Somewhat OT but focused on gold. Important thoughts for anyone invested in gold stocks and/or bullion. Note particularly the last paragraph, and the last sentence. (Rather long Q&A from the Northern Miner)

Snug

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Q&A with John Embry

With the price of gold taking a breather in recent weeks after setting new highs earlier in the year, Mining Markets spoke with John Embry, chief metals strategist at Sprott Asset Management on where the yellow metal is headed. A great gold enthusiast, we also asked John for his views on how much gold investors should hold, whether it's best to diversify into other precious metals, and whether investors should look at holding gold stocks, as well as physical gold. The full interview will appear in our feature "Two Views on Gold" in the September issue of Mining Markets magazine, alongside an interview with Kitco senior analyst Jon Nadler.

Will gold continue to set new highs over the next year?

I'm pretty adamant about that. We've had this summer setback, which is not unusual, and we saw the price come off from US$1,260 down about 100 bucks to the bottom. I think we've probably seen the bottom end now and I would be disappointed if we aren't back at new highs by sometime in the early fall, and that will act as a springboard to prices headed north of the US$1,500s certainly by year end or early next year.

Why? What's going to drive it higher?

I think that we saw a real straw in the wind late last week. There's a belief in the public that is being fostered by the powers that be that we're on a sustainable economic recovery and everything's tickety-boo, but James Bullard who's the Federal Reserve president of St. Louis and one of the Fed governors, came out late last week and said that it appears that the U.S. may be lapsing into a Japanese-style deflation and that we may require another bout of quantitative easing. Well if that's the case, it supports my whole contention that this entire economic recovery we've had has been on the back of government stimulus and zero-based interest rate policy and in my mind, isn't sustainable and they know that. And Bullard's admission -- and he's been a hawk about inflation and higher rates and everything - for him to come out and say that was really interesting. The fed knows what it's up against and they realize that the economy is starting to flag here and as a result they're going to have to pump a lot more money into the system. Nothing could be more bullish for gold than that

How much gold should investors hold?

I used to say back when it was kind of a minor asset, you should always have 5-10%, just like insurance -- that's why we all have insurance on our houses and our lives -- and I think you should have insurance, in those days, on your financial future by having 5-10% in gold or gold-based assets. I would say now the situation has become so fraught with peril that I would recommend a minimum of 20% and if you really agree with me, a lot more than that.

Do you see gold as an investment or as insurance?

I see it as both, I see it as money. I see it as a replacement for money because I think the currencies of the world today, the fiat paper currencies are in deep, deep trouble and I think that we probably will have to realign the currency system before this is all over. So in my opinion, people are holding gold as a substitute for money and as insurance most assuredly against something seriously going wrong in the whole financial situation.

What are the biggest risks to holding gold?

I think the biggest risk to holding gold at this point is if I'm dead wrong and there's some basic ability for the authorities to get us back on a sustainable, low-inflation growth path. As a great advocate of the Austrian school of economics, which deals in credit cycles, we've just come off the biggest credit cycle in the world's history. I believe the system is broken because of that, so I think the probability of getting a sustainable, low-inflation growth path going forward in the Western world is about as close to zero as possible. So to me, outside of that risk I see no risks particularly to holding gold at this point.

Should gold investors diversify by buying silver or PGM assets?

I would certainly diversify by buying silver. I don't have anything against platinum and palladium, I just think there's a much bigger opportunity pricewise in gold and particularly silver. As bullish as I am on gold, I think that the silver situation fundamentally is even better and there's a long-followed gold silver ratio, which is currently around 60 or 65:1 and I suspect in history it's been as low as 15:1 -- which suggests that silver is dramatically underpriced today, compared to gold. In the bull market in both of them that's going to take place, I think the gold-silver ratio will come down, which suggests that the silver price will go up a lot more than the gold price. That's for several reasons, one being that, unlike gold, which isn't consumed (it's basically either in jewelry or it's hoarded as a monetary asset) silver is also poor man's gold, it is a monetary asset. More importantly, because of its many uses in medical and industrial and what have you - most of the silver in the world is being consumed, so you don't have this big aboveground stock. So if people want to go there, they're going to have a more outsized impact on the price.

Should investors also hold gold mining stocks as well as physical gold?

That's a very good question -- very germane at the present time. I've been very very bullish on gold bullion. I've been less bullish in the recent past on stocks. I'm now beginning to believe that if we get the breakout that I'm looking for in the bullion, and I'm looking for it probably as we move into the fall -- then, attention will come back to the stocks. They are now well behind the bullion, and I think you could see a massive catch up, so I'm actually very bullish on gold stocks right at this very moment. A well diversified list of the big stocks, some quality mid-sized producers and the best of the exploration vehicles will probably give you a dramatically better return than you'll even see in your bullion.