Chief Investment Strategist
Last week we had the pleasure of interviewing John Embry, Chief Investment Strategist for Sprott Asset Management. Mr. Embry joined Sprott Asset Management LP as a chief investment strategist in March 2003.
He plays an instrumental role in developing the corporate and investment policy of the firm. Mr. Embry, an industry expert in precious metals, has studied the gold sector for over 30 years and has accumulated industry experience as a portfolio management specialist since 1963
Patrick MontesDeOca: Going right into the interview, can you give us your comments and opinions on the current gold and silver market right now?
John Embry: Well, the violent take down that everybody is clearly aware of because it's getting such widespread mainstream attention, I think has created a wonderful long-term buying opportunity. I'm of the mind that this, the carnage, is over. We're probably a lot closer to the end than the beginning of the carnage. I think it will represent the single best buying opportunity for both gold and silver in the entire bull market, which is now in its 13th year, but right now for everybody concerned it is extremely painful.
PM: Do you think the collapse in gold and silver was intentionally manipulated, and why?
JE: I don't think it, I know it was! And the fact is there are huge problems in the world financial and economic systems, and the powers that be realize they are going to have to print so much money to keep this thing from imploding that the last thing they want is gold and silver rising sharply in price because that would be a tell about what they're having to do and would probably lead rapidly to higher interest rates. The one thing this system can't stand is higher interest rates and you've got to realize there's almost $200 trillion worth of debt in the world, and sitting on top of that is more than a quarter trillion dollars worth of derivatives. I mean the leverage in this system is almost unfathomable.
PM: How can one deleverage such an extended system without any major chaos or possible defaults or major crisis developing?
JE: Well, that's an excellent question, Patrick, because my opinion is, you can't. I mean you have two options: the easy option, or the easier of the two options, is to start gradually winding your way into hyperinflation, which will sort of put the inevitable off for a considerable period of time. If you basically try to invoke austerity throughout the world like some of these are trying to force peripheral nations, I think it would almost collapse overnight. I believe the US authorities know that, and they have no intention of pursuing any austerity.
PM: Do you think the Eurozone is running on fear now, panic, as the Cyprus model certainly proves, and is the Cyprus model possibly going to be used globally?
JE: That's a good question. I was surprised actually that they revealed their hand as early as they did there and I think the fact that they back pedaled very quickly was in response to the negative response they got to their initiative. But basically, there's such a need for money from all sources and, basically, I guess this is just another way of getting it, bailing in the depositors rather than printing it all up on their own. I'm worried about it. I think it's a very bad precedent
PM: Why is the gold market so worried about the situation in Cyprus if they may be forced to sell a portion of their gold?
JE: Well, I think that was just bogus misinformation. I mean Cyprus could sell all of their gold and it would be like a flea bite, it's such a small amount, I mean it's nothing, a well to do individual could write them a check for it. So I just thought that was misinformation. Now perhaps you could say, well maybe this sort of model is going to be forced on the entire Eurozone and anyone that needs bailing out, Italy, Spain, et cetera, they're going to have to sell their gold perhaps, but I think a lot of their gold is already leased and it probably isn't available, so nevertheless to me it's all just part of the propaganda that's out there to try to provide an environment in which gold can be forced lower.
PM: They may be making a market for themselves to come in and essentially scare everyone out of their gold holdings and assets in order for them to accumulate. I mean, if you were running short on the product this somehow makes a lot of sense that it's a way for them to transfer the gold ownership right into their hands, isn't it?
JE: Patrick, that's an excellent point, and I believe, you know the bullion banks have probably been working at the behest of the central banks and have been on the short side of this market in a very big way for a long, long time. I think that they realize that the end is coming and this could very well be a part of the strategy. I mean to panic everybody, hedge funds, and individuals into selling so they can cover and maybe even go long, so I think your point's well taken.
PM: If gold stays at this level do you think production will slow dramatically?
JE: That's a really good question. I'm glad you asked me that, because I've been sort of an outlier on this subject for a while. For the longest time I believed we were at peak gold production, and that you couldn't increase the world's gold production to any great extent because a lot of the old open pits are being depleted, and you can't find enough new gold and get it online to replace it. So I thought we'd be do well to stay sort of flat. Well what's transpired recently, I mean, is devastating as the mining sector and gold mining shares have been crushed -- (PM: demolished completely) -- and I mean all the exploration of any significance is conducted by juniors in that now they have no money and no future. So I think instead of the gold production model staying flat for the next few years, I think there's a very real probability it could fall dramatically.
PM: The prospects for the mining industry right now moving forward, John, what do you make of it?
JE: Well, I think you need a fairly robust recovery in prices and at some point in gold prices and silver prices and, if you get that, and I firmly believe we will, probably starting at the latter part of this year, at that point there will be a reevaluation of the shares because there will be a lot less of them and their market caps will be so tiny that any significant amount of money flowing in that direction will have an outsized impact, I think these are by far the cheapest in the valuation sense that I've ever seen them, but it will take higher prices to change psychology towards them.
PM: Do you think that it's possible in the short term coming from this extreme level or do you think that the gold market is damaged long term or that the secular bull market has ended?
JE: I don't think its damaged in the least long term and I'm absolutely sure that the secular bull market is not ended and I say that because if you don't like gold prices here you must like the value of paper money and if you're getting next to 0 percent interest on it and people are printing it like the Japanese and the Americans and even the Europeans are at this point, I don't see how you can possibly make this argument. So no, I don't think the secular bull market is over in the least.
PM: At Sprott Asset Management, what's the buying model at these levels?
JE: Well, I mean obviously we have had a problem because we were pretty well represented in that sector and we got badly hurt and our clients are suffering, but I sent a note out to my salesforce the other day when it was getting murdered on Friday, and I said, look the first thing you must tell the customer is do not be sucked in by this and sell; this is exactly what they want you to do. You must hold your positions and for those people who aren't well represented and have cash or cash flow, I think this is a wonderful opportunity to just dollar cost average in. You can't pick the bottom because you can see what these guys can do in a short period of time. There's no rationale to the depth of the decline, so I mean could it go further? Sure it could, but I mean we are in a bottoming area. I think the best strategy to follow would be to dollar cost average in.
PM: When do you think the metals will be back in favor?
JE: I would be surprised if they weren't back in favor by the fall, because I don't think that these guys can maintain this facade of everything is fine, because I don't believe the world economy is recovering in the least. I think a lot of the American statistics are kind of cooked and I don't think there is a robust recovery going on there at all and this is in the face of trillion dollar plus deficits and zero percent interest rates, and if you can't get a robust economy going in that environment you haven't got a chance. But I'm a real believer in austere economics. There's too much debt in the system and by that definition you can't grow sustainably from those levels.
PM: What else would you like to say John? We have a lot of people that are confused, scared, nervous. They've lost a lot of equity. What do you have to say to them?
JE: I would say very simply, ignore everything you read in the mainstream press. It is out there to confuse you and make you do the wrong thing. If you are basically in gold and silver, and particularly at this point in time, maintain your positions, and if you don't have much, I think it would be a great opportunity to add to positions here, and I think looking forward, to say in a year you'll be extremely delighted. As I said in an interview I did, I guess yesterday, I said, look, if you look back at this unfortunate period from say a vantage point of two or three years from now, I will almost guarantee you it will look like a small blip in a chart because the prices will be so high by that time.
PM: John how can our viewers and our audience follow your wisdom and insight? Can you tell us how we can get in touch with you?
JE: Yes. You can go to www.sprott.com. It's a good website, and we've got not only my opinions but also there's a lot of other very smart people who will offer opinions on a number of subjects.
PM: John Embry, Chief Investment Strategist, Sprott Asset Management. Once again, thank you, John so very much again for your time, for your wisdom and insight.
JE: It's always a pleasure, Patrick.
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any securities. futures or options contracts.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, AGOL, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, UBG, UGL, UGLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.