The Coming Explosion in the Price of Gold

Six months ago, we had the opportunity to sit down with John Embry, the chief investment strategist at Sprott Asset Management. He is one of the world’s leading gold experts.

Of course, that was March and not too many investors were interested in buying anything. But Embry said to look past the short-term and focus on the big picture.

At the time, Embry predicted:

I think the major development is going to be ongoing issues of currency debasement. The value of paper money against real tangible assets is going to fall considerably. Right now, we are going through this deflationary scare. It won’t last. It will change into a hyperinflationary environment in the not too distant future.

Since then, gold and silver have climbed 9% and 25% respectively. They’ve done well, but the big gains have been in gold and silver stocks, where Embry pointed us to last time. The Philly Gold and Silver Sector Index (XAU) has climbed 51% and many gold and silver stocks have done much better.

The prediction has proved nearly prophetic. So I’ve invited him back to learn what he expects to happen in the short- and long-term and the opportunities he is seeing now.

In our most recent conversation, Embry reveals:

  • catalyst for an “explosion in the price of gold” over the next two months
  • assets for which “demand is exploding”
  • China’s “interesting problem”
  • the sector where short-term sentiment is hiding a huge rally
  • hidden impact of 10% official unemployment

That’s just for starters. There’s a lot more on silver, farmland, uranium, and plenty of other high-potential sectors.

Read on below for a full transcript of the exclusive conversation.

Exclusive Interview with John Embry

Andrew Mickey: Thanks for joining us today John. A lot has happened since we last talked in February. Basically, it looks like almost everything we looked at last time – gold, silver, agriculture, and other hard assets – continue to be out of favor. There have been “gold shoots,” but nothing really sustainable.

That’s why, today, I want to get into a few more specific topics with you. And one thing that’s really hot right now is what’s going on in China with the real debt explosion. To me, it seems similar to the “Greenspan Solution” – cut interest rates so low they’re actually negative so its cost prohibitive not to borrow money, sit back, and watch an asset bubble form.

Do you see any problems in China? What are your thoughts on this?

John Embry: Actually, I have some fairly strong views on this subject. I don’t think that you can do what they have done and end up without a problem.

To put it simply, they have force fed an enormous amount of credit into their economy through their banking system quickly. And the numbers, for such a short period of time, are quite staggering. But it seems to me that the kinds of loans that are being made are going to be hard to service. I think there are going to be a lot of loans made to people that are going to have to do uneconomic things, and I think we are seeing it also show up in the areas of speculation in stocks and commodities.

I don’t think China is going to have a smooth ride. It just seems to me that people think China has got the magic solution and they are just going to continue to grow at 7% to 10% a year, forever. I believe they will have a huge hiccup at some point, and maybe sooner rather than later.

So yeah, I think that they sort of got a short term bail out with all this money they jammed into the system, but we will see how it works out in the longer term.

Mickey: The other thing that I wanted to talk to you about is agriculture, which has really fallen out of favor. It’s tough to imagine expectations getting much lower.

I know we’re both big on agriculture over the medium- and long-term, but what do you see happening right now. What’s going on with this year’s crop? What do you see happening in the near term and also more longer term?

Embry: I think that crops are coming in better than what most expected. For example, if you have a longer term point of view, you are going to go through some bumpy spots for the simple reason that no one can predict what any individual growing season is going to be like. But the fact is, in my opinion, the long term view is still very intact. There are too many people on earth and more of them are becoming better off to the extent that they can eat better.

I suspect the climate is going to be an issue going forward; consequently, there will eventually be food shortages. In the short term, we appear to have gotten bailed out by an exceptional crop. Consequently as the crop actually starts rolling in, prices can be very volatile and perhaps move to the downside.

As I said in the short term, we cannot predict crops on an annual basis up here or anywhere. The industry is very large and a lot depends on unpredictable variables like weather.

However, at Sprott Resources, we are putting together a potential million-acre farm in Western Canada called One Earth Farms. We are putting our money where our mouth is. We think there is a huge opportunity over the full food cycle.

Mickey: I have heard a little bit about that. Is that going to be part of Sprott Resource Corp?

Embry: At Sprott Resource Corp we have a joint venture with the First Nations in Western Canada. I think it’s a hell of a concept. We are going to give them a fair shake because they haven’t been given a fair shake, in the past. They have some great land and we think that, if farmed efficiently, it’s going to be a very successful economic venture.

Mickey: Where is this located?

Embry: It’s in Alberta and Saskatchewan.

Mickey: So there has been a mutual agreement over the use of their land reached? I know that can be a problem for a lot of mining and energy companies in those parts.

Embry: Yes it is. In the past, I think the natives were not treated fairly and in this instance we won their confidence and now things are going pretty well. We are putting it all together and getting it started, but it will take years to play out to its full extent, but things have gone smoothly to date.

Mickey: That’s an excellent idea. One thing that’s tough to do, from a retail investor’s perspective is to get exposure to farmland. You really may have something there.

What about uranium?

Just yesterday, I saw that Southern Company (NYSE:SO) announced they are building a nuclear facility in the United States. Is this something that China is still going after? Do you think the cap and trade is beneficiary?

Embry: My attitude is very simple on energy. We are going to have shortages, and alternative energy isn’t going to come fast enough.

One of the more efficient ways to combat this problem will be, or seems to be, uranium. And again, right now we have been going through a challenging period in the commodity cycle, and clearly uranium has been hit, but I don’t think the longer-term picture is impacted too much.

Mickey: Let’s get into global infrastructure for a moment. Every country seems to believe building something will be the way out of this situation. The US has a couple of “show” projects. India has some very big aspirations. And infrastructure looks to be China’s continued focus of its efforts. Do you see more opportunity in infrastructure?

Embry: A lot has gone into that. China has got an interesting problem. It’s clear they grew off the back of the international demand for their manufactured products. This occurred in a sort of bubble-type atmosphere where the entire western world was over stimulating their economies and their consumer sectors. It provided a tremendous stimulus to China.

Now, China has to deal with the collateral damage from getting a significant proportion of their wealth from exports. They are going to have to develop their domestic demand and they as part of this have put a lot of money into their domestic infrastructure.

My concern is in the short run. China may have gotten into a significant overcapacity situation in a number of areas. That’s certainly the case on the manufacturing side. They can build roads and bridges and all sorts of things, including electrical plants because they need these and they have the money to do it. So I think infrastructure spending in China will continue to remain a very significant economic stimulus.

Ironically, in the United States where they are bailing out all the banksters, what the United States really needs is an infrastructure build out.

I don’t know where the money is going to come from but there’s an awful lot of stuff that has been just kind of ignored for the last 20-30 years; roads, bridges and all the real structures. If it were up to me, I would be focusing significantly on that.

Mickey: Let’s switch our gears for a moment here to gold and silver…right at this point, everyone is focusing on the long, long term, say 10 years, 15 years out.

Embry: I’m focusing on the next two months and I think we are going to have an explosion in the price of gold.

Mickey: Do you see a specific catalyst?

Embry: One of the great factors is sentiment right now – the sentiment that you just mentioned. There is currently considerable apathy towards gold and silver. However, demand is exploding on the investment side, for the simple reason that people can see, with each passing day, that the currencies are going to be significantly debased.

You’ve got enormous government financing requirements over the next 12 months. Where is the money going to come from? A lot will be created out of – thin air and, that’s going to result in a huge volume of new currency.

I see the demand from the investment side alone just overwhelming supply. And on the other side you’ve got diminishing supply.

The central banks are running out. And you can see this with the central bank sales each year. The European central banks can sell up to 500 tons a year, they are not selling anything near that.

And lastly, all the eastern central banks that are jammed with US dollars are talking about diversifying into other assets, one of which is gold.

Central banks have been major suppliers of gold to fill the gap in the market for years. That’s coming to an end. At the same time mine supply continues to plummet. So I will be shocked if gold is not dramatically higher in the next three or four months.

Mickey: So you really see all that playing out even with unemployment basically pegged – officially – at 10% for a long time to come and other economic indicators which show how stagnant economies around the world really are?

Embry: Well, I don’t think it is 10%, I think it is dramatically higher. The problem is with the way it is computed. But yes, unemployment to me is a huge problem, but I believe that if you print enough currency, despite how weak demand is in the real economy, you will create inflation.

If you go back and study hyperinflations, and I have been doing a bit of that, in fact most hyperinflations have gotten underway in the kind of environment where real economic demand is weak, and they just keep printing more money to try to stimulate things, or sort of keep things from imploding. Eventually, velocity picks up rapidly and increases inflation dramatically.

One of the most outrageous comments that I have seen in a long time was Bernanke’s testimony to Congress recently when he said:

“We also believe that it is important to assure the public and market that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed to avoid the risk that this policy could lead to a future rise in inflation.”

That’s just an outright lie. They can’t possibly withdraw the stimulus. If they did – either raise interest rates or shrink the Fed balance sheet- the economy and the financial system would collapse.

That’s not all, they are just going to keep on with the money printing, creating as much as the current situation requires.

Mickey: You mentioned that you are looking into the past few hyperinflationary periods. What are some of the common elements that you might be seeing now that you also saw then, and also, what’s the general timeline in those situations?

Embry: The timeline is interesting. They start slowly and the public is totally baffled. They don’t see it coming at all. And the authorities lie to them. The authorities continue to understate inflation and they give the impression that everything is swell. In the meantime, they are just printing money like crazy to try to keep things afloat. Lo and behold it catches up to them.

It takes the average citizen a long time to figure out what’s going on. He is still holding his bonds, and he’s doing things that are sort of the wrong thing to do under this type of an environment.

I see the same thing unfolding today. I see this basic apathy amongst people. They don’t seem to be the least bit concerned when there are all sorts of things to be concerned about. In the meantime, these governments are creating money hand over fist` because they have no other choice.

Mickey: What about the timeline from today. Do you see a slow build for years before inflation is a critical publicly known problem?

Embry: I’d say ay it could be two or three years from today to perhaps reach a critical level. If things are going to unfold in that direction – and it could easily go in that direction – I think we will see the fruits of all the money printing by 2012 or 2013 at the latest.

Mickey: Do you see what’s going on with the individual states in the United States and their budget and pension problems as kind of foreshadowing what’s going to come for the US once the lenders stop lending?

Embry: That to me is the great problem. I find it fascinating, what’s going to happen with the States. The last figure I saw for the collective budget deficits of the States was $160 billion led by California with $26. And in many of the states constitutions, they are prohibited from running deficits.

So if the federal government doesn’t print the money to bail them out and help them, they are going to have to undertake draconian program cuts. They are going to have to raise taxes, cut programs and fire people and every one of those things is deflationary. And if they do print the money then that’s going to be another huge problem they are going to have to deal with. They are just going to have to keep printing more money to keep the whole thing from imploding.

I think it would be tough if they let California fend for itself after going through the problems of letting Lehman Brothers fail. They’re on a slippery slope and you better keep everything afloat or there is something that is going to come and blow you up.

Mickey: That’s one thing for sure. And with all the bad news, I think a lot of people are concerned with it and they’re just looking the other way. That’s a lot easier to do.

Embry: I have a theory. My brother is a bit of a psychologist and he says, he believes there is a blocking mechanism in most humans’ minds, that when they are confronted with a problem that is so overwhelming that there is no answer to it, they choose to ignore it.

Most people tend to ignore things because they don’t want to deal with them – they can’t deal with them. Eventually it reaches the stage where you can’t ignore it, and I think that is going on to some extent in the United States right now.

I saw this in Minneapolis, which is a city I love and I have gone to probably 40 times in my life. I was downtown and I went into Macy’s. Macy’s had the most astounding collection of inventory I have seen. I stood marveling at the stuff during a one day sale. The prices were remarkable. Some of the stuff was marked down 75% and guess what, there wasn’t anybody in the store, I was amazed but economists will still have you believe the retail environment is improving.

It seems to me that there is a large disconnect between all these “green shoots”, all the stuff that the government is telling us and what is actually happening.

Mickey: Let’s go there for a second – retail, real U.S. economy, and the great disconnect?

Embry: I think it’s a great risk. I was born in the U.S. and have always thought of myself as an American. So I find what is going on hard to accept. I am a great fan of the United States.

I think the greatest risk is that the currency could come under enormous downside pressure and that’s exactly what they are trying to fight here. Because once that happens it unleashes all sorts of problems.

You just alluded to one earlier when you said they are going to have trouble financing their bonds. If the currency starts to collapse who is going to lend them money? And if foreigners don’t lend the money it’s sort of a self fulfilling prophecy because the currency will collapse and therein lies the problem.

I don’t think you can print your way out without creating a massive inflationary problem which ends up as an even a bigger problem than we have today. There is no easy solution to this.

For example, let’s say you have a hell of a party. Well it generally ends up the next day with a hell of a hangover and it’s a problem you can’t easily ignore. That’s where we are in the economy today; there is no easy solution to this.

They are trying to avoid a deflationary collapse because they remember what happened in the ’30s. But in doing so they create a new set of problems. And in the end it’s even more difficult.

So I wish I could say something real positive but I am a huge believer in Austrian economics and credit cycles, and from that perspective it’s very hard to be optimistic.

Mickey: I think there is one more catalyst here and that’s unemployment. Will unemployment realistically need to come back somewhat from inflationary forces to have an impact?

Embry: Well, I don’t think the unemployment problem is going to be any better in the foreseeable future. In fact, I think that if unemployment were to intensify it would require the government to print even more money to fill all the holes in the revenue shortfalls. This could lead to the worst scenario possible.

You could have a terrible economic backdrop with inflation rising dramatically at the same time. This would lead to a plummeting currency and even more dramatically rising inflation in conjunction with a terrible economic scenario. And nobody wants to talk about that because it is so depressing without an easy solution.

Mickey: Yeah, I’m right there with you. I actually bought some more silver over the weekend.

Embry: I will tell you what I have been buying. I’ve got a coin dealer here in town, he is a friend of mine. He sees me before I even come in the door. Last time I was there, he told me not to even bother to come in. Before I could buy anything I wanted – which is just a few coins and few small bars every once in a while – and it was there to purchase.

Now he says it’s drying up, but I think the smart person is still looking to buy something of historic value. So I say to everybody, you should have some physical gold and silver in your portfolio just as insurance. Because, if I am right, you are going to need the insurance.

Mickey: Is there anything else out there that you just see as wrong or something that’s going to have some pretty severe unintended consequences which the market hasn’t started to discount yet?

Embry: I sort of start in United States. It bugs me because I love the country. Then I look across the Atlantic and look at what’s going on in Europe and it’s awful as well, particularly Britain, Spain and Ireland.

I think the biggest misconception about the markets today may be when people say “buy the euro.”

I think things are as bad in Europe as they are in the United States. They may not have quite the deficit problems but they have got massive problems there as well. All sorts of them.

Look at what’s going on in Ireland for example. Things had been just terrific and look at where they’re at now. People are being fired left and right, benefits are being cut, it’s just awful. And they don’t have the freedom to sort of create money like they do in the United States because they are under the constraint of the euro.

I do believe that we are going to have it tough going forward. I am almost glad I am old because I believe that this century is going to be the century of the east. I firmly believe that China and India and that part of the world are going to rise. And at the same time we are going to deteriorate.

I always say to my daughter that I like my past a whole lot better than I like your future.

Mickey: I guess…prepare for the worst, hope for the best, I guess. I think we will leave off right there. Let me thank you for sitting down with us today.

Embry: It’s always nice to chat with you Andrew…so, anytime.

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