But as long as we're talking about Eric Sprott, anything he says should be taken with a spoonful. After all, the man runs physically backed gold and silver ETFs with billions in assets and multiple funds which are bullish on both metals.
That said, Sprott's latest missiveâa call to arms aimed at the largest silver producers in the worldâis a must-read for anyone interested in the price of silver or companies that mine the metal.
His predictions about silver prices and potential government intervention in the marketâabove and beyond the CME margin hikes already institutedâare, of course, inherently biased. His impact on the market is unmistakable. He obviously wants to influence prices upwardly, and he probably has the influence to do so, but that doesn't mean he'll succeed.
With this in mind, there are some interesting takeaways from his piece that could impact ETF portfolios dramatically. The first is his assertion that silver producers, in a way some have described as similar to what the Saudis have done with oil, start stockpiling silver production as opposed to selling it.
"If the largest pure play silver producers simply adopted the practice of holding 25% of their 2011 cash reserves in physical silver, they would account for almost 10% of that US$9 billion. If this practice we're applied to the expected 2012 free cash flow of the same companies, the proportion of investable silver taken out of circulation could potentially be enormous," wrote Sprott.
While it remains to be seen how responsive silver mining firms will be to his proposal, the potential impact for ETF investors could be twofold.
First, those owning silver commodity ETFs like Sprott's Physical Silver Trust ETV (NYSEArca:PSLV) or the iShares Silver Trust (NYSEArca:SLV) would likely benefit from the diminished supply's impact on market prices.
Furthermore, investors in the Global X Silver Miners ETF (NYSEArca:SIL) would benefit both from the increased revenues realized by silver mining companies selling production at higher prices and the increased enterprise value from the replacement of cash with physical silver, which, hypothetically, would be rising in price.
In other words, companies that mine the most silver become the most attractive targets in this scenario, as their cash flows and assets would increase concurrently, and at a high velocity. Pure-play companies like Silver Wheaton ( SLW ), Coeur d'Alene ( CDE ) and Silver Standard Resources (NasdaqGS:SSRI) immediately jump to mind.
Guess who is one of the biggest investors in these companies?
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You guessed it, Eric Sprott. At least he's not like most snake oil salesman in that he admits he has as much to gain from his proposal as anybody:
"Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher. We certainly do, and we are extremely active in the silver equity space. We would never buy these stocks if we didn't. Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce. Silver is just another form of currency today, after all, and a superior one at that," wrote Sprott.
In many ways, what Sprott is saying in this letter is the same thing many market participants have been saying for years:Gold and silver are now legitimate currency alternatives.
The difference is he is appealing to the companies mining these metals to start acting just like he is. That means stockpiling silver and start using it to replace cash on your balance sheet.
And as an investor in physical silver or silver miners, this has to be just what you are looking for:someone of influence trying to compel these mining companies, whose performances have disappointed greatly in the past year, to start trying new ways to maximize shareholder value.
But it's never that simple.
Sprott's argument for higher silver prices is based largely on his forecasts of currency crises, monetary mismanagement, and potential confiscatory policies.
All of these are certainly possibilities, and history is littered with examples of each. But that doesn't make them any more or less likely to come true.
So to round out my rant, we'll just have to see whether Eric Sprott is right or wrong.
But while we wait, those investors who do agree with him and own SIL or individual silver mining companies owe the man a thank-you. Few, if any, people go to bat as hard for an investment theme as Mr. Sprott did this week. Cue the trumpets.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
