John Embry: It’s my pleasure, I assure you, Daniel.
Daniel: John, before I even start, I recently saw a picture of a gold coin in your office. To describe this as gigantic might be an understatement. How big is that coin?
John: I think it’s 100 kilos. The thing is ginormous. The day they were installing it, I mean it took about three guys to move it.
Daniel: What does that convert to ounces?
John: I don’t know. I’m terrible going from pounds to kilos.
Daniel: No worries. I would have cheated anyway. I would have went…
John: It was worth, at one stage, I think close to a million bucks.
Daniel: Oh, man. Gold is the topic I want to discuss with you. We have almost, actually, hit a new low, but it looks like we bounced off that 1,180 mark. But I wanted to ask you a question about, are we at a bottom? Because a lot of people are saying we’re at a bottom, but I’m a bit confused and I’m, obviously I can’t even scratch the surface compared to your experience. But I look at these stories about physical demand being at highs and huge, huge physical buyers coming in.
To me on the surface, that would seem that that wouldn’t be a bottom, because yes, the price is down, but people are still buying. Is it because just a few big buyers are buying, or what’s going on behind the physical scenes?
John: I think you’ve got to understand the nature if the market. That is the that, basically, there are two markets in effect. But the price is currently still being set in the paper market, the future market on the COMEX or over in the LBMA in London. It has been, obviously, a ploy of the world central banks, or particularly the western central banks, but they, under the auspices of the Bank of International Settlements, took control of the gold price.
They’ve been able to do that. I’ve been wrong. I never thought the price could go this low. As I didn’t understand the full extent of financial innovation today, the use of massive quantities of derivatives, high-frequency trading, algorithm programs, all of these things have combined to allow these forces to create artificial prices in the paper market that really have little to do with the true fundamentals of the metal.
What this has permitted is those people who had not been taken in by this and have become bearish, to buy as physical at these depressed prices as possible, which begs the question, where is the physical coming from? It’s been my contention for many, many years that it’s coming out of the vaults of the western central banks, and a lot of it is moving to China.
I think, my perspective, this is a dreadful development for the west and when China finally figures they can’t get any more at these depressed prices, you’re going to see this full price take off like a rocket. But in the short run, I can’t tell you whether this is the bottom. I never thought it would go this low. It’s a triple bottom right now bouncing off of that 1,180. I would like to believe it’s a bottom, but I certainly can’t guarantee it.
Daniel: Do you think before we have a bottom we need to see the physical demand dry up, where people are just throwing in the towel and they give up on gold?
John: Won’t happen. The guys that are buying it are people like me and an awful lot of people who understand the true fundamentals. Basically, I think it’s where there isn’t any more physical to satisfy the demand at these levels that the trend changes, and it will change violently.
Daniel: Have you or your team, and I’m sure you’ve done some research, but has anyone narrowed down how much physical is out there to when this could stop? Can this go on for another 10 years?
John: No. I can assure you it can’t go on for 10 years. I would be surprised if it would go on for 10 months. We’ve done a lot of work through the years and the amount of, the true demand for gold and the amount of gold that’s been going into the east India, Russia, China, et cetera, et cetera.
I think that the western central banks have been one of the main sources of above-ground supply, are getting very short on gold. I think a real tell is that the US allegedly has 8,000 tons and they hold a whole lot of gold in custody for other western countries. The Germans got a little uncomfortable, at least their public did, and they demanded some of their gold back a year and a half ago.
Basically, there was 1,500 tons being held in there, 1,600 tons to be exact, being held in New York on behalf of the Germans by the Bank of New York. They asked, finally, I think they asked for 300 tons back, and it was decided they’re going to get it back over seven years, and in the first year they got five tons back.
Look, if the gold was there, they could have put the gold on three airplanes and flown it over there. I believe that the western central banks reserves for this sort of activity are getting extraordinarily low.
Daniel: A lot of people, especially in the gold analyst industry, are making a really big deal about silver and gold being below the cost of production. Again, I’m a rookie here. I’ve only been looking at this stuff for four or five years now. But I know coal, uranium, and platinum have been not meeting the profitability for miners for years and years.
My question is, is just because silver and gold are now below the cost of production, my assumption is that this doesn’t mean there’s an imminent problem. This, too, could remain for years. Am I correct?
John: That’s a good question, but I would say no, in the sense that if I’m correct and my numbers that I’m looking at, the physical demand for gold and silver are quite robust, and as a result they’re having to consume above-ground inventories to keep the price here. If you have a, in the case of silver, like a pure silver mine, and to be fair only 25 percent of the silver coming out of the ground comes from pure silver mines.
But if the average pure silver mine now can’t get it costed out of the ground for much than $25. If this were to continue for any length of time, a lot of these mines are going to have to be mothballed, because nobody in their right mind is going to use up a valuable resource and take a large loss on it.
With limited above-ground inventories and strong industrial demand for silver, rising industrial demand, I don’t think it can remain down here at these levels for very long. Just as a total aside, the open interest on the COMEX in the silver market is so far out of line with physical inventories than any other commodity in terms of the size of the short position that this is, this is one of the great explosions waiting to happen to the upside.
Daniel: When you look at the precious metals, I know you guys are resource in general, but you, specifically, have a special background in precious metals and research.
John: Yeah, I’ve been actually looking at them for 40 years, so I do have a bit of experience.
Daniel: That’s longer than I’ve been alive. That is a long time.
John: [laughs]It just proves that I’m getting awful old.
Daniel: [laughs]Hey John, out of the four, gold, silver, platinum, palladium, which one is the best buy, or which two? Which ones do you like the most?
John: By far, silver. That’s not denigrating the other three to the extent, I just think silver is one of the great investment opportunities of my lifetime. This is going to sound a little outrageous, but I think…There’s a gold-silver ratio that has been, people have monitored for many years, and it’s ranged from a high of 100 to 1, or just over to 100 to 1, where we’ve taken 100 ounces of silver to buy an ounce of gold.
In the last raging bull market in precious metals, that number got down to 15 to 1, so it only took 15 ounces of silver to buy an ounce of good. Currently, that number’s around 70 to 1. I believe in a raging bull market that I foresee in precious metals in the next two years, I think the gold price, just to pick a number, could go to 3,000.
If that happened and the gold-silver ratio fell down to 15 to 20 to 1, I mean, silver’s going over 100 bucks, and it’s currently trading at 17. I think it’s by far the best opportunity versus anything on the planet.
Daniel: John, my big concern, I started buying heavily into the junior resource space just over the summer, and really, I told Rick Rule, I had to have a weekend of like watching Rick Rule videos to have the courage to go in as big as I did. But my biggest concern going into the junior resource stocks was that cyclically the US is due, is overdue now for a, even a cyclical recession. Even if, I don’t personally believe we’re out of the recession, but…
John: I think we’re going to have a, not to be pessimistic, but I think a depression might be a better explanation. I think that that will be extraordinarily bullish for previous metals, because at that point it will undermine the dollar and the banking system and finally the safe havens, the metals with no counterparty risk will come into their own. That scenario is actually extremely bullish for silver and gold.
Daniel: What about if oil goes down like in ’08 and production costs drop, demand slows across the board, your assessment is that it’ll be more of a monetary event if we go into another…
John: Daniel, that’s exactly what it will be. Finally, it will be a monetary event. The fact is the central banks, and I don’t blame them, they’re trying to defend a failing fiat currency system. Their worst nightmare is gold and silver catching the public’s attention. Because when they do, there’s so much money that can move from the other spaces, bonds, stocks, real estate, et cetera, into gold and silver and the markets are so tiny, the impact on price is going to be spectacular.
It’s not a matter of if it’s going to happen. What we’re debating is when it’s going to happen.
Daniel: Last question for you, John. Behind the scenes, you guys are, when people think natural resources investments they think Sprott. What are you seeing as far as capital flows for the junior sector, and the physical side? What are you guys seeing behind the scenes at Sprott? Is the money starting to come back? Is it looking like the worst may be behind us for the juniors?
John: I think, yes. I think the sophisticated investor realizes that the opportunity is so large. I mean, as I’ve told people, until such time as we can get the silver and gold prices turned around and going the right way, and you’re going to have to be patient with the stocks, because they can’t make money at these levels. There’s so little interest in the sector, exploration vehicles can’t get the kind of support.
But having said that, if you can find a company with a balance sheet that will withstand another year or two at worst of ban conditions and it’s got a great oar body, I think you’re going to make 30 to 40 times in your money.
Daniel: Just real quick, and this puts you in a conflict of interest, but you might also enjoy the question, because it’s self-promotional. I was looking at Sprott. It traded for over 11 bucks, today it’s less than 3. It seems like a safe play, no debt, lots of cash, major exposure to the sector. It seems like, for someone who’s like, “You know what? To hell with these individual junior miners.” What about just buying Sprott?
John: Sprott would be a different way to play it. I think, the leverage is in the junior miners. The safer way to do it is to go, because we are not only a precious metals company, we’re a diversified money manager. But we are now undervalued, and we are associated so closely with previous metals that if they go, the whole attitude and sentiment towards our stock will change dramatically.
I’ve got to be careful here, because I’m a large shareholder, but I think it’s a reasonably safe way to play the sector.
Daniel: John, thank you so much for your time. Sprott Asset Management. Don’t forget, everyone subscribe to Sprott’s Thoughts. It’s a weekly newsletter that is free and you will hear from John Embry, Rick Rule, Eric Sprott, and many other specialized guests who discuss precious metals and other investments.
John, if somebody would like to reach out to Sprott Asset Managed to become a client, what is the best place for them to go?
John: Just go to the website, Sprott.com.
Daniel: All right, John. Thank you so much, and you have a safe trip to Europe.
John: It’s a great pleasure talking to you, Daniel. Take care.