Gold Research Videos

James Turk: I'm James Turk. I'm the director of the GoldMoney Foundation. It's my pleasure to be here this morning with John Embry, the Chief Investment Strategist of Sprott Asset Management.

You know, John, we meet a few months ago in Jersey and things are pretty much playing out as we discussed back then. The big news, of course at the moment, is the sovereign debt crisis, and specifically the U.S. government debt downgrade by S&P. How do you see the implications of this playing out? We're still on the same path, right?

John Embry: Well, nothing's changed. There's a certain inevitability to all of this. I will admit that, given the turmoil of the most recent period, I'm actually a little surprised that the S&P chose this moment to downgrade.

But having said that, after seeing the very weak debt-limit resolution, theoretically, you should have downgraded them about two seconds after that was agreed to. to me it's just unfolding much as we had expected.

James: Yeah, the debt goes up, there's no serious cuts in the budget, the government continues to spend, borrow more than the market's willing to lend to it, so the central bank has to come in, quantitative easing and therefore we're still on this path to dollar destruction.

John: I think there's a knowledge. they know full well if they reduce too much stimulus at this point the economy is sufficiently weak it would probably just start to nosedive.

So they have to go with this cosmetic talk, at the same time they have got to keep spending. Because there is insufficient savings, as you point out, they're going to have to print the money, because there's not enough out there to borrow, and nobody would be stupid enough to lend it to them in that quantity.

Consequently, we're headed down the road to ever-greater inflation. And as much as it pains me to say it--hyperinflation. Because hyperinflation, in my mind, is the most corrosive thing that can happen in a society. I would move heaven and earth if I were emperor not to let that happen, but I don't think that's the way it is. I think that's where we're headed.

James: Yeah. We are here at the GATA conference in London, one of the keynote speakers in addition to yourself, Eric Sprott, Jim Sinclair yesterday was talking about 1,764 on gold. And his view was, is that if we take out 1,764 in the upside we could go exponential. In other words the gold price keeps rising, which would basically be saying that the dollar is collapsing.

Is this something that's likely to happen in the near future?

John: Yeah. I think it can happen very easily in the near future. I totally agree with Jim Sinclair. He was the gentleman, I believe, who coined that wonderful expression 'QE to infinity'. And he made a comment in his talk yesterday that at some point gold would become overvalued, which kind of struck me as a little odd. If you believe in 'QE to infinity' how does gold become overvalued?

So I asked him afterwards, I said, 'Jim, I find an inconsistency here in your analysis.' He kind of smiled and he said, 'Gold's going to keep going up.'

James: Oh, OK.

John: And I agree with him. The number he put more emphasis on was $3,200 and something.

James: Yes, that's right.

John: And I think it will blow through $1,700 in reasonably short order. And that's going to catch a lot of people by surprise. Because the majority of observers, many of whom do not understand the system in my opinion, keep talking about tops in gold and bubbles and what have you. And nothing is further than the truth.

James: Yeah. I like to compare it to the Dow Jones Industrials, back in 1983-84. Once it went over 1,000, where it had been held below since 1966-67.

John: Sixteen years.

James: You know, $1,100, $1,200, $1,300, there were a lot of top callers, and a lot of people saying that the Dow was expensive. What they were looking at though was the price and not the value.

John: That's right.

James: It's the similar thing that's happening here with gold. They're looking at the price and not looking at the value.

John: But the fascinating thing with that analogy is that back then I was really bullish on stocks. And I wore a badge that said, 'Dow 3,000', and people thought I was crazy.

James: [laughs] But it did play out.

John: I was way too conservative. It went to 12,000 or 14,000.

James: Do you have the 'Gold $3,000?'

John: Oh, I think that's probably, I haven't got the badge but I should have because I certainly think that's where it's headed as a reasonable expectation. Beyond that who knows.

James: Yeah. And I think that the momentum is developing in such a way that maybe some of that exponential move that Jim was talking about might be possible here in the near future.

John: Well it could be, because as you go down the path to hyperinflation, it just means that money is being devalued at an ever greater rate. Gold, being real money, is priced in this devalued money.

People just don't seem to grasp that it's not gold that's doing anything; it's the value of the money in which it's denominated that's driving the bus. It's going straight down and the price of gold ultimately will go straight up.

Now having said all of that, you got to be careful what you wish for, because the societal impact of this could be very, very negative. I would just as soon be wrong, but my job is to analyze things and this is the way I see it.

James: Yeah. Call them as you see it.

John: Absolutely.

James: You've been on this road for quite some time. I know you've been bullish on the purchase of metals even before you joined Sprott Asset Management, going back to the late 1990's.

John: Well, I was bullish in the late 1990's and I was wrong. This is what got me involved with GATA because I started to analyze the situation more closely. When you discovered what the central banks were really doing in this space, leasing their gold and what have you, it all started to become very clear.

As I mentioned in my talk yesterday at the conference, I don't think people recognize what weakened position the Western Central banks are in with respect to their gold reserves.

As a result, I think, that the swing from supplying gold to the market, where the Western Central banks have been doing this great amounts for 15 years, now with the Eastern Central banks taking gold out of the market, and the Western Central banks being limited in what they can do going forward, this is an enormous change. That alone would have a significant upside impact on the price.

James: In the old days when the classical gold standard was still being followed around the world, what they would do is... you can't increase the weight of physical gold overnight because that's just an impossibility. So they would just devalue the currency relative to gold. If you had a ton of gold, and one day it was valued at $20.67, then next day you value it at $35.

John: Yeah. Mr. Roosevelt did that after he had confiscated his citizen's gold.

James: Yeah. But basically that's what the market is doing now. They're looking at what the limited available physical supply of gold is in central bank reserves. Rather than the central banks formally announcing a devaluation of their currency relative to gold, the market itself is announcing it for them by raising the gold price. It's no different really, is it?

John: That's exactly the case. Before, it was done formally; now it's being done informally. And the central banks are trying to fight this perception but they're going to lose.

James: Yeah. There's been some things that have been happening recently including the fact that since it broke a 1,000, gold's been heading pretty much straight up. I also follow very closely the Asian premiums or discounts. Back in the early part of the decade, before that physical buying came in, you'd see a 20 or 30 percent reaction in the price of gold before that physical demand appeared.

But what's been happening recently, and here at $1,600 even. The Asian demand came right back into the market following the price up, which has been very unusual. Is that an indication that maybe the gold cartel is finally losing control?

John: Oh, I believe that totally. I think a fellow named John Brimelow, who's also been at this conference, he's been a very big follower of the Asian scene. He's done a lot of good work on these premiums and what have you. And that's the thing that I've noticed most. The premiums are really just tucked right of underneath the price of the current gold price.

If there's any diminishment in the paper price of gold, the physical demand is right there underneath it. And that's a big change, and that makes their job much tougher as they try to work the paper market lower.

James: Yeah. I follow John's work very closely, and I follow those premiums just for that reason. Because I do think it's a real good indication as to what the physical demand for the metal is. And obviously we see it in GoldMoney and you see the different reports from coin sales from the various mints and things of that nature, but at the end of the day it's the physical market that really drives the price of metal.

John: Well, that's going to be the big change that I think some people don't grasp, because for the longest time it was the paper market that literally set the price and the physical market was kind of abused as a result.

But now the supply-demand equation of the physical market has become so strong in terms of the demand, that it will overcome the paper manipulation. That's when the real game starts to the upside.

James: Yeah. Let me put a thesis out and see if you agree with this or not. I'm often asked if we do have a meltdown like Lehman Brothers, and indications are we're maybe in the early stages of another meltdown like that, a lot of people have been concerned that gold might get sold off like it did back then.

And my response has been that the Lehman Brothers was a liquidity crisis. People were selling everything they could get in order to get liquid. They were throwing out the baby with the bathwater, as the saying goes.

But my view was that, this time if we do have a meltdown, it's going to be a rush to safety. Liquidity will be only of secondary importance. And that as a consequence in a rush for safety the gold price will not get sold off, it will actually go up.

Is that something that you think is plausible?

John: I totally agree with that because the idea now, particularly in the view of the U.S. downgrade, that the idea of rushing to U.S. Treasury Bills, as a safe haven in an environment that what you just described, to me is preposterous. You have got to go to the real long-term money.

You're not going to replay what happened in the Lehman. It could ugly, but it won't be ugly for gold and silver. I think they will be the safe havens this time.

James: Yeah. But it's going to take a while for people's perceptions to change.

John: That's the best part about it, because despite what we see, it's just an absolute spectacular investment opportunity. The sentiment is terrible in the gold and silver space, and that's remarkable given the fundamentals.

So this got the makings of a huge move because there's an awful lot of people that would have to re-position.

James: And it's so implausible that people would see a T-Bill as a safe haven, when, aside from the downgrade, you're not getting any interest income. And we all know there are risks there.

John: Well, I guess, once you're sort of in this camp, some of the behavior of markets appears preposterous. Like, why anyone would buy a ten-year U.S. bond with a 2.60 yield on it in the environment we're sitting in here discussing today is beyond my comprehension.

James: Yeah. I agree.

John: Which makes me wonder if anybody other than the government is buying these things.

James: [laughs] Yeah. That's a good point. I really like a quote by Niall Ferguson, he's GATA historian, talking about government bonds and the perception that they are a safe haven. He was saying that they are a safe haven like Pearl Harbor was a safe haven in 1941.

John: Well, it wasn't that long ago that they were being called, back in the late '70, 'Certificates of Confiscation'. And that seems to have been forgotten. I think they are certificates of monetary confiscation. They will take your purchasing power away as sure as we're sitting here.

James: Yeah. That was one of the observations of the famous Franz Pick, and I agree with that wholeheartedly.

Let's turn to silver. Silver has different dynamics. Some people still see it as an industrial metal and only secondarily as a monetary metal, but I think that's changed in the past couple of years. But more importantly the above-ground stock of silver is relatively small.

Yet silver sold off the last couple of days even though gold held that 1,660 area. What are your thoughts on silver?

John: I think, because it's a much smaller market, that the paper manipulators can have a bigger impact in a short period of time. As result and because of a certain large banking entity that has a massive short position, they have a real good incentive to sell it off whenever they get the opportunity.

So I think that's all that you're seeing there. I think silver is on the verge of an upside explosion. Because the physical market, it looks particularly robust. I think one of the key factors is it is poor man's gold. And as the gold price continues to rise it becomes less affordable for more and more people who are going to ultimately want safety in precious metals.

They will be forced to go into the silver market, which is a small market. Investment demand will have an outsized impact on the price. As you correctly point out, inventories in the world are very low because so much of it is consumed because it is an industrial metal and it has wonderful medical uses and everything.

If you examine the new usages for silver, even the demand side from that part of the equation is robust. So you put that together with investment demand--it's 75 percent anyway, it's a byproduct of base metals. In the kind of world I see unfolding a lot of base metal demand may evaporate as the economy nosedives.

Even the supply side could be constrained at a time that people want more and more. What I think that silver is headed for those lows in terms of the gold/silver ratio. The gold/silver ratio is heading for the lows that we've seen historically 10, 15 times.

Let's just say for instance if gold goes to $3,000, silver could go to $250, $300. So that's one heck of an investment opportunity.

James: Yeah, I agree. Also you have the benefit of owning a tangible asset which doesn't have any counterparty risk.

John: Well that's the beauty of all these precious metals. That's another thing that is not well understood. You say 'counterparty' to some people and they look at you blankly. But it's absolutely essential that you not have counterparty risk because there's so many weak entities in the world today that your counterparty might be one of them.

James: Absolutely. During a financial bust promises are broken. You don't get to the end of that financial bust until all of those promises end up being broken. I think we have a lot more promises to be broken. So you really want to own something that isn't reliant on someone else's promise.

John: I tell you, that certainly is brought home to me whenever I listen to Jim Sinclair who I think really has a deep understanding of the malign impact of the derivatives in our system. And the fact that he believes--they've changed the definition of how they say how many there are, but under the old definition there's more than a quadrillion dollars worth of them.

Those numbers, I have trouble with trillions let alone thousand trillions. The system's polluted with the stuff. I think you have to be in real assets that can protect yourself from what is going to ultimately happen in the financial side anyway.

James: Yeah. Just turning to the currencies for a minute, is there any currency out there that you like?

John: Not really. Obviously the favorites these days is the Swiss Franc, the Canadian Dollar, and the Aussie. I can speak reasonably intelligently about the Canadian dollar because I live there. You tend to see the warts in something that you're closer to I will admit, but Canada is not without it's problems, particularly in the eastern part of the country where I live.

We do have a wonderful resource base and we do have a small population. Our debt situation isn't as good as people think it is because a lot of it has been pushed down to the provincial level. Do not look closely at the Province of Ontario's financials or you will be very uncomfortable.

James: Yeah, it's the weakest link the chain now.

John: Yeah. And Quebec's no better. So these big eastern provinces, which are where most of the people live, have some pretty tough economic and financial statistics, if you look closely.

Having said all of that it's still better than the US Dollar, but at the same time - because we trade... Well 80 percent of our trade goes north-south and we've risen from 62 cents to a $1.3 or a $1.2 yesterday. We just don't have that kind of flexibility in our cost space to absorb that.

Naturally outside of our resource-based industry most of our manufacturing and that's been really hollowed out.

James: Is it a depression in places like Windsor?

John: Yeah. Oh, it's terrible in certain places. And I think if it weren't for all the government spending and people are lending the money in Ontario. I think the Ontario economy could look really questionable.

James: Yeah but that spending is coming from debt.

John: It's totally coming from debt.

James: It's not about savings.

John: That was why I said, just before... I was at Alasdair MacLeod's discussion at the conference when he was talking about the real theoretical basis for why we're going through what we're going through.

James: The Austrian.

John: A true Austrian economist, which I totally support. When you lay it out as clearly as he did... There's no outcome that's very positive here. We're going to just have to go through it and clean it out and start over again.

James: Yeah. Let's turn to the mining stocks a little bit. It's been a big topic of discussion here at the GATA conference. How do you see it at the moment?

John: Well, I have been of the mind for some time that the mining stocks have been the victim of a computer algorithm program and that basically the same guys that have manipulated the gold price have sort of moved into the stocks in a big way, all with the idea of discouraging the public from participation, and it's working.

There's very little buying amongst the public now because it's getting their heads kicked in in most of these stocks. It's totally counterintuitive. It just keeps going up, the gold stocks and silver stocks are under pressure in most cases. But how I see it ending is that when we get the inevitable breakout to the upside on the gold and silver prices, like big breakouts, that's going to start to get rid of all this negative sentiment about the fact that we're in a topping phase or we're in a bubble.

And at that point the stocks - I think maybe on one other occasion that the bottom of the liquidity crisis in '08 they might have been cheaper relative to gold price. They're so cheap now that there will be a massive catchup. Now the question I've got, 'Is it next week or is it next month or is it six months from now?' But I think it's in that time frame.

When it starts, say the gold price moves up 30 percent, I think the stocks will move up 100. Some of the more speculative ones might move up 300 or 500. I'm not concerned in the longer term. I'm irritated in the short term because it's a market that's not reflecting reality.

James: Yeah, as money managers, though, we're always frustrated by something aren't we?

[laughter]

James: The markets never make it easy for you. You have to patients sometimes and I think this is...

John: Well that's what I've been preaching to a lot of people at this conference. Because a lot of these individuals here are good, solid citizens and they're heavily invested in these stocks and they're hurting as a result.

But a lot of them, if you see higher prices, the cash flow impact is going to be so significant positively that people will have to go there. It's just a matter of time.

Then you've got all the shorts that are going to have to get covered. That's why it's going to be really explosive.

James: I sort have been watching on the XAU because I follow that more than the HUI. But the XAU, I've been saying, once you finally break above the 230 area, you're probably off to the races. Would you say there's an equivalent level on the Huey that you're watching.

John: Yeah, 600. I would say if you break to new highs over 600. I was strengthened in my view when Jim Sinclair agreed with me yesterday because he used that exact number. I think that's inevitable. I think it will move the six to 900 very quickly, once it clears 600, with some gusto.

James: Just turning to the sovereign debt crisis and debt downgrades, when's the UK going to get downgraded? Are there going to be more downgrades? It seems inevitable, right?

John: I was just reading one of the local newspapers this morning. I think the UK situation may be more desperate than the US situation and nobody seems to talk much about it. To me. it's just a matter of the dominoes falling, because you can't look very closely at very many of these countries without seeing that they have a debt problem that's insoluble.

James: I guess, to a certain extent, because it's all unfolding relatively slowly, sometimes people don't really see the trends that are occurring here. But this is a trend that's well-established. You use the term dominoes, the dominoes are indeed falling even if they're falling slowly.

John: Hey, we're just talking at this moment just after the US downgrade. Maybe that's the thing that tips the whole thing. It seems too obvious, but I've often thought that whatever set off the next global financial crisis too in a big way is probably something I haven't even considered.

But the fact is that this globalization that everybody's sort of talked about in positive terms for the longest time, now we're seeing the negative side. Because everything's so interlinked that if one starts falling it's going to start pulling everybody else in with it.

One subject that I'm more bearish on than most people is I don't think the Chinese miracle, which necessarily can be maintained without some hiccups. Let's face it, the US dominated the 20th century and they went through the entire decade of the '30s.

I don't have any problem with the Chinese being the power and I believe they will be in the forthcoming century, but that doesn't mean they won't have a real hiccup too because if you look closely, with their debt issues and a number of things, they're not without fault.

Everybody seems to just cling to them as, 'We've got all these problems in the west. We've always got China to sort of pull us through.' I'm not sure that's true.

James: One of the key foundation points of the Austrian school of economics is the allocation of capital. One of the elements of that is that a private individual will always allocate that capital more efficiently than the government could ever home to allocate capital, largely in part because the government is looking for political considerations and not bottom line.

The bad part about that is that capital is so hard to accumulate and it is relatively so scarce,that to waste capital in that way-- through government allocation of capital--is totally outrageous.

John: Well if you look at the Chinese situation - I have always enjoyed Frank Veneroso's work on the subject and he has always pounded away at the unbalanced nature of the Chinese economy. It's so heavily dependent on capital spending and exports.

I would say, to some extent, that might have been an inefficient allocation of capital because they got massive overcapacity in a lot of these areas now. The thought is, 'Well, then they're just going to make a nice switch into domestic demand that's going to offset the weaknesses in the other two dominants of their economy.'

James: In theory.

John: I think yeah, ultimately it probably will but it won't be smooth. But that's a good point. The Austrian model could be applied to China and I don't think they are any sort of utopian world.

James: John, any last comments you'd like to share with the viewers. Your last interview with me back in May was very, very popular and I'm sure this one will be as well. Any final thoughts you'd like to share?

John: My only final thought is that it's absolutely incumbent on people to have some gold and silver and some gold and silver shares in their portfolio. If the history's any guide you don't need to have 100 percent. If you've got 20 percent that will probably go a long way in offsetting whatever else might be going wrong in your portfolio.

Most people aren't getting that advise from their local investment advisor or broken. So I would just like to emphasize that it's important that you have a good exposure to gold and silver and their shares at this time with what's unfolding.

James: It's a form of protection.

John: Absolutely.

James: And likely to become very valuable given the uncertainties we're facing at the moment.

John: Well if you go back and look at the '70s, which I think will be seen as a walk in the park compared to what we're going through now. If you only had 10 percent exposure to gold and silver in that era, it offset the losses in the bonds and stocks.

James: Yeah, and the other financial assets.

John: Yeah. I would be a little more aggressive this time. I'd say 20 percent, but that would protect you. If you believe as strongly in this as me, probably 100. I'm not going to recommend that.

[crosstalk]

James: Well Eric Sprott, your partner, was saying 80 percent. I guess there's really a question of subjective personal judgment.

John: Yeah. Put it this way, the vast majority of my net worth is in these items.

James: Yeah. I think that's a safe way to play it. I'm basically the same way. John Embry, Chief Investment Strategist for Sprott Asset Management. Thank very much. It was a wonderful opportunity to sit down with you here today and have this opportunity to talk about the markets.

John: It's always great to talk with you, James.