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Sprott: Silver Miners Should Re-Invest Earnings in Silver

Posted on 2012-11-05, By A-Best Staff
By Michelle Smith–Exclusive to Silver Investing News

Eric Sprott, founder and CEO of Sprott Asset Management (TSX:SII) believes that silver miners should invest in the commodity that they produce. Last week, Sprott announced that he was going to urge producers to do just just that—stop selling all of their silver for cash and instead, retaining a portion as reserves.

“I’m writing a letter basically suggesting to the silver producers, you guys have all this money. Why do you have it in banks? Put it in silver,” Sprott said on King World News. “It’s a way better asset than having a bank deposit that pays zero interest rates and you take all the risk of the bank on.”

Sprott warns of both currency and banking dysfunctions and considers silver to be safe and to be a superior form of currency.

Furthermore, by acting upon his advice, he believes that silver miners could have a positive effect on the market overall by absorbing a substantial portion of the potential surplus that is expected this year.

“If silver miners were to reinvest 25 percent of their 2011 earnings back into physical silver, they could potentially account for 21 percent of the approximate 300 million ounces available for investment in 2011. If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82 percent. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?” he wrote in his letter to miners.

Before proceeding, it should be pointed out that Sprott has a hefty load of vested interest in seeing such a trend develop as his company offers products such as the Sprott Physical Silver Trust (NYSE:PSLV,TSX:PHS.U) and the Sprott Silver Bullion Fund. If miners did invest and drive prices upward, it would generally be beneficial for products such as these.

In his letter, Sprott also said “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.”

As an investor in mining equities, if producers used physical silver to boost their value and to make themselves more attractive to investors, Sprott again stands to gain. However, the ethics or motives of Sprott’s appeal to miners is beyond the scope of this article.

Instead, what is interesting is the fact that it is often reiterated, even here on Silver Investing News, that silver trades more as an industrial metal than as a safe haven. When these discussions arise, the focus tends to be on how investors view the white metal. But, rarely are silver miners attitudes toward holding the metal that they produce discussed.

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