From today's National Post:

The Standard & Poor’s 500 index will collapse below its March lows as an expected rebound in economic growth fails to materialize, says hedge fund manager Eric Sprott

The Toronto-based money manager, whose Sprott Hedge Fund returned 496% over the past nine years while the S&P 500 lost 32%, said the index’s 67% rally since March reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40% to below 676.53, the 12-year low reached on March 9.

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Mr. Sprott, chief executive of Sprott Asset Management LP, which oversees $4.3-billion, said in an interview Dec. 18.

Investors in Mr. Sprott’s funds have been rewarded by his holdings in gold, which has climbed 40% since October 2007 as the S&P 500 lost 26%.

Mr. Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March.

Expiration of the program would reduce demand for fixed-income securities, forcing up bond yields and interest rates and hurting economic growth, Mr. Sprott said.

Should the Fed renew the programs while the U.S. government continues to run record deficits, investors will lose faith in the U.S. currency, he said. “If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day.”

Mr. Sprott has been bullish on gold and gold stocks since at least 2001, when the precious metal was trading below US$300 an ounce.

American payrolls fell by 11,000 in November, the fewest since the recession began, while retail sales gained 1.3%, twice the rate forecast in a survey of economists by Bloomberg, according to government reports released this month.

Mr. Sprott says investors have been too eager to see the data as signs of recovery. While the S&P 500 added 0.6% on the day of the employment report, a 23rd consecutive month of payroll contraction was no reason for optimism, he said.

“We don’t have employment gains,” he said. “We have less of a decline. That’s a sign of weakness. The data is weak.”

Mr. Sprott said gold is the only asset about which he remains positive in the short term. The $1.42-billion Sprott Canadian Equity Fund — which is up 22% in five months — has 34% of its portfolio in mining stocks and another 39% in bullion as of Nov. 30.

He said though he has no target price for the metal he doesn’t think it has reached a ceiling after quadrupling over the past eight years.

“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Within the mining industry, Mr. Sprott prefers companies with smaller market capitalization, which he said have greater potential to grow.

Since last year, Mr. Sprott’s firm has become the biggest shareholder of Avion Gold Corp., which mines in Africa, and East Asia Minerals Corp., which explores in Indonesia. Avion is undervalued for its projected 2010 production, he said.

Regarding East Asia Minerals, Mr. Sprott said, “I just get the feeling that these guys could find a multi-double-digit-million-ounce property.”

East Asia completed a 2,000-meter, 14-hole drilling program at its largest Indonesian property that Canaccord analyst Wendell Zerb called “encouraging” and indicative of a large zone of gold mineralization. Outside of the gold industry, Sprott funds own shares of Wavefront Technology Solutions Inc., a TSX Venture Exchange-listed company whose products are meant to increase oilfield production. Its technology could be used on at least two-thirds of the world’s oil wells, he said.