Turmoil in global credit markets may lead to the collapse of a North American bank, pushing bullion prices up to $2,000 an ounce as investors seek a haven in gold, Eric Sprott said.
This year's decline in banking and brokerage stocks will worsen, said Sprott, 63, founder and chairman of Sprott Asset Management, which manages about $7 billion. In response, the company is short-selling financial stocks and increasing holdings in bullion and mining companies, Sprott said. He declined to name which bank he thought may collapse.
"We're in a systemic financial meltdown," Sprott said in a March 6 interview at the company's Toronto headquarters. "There are probably 10 companies that are broke that are still trading -- banks and financial institutions."
Sprott, who in 2004 foresaw uranium and crude-oil prices rising, expects that the global financial system will come under increased stress as banks, faced with slipping stock prices and capital erosion tied to subprime-mortgage loans, battle to raise money to offset losses caused by asset writedowns.
Banks Still Have Tens of Billions in Bonds to Write Down
Bloomberg reported that at least one hedge fund would go on record with its strategy to keep shorting U.S. financials - despite the Tuesday, March 11th rally. Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.
Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in writedowns for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant
Where Can an Investor Go ?
The AMP continues to purchase gold producers . The commodity has run ahead of the miners leaving the shares as bargains - even as the gold price seeks $1000.
Yamana has recently announced its first dividend and the CEO predicts $1500 for gold by the end of 2008. In addition, Yamana is raising its production from 1.2 million ounces in 2008 to 2.4 million in 2010.
We also own two juniors, both listed on Toronto.
Western Goldfields has recently moved into production with its mining property ( as at January 2008 ). The shares are still trading at less than $4.00 which values the Company as an exploration play only.
Centamin Egypt is developing a gold property in Egypt and expects to begin production at the end of 2008. the selling price will increase as the company moves into production - and at elevated commodity prices.
I expect gold to cross the $1000 level in the next few weeks . that milestone will generate investor interest in all these gold juniors.
Jack Bass is the editor of The Apprentice Millionaire Program , a market letter available at www.amprogram.com His latest book is " Building Your AMP Portfolio".
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