9 September 2009

Gold Outlook: Explosion in the Price of Gold Imminent (Part II)

Sep 06, 2009
Gold Outlook: Explosion in the Price of Gold Imminent (Part II)

By Andrew Mickey, Q1 Publishing

Andrew Mickey: Let’s switch our gears for a moment here to gold and silver…right at this point, everyone is focusing on the long, long term, say 10 years, 15 years out.

John Embry: I’m focusing on the next two months and I think we are going to have an explosion in the price of gold.

Andrew Mickey: Do you see a specific catalyst?

John Embry: One of the great factors is sentiment right now - the sentiment that you just mentioned. There is currently considerable apathy towards gold and silver. However, demand is exploding on the investment side, for the simple reason that people can see, with each passing day, that the currencies are going to be significantly debased.

You've got enormous government financing requirements over the next 12 months. Where is the money going to come from? A lot will be created out of – thin air and, that’s going to result in a huge volume of new currency.

I see the demand from the investment side alone just overwhelming supply. And on the other side you’ve got diminishing supply.

The central banks are running out. And you can see this with the central bank sales each year. The European central banks can sell up to 500 tons a year, they are not selling anything near that.

And lastly, all the eastern central banks that are jammed with US dollars are talking about diversifying into other assets, one of which is gold.

Central banks have been major suppliers of gold to fill the gap in the market for years. That's coming to an end. At the same time mine supply continues to plummet. So I will be shocked if gold is not dramatically higher in the next three or four months.

Andrew Mickey: So you really see all that playing out even with unemployment basically pegged – officially - at 10% for a long time to come and other economic indicators which show how stagnant economies around the world really are?

John Embry: Well, I don’t think it is 10%, I think it is dramatically higher. The problem is with the way it is computed. But yes, unemployment to me is a huge problem, but I believe that if you print enough currency, despite how weak demand is in the real economy, you will create inflation.

If you go back and study hyperinflations, and I have been doing a bit of that, in fact most hyperinflations have gotten underway in the kind of environment where real economic demand is weak, and they just keep printing more money to try to stimulate things, or sort of keep things from imploding. Eventually, velocity picks up rapidly and increases inflation dramatically.

One of the most outrageous comments that I have seen in a long time was Bernanke’s testimony to Congress recently when he said, “We also believe that it is important to assure the public and market that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed to avoid the risk that this policy could lead to a future rise in inflation.”

That's just an outright lie. They can't possibly withdraw the stimulus. If they did – either raise interest rates or shrink the Fed balance sheet- the economy and the financial system would collapse.

That's not all, they are just going to keep on with the money printing, creating as much as the current situation requires.

Andrew Mickey: You mentioned that you are looking into the past few hyperinflationary periods. What are some of the common elements that you might be seeing now that you also saw then, and also, what's the general timeline in those situations?

John Embry: The timeline is interesting. They start slowly and the public is totally baffled. They don't see it coming at all. And the authorities lie to them. The authorities continue to understate inflation and they give the impression that everything is swell. In the meantime, they are just printing money like crazy to try to keep things afloat. Lo and behold it catches up to them.

It takes the average citizen a long time to figure out what's going on. He is still holding his bonds, and he’s doing things that are sort of the wrong thing to do under this type of an environment.

I see the same thing unfolding today. I see this basic apathy amongst people. They don't seem to be the least bit concerned when there are all sorts of things to be concerned about. In the meantime, these governments are creating money hand over fist` because they have no other choice.

Andrew Mickey: What about the timeline from today. Do you see a slow build for years before inflation is a critical publicly known problem?

John Embry: I’d say ay it could be two or three years from today to perhaps reach a critical level. If things are going to unfold in that direction - and it could easily go in that direction - I think we will see the fruits of all the money printing by 2012 or 2013 at the latest.

Andrew Mickey: Do you see what’s going on with the individual states in the United States and their budget and pension problems as kind of foreshadowing what's going to come for the US once the lenders stop lending?

John Embry: That to me is the great problem. I find it fascinating, what's going to happen with the States. The last figure I saw for the collective budget deficits of the States was $160 billion led by California with $26. And in many of the states constitutions, they are prohibited from running deficits.

So if the federal government doesn't print the money to bail them out and help them, they are going to have to undertake draconian program cuts. They are going to have to raise taxes, cut programs and fire people and every one of those things is deflationary. And if they do print the money then that’s going to be another huge problem they are going to have to deal with. They are just going to have to keep printing more money to keep the whole thing from imploding.

I think it would be tough if they let California fend for itself after going through the problems of letting Lehman Brothers fail. They’re on a slippery slope and you better keep everything afloat or there is something that is going to come and blow you up.

Andrew Mickey: That’s one thing for sure. And with all the bad news, I think a lot of people are concerned with it and they’re just looking the other way. That’s a lot easier to do.

John Embry: I have a theory. My brother is a bit of a psychologist and he says, he believes there is a blocking mechanism in most humans’ minds, that when they are confronted with a problem that is so overwhelming that there is no answer to it, they choose to ignore it.

Most people tend to ignore things because they don't want to deal with them - they can't deal with them. Eventually it reaches the stage where you can't ignore it, and I think that is going on to some extent in the United States right now.

I saw this in Minneapolis, which is a city I love and I have gone to probably 40 times in my life. I was downtown and I went into Macy’s. Macy’s had the most astounding collection of inventory I have seen. I stood marveling at the stuff during a one day sale. The prices were remarkable. Some of the stuff was marked down 75% and guess what, there wasn't anybody in the store, I was amazed but economists will still have you believe the retail environment is improving.

It seems to me that there is a large disconnect between all these “green shoots”, all the stuff that the government is telling us and what is actually happening.

Andrew Mickey: Let’s go there for a second – retail, real U.S. economy, and the great disconnect?

John Embry: I think it's a great risk. I was born in the U.S. and have always thought of myself as an American. So I find what is going on hard to accept. I am a great fan of the United States.

I think the greatest risk is that the currency could come under enormous downside pressure and that's exactly what they are trying to fight here. Because once that happens it unleashes all sorts of problems.

You just alluded to one earlier when you said they are going to have trouble financing their bonds. If the currency starts to collapse who is going to lend them money? And if foreigners don’t lend the money it’s sort of a self fulfilling prophecy because the currency will collapse and therein lies the problem.

I don't think you can print your way out without creating a massive inflationary problem which ends up as an even a bigger problem than we have today. There is no easy solution to this.

For example, let’s say you have a hell of a party. Well it generally ends up the next day with a hell of a hangover and it's a problem you can't easily ignore. That's where we are in the economy today; there is no easy solution to this.

They are trying to avoid a deflationary collapse because they remember what happened in the '30s. But in doing so they create a new set of problems. And in the end it’s even more difficult.

So I wish I could say something real positive but I am a huge believer in Austrian economics and credit cycles, and from that perspective it's very hard to be optimistic.

Andrew Mickey: I think there is one more catalyst here and that’s unemployment. Will unemployment realistically need to come back somewhat from inflationary forces to have an impact?

John Embry: Well, I don't think the unemployment problem is going to be any better in the foreseeable future. In fact, I think that if unemployment were to intensify it would require the government to print even more money to fill all the holes in the revenue shortfalls. This could lead to the worst scenario possible.

You could have a terrible economic backdrop with inflation rising dramatically at the same time. This would lead to a plummeting currency and even more dramatically rising inflation in conjunction with a terrible economic scenario. And nobody wants to talk about that because it is so depressing without an easy solution.

Andrew Mickey: Yeah, I’m right there with you. I actually bought some more silver over the weekend.

John Embry: I will tell you what I have been buying. I’ve got a coin dealer here in town, he is a friend of mine. He sees me before I even come in the door. Last time I was there, he told me not to even bother to come in. Before I could buy anything I wanted – which is just a few coins and few small bars every once in a while - and it was there to purchase.

Now he says it's drying up, but I think the smart person is still looking to buy something of historic value. So I say to everybody, you should have some physical gold and silver in your portfolio just as insurance. Because, if I am right, you are going to need the insurance.

Andrew Mickey: Is there anything else out there that you just see as wrong or something that’s going to have some pretty severe unintended consequences which the market hasn’t started to discount yet?

John Embry: I sort of start in United States. It bugs me because I love the country. Then I look across the Atlantic and look at what's going on in Europe and it’s awful as well, particularly Britain, Spain and Ireland.

I think the biggest misconception about the markets today may be when people say “buy the euro.”

I think things are as bad in Europe as they are in the United States. They may not have quite the deficit problems but they have got massive problems there as well. All sorts of them.

Look at what's going on in Ireland for example. Things had been just terrific and look at where they’re at now. People are being fired left and right, benefits are being cut, it’s just awful. And they don't have the freedom to sort of create money like they do in the United States because they are under the constraint of the euro.

I do believe that we are going to have it tough going forward. I am almost glad I am old because I believe that this century is going to be the century of the east. I firmly believe that China and India and that part of the world are going to rise. And at the same time we are going to deteriorate.

I always say to my daughter that I like my past a whole lot better than I like your future.

Andrew Mickey: I guess…prepare for the worst, hope for the best, I guess. I think we will leave off right there. Let me thank you for sitting down with us today.

John Embry: It's always nice to chat with you Andrew…so, anytime.

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