Patrick MontesD...'s  Instablog

"The fundamentals for gold are unassailable, the long technical picture is excellent and gold remains very inexpensive when compared to almost every other alternative (most particularly, bonds, treasury bills and bank deposits). With currency debasement assured and some form of hyperinflation probable, gold should trade at several multiples of the current price before this bull market reaches its end." John Embry, Chief Investment Strategist for Sprott Gold and Precious Minerals Fund

Has the gold bear market started?

Not according to my most recent interview with John Embry, (Sprott Asset Management, Chief Investment Strategist), "I am absolutely sure the gold and silver bull market has not ended. If you don't like gold prices here, then you must like the value of paper money and you're getting next to zero interest on it." With governments printing money around the world, he said, "I don't see how you can possibly make that argument."

After a painful week for the bulls experiencing a massive effort by the central banks to collapse the price of the yellow metal more than $200 an ounce in just a couple of days, the price rallied on Friday to close near the 1400 level.

The price of gold dropping from a high of 1557 made on April 10, 2013 to a low of 1323 in 6 days was a clear move by the central banks to indirectly confiscate the ownership of the gold market from the private sector by using the virtual electronic paper market and manipulate prices to extreme levels.

The volume collapsed from 219,806 contracts as of March 25, 2013 to 92 contracts by April 17. One might say, it is an understatement to make that all the sell stops have been taken out.

According to the latest Commodity Futures Trading Commission report COT released Friday, it indicates that hedge funds and commodity trading advisors took advantage of the steep drop in prices.

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Managed money traders raised their net "long" positioning, or bets prices will go higher, by 21,675 contracts to 68,662 contracts net long, according to Gene Arensberg, editor of the Got Gold Report.

Managed money, which had recently built up a record short position in gold, covered 12,411 shorts to show a "still high" 54,025 contracts of short gold futures, he said."Managed money covered a goodly portion of their huge short position and they increased their net long position, but they still hold a very large gross short position," said Arensberg.

Is the gold really there?

Over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since record keeping began in 2001.

"This is one of the greatest and generational opportunities to accumulate gold and silver at these levels" stated Karl Schott, bullion specialist with EMA in a recent interview. " The spreads between the paper market and the real physical bullion market are beginning to get expensive and it is becoming increasingly more difficult to buy the physical bullion without some kind of substantial premium. I think this is a clear sign of capitulation in prices."

Why isn't gold in a bear market now?

Objectively investigating from the physical markets perspective, I recently wrote a piece entitled - Gold: A Possible Paper Short Squeeze? - I pointed out the discrepancy between the activity in the physical market trade on the LME and the virtual paper markets or electronic platforms.

Bullion banks and central banks, which have been shorting gold, have applied great pressure to drive the price of gold down in the paper markets. This, in turn, has led to the fall in the price of gold--at least on the paper market.

In my report London metals trader and whistleblower, Andrew McGuire made the following comment; "Since gold broke 1550, McGuire said, "there has been far in excess of 500 tons of paper gold that has been sold, strongly suggesting a bull market-at least on the paper market. The physical market, however, tells an entirely different story. Just in Shanghai, physical deliveries were 283 tons in March alone. In eight trading days in April another 183 tons were delivered. Some 400 tons have been delivered to buyers in Shanghai in less than a month and a half, and that is just for one exchange."

McGuire stressed the importance of the difference between a paper market intervention and a physical intervention. He said, "There's a huge difference. Traditionally, when official buyers have come into the market, they have been able to back up the paper intervention with real physical supply. McGuire said, "What we're seeing now is none of the physical supply is there."

What to do now?

"Do not be sucked in by this," Mr. Embry said. "Sell is just what they want you to do. You must hold your position. If you have cash, I think this is a wonderful opportunity to dollar-cost average in."Although we are in a bottom area, he said, "You can't pick the bottom because you can see what these guys can do in a short period of time."

If you are long gold or hold physical gold, this is certainly not the time to sell. Studies show that most investors lose money by buying high when the media is focused on the latest hot investment, and selling low, as the media focuses on stories about an investment that is plummeting. Gold is plummeting.

However, the fundamentals reinforce a mid- to long-term prediction of a bull market in gold and silver. Governments around the world continue to run deficit budgets. Even in the United States, where sequestration was, and is, big news, the reductions in spending were not a reduction in overall government spending. They were reductions in the rate of increases in expected spending, with non-discretionary spending, such as funds spent on Social Security and Medicare, let untouched. The US government continues to borrow more money in order to spend more, even with all the talk of reducing spending. The total debt of the US government continues to grow, from $17.7 trillion in 2011 to an estimated $20.2 trillion in 2013.

To meet such debts, governments around the world are printing more money and borrowing. Printing more money, as with anything, decreases the value of each piece of currency. By keeping interest rates extremely low, governments seek to keep their own borrowing costs low, but also help inflate the stock market and housing markets with artificially induced growth. How long can this cycle last?

Let's examine what I said in this recent forecast and see what the market has done since the projection was made. "Conventional interpretation of cycles defines the expectation of a cycle top to be accompanied ideally with new seasonal or historic highs in price. This is the highest probability factor for the signal to materialize as originally anticipated. In the current analysis, this is not the case. Instead, what we see as we move into the latter part of the forecast is that prices are doing the opposite or have created an "Inversion".

Sometimes a cycle high occurs when there should be a cycle low and vice versa. This can happen when a cycle high or low is skipped or is minimal. A cycle low may be short or almost non-existent in a strong uptrend. Similarly, markets can fall fast and skip a cycle high during sharp declines. Inversions are more prominent with shorter cycles and less common with longer cycles. For instance, one could expect more inversions with a 10-week cycle than a 40-week cycle.

This is actually an alternate count to interpret the signal. Based on the fact that the prices are making weekly lows into this cycle time frame, it is actually telling us that instead of a cycle high it is making a cycle low. It indicates that this inversion confirms the probability that we're looking not only at a short-term bottom, but a major generational bottom or the yearly lows are coming in sooner than expected for 2013."

No one knows for sure, but it is an ideal time to start cost-averaging into the precious metals markets. Why? Because no one can ever pick the top or bottom of a market, but we are in the region of a bottom. Once the massive printing of money leads to inflation, fiat money will be worth less and, as has happened historically, investors will flee to physical investments, such as gold and silver.

Such a volatile market also provides opportunities for short-term trading that can lead to nice profits.

Strategies and Technical Landscape

Let's take a look at a few derivative instruments in the precious metals sector and see what short-term opportunities we can identify for next trading week.

GOLD

The April gold futures contract closed at 1400. The market closing below the 9 day MA (1452) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 1442, it confirms that the price momentum is bearish.

Long positions, look to take some profits, as we reach the 1561 and 1722 levels during the week. Short positions, buy corrections at the 1281 to 1162 levels to cover shorts and go long on a weekly reversal stop. If long, use the 1162 level as a weekly Stop Close Only and go neutral.

The weekly lows need to hold and close above it on a weekly basis. Then we can begin to build a strong argument that weekly lows are in and the foundation is in place to support a larger move to the upside. Extremely Oversold.

SILVER

The May futures contract closed at 23.24. The market closing below the 9 day MA (24.97) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 24.53, it confirms that the price momentum is bearish.

Long positions, look to take some profits, as we reach the 27.07 and 30.89 levels during the week. Short positions, buy corrections at the 20.71 to 18.17 levels to cover shorts and go long on a weekly reversal stop. If long, use the 18.17 level as a weekly Stop Close Only and go neutral.

The weekly lows need to hold and close above it on a weekly basis. Then we can begin to build a strong argument that weekly lows are in and the foundation is in place to support a larger move to the upside. Extremely Oversold.

AGQ - ETF

The AGQ ETF contract closed at 24.43. The market closing below the 9 MA (29.14) is confirmation the trend momentum is bearish. With the market closing below the VC Weekly Price Momentum Indicator of 28.23, it confirms the price momentum is bearish.

Long positions, look to take some profits, as we reach the 33.02 and 41.60 levels during the week. Short positions, buy corrections at the 19.85 to 15.26 levels to cover shorts and go long on a weekly reversal stop. If long, use the 15.26 level as a Stop Close Only and go neutral.

The weekly lows need to hold and close above it on a weekly basis. Then we can begin to build a strong argument that weekly lows are in and the foundation is in place to support a larger move to the upside. Extremely Oversold.

GLD - ETF

The GLD ETF contract closed at 135.47. The market closing below the 9 day MA (140.65) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 140.30, it confirms that the price momentum is bearish.

Long positions, look to take some profits, as we reach the 150.10 and 164.72 levels during the week. Short positions, buy corrections at the 125.68 to 115.18 levels to cover shorts and go long on a weekly reversal stop. If long, use the 115.18 level as a weekly Stop Close Only and go neutral.

The weekly lows need to hold and close above it on a weekly basis. Then we can begin to build a strong argument that weekly lows are in and the foundation is in place to support a larger move to the upside. Extremely Oversold.

PGLC

The PGLC stock closed at .415. The market closing below the 9 day (.42) MA is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral. With the market closing above the VC Weekly Price Momentum Indicator of .40, it confirms that the price momentum is bullish.

Long positions, look to take some profits, as we reach the .43 and .44 levels during the week. Short positions, buy corrections at the .40 or .37 levels to cover shorts and go long on a weekly reversal stop. If long, use the .37 level as a weekly Stop Close Only and go neutral.

The weekly lows need to hold and close above it on a weekly basis. Then we can begin to build a strong argument that weekly lows are in and the foundation is in place to support a larger move to the upside. Extremely Oversold.

Trading derivatives, financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, SLV, AG, PSLV, GLD, GDX, SLW 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.

Additional disclosure: 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.

A Cypriot Black Swan

Eric Sprott is Chairman of the Board of Sprott, Inc., parent company of Sprott Asset Management USA, and has more than 35 years of experience in the investment industry. After becoming a chartered accountant, Mr. Sprott entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which is one of Canada's largest independently owned securities firms. After establishing Sprott Asset Management in 2001 as a separate entity, Mr. Sprott divested his entire ownership of Sprott Securities to its employees.

Mr. Sprott has an impressive track record managing a range of funds, including the Sprott Hedge Fund LP, Sprott Hedge Fund LP II, Sprott Bull/Bear RSP Fund, Sprott Offshore Funds, Sprott Canadian Equity Fund, Sprott Energy Fund, and Sprott Managed Accounts. In 2007, Mr. Sprott was named Fund Manager of the Year by Investment Executive, a widely circulated publication for Canadian financial advisors.

I had the pleasure of recently speaking with Mr. Sprott by phone. The following is the transcript of the interview edited for readability.

Patrick MontesDeOca: Hello, Mr. Sprott and thank you once again for sharing your insights at this most opportune time. Getting right into the interview, first of all, can I have your opinion on a report you recently published on your website SprottUSA.com called "Markets at a Glance." In the report you cover in detail the Eurozone crisis currently happening in the Eurozone, Cyprus and many other peripheral countries. Can you give us your opinion and insight on that?

Eric Sprott: Sure. Well, Patrick great to talk to you again first of all and again congratulations for keeping people informed on events that are transpiring that perhaps aren't in the mainstream media but are important for people to follow very closely. The "Markets at a Glance" article I can probably explain in two words, and that is the title of the article: "Caveat Depositor." Obviously, when Mr. Diesel Boom suggested that there was no template, he was not being very forthright because there is a template. In fact, I think in his first interview he basically said the same thing four times. When the banks have risks, those banks' risks have to be shared with the various people who have liabilities with the firm, which are, of course, the depositors. We saw that play out in Cyprus and it was very, very unfair what happened. The more I think about it, and I don't think many people have commented on this, but what I find most interesting is that the depositors take the first hit. In other words, when the ECB (European Central Bank) says they are going to put in $10 billion-we are not even sure what they are going to put it in-they get a piece of paper in return. They say they have a loan to somebody and therefore it could possibly be repaid. The depositor walks away with a loss, day one. He doesn't get a piece of paper. In fact, I think I even heard that the ECB is exempting any deposits they might have as liabilities that they already had with Cyprus from the haircut. That is just a travesty of how things should work; the depositor taking the first hit. In fact the bigger they hit the depositor, the more likely the ECB is to collect their $10 billion, because of the hierarchy on the balance sheet. But essentially what we said is what we've seen in other countries, for example in New Zealand, where the banking authority just passed the same sort of thing. If there is a systemically important bank, here is what is going to happen, the same as happened in Cyprus. The government in Canada recently introduced legislation to do the same thing. The US and the UK have done the same thing. Obviously there has been a decision made by the governments who realize that their financial systems are at risk-their banking systems I should say-when their banking systems are at risk, how are we going to deal with this problem? Because the problems are bigger than the countries, because the banks are so much bigger than the countries, and that is obviously their solution.

PM: You know one of the things that I find disturbing is the complacency of investors in realizing that the central banks' leaders' intentions are to levy, basically to steal, deposits to save the banks. They do not really understand what the consequences are. Could Cyprus possibly be the black swan in the Eurozone banking system or will it disappear from the headlines?

ES: Well Patrick, for the first part of the question, that people are being benign about it, I'm not so sure in fact that is the case. We judge that by what's happening in the precious metals market and the stock market. The stock market is going up and the precious metals market is going down, and therefore everyone is complacent about it. I don't think that is the case whatsoever in the real world. As you know, the stock market is almost a function of central banks printing money, which is essentially what is happening. And I have written many times that I think the Western central banks continue to supply physical gold to the gold market to suppress the price, and I fully believe it and I fully documented it. The other thing I would say is that we have noticed that there has been a pickup in the buying of precious metals since the Cyprus thing happened. There is no doubt that it is happening when you look at US Mint statistics. We have a company called Sprott Money and we see more buying of gold and silver happening there. People aren't stupid, particularly when you realize that the people at risk are the people with over 100,000 Euros in the bank. These are not stupid people. These are people that got that kind of wealth because they anticipated things. I think that things are going on and I think it is a black swan. The thing I am watching the most is; what's the next bank? Because there are weak banks out there and we know who they are. Do we not think that there will be a bank run going on in some of those banks right now?

PM: Just the peripheral countries should be affected by this economically, so it's a domino reaction?

ES: There are weak banks in those countries. We all know who they are, so if you are sitting there with money in a weak bank do you think people are leaving their money there? I mean all they have to do is change banks-move it to at least a stronger bank.

PM: I think the danger is third-party risk at the highest level that you have ever seen.

ES: Right. You know the money has got to be moving and of course here is the problem; banks can't fund the deposit withdrawal because they don't have that much in current assets or cash ready assets, so when the money starts leaving, we have an example we had when Banco di Montepaschi said, We've had a few billion dollars, undefined by the way, leave the bank. You know you have to sell something in order to fund the deposit withdrawals, which means you have to sell an asset. In lots of cases banks don't have assets that are readily saleable, or the first ones to go, they sell and then of course it gets tougher. You can't just liquidate a mortgage portfolio, particularly when everyone else is trying to liquidate one. I would imagine that there are bank runs going on right now in some of these lower quality banks which you are not going to hear about, but you know it has to be happening.

PM: What does this mean for the fragile US economy and the stock market?

ES: I have always been of the view that there is no recovery. We are always told this is a great recovery, as we were told last year. We are told that 2012 is going to be a great year. We finally get to the end of the year and GDP is up .1%, so there was no recovery going on even as it was much touted earlier in the year. As I look at 2013, I've argued there is even more reason for there to be no recovery this year. We have had people who have taken a tax increase, we have had a sequester that is going to negatively affect people, and everyone is merrily looking at the stock market saying, "Oh well everything must be fine," but recent data is not very good. We've have the PMI's go down, and the purchasers manufactured index go down. We've had jobless claims going back up. We had announced job cuts up 30% in March in the United States this year versus last year. We had announced job hirings that went down by 90% this year in March versus last year. So my view is that it is not very robust at all. We've had lots of earnings warnings from Caterpillar, FedEx and Oracle, and restaurant chain sales went down 5.6% in February, which is totally in line with what would be happening to the disposable income of workers because of the increase in tax. So I don't think there is recovery. I think the market goes up on the fumes generated by the Fed, but sooner or later we are going to look at things in the light of day, what's really happening here, and I am very much looking forward to seeing the first quarter-both revenues and earnings-to see if this huge rally that we've had off the 2009 low is substantiated.

PM: You know, Eric, we have covered the Eurozone in our previous interviews and we talked about the possibility of bank runs and price controls. These are the very thing we are witnessing right now. Are we moving closer to a total collapse of the monetary system as we know it or do you think there is hope that things will get fixed?

ES: I think that we are getting closer to a total monetary collapse. If I took myself back 10 years, which we wrote about at the time, the problem is that the banks are too leveraged. They are all leveraged twenty and thirty to one. If you are leveraged thirty to one, you could take a 3% hit on your assets and you have no capital, well what the hell is a 3% hit. I mean if you are in Greek bonds or Cypriot bonds, you know what the percentages are; they are just unbelievably greater than that. That is the problem; the financial system got too leveraged. They got too leveraged, if you want to go back and review it, because the banks thought they could generate a 15% return on equity every year, and the banks as a group became such an important part of the economy. For example, I think at one point banking was 25% to 30% of the stock market. When you are 25% to 30% of the stock market, if you grow at 15% a year for about 15 years you are 100% of the stock market. It is impossible. How can you do that? But they believed it, and the only way they could grow that way is they had to keep leveraging. They just leveraged and leveraged in order to keep up this facade of being this wonderful business so that they could forever produce a 15% ROI while world GDP grew at 2 or 3%, so we know it couldn't continue to happen.

PM: What are the alternatives to deleveraging or what is the process?

ES: Well there are only two ways to deal with it; either you inflate the debts away through hyperinflation…

PM:…Argentina, Mexico…

ES: …which is one way of doing it. Of course the other way is what you call a dead jubilee or where you all just agree, we can't pay off these debts, let's just write them all off, which of course would be disastrous for those who think they have some asset which is worth something in their portfolio and find out that they aren't going to get repaid.

PM: Well isn't that happening right now in Cyprus?

ES: That's exactly what's happening in Cyprus, and already happened in Greece. I mean that was a $100 billion haircut there, and it'll happen in other countries. You know it's funny that almost every month these European countries keep downgrading their GDP growth and upgrading what the size of their debt or deficit is going to be versus GDP; every month it goes higher. I have a theory that weakness begets weakness. When JP Morgan announced they were going to lay off 19,000 people, it's not just the 19,000 people that are affected. It is where the 19,000 people spend their money, they are also affected. There are only two ways to change a trend of weakness: fiscal policy and monetary policy, and it has got to be sort of an exogenous event. Nobody has got any room for fiscal policy changes. Here we even have austerity in the USA with sequestration. Everything is austerity policies in Europe, so we don't have a fiscal policy that can change things. Now you go to monetary policy. We have zero interest rates and we are printing money. Is there anything left in the tank here? I don't think there is anything left in the tank.

PM: There is some discussion going around about basically using gold as collateral to replace austerity in the Eurozone and some other countries. How much of a real possibility is that, that they could use their gold reserves?

ES: In other words sell the reserves to spend more money?

PM: Not sell it, but basically collateralize it lets say five to one in order to possibly generate some liquidity and reduce the interest rate payments on the bonds.

ES: I don't know who would want to be the guy backing that quite frankly. Maybe the ECB would. It's just another form of printing money. They may as well print the money.

PM: Well, that's essentially the same thing.

ES: Have another LTRO (Long Term Refinancing Operation) right? Whatever amount of money you want, just take it. But all of these are essentially insane financial policies. It comes down to pure insanity. We keep thinking and looking at the same things they do and they don't work. We keep thinking the next one is going to work. QE1 didn't work. QE2 didn't work. It doesn't look like QE3 is going to work. I don't know why people are always hopeful something is going to change the economy. It just doesn't have any spunk to it. The only things that are getting better are auto sales and home sales, which are 100 percent reliant on ridiculous amounts of credit. Particularly in autos, I was reading in an article where subprime lending in autos has gone crazy. So we keep having these people who can't afford a car, get a car. Of course the interest rate is 25%. Then they put it in some package where they sell it off as a lump sum. It's almost like subprime in housing all over again.

PM: Moving into the gold and silver market, Eric, what's going on with the gold market? Have you ever seen such a disparity between the paper and the physical market in your career?

ES: It gets a little more bizarre all the time and I'll just use one proximate. Look at US mint sales. They're up 40% in gold and 40% in silver, which is a statement about what people think of the system. Here we have the price of gold going down, which unfortunately is determined in the paper market, so there's no decrease in demand for gold and silver here. But I think there are so many reasons for the Western central banks to want the price of gold to be down, because it would be the towel on their financial policies and they know it. We're all looking at inflation to break out with all the printing of money. Where are you going to look for inflation first? You think it would be manifested first in gold and silver because that would be the first physical thing that people would buy because it is so easy to store and it has a long history. We're not all going to go out and buy wheat and soybeans and stuff like that. The natural thing to do is to go out and buy gold and silver, and I see by the US Mint statistics that that's what people are doing; they are buying it.

PM: Just for the common listener to understand; why is the price of metals going down if there is physical demand like you describe?

ES: Because the Comex market, which is a paper market, determines the price. For example, I believe that if I single handedly wanted to go into the wheat market today and sell a bunch of wheat contracts, I could probably get the price down 5 percent today in the paper market. God forbid they ask me to deliver the wheat because I wouldn't have it. But that's what is going on. People are shorting the paper market and driving the price down. I think it's the big banks that were short or scaring the hedge funds into thinking gold and silver are going to go down. They all start shorting it. All the while the big bankers have been short the whole time and covering their shorts, and now we've got all the hedge funds going short.

PM: The commitment of traders report showed that the specs increased their short position to a massive 22,382 contracts from about 2,900 as of February 5. That is huge.

ES: That's what's happening. You get everyone believing it's going down and you get these reports of this, and others who have never been right on gold suggesting that the gold price is dead or that the market's over and everyone, herd like, goes into shorting the paper. They're going to get a rude awakening when we find out that China is still a buyer and Russia is a buyer and Turkey is a buyer and all these countries that have been buying gold, they're not going to back away from the gold market. It's like it's on sale here. The physical guys will win the day here.

PM: What other metals do you like besides gold and silver?

ES: Well, Patrick, we just started a platinum and palladium trust the same as our silver and gold trust. When we look at the supply/demand for platinum and palladium it's just outstandingly positive. We even had Russia and South Africa talking about having a cartel in the metals, and the price didn't do anything. They want to get together and do something. They produce 80 percent of the world's platinum and palladium, so that will have a big impact. But again we had all these people coming in to short those two markets, too. Where there was no activity in the futures markets, all of a sudden there's these huge short positions in platinum and palladium. I think they went in there because of the shortage of platinum and palladium. The outlook is so positive, but they didn't want them to go because it might lean into silver and gold. People see that platinum might go through $2,000 (an ounce). People are going to buy gold, too. So they try to control these things and they control it because they know any central banker in his right mind must know that those policies are insane and irresponsible. They know it. And yet we've got to keep everyone in the game and keep them calm and keep the market going up; keep gold a little subdued and everything looks normal. Cyprus is a one-off event. Oh yeah! Sure it is. It'll be a one-off event until we get the next event.

PM: What do you think of the mining sector, Eric? They've demolished that completely almost to the point of extinction, but what do you make of it?

ES: Well, you know there are some tremendous opportunities in mining. I'm looking now at some companies that could pay very, very significant dividends. I'm talking about dividends of 20% per share. One of the things we have got to convince some of these managements is that if you pay the dividend and don't start the new project, your shares will react. As long as you've got a long life line, just pay the dividend. Your share price will probably double and it'll still be yielding 10%. You'll be able to raise all the money you want for your future capex (capital expenditure) program. But, whatever you do, don't commit to another project, because then the investors will say, I won't see that money for a while and now I gotta worry about the next mine and is it going to be capex or is the mine going to work? You put all this risk on the table that's not necessary, because mining companies are quite profitable and they have a lot of free cash flow, so they could easily pay it out. I'm working on trying to get some of these companies to go that route and I suspect we're going to be successful.

PM: Eric, can you leave our audience with your wisdom and insight on how to deal with these unfolding and accelerating crises?

ES: Sure. I think the safest thing I can say is that paper assets are very dangerous to own. I wouldn't be caught dead with a Japanese bond or a US bond or a UK bond or an ECB bond. First of all, you get paid nothing. Much like a bank deposit, you get paid nothing. Now you find out your risk, as it is in Cyprus, was 60%. My god, you get paid nothing while taking on all that risk. As I've written many times before, the US is effectively bankrupt. The gap deficit was $6.6 trillion last January, excepting accounting principles. The deficit was $6.6 trillion, as was announced by the Department of the Treasury. That news never made it to any newspaper by the way, but that is what they announced, and this year it will be $7 to $8 trillion. This is all in a $16 trillion economy. There is no way they are going to meet their entitlements, so you just give yourself a little forward time here; it might happen in as little as one or two or three years. This whole paper thing could just implode in front of us, so I think get out of paper and get into real.

PM: For the benefit of our audience, Eric, how can they get in touch with you, and learn more about your product?

ES: Well, as you know Patrick, we have the gold and silver trust, and now the platinum and palladium trust listed on the NYSE and in Toronto here. People who want to keep up to date on the things we write, if they just send a note to Sprott.com, we'll put them on our mailing list and they can see the array of hedge funds and other funds we run here.

I think that one thing we bring to the table is that we bring a view that isn't an accepted view; it's always a little off the scale. It has been important to be off the scale in these last few years because we've gone through some pretty weird times that most people would never forecast, so if they go to Sprott.com they'll know everything they need to know.

PM: Once again, Eric, thank you for your time and your insight and wisdom, and until next time my friend, you take care.

ES: OK, Patrick all the best to you now.

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 AG, GDX, GLD, PSLV, AGQ, DBS, DSLV, PSLV, SIVR, SLV, 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.

Additional disclosure: 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.

John Embry

Chief Investment Strategist

On the day the gold and silver markets experienced another wave of "Manupulation" by trading over 30,000 contracts short within approximately one hour -- and a report by the Comex warehouse indicating inventories in gold at the lowest levels ever -- I found myself calling John Embry for an interview to find out what he thought of this action.

This Is What He Said
This is an overt totally manipulated attack on the alternative forms of money by the powers-that-be. Strangely, this demonstrates the degree of their desperation as financial and economic conditions continue to deteriorate alarmingly behind the scenes despite the feel-good rhetoric from the mainstream media.

Gold and silver were at potential upside breakout levels on Tuesday at $1583 for gold and $28 for silver. This prompted a release of four so-called news items construed as bearish for the precious metals.

Goldman Started It
He continued, The first was a report from Goldman Sachs calling for gold to fall to $1450 per oz and announcing the ignition of a short position. The fact that there was no rational documentation supporting this position told you all you had to know.

Then there was the leaked Fed minutes suggesting there was dissensions among the governors concerning the future magnitude of quantitative easing. That was totally bogus because any meaningful cessation of Q.E. would lead to sharply rising interest rates and would see the U.S. economy collapse in a smoking rain.

Crying "Cyprus'
Then came the story that Cyprus would be forced to sell a significant portion of its gold reserves. The fact that it was totally untrue and denied by the Cypriots was bad enough but the fact that the amount under discussion was worth less than $500 million showed its utter irrelevance.

Then Ms. Lagarde from the IMF made a statement concerning improving conditions in Europe that was total balderdash. Under the cover of these stores gold was knocked down some $25.00 per oz, which proved to be a mere precursor to today's all out attack on both gold and silver.

He pointed out, the bullion banks who have orchestrated a lot of this activity know they are ultimately on the wrong side of this trade and they are moving heaven and earth in an attempt to reverse their positions to the extent possible. Investors the world over being panicked out of the very investments which will be their salvation when the true tsunami of financial and economic distress hits.

Do Not Sell Your Positions...
He emphasized emphatically. The short-term downside is indeterminate but both gold and silver will recover faster than they have gone down and I fully expect new all-time highs before the year is out.

John Embry joined Sprott Asset Management LP as Chief Investment Strategist in March 2003. 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.

After graduating from the University of Manitoba with a Bachelor of Commerce degree, John Embry began his investment career as a stock selection analyst and Portfolio Manager at Great West Life. He later became Vice President of Pension Investments for the entire firm. After 23 years with Great West Life, John became partner at United Bond and Share, an investment counseling firm acquired by Royal Bank in 1987. John was named Vice-President of Equities and Portfolio Manager at RBC Global Investment Management, a $33 billion organization. There he oversaw $5 billion in assets, including the flagship $2.9 billion Royal Canadian Equity Fund and the $250 million Royal Precious Metals Fund, the #1 ranked fund across the country for its 2002 net performance of 153%.

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 AGQ, DBS, DSLV, PSLV, SIVR, SLV, 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.