We have the great pleasure and honor to have with us today John Embry.
John joined Sprott Asset Management LP as Chief Investment Strategist in March 2003 with more than $7 billion under management. He plays an instrumental role in developing the corporate and investment policy of the firm. John, an industry expert in precious metals, has studied the gold sector for over thirty years and has accumulated industry experience as a portfolio management specialist since 1963.
In a recent interview, I had the opportunity to chat with John over the phone about the U.S. Economy, the Fed, gold and silver. The following is a transcript of this interview exclusive to Seeking Alpha.
JP: What are your comments on the new Fed's new chairwoman Janet Yellen's monetary policies and tapering moving forward from here?
JE: I think I've said before that I view Janet Yellen as "Ben Bernanke lite," and irrespective of what she says, she will do what she has to do. And I thought it was a very interesting comment she made a couple of days ago when she said that due to the sub-par job recovery, we're going to maintain interest rates at low levels for the foreseeable future essentially, and the stock market responded very positively to that. Naturally the gold market was knocked down, but the fact is that this is wildly bullish for gold in the longer run because of the very simple fact that they cannot remove the punch bowl to any great extent without sending interest rates much higher in the United States, and the impact on the economy would be extreme.
JP: Will she create a margin call globally as a consequence of this tapering process?
JE: Well, I think not. I think the tapering process will probably be reversed before that becomes a reality. I think that they are aware of the fact that these are global markets now and this would sort of bring down a number of global markets because they are focused on tapering. I think that is probably not going to happen. See, the problem that they have is they basically have two conflicting issues, one is that they are trying to support the U.S economy, and at the same time, they are trying to support the U.S dollar, and I think that those are mutually exclusive and in the end, when push comes to shove, I expect that the dollar will be the one that is going to take the hit.
JP: Please explain how the Fed can maintain a zero base interest rate policy for a couple more years on the long end of the market. And isn't tapering another way of manipulating short term interest rates higher?
JE: Look, I think that's correct, and I guess I'm in the camp that doesn't believe that they can ultimately keep these long term interest rates at these levels because the problem is that the U.S dollar is severely over-owned throughout the world. People are not being compensated for the risks that they are taking by holding the U.S. long bonds with what's going on with U.S monetary policy. I think this whole tapering discussion and the idea that they have been tapering for several months is at this point just trying to keep everything at status quo. So, they can go around saying that they are going to lower interest rates for the next few years. I don't think they can do it, but time will tell.
JP: How can this policy help the U.S economy when we have such a high debt interest payment obligation?
JE: In the long run, it can't. I mean, right now their greatest fear is that the dollar is going to break down particularly at the time of the Russian Crimean crisis, and if you looked at a chart of the dollar, the trade-weighted dollar, it looked hideous, and so consequently, I think a lot of this right now is focused on the dollar, and they're trying to maintain the fiction that the U.S economy is staging a relatively robust recovery. I do not see that in the numbers. I think that the policy will change again as the economy becomes a problem.
JP: Is the Fed's use of scare tactics again to stimulate loan demand and increase the velocity of money into the economy which has been lagging even under such record stimulus levels (from $800 billion at the start of the 2008 great recession to the currently and increasing Fed's $4 trillion balance sheet) seeing anemic results?
JE: It's astounding actually what has transpired since the global financial crisis unfolded in terms of what's happening to the monetary base in the United States and the Fed balance sheet. The fact is if you want to be brutally honest about it, this has been directed primarily at trying to keep the banking system under control, interest rates low and fund the massive federal deficits. The idea that it was going to have any significant impact on the economy I think was a misplaced idea, and I think that's proven to be the case. I mean there has been a minor recovery, but given the degree of stimulus, I mean, if the economy wasn't sort of clogged up with excessive debt, it would have gone berserk with all this money that's jammed into the system, but they can't get the monetary expansion into the banking system and into the public's hands, because there aren't enough creditworthy borrowers anymore. Those people who need money can't get it, and those people that don't need it don't want it. So it's kind of blocked up, and I don't think it's going to work. In my opinion, it hasn't worked other than it has kept the markets afloat where you've got bubbles forming in a number of markets.
JP: That seems to be the general sentiment John, even with Japan or even with possibly China creating potentially a massive crisis down the road.
JE: Well that's an excellent observation. I am a particular bear on Japan. I think that people should study Japan closely, because I think that coming to a number of the industrialized economies ultimately in the West and Japan is a hopeless situation. They have massive government debt. They have a huge bond market that yields next to nothing, and they are attempting to create inflation. Why would anyone in his right mind own a Japanese bond in that circumstance? So I think that they are heading for trouble, and their economy is not responding at all in reality, and basically they are getting a little more inflation. Their economic growth virtually none and their current account deficit is finally lapsed into a negative position after many years of being positive. I see Japan as a textbook case of what could envelop the entire western world.
JP: Can you bring us up to speed on what's going on with the gold and silver markets?
JE: I mean, as you know they got off to a pretty decent start at the beginning of the year. I mean gold rallied from what, 1180 at the low the last day of the year, and it got up to 1385-90, and then the day Putin annexed Crimea, which I considered a negative event from the West's point of view, suddenly, the gold market came under tremendous pressure for 12 consecutive days. It was pounded, and they drove it down 100 bucks, and yet if you can point out one fundamental reason for this, you're a better man than I am because, I can't see anything that would justify the gold price going down in the environment we have seen in that past twelve days. So it's interference in a market; it's the flip side of trying to keep the dollars strong and it's to me transitory setting up an even better buying opportunity in gold than we saw at the beginning of the year.
JP: Have we bottomed yet or there is much more to the downside?
JE: Yes. And you always have to be a bit circumspect about calling bottoms when the market can be affected so much with derivatives and naked short selling and all sorts of things. But having said that, I think that we haven't bottomed, absolutely. We are extremely close, and what people should be focused on is not how much money they can lose in the next two weeks, but how much they can make in the next two years.
JP: Your comments on the China economy. Anything we should be concerned about there?
JE: I think there are a lot of things to be concerned about, but I'm a long-term bull in China, like most people. And I think the 21st century in retrospect will be considered the Chinese century just as the 20th century was an American century, but having said that, I think they are in the throes of going through a difficult period. I mean they have expanded dramatically on the basis of massive debt expansion and on the sort of buying power of the rest of the world, and they became the manufacturing center for the rest of the world. As you know, I mean in the Western world, the consumer is largely tapped out, and this is starting to back up in China, and when you start to have an economy that is growing as rapidly as they have with the debt creation particularly in their shadow banking system, the economy starts to slow, and it is most definitely slowing. Then the debt problems emerge, and that is what we are looking at now. We are starting to see defaults in the Chinese bond markets and what have you, and the idea that these people are immune from the same problems that affect other economies I think is wrong. So I think the Chinese economy is under stress, and I don't believe a lot of the economic numbers that are coming out, I think they are overstated, and I think it's a negative thing in the world because China has been the strongest entity in the world the last couple of years. If it weakens with what else is going on, it's not a positive.
JP: Do you think the Chinese record demand for physical gold will continue in 2014?
JE: I think that even if they're going through reasonable economic difficulties, the longer-term policy is for them to accumulate physical gold, and I've seen no appreciable slowdown to date, and at some point, their demand is so strong, and with other countries and individuals looking for gold, I don't know where it's all going to come from. So I think that the physical side of the market will eventually drive the price, and it's still looking extremely positive.
JP: Do you like silver or gold down here?
JE: In the very short term, gold looks a little better, just because of the open interest situation on the Comex, just because there is a massive open interest on silver, which makes me uncomfortable. But having said that, I think silver is materially cheaper than gold on a longer term, and when the bull market reasserts itself with real enthusiasm. I think the gold and silver ratio will decline precipitously, and I think that means that obviously no matter where gold is going, silver is going a lot higher on a relative basis. So if you really want to make a home run in the bullion field, I think you ought to be accumulating silver around twenty bucks. I think that an absolute gift price.
JP: What about the mining shares, and do they still have some potential for recovery under the Yellen-nomics monetary policies or if real interest rates start heading higher?
JE: Without question, the fact is that nothing has changed in the mining shares. They were looking pretty perky there up until about two and a half weeks ago. They were starting to break out, and I mean that wasn't going to be allowed. I mean there was just a violent attack on them. I mean, I had one company which I think is a pretty good producer, and it dropped 31% in five days. It's preposterous. It was already under priced. I mean, this wasn't natural selling; this was an attack by the powers that be. So what they've done on the premise that I'm right, physical gold and silver bullion are moving much higher in the next two years and these stocks are remarkably cheap. And you're getting a renewed opportunity to buy them at remarkable prices. The only caveat I would put on it is you've got to be very selective because some of these companies have been damaged a lot. Do your homework and I think you'll be shocked at how much money you'll make.
JP: Any additional comments you like to make?
JE: No, I just think that there is a surrealistic aspect to what has gone on. You have to step back and look at the true fundamentals of the situation in the world economy. The geo-political aspects, how cheap gold and silver are and make the right decision; I mean a lot of people are tied up in paper, and I think they could get badly hurt if this thing unfolds, the way that I see it coming.
JP: Where can our audience contact you directly?
JE: It's www.Sprott.com. We've got an active website and you can get in touch with me there.
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 futures or options contracts.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLL, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL 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.