PM: Hello, everybody. This is Patrick MontesDeOca with Equity Management Academy. We have the great pleasure and honor to have with us, John Embry, chief investment strategist of Sprott Asset Management. John Embry joined Sprott Asset Management LP as a chief strategist in March of 2003. He plays an instrumental role in developing the corporate and investment policy of the firm. John, an industry expert in metals, has studied the gold sector for 30 years and accumulated industry experience as a powerful portfolio management specialist since 1963.
JE: Patrick, it’s always a pleasure to chat with you.
PM: The US dollar recently broke below the 80 price level signaling a loss of confidence for the almighty buck. Is this the technical signal, the silver and gold markets are waiting for the completion of this 2 ½ year correction and that we’re accelerating, you might say, in the collapse of the US dollar as the US world’s reserve currency?
JE: I think the level of the dollar and its role as the world’s reserve currency is probably one of the most important factors if not the most important currently in the outlook for gold. Very simply, I think the US government would move heaven and earth to try to prevent the US dollar from losing its reserve currency status and, more importantly, from collapsing in price vis-à-vis other currencies. I don’t think they’ll be successful ultimately. I think the Chinese are already planning to usurp the American role as the world supplier of the reserve currency. And, when that becomes more and more evident to more and more people, I think the impact on the price of silver and gold is going to be extremely positive.
PM: Do you see inflation picking up at some point? And, when do you see this potentially happening here?
JE: That’s a really interesting question? Number one, I think inflation is understated by the government. I mean, the amount of money that’s being created, it’s going somewhere. Just because it’s not going into some of the things that they put in their CPI, doesn’t mean that there isn’t inflation. I think one area that I’m aware of that the prices are just going berserk is rare art. There are people with a lot of money, all this money that’s being created is going into the upper part of society. And, so you’re seeing inflation in different things. But having said that, one of the reasons inflation hasn’t picked up dramatically through the whole system is that the velocity of money, the turnover of money, has dropped precipitously to almost record lows. I think that will only go on for so long because, at some point, the people that are putting all their money into various financial assets , are going to realize that the money that these assets are denominated in, is being destroyed systematically by the central banks of the world. And, then they’ll try to spend that money, get it circulating again. And, I think inflation could explode, not just pick up… I think it could rise dramatically at some point. I would think that could happen within the next couple of years, 2- 3 years.
PM: What will this do to the US debt and interest rates?
JE: Well the US debt is the problem. By that I mean the US debt is already enormous. And, if you take in all of the unfunded liabilities it’s preposterous in relation to the size of the economy. And, the fact is, the US debt is going to continue to rise. They have basically removed the debt limit. They’re going to have more talk about it, but I don’t think they’ll ever come to any real resolution. But, more importantly, as it becomes apparent that this is all going on, interest rates will have to rise, particularly in the long end of the curve. And, that’s really, really damaging to the US financial position because of the size of their existing debt. It’s got a very low interest rate on it right now and if rates were to go up in the near term it’s just going to exacerbate the deficit problem, which is already intolerable.
PM: How would this impact the price of gold and silver?
JE: I think that gold and silver are so dramatically underpriced now, that it’s just a matter of time unit more of the public realize what’s going on and money starts to flow into this sector. The sector is relatively small in comparison to all the money outstanding. So, I think the impact on the price on the gold and silver over time, over the next say two to three years as a time-frame, is going to be spectacular. I think that this will be seen, this current period we’re going through, as perhaps the finest opportunity in history to purchase gold and silver at great prices.
PM: The current 85 billion monthly purchases from the federal government or otherwise called QE stimulus is not showing the expected economic result thus far. The Obama health care issues offer more uncertainty for the future of the economy. How do you think this will influence the FOMC position on tapering and what do you think needs to happen?
JE: Well, you know, I’ve always believed that this QE, which is just a very fancy term for printing money, has been directed at the banks basically, I think they realize they can’t stimulate the economy that much. What is being done is that it’s keeping the banking system liquid and afloat. The banking system in the world, not just in the US, is in tough shape so I think a lot of the reason for this QE is not confined to the United States. If you add up the QE in Japan and the United States, it’s close to 150 billion dollars a month. And when you throw in all this stuff that Draghi’s talking about in Europe, backstopping all the debt, we’ve got a money printing blizzard going on. So, at this point they have to use semantics to kind of hide this from the public. And as a result they’re talking about tapering. I don’t think they’re going to taper at all. I don’t think they can afford to. They tried. Even the talk of taper drove interest rates up. And so, consequently, I think they’ll keep talking but do nothing except perhaps increase QE in the future at some point.
PM: What levels do you see that potentially happening… at what levels do you think they could potentially increase it, in order to justify this?
JE: Well, I think it’s all going to depend on what’s unfolding in the actual economy. I mean, if this thing starts to implode, which I think is a high probability, this will require more QE and I think this could be certainly be evident in the next 6-12 months.
PM: This could certainly push interest rates up. What will the effect of rising interest rates have on the price of gold and silver?
JE: Well, you know, it’s funny… basically, in the late 70’s, interest rates were rising sharply and that’s when gold and silver had their biggest move in history. And, eventually, when Volcker came in and really jammed rates up, he stopped the inflationary psychology and that put tremendous pressure on gold and silver for 20 years. But, there’s no possibility of that happening again because the amount of debt that’s been added to the system in the last 30+ years is so extreme that if you raised interest rates several hundred basis points here, the whole debt edifice would collapse. And nobody wants to be in charge when that happens. So, that’s why I think interest rates will work their way higher. But, they’ll just keep printing more and more money to stave off the impact. I think the greater probability is we’re going to face a bout of hyperinflation before this is over.
PM: According to Eric Sprott, recently record levels of physical gold and silver are being drained from the COMEX warehouse inventories and the precious metals ETFs like the GLD and the SLV. Can you comment on the disparity we currently have between the paper market prices and the physical markets for gold and silver reflecting such historic physical demand, while the price in the paper market is pushed down artificially?
JE: That’s an excellent question Patrick, and it’s not only the gold that is being drained from the COMEX warehouses and the precious metals ETFs. There were 1300 tons that were exported out of London. What was that all about? A lot of it went through Switzerland, where it was being re-refined and shipped to the Far East. I mean this can only go on for so long and at some point the West is going to run out of gold they can mobilize to continue this game and support the paper suppression that is going on with the derivatives and all sorts of other chicanery. And, when that moment comes, the price will be set in the physical market and that is when the price is going to explode.
PM: How long can this last?
JE: That is the question that we can’t answer. The only thing I will say is that it’s gone on a lot longer than the rational mind would have thought possible at this point. So, on that premise, I think we’re getting a whole lot closer to the end. I would be shocked if it lasted another 6 to 12 months.
PM: The boiling point is that close. Can you give us your comments on the battered and almost extinct gold mining shares sector? Is this the time to load up the boat or stay away from them?
JE: The single best buying opportunity in the history of golf and silver shares is right now. And, I know these companies. I’ve been following these companies for 40 years. I have never seen anything quite like this. Now, you’ve got to be careful. You just can’t buy them all. Some of them have been so badly damaged by what’s transpired that they may never recover. But, if you do some sound analysis or you buy a good gold share fund where your manager knows what he’s doing, I think you’ll be absolutely staggered at how much money you will make over the next few years in this sector. My partner, Eric Sprott, is on record, and he follows these things more closely than I do now… he is on record saying there’s going to be 30 and 40 baggers in a number of the ones that are the most beat up and still have real value.
PM: Wow, that’s amazing. What do you like better, gold or silver?
JE: Quite frankly, I’ve always loved gold because; it’s the true monetary metal. But, at this point in time, I think that silver is going to outperform gold. I think gold will go up several multiples and silver will go up several multiples more than gold. And the reason I say that is that I think silver is poor man’s gold. The wealthy people in the world and the central banks will be buying gold to protect themselves from monetary debasement. But-, when the public wakes up to the fact that they better get into this game in a big way, they won’t be able to afford gold. It will be trading for 3, 4, 5 thousand dollars an ounce and silver will look, at 1/60th the price of gold currently, a lot cheaper. So, I think a lot of money will go into the silver space that isn’t going in at this point. And, at the same time, there isn’t a lot of above ground inventory in silver like there is in gold. And, a lot of the silver that’s coming out of the ground is being consumed by growing industrial uses. A lot of the new uses for silver have been really soaking up a lot of silver. So, I think there’ll be a major shortage of silver and on top of that, JP Morgan has been reputed to have a major paper short in this area so that will just add more fuel to the fire. So, I think yeah if gold goes up 3 fold, silver will go up 5 fold, 6 fold, 8 fold.
PM: And, that possibility is very real over the next 6-12 months?
JE: I wouldn’t say six. I hate putting time frames on things. I think it’s important that people realize that this is a great place to be positioned at this point, and the timing of it, the size of the move, is less important than being there now. And, why I say that is that most people, if you look at most portfolios, they don’t have any gold or silver in them. And, the fact is that as money moves into this small space that alone is going to drive the price much higher. So, I like to say it is better to be months or even years early rather than 5 minutes late because you may not get in if you’re late.
PM: Won’t give you a chance.
JE: No.
PM: Once again, John Embry, thank you for spending this valuable time on sharing your wisdom and experience with our audience.
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