NO END TO QUANTITATIVE EASING AND $ DEBASEMENT All great moves are preceded by hard negative sentiment.
There is no end in sight for quantitative easing and dollar debasement.
Worry less about the downside and focus on the upside.
Why I like both gold and silver - Embry
Sprott Asset Management's John Embry discusses how he sees the current global financial situation ending and why he likes both gold and silver.
Author: Geoff Candy
Posted: Wednesday , 10 Apr 2013
GRONINGEN (MINEWEB) -
GEOFF CANDY: Hello and welcome to this Mineweb.com Gold Weekly podcast and joining me on the line is John Embry – he’s the Chief Investment Strategist for Sprott Asset Management. John so far this year it’s been a pretty tough year for gold bugs in terms of what gold prices have done. How do you see the marketplace at the moment? In your latest investor report you do mention the level of market manipulation at the moment. Where do you think...?
JOHN EMBRY: Well basically the manipulation – it’s been going on for years, but the fact is its becoming more widely recognised... since the Treasury Secretary Paul Craig Roberts wrote a really good piece the other day he called “The Assault on Gold” and basically it’s really picked up steam in the wake of the downgrade of the US debt back in August 2011. At that point gold hit about $1900 and ever since then it’s been under increasing attack. And yet if you went back and looked at all the fundamentals that have occurred between then and now, none of them are gold unfriendly. Everything basically that is going on is supportive of higher gold prices yet they haven’t happened. So my take right now is that gold is very inexpensive, and as a result of the counter intuitive price action we’ve seen for a considerable period of time sentiment is dismal and when you put that combination together, under valuation, dismal sentiment and improving fundamentals, to me it’s just a matter of time. And I think when we look back at this period we will recognise this may have turned out to be the single best buying opportunity in the entire bull market which is now in its 13thyear. So am I bullish, yeah I’m real bullish but timing is very hard to get a handle on because of the amount of interference short-term and the paper gold market.
GEOFF CANDY: Speaking to other commentators over the last few weeks, a lot of them have highlighted the importance of investor sentiment. How big a role does this play in your view, and how important is it likely to be going forward?
JOHN EMBRY: Well I think it’s playing a huge role and the fact is that all great moves are always generally preceded by lousy sentiment because lousy sentiment means everybody is getting out rather than getting in. Now the question is what's going to change that sentiment, and I was asked that on a TV show yesterday. I’d say it’s any number of things that could happen but I think one that may be significant will be when the public at large recognises that there's going to be no end to quantitative easing. Once you get into this to the extent that the US government and other western governments have, you cannot reverse this without creating a complete collapse in your financial system and your economic activity, and they won’t do that. So I think there will be recognition at some point in the not too distant future that QE is not going to stop and money is going to be debased more and more aggressively. That’s the best environment possible. You’ve got to own gold in that environment.
GEOFF CANDY: There's been an expectation on the part of some people that when we saw the eurozone crisis happening, when we saw the initial bouts of QE, QE1, QE2 that there was going to be a definitive breakdown in shall we say the financial system, similar to what happened to Lehman, if not much worse. In some respects that hasn’t happened as yet and the expectation is increasingly that while that won’t happen any time soon, what we’re going to see is bumbling along over the longer term with extra or continued quantitative easing and fairly poor economic growth and all those kinds of things. Is that a scenario that you do see playing out, or that you can see playing out that we’re going to see a decade or more of anaemic growth, if any at all, and just generally speaking more of the same or do you think there will be a definitive break?
JOHN EMBRY: I believe there will be a crisis – the situation is sufficiently far gone and what will happen is what you’ve just said. You're not going to be able to really underwrite sustainable growth given the amount of debt in the world and I’m a great believer of Austrian economics – to me that’s just out the window with the amount of debt we’ve got here – the idea that we could have sustainable growth. But nobody wants to see the thing collapse on their watch so the obvious alternative is creating as much liquidity as is required to keep the thing afloat. Now the negative aspect of that is that right now you can get away with that because of the velocity of the high powered money that’s being created is dropping. It’s being kept held in banks - it’s not being really recycled continuously so the velocity is dropping and that has sort of kept a relative lid on inflation. But if you continue down this path, continuing to print more and more money there will be a collective realisation by society at some moment that they're destroying the money. We’ve got to start spending and get rid of it and when that happens, inflation mounts very rapidly and I don’t think they have the capacity when that starts to stop. I’m actually worried about a dramatic rise in inflation maybe culminating under worse circumstances and some form of hyperinflation than I am about a collapse, because I don’t think that they will create enough money to prevent a collapse in my opinion. But there are negative aspects to it. We haven’t seen them yet...
GEOFF CANDY: Why do you think we haven’t seen them yet?
JOHN EMBRY: I think that basically with all the new financial innovations and what have you – the derivatives and everything – they’ve been able to keep things afloat longer but all it’s done is add more leverage to the system, which in my opinion makes the endgame even more catastrophic. So I am one of those that I guess believes that we should have taken the pain many years ago and realised the business cycles and sort of cleaned some of the debt out along the way. But now we’ve reached such a state that we don’t have that option because it merely means a collapse. So consequently we’re just going to sort of bumble along until something horrible happens.
GEOFF CANDY: Now clearly you're an advocate for bullion and hard money, in terms of...
JOHN EMBRY: ...hard assets in general...
GEOFF CANDY: Hard assets I should say – clearly you're an advocate for hard assets, what about mining equities because clearly that’s an interesting class. They are fairly depressed at the moment and the outlook for them doesn’t look good. What is your view of those, particularly...
JOHN EMBRY: I would rank as one of the greatest understatements there might be, but I’ve never seen them in my 50 years in the business, this out of favour, this depressed and if I am correct, and I believe I will be under correction of bullion prices, particularly silver... now we’ve yet to talk about silver but it looks spectacular. But in any case if I am correct on bullion prices, you will see the greatest rally in history of mining shares for two reasons. One because they're so depressed and the sentiment towards them is awful, and secondly, a lot of them are being destroyed. You're going to have a lot less entities when this thing turns, at the same time that the market cap of the existing ones that remain it’s going to be so small that it won’t take much money to drive these things skyward. So it’s a matter of how much patience you’ve got but we’re just bumping along the bottom now and when this thing turns it’s probably one of the great investment opportunities I’ve seen.
GEOFF CANDY: That’s obviously predicated on the fact that system in its fundamental form will stay afloat. We’re not predicting an apocalypse here, we’re just predicting a change in sentiment.
JOHN EMBRY: You're right – if you really thought the thing was going to fall apart we’re going to have a systemic breakdown, you’d be better off with gold and silver bullion, at least that’s a real tangible asset, and you don’t have to worry about a functioning system to get it out of the ground. But I’m not going to go that far, I think we can sustain the activity in the world that under that scenario I do believe that the gold and silver prices will be multiples of where they are now in the next few years and in that scenario, the stocks are a spectacular investment opportunity.
GEOFF CANDY: I was chatting to somebody a couple of weeks ago about the fact that miners should be banking themselves in gold. They should be retaining as much of their product as possible and basically paying out and banking themselves and using their bullion as their best asset. Would you go along with that kind of thinking?
JOHN EMBRY: Brilliant suggestion because I’m a great proponent of the fact that gold is money. It’s been money for centuries and the fact that our current FIAT currency system is breaking down, makes it even more important that the fact that gold is money. These companies, if anybody, should be proponents of that theory. It’s the companies that dig it out of the ground so yeah I’m 110% in favour of what you just said.
GEOFF CANDY: In terms of the equities themselves as well, regarding mine supply in particular, we’ve seen a significant decline in the amount of exploration that’s been happening and the amount of successful exploration for the amount of dollars spent, has definitely come down. Do you see a limit to the amount of gold left in the ground that is economically viable at these kind of levels and where is there a peak gold situation happening?
JOHN EMBRY: Without question. I was an outlier for several years because I thought we’d been at peak gold for several years now but I’ve revised my opinion. I think gold supply is going to fall, mine supply is going to fall fairly significantly irrespective of what price does over the next five years for the simple reason – the reasons you’ve just cited. And I mean all the low hanging fruits have been plucked. Most of what Greenfield discoveries there are tend to be in unpleasant places and a lot of the open pits that were developed in the 1980s and 1990s, which was a major revolution in mining, are coming to their end and I don’t think they're going to find enough new stuff and get it on line to replace the stuff that’s being depleted, let alone grow the supply. So I’ve actually revised my mine supply, I think it’s going to fall over the next five years.
GEOFF CANDY: Then just before we get into silver very briefly, in terms of expectations of higher prices one of the key demand side fundamentals has always been jewellery demand, particularly in Asia. If we see the rapid kind of escalation of prices that you are expecting, what is that likely to do to jewellery demand and how much of a support is that going to perhaps diminish?
JOHN EMBRY: I think jewellery demand is a key element when the gold price is low because then the primary use for it tends to be jewellery, but when you get into a situation where gold is re-establishing itself as money, the jewellery aspect of it declines and all great bull markets are driven by investment demand, not by jewellery demand, so yeah I think jewellery demand will fall. Does it bother me, no not at all. And for most people that think that the gold price isn’t going to go up, that’s tantamount to saying they think the value of paper money is going to go up and in view of what's happening in the world of zero interest rates and unlimited printing I just think that that’s a preposterous assumption, so the gold price will be going up in terms of all these devaluing currencies.
GEOFF CANDY: Just quickly on to silver, you mentioned earlier that you do like it. Are you preferring silver to gold at the moment...
JOHN EMBRY: Oh yeah I do and that’s not to denigrate gold in the least. I like gold very much. I just think that the gold:silver ratio which is currently north of 50 probably as the bull market re-asserts itself in both metals, will fall towards historical lows which is down around 10 to 15:1, so if you thought the gold price was going to double just to take a number, the silver price could go up two or threefold more than that. So yeah I like silver a lot and if you look at its industrial uses which are growing quite rapidly actually, at the same time that it’s going to be poor man’s gold, as gold becomes more expensive, more people will seek silver as their monetary asset. And it’s a small market – you can see the fundamentals that will drive that drop in the gold:silver ratio.
GEOFF CANDY: To close off with, in terms of the outlook going forward, we’ve seen poor sentiment, we’ve seen lower gold prices over the last few months, until you see the type of break that you are expecting there is a good chance that we’ll see gold moving lower. Is there any way to...
JOHN EMBRY: No I’m not sure I would agree with that. I think that gold has been driven down from $1900 to $1580 give or take, it’s been a 19 month correction. Silver has been in a two year correction, a lot of this has been manufacture. Sure it could go lower but what we talk about is risk reward, that’s what I always look at and I think that the risk in the downside in gold is 5%, just to pick a number, and that the upside is hundreds of percent, then the numbers are even better in silver. So I would be less inclined to worry about the downside, I’d focus on the upside and I would be positioning myself carefully at this point in time.