Sprott Asset Management's Chief Investment strategist likes gold but prefers silver and is very positive on gold stocks
Interviewer: Geoff Candy
Posted: Wednesday , 19 Jan 2011
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is John Embry, Sprott Asset Management's chief investment strategist. John I've been speaking to a number of commentators recently, trying to get a handle on what the global economy is going to look like in 2011 - how do you see things playing out?
JOHN EMBRY: It's an excellent question because as you know there's a lot of controversy about what is unfolding. It will probably hold together to the extent that there's just so much stimulus being applied to it, both monetarily and fiscally - these deficits are ginormous and interest rates - they're still zero based. The inflation is becoming rampant in a number of key commodities and when this feeds through to the consumer chain, it's going to really impact the public's ability to consume - in the Western world in particular - that's going to be a big negative going forward.
GEOFF CANDY: And of course looking at your latest note, you don't see the end to the stimulus any time soon.
JOHN EMBRY: I don't think that they can really put an end to it for the simple reason that the financial system is so fragile. If you really analyse the US banking system which I know to some degree, and you look inside the numbers - they're marking a lot of their stuff to what I call ‘fantasy' not the market, and then they got superimposed so that the massive quantities of derivatives in there and it seems to be that they just need more and more liquidity to make sure that the thing doesn't bust. So yes, I love the expression ‘QE to infinity' which was coined by my friend Jim Sinclair.
GEOFF CANDY: What does this mean for gold prices?
JOHN EMBRY: I couldn't be more bullish actually, despite the rather slow start we've had to the year - this is typical. This is now the third year in a row that gold has been leaned on at the beginning of the year and gold shares have done very poorly at the outset only to recover smartly as the year has gone on. I see exactly the same thing unfolding this year - the fundamentals are impeccable.
The price has clearly been suppressed here in the paper markets. The physical demand is on fire - both gold and silver in physical demand is terrific, particularly in the East where you see huge premiums opening up on the quoted prices and sentiment strangely enough, in the face of all this is really quite negative. A lot of people have been discouraged by the short term price action. I believe it's another fabulous buying opportunity.
GEOFF CANDY: What do you make of the recent sell off we've seen in gold stocks, because there does to have been over the last month or so, quite a lot of selling pressure, particularly on some of the biggest stocks, and potentially moving into the likes of copper, for example?
JOHN EMBRY: I go back and I look at exactly what happened in January of 2009 and 2010 - we had the exact same thing - the gold stocks got clobbered for reasons that I couldn't understand - there's a lot of shorting activity - various sources to be quite honest - and I'm not the least bit worried. It's a phenomenal opportunity - gold stocks are going to blow the roof off before this year is over.
GEOFF CANDY: Would you advocate anything in particular or at least the big ones over the small ones and vice versa.
JOHN EMBRY: The way I approach it is I sort of use an across the board - you have some large cap stocks in your portfolio because they won't go up much but you need the stability of them. I don't differentiate - I like GoldCorp, I like Gold Fields, I like Barrick - they're all going to participate. Then you go down a level and you get into some of the mid cap producers and they will do very well because they're way behind the big stocks in terms of pure valuation and then, without question, you're going to get some major home runs in the exploration space. So to me an investor should be well exposed in all three areas - just to get that diversification.
GEOFF CANDY: Are you not concerned though that they are running quite high in terms of the cost of production, of getting the gold out of the ground itself, even though we're seeing prices so high?
JOHN EMBRY: That's an excellent point because that's been something that has been missed by a lot of people. Costs have gone up a lot and their profits have been subdued because of that. I believe though that in the next move up in the gold price - and I'm not looking for a small move - I'm looking for at least $2,000 in this year - I don't think the costs will run anywhere near that rate and that finally we're going to see some major bottom line numbers for these guys and more than that, they will probably start paying fairly reasonable dividends in a world that's really short of good income - that will be a major incentive to buy them.
GEOFF CANDY: Just to play devil's advocate slightly - what do you make of people that say perhaps with gold prices where they are now with the likelihood that they are possibly going to continue upwards that they're getting overbought ant that we might see a pullback or a correction in the next year or so?
JOHN EMBRY: I think that they're wrong - very simply that what is the alternative - in a world in which you're going to see all sorts of quantitative easing, anybody that owns a bond has to have his head examined and these things are just certificates of confiscation. Stocks: some stocks I like, other stocks I hate and real estate stinks in most markets - where are they going? Basically to protect yourself you've got to have some gold. Every once in a while I see a comment that really makes me laugh - there was a chap called Robin Griffiths over in your part of the world, at Cazenove Capital - he said, "I think not owning gold is a form of insanity - it may even show unhealthy masochistic tendencies that might need medical attention." He then added that the dollar was headed for oblivion which I also happen to agree with, and he predicted that gold's 10 year run would continue and even intensify and I totally agree.
We haven't seen - it's been a very measured increase for the last 10 years. Its been no big blow offs and the blow off has never been a bull market particularly one of this like, that hasn't ended in a massive blow off and this one will be one for the ages when the price explodes. Whether that happens in 2011 I'm not sure, but we're getting closer to that date.
GEOFF CANDY: In terms of the difference between gold and silver, is there much in it at this stage - would you prefer one over the other.
JOHN EMBRY: I would prefer silver for the simple reason that all the silver that gets mined gets consumed and so consequently inventories in the world are very small and with silver now being seen as poor man's gold and a huge investment interest now being reflected in silver, where is the silver going to come from. All it's going to do is drive the price up - there's a long term historical relationship between gold and silver prices and right now it's about 48:1 in favour of gold - and it's been as high as 80 or more. But in certain bull markets it's been as low as 15. I believe we're headed towards the lower region so if gold goes up, silver has got to go up to make that ratio come true a lot more, and I believe that will be the case.
GEOFF CANDY: Just to close off, coming back to the macro-economic picture and as you mentioned the dollar and its potential strength or weakness - do you think we're getting to a point or is there a time soon that we're getting to a point where people that are buying this US debt are going to start asking pointed questions of America as to where exactly the money is going to come from?
JOHN EMBRY: That's an excellent question - in a one-word answer - yes. And as a result you're going to see the US Federal Reserve monetise more and more of the Treasury's debt for the simple reason that they cant get rid of the need for more funding, and the more they do that, the more they're going to be questioned by foreigners. We've seen it already, the indirect bidders at these bond auctions are taking more of the deals and the foreign holdings of Federal and US debt are sort of flattening out. So as this unfolds this is going to lead to more and more questions and ultimately I would suspect much higher rates in the long end of the US bond market. That's not good for the economy but certainly isn't bad for gold.
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