I interviewed Sprott’s John Embry a few weeks ago.
John believes gold and silver will move big as weakness in the economy and
financial system comes to light. I got on the phone with Mr. Embry for a
follow-up on his ideas and predictions…
Hello again John.The last time we talked,
you said gold and silver were at ‘historic
undervaluation.’ What’s on your mind now?
Well, my main concern today is that the economy is
really much worse than most people are prepared to admit. And this will have
significant ramifications on various markets. Obviously, the one market we are
particularly interested in is gold and silver. Both of them, as I said before,
are considerably undervalued. They are under-owned too. I still think that the
fundamentals look better than ever. And I still think there is an explosive
move coming in 2014.
Of course, be careful what you wish for because
this is suggesting an economic event with some very negative societal impacts.
With the amount of leverage that exists in the financial system today, a heroic
upwards charge of the precious metals would expose the policies of zero-based
interest rates as an utter fraud. If interest rates rose sharply as a result,
it would bring the banking system to its knees. That would have a very negative
impact on society as a whole.
A lot of it has to do with the law of unintended
consequences. The heavy-handed actions of the Feds in the financial system will
likely lead to negative unforeseen consequences.
As an analyst, I look at the current situation and
try to figure out what might happen, but that does not mean Iwantit
to happen.
What about the headlines we are seeing these days?
Any indications of what’s to come?
Well, I follow the headlines – but they mostly
exist to confuse the poor public. The smart people who are buying gold know
what is going on. And very few are smarter than the Chinese in this regard. As
you know, they have been buying massive amounts of gold bullion for a while.
This is extremely negative from the perspective of
the West. As that old adage says, gold goes where the wealth is being created.
What does that say about us, that we are letting a significant portion of gold
head east?
What about the recent reports that JP Morgan might
own a record amount of physical silver?1
That is an interesting story because we believe
that JP Morgan is likely the main entity that has suppressed the silver price
in the paper market. But now we are hearing that they may have accumulated a
large position in the physical metal. To be honest, it is hard to know what to
make of it.
The silver price is grotesquely undervalued so I
have to congratulate JP Morgan if they are clever enough to sell paper and buy
real silver. Before this is over, there is probably going to be a ‘force
majeure’ in the paper market because there are so many claims to such a small
amount of silver. If that were to occur, people who owned the metal or even
exchange-traded products that have a real claim to the metal would be the big
winners.
When this comes to light, I think the upside to the
silver price will be incredible. My colleague Eric Sprott and I think that
within a reasonable timeframe silver will probably trade over 100 dollars – a
big move from its current price of 20 dollars an ounce.
Does silver have more upside than gold, in your
view?
I think it certainly does – and I know many, such
as Jim Sinclair, might disagree with me on this. Some say that silver will
always be a peripheral metal to gold, even if gold becomes part of the monetary
system again. Silver would be more of an industrial metal than gold.
But looking at historical gold and silver markets,
the price ratio of gold to silver – currently over 60:1 – has fallen
precipitously in raging bull markets for the metals, going as low as 12:1. So
the silver price could have an upwards move at four times the rate of any gold
price increase, I believe.2
I am particularly fascinated with the fact that
about a third of the industrial usage of silver in photography has gone away
these past few years because of the rise of digital cameras. And yet, the
industrial demand for silver has held more or less steady. New medical
applications and use in the solar power industry have filled the demand. So the
industrial demand is solid, yet there is very little physical silver in the
world to meet that demand.
Is silver the “poor man’s gold?”
I believe that is absolutely wrong. If the gold
price goes way up a lot of people will be forced into the silver markets
because gold will have become so expensive. So, if they want precious metals
exposure, they will go to one that is much cheaper per ounce – silver.
Because the silver market is so much smaller than
the gold market, and because silver is consumed for industrial purposes, we
could see the gold to silver price ratio plummet – at an incredible benefit to
silver.
What are you seeing happening next in the gold and
silver story?
There is something that I want to emphasize. When
all things are said and done, the gold and silver paper markets will be
revealed as one of the greatest Ponzi schemes that ever happened. All these
products in the futures markets are allegedly backed by gold and silver, but
the actual metal is not there. When this is revealed, it will happen at the
exact time when people need the protection of gold and silver against paper
money. I think this future development will have an enormous beneficial impact
on gold and silver prices.
1http://www.marketoracle.co.uk/Article44278.html
2http://www.silverseek.com/article/goldsilver-ratio-signals-much-higher-silver-prices-12437
John Embry is a Chief Investment Strategist at Sprott Asset Management LP and works
alongside Rick Rule and Eric Sprott. Mr. Embry oversaw $5 billion in funds at
RBC Global Investment Management before joining Sprott, and he is a well-known
gold and silver bull and considered an influential thought leader on precious metals.
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