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Posted Friday, 12 September 2008 |urce:
GoldSeek.com
Source
The
Gold Report 09/12/2008
John
Embry, Chief Investment Strategist for Sprott Asset Management and
renowned industry expert, has researched the sector for 30 years.
He expresses disbelief as he explains today's irrational pricing
in this exclusive interview with The
Gold Report. He attributes gold's alarming distress to
"violent
intervention by the paper players." But
he's convinced they can only hold prices down for so long and
forecasts four-digit gold by January 2009. Juniors present the
best opportunity to leverage the coming gold price explosion.
The
Gold Report: In
our last interview you said gold would unquestionably detach from
the dollar. Ten months later, gold is still tethered.
John
Embry: The
downturn in both gold and silver was literally preposterous in
magnitude relative to the rise in the dollar. This was a
violent intervention by the paper players.
Three U.S. banks on COMEX shorted something like 8,000 contracts
in a very short time. That’s more ounces than all the
world's miners produce in a month.
TGR:
Can they
keep doing that forever?
JE:
No, they
can’t. This is similar to what happens when you compress a
spring. You hold it down but when it comes up, it springs back
hard. We'll see a violent reaction in the gold price soon.
TGR:
Will we
have to wait six months or six weeks?
JE:
If gold
hasn’t moved up by the end of this year, I would be very
surprised. People don't realize how distressed the gold mining
industry is. Even at $1,000, miners weren’t doing very well.
At $800, the entire industry is in crisis. Costs have risen so
much, nobody’s making any real money. In fact, some mines
are starting to close.
TGR:
Could
mines reopen when gold reaches $850 or $900?
JE:
Gold
would have to be at least $1200 before mines reopen.
TGR:
Is now
the time for the majors to start acquiring?
JE:
I don’t
understand why the majors aren't acquiring because I've never seen
anything like the discrepancy in value between the big cap stocks
and the small stuff. Many interesting smaller companies are
trading for a song; whereas, Agnico-Eagle
and Goldcorp and Kinross
are aggressively valued.
TGR:
Some of
the juniors have lost 80%.
JE:
If you
had told me we'd see this kind of carnage in the juniors while the
gold was still north of $800, I would have said impossible. One of
the reasons is that investors are giving up and gold funds, ours
included, are under redemption pressure. This creates forced
selling with insufficient buying and that leads to the most
depressed prices since this cycle began in 2000.
TGR:
How long
can this go on?
JE:
I don’t
know but I’ve got some that actually are selling below the
cash on their balance sheets.
TGR:
Should
investors wait for gold to go above $1,000 before investing in the
juniors?
JE:
Things
have gone much farther down than I could have imagined in my worst
nightmare. If you are confident that the gold price is going
higher, this is an ideal time to be picking away and buying a
diversified list of very good quality, cheap juniors. I’ve
made the most money in my life buying things that are out of favor
because there’s no downside risk, certainly from a
fundamental standpoint. When the worm turns, these things could
double very quickly. When that happens it’ll be hard to buy.
Start picking away now, as long as you share my opinion that the
gold will see a hefty price rise over the next 12 months.
TGR:
How does
an investor determine which juniors merit a closer look?
JE:
It all
revolves around the people and the asset. I
look for companies with strong financial support,
a legitimate project with a
43-101 resource
and sound management. Using those criteria, you can make a
reasonable evaluation of what the net asset value is. You can put
in your own gold prices while knowing that they’re not going
to be cash-starved.
TGR:
Do we
have to work through this panicked selling before stocks will
change?
JE:
As long
as people are abandoning the sector and taking money out of these
funds, then there's a lot of irrational selling. The fund manager
has no choice but to sell. This is creating a phenomenon where
prices don’t make much sense. The larger cap stocks are the
ones being bid up; they trade because generalists buy them.
There’s a far bigger pool of capital prepared to buy them.
That’s why you’ve got this remarkable discrepancy in
valuation between the little guys and the big guys.
TGR:
Other
people we've interviewed are concerned about a
real crash in the overall markets.
JE:
We’ve
already had the crash in the junior gold shares. That brings up
the naked
short
selling of these stocks. I think there are grounds for a suit. A
lawyer has been phoning me on this subject. Someone is trying to
bring a suit against the perpetrators. There has clearly been
nefarious activity in these stocks because they get driven down to
a level where they can’t put their head up without getting
pounded back down again.
TGR:
If the
market crashes, it'll pressure the gold funds.
JE:
That
assumes that the gold price doesn’t explode. If the market
crashes, the authorities are going to pour so much money into the
system to try to avert economic disaster. Money has to go
somewhere. Some of it will go to gold. If the gold price heads
higher, you’ve got the cheapest gold stocks in history.
Maybe they won’t get dragged down in the crash. Maybe the
big caps are going to crash.
TGR:
Big caps
gold stocks?
JE:
Big caps
period. Investors have already abandoned the illiquid stocks and
huddled in the big caps.
TGR:
A lot of
people are saying that they see a slowdown in deflation. Do you
agree?
JE:
I think
the problem is potential deflation because I am a great believer
in Austrian economics and we’ve had the greatest credit
abuses
in history. There’s an awful lot of debt and you're stuck
creating more of it to keep the momentum going. The real issue
here is, can you do it? There is a good argument for a
deflationary spiral like the Great Depression. On the other hand,
this time paper money isn’t anchored. Everything’s
fiat and the government can create it with the stroke of a pen or
the touch of a computer key. If you really want to pin me down,
I'd say we’re going to have a hyper inflationary depression.
The value of money will be destroyed and economic activity will
grind to a halt. It'll be the worst of all possible worlds—
a South American meltdown. If that happens, the one thing I want
to own is gold. I have been investing more in bullion
recently than in stocks. I already own some stocks. But I do
believe that if bullion performs as I expect it to, the stocks
will do well. If you go back to the 1930s, the best performing
things on earth were the gold stocks.
TGR:
They
went down in the beginning.
JE:
They
did, but these have already gone down. That would make the case
that we had the bear market in gold. I guess they could go down
90% from the peak prices, but still the risk/reward heavily favors
the reward side. That is not true for large cap stocks,
particularly those that make up the indices.
TGR:
But if
the price of gold doesn't turn around, don't
a lot of juniors risk bankruptcy?
JE:
If
they’re not in production and are fairly careful, they can
gear back. The
ones in production and losing money are at the greatest risk
of bankruptcy. If gold doesn't turn soon, they won't be able to
finance their operations. A lot of these guys lose money and just
kept going out and raising more. They just keep losing money, so
they close the mines. That’s also very bullish for gold.
We're going to have less and less gold in production.
TGR:
What
about the juniors that aren't in production?
JE:
I'm not
worried about the ones that have real ore bodies and have gotten
pounded down to where they’re trading at $10, $15, or $20 an
ounce in the ground.
TGR:
Because
they’ll be taken out?
JE:
They’ll
be taken out or they’ve hit bottom and, as
long as they have enough capital
to move forward, they can gear down. Small, quality gold shares
are proxies for a higher gold price. The problem is that the gold
price is so severely suppressed vis a vis other commodities that
the whole business has become uneconomical.
TGR:
What
percentage should an investor have in bullion and in what
form?
JE:
If the
worst happens and everything goes to hell in a handcart, you want
bullion. So the core of your portfolio has to be bullion.
Depending on how much money you’ve got, you can decide what
percentage you want to wager on the upside.
TGR:
So you recommend a core holding of bullion.
Do you believe people should have coins?
JE:
Absolutely. I’m
a big believer in coins and
actually have them in addition to physical gold as part of my
position.
TGR:
Would the balance be in producers and
exploration companies?
JE:
I can't pound the table for any of the large
cap producers because they don't represent terrific relative
value. However, when the gold price goes up, they’re going
to go up in price. My view is that some of the smaller ones will
go up a lot more. It depends on what your goal is. If you only
want to protect yourself, own nothing but bullion. But if you want
some leverage and to make some money, then you should probably get
some intermediate and smaller gold stocks that have been really
taken to the wood shed and pounded.
TGR:
Could the powers that be continue to drive
gold down?
JE:
They have a financial crisis of epic
proportions and the last thing they want is for gold to become the
go-to asset, so they’ve been throwing everything at it but
the kitchen sink. That strategy has resulted in unprecedented
shortages of physical gold. Half the bullion dealers and coin
dealers in America can't get it.
The U.S. Mint suspended
production of Gold Eagles. They claimed it was due to a shortage
of blanks. I don’t believe that. I think it’s a
physical shortage. COMEX has created an irrationally low price and
people are coming out of the woodwork buying it.
TGR:
And they can’t replace it.
JE:
The fact is that all this stuff at central
banks has been leased and swapped and sold into the market. It’s
gone; it’s not coming back. So we’re running out. The
question is when will it be completely gone—that's when the
market will go nuts.
TGR:
Are you forecasting that for January of
2009?
JE: That's
when we’ll have four-digit gold—maybe higher four
digits. As this credit crisis unfolds, the gold market can come
into its own again. Attempts
to discourage people by pounding the gold will end. When
everyone realizes what’s going on, I think it’ll have
a salutary effect on the gold price.
TGR:
John, as usual, we appreciate your time.
JE:
It’s always best to talk when things
are at their worst because I think that’s when the
opportunity is the greatest. When we have another conversation six
months from now, I think it’ll be a much happier one.
John
Embry is chief investment strategist at Sprott Asset Management.
Embry, an industry expert in precious metals, has researched the
gold sector for over 30 years and has accumulated industry
experience as a portfolio management specialist since 1963. He
joined SAM as Chief Investment Strategist in March 2003 with focus
on the Sprott Gold and Precious Minerals Fund and the Sprott
Strategic Offshore Gold Fund, Ltd. Prior to joining Sprott, Embry
was Vice-President, Equities and Portfolio Manager at RBC Global
Investment Management, a $33 billion organization where he oversaw
$5 billion in assets, including the flagship $2.9 billion Royal
Canadian Equity Fund and the $250 million Royal Precious Metals
Fund.
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Posted Friday, 12 September 2008 |
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