Sprott's Thoughts

Gold and Silver at ‘Historic Undervaluation’: John Embry

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. I got on the phone with Mr. Embry to talk about gold and silver at the start of 2014…

Hello John, what’s on your mind when it comes to gold and silver right now?

Well, I am really fascinated with the gold and silver markets for a simple reason: I believe that the fundamentals that should be driving the price couldn’t be better. At the same time, because the price of both gold and silver have been driven down relentlessly – going on two and a half years now for gold – the degree of undervaluation against any method that I look at is approaching historic records.

As a result of this counter-intuitive price action that we’ve seen in both metals, the sentiment in the market is horrible. I don’t think I have actually ever seen people so negative and disinterested in the subject, which I think represents one of the greatest buying opportunities in history.

Do you agree with Eric Sprott on his outlook for gold in the next 12 months (that the price could double in that timeframe)?

Yes, definitely; we certainly see eye-to-eye on the precious metals thesis. And one of the reasons I am buoyed in this is that all of the preconditions for a significant bottom are in place; none more so than the sentiment. I love to see really negative sentiment and right now it’s about as negative as it gets. When you throw in what’s going on in the financial and economics world – what’s really going on, not what the mainstream is telling you – and you superimpose it on that historic undervaluation, I totally agree with Eric’s views on this thing.

We’re not talking small moves here. When this thing really gets going, we’re going to be talking multiples of the current prices. It will unfold over time but it could happen quickly too.

What timeframe are we talking? Do you see a catalyst ahead?

Well, one thing that I've been watching closely is Germany's request to repatriate its gold. The Germans asked for their gold that was being held at the Fed to be returned a year ago. We’re told, remarkably, that they’ll only get the 300 tons back over 7 years. Quite frankly, if the gold were actually there, they could put it on a couple of cargo planes and get it back to Germany in a week.

It begs the question: Is the gold there?

It turns out that a year later they’ve returned about 37 tons. If they’re stretching it out evenly over 7 years then they should have delivered substantially more than that. It also turns out that the gold has been re-refined! I think that one of the great scandals that is going to emerge when all this is over is that this gold, which is allegedly in official hands, has been lent and hypothecated, and it just isn’t there anymore. When that comes to widespread attention, I think that the impact on the price of gold – and by extension silver – is going to be enormous. And I think we are dealing with a timeframe on the order of 12 months for this to happen.

Rick Rule frequently talks about Quantitative Easing and the inevitable effects of the increased monetary supply. Is this separate thesis somehow connected to the thesis that there is a gold shortage?

That’s the fundamental driver that is going to affect gold. It’s not gold changing price – it is the price of the money in which gold is being valued that’s going down. So I completely agree with Rick.

Superimposing on that, there is also a significant physical shortage of gold because a lot of the gold that we think is there isn’t there. More importantly, the Chinese have long since figured this out and are buying every single ton they can get their hands on.

So we’re not even dealing with outcomes here – I’m very confident about what the outcome will be. We’re dealing with the short-term timing of it; and that’s been difficult. It’s stretched out longer than I would have thought.

Do you think central banks are still in ‘denial’ about this; or have they recognized it to some extent?

Well, I’m glad that I’m playing my hand. I would not want to be playing theirs because I don’t know what their answer is going to be. As far as I can see, they have painted themselves into a corner.

Given the state of the economy and particularly the financial system, the idea that there’s going to be any significant reduction in the money printed by these central banks in the Western world is preposterous. They’re going to have to keep printing more and more money just to make sure nothing goes badly wrong.

The gold and silver are really small potatoes compared to the real problem that we face – interest rates. If gold and silver were to escape the shackles that they’ve been in for the last couple of years and started to rocket in price, I think that people might start to question whether the monetary policy that’s been in place for the last decade is in fact prudent.

And if they came to agree that it was not prudent, interest rates could rise dramatically. This is the one thing that this system cannot stand, and that’s the reason that they’ve been pursuing this policy of zero-based interest rates.

What about the Fed’s attempt to ‘taper,’ reducing QE recently?

Well, I think it’s all optics. As they realize that people are catching on to their act, they’re going to try to look like they are somewhat responsible.

I think a $10 billion taper per month is next to nothing. Do I think that they are going to continue to taper continually until we get to the zero? No, because I think that at that point the economy would buckle. Then they’d have to recognize that they need more stimulus – and that will be the end of the “taper.”

Do you think mining stocks will be good investments if gold recovers?

I think, quite frankly, that this might be one of the great trades of all time. These stocks are so cheap now because at these gold and silver prices, nobody can make any money! If I’m right on the large magnitude move in the gold and silver price, it will lead to a tremendous flow of money into this sector, because these companies will start making a lot more money.

The sector has shrunk to such a small market cap – because of the current bear market – that when the money does come I think it will be outsized. These stocks have fallen so far, and people are so negative on them, that a change in sentiment could drive these prices upwards very quickly.

Are you concerned that the price of gold could fall even further within, say, the next 12 months?

Well, that seems to be the ‘buzz’ out there. That’s what the media are saying. Honestly, I was surprised that the price had fallen this far, so I will not exclude that possibility.

But I would advise you to look at the shortage developing in the physical market. I would be very surprised if these negative predictions that we see everywhere will come true given what is happening with the physical demand.

This interview was previously printed on January 22, 2014 by Casey Research.