John Embry - Chief Investment Strategist Sprott Asset Management

John Embry speaks about why gold has been trending down over the last few weeks and the implications of a knee-jerk reaction to gold when the US dollar appreciates. He also looks at what we can expect from the quarterly numbers due out from the big gold stocks and why the next big move for gold is likely to be up.

GEOFF CANDY: Welcome to the first edition of Mineweb's Gold Weekly Podcast - we're going to spend a little bit of time picking the brains of some of the world's foremost experts on the yellow metal and find out what's been making headlines.  With me today, is John Embry, chief investment strategist at Sprott Asset Management.  John, let's start with the gold price itself.  It started off with a pretty good run at the beginning of December 2009 and since then seems to have been trending down - January no exception to that as well - what's going on here and where are we likely to see the next big move coming in?

JOHN EMBRY:  Actually gold had about of a $300 plus run in US dollars from July 2009 into the early part of December 2009 and it's come under, as you mentioned, heavy pressure subsequently - it's down some $140 off the peak that it made.  I consider actually it a healthy correction - it certainly has engendered immense bearishness amongst the commentators, which is actually good from my perspective.  The fundamentals are undisturbed and as a result it is setting up for another strong buy.

GEOFF CANDY:  What are those fundamentals, or which ones in particular are you looking at now?

JOHN EMBRY: I look at three aspects.  One is the protection against monetary debasement and a lot of the world's wealth is figuring out that we have little choice with the debt problems in the world - its the unlimited creation of money. And so I think as a solid investment bid in the market for gold - I dismiss the concern that jewellery is an issue because to me all great bull markets and precious metals come from - re-establish themselves as money.  On the other side of the coin mine supply is going nowhere but probably down as we go forward, and the Central Banks have spent a lot of artillery and the fact that the European Central Banks are selling absolutely nothing under their agreement right now demonstrates what the real condition of the Central Bank gold position is.

GEOFF CANDY:  If you look at where the price of gold is at the moment, if anything, we're seeing a little bit of physical buying coming back into the market from the retail side of things...

JOHN EMBRY: I certainly see that.  I see basically in a number of the physical market appears to be pretty tight and when you look at premiums and certain key markets like Vietnam which has become a big market - the premium to bring gold in is huge - which suggest demand's pretty good.

GEOFF CANDY:  John if we move to the US dollar there seems to be a very much a knee-jerk reaction that as soon as the US dollar strengthens the price of gold drops.  Is that knee-jerk reaction likely to stay with us going forward?

JOHN EMBRY: No, as a matter of fact I think that's an excellent question that's a key factor.  The fact is that if one looks at the US situation and ergo by extension the US dollar, sure we've had a drop off in the euro because of the Greek problems etcetera.  I mean Barrack Obama is just going to come here and announce that $1.55trillion budget deficit for the upcoming year, and I would suspect that's probably conservative.  The problems are everywhere and so consequently the idea that one should run away from gold into the US dollar because its strengthening against the euro and several other currencies to me is actually preposterous.  The idea is that the US dollar is a safe haven today is flat out wrong.  I think that's going to be one of the major factors that are going to change perceptions in the gold market going forward.

GEOFF CANDY:  If that is the case, and people start looking at gold again as currency - are we likely to see a rebound in flows into Exchange-Traded Fund (ETF's) for example as a method of getting into that market. We've seen them come down recently.

JOHN EMBRY: We at Sprott, my company - we're just launching a major new gold vehicle which is more of a trust whereby you can redeem, in physical gold, at the end of every quarter.  I have always been suspicious of the ETF's because I'm not totally convinced at all the gold is there - sort of like a fractional gold system where if everybody wanted their gold you couldn't get it.  So I'm not totally convinced that ETF's the right way to go in the first place.  If people basically focused on physical gold, either in a paper vehicle or the audit proved that it was all there and you could get your hands on it or just buying physical - I think the price would be far stronger than it is today - the ETF's have siphoned off a lot of demand and I'm not sure they bought all the physical gold that they've alleged.

GEOFF CANDY:  Are we likely then to - we've seen a few new ETF's coming onto the market, or being announced - is that going to have any effect do you think or are most people that wanted access to ETF's now using them already?

JOHN EMBRY:  There are a lot of people using them now but to be very honest I don't think that the vast proportion of the population has figured out that gold's the right place to be - there is a massive amount of buying that is sort of stuck in bonds or whatever around the world, that will still ultimately be looking for a vehicle and ETF's are just being one of the windows.

GEOFF CANDY:  If we look now or move our focus to the gold producers themselves and one of my colleagues, Barry Sergeant, is always on about the lack of free cash flow coming out of these miners at the moment - what are you likely to expect from the gold quarterly numbers coming out of the gold miners in the short term?

JOHN EMBRY:  By and large they'll be disappointing because there is this great   ‘nef' that the current gold price is a bubble and it's too high and therefore these companies should be doing really well - they're not.  When you fully cost gold mining and put in all aspects of it, these people aren't making much money and all you have to do is to study their quarterly reports to figure that out.  Consequently, I think the numbers to be a little disappointing which may or may not sort of be the reason that the gold stocks have been awful in the last few weeks. The huey is plumbing new depths here.  So I think it is reflective that the earnings reports will probably be below expectation and what these companies need and will ultimately get is a much higher gold prices, but without them they're not going to make a whole lot of money.  At the same time their reserve bases are whittling away and it's hard to find good deposits.

GEOFF CANDY:  John that's another issue that I want to talk about - perhaps it's something we can delve into in more detail in the next episode, but the notion of replacing reserves and there aren't that many pure gold deposits left, so you're finding gold companies forced to look at other metals as well - is that changing the way in which they have to be valued.

JOHN EMBRY:  Yes it is - I much prefer pure gold producers and if these people are going to get more heavily into base metals and what have you, by definition it's going to reduce their valuation methods ...

GEOFF CANDY:  Just one final question where are we likely to see gold going over the short term in this case?

JOHN EMBRY:  I would say in the next month or so gold may continue to consolidate but the next major move, I believe, is going to be sharply up - I'm looking for $1350 to $1400 by late spring.

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