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 Sprott, and he
is a well-known gold and silver bull and considered an influential thought
leader on precious metals.
Henry Bonner: There’s
been a price move up in the metals; is this exciting to you as an investor in
gold and silver?
John Embry: Well,
there’s been a good move up here. Gold and silver are doing well against
resistance, and against sentiment, which remains very negative. So many people
are still very bearish on the metals for reasons that I can’t understand. But
that bearishness exists.
I also think that there’s ongoing
interference in the markets. One thing is that they don’t want gold and silver
breaking out and running hard. I think they’ve done a good job at that because
gold’s up $150 off the low that was established at the end of last year—it got
down to $1,180 briefly, and even silver, against great resistance, is pushing
forward. And yet, most commentators remain negative or worse on this subject
shows that they’ve done a great performance.
Henry: What
do you think investors in gold and silver should look at now?
John: Well,
I’m looking at the reality of the picture. First of all, the world economies
are not what they are made out to be. Without exception, pretty much, they are
weakening, and they are struggling. It’s very simple: there’s far too much debt
in the world, in virtually every country at every level. If you believe in the
tenets of Austrian economics to the extent that I do, when you get an excess
debt situation in the world, you cannot create enough new debt to get the
economy to grow. I think that’s what we’re up against. Consequently, I don’t
see the economy bailing out the bulls at this point. As things get worse and
worse in the economy, I think that gold and silver become a worthwhile
alternative. What goes unremarked is how small these markets really are. If you
looked at every ounce of gold that’s been mined since the beginning of time,
that’s only 170,000 tonnes—more or less. That’s only worth a little over $7
trillion. And a trillion dollars doesn’t go very far these days. So you think
about how little gold there is—silver is a fraction of that. If money decides
they want an outlet in these two metals, it’s going to have an outsized impact
on the price. I think as things get more and more difficult in the real world,
people will seek outlets in gold and silver, and the impact will be outsized.
Henry: What
about the situation with BaFin, the German equivalent of the SEC? After
investigating Deutsche Bank, which is involved in the London price fix for
gold, they announced that gold may be manipulated worse than LIBOR. Are we on
the cusp of a great revelation about price fixing?
John: I
think it’s interesting that they’re focusing on the London price fixing. I’m
sure that there’s probably been some chicanery there. But it’s absolutely a
mere bagatelle compared to what’s going on in the gold market, between the
Western central banks and the bullion banks and the amount of pressure they’ve
brought on the gold price. The thing is, I would be more interested in the
extent to which the gold and silver prices have been held back by relentless
central bank activity. But you’ve got to start somewhere, and that BaFin
inquiry is a positive step in the right direction.
Henry: What
do you mean by central bank activity?
John: I
mean clandestinely leasing out significant amounts of gold into the world. The
last big thing was a major shipment of gold from Switzerland—that had to be
central bank gold, because where else was it coming from? That stuff was being
re-refined in Switzerland and shipped on to China. This whole West-to-East
transport of major quantities of gold, from a Westerner’s perspective, is not a
good development. The old adage is that gold goes where the wealth is being
created. And the other is that those that have the gold make the rules. So I’m
really upset with this whole migration of gold from West to East.
Henry: Do
you think that the West is no longer creating real wealth?
John: Well,
I think what’s really happened is that the West has abdicated its manufacturing
space to China in particular and a number of satellites in that part of the
world. I think one of the great problems with unemployment in the West today
derives from that. There used to be huge numbers of well-paid manufacturing
jobs in North America and Europe. A lot of those have been lost, and a lot of
those products are being produced at lower cost these days in China, because
they have a much lower cost base. I don’t think that’s a particularly positive
development in the long term for North America and Europe.
Henry: What
is driving this big world shift?
John: Basically,
for the longest time, Henry, from the post-war era China was asleep; it was
just over there, not doing much of anything. But they do have over 1.4 billion
people now. All the wealth was centered in the Western world, in North America
and Europe, and Japan to a lesser extent. There are not many people in that
group, probably 600 million people. Suddenly China, and India to some extent,
awoke. 2.7 billion people decided they wanted what we had and were prepared to
work hard for it. It’s started to have a dramatic impact on the standard of
living in North America. And I think the manifestation of that is that the
bottom half of our society is having trouble getting well-paying jobs, and it’s
starting to take a toll.
Henry: Do
you think that China might follow the West’s path of expanding debt and letting
go of gold?
John: Well
no; in fact I think the opposite. What’s happened is that we in the West, and
America in particular, were paying for all these goods from China with more and
more printed money. And China was running up huge surplus accounts as a result.
So they had this enormous quantity of US dollars in reserve, and they know it’s
pretty vulnerable. And I think that’s an underlying reason that they’ve been
buying gold—and it’s not just gold, but properties and other stores of value.
They really want out of these US dollars and into hard assets to whatever
extent they can do it.
Henry: Are
the Canadian and European currencies on a better track that the US dollar?
John: Well,
no. Rather than criticize the US specifically, I would be more critical of the
Western world in general. We’ve lived a pretty good life after the Second World
War and in the ensuing 70 or so years. And if we run up an awful lot of debt,
it’s going to take some real doing to get back on the right track. In the
intermediate, as we’re dealing with all these issues, money might be debased
just to keep all of these things afloat. That’s one of the reasons I am so
bullish on gold and silver. These are constants in an ever-changing world, and
I think they are cheap now—very cheap. I don’t think people own enough of it,
and when they finally get that this is happening, there’s not going to be
enough to go around. So my advice to people is to get all the gold and silver
you can at these prices. And better than that—if you really want leverage—buy
the shares that mine the stuff. If you have the right shares, I think you’re
going to make a fortune. So I’m a huge bull on the gold and silver shares; the
only caveat is that you’ve got to be very selective. There have been a lot of
bad stocks promoted through the years. And if you’re buying into this space,
you’ve got to be real sure that they’ve got the goods—they’ve got a real ore
body or they’re in production. Or they’re very close to production so you’ve
got some kind of certainty that it’s real. Those kinds of stocks are going to
do spectacularly well when this market starts to rock and roll.
This gold and silver issue is a huge deal;
and I don’t think most investors understand the playing field that we’re on.
Henry: So
stay strong; own gold and silver; and wait?
John: Well
yes; and I want to reiterate that there is so much bad press out there that
most people just avoid the sector, and it seems like in the fullness of time it
will turn out to have been a terrible mistake not to have had the protection of
gold and silver and some related shares in your portfolio.
Henry: Do
you think we are getting close to vindicating the case for gold and silver?
Will it take a few more years?
John: I
wouldn’t say years. Of course, I want to leave myself some breathing room, but
I think we are getting real close. There are more and more drumbeats about the
degree to which the price has been messed with. And there’s all this paper out
there with no real gold or silver backing it. When all this comes together in a
crescendo for gold and silver, I think the impact on the metals is going to be
way beyond what most investors can even comprehend today. And that’s why I
think it’s important to be early rather than late today. If you’re late, you
might never get in—because it may move so quickly and the availability is
limited.
Henry: Will
there be signs of an imminent change in gold and silver to the upside?
John: I
think there’s a lot of evidence now of how they are controlling the paper
markets with all the rules that they have put in place, and the way their
algorithms work. If the price of gold ever goes up 2% in a day, they stop it.
So I will be feeling comfortable that we are really rocking and rolling in this
when we start to see some really outsized moves—say, gold going up by $50 in a
day. I think that would really tell us that the game is on. And I think we’re
close—we’re talking months, not years.
Henry: What
forces the pressure on gold and silver to give way?
John: Lack
of physical. I think the real Achilles heel of the paper market is that there
is overwhelming physical demand from China and other sources. Recognition of
the lack of physical, especially to back all of the paper products, could
really push this thing dramatically in a very short time frame.
Henry: What
will be the response of the Federal Reserve?
John: I
think they’ve already made all their responses. They have printed all this
money, and I think that a lot of US officially held gold has entered the market
through leases, swaps, or what-have-you. I think they have less and less
firepower to maintain this sort of activity. As a result, when it changes, it
will change dramatically, because there will be more demand than there is
physical supply to meet. And the paper market, which has controlled the pricing
mechanism for as long as I can remember, will finally be overrun.
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