Contrite Sprott blames U.S. actions

Date: Friday, September 12, 2008
Author: Boyd Erman, Globe and Mail

Eric Sprott says he is sorry about the losses investors in his firm's funds have had to endure as commodities have sunk, but the country's best-known hedge fund manager isn't giving up on his belief that oil and gold are headed inexorably higher.

Shareholders of money manager Sprott Inc. and investors in the funds it sells have watched huge chunks of value melt away with oil's fall to barely $100 (U.S.) a barrel and gold's plunge below $800.

Mr. Sprott didn't see those declines coming, especially in gold, in large part because he never expected regulators to act so aggressively to bail out the financial system.

"We apologize for that," he said on a conference call yesterday after telling investors "we thought we were well positioned because we thought that gold would rally."

The problem has been the stream of government-backed salvage plans for financial companies such as Fannie Mae and Bear Stearns Cos. Inc. These are keeping bank stocks artificially inflated and taking the wind out of a rally in commodities, he said - a complaint shared by other commodity bulls. Mr. Sprott expects that the U.S. government will rush to help should Lehman Brothers Holdings Inc. and Washington Mutual Inc. need aid.

"The Treasury and the Fed are breaking all the normal rules of engagement," Mr. Sprott said.

Still, Mr. Sprott said the bailouts will eventually contribute to a renewed bull market in commodities because the U.S. government is having to print so much money to fund them. That will drive up inflation, push down the U.S. dollar and benefit gold.

"The actions that are taking place at the governmental level all argue for owning gold," he argued.

The bailouts are causing another problem for his funds, Mr. Sprott said. They're making it too dangerous to bet on declines of financial firms, even though he said he still believes the financial system is a "farce."

"Every time you have a bailout, the financials rocket higher."

Even with his funds getting hit hard, the firm expects to have positive sales for the third quarter, Mr. Sprott reiterated. The firm didn't have net redemptions in July or August, and "we do not anticipate that we will have net redemptions this month."

Nonetheless, investors have hammered shares of Sprott, which went public in the spring at $10 and has since fallen more than 50 per cent since on the Toronto Stock Exchange.

And investors in the firm's funds haven't done much better.

The Sprott Canadian Equity mutual fund is down almost 30 per cent this year and Sprott Hedge LP fund has slumped 11 per cent so far in September, erasing almost all the year's gains.

The declines have taken a toll on the personal wealth of Mr. Sprott. Besides owning a majority of Sprott Inc., he is also a big investor in all the funds.

"Trust me, we are all in this together," he said, though he declined to say how much money he has in Sprott funds "because it's almost embarrassing."

SPROTT INC. (SII)

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