Why Gold Is Unstoppable

Doug French, Contributing Editor

Stars of stage, screen, and boardroom have come together to “ban ‘bossy.’” The world has lots of problems, and Sheryl Sandberg and Beyoncé think the word bossy tops the list. Reportedly, assertive girls are called the b-word growing up, dissuading them from pursuing leadership roles. At least that’s what Condoleezza Rice and Diane von Fürstenberg claim.

Rest assured these women don’t want bossy attitudes to go away. They want it called something else. Jay-Z’s wife offers an alternative: “I’m not bossy. I’m the boss,”… which sounds a little bossy to me.

No one knows whether the new head of the Federal Reserve, Janet Yellen, was called bossy when growing up. For sure she’s no wallflower these days. Four years ago as president of the San Francisco Federal Reserve Bank, she said, “Accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low. If it were possible to take interest rates into negative territory, I would be voting for that.”

Now that she’s the boss, Yellen might ban interest rates. As a believer in the musings of John Maynard Keynes, Chairwoman Yellen no doubt insists that people are too future-oriented (remember, in the long run we’re all dead), society doesn’t consume enough, saves too much, interest rates are too high, money printing will lower rates, and unused savings leads to unemployment.

The last three Fed bosses have wanted to, if not do away with interest rates, at least ground them to nothing. What’s inescapable, however, is money today is worth more than money tomorrow. That means interest rates provide important signals to the marketplace. Left to the markets, these rates will reflect society’s time preference: How much must savers be paid to delay consumption? In turn, interest rates will direct capital toward its optimum use.

When the Fed bosses interest rates down below what they would be naturally, entrepreneurs and investors receive faulty signals. The cheap money then flows into investment assets: stocks, bonds, land, art, etc. Eventually the asset bubbles will pop when people realize these investments were uneconomic in the first place.

The Fed can ban interest by forcing the rates it controls to zero, but the Eccles Building bosses cannot dictate the results. Janet Yellen can’t print jobs or force Amazon to increase prices. The newly minted money will flow where it wants to—and it almost always gushes into the speculation du jour.

Gold is (and always has been) its own boss. The cost to create an ounce is somewhere around the going price—$1,366. This fact will keep too much from being mined.

This sort of economic brick wall doesn’t prevent Yellen and company from creating more dollars. Using Fed credit to buy Treasuries costs nothing. And while the cost of making the new, hi-tech C-Note is 60 percent higher than the old paper, the government can still make $100 bills—backed by legal tender laws—for only 12.5 cents.

It’s good to be the boss. It’s bad for the rest of us.

Today we have Sprott Global’s Henry Bonner interviewing one of the preeminent gold analysts in the world: John Embry. If you have your doubts about Dr. Yellen’s management of the government’s money, Mr. Embry makes a compelling case for holding the people’s money.

Enjoy.

Doug French, Contributing Editor


John Embry: Why Gold Is Unstoppable

By Henry Bonner (hbonner@sprottglobal.com)

John Embry is a chief investment strategist at Sprott Asset Management LP and works alongside Rick Rule and Eric Sprott. Mr. Embry oversaw $5 billion in funds at RBC Global Investment Management before Sprott, and he is a well-known gold and silver bull and considered an influential thought leader on precious metals.

Henry Bonner: There’s been a price move up in the metals; is this exciting to you as an investor in gold and silver?

John Embry: Well, there’s been a good move up here. Gold and silver are doing well against resistance, and against sentiment, which remains very negative. So many people are still very bearish on the metals for reasons that I can’t understand. But that bearishness exists.

I also think that there’s ongoing interference in the markets. One thing is that they don’t want gold and silver breaking out and running hard. I think they’ve done a good job at that because gold’s up $150 off the low that was established at the end of last year—it got down to $1,180 briefly, and even silver, against great resistance, is pushing forward. And yet, most commentators remain negative or worse on this subject shows that they’ve done a great performance.

Henry: What do you think investors in gold and silver should look at now?

John: Well, I’m looking at the reality of the picture. First of all, the world economies are not what they are made out to be. Without exception, pretty much, they are weakening, and they are struggling. It’s very simple: there’s far too much debt in the world, in virtually every country at every level. If you believe in the tenets of Austrian economics to the extent that I do, when you get an excess debt situation in the world, you cannot create enough new debt to get the economy to grow. I think that’s what we’re up against. Consequently, I don’t see the economy bailing out the bulls at this point. As things get worse and worse in the economy, I think that gold and silver become a worthwhile alternative. What goes unremarked is how small these markets really are. If you looked at every ounce of gold that’s been mined since the beginning of time, that’s only 170,000 tonnes—more or less. That’s only worth a little over $7 trillion. And a trillion dollars doesn’t go very far these days. So you think about how little gold there is—silver is a fraction of that. If money decides they want an outlet in these two metals, it’s going to have an outsized impact on the price. I think as things get more and more difficult in the real world, people will seek outlets in gold and silver, and the impact will be outsized.

Henry: What about the situation with BaFin, the German equivalent of the SEC? After investigating Deutsche Bank, which is involved in the London price fix for gold, they announced that gold may be manipulated worse than LIBOR. Are we on the cusp of a great revelation about price fixing?

John: I think it’s interesting that they’re focusing on the London price fixing. I’m sure that there’s probably been some chicanery there. But it’s absolutely a mere bagatelle compared to what’s going on in the gold market, between the Western central banks and the bullion banks and the amount of pressure they’ve brought on the gold price. The thing is, I would be more interested in the extent to which the gold and silver prices have been held back by relentless central bank activity. But you’ve got to start somewhere, and that BaFin inquiry is a positive step in the right direction.

Henry: What do you mean by central bank activity?

John: I mean clandestinely leasing out significant amounts of gold into the world. The last big thing was a major shipment of gold from Switzerland—that had to be central bank gold, because where else was it coming from? That stuff was being re-refined in Switzerland and shipped on to China. This whole West-to-East transport of major quantities of gold, from a Westerner’s perspective, is not a good development. The old adage is that gold goes where the wealth is being created. And the other is that those that have the gold make the rules. So I’m really upset with this whole migration of gold from West to East.

Henry: Do you think that the West is no longer creating real wealth?

John: Well, I think what’s really happened is that the West has abdicated its manufacturing space to China in particular and a number of satellites in that part of the world. I think one of the great problems with unemployment in the West today derives from that. There used to be huge numbers of well-paid manufacturing jobs in North America and Europe. A lot of those have been lost, and a lot of those products are being produced at lower cost these days in China, because they have a much lower cost base. I don’t think that’s a particularly positive development in the long term for North America and Europe.

Henry: What is driving this big world shift?

John: Basically, for the longest time, Henry, from the post-war era China was asleep; it was just over there, not doing much of anything. But they do have over 1.4 billion people now. All the wealth was centered in the Western world, in North America and Europe, and Japan to a lesser extent. There are not many people in that group, probably 600 million people. Suddenly China, and India to some extent, awoke. 2.7 billion people decided they wanted what we had and were prepared to work hard for it. It’s started to have a dramatic impact on the standard of living in North America. And I think the manifestation of that is that the bottom half of our society is having trouble getting well-paying jobs, and it’s starting to take a toll.

Henry: Do you think that China might follow the West’s path of expanding debt and letting go of gold?

John: Well no; in fact I think the opposite. What’s happened is that we in the West, and America in particular, were paying for all these goods from China with more and more printed money. And China was running up huge surplus accounts as a result. So they had this enormous quantity of US dollars in reserve, and they know it’s pretty vulnerable. And I think that’s an underlying reason that they’ve been buying gold—and it’s not just gold, but properties and other stores of value. They really want out of these US dollars and into hard assets to whatever extent they can do it.

Henry: Are the Canadian and European currencies on a better track that the US dollar?

John: Well, no. Rather than criticize the US specifically, I would be more critical of the Western world in general. We’ve lived a pretty good life after the Second World War and in the ensuing 70 or so years. And if we run up an awful lot of debt, it’s going to take some real doing to get back on the right track. In the intermediate, as we’re dealing with all these issues, money might be debased just to keep all of these things afloat. That’s one of the reasons I am so bullish on gold and silver. These are constants in an ever-changing world, and I think they are cheap now—very cheap. I don’t think people own enough of it, and when they finally get that this is happening, there’s not going to be enough to go around. So my advice to people is to get all the gold and silver you can at these prices. And better than that—if you really want leverage—buy the shares that mine the stuff. If you have the right shares, I think you’re going to make a fortune. So I’m a huge bull on the gold and silver shares; the only caveat is that you’ve got to be very selective. There have been a lot of bad stocks promoted through the years. And if you’re buying into this space, you’ve got to be real sure that they’ve got the goods—they’ve got a real ore body or they’re in production. Or they’re very close to production so you’ve got some kind of certainty that it’s real. Those kinds of stocks are going to do spectacularly well when this market starts to rock and roll.

This gold and silver issue is a huge deal; and I don’t think most investors understand the playing field that we’re on.

Henry: So stay strong; own gold and silver; and wait?

John: Well yes; and I want to reiterate that there is so much bad press out there that most people just avoid the sector, and it seems like in the fullness of time it will turn out to have been a terrible mistake not to have had the protection of gold and silver and some related shares in your portfolio.

Henry: Do you think we are getting close to vindicating the case for gold and silver? Will it take a few more years?

John: I wouldn’t say years. Of course, I want to leave myself some breathing room, but I think we are getting real close. There are more and more drumbeats about the degree to which the price has been messed with. And there’s all this paper out there with no real gold or silver backing it. When all this comes together in a crescendo for gold and silver, I think the impact on the metals is going to be way beyond what most investors can even comprehend today. And that’s why I think it’s important to be early rather than late today. If you’re late, you might never get in—because it may move so quickly and the availability is limited.

Henry: Will there be signs of an imminent change in gold and silver to the upside?

John: I think there’s a lot of evidence now of how they are controlling the paper markets with all the rules that they have put in place, and the way their algorithms work. If the price of gold ever goes up 2% in a day, they stop it. So I will be feeling comfortable that we are really rocking and rolling in this when we start to see some really outsized moves—say, gold going up by $50 in a day. I think that would really tell us that the game is on. And I think we’re close—we’re talking months, not years.

Henry: What forces the pressure on gold and silver to give way?

John: Lack of physical. I think the real Achilles heel of the paper market is that there is overwhelming physical demand from China and other sources. Recognition of the lack of physical, especially to back all of the paper products, could really push this thing dramatically in a very short time frame.

Henry: What will be the response of the Federal Reserve?

John: I think they’ve already made all their responses. They have printed all this money, and I think that a lot of US officially held gold has entered the market through leases, swaps, or what-have-you. I think they have less and less firepower to maintain this sort of activity. As a result, when it changes, it will change dramatically, because there will be more demand than there is physical supply to meet. And the paper market, which has controlled the pricing mechanism for as long as I can remember, will finally be overrun.

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Mar 19, 2014
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