Wesdome Gold Mines Ltd T.WDO

Embry on WDO

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John Embry: As Confidence Returns, Gold Will Rise
Source: Interviewed by Gordon Holmes, The Gold Report 03/08/2010
The Gold Report caughtup with John Embry, Chief Investment Strategist, Sprott AssetManagement, to get his thoughts on gold and some mining stocks hefavors. Embry, an industry expert in precious metals, has researchedthe gold sector for over 30 years. Read about why he thinks gold couldgain another 30% this year as a greater proportion of the publicrealizes the degree of difficulty that sovereign debt is in. Hebelieves as confidence in gold returns people will seek an outlet ingold stocks, especially small-cap gold producers and junior explorerswith solid projects.

The Gold Report: John, in Investors Digest of Canada you recently said you're expecting gold to gain another 30% this year.

John Embry:I would say at least 30%. I said that I thought it would be the bestyear to date. We've had nine years consecutive higher year-end pricesand the best year in that span for a year's return was 31%. I thinkthis will be the year that we exceed it in this, the 10th year of thebull market.

TGR: What's driving this? Why is this year going to be the best year?

JE:I think we're getting very close to the point when a greater proportionof the public realizes the degree of difficulty that sovereign debt isin. And at that point, when you can't depend on your government paperas a safe haven, I think that fact puts gold in a much better light inmore people's eyes.

TGR: You might say the first legdown were the individuals who couldn't pay their mortgages and thatcaused part of the '08 collapse. And now it looks like it's thegovernment's.

JE: It's very simple, actually. Privatedemand, as you know, was so weak that governments had to step in tomaintain order in the economy and in so doing, they spent an enormousamount of money, at the same time that revenue streams fell because ofthe weakness in the private sector. Governments spent dramatically moremoney and the results are a budget deficit I never thought I'd see inmy life. I'm shocked at the numbers in many places.

TGR:It's been unbelievable. Now when you talk about gold, you're talkingabout bullion. How do you see the gold stocks? Do you think we're goingto have a pullback? Ian Gordon of Longwave Analytics and RichardRussell (Dow Theory) predict the Dow will go to 1000.

JE:I don't agree with them. As much as I love Richard Russell—he'sprobably been as big an influence in my career as anyone—I don't thinkthat deflation is necessarily the outcome when you have a pure fiatcurrency system. I think the far greater risk is hyperinflation becauseI believe that these guys that are in control today have seen thedepressionary '30s, and they will move heaven and earth to prevent thatoutcome. And when you've got the capacity to create unlimited money, Ibelieve you can do it. So I hear Gordon and Russell and I respect them,but I'm in the camp that thinks we'll get hyperinflation first. We'lleventually have to clean out the debt, but I think we go hyper beforethat.

TGR: So hyperinflation. Would that include stocks as well?

JE:I think stocks will do fine. They may have a violent correction firstbecause a lot of people don't know what the heck we're talking abouthere. And when they see inflation mounting and economic conditionsbeing less than ideal, they'll sell their stocks. But the fact is thatif you go back and look at any hyperinflationary environment anywhere,stocks did infinitely better than paper instruments. So precious metalsfirst, stocks second.

TGR: When you're talking about stocks, you're not talking just about gold stocks.

JE:No, I'm talking about good businesses. I'm not talking necessarilyabout banks and other stuff that's more dubious, based all on paper,but businesses like breweries, for example. People are always going todrink beer and a good brewing company will do exceptionally well in thedebased currency of whatever country it's in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

JE:Gold stocks, maybe. I believe the next time everything goes down, goldisn't going down. And if that were to be the case, I think gold stocksmight surprise. They've been awful. Given what the gold price has done,gold stocks, by and large, have been awful.

Well, thewell-promoted ones and the odd good one have done okay, but across thewhole list, it's been pretty hard slog over the last three or fouryears, particularly 16 to 17 months ago when it we hit bottom. Ithought they were going to zero.

So many of them are tradingat less than they were back in November 2003, which was the real peakof the excitement in gold stocks, if you can imagine. Six and halfyears ago. The gold price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

JE:Oh, I think the juniors. The whole thing is a matter of confidence.They've got so much volatility in the gold price. You get a good thrustup and you got a violent correction and I think they've got so manypeople discouraged and going the wrong way on these gold stocks thatright now the degree of confidence is very low. If I'm right and thegold price stages a dramatic breakout in the next 12 months—and I'mtalking hundreds and hundreds of dollars on the upside—then I think theconfidence will return and people will seek an outlet in gold stocksbecause so many of them have been beaten up. More importantly, theoverall market cap of all the gold stocks is really small in thecontext of all the money around.

TGR: What's the seasonality of this year?

JE:I think that probably we may continue to wallow around here for maybethe better part of another month. Maybe not quite that long. But,historically, mid-March to mid-May has been a really good period. WhenI look at the fundamentals and everything that's going on, I see noreason why it shouldn't be a very good period this time. And there'sone other development. I don't know whether it will come to fruition,but on March 25th the CFTC is going to be investigating position limitsin gold and silver on the COMEX. And if they ever put any teeth intothose things and kept these bullion banks from what they're doing onthe short side with their large positions, I think that could have asalutary impact on gold and silver prices.

They're finally goingto have to address this because there's been so many complaints aboutthe bizarre price action on the COMEX in both gold and silver.

TGR: What about some individual stocks? Any that you'd like to comment on?

JE:Gold Fields (NYSE:GFI)remains very cheap. It's been under a cloud, I think, because there'sbeen a lot of conversation among some of the more radical factions inSouth Africa about nationalizing the gold mines. I don't believe it'sgoing to come to that. I talked to a chap who knows South AfricanPresident Jacob Zuma fairly well and Zuma is certainly not in favor ofthat. There's always going to be radical factions. If they want todestroy their gold industry, nationalize.

TGR: That'll do it.

JE: Hopefully, cooler heads will prevail. On that basis, Gold Fields is extraordinarily cheap based on its reserve base.

TGR: What about consolidation plays? Do you think the time is right for that?

JE:I think the big problem is that the guys that head up some of thesegold companies don't have the confidence in their own product that theyshould have. As a result, they're reluctant to pull the trigger onacquisitions that to me would be brilliant at this stage in time. We'veseen some activity, as you mentioned, in Mexico. I know Goldcorp (NYSE:GG, TSX:G)has been picking up a few around its big silver play down there. And Ithink that's a great move. My attitude is that these guys, withoutexception, all have long-term reserve issues. If there's ever been abetter time, based on my outlook for where all this is going, to pickthem up, I can't think of one. These guys should be looking foranything that's real and using their paper right now to buy it.

Another stock I like that I sound like a broken record on is a Canadian-based company called Wesdome Mines (TSX:WD).They've got two operating gold mines, one in Quebec and one in Ontario.You couldn't be operating in a better geopolitical environment. They'reboth profitable. They had a dividend last year; they will pay adividend this year. I believe the Canadian dollar, despite otherpeople's belief that it's going to be very strong, isn't. Given thebudgetary problems and everything that are coming up here, Canada willmove heaven and earth to make sure its currency doesn't move up againstthe U.S. dollar, so I don't see any further cost pressures because of astronger currency in Canada. They're having success with extendingtheir ore bodies and they've got absolutely blue chip mining facilitiesand the stock, which probably earned something like 20 to 25 cents lastyear when it reports, trades at just over two bucks. I just think thething is dirt cheap. I look at a lot of stuff that's years fromproduction with market caps three times as big as this one. This one'sgot a total market cap of $215 million. So I think, of all the smallstocks that I look at, I like small producers that are basicallyoverlooked and this, to me, is probably the most overlooked smallproducer. I'm always interested in profitability and the ability toextend their reserve life related to market cap.

TGR: Any others?

JE:One that I like up here in Canada that I've liked for years that's justcoming into production, and they are really adding to their reservebase, is Lake Shore Gold Corp. (TSX:LSG),which trades around three bucks. I think that they'll eventually proveup multi-three, four million ounces just outside of Timmins, which isanother great place to be operating because of its long mining history.I'm a little less adventuresome these days in the sense that mygreatest concern down the road for gold stocks is if my maligned viewof where this is all headed occurs, one of the few sources of revenuefor governments may be taxing gold mines. So I want to be in ageopolitical area where there is some respect for law and people aren'ttotally rapacious like they are in some of the third world countries.

They'llalways go where the money is and in this case they may be even moredesperate for money, so that's why when people ask me how should I beexposed to the gold industry, I say, well, the first thing you've gotto have as the core of your portfolio is bullion, because that'sforever. You don't have the same leverage to the upside necessarily,but on the other hand you know what you've got. The gold stocks areephemeral, but if you hit them right, you're going to make a fortune.You will get a three- or four-time bigger move than you will in bullionat some point in time. But the long-term hold is bullion, in my opinion.

TGR:Would you speculate? I read that the IMF is going to be selling somegold and India stepped up earlier. What are your thoughts on that?

JE:The whole thing irritates me. The IMF has announced the sale of thisgold 500 times and every time with the express purpose of knocking theprice of gold down. It was interesting the last time when the Indiansactually relieved them of over 200 tons because that was what basicallyvaulted the market from about $1,045, which the Indians paid, up to$1,225 in the space of less than a month. That has been followed by thethird significant correction in the last three or four years.

Ithink we've seen the vast proportion of the correction and I think whatmay be one of the factors that could get this thing going again is whensomebody does relieve the IMF of the gold, the 191 tons to be exact.There's speculation that India might be prepared to go to the plateagain because the Chinese have been reluctant to step up. Number one, Idon't think they want to be seen publicly doing it. They'd probablyrather do it more clandestinely because they've got so much money toconvert into hard assets. And, secondly, as somebody pointed out, theChinese at least have a domestic supply of gold. They can buy all theirdomestic to augment their reserves, where the Indians really don't havethat. So I think the Indians conceivably have a bigger vested interesthere in taking that IMF gold. And there's also sort of the suggestionthat the Chinese wouldn't want to be seen to be paying more than theIndians did, so they're reluctant to step up with the gold price $50higher currently than the Indians paid. If it was really a free market,if they were really prepared to sell it to anybody, I think I couldname any number of institutions, organizations, individuals that wouldbe more than glad to relieve them of it. It's not much money. It's $6billion. They throw it around as if it's a big deal. Heck, given thebudget deficits in some of these countries, $6 billion is literally apiss in the ocean.

GR: That's right. What do you think when Soros came out and said that gold was a bubble?

JE:I wrote about that and I got it right. I was very pleased about thatbecause some people got all upset. The people that were negative ongold thought this was great, brilliant George Soros doesn't like gold.But if you read between the lines, if you read really what he said, hesaid gold is the ultimate bubble, but he didn't say gold is currentlythe ultimate bubble. I believe that it will be the ultimate bubble. Ithink the gold price is going to go crazy and at that point I'd beworried about. And then it came out after the fact that Soros had beena major buyer of gold for his funds in the fourth quarter. So who knowswhat he was doing. The fact is, depending how you interpreted hisremark, he was speaking at Davos, which is a very mainstream event, andhe said something that can be interpreted any number of ways.

TGR: Right. And, again, I think the financial talking heads used it as the negative.

JE:Absolutely. The mainstream guys were all over it. The guys who havenever like gold have been wrong all the way up and said, oh, my god,George Soros doesn't like gold. But I think George Soros' remarks weremisinterpreted and if you saw what he was doing, not what he wassaying, he was buying gold.

TGR: Alright. Any last comments?

JE:The only comment I'd make is I really think things are sufficientlyserious here in a financial or monetary debasement sense thateverybody—and I have never been a table pounder—but I think everysingle person with a serious portfolio has got to have a reasonablysignificant exposure to precious metals. This isn't something that'sjust insurance for those who've got cold feet. This is something Ithink is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

JE:I used to say 5% to 10% when it was just an insurance thing and themarket was pretty sanguine. I say at least 20% now. I see the otherassets as being less attractive. I wouldn't buy a bond if you gifted mewith the money to do it.

TGR: John, once again, I appreciate it.

JohnEmbry is chief investment strategist at Sprott Asset Management andSprott Gold and Precious Minerals Fund. He also co-chairs the CentralGoldTrust Board of Trustees. An industry expert in precious metals,John's industry experience as a portfolio management specialist spansmore than 45 years; he's simultaneously researched the gold sector for30-plus of those years. He joined Sprott in 2003, after 15 years asVice-President Equities at RBC Global Investment.

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DISCLOSURE:
1) Gordon Holmes of The Gold Reportconducted this interview. From time to time, Streetwise Inc. and itsdirectors, officers, employees or members of their families, as well aspersons interviewed for articles on the site, may have a long or shortposition in securities mentioned and may make purchases and/or sales ofthose securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Gold Fields Ltd., Goldcorp.
3) John Embry: I personally and/or my family own the followingcompanies mentioned in this interview: Wesdome Gold Mines, Lake ShoreGold Corp., Goldfields Ltd. I personally and/or my family am paid bythe following companies mentioned in this interview: None.