltd., which produces what it claims is solar-chip grade silicon, will pay off
big-time. Between its various funds, the Sprott organization owns 17 per cent of the
controversial company, which is down about 60 per cent since June. “We know that
they can produce this upgraded silicon and we know they can sell it at top prices,”
he said.

He also produced a chart that showed the volatile fund has rebounded several
times from deep set-backs over the past decade. We’ll see if the lightning can
strike again. However, I would not advise nervous investors to place a big bet
on it. Good as the long-term performance has been, this fund is a stomach-churner
— its performance chart looks like the Rocky Mountains.

That doesn’t mean you should not pay attention to what Sprott is saying, however.
The eternal pessimist has been right more often than wrong in recent years.