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Five per cent…? Ten per cent…? Try nearer 20% says this four decades’ veteran…

The GOLD REPORT recently caught up with John Embry, chief investment strategist at Sprott Asset Management, to get his thoughts on gold and Gold Mining stocks.

An industry expert in precious metals, John Embry has worked as portfolio management specialist for  more than 45 years; he’s simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

Here he tells the Gold Report about his outlook for strong Gold Price gains in 2010…

The Gold Report: John, in Investors Digest of Canada you recently said you’re expecting gold to gain another 30% this year…

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We’ve had nine years consecutive higher year-end prices and the best year in that span for a year’s return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: Why is this year going to be the best year?

John Embry: I think we’re getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can’t depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people’s eyes.

TGR: You might say the first leg down were the individuals who couldn’t pay their mortgages and that caused part of the ‘08 collapse. And now it looks like it’s the government…

John Embry: It’s very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I’d see in my life. I’m shocked at the numbers in many places.

TGR: When you talk about gold, you’re talking about Gold Bullion. But how do you see the gold stocks? Do you think we’re going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

John Embry: I don’t agree with them. As much as I love Richard Russell – he’s probably been as big an influence in my career as anyone – I don’t think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary ’30s, and they will move heaven and earth to prevent that outcome. And when you’ve got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I’m in the camp that thinks we’ll get hyperinflation first. We’ll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

John Embry: I think stocks will do fine. They may have a violent correction first because a lot of people don’t know what the heck we’re talking about here. And when they see inflation mounting and economic conditions being less than ideal, they’ll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you’re talking about stocks, you’re not talking just about Gold Mining stocks…?

John Embry: No, I’m talking about good businesses. I’m not talking necessarily about banks and other stuff that’s more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it’s in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

John Embry: Gold stocks, maybe. I believe the next time everything goes down, gold isn’t going down. And if that were to be the case, I think gold stocks might surprise. They’ve been awful. Given what the Gold Price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it’s been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The Gold Price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

John Embry: Oh, I think the juniors. The whole thing is a matter of confidence. They’ve got so much volatility in the Gold Price. You get a good thrust up and you got a violent correction and I think they’ve got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I’m right and the Gold Price stages a dramatic breakout in the next 12 months – and I’m talking hundreds and hundreds of Dollars on the upside – then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What’s the seasonality of this year?

John Embry: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that’s going on, I see no reason why it shouldn’t be a very good period this time. And there’s one other development. I don’t know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the Comex futures market. And if they ever put any teeth into those things and kept these bullion banks from what they’re doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They’re finally going to have to address this because there’s been so many complaints about the bizarre price action on the Comex in both gold and silver.

TGR: The International Monetary Fund is going to be selling some gold, and India stepped up earlier. What are your thoughts on that?

John Embry: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we’ve seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tonnes still to be sold.

There’s speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don’t think they want to be seen publicly doing it. They’d probably rather do it more clandestinely because they’ve got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic output to augment their reserves, where the Indians really don’t have that.

So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there’s also sort of the suggestion that the Chinese wouldn’t want to be seen to be paying more than the Indians did. So they’re reluctant to step up with the Gold Price some $50 higher currently than the Indians paid.

If gold really was a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It’s not much money. It’s $6 billion. They throw it around as if it’s a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

TGR: What did you think when George Soros came out and said that gold was a bubble?

John Embry: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn’t like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn’t say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the Gold Price is going to go crazy and at that point I’d be worried. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing? The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: And, again, I think the financial talking heads used it as the negative.

John Embry: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn’t like gold. But I think George Soros’ remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was Buying Gold…

TGR: Any last comments?

John Embry: The only comment I’d make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody – and I have never been a table pounder – but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn’t something that’s just insurance for those who’ve got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

John Embry: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn’t buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

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Source:Gold: How Much is Enough?

Gold as well as stocks could offer protection from government-wrought inflation…

WHAT’S BREWING in the economy and financial markets? Beyond the horizon, believe Charles Oliver and Jamie Horvat at Sprott Asset Management, the stock market may serve as a hedge against hyperinflation, with the strongest sector in Gold, they tell the Gold Report…

The Gold Report: A lot has happened to influence Gold Prices since the last time we spoke with you in June. India and Russia started buying Bullion, which helped increase the price. Now, the news from Dubai has put some downward pressure on prices. What does all of this mean for the gold sector?

Charles Oliver: In terms of central banks Buying Gold, it’s very positive. You mentioned India, which just bought a couple hundred tons from the IMF. Sri Lanka also bought 10 tons, and Mauritius bought two tons. We’ve also seen the Russians buying and there’s talk of China buying more – after the 400 tons they added to reserves in April.

So we’re seeing some very positive fundamentals on the demand side of the equation. The last decade the central banks have been net sellers. It looks as if maybe over the next 12 months central banks will be net buyers, which is a completely turnaround.

I am not going to make too much out of Dubai and its implications for the Gold Price. We saw a small correction in every asset when the news came out. Everybody sold a bit of everything; I think that was just a knee-jerk reaction. If you look at the chaos in the financial markets, gold is actually a safe-haven area.

Jamie Horvat: The only thing I’ll add is that it appears gold is reasserting itself as a currency, instead of being viewed solely as a commodity.

As far as Dubai goes, as Charles said, short-term it looks as if a lot of people got spooked in the market and started taking profits. Gold, obviously, has been pretty profitable year-to-date and we saw a couple of days of selling where people got nervous and wanted to lock in their returns. But that panic selling seems to have ceased.

TGR: Most people expect that all the money printing that’s happened is going to lead to inflation – or worse. What’s your view on that?

Jamie Horvat: Our view is moving more toward the probability of hyperinflation as governments have actually stepped up their stimulus programs and their deficit spending.

TGR: Let’s define hyperinflation. Everyone knows it’s big inflation, but what does that mean?

Charles Oliver: The dictionary gives no fixed definition, but one of the best descriptions I have heard is that hyperinflation is an inflation in which the rate is measured in months or days rather than years. In my mind, if you’re running at 50%, you’re basically there. But again, there is no absolute number.

Jamie Horvat: One of the other things we’ve come across and talked about in the past is the aspect of monetary debasement or monetary inflation, where there’s a definition for hyperinflation we came across stated as very high or out-of-control inflation due to currencies rapidly losing their value resulting in rapid price increases for all other goods.

TGR: So it’s not necessarily the Zimbabwe type of hyperinflation, but something that certainly North America hasn’t seen.

Charles Oliver: Just after the Civil War, the US did go through a period of hyperinflation. Every nation on the planet has at some point basically experienced hyperinflation. And that includes the Chinese; I believe it was around 1945 they went through a period of hyperinflation.

TGR: But this time you’re looking at this potential hyperinflation as being a worldwide phenomenon – not one country at a time.

Charles Oliver: It all depends on what the individual governments do. Right now, many of those countries are continuing to expand their monetary base. They’re spending money left, right and center. Governments that continue to expand the monetary base at an increasing rate will share in the hyperinflationary phenomenon. Not every country’s going to do that, and we ultimately don’t know how it will unfold but as Jamie mentioned, we are seeing a lot of signs that governments are continuing to spend vast sums.

Just as an example, the US is spending a huge amount this year. The healthcare program is going to cost them more money. The demographic story that’s going on out there, as people retire, Social Security payments will increase while the tax revenues decrease. The Prime Minister of Japan and government bankers there are reportedly having discussions about quantitative easing, which, again, quantitative easing is printing money. The Bank of England has embarked upon a huge program of quantitative easing. Those governments that are going to ultimately pay the price.

TGR: In our last conversation, you mentioned that stock market studies suggest one of the best ways to protect your assets is investing in the market. Can you elaborate on why that works? And whether it would work in a hyperinflationary environment?

Charles Oliver: If you go through a period of hyperinflation, the worst thing you can own is cash because it becomes worthless. You want to own assets that will protect you against inflation. Gold is one of the simplest things that we all talk about as protecting against inflation.

But interestingly enough, if you go back to Weimar Republic, Germany and if you look at the Zimbabwe Stock Exchange a few years ago, the stock exchanges actually acted as an inflation hedge. That’s because many of the companies on the exchanges actually pushed through price increases on their end products.

Hence, during a hyperinflationary period, these companies were selling their products for much higher year after year after year and their prices went up to reflect that huge increase in earnings. The huge earnings increases were not the result of improvements in productivity or expanding and growing their companies. It was based purely upon the inflated prices they charged for the goods they were selling. So, yes, the stock market can be a very good hedge against hyperinflation as well as inflation.

Jamie Horvat: I’d argue that the stock market is potentially taking on this role already. It may be starting to act as an inflation hedge, as discussions have been coming out of China, Japan, Russia, and even the recent Fed minutes talking about the low interest rate policy in the US and the US Dollar as potentially the new carry trade, resulting in this inflation of assets bubble globally.

If you can borrow money at prime less 25 or 50 basis points, or essentially for free if you are one of the big US banks that received a bailout, and can put that to work in the market to buy stocks and assets forcing prices up, or you can earn a yield spread, then under these circumstances, I would argue – as many central banks have stated – that this free money is causing the market to act as an inflation hedge.

Charles Oliver: Just a small counterpoint to my partner in crime…At the beginning of this year, we thought hyperinflation would happen several years out. With the market performing as well as it has, it’s a bit of a conundrum with our belief of where we think the market should be valued. Jamie correctly points out that you can explain this by talking about it acting as a hedge against inflation or hyperinflation. But to some extent, my own personal view is that the big movement in stocks will be several years out, and that’s contingent upon the governments continuing to expand and spend money at an increasing rate.

People always ask what the risk is to your expected outcome. And the risk is that at some point in time, some of these governments will start to get religion. If you go back to the 1970s, the US was going through a period of huge stagflation. And then one man sort of stood out of the crowd – Paul Volcker. When he got religion and raised interest rates and did the right thing, people absolutely hated him. We look back now and say, "You know what? He stood up; he did the right thing. The US was in a much better place and continued to be a very stable and good environment to invest in, to grow in." So that’s the one risk, that there’s another Paul Volcker out there who steps up to the plate.

Jamie Horvat: One counterpoint to my earlier argument about the market acting as a carry trade, as Charles said earlier, the thing you have to monitor when you look globally, is the UK still has a negative GDP number. The US recently revised the third-quarter number down from 3.5% to 2.8%. Look at Canada. Look at Japan. There’s no growth without government stimulus.

So if governments rein in or pull back the stimulus spending or someone gets religion and bumps interest rates 25 basis points, we could easily set up for a double-dip scenario or double-dip recession because the consumer is dead. And without the incentive to spend there is no consumer spending and growth.

TGR: If you’re looking at investing in 2010, it sounds like the hyperinflation issues will happen several years out, and in the largest consuming nations we continue to have government expanding the M1 to provide stimulus, which will keep the market growing because the market is going to grow as a hedge. So should we take advantage of the market hedging potential inflation in 2010, and then bail out when we see hyperinflation on the horizon?

Charles Oliver: We spend a lot of time trying to figure out how next year will unfold. It’s a very tough call. Having said that, as long as Ben Bernanke says for the next 12 to18 months the Fed will keep rates low, you could see the stock market show some strength. I think as the market goes higher, the risk of a downturn increases because a lot of the growth in the stock market is people paying higher multiples for earnings.

If you look at the economy, we still have a very weak consumer and very weak earnings growth. A lot of it is a result of cost cutting, and there comes a point where you just can’t cut any more costs out. Hence, you may see the stock market continue to go up, but I think the risk is significant that we see a double-dip recession, and as soon as the market catches a whiff that rates are going to start increasing, it probably will take a very big knock.

Again, we don’t know exactly how and when that will happen, but we do see the market getting more and more expensive. So I think you’ll want to tread very carefully, because there’s a significant risk that at some time in 2010 the economy may go back into a double-dip recession.

TGR: Will it be as dramatic as the one that started in 2008?

Charles Oliver: I don’t think so, but it depends on how things play out. If you see the market get really, really expensive and continue upwards, it’s going to have to come down further. My personal view is that it won’t be as aggressive, but we will continue to monitor that and be ready to be wrong.

In 2008 the whole financial system looked like it was about to implode, and now we’ve seen if that happens, the government plans to take action. Unfortunately, the action is taking taxpayer Dollars and giving them to the banks, but they are ready to act. In that case, the same degree of fear may not exist as it did in 2008 when people were fearful that the whole system would collapse.

Jamie Horvat: I agree with Charles as he hit it on the head. You have to question how forward-looking is the market? When does the market wake up and realize that the growth we had was all predicated on government spending and cost cuts? We can’t cost-cut our way to prosperity. At some point the government stimulus and spending have to cease and we have to pay for all of this through future concessions, lowering the benefits that we were going to receive in the future and increases to our taxes.

Also we still need to repair our balance sheet. We haven’t really solved the problem of all of those toxic assets and the quadrillion or $800 trillion of derivatives – whatever the number may be; it is still lingering out there.

So it’s going to be an ongoing period of lower growth and balance sheet repair. When does the market correct? As Charles said, and I said earlier, that will happen as soon as we get a whiff that interest rates are going to go up.

TGR: If investors are already well into their gold positions in their portfolio, what other sectors should they be looking at?

Charles Oliver: Gold is our favorite sector. On a long-term basis, we’re believers in peak oil, too, so we believe that energy should be part of an investor’s outlook. In terms of mid-term themes, we think over the next decade there are some areas in which to have some exposure that maybe over the last two decades weren’t so important. Agriculture is one example. A decade ago nobody talked about agriculture. I think now it’s very important, and the macro themes are very compelling for why investors would want to get into agriculture.

TGR: Okay. Agriculture is one. Where else?

Charles Oliver: We think infrastructure will be a good area. With all the government spending that’s going on, there’s going to be a lot of spending in infrastructure. We’ve gone through a year of talking about it. So far, the infrastructure companies haven’t really benefited that much because it’s been a time for signing contracts and getting everything put in place. The real spending comes on later down the line.

Jamie Horvat: We’re looking at areas of the healthcare sector as well, but it’s more on the productivity, technology and medical equipment side and not so much in biotech and pharmaceuticals. So the bread-and-butter supply types of companies look pretty good.

There’s some appeal in the technology space as well, with developments that enhance productivity and make companies a little more efficient.

TGR: Anything else you’d like to tell our readers?

Jamie Horvat: Keep the faith. As long as governments continue to print money and debase fiat currencies, hard assets should continue to appreciate and do well as a store of value.

Ready to Buy  Gold…?

Source:Hedging Inflation

Australia’s third-largest gold company now one of top 100 stocks, with a strong-performing gold sector and a mid-quarter reshuffle of stocks helping its new status.

Source:Sino Gold shines in ASX's top 100 (Business Day)

The Gold sector has been performing relatively well over the past month. The price of gold has broken trend line support but is still holding horizontal support and forming a bull flag. Gold stocks and the broad market have been performing well and that has boosted the price of gold stock.

Source:The Gold Sector & Most Powerful Indicator (GoldSeek.com)