1

Gold's continuous ten-year rise hasn't

sheltered it from controversy. Despite
producing consistent returns in virtually
all currencies year after year, some
market pundits still question its validity as
an asset class. t's true that gold doesn't
pay any interest, and it's also true that
much of the gold produced throughout
history still exists in some form today.
But these characteristics shouldn't inhibit
it from performing as a monetary asset.
Cash, after all, doesn't pay real interest
either, and there is more fat money in
existence today than ever before. So
why does gold still receive such harsh
criticism?
We believe much of it stems from a
widely held misconception that gold is
forming a fnancial bubble. t's a fairly
straightforward view that gold buyers
are merely foolhardy speculators buying
on a whim with no rationale other than to
sell to the 'greater fool' at higher prices in
the future. t's a view that assumes that
gold has no intrinsic value and is simply
a speculative asset that has captured
investors' imaginations.
We don't take these views on gold lightly.
We've seen bubbles before and fully
know how they end. We have no interest
whatsoever in participating in some sort
of speculative frenzy that's a recipe
for disaster in the investment business.
Thankfully, however, our gold investments
present no such risk. As our analysis has
revealed, gold is actually a surprisingly
under-owned asset class and one
that has generated far more attention
in the media than it probably deserves.
While its exemplary performance since
2000 is certainly worthy of discussion,
gold simply hasn't commanded enough
investment to warrant the bubble fears it
seems to have aroused among market
pundits and business commentators.
The truth about gold is that most people
simply don't own it.yet.
By: Eric Sprott & Andrew Morris
Contributing Editor: David Baker
www.Sprott.com
Debunking the
Gold Bubble Myth
February 2011
2
To be clear, a speculative bubble forms when prices for an asset class rise above a level justifed by its
fundamentals. For this to happen, increasing amounts of capital must fow into the asset class, bidding it up
to irrational levels. Gold may be trading at all-time nominal highs, but a look at investment fows proves that
it isn't anywhere close to being overbought.
n their Gold Yearbook 2010, CPM Group noted that in 1968, gold held by individuals for investment
purposes represented approximately 5% of global fnancial assets. By 1980 that amount had fallen to
roughly 3%. By 1990 it had dropped signifcantly to 0.6%, and by the year 2000 represented a mere 0.2%
of global assets. By the end of 2009, nine years into the gold bull market that began in 2000, they estimate
that gold had increased to represent a mere 0.6% of global fnancial assets hardly much of an increase.
Gold ownership didn't change much last year either, as we estimate that this percentage increased to 0.7%
of global fnancial assets in 2010.
1
So despite gold reaching record nominal highs, the world holds about
the same portion of its wealth in gold as it did over two decades ago. While this probably says more about
the proliferation of fnancial assets over the past decade than it does about gold investment, it is surprising
to note how trivial gold ownership is when compared to the size of global fnancial assets.
The increase in gold ownership from 0.2% in 2000 to 0.7% in 2010 is also misleading. f you consider the
approximate $227 billion that was invested in gold bullion in 2000, that level of investment would have
grown to $1.18 trillion, or 0.6% of fnancial assets, by the end of 2010 - based pureIy on goId appreciation
aIone.
2
n other words, the actual amount of new investment into gold since 2000 represents only 0.1%
of current global fnancial assets, or about $250 billion. Although this number may seem large, consider
that roughly $98 trillion of new capital fowed into global fnancial assets over the same period, so gold's
approximate 0.3% share of global investment fows is essentially trivial.
3
The 0.7% ownership data point also has interesting implications for global gold ownership going forward.
Consider that to return to a meaningful level of gold investment, say to the 5% level of 1968, it would require
over $9 trillion of gold investment today, or about 6.5 billion ounces of gold at the current gold price. This
would represent well over 1.3 times the amount of gold ever produced throughout history and four times the
amount of known gold reserves.
4,5
So not only is the public relatively underinvested in gold, but at current
prices it isn't even possible to increase our gold holdings back to a meaningful level.
Gold's apparent underinvestment also applies to gold equity fnancings since 2000. According to our
sources, gold companies raised approximately $78 billion of equity capital in new fnancings over the past
11 years.
6
To put this amount in perspective, this is equivalent to the total amount of equity raised by
technology companies in the frst three months of 2000.
7

To further illustrate the lack of activity in the gold equity capital markets, we compare last year's gold
company fnancings with the technology company fnancings in the year 2000 (Chart 1). Once again,
looking at the relative amount of capital market activity in the gold equity markets, we fnd no indication of
a bubble whatsoever.
Furthermore, we compiled information on mutual fund fows to get a sense for the average retail investor's
appetite for gold equity investments (Chart 2). We found very familiar results in this area as well: compared
to the $2.5 trillion dollars that was invested in US mutual funds since 2000, precious metal equity funds have
seen a mere $12 billion in infows. f there is a bubble in gold investments, the average retail investor hasn't
participated in it.
www.Sprott.com
1
SAM estimate based on data obtained from McKinsey & Co., IMF, CPM Group, Thomson Reuters, BIS
2
CPM Gold Yearbook 2010 CPM Group (March 2010)
3
SAM estimate based on data obtained from McKinsey & Co., IMF, CPM Group, Thomson Reuters, BIS
4
Larmer, Brook. The Real Price of Gold National Geographic Magazine. (January 2009) Retrieved on March 7, 2011 from: http://ngm.nationalgeographic.com/
print/2009/01/gold/larmer-text
5
Mineral Commodity Summaries 2011 US Geological Survey (January 2011). Retrieved March 7, 2011 from: http://minerals.usgs.gov/minerals/pubs/
mcs/2011/mcs2011.pdf
6
RBC Capital Markets, Dealogic
7
Ibid.
3
www.Sprott.com
Source: Bloomberg, Sprott Asset Management LP
CHART 3
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CHART 2
Source: Morningstar, Sprott Asset Management LP
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To truly gauge the level of exuberance
(or lack thereof) in today's gold market,
it's benefcial to review equity valuations,
since they provide an excellent lens into
investor sentiment for an asset class.
Certainly if a bubble was forming in gold,
it would likely rear its head in the stock
market, where speculative manias have
been feecing 'greater fools' for centuries.
The best gold index to review for valuation
is the Amex Gold Bugs ndex (HU),
which has returned a stunning 674%
since 2000. t is certainly an index that
could be mistaken for a bubble based
on its incredible performance. until one
considers its relative valuation. n Chart 3
we present a time series chart comparing
the price-to-EBTDA of the HU vs. that
of the Nasdaq Composite since 1998.
Price-to-EBTDA is a valuation metric
that compares a company's stock price
to its profts before accounting for taxes,
interest payments, and non-cash charges
like depreciation and amortization. t is
similar to the ubiquitous price-to-earnings
(P/E) multiple but allows for a comparison
across periods where net earnings are
negative and P/E ratio's incalculable.
Looking at the price-to-EBTDA multiple
for the HU ndex we see absolutely
no evidence of a frothy market for gold
stocks. At the current level of 13 times
EBTDA, the HU is actually trading below
its 15-year average of 14 times. Moreover,
valuations for gold stocks are currently
one-third of the levels reached by the
Nasdaq in late 1999. There simply isn't
any evidence of excessive valuations in
gold stocks, which is most certainly where
we would expect the excesses to be most
apparent.
Based on our fndings, this notion of a
gold bubble is patently false. The current
investment interest in gold relative to other
fnancial assets remains surprisingly low
- about where it was two decades ago.
Moreover, the modest valuations of gold
equities highlight the absence of unbridled
investor enthusiasm for gold investments.
Source: RBC Capital Markets, Deal Logic, Sprott Asset Management LP
CHART 1
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The opinions, estimates and projections (information) contained within this report are solely those of Sprott Asset
Management LP (SAM LP) and are subject to change without notice. SAM LP makes every effort to ensure that the
information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility
for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under
any obligation to update or keep current the information contained herein. The information should not be regarded by
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Views expressed regarding a particular company, security, industry or market sector should not be considered an indication
of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as
investment advice nor should they be considered a recommendation to buy or sell.
The information contained herein does not constitute an offer or solicitation by anyone in the United States or in
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to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their
nancial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
4
The fact is, despite all this talk about the gold bubble, the capital fows into gold vis--vis other fnancial assets
have simply not been large enough to indicate any speculative mania. nvestors can rest assured that they
are not participating in any speculative bubble by owning gold. They are merely protecting their wealth.