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Problems in both the U.S. and Europe as well as continued growth in investment demand are some of the reasons why Sprott's John Embry believes gold is likely to have a good summer.
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is John Embry, he's the chief investment strategist at Sprott Asset Management. It's been an interesting couple of weeks for gold and even more interesting for the geopolitical environment globally. We've had a resurgence of concerns around Greece and debt there. We had disappointing job numbers out of the US last week. How do you see gold situated as it stands now?
JOHN EMBRY: I'm one of the few who thinks we are going to have a very big summer in gold. There's a seasonal argument that suggests that it will be dull for a couple of months, but I see enough going on in the big picture geopolitically and economically that these things will be very positive for gold. So I'm in the minority at this point, I think the gold price and the silver price for that matter are going to do very well this summer.
GEOFF CANDY: Let's talk a little about those seasonal factors. Perhaps if we can start with India, a lot of the seasonality historically has been because a lot of the wealth came from the farmers who are now moving into the sowing period and are focussed on their crops. There is now a burgeoning middle class, a burgeoning urban class of people in India and gold demand from them coming and probably less seasonal than it was in the past. How big an impact is that do you think?
JOHN EMBRY: That's an excellent point. People forget that the gold market is changing fairly significantly here from traditional demand into investment demand as an alternative to currencies and you make a good point when you say there has been a growing middle class in India who is more financial sophisticated and they are looking at gold in a different context and they have the same seasonal demand. That's one of the reasons why I think this seasonality may be trumped this year because I think the investment demand doesn't know seasons - it buys gold because it is fearful of other assets.
GEOFF CANDY: Of course we've got quite a few potential few fearful things coming up and in particular in the US, concerns around the debt ceiling, concerns around the end of QE2. How important are those factors?
JOHN EMBRY: These things in the next several months are going to be real factors in this, particularly given the fact that all the evidence that I am looking at suggests that the US economy is starting to recede again and if you want to withdraw enormous amounts of stimulus by cutting the deficit dramatically at this point, or if QE2 actually marks the end of quantitative easing there's no question that the United States' interests rates are going to go up dramatically because from the numbers I look at the Federal Reserve has been buying the vast majority of the all the treasuries that have been coming into the market. It's still flowing at about $1.6 trillion a year - so the idea to have no quantitative easing, unless they want to a complete and utter financial and economic collapse doesn't seem to be on. So these are all big items that are coming up and they are going to have dramatic impacts on markets.
GEOFF CANDY: I suppose the US is between a bit of a rock and a hard place because you don't want to cut the stimulus but the stimulus in itself is likely to cause inflation.
JOHN EMBRY: This is the big question that you've just identified. In my opinion we have reached the point of no return. We are either going to take a collapse in the dollar or a collapse in the economy depending on which direction they take. The idea that they can return to normalcy in my opinion is out of the question at this point. They are way too far off line.
GEOFF CANDY: Coming back to the seasonality factor - clearly the old adage "sell in May and go away" is not something you're beholden to at this stage but if we look at the timeline over the summer, what are you expecting gold to do?
JOHN EMBRY: There's a very real probability that it can rise dramatically - I don't like putting numbers and dates in the same sentence because you always make yourself look bad - but I would be very surprised if it doesn't take out $1,650 this summer and maybe headed towards $1,800 over the next three months, to take a time frame.
GEOFF CANDY: Looking across the pond in Europe, clearly there are a whole host of other problems there - Greece being at the forefront of those. How significant a factor is that in what's going on in the gold price, given in euro terms gold isn't doing as well as it is in dollar terms.
JOHN EMBRY: Until about a week and a half ago gold broke to a new all time high in the euro. Since then the euro has staged a recovery against the US dollar whereas gold has basically stayed fairly steady in US dollars or ergo, the European prices corrected here but it's interesting that there are an enormous amount of problems in Europe as there are in United States and to me the conclusion one should arrive at is neither of these currencies are attractive and that to me is one of the underlying factors why I am so bullish on the gold price. It just bounces back and forth between who is worse at any given moment. I look at the Greece situation and I see absolutely no way out that's palatable to the euro and the European banks or what have you that hold a lot of this paper. In some way the Greeks cannot afford to carry the debt load they've have got and somehow that's going to have to be addressed.
GEOFF CANDY: If we look at the investment side of things and you mentioned earlier that there is this investment demand for gold that's underpinning a lot of these prices. There was an interesting report out of the UN Trade and Development Agency talking predominantly about oil and soft commodities and food commodities in particular - but they warned or raised concerns about the increasing financialisation of these commodity markets - is this a concern for the gold market as well do you think?
JOHN EMBRY: I tend to look at gold very separately from the other commodities. Gold to me very simply is a monetary metal and silver is becoming such. So I look at them in one equation and look at the rest of the commodities, oil and metals etcetera, even grains and what have you. They are subject to economic demands and I am one that thinks that we can get into serious economic difficulty over the next couple of years, so I am less enthusiastic about those commodities than I am about gold and silver. I share the concern that was mentioned by their organisation that there has been an enormous financial input into these commodities which have inflated the prices unduly.
GEOFF CANDY: Looking across the rest of the year are we likely to see some kind of turnaround after the summer in gold prices or is this still a run that has got some legs to it throughout the rest the year.
JOHN EMBRY: I think we're in a very strong bull market. You are always going to have corrections and there are people who are in this market who are using leverage that had better be careful because the corrections can be quick and violent. But having said that, for you to say that the end of the bull market in gold is over is essentially by saying that we are going to re-establish paper currency as viable and I don't think that's going to happen - I am of the mind that before this whole mess is ended we are going to have a new monetary system and as we make our way towards that, gold and silver will be refuges.
GEOFF CANDY: The silver price has been mentioned a few times but it did seem to over extend itself, it has come back. Is that the correction you think that people were looking for and is it likely to go further from here or perhaps is there still a bit of downside to come?
JOHN EMBRY: I believe the correction is largely over. You had - one person referred to as a mugging of the silver price. You had five margin hikes in the space of eight days. This was taking place in a market where the price was falling. So not surprisingly people liquidated aggressively and you got your correction over in no more than a week and now you are re-establishing a new base and I would be surprised if we don't take out that high that we saw recently before the end of the year.
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