The long view

Eric Sprott is probably Canada’s best-known bear. He has been predicting doom and gloom for more than a decade and has made a lot of money for his investors in the process. Over the decade to Aug. 31, his flagship Sprott Canadian Equity Fund produced an average annual compound rate of return of 18.4 per cent. That means for every $1,000 invested back in 2001, you’d have more than $5,400 today.

Mr. Sprott, who is the founder and head honcho of Sprott Asset Management, has been consistent in his mantra throughout. The world financial system is crumbling. Paper money is steadily losing value. Bonds are highly risky. We’re in a prolonged bear market that may last for many more years. The only dependable sources of wealth are hard assets, specifically gold, silver, and, to a lesser degree, oil.

“We are of the view that the appetite for sovereign paper promises will continue to decline, and such promises will continue to lose their value relative to real assets, like gold,” the company said in the August issue of its Markets at a Glance newsletter. “What needs to be understood is that paper promises (sovereign debt and fiat currencies) are ‘faith-based assets’. They have no inherent value. They have perceived value in that they have historically been convertible into real assets. With their value decreasing against real assets, however, we are of the view that holders of faith-based assets will be increasingly unwilling to store their wealth in them. This will drive up the prices of real assets versus faith-based assets, a process which we have already begun to see en masse.”

The inevitable conclusion, according to Mr. Sprott, is that paper money will eventually lose all value through hyperinflation, such as we saw recently in Zimbabwe which finally had to abandon its currency altogether. People will rush to convert whatever assets they have left into gold and silver, driving their values even higher.

It should come as no surprise, therefore, that the Sprott Canadian Equity Fund is crammed full of the types of assets he feels will benefit most from the forthcoming financial Armageddon. As of the end of the second quarter, the fund had about one-third of its assets in gold mining stocks and 13 per cent in silver miners. Another 30 per cent was being held in gold and silver bullion. Of the rest, 11.5 per cent was in oil and gas stocks, 2.2 per cent in agriculture and forest products, 1.8 per cent in base metals, and 1.4 per cent in uranium. Only a tiny 1.7 per cent of the investments were in “soft” companies, most notably a position in Wi-LAN Inc.

But here’s the problem. Armageddon hasn’t shown up yet and the fund is being battered as a result. As of the close of trading on Oct. 11, it was down 16.7 per cent over the previous 30 days and 21.2 per cent year-to-date. That’s going to pull down that impressive 10-year figure by a few notches when the final third-quarter figures come out.

This is not to say that Mr. Sprott won’t eventually be right. Perhaps he will. But it’s hard to imagine the U.S. greenback going the same route as the Zimbabwe dollar (yes, that’s what it was called) any time in the near future. We’re looking a long way down the road here. As things stand right now, the U.S. buck is actually strengthening as offshore investors rush to the perceived safety of American Treasury bonds.

We’re constantly being told to invest for the long term but the philosophy and composition of the Sprott Canadian Equity Fund puts an entirely different perspective on that advice. In this case, you are investing for the very long term. The events Mr. Sprott forecasts may not occur for 10 or 20 years, if ever.

To be clear: when you put money here, you’re effectively betting on a cataclysmic series of events that are going to wipe out the value of almost everything but gold and silver at some stage.

This is not to say the fund won’t make money in the interim — it has already proven it can do that. But you need to understand exactly what you’re buying and the rationale behind it. You also need to realize that if you own units in Sprott Canadian Equity, you don’t need to buy a precious metals fund as well. You already have it.

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Photo © Stephen Strathdee