Chief Investment Strategist
Once again, we have the great pleasure and honor to have with us John Embry, Chief investment Strategist at Sprott Asset Management.
John Embry joined Sprott Asset Management LP as a Chief Strategist in March 2003. He plays an instrumental role in developing the corporate and the investment policy of the firm. John, an industry expert in precious metals, has studied the gold sector for over 30 years and has accumulated industry experience as a powerful portfolio management specialist since 1963. The following is a transcript of an interview that took place last week.
Patrick MontesDeOca: Welcome John. I want to go right into the interview. I think this is really a favorite subject of yours, but let's talk first a little bit about the future of the U.S. economy, the dollar and interest rates before we move into the future of retirement in America.
John Embry: Well, I'm very concerned about the future of the U.S. economy for the very simple reason, as you know, that there is infinitely too much debt in the system at all levels. I just don't think you can have sustainable growth when you have excessive debt because I believe very strongly in Austrian economics and basically at some point, you have to recognize that the debt has to be eradicated and that is a very difficult procedure and nobody really wants to do it, so consequently they're just going to print more and more money. I don't think it'll lead to a lot of growth, but ultimately it's going to lead to a lot of inflation.
PM: How does that bode for the dollar and interest rates?
JE: Well, my greatest concern is that the dollar at some point in the not too distant future may lose its role as the reserve currency of the world. I say that for two reasons. One is that I think the U.S. has not lived up to their responsibilities as the providers of the reserve currency because of their financial profligacy. But more importantly, the Chinese are conducting themselves in such a way that I suspect they would love to serve that role, and what they're doing right now is they're cutting deals with all the other countries in the world in which the dollar is being knocked out of the transaction so the demand for dollars will drop. So I see this as a very problematic time for the U.S. dollar, and if I'm right, the implications for interest rates are not positive. I mean interest rates are far too low and they're being maintained at those levels because of the excess debt in the system, but I think that has a limited shelf life and I think higher interest rates are ultimately going to be another problem for the U.S. economy.
PM: Taking that into consideration John, what is the future America is offering for the next generation of retirees regarding Social Security and Medicare?
JE: Well, you know that's an excellent question. I'd like to preface it with just an observation. I for the longest time have had the theory that my generation -- I was born at the onset of World War II -- and the people that followed in the baby boom generation have not really been challenged in their time on earth. I mean we basically have had a pretty easy life, because jobs are plentiful and the U.S. was dominant in the post-war era. I've always thought that most generations are challenged for a long time, and now it's starting to come true in that the big problem is going to be in retirement and so this is an interesting subject to discuss.
PM: Are retirement accounts facing extinction?
JE: Well no, not that they are facing extinction, but the fact is the U.S. budget deficit is something in the neighborhood of north of a trillion dollars a year but that doesn't even account for the liabilities that are accumulating at a rapid clip for Social Security and Medicare and Medicaid. But I've seen numbers suggesting that if you've accounted for this correctly, your annual deficit would be closer to $5 trillion, and people talk about the unfunded liabilities being somewhere closer to $50 or $100 trillion, which dwarfs the $17 trillion unfunded debt outstanding, so on that basis, that bodes very badly for the future for both Social Security and Medicare.
PM: What percentage would you suggest of a retirement portfolio should be in gold?
JE: Well, that's basically personal taste. I mean, obviously, I think that gold is going to be the salvation for a lot of people and what's coming up in the next few years, so I mean clearly, I have more gold than the average person would. But I would say today the goal is -- the old rule of thumb used to be to be 10% -- I think things are far more onerous. I'd be saying closer to 20% to 25%.
PM: Should retirees look at gold as part of their retirement account?
JE: Absolutely. I mean, to me, it's the insurance in your retirement account if my worst fears are realized.
PM: What is the role that gold should play over the long term regarding your retirement accounts' objectives and risk management?
JE: That's actually the easiest question because what gold will do is preserve purchasing power, and what I'm concerned about is that one of two things is going to happen to a lot of these retirement accounts. I mean the chaos in the traditional financial markets could play havoc with bonds and stocks and what have you, and the valuations, and so consequently a lot of the pensions will become very underfunded. Or failing that, and the route that it appears we're following, is more towards a hyperinflationary outcome. That's going to be extraordinarily difficult for people living on fixed incomes for retirement accounts, so I mean gold is there to sort of moderate that and sort of act as a counterbalance and maintain your purchasing power.
PM: Is it time to sell stocks and buy gold, whether it'd be in a retirement account or just as a general strategy?
JE: Well, I think that there's been a lot of interference in the stock market on the upside. I do think that stocks have gotten elevated in value because of all the money that's been created in the world. I mean if you think… that between Japan and the U.S., they're creating $160 billion a month out of thin air. This has certainly elevated stocks and it has not elevated gold, so I mean in my mind gold is the better alternative in that scenario, so yeah, I think I wouldn't sell all my stocks to buy gold. I do like certain stocks because they also represent real assets, but I think at the margin, you should be moving out of stocks into gold, particularly if you're underweight gold.
PM: Any personal message as to what they should do at this point based on the tremendous sell-off we saw in precious metals recently? Is this an opportunity to accumulate or buy if you don't have it, or is it a great time to get involved in metals at these levels?
JE: Patrick, I think this will be seen in the fullness of time as perhaps the greatest opportunity in the entire bull market, which started over 12 years ago. I mean, the price has been pounded down to levels where the mining companies themselves basically can't make any money and so anyone that suggests that gold is in a bubble, well that is just a ridiculous assertion, and I think that we have probably seen the major portion of the down move because it was all in the paper market, as you know. Physical demand has exploded around the world, and I think that will act as the base for the gold price going forward, and as it becomes more and more obvious to people that monetary debasement is the order of the day, and there is really no alternative, I think that more and more attitudes will change towards gold and silver for that matter, and more money will go in that direction and they're small markets. There's one other aspect I would like to mention, and that is the fact that with this paper gold market, a lot of people think they own gold when they have an ETF or a gold pool account or certificate, but these accounts aren't backed by much gold and I think that the leverage in here is actually a Ponzi scheme. If you do own gold, make sure you own physical or a paper product that you can be assured has 100% allocated gold behind it.
PM: John Embry, Chief Investment Strategist, Sprott Asset Management, once again, thank you so very much for your wisdom and insight, and until next time!
JE: Patrick, it's been my pleasure!
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.