Eric Sprott is one billionaire investor certainly worth listening to. Since establishing a brokerage firm in 1981, Sprott has amassed a personal fortune of over $1 billion and in the process created a leading Canadian-based hedge fund with a focus on commodities including gold, silver and timber.
With Forbes reporting that Sprott now has 90% of his personal wealth invested in gold and silver, the wealthy Canadian certainly has put his money where his mouth is! In one of his recent notes to clients titled: The Ongoing Rot in the Economy, Sprott outlined why he is still so bullish on gold.
Here are three reasons why Sprott suggests gold is a great investment right now:
- While companies and officials in the USA have “conveniently” been blaming the weather for the 2.9% fall in first quarter GDP, Sprott thinks this is actually because the US economy is on life-support and symptomatic of much more significant economic troubles.
- Excluding Government Transfers the bottom 40% of households have disposable income per capita in the USA that is actually lower than it was pre-GFC. These households have an average after-tax income of less than US$19,000 and while this has increased slightly (up from about US$17,500 in 2005) it is almost entirely due to Government Transfers such as social security, unemployment benefits and food stamps.
- On average the poorest 40% of US households are spending more on basic necessities (non-discretionary items such as food and shelter) than they are receiving in income. This is largely due to high inflationary price pressure for basic non-discretionary goods and services, leading to the perverse situation that since the GFC 40% of the US population has been going backwards!
Sprott paints a stark picture of the underlying health or rather ill-health of the US economy and the restraints it will put on future economic growth and particularly consumer spending.
While many investors appear to believe that the US will ‘muddle through’, investors who are more sceptical about the robustness of the economic recovery both in the US and around the globe will likely share Sprott’s enthusiasm for gold. Under this scenario stocks such as Newcrest Mining Limited (ASX: NCM), Northern Star Resources Ltd (ASX: NST) and Beadell Resources Ltd (ASX: BDR) could all offer an appealing hedge for an equity portfolio.
Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
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