Sprott: Gold Prices Could Double Amid a U.S. Depression

By Don Miller
Associate Editor
Money Morning

Respected Canadian money manager Eric Sprott predicted gold prices will more than double over the next few years as the U.S enters a full-blown depression.

Sprott, who correctly predicted the collapse of banking stocks, made the comments yesterday (Tuesday) during an interview with Bloomberg News.

The United States could be faced with a growing number of financial catastrophes over the next year – culminating with the failure of a U.S. Treasury auction – and gold could soar well over $2,000 an ounce as a result.

Sprott is the chairman and founder of Toronto-based Sprott Asset Management Inc., which manages $4.5 billion. He gained tremendous credibility in the financial world after his call in March 2008 that the world was suffering through a "systemic financial meltdown" that eventually resulted in the collapse of financial institutions including Bear Stearns & Co. and Lehman Brothers Holdings Inc. (OTC: LEHMQ).

Since March 6, when Sprott announced he was buying bullion and shares of gold producers and shorting financial stocks, the Standard & Poor's 500 Financial Sector Index has dropped 62%. Gold slipped 6.3% during the same period.

Sprott Hedge Fund LP posted a one-year return of 9.9%, Sprott Hedge Fund LP II rose 18% in the period, and the Sprott Canadian Equity Fund dropped 37%, Bloomberg reported.

"The trend is down, and there's not one signpost that says it's changing yet," Sprott said of the U.S. economy. "We'll stand by to wait to see those, and until it does, you have to assume it gets worse."

Perhaps the most disturbing aspect of Sprott's latest assertion is the possibility that a U.S. Treasury auction will fail. That outcome will have a "catastrophic" impact, he said.

As countries pull back funds to quell financial turmoil in their home markets, it reduces funds available for buying U.S. government debt offerings. 

"Each country has their own financial problem, so there's no funding for anything external," Sprott said.

Contributing Editor R. Shah Gilani warned in Money Morning last week that the government's continuing efforts to stimulate the economy with trillions of dollars in bailout funds may eventually ignite a round of inflation.  That could spark a rise in interest rates for all sorts of financial instruments and dampening investors' appetite for relatively low-yielding U.S. treasuries in the process.

The combination of spiking interest rates that cause a lack of enthusiasm for government debt and dwindling capital investments from foreign investors could result in a failed Treasury auction that would be a disaster for world financial systems.

"If you had some failed government auctions in the developed world, people will realize that even the government can't get the money that they want to get and that would be very disconcerting to the financial system," Sprott told the Gold Report earlier this month.

Indeed, demand for treasuries seems to be on the wane. The latest auctions saw yields rise, as investors demand higher rates for their capital. Just this week, interest rates on short-term Treasury bills rose with three-month bills climbing to the highest level since early November, the Associated Press reported.

The Treasury Department sold $29 billion in three-month bills at a discount rate of 0.27% on Monday, up from 0.15% last week. Another $29 billion in six-month bills was auctioned at a discount rate of 0.39%, up from 0.345% last week.

Growing demand for gold as an investment over the last two weeks that has pushed the yellow metal to a four-month high, and is further evidence that investors across the board are slinking more away from U.S. debt.  Indeed, the spot price of gold now hovers above $890 an ounce on the New York Mercantile Exchange, up about 25% from its October lows.

"I believe no matter what environment you're in – deflation or inflation – people will run to gold," Strott said. "Gold is proving exactly what we all would have expected, that in almost any environment, it's a go-to asset."

News and Related Story Links:

• Bloomberg:
  Sprott Says U.S. Depression Will Boost Gold Price

• Money Morning:
  Obama's New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble

• Gold Report:
  Eric Sprott: Gold Is the Go-To Asset in Any Environment

• Money Morning:
  2009 Outlook Report on Gold