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Embry Sees Trouble for Paper Money
5/23/2019 4:57:45 AM
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Levi Folk
Levi Folk is President and Managing Editor of The Fund Library and is a regular contributor to the National Post newspaper.

By Levi Folk  | Monday, May 01, 2006

Gold headed for US$1,000, says Sprott strategist.

We are “in the early throws” of paper money “getting seriously debased,” warns John Embry of Sprott Asset Management, and the price of gold is headed higher from its current near-term high of over US$ 600 per ounce, by his estimation to $700 this year and $1000 conceivably within two to three years—“maybe quicker.” This story is finally “gaining traction because of the remarkable deterioration in the financial position of the United States ,” he says. Confidence in US paper money is “starting to ebb away, and, boy, when it really starts to move, you’ll be shocked, I think, at how fast the prices will move.”

“I think what you’ve got here is a perfect storm,” he concludes. The US has shown “very little interest in any fiscal responsibility,” and has created, in the face of declining savings, “an enormous debt pyramid” that can only be sustained by ever greater credit expansion, he explains.

The supply of money is ever expanding, whereas the supply of gold is relatively scarce, hence the “perfect storm.” Insufficient exploration for at least the last five years suggests “at best a flat production profile” for gold says Embry—this in a situation where demand already outstrips supply by roughly 1500 tons/year.

Behind this “perfect storm” is a conspiracy theory advanced by Embry that points to the US Federal Reserve Bank doing whatever it can to hide the truth about its “debased” currency. To give one subtle example, the Fed recently stopped publishing a broad measure of the money supply (M3) because it suggests that the money supply remains loosen despite the rate hikes in the U.S. To take another, central banks have been selling gold over the past decade to drive down the price of gold to make their currencies look stronger.

The problem with conspiracy theories is that they can be used to dismiss any evidence that does not corroborate one’s view of the markets. For example, inflation is the smoking gun that Embry cannot find. In fact, expected inflation, which can be calculated as the difference between current yields on real-return bonds (TIPs) and nominal bonds remains muted. Embry explains this conflicting evidence by suggesting the bond market is also being manipulated, this time by the US Treasury.

Conspiracies aside, the fundamentals for gold and silver continue “so strongly in their favour,” he adds. “The fund has been managed on the premise that gold and silver were going materially higher in price, and that they’re going to go far beyond what most people think is possible.” Investors simply do not understand the “upside magnitude” implied by the supply-and-demand gap.

Other factors are kicking in to bolster gold stocks, otherwise a high-beta play on the actual commodity. For instance, the gold sector is witnessing a spurt in M&A activity as the majors are snapping up juniors with proven finds. In addition to hedge funds and futures markets fuelling speculation in precious metals, there are also now mainstream investment vehicles like exchange traded funds (ETFs) that are whetting the appetite of investors. “What they’re doing,” says Embry à propos ETFs, “is they’re providing a much easier mechanism for people to invest in precious metals,” potentially “a huge positive.”

We are weeks, maybe days, away from the first silver ETF: it’s in the hands of the SEC. As a result, silver has been seeing a rise in price for months in anticipation of that move. Silver, in Embry’s view, is the much more interesting story. True, there is no central-bank silver reserve, but the supply-and-demand equation is also working in favour of silver, as the enormous above-ground inventory has been largely depleted and new sources of demand mushroom (e.g., in the health sciences).

For these reasons, Embry thinks we’ll see silver at $20 in the not-too-distant future. Accordingly, the fund has a 10 percent allocation to silver bullion, and a relatively high exposure to pure silver plays such Silver Wheaton, Western Silver and Bear Creek Mining. Meridian Gold should be included here too, he adds, because of the high silver content in their ore.

Beyond the above-average exposure to silver, the fund is also characterized by an emphasis on juniors over seniors. “The way I’ve made my money through the years,” boasts Embry, “has been to put considerable emphasis on juniors: emerging companies, exploration vehicles.” The juniors have “much more leverage to the upside,” he explains; “they’re still relatively well-priced as per ounce in the ground”—but that will change, he adds.

Embry also sees value in gold producers in strong-currency countries like Canada . “I like small producers who have really struggled to survive: they’re lean and mean to the extent they can be; and now they’re in a position to benefit, and they stock prices don’t reflect it, because they’re still not making much money.” This has become a secondary theme in his stock selection.

The emphasis on juniors, however, translates into higher risk, especially in light of today’s price volatility. Embry manages this risk by maintaining a diversified portfolio of 70 names with an emphasis on careful selection of juniors. Among his juniors, Southwestern Resources and Greystar Resources have consistently played a prominent role in the portfolio.

Precious metals are “monetary commodities,” emphasizes Embry, and do not behave like base metals (which have also had tremendous runs). One day investors will realize that the “days of disinflation are over” and the real risk is hyperinflation; on that day “gold would be the asset of choice.”

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