Dive in Silver Price a “Setup,” Says Sprott

By Damon van der Linde – Exclusive to Silver Investing News

Eric Sprott is CEO of Sprott Asset Management and a long-time proponent of owning both gold and silver. He is also a long-time proponent of the belief in the conspiracy theory whereby large financial institutions are colluding to drive silver prices down, as when prices fell from around $50 to $32 an ounce in May.

“In my heart of hearts I believe it was a manipulation,” said Sprott in an exclusive interview with Silver Investing News. “There was no market, it was a setup. They’ve just pushed it down. It’s ridiculous.”

The recent price correction has largely been attributed to the increased margin requirements from the CME group. Between April 25 and May 5, COMEX increased silver margins to as much as 12 percent – or $21,600 per contract – from 6 percent, before silver tumbled 25 percent.

“China was closed, the UK was going to be closed that day, it was at the quietest time in the market and we all woke up and ‘bang,’ we had margin call,” said Sprott. “One of the most famous saying in the business is: never meet a margin call. Don’t put up the money, just get outta Dodge. This creates selling.”

Regarding who exactly is responsible for this manipulation, Sprott says that he believes those who initiated the recent drop in silver were large financial institutions unsatisfied with their current volume of holdings.

“We all suspect they’re the same guys that are mentioned in the 2008 lawsuits against the two major players in the silver market,” he said. “The guys who were short who were getting killed were losing huge amounts of money, so it was a perfect time to do something.”

Sprott is referring to two separate lawsuits filed by trader Peter Laskaris in federal court against JP Morgan Chase & Co. and HSBC.

Laskaris claims that the institutions held large positions in silver futures and silver options, then made large trades at key times, made large “spoof” orders that were placed and then canceled after the order has influenced the price, and communicated their trades to each other.

The silver market has long been the focus of manipulation theorists. Fueling this speculation, at a CFTC hearing to consider new rules to strengthen its commodity-enforcement powers, commissioner Bart Chilton said market players have made “repeated” and “fraudulent efforts to persuade and deviously control” silver prices.

In spite of his speculations of manipulation, it would be an understatement to say that Sprott is bullish on silver. Around the time of silver peak, financial blogger Kid Dynamite and later the Globe and Mail reported that Sprott had sold 1.6 million trust units of Sprott’s Physical Silver Trust. Sprott later explained that he was in fact only selling so he could buy back in without the premium.

“Our position in silver did not change,” said Sprott. “If I can buy the silver back at a 20 percent discount from the value, then I can buy back 20 percent more ounces of silver in the physical market. One hundred percent of the proceeds of those transactions went either in the physical silver or into silver equities.”

Sprott also says that the force of quantitative easing is pushing the price of silver. The second round of quantitative easing is drawing to a close as the QE2 trade was “officially over” in late March. Many analysts, including Sprott, are prepared for  a QE3 around the corner, and that this would once again drive silver prices to record highs.

“A lot of that QE1 and QE2 are giving a tailwind to gold and silver. If you want to tell me there’s going to be a QE3, I’m going to tell you silver will hit $50 before we even know it,” said Sprott. “I’ve always publicly stated that it will trade at a range based on the gold price of 1/16 of the gold price, that’s what I think it historically was always at and I think it will go back there. The charts tell you that”

Looking to the future, Sprott says he believes demand should push silver to new highs. Over a billion ounces of silver are traded a year and yet around only 900 million is produced. There hasn’t been a huge increase in the amount of silver production in the last 10 years and yet the physical demand for silver, has changed massively. In spite of this demand, Sprott says he is still uncertain over what forces will ultimately drive the value of this precious metal.

“It’s hard to make a call on where for sure all these things are going to go because we don’t know what the next ridiculous policy on the part of central banks and governments are going to be,” he said. “Silver and gold are competitors to fiat currency. They’re competitors and for the capitalist system to function, people have to trust currencies.”