Sprott: Silver Miners Should Re-Invest Earnings in Silver

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.

According to Mining Weekly when the idea was presented to Mitchell Krebs of Coeur d’Alene Mines (NYSE:CDE), he didn’t dismiss it.

Noting that it would provide additional leverage to investors, he said, Coeur would first have to build up a “sufficient cash cushion” before it would consider holding some of it in precious metals.

Though Sprott stands to gain if miners did act upon his advice and the chips fall as he predicts, so do an abundance of others who invest in various silver products. Throughout the year, it has been often stated that silver miners are undervalued and there are many who believe that these equities will rally.

At last week’s ETF Precious Metals Seminar, Jim Steel, Chief Commodities Analyst for HSBC predicted a positive outlook for silver in 2012 with the metal trading in a range of $30-40 with a yearly average of $34.

Those results are of course expected without the type of intervention that Sprott is calling for.

At Silver Investing News, we would like to hear from you how much influence miners’ investment choices would impact your buying decisions.

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Results will be reported next week.

I, Michelle Smith, do not have interests in any of the equities mentioned in this article.