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Sprott Asset Management's John Embry wouldn't be surprised to see gold at $2,500 per ounce within the next 12 months but says he would prefer to see some kind of correction first
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. The last time we spoke was in June and you said that you were expecting gold to have a good summer - did you expect it to have this good a summer.
JOHN EMBRY: Close, yes I did think we were going to be a lot better than most people expected - $1900 would have been a little more than I would have expected by the end of August, but I'll take it.
GEOFF CANDY: I get the sense that at one level it's very much a case of be careful what you wish for because in your latest investors digest piece you talk about two ultimate outcomes for the current situation that we face in the macro economy and one of them is hyper-inflation if we see quantitative easing until infinity and the other is a deflationary cycle if we go the austerity route - clearly that's likely to be good for gold but at what cost.
JOHN EMBRY: It's a very good point - as I said this is something I would just as soon be wrong on but unfortunately I am just an analyst and I believe very strongly in the precepts of Austrian economics and we've reached a stage in the debt cycle where it doesn't appear we can move forward and on that basis you need more and more debt creation to generate the same dollar real GDP growth - and I don't think we can get that kind of debt growth. So to keep these systems stuck together they are either going to have employ quantitative easing in massive quantities, and if they don't, the current softness in the economy is going to turn into a rout. So it's not a very pleasant outlook but it's the result of what went before not anything we've done in the last three months.
GEOFF CANDY: How is it likely to happen if it does go either one way or the other?
JOHN EMBRY: I think that as the economy softens here - we were having this conversation before the meeting in Jackson Hole with all the central bankers, we made up a clear vision at that point, what direction they were prepared to go. But if they do not continue to provide unlimited funds to keep the banking system afloat and the sovereign risk issues under control, we risk deflation in fairly short order because the deflationary pressures around in the Western world in particular are huge.
GEOFF CANDY: How is it likely to impact on the eastern economies and in particular China - we are seeing slower growth there and higher inflation but clearly they still rely relatively heavily on exports.
JOHN EMBRY: That's an interesting question because I am one of these people, you can put me in the camp that the Chinese miracle is grinding to a halt and they've dined out in the West for years. They paid for it by taking back our crappy paper but the fact is that they kept their economy going at breakneck pace and I would also say it is probably one of the most unbalanced economy I have ever seen. They have depended so heavily on exports and capital spending and now the export markets are weakening at the same time they have massive over capacity. So those two engines are coming to a halt and the hope is that they can do lateral arabesque into consumer demand to keep the thing going. I think that will be a hard act in the short run and consequently China faces some fairly difficult economic problems going forward as well as the West.
GEOFF CANDY: If we look ahead what is the best outcome at this stage?
JOHN EMBRY: It depends where you come from. To me there is no good outcome. There's just the least worst. I suspect that they will - because it is probably more expedient - lean towards more accommodation, more money creation, because nobody wants to be at the tiller when the ship goes down and if they basically adhere to austerity throughout the Western world the ship most assuredly will go down.
GEOFF CANDY: Clearly this is good for gold I suppose is the only silver lining, no pun intended, how is it going to manifest in terms of gold prices.
JOHN EMBRY: It is interesting - I prefer to take the other side of the argument. It's not gold and silver that are doing anything. There have been constant stores of value for centuries. It's the value of the paper money that they are being denominated in that is at risk here and you know every attempt in history, fiat paper currency has always ended in tears and this one has been going for 40 years since Nixon closed the gold window exactly 40 years ago and it's probably in its terminal stages. So I think the upside in gold and silver is going to knock your socks off in valued conventional fiat currency paper. I have seen some wild estimates, $5000 to $10000 in gold. I am not going to say that but it wouldn't surprise me.
GEOFF CANDY: There has been a lot of talk about perhaps a return to a gold standard if you will or at least partially a gold standard. How exactly would you see a new currency system working if we do see a collapse of the fiat currency system?
JOHN EMBRY: I am of that mind that we ultimately will see it. The question is how much time is it going to take and that when we do have to recast the currency system, just to restore confidence there will have to be some backing that maintains discipline - and gold has traditionally filled that role. So I can see gold being introduced as a maybe a fractional reserve like there was before 1971 in the United States. but to do that given the amount of paper out there and the limited amount of gold, they would have to mark the gold price up dramatically. I was at the recent GATA conference over in London and a very smart guy by the name of Jim Rickards was there. He was LTCM's (Long-Term Capital Management) lawyer at the time that they got into their gold snafu back in 1998. He is one of the smarter guys that I've run across and he made the comment recently that he thinks that they will bring gold back into the system at probably $7000 an ounce. This guy is well connected so when he said that it kind of resonated with me.
GEOFF CANDY: If we look at what's been happening over the last few months or so and in particular in the last few weeks, we have seen gold run up significantly and almost in a parabolic fashion we have had some commentators saying if we do see a strong policy action particularly in Europe because it isn't just the US that is having these debt problems, we are likely to see gold come back a little bit at least in the short term. What's your view - are we perhaps going to see a correction before the next up leg?
JOHN EMBRY: Actually I would prefer to see something of a correction. I don't want to see this thing just scream away and become out of control and conceivably if you got a strong effective action in either Europe or the United States - that might be the catalyst for a significant correction of a couple of hundred bucks - but having said that I don't see the easy solution. I was just reading something this morning in the Financial Times about the Greek loan and the Finns want collateral and the other people are upset, the thing almost fell apart. so I don't see any easy solution in Europe - maybe if Angela Merkel in Germany decided that she would accept euro bonds, that might be a short term panacea but the problem is that there is far too much debt and there is far too many weak entities and I don't see any easy out - and the United States I am appalled at what's gone down there with their debt limit debates and their downgrading of the debt etcetera. They are not making any progress.
GEOFF CANDY: If we move from gold bullion to gold stocks quickly, clearly there is a disconnect between the gold stocks and gold bullion at this stage, at least in performance terms - and there has been a lot of talk about things like cash costs and all sorts of things on the mining side of things, and also perhaps the relative upside when gold was at $200 an ounce to where gold is now for some people at least is a lot less than it used to be - why do you think there is this disconnect.
JOHN EMBRY: I think you made a good point. There has been a cost issue through the piece and costs have gone up a lot but not nearly as much as the price has gone up and I think there have been a lot of paper issues, a lot of stock issues by various gold entities which has soaked up some of the demand but as big an issue and this is a little bit controversial, there's a computer algorithm programme being run by the same guys that have been involved in the gold price suppression that have been screwing around with the stocks - and the fact is it has been effective. Not only the stocks underperformed but people are so discouraged - legitimate investors are getting rid of them at the very time they should be piling into them. So I think that if I'm correct and the gold and silver prices stage another massive breakout sometime in the next few months that will be the catalyst for people re-evaluating their views on gold stocks and silver stocks and I think they are so far behind the bullion, this is about the second cheapest I have seen in my career. If gold went up 50%, I think the stocks could go up 300%
GEOFF CANDY: Is there any way to gauge what kind of stocks you should be looking at or would this be an across the board increase?
JOHN EMBRY: I think that's another legitimate question. Clearly the juniors have been more abused and the smaller exploration players than the seniors. I think the seniors can have a sharp move because even they are cheap in relation to the bullion price but a well selected group of juniors, if you have the right companies emerging ore bodies, you could see spectacular performance so I would recommend to someone that was interested to look into that space. But for more people because it is a very risky area, due to the geology and other issues - a well-managed fund that had a lot of juniors in it would probably be the safest way for the average investor to go.
GEOFF CANDY: What did you make of Hugo Chavez's announcements last week around bringing back gold bullion from western banks to Venezuela and also the nationalisation of that gold sector - how do you see that playing out.
JOHN EMBRY: I think it's extraordinarily bullish for gold in two senses. The first, the very fact that there seems to be some doubt whether the gold is easily available and he wants it back because he is not sure it's there is an interesting observation and they are going to have to come up with 99 tonnes ...
GEOFF CANDY: I think its 211 tonnes...
JOHN EMBRY: ... and I think that puts more pressure on the physical market which is in short supply now. Just as interesting his nationalisation of the gold mining area in Venezuela will also act as a constraint on future gold production because trust me if he doesn't let private enterprise in there to develop these things they are never going to get developed - so over those events we're extremely gold friendly and the first one could really trigger something big if in fact some of these concerns about whether the gold has been lent out prove to be true and you can't get it back immediately that could be a real game breaker.
GEOFF CANDY: What do you think is going to happen over the next 12 months? Is there any way to gauge it?
JOHN EMBRY: You never want a date and price in the same sentence - but I'm getting old and it doesn't bother me anymore. I'd be real disappointed if gold wasn't in excess of $2500 in the next 12 months.
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