Terence Corcoran: Eric Sprott and the gold school look like the only game in town

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By Terence Corcoran
Financial Post / National Post, Toronto
Friday, August 5, 2011

http://opinion.financialpost.com/2011/08/05/terence-corcoran-making-mone...

Eric Sprott, newly discovered as a Canadian billionaire, on Friday night is set to deliver the keynote address to a sold-out GATA Gold Rush conference in London. What a celebration that will be.

With gold hitting a record this week at US$1,666 an ounce, stock markets down 11% in two weeks, money market rates below zero, sovereign debt crises unravelling in Europe and North America, banks in turmoil, and economic growth flagging with talk of a second recession, the world is unfolding as Mr. Sprott has long predicted.

All of Mr. Sprott's fortune is based on his economic theories about gold, money, and government abuse of financial systems. Along with other proponents of gold as a foundation for sound economic policy -- not to mention a get-rich-fast investment strategy -- Mr. Sprott's ideas today look to many like the only rational explanation for what is shaping up as a major global economic crisis.

... Dispatch continues below ...



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They may turn out to be wrong, of course, as the goldbugs have so often been in the past. But it's easy to see why their ideas have gained such a wide following. One need only look at the huge failure of mainstream economists -- and policy makers -- to explain why the crisis is happening and what should be done about it.

While those economists and establishment theorists continue to repeat calls for stimulus and quantitative easing, Mr. Sprott in London will tell his gold conference audience that the game is up. In his view, Europe's banks are grossly overleveraged, Europe is on the brink of a full-blown sovereign debt crisis, and America is heading for a fiscal blowout.

The final domino in the Sprott scenario, supported by other gold backers such as U.S. celebrity economist Peter Schiff of Euro-Pacific Capital, would be mass printing of money by central banks to cover the financial and sovereign debt that taxpayers will not or cannot repay. That money printing is the trigger that they say could push the price of gold to -- who knows? -- $6,000 an ounce?

An associate of Mr. Sprott told me yesterday that he believes the billionaire is already worth much more than the $1.3 billion assessed in recent media reports. If gold were to go to $6,000, Mr. Sprott would easily become the richest man in Canada.

Not bad for engaging in the simple business of applying economic theory to global developments.

Gold enthusiasts have always been with us, nagging away at the fringes of economics, always seemingly waiting for the inevitable that never happens. But the current economic situation appears to be playing out exactly as Mr. Sprott and others have long predicted.

In Mr. Sprott's case, his operation -- now a public company called Sprott Inc. -- accurately forecast any number of developments that conventional analysts and economists ignored or dismissed. The U.S. housing bubble and the collapse of the government-backed Fannie Mae and Freddie Mac mortgage giants were predicted as far back as 2003. "Dead men walking," they called them.

In a 2009 report, "Dead Government Walking," Mr. Sprott said, "The United States is on a trajectory to default on their obligations." In the colourful language typical of the gold school of economics, Mr. Sprott added: "The Federal Reserve and the U.S. government have assumed the toxic financial trash that brought the banking system to its knees a year ago. By monetizing debt to support their budget deficit and 'save the system,' both entities have chosen to walk a well-worn path travelled by so many governments before them. Like dead men walking, the U.S. government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors, or Citigroup, however, there is no one to grant a reprieve."

Europe is not much better off, facing a sovereign debt crisis and a banking crisis that the gold community feels can be resolved only by running printing presses. "We still don't know if a financial collapse can be averted in Europe," wrote Mr. Sprott and an associate, David Baker, in a July market letter.

It's been easy to dismiss the gold school of economics in the past. Their extreme predictions of pending doom have often failed to materialize. But with the current crash in growth and markets and the seeming inability of mainstream economists to offer explanations, the gold school looks good.

It looks even better as official policy makers appear to be at a loss. They've pulled all the fiscal and monetary levers they said they needed to pull to reinvigorate the global economy, but recovery remains as elusive as it was in 2009. More stimulus, they say, more quantitative easing. And more debt, which is the prescription now being administered in the United States by the Obama administration and Congress.

Gold backer Schiff of Euro-Pacific Capita, says the U.S. debt ceiling debate bizarrely tried to solve the U.S. debt crisis by increasing the debt. The absurdity won't succeed, he said in a recent letter. "Besides default or major cuts in domestic spending, inflation provides the only other means for the government to deal with this intractable crisis."

The gold message is that gold is the only real currency and all the paper produced by central banks is sham money. "Every fiat currency system in history has ended in ruins," says a Sprott report. "Our current experiment seems to be headed down the same disastrous path, thus allowing gold to re-emerge as a currency once again."

Gold bugs know this message all too well. They've driven the gold price to record highs, although the gold market has some new less-than-fringe players. On Wednesday South Korea's central bank, which holds massive amounts of U.S. Treasury bills, tripled its gold reserves by buying 25 tonnes of gold worth $1.24 billion. Thailand bought 17 tonnes in June, joining China, Russia, India, and Mexico as official government-backed gold buyers.

None of this means the gold school's theories will dominate in the future.

In the meantime, though, Eric Sprott and others appear to be operating the only game in town that offers a plausible explanation for the current economic mess.

* * *

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