I interviewed Sprott’s John Embry a few weeks ago. John believes gold and silver will move big as weakness in the economy and financial system comes to light. I got on the phone with Mr. Embry for a follow-up on his ideas and predictions…
Q -- Hello again John. The last time we talked, you said gold and silver were at ‘historic undervaluation.’ What’s on your mind now?
Well, my main concern today is that the economy is really much worse than most people are prepared to admit. And this will have significant ramifications on various markets. Obviously, the one market we are particularly interested in is gold and silver. Both of them, as I said before, are considerably undervalued. They are under-owned too. I still think that the fundamentals look better than ever. And I still think there is an explosive move coming in 2014.
Of course, be careful what you wish for because this is suggesting an economic event with some very negative societal impacts. With the amount of leverage that exists in the financial system today, a heroic upwards charge of the precious metals would expose the policies of zero-based interest rates as an utter fraud. If interest rates rose sharply as a result, it would bring the banking system to its knees. That would have a very negative impact on society as a whole.
A lot of it has to do with the law of unintended consequences. The heavy-handed actions of the Feds in the financial system will likely lead to negative unforeseen consequences.
As an analyst, I look at the current situation and try to figure out what might happen, but that does not mean I want it to happen.
Q -- What about the headlines we are seeing these days? Any indications of what’s to come?
Well, I follow the headlines – but they mostly exist to confuse the poor public. The smart people who are buying gold know what is going on. And very few are smarter than the Chinese in this regard. As you know, they have been buying massive amounts of gold bullion for a while.
This is extremely negative from the perspective of the West. As that old adage says, gold goes where the wealth is being created. What does that say about us, that we are letting a significant portion of gold head east?
Q -- What about the recent reports that JPMorgan might own a record amount of physical silver?
That is an interesting story because we believe that JPMorgan is likely the main entity that has suppressed the silver price in the paper market. But now we are hearing that they may have accumulated a large position in the physical metal. To be honest, it is hard to know what to make of it.
The silver price is grotesquely undervalued so I have to congratulate JP Morgan if they are clever enough to sell paper and buy real silver. Before this is over, there is probably going to be a ‘force majeure’ in the paper market because there are so many claims to such a small amount of silver. If that were to occur, people who owned the metal or even exchange-traded products that have a real claim to the metal would be the big winners.
When this comes to light, I think the upside to the silver price will be incredible. My colleague Eric Sprott and I think that within a reasonable timeframe silver will probably trade over 100 dollars – a big move from its current price of 20 dollars an ounce.
Q -- Does silver have more upside than gold, in your view?
I think it certainly does – and I know many, such as Jim Sinclair, might disagree with me on this. Some say that silver will always be a peripheral metal to gold, even if gold becomes part of the monetary system again. Silver would be more of an industrial metal than gold.
But looking at historical gold and silver markets, the price ratio of gold to silver – currently over 60:1 – has fallen precipitously in raging bull markets for the metals, going as low as 12:1. So the silver price could have an upwards move at four times the rate of any gold price increase, I believe.
I am particularly fascinated with the fact that about a third of the industrial usage of silver in photography has gone away these past few years because of the rise of digital cameras. And yet, the industrial demand for silver has held more or less steady. New medical applications and use in the solar power industry have filled the demand. So the industrial demand is solid, yet there is very little physical silver in the world to meet that demand.
Q -- Is silver the “poor man’s gold?”
I believe that is absolutely wrong. If the gold price goes way up a lot of people will be forced into the silver markets because gold will have become so expensive. So, if they want precious metals exposure, they will go to one that is much cheaper per ounce – silver.
Because the silver market is so much smaller than the gold market, and because silver is consumed for industrial purposes, we could see the gold to silver price ratio plummet – at an incredible benefit to silver.
Q -- What are you seeing happening next in the gold and silver story?
There is something that I want to emphasize. When all things are said and done, the gold and silver paper markets will be revealed as one of the greatest Ponzi schemes that ever happened. All these products in the futures markets are allegedly backed by gold and silver, but the actual metal is not there. When this is revealed, it will happen at the exact time when people need the protection of gold and silver against paper money. I think this future development will have an enormous beneficial impact on gold and silver prices.