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John Embry: Hold Onto Gold As ‘Currency Event’ Likely

May 6, 2014

John Embry said last month that the rally at the beginning of the year was encouraging, but to remember that sentiment for gold was still extremely negative. He says that the stock market’s new highs are a result of the Fed ‘jamming cash into the economy.’ With nowhere else to go, cash is creating bubbles in stocks, real-estate and bonds, he warns.

Hello John. Gold has fallen back down over the last month. Do you think optimism for a fast recovery in gold has fizzled out?

John Embry:I believe that is probably a fair assessment of what has happened since. I think that the decline in the last month has hurt confidence in the West. But I can assure you that the Eastern interests are rubbing their hands and piling into all the physical gold they can get. Once they realize that there is a limited amount remaining for them to pour their U.S. dollars into, I believe the price will move up sharply.

I think that people should be focusing more on the eventual upside -- which is going to be huge--than on the short-term downside which is due to the paper markets.

What is your view of gold in the next few years? What if we continue to have low inflation, or even deflation? How will gold fare?

Well, I don’t think that the situation that we have here is sustainable. We are going to have to create a sufficient amount of money to keep the debt load afloat. We are going to have to keep interest rates low because if those basic requirements are not met – that is lots of liquidity and maintenance of low interest rates – the system is going to collapse.

I think that’s why you own gold; because the odds favor something going badly wrong – a ‘black swan’ if you like. And to continue they will have to jam liquidity, and at some point there will be a massive recognition that the money is no good and people will want out into real things. So I don’t worry about low interest rates and low inflation keeping gold low.

Low interest rates suggest that there is a low demand for capital in the economy. High amounts of cash on corporate balance sheets also indicate that companies are no longer finding profitable opportunities to deploy cash. Do we need to see a higher demand for capital in order to see higher inflation and rising interest rates?

Well, yes, companies are finding it hard to re-deploy capital – and for good reason. There are just not enough credit-worthy borrowers or investment-worthy opportunities to exploit. This happens because the economy is so weak. I don’t believe it for a minute that the economy is as strong as people suggest. As the economy continues to weaken, inflation becomes a currency event.

It’s not inflation like in the 70s’, where a higher demand for things led to prices going up. This time, it’s the currency that is being severely debased and that is what will lead to – I believe – hyperinflation before this is over.

In a weak economy, where there is nowhere for companies or banks to deploy capital, could cash continue to accumulate in banks and corporate balance sheets, preventing this cash from causing inflation?

Well, I guess that could happen. But the question becomes: Why would you want cash, when it generates no return?

I mean, I don’t accept the fact that there is no inflation anyway. I am a big believe in John Williams’ ShadowStats. I think his inflation number may be too high at 5 percent or so right now.1 But the real number is probably somewhere between that and what they report. So if you’re putting your money in bonds, particularly in the short-term ones, you’re losing purchasing power every single day that is sits there.

So we are waiting for investors to recognize this guaranteed loss in purchasing power from holding bonds?

Well quite frankly, Henry, I am amazed that people, given what is unfolding, are prepared to hold bonds. I my view, these things won’t buy a loaf of bread by the end of the experience. And yet there are trillions and trillions of these bonds in the hands of investors everywhere. Now, obviously, nobody wants to buy American bonds quite so much. That’s why the Fed has been forced to step in and buy so many of them.

I think that the next shoe to drop will be the geopolitical mess that is unfolding in the Ukraine and elsewhere. I believe there will be others: the Chinese have already stated their intention of diversifying away and pricing everything in Yuans. I think the Russians are going to head in that direction too. I believe there is going to be an overhang of U.S. dollars in the market, which is going to lead to the price of the Dollar declining. It’s not that the Dollar is particularly overvalued against Euros or any other currencies. It’s just that people are going to want to get rid of all of them, and I think the Dollar is extraordinarily vulnerable.

What else is on your mind today that is important for gold and silver investors?

Well, there is something I would like to comment on. It’s this whole paper gold market. I don’t think that people fully understand what a Ponzi scheme it is. I’ve seen numbers, which could even be too conservative, stating that there are at least 100 claims on every single ounce of gold in the Western system.

This continues until it doesn’t, but the minute that it stops, people will be asking themselves what they really own through their ‘paper gold’ vehicles. I think that this will have an unbelievably large impact on the price of physical gold. I believe that to own gold, you should only buy either physical gold or a vehicle that is backed by the metal such as the Sprott Physical Gold Trust, where there is an audit showing that all of the physical gold is there. That is not the case of 90 percent of the ‘paper gold’ products out there.

I think that could be a real catalyst for dramatically higher gold prices soon.

Do you see a chance of a weakening of demand from India or China?

Oh, not at all. I think that the Chinese have changed the whole ball game. You could measure how much gold was being imported into China through Hong Kong and they were importing staggering quantities. They were essentially buying up the equivalent of the world’s entire annual mine production outside of China. Now, they are going to start taking gold in more clandestinely through Beijing and we won’t know how much they are buying, but I think they will buy as much as they can get their hands on.

James Turk had an insightful comment about the gold market; he said that a lot of the physical gold getting into the market were old, 1960s’-style bars. That suggests that we are running out of gold in the Western world.

Why have we experienced new all-time highs in the stock market and record profits from big corporations when the economy is so fragile?

Well, I think it’s very simple. You alluded to it when you said that people don’t know what to do with their money. As more money is jammed into the system by the Fed, the money has to go somewhere. What’s happening is that it’s creating bubbles in lots of things – stocks, bonds, or urban real-estate. Sure, profits look good, but there is a lot of phantom accounting that can make profits look a lot better than they are.

I tend to look at the top line, which is not nearly as good in most instances as the bottom line, which you can tamper with through accounting tricks.

So, I think we’re doing what we did at the end of the 90s’ with the tech bubble. I think we are just having a more widespread bubble in stocks.

What do you make of the Fed tapering, which has taken QEdown to 45 billion dollars2 from 85 billion dollars per month?

Well, quite frankly, I don’t believe a word from these people. Why was Belgium the biggest buyer of Treasuries in the most recent period? Belgium -- they’re bankrupt too! So, I would not be surprised if the Fed is operating in some back-door way. If the Fed tapers, somebody still has to buy these bonds.

You see, the U.S. is faced with two challenges, which are mutually exclusive. On the one hand, they are trying to protect their currency, and on the other trying to protect their economy. And I think that one of these will surely fail. And I suspect that the easiest route will be to let the Dollar go eventually than to let the whole economy go. If they continue to tighten up and taper, I think the economy will buckle, and I think that’s the last thing they want.   

‘Tapering’ will continue until the pain becomes too strong, at which point it will be violently reversed.

Will the Feds have the capacity to ramp QE back up in order to save the bond market?

Well, I think they will have to at some point because it’s becoming abundantly clear that the previous large buyers, for various reasons, are not buyers anymore – the Chinese and the Japanese for instance.

The Japanese have their own problems to worry about. The fact that Belgium shows up all of a sudden as a large buyer tells you that there is something very wrong in this market.


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