Sprott Asset Management’s Chief Investment Strategist John Embry loves to talk gold. And we love to listen. We thought you might, too, because he’s always long on opinion and predictions. John envisages that the “extraordinarily painful” economic times ahead will ultimately lead to a new currency backed by, of course, gold. In the meantime, John suggests you “protect yourself” from downside risk by shifting 25% of your portfolio to precious metals. In this exclusive interview with The Gold Report, John even proffers some names to help you bulk up.

The Gold Report: Thank you, John, for taking the time to talk with The Gold Reporttoday.

John Embry: It’s always a pleasure to chat with you.

TGR: I noted in a recent article in Investor’s Digest that you were talking about the M3. You said, “M3 in the first quarter was falling at a rate last seen during The Great Depression.” We recently interviewed John Williams of ShadowStats, who noted that the M3 has had its sharpest ever year-over-year decline. He concluded that we will see a deepening recession with inflation/hyperinflation afterward. You are in the camp that believes hyperinflation will occur first, and then deflation will wipe out the remaining debt. What do you see in the numbers to indicate that?

JE: Well, I think I’m being misunderstood because I think we are in a highly deflationary situation as we speak. I don’t really disagree with Williams. The basic problem is that the amount of debt in the system is extraordinarily deflationary. The only way to combat it without having the hard 1930s-style deflation is to print more money. The risk of doing that is hyperinflation. I think they will opt for that, but I’m not 100% convinced the economy will go that way. The economy could very well go Bob Prechter’s way (Elliott Wave International) and go into a hard deflation, but not without a huge effort from the authorities in the United States to prevent it.

TGR: Let’s go down the path where we reduce quantitative easing and start seeing inflation that ultimately becomes hyperinflation. Does quantitative easing ever pay off that debt, or do we go into hyperinflation and still default on the debt?

JE: In the end you will default on the debt. If you go back and look at any hyperinflation situation in history, the currency and the debt that’s denominated in the currency get destroyed. I would not do that. I would take the pain. I agree with Jean-Claude Trichet, head of the European Central Bank, who said that you’ve got to start reining things in. Better to take some pain now than the even worse pain caused by the total social disruption that hyperinflation creates.

TGR: Are we in a situation where, if we really implemented austerity measures, we could avoid debt default and/or inflation? Or are we just too far down the line?

JE: I think we’re way too far down the line. If you were to go into a real austerity program in the United States by raising taxes, cutting spending and having interest rates that reflect the reality of the situation, you would go into a hard deflationary depression. I don’t see an alternative. I’ve said many times that the middle ground has long since been lost. We’ve just had the greatest credit cycle in history, and as a result we’re going to pay a huge, huge price for it.

TGR: But if the austerity program would throw us into a deflationary depression, then more quantitative easing would ultimately end in a deflationary depression.

JE: In the end you will end up with a new currency system. And those who invest in the right assets will come out intact at the other end. Those who invest in paper assets of any description will be wiped out.

TGR: That leads into our next question. In your recent column in Investor’s Digest you said Fed Chairman Ben Bernanke “knows full well that it is his monetary policy featuring zero-based interest rates for the world’s reserve currency and profligacy of his own government that are fueling the desire to own gold.” If Mr. Bernanke were replaced by John Embry, what changes to U.S. economic policy would be made?

JE: I sort of pre-empted the question by suggesting I would be inclined to take the pain now. But, if John Embry had been determining monetary policy for the last 15 to 20 years, we would have never been in this position. As I have said before, I believe very strongly in Austrian economics. You’ve got to rein in the credit cycle early if it’s getting out of control, or you’re going to end up exactly where we are now. I do not see a solution that isn’t extraordinarily painful.

TGR: Are you referring just to the U.S. or is Canada, where you are, going to see the same painful situation?

JE: That’s a very good question because there’s a lot of hubris up here in Canada. We think we’re immune because we have resources and we’ve done a better job with our banking system, etc. But if the United States gets into deep difficulty, we get into deep difficulty because our economies are so closely aligned. Now, we may not get in as much trouble because we have more resources, we have a lot less people and our finances are in better shape. But the fact is the whole Western world will be seriously impacted by what happens in the United States. The United States is the linchpin of the entire Western world.

TGR: Will the impact be felt in the Eastern countries?

JE: Yes, I think the impact will be felt there, too. I believe China will be the emerging power in the next century, and I’ve believed that for a long time. But before the United States became the emerging power in the previous century, they went through a depression followed by a World War. And China’s not just going to glide through this without difficulty. If the U.S. were to get into major difficulty, China would have a real economic setback. It wouldn’t be for the long term, but the short term could turn very ugly.

TGR: To what extent will China incur economic pain?

JE: The problem with the Chinese is that the Communist government basically has to provide improved living standards for China’s massive population. If they don’t do that, I think you will see incredible unrest. I foresee that happening if this thing goes in the direction that it appears headed.

TGR: What do you make of reports from China on the pending real estate bubble and the Chinese government telling its citizens to buy gold?

JE: I think there is a huge real estate bubble in China. I saw some statistics and I can’t even remember the number of homes that were apparently not inhabited. But it was massive. I find it fascinating that the Chinese government is telling the public to go to gold, which is the exact opposite strategy that’s being followed in the Western world. I think they realize that this is probably the safest place for their people to be invested in the coming period. The Chinese are very smart. I think, quite frankly, that in the end the Chinese will back their currency with gold.

TGR: You mentioned that we were ultimately going to get a new currency system. Would it be just the Chinese going to a gold standard, or would it be the world?

JE: I think that if we get a new currency, which I firmly believe we will before this is all said and done, I think gold will be a component of the new currency. You’ve seen the Chinese on occasion mention the idea of a kind of Special Drawing Right (SDR, an IMF currency unit) backed by a basket of currencies and gold. I believe gold will be reintroduced to the system because there will be so much bad feeling toward fiat currency. They’re not going to get away with it a second time, at least not for another 100 years.

TGR: When we start moving to a new currency that you say will be backed in part by gold, won’t almost all currencies have to hyperinflate and become devalued because there’s just not that much gold being mined?

JE: Oh, I think that’s in the cards. The United States might be the linchpin for the whole problem, but because of this competitive devaluation that’s going on nobody wants to have a strong currency. If the U.S. currency is failing because of the problems we’ve discussed, there’s no question that the other currencies are going fail with it. That’s why I hold all of my assets in hard assets, be it gold, silver, oil companies—anything that’s producing something tangible.

TGR: Other than precious metals, gold and oil, are you invested in anything else?

JE: I own a couple of iron plays. I like iron longer term. There’s a good income trust up here in Canada, Labrador Iron Ore Royalty Corporation (TSX: LIF.UN), which pays a pretty handsome dividend. I’m getting old; I have to get a little dividend income along with my precious metals.

TGR: You had an interesting interview with Mineweb recently. The headline used a quote from your interview. It reads: “If gold is not between $1,500 and $2,000 in the next 18 months, I’m dead wrong.” What specifically would you be “dead wrong” about? The price? The timing? The underlying fundamentals?

JE: I would say probably the underlying fundamentals, because I think that they’re sufficiently bad that we will not be able to hold this together for another 18 months. In that event, I would see the gold price moving up sharply. They could conceivably keep this thing stuck together for 18 months. I just don’t believe it. If it’s not $1,500 to $2,000 by then, clearly I’m wrong in the sense that they’ve been able to allay the difficulties in the system longer than I thought. The United States is plunging back into a hard recession, if not worse. The implications of that for the gold price are extraordinarily bullish.

TGR: So, really it would be the timing that would be wrong.

JE: Yes, I guess you can’t change the fundamentals. The timing would be wrong. But at the same time my analysis of the underlying fundamentals would suggest this is getting relatively imminent. I was fascinated to see that Niall Ferguson, a brilliant historian and economist, is of the mindset that this thing is going to fall apart within two years. At least I’m in the company of intelligent people.

TGR: John, do you think it will fall apart slowly or rapidly?

JE: That’s a really good question and Ferguson addressed that. He thinks it will come quickly and so do I. I have a friend who thinks if you’re not positioned the right way financially, one day the curtain’s going to come down, and when it goes back up, you’re not going to be able to alter your position. That means you better own the right stuff going in.

TGR: You were managing funds with gold holdings long before the era of $1.5 trillion deficits and sovereign debt issues in Europe. How has your strategy for asset management changed over the last decade, and more specifically, pre-2008 versus post-2008?

JE: That’s a very good question. I’m working here with my partner Eric Sprott. I’m not managing money on a day-to-day basis anymore. I’m just working on strategy and the gold scene. But I know that the long side of Eric’s hedge fund has gone almost exclusively to precious metals, and he’s short housing, banking and all of those industries. Clearly this is something that’s evolved. I mean we have gone more and more in that direction as we’ve become more and more sure of our point of view. I recently read Michael Lewis’sThe Big Short, which I found fascinating because the fellows who figured out that subprime mortgages were going to be a major problem were in such a minority that their clients were turning on them almost until the whole thing broke. I feel much the same way today about the public’s view on the economy. Everybody is being told things are fine and that the economy is going to return to normal and growth will continue. I think that underlying assumption is dead wrong.

TGR: In reading your recent interviews and columns, one thing that comes through quite plainly is the passion behind your arguments that the public is being duped and not being told that they should own gold. Why are you so passionate about what’s happening?

JE: I appreciate your saying that because I am. I think it’s really important to tell the public the truth if you really believe that this is what’s going on and you want them to protect themselves. I think the public is getting horrible advice from a lot of financial establishments. It’s amazing. I can draw parallels to when the subprime thing blew up. It was astounding to me that people thought housing prices in the United States would rise forever. I mean housing prices are related to underlying income. They were so far out of line that it had to crash.

TGR: Let’s move into investing in gold equities. Kinross Gold Corp. (TSX:K; NYSE:KGC)just bought Red Back Mining. The markets certainly didn’t respond well to the purchase. What’s that deal telling us?

JE: I think it’s telling us a number of things. First off, I think Kinross paid too much. The people behind Red Back—the Lundin family—are extremely clever. They got an outstanding price. I know the assets very well. Don’t get me wrong; Kinross is buying some decent assets. It’s just what they paid for them. But what that might be telling you is that those gold projects will look inexpensive if the gold price goes where I think it’s going. Anybody that’s buying assets today is going to be seen to be doing the right thing.

TGR: Certainly the call options on Kinross were up a few days afterward on the belief that Kinross shares might do better come September.

JE: Oh, I think they will. I’m not a great fan of Kinross, but on the other hand I think there’s just such a limited selection of big cap gold stocks. The fact is Kinross has bought some interesting properties. They bought the Aurelian property down in Ecuador. They’re topping off their inventory of properties. From that perspective, they’re doing the right thing. The great problem for senior companies going forward is that their reserves are declining and so are their production profiles. The big funds are going to be on them to go out and buy something.

TGR: If you’re not a fan of Kinross, what senior companies do you like?

JE: The big cap stock I like the best, and one that controls a massive number of ounces, is Gold Fields Limited (NYSE:GFI). That carries a fairly significant discount because it’s in South Africa. But given the number of ounces it has, I continue to like Gold Fields as the best of the big caps.

A company that I had not liked for many years was Barrick Gold Corporation (NYSE:ABX; TSX:ABX). I’ve moderated my view because by getting rid of their hedges, Barrick has set itself up nicely. They’re a big producer. If the gold price goes up a lot, they’re going to be able to take advantage of that. They’re not terribly inexpensive at current gold prices, but that isn’t a particular problem because I think the gold price is going materially higher. There will be so much money trying to get into senior equities that the price could look Internet-like before it’s over.

TGR: What about the impact of some of the near-term juniors?

JE: I think they’re a much better value. They’ve mostly been crushed. I mean there’s been very little buying. They are so far out of line with the gold price that this is a great opportunity. If gold really moves up and sentiment changes, I think it won’t take that much money to drive some of these juniors nuts. I think there will be five and ten “baggers” in the good ones.

TGR: Do you have some “good ones” you can share with us?

JE: Well, I’ll tell you a couple that I like. I really like Wesdome Gold Mines Ltd. (TSX:WDO), which I’ve mentioned before. It’s got two operating mines, one in Ontario and one in Québec, which are great geopolitical areas to operate. Wesdome makes money and they’re improving their reserve base. That’s always been an issue because their underground mines have never reported large reserves. But now they’re undertaking a large drill program to enhance their reserves. I think that’s going to change the view of the company.

I like Orvana Minerals Corp. (TSX:ORV), which is another small company with a tight market cap that is developing the El Valle gold-copper project, one of the old Rio Narcea properties in Spain. I think that one is just starting to catch on. They’re very competent underground miners. They proved that at the Don Mario mine in Bolivia. Their stock was always extraordinarily cheap because of its Bolivian base. It’s moved fairly significantly recently. I think it’s got a lot further to go.

Another one that I’ve always liked because they’re finding a lot of gold in Ontario is Lake Shore Gold Corp. (TSX:LSG). They continue to have success. They just got some interesting new drill results on another part of their property. I can see this one being a stock that money will gravitate to.

The one thing I tell people is that you have to be careful rifle-shooting juniors because you might just pick the wrong one. The worst thing that could happen would be to load up on one or two juniors, watch gold skyrocket, only to find out your company didn’t have the goods and you didn’t make any money. That would be a terrible mistake.

TGR: What’s your view of silver compared to gold in this economic environment? 

JE: I like it better, believe it or not, as much as I love gold for the simple reason that there’s so much less aboveground inventory in silver. Unlike gold, silver gets consumed at a reasonably rapid clip because of its medical and industrial uses. The current price ratio of gold to silver is about 65 to 1. Historically, it has been as low as 15 to 1. As the whole precious metal cycle really starts to lift off again, I suspect that the silver ratio is going to fall fairly significantly from 65. If that happens, clearly you’re going to have a better percentage gain in silver than you are in gold. I wouldn’t have all my money in silver,but I would certainly have solid exposure.

TGR: Will silver equities also have the opportunities for five and ten baggers?

JE: Oh, for sure because there are a lot more gold stocks. Silver is a pretty scarce element in the earth’s crust and it’s pretty hard to find. There are not a lot of silver stocks. Of the silver stocks that I like, the only one that’s outperformed silver over the last while is Silver Wheaton Corp. (NYSE:SLW; TSX:SLW). To me that’s a great silver stock, because they can control their costs through the approach they have.

TGR: If silver has a rapid rise, are any of them going to outperform silver in the future?

JE: Yes, I think they will. I mean both the gold and the silver stocks are miles behind the bullion. That reflects the negative sentiment in the whole area.

TGR: Why are there negative sentiments?

JE: It totally baffles me in the sense that the fundamentals couldn’t be more compelling. But at the same time that isn’t what the public is being told by the financial establishment. Just the other day The Economist featured an article on the front page with the question, Has Gold Topped? It was the standard questionable statistics, dubious conclusions, etc. But if you actually read it closely, you could have drawn the exact opposite conclusion and become a roaring gold bull. Essentially, the public doesn’t know a lot about it and it’s not their fault. Nobody’s telling them. To me, that isn’t an accident. This is being orchestrated. But I think it’s just about to become spectacularly unstuck.

TGR: What do you think will be the tipping point?

JE: If the U.S. is lapsing back into some serious economic difficulty, there will be a sudden realization that the financial situation is hopeless. As a result they’re going to have to create so much money or take such a brutal deflationary depression that people will change their philosophy and not invest in U.S. bonds at 2.85% for 10 years. It won’t take much money coming in the direction of gold and silver to have a significant impact.

TGR: Do you have any parting thoughts?

JE: My one parting thought is that people have to understand how serious this is and protect themselves. They’ve got to have some precious metals in their portfolio. If they don’t, I think they’ll rue the day they didn’t.

TGR: How much should they have?

JE: I used to say 5% to 10% before this mess started rolling. I’d say a minimum of 25% now.

TGR: Thank you for your time, John. 

JE: You’re quite welcome.

John Embry is chief investment strategist at Sprott Asset Management and Sprott Gold and Precious Minerals Fund. He also co-chairs the Central GoldTrust Board of Trustees. An industry expert in precious metals, John’s industry experience as a portfolio management specialist spans more than 45 years; he has simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as vice-president of equities at RBC Global Investment.

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DISCLOSURE: 
1) Karen Roche and Brian Sylvester, of The Gold Report, conducted this interview. She/he personally and/or her/his family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Gold Fields.
3) John Embry; I personally and/or my family own the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

A significant feature of fiat money systems is the privilege for the custodian to commit fraud, big fraud, gargantuan fraud, even counterfeit. Fannie Mae might function as the clearinghouse for numerous massive role programs with $trillion fraud behind each, hidden from view, especially since it was conveniently nationalized. Follow some other fraud schemes, right out in the open. Surely such recount only touches the surface, but these shenanigans are advanced forms of fraud. They are smoking guns of USTreasury fraud and counterfeit, with strong whiffs of monetization. Much more monetization is to come, fully endorsed and sanctioned. Other clever techniques are being used, given the Quantitative Easing has officially been halted. A close look reveals that Excess Cash Reserves at the USFed are being drawn down, which are thus funding the USGovt deficits in the last couple months. Ironically, such reserves held by big banks at the US Federal Reserve were the only thing preventing vast insolvency. Now that cash is being used. Details can be found in the July Hat Trick Letter reports. The data is right before us. Bring the trails and tallies to the table, and it looks like a grand racket worthy of any sophisticated syndicate. Evidence is compelling, and grand motive for foreign creditors to reject the USDollar with all of its active Dollar Dons. When recognized monetization destroys the last vestige of trust and confidence in the USDollar, when more official rounds of sponsored Quantitative Easing arrive, the USDollar will be on a downward spiral. In fact, all major currencies face the same prospect of vast monetary expansion. They will all fall sharply in value, and by counter-effect, the Gold price will skyrocket.

CHINESE WARNING SHOTS ACROSS THE BOW

This story is a gem. The Chinese Dagong credit agency made an inaugural splash with a debt downgrade of the USTreasury Bonds. They called the US-based trio of debt rating agencies politically biased, an under-statement. The Dagong agency used its first splash into sovereign debt to establish a bold standard of creditworthiness around the world, giving much greater weight to wealth creating capacity and foreign reserves than Fitch, Standard & Poors, or Moodys. They also pay attention to rapidly escalating debt levels. The Chinese Govt has coordinated their strategy, selling off short-term USTreasury Bills, but hanging onto a large raft of long-term USTreasury Bonds. On a net basis, the Chinese purchases have hit a plateau.

Meanwhile, with distracting commentary, China has doubled its gold holdings. At least the Chinese Govt thas promised not to use their foreign reserves as a weapon. What a relief!! And Wall Street promises no more bond misrepresentation, no insider trading, no more fraud, no more drug money laundering (see Wachovia & Wells Fargo). What a relief!! The USGovt strives for clarity about management of China’s $2.5 trillion in FOREX reserves, the world’s largest. It contains $868 billion in USTreasurys at last count. The growing fear is that, in anger over trade friction, or in disgust over horrible USDollar management, or from a response to discovered hidden USTBond monetization, or with ambition to displace the US from its catbird seat, China could dump USTreasury Bonds with a vengeance. The credit market analysts justifiably call it the Nuclear Option. The Beijing officials have given veiled warning to reduce the USGovt deficits and to put aside thoughts of another Quantitative Easing. The next QE2.0 comes as sure as night follows day. The message is written on the wall, that the United States has forfeited its sovereignty with rampant debt production rather than industrial production.

USTREASURY ISSUANCE EXCEEDS USGOVT DEFICITS

This story is a gem. USTreasury bond issuance exceeds even the gargantuan USGovt deficits. The gap is $1.5 trillion over four years. One could guess that Wall Street is selling bonds and squirreling the money in foreign banks, a basic counterfeit in a syndicate operation. The operation might bring new meaning to monetization. At least a parallel exists. The majority of home mortgages have their income stream used in more than one mortgage bond. That is the real reason why home loan modification is a thin farce. The MERS database conceals the game, but the public has the satisfaction of knowing that MERS has no legal standing. The state courts are declaring no legal standing, and foreclosure procedures are blocked as a result. People cannot be removed from their homes when the database is used in handoffs of notes and titles.

Under Goldman Sachs rule, the USDept Treasury is running some bold kind of racket game, whose purpose is unclear, except clearly that it aint honest. The USGovt borrowing through debt issuance was $142 billion more than the June USGovt federal deficit, which means they are doing more than financing the deficit. They are funding a syndicate. In chronic fashion, excess issuance has been the pattern, as the USGovt has issued $1.5 trillion more in debt securities than its budget deficit in the past four years. During the past 45 months, the USGovt has accumulated an incremental $4.7 trillion in new debt, but the federal budget deficit has grown by $3.2 trillion, much less but still a mammoth amount. Nobody asked why so, and nobody asks where the bond proceeds go. One is left to speculate that a vast bold new syndicate technique is simply selling bonds beyond newly formed debt, stealing the funds as proceeds, and tucking the bonds in foreign locations for syndicate usage on rainy days or retirement days. The June USGovt official budget deficit was logged at $68.4 billion. During the same month, the USGovt borrowed a staggering total of $210.9 billion. These are not refinances of USTreasury debt in rollover. On a consistent basis, the USGovt has borrowed much more in each deficit month than was required to close the deficit and finance the debt accrued. The differential of excess debt issuance for the first six months of 2010 comes to a hefty $290 billion, a pattern in continuance.

Perhaps the US syndicate maestros figure that with large numbers, nobody will notice, or given the hidden monetization, they might as well put the bond presses in hyper-drive. The cumulative data, as well as the mindboggling differential (dotted line) between the two series is shown on the attached chart. Perhaps it is for war funding far in excess of the stated costs, to save embarrassment and questions. Perhaps it is for enormous vertically integrated business investment in Afghanistan for industrial processing of poppy into heroin. Perhaps it is for the heavily rumored underground cities under construction for elite resident purposes. Perhaps it is extra costs for additional new military bases scattered across the globe. Perhaps the answer is simpler, in that it is just being counterfeited and stolen by the financial syndicate led by Goldman Sachs that controls the USGovt financial ministries, and operates criminally with full impunity (except for meager fines). My sincere belief is that all the above are part of the destinations for the money. This is a smoking gun.

ENGLAND BUYS $170B USTBONDS FROM SAVINGS ???

This story is a gem. The Chinese dump USTreasurys and England accumulates them. Or more accurately, the USFed hides its vast monetization efforts in the United Kingdom account ledger item. No way to the reasonable man can Britain purchase $170 billion in USTreasurys in five months from legitimate sources of savings!! In May 2010, China reduced their USTreasury holdings by $32.5 billion, now the lowest level since June 2009. China shed $35.4 billion in short-term USTBills, offset by a mere $2.9 billion in purchased USTBonds. Furthermore, Japan reduced holdings in USTBonds, as did the OPEC nations. However, buyers could be found, all Anglo descent, at least on the surface. The total foreign USTreasury holdings rose from $3957 billion to $3964 billion. Attribute the good tiding news to gigantic ongoing accumulation by England, just like the last several years. The UK-based buying is highly suspicious, like a neighborhood crack house purchasing a swimming pool, but arouses no attention except by intrepid analysis divorced from Wall Street or the USGovt, the bicameral syndicate. Generally, the United States financial system suffered a dramatic decline in May as foreign purchases of US assets hit a wall, falling from $110.3 billion to just $33 billion. See the graph of steady Chinese unloading of USTreasurys in the last several months.

As of end May, China still holds a gaggle of USTreasurys, but their USTBill holdings are down to a trifling $7 billion, as China sells into the confusion, especially at high principal prices tied to near 0% yields. China is selling the bubble. Without any question whatsoever, the USFed and USDept Treasury are using the United Kingdom as a ledger item for their mammoth USTreasury monetization, all barely hidden, with the TIC data used as a tiny fig leaf to obscure a bulging protuberance. The story receives no mainstream attention. The United Kingdom has wrecked banks, staggering deficits, no trade surplus, yet managed to buy a whopping  $28 billion of USTBonds in just the month of May. Seems like Printing Pre$$ operations and London serving as the Hidey Hole. At end 2009, as of the December tally, the UK owned $180.3B in USTBonds, yet somehow managed to accumulate in the new year, up to the current $350.0B. THE UK SUPPOSEDLY HAS ALMOST DOUBLED THEIR HOLDINGS IN A MERE FIVE MONTHS!!

Bear witness to the shadow USFed debt monetization operation, operating out of the United Kingdom, or at least its accounting. The hidden USTreasury Bonds reside in England. If truth be known, this is where the owners of the USFed reside. Anyone who accepts the following graph on its face is a blatant moron, a bold huckster for Wall Street, or a dimwitted employee of government.

Bear in mind that we are talking about crippled England here, or the United Kingdom more generally. The UKGovt just announced spending cuts to reach 40% of budget, not the previous 20%. Britain could not cope with an extended episode in the credit crisis, according to the Bank For Intl Settlements. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. The Bank For Intl Settlements has warned that sovereign debt under siege cannot adequate be relied upon as the coupon for broad national financial rescue and stimulus, not again, not in the next round. The UKGovt is admitting openly that the situation is worse than they said before. Newly ordained Prime Minster David Cameron ordered the officials to draw up 40% cuts, the biggest in history. He has ordered cabinet ministers to draw up a Doomsday budget whose essential service spending cuts could see tens of thousands given pink slips. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. This is a smoking gun.

In the summer 2008 leading up the the Wall Street death experience, the British suffered their own shameful episode with Northern Rock, Royal Bank of Scotland, even the venerable Lloyds of London each succumbing, no longer breathing life in a solvent sense. They are all broken, just as broken and insolvent and wrecked as the biggest US banks, all Zombies. Billions of pounds were spent in nationalizing the Royal Bank of Scotland (partial), Lloyds Banking Group (partial), and Northern Rock (total) in an attempt to prevent their collapse. Neither the UK nor the US is on any path of reform or restructure. London redeemed failure from a real estate bust, which is the absolute opposite of investment or stimulus. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. This is a smoking gun.

USGOVT HIDEY HOLE IN “HOUSEHOLD” CATCH-ALL

This story is a gem. Eric Sprott of Sprott Asset Mgmt casts a suspicious eye at the USTreasurys for the so-called Household category in their accounting. It is a blatant ledger item for illicit monetization, a veritable crime scene without the yellow tape. Sprott directs his accusations like a skilled prosecutor. He reinforces the claim of Ponzi Scheme cited by Bill Gross of PIMCO. Sprott calls the solution to finance the mammoth USGovt deficits to be the actual problem, namely hidden monetization. The Hat Trick Letter is in perfect synch with his line of reasoning and accusation, as the “Household” accounting ledger item is the culprit. This item has been the topic of past Jackass focus and analysis. Data in bloody detail is offered in his indictment. Sprott points out that in order to balance the budget for fiscal 2009, the USGovt needed to sell $2041 billion in new debt, equal to three times the new debt that was issued in fiscal 2008. Witness the grand rampup without identified sources of buyers, mythical buyers in official USTreasury auctions, fraudulent accounting on the official books. No purchasing groups could could afford to increase their 2009 USTreasury purchases by 200%, a simple conclusion. So by process of elimination, the monetization source arises most visibly, but he shows where it appears in the accounting.

In the latest USDept Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. That much is clear. According to this report, there were three distinct groups that increased their purchases from 2008 levels. The first was “Foreign & International Buyers” which purchased $697.5 billion worth of USTreasury securities in fiscal 2009, a 23% rise from fiscal 2008. The second group was the US Federal Reserve itself. Their published balance sheet reveals an increase in its USTreasury holdings by $286 billion in 2009, a 60% annual rise. Consider that jump to be a direct result of the official USFed Quantitative Easing program announced in March 2009. Quick summaries cover the other groups. Q1, Q2, and Q3 data from 2009 suggests that the State & Local Govts and US Savings Bonds groups were net sellers of USTreasurys in 2009. Then the pension funds, insurance companies, and depository institutions increased their purchases by only a paltry amount. The remainder was purchased by a category called loosely “Other Investors” as a catch-all. This other group purchased $90 billion in 2008, but then jacked up in extreme hyper-drive its purchases to $510.1 billion of freshly minted USTreasury securities so far in the first three quarters of fiscal 2009. On an annualized rate of purchase, the catch-all category is on pace to buy $680 billion of USTreasurys this year, over seven times the 2008 level. So the murky vague “Other Investors” saved the day and financed a gargantuan amount of the USGovt deficit.

Go to the source. The USDept Treasury Bulletin identifies “Other Investors” as consisting of Individuals, Government Sponsored Enterprises (GSE, as in Fannie Mae & Freddie Mac et al), Brokers & Dealers (who sell as intermediaries), Bank Personal Trusts & Estates, Corporate & Non-Corporate Businesses, Individuals, and Other Investors. It is far-fetched to believe parties in these groups had $700 spare billion to invest in the USTreasury market in fiscal 2009. Sprott dug deeper, and found the source in the data. The Federal Reserve Board of Governors Flow of Funds Data provides a detailed breakdown of the owners of USTreasury securities to 3Q2009. Within these parties, the GSE group acted as small buyers of a mere $5 billion this year. Brokers & Dealers were sellers of $80 billion. Commercial Banks were buyers of $80 billion. Corporate & Non-Corporate Businesses collectively were buyers of $11.6 billion. Add these cited parties to arrive at a net purchase of only $16.6 billion. The huge increase of purchases in 2009 came solely from one source within the “Other Investors” group.

The Federal Reserve Flow of Funds Report defines the infamous “Household Sector” which is a grab bag catch-all miscellaneous ledger item. The Hat Trick Letter has honed in on this corrupted ledger item in past reports. This category supposedly purchased $15 billion worth of USTreasurys in 2008, then jumped with jet (printing press) assist in 3Q2009 to a staggering $528.7 billion in purchases, a 35-fold increase. The Household is on track to buy $704 billion worth in all fiscal 2009. The bottom line is a shocker! What is the Household Sector? It is a combination of miscellaneous, ledger adjustments, and blatant monetization. Sprott calls it a PHANTOM that does not exist, but serves the purpose to balance the ledger in the US Federal Reserve Flow of Funds report. In the past, this ledger item was calculated as residuals, securities on loan across groups, even inclusive of rounding error. The monetization is no longer hidden. He concludes that USTreasurys have become one giant Ponzi scheme, just like Bill Gross of PIMCO quipped. This is a smoking gun.

BY THE END OCTOBER 2009, THE “HOUSEHOLD” ACCOUNTING CATEGORY OWNED MORE USTREASURYS THAN THE US FEDERAL RESERVE ITSELF. THAT IS CORRECT. MONETIZED USTREASURY BONDS ACCOUNT FOR MORE THAN WHAT THE USFED HOLDS. THE USTBONDS ARE HIDING IN ENGLAND.

Sprott summarized the bulk buyers of the $1885 billion in USTreasurys through Q3 of 2009:

1. Foreign & International buyers which purchased $697.5 billion

2. The US Federal Reserve which bought $286 billion

3. The Household Sector which bought $528 billion (think printing press).

Foreign USTBond holders share their worry openly. Zhu Min is deputy governor of the Peoples Bank of China. In a recent discussion on the global role of the USDollar, he told an academic audience that “The world does not have so much money to buy more USTreasurys. The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.” With foreign sources unwilling or unable to support USGovt debt, the monetization card will be used repeatedly and powerfully inside the desperate US-UK quarters. When the process is more widely recognized and publicized, the USDollar will be trashed. It is that simple.

IMPLICATIONS TO THE USDOLLAR & GOLD

No creditor nation whose leaders are in their right mind would continue to support the USDollar as the global reserve currency when its debt securities are the object of colossal fraud and powerful monetization. The USFed Chairman Bernanke before the USCongress testified that the USTreasury is not buying its own debt with printed money. He is a liar. He cannot identify the USTBond buyers. The evidence is compelling, and all around us. One does not have to be an advanced financial engineer to detect the trails of the monetized debt, its accounting location at the Household slot within the USGovt and within the United Kingdom in the Treasury Investment Capital (TIC) Report. The USGovt is racking up gigantic deficits, which will run in the neighborhood of $1.5 trillion annually for some time. The second half recovery claim is for morons. Austerity measures are a pipedream. The wars are both sacred and endless, a shameful badge of honor for a fascist nation. Reform is nowhere. Economic recovery is a mirage.

Blown opportunities, wasted bailouts, and lack of solutions like reform & restructure assure a much high gold price. Actually, they assure much lower currency valuations. With the redemption of Wall Street bond failure in October 2008 (see TARP Funds), and the nationalization of failed firms (see Fannie Mae, AIG), and the vacant economic stimulus that served little more than state budget shortfall plugs, the potential for a $2000 gold price was provided. Over $2 trillion was wasted. Debt across the debt-plagued landscape will be monetized. That is a fanciful way of saying newly printed money will be used to buy the wrecked debt, so that it can be shoved under the carpet. But the elephant living under the carpet creates a problem, with size and feces. With the redemption of British bond failure in 2008, and the nationalization of failed firms, the potential for a $2000 gold price was reinforced from the Anglo flank. Over one trillion British Pounds were wasted. Debt across the debt-plagued landscape will be monetized. With the redemption of European sovereign debt in May 2010, and the absence of stimulus in the European Economy, the potential for $3000 gold price was provided. Almost $800 billion was wasted. Debt across the debt-plagued landscape will be monetized. Gold thrives when the major currencies are debased, debauched, and destroyed.

The winds are showing strong signals of another powerful round of Quantitative Easing, the so-called QE2. When announced formally, or incontrovertibly detected, the potential for a $5000 gold price will be provided. The USEconomy is moribund, and the EU Economy is moribund. Economic stimulus and monetary accommodations have ended in the United States. The deceptive cry of a second half recovery is met by the arrival of a second half deep swoon. November elections are coming in the United States, when liberal policy, free spending, and reckless decisions are normally made. Numerous smart analysts like Eric Sprott, Jim Grant, Jim Rickards, and Porter Stansberry expect the QE2.0 to set sail soon, maybe announced this calendar year. Some analysts believe another financial market crisis episode will be permitted first, in order to permit an easy political path for the next round of Quantitative Easing. The QE2.0 is assured, not even worthy of a forecast. My forecast is for QE3.0 to be announced by early 2012, and for QE4.0 to be announced in 2013. The reason is simple. Absolutely no effort is being made to fix anything. The objective is to preserve power.

Banks still hold tons of toxic debt, as mortgage debt has been written down by $270 billion but residential housing alone has come down $7 trillion in value. Even the SEC head Shapiro admitted that a slew of bank failures are coming soon. Restructure of the USEconomy is not even a topic, as consumption is desired, not seen, as job growth is desired, not seen. Capital formation and job creation are no longer an understood concept within the tarnished marble halls of US economist offices. Return of the US industrial base is not even discussed, a lost bastion. Instead, the priority of banking and political leadership is preservation of power, in order to control the coveted US$ Printing Pre$$. The war machine churns, with huge costs, no debate, no change to believe in.

The entire world is working overtime behind conference doors to fashion a new global reserve currency. The IMF Special Drawing Rights vehicle is openly discussed, more like a Straw Man. The New Nordic Euro is a hopeful initiative conducted in secrecy, to be constructed with a gold component. By design, it is to enable a return to monetary system stability. However, by design it is also a USDollar killer. Its arrival will come without any doubt. When it does, the talk will not be about clownish deflation topics. Talk will be about hyper-inflation and the United States facing a Third World prospect. Talk will be about $5000 gold. Talk will be about nothing fixed by the financial syndicate in power. Let’s hope by then, the Interpol arrest warrants for many US & UK bankers and some EU bankers are delivered. The warrants already exist and await timing to be served, seen by a friend of a contact. The Jackass proposes the arrest warrants be served at the next Davos Economic Summit.

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As inflation rears its ugly head and future demand for gold promises to overwhelm mine supply, gold’s price will launch a parabolic rise from current levels in the near future. Gold has much, much further to go.

In further edited excerpts from the original article* John Embry (www.sprott.com), chief investment strategist at Toronto-based Sprott Asset Management, goes on to say:

Inflation The monetization of various forms of government debt by the printing of large sums of money, disarmingly referred to as ‘quantitative easily,’ is proving to be the catalyst for accelerated inflation and, as such, if inflation gathers momentum, long-term interest rates will rise, which in turn should speed up the weakening of the anemic US dollar.

U.S. Dollar Furthermore, gold is increasingly asserting itself as a powerful inverse proxy to the dollar. This makes the yellow metal the ultimate safe haven alternative to holding US ‘fiat’ money which is a currency that is not backed by anything of tangible value.

Supply Then there’s the fact that most of the world’s major deposits are virtually mined-out and new ones are becoming harder to find and more expensive and politically problematic to bring on-stream. Indeed, Aaron Regent, president of Barrick Gold (ABX), recently told a gold investment conference in London that major gold mining companies are continually struggling to replace mined-out reserves saying, “There is a strong case to be made that we are already at peak gold. Production peaked around 2000 and it has been in decline ever since. We forecast that decline to continue as it is increasingly difficult to find ore.”

It is interesting to note that the world’s top trio of producers — Barrick Gold, Anglogold Ashanti (NYSE: AU) and Newmont Mining (NYSE: NEM) (TSX: NMC) — each generate between 5 to 8 million ounces of gold per annum which means that at least one new multi-million ounce deposit needs to come on-stream every year just to replace this output. That simply is not happening.

Demand
It will not be long before inflation, a debased US dollar, and shrinking global output converge to act a springboard for gold’s ascendency well above the $1,100 level and, at that point, investment demand will explode on a worldwide scale.

Conclusion
The rally in bullion prices is far from over, contrary to what some market pundits are suggesting. It has is merely in a consolidation phase before its next up-leg.

Gold’s price still has a long way to go before it even comes close to matching its peak price during its last major bull run, when it hit an intraday high of $875 on January 21, 1980. To do so it would have to rise to around $2,300 on an inflation-adjusted basis.

*http://www.goldalert.com/stories/Parabolic-Gold-Price-Rise-Imminent-Asserts-Gold-Bull-John-Embry

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Posted here: http://www.munknee.com/2010/04/peak-gold-and-inflation-a-perfect-storm/

PHYS was added last week as a way to tag the NFTRH speculative account to actual gold as opposed to what may be going on over at GLD. If it worked out as a trade, hey great. Or it could be held longer term. The point was that I felt its management (Sprott) was of higher integrity than that of GLD.

PHYS, unlike GLD however, is subject to premium/discount swings and it appears we are getting a bit euphoric here. Thus, I sell and take a 3.5% gain as the PHYS-GLD ratio chart shows a bump up in premium from what had been 8% last time I checked.

As you know, the spec account is not for long term philosophical holding, even of things I believe in strongly, like the value of gold. That type of investment is done elsewhere and through different means. So the spec account takes the froth off of PHYS and perhaps awaits future opportunities.

Originally Posted here

“I just spoke with Eric Sprott, who bid to buy [the IMF's remaining gold on the block] and they refuse to sell it.” As Kitco points out, “the IMF might be holding out for a bigger buyer or a central bank or for higher prices. But Holmes argues the IMF’s rejection of Sprott’s bid means markets are being manipulated.” Back to Holmes: “I think there is a lot of manipulation done by governments around the world in the currency markets which affect the bond markets so to me it’s just normal course.” Holmes concludes “with an election year there may be a gold rally that could be two standard deviations, or $300 dollars, to the upside. So you could see gold run to $1300 to $1500 quite easily.”

This all isoccurring as ever more pundits finally realize that as fiats are discredited across the world, the only safe, non- dilutable resource is gold.

Click Here for ZH’s full post

The Gold Report: John, in Investors Digest of Canada you recently said you’re expecting gold to gain another 30% this year.

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We’ve had nine years consecutive higher year-end prices and the best year in that span for a year’s return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: What’s driving this? Why is this year going to be the best year?

JE: I think we’re getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can’t depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people’s eyes.

TGR: You might say the first leg down were the individuals who couldn’t pay their mortgages and that caused part of the ‘08 collapse. And now it looks like it’s the government’s.

JE: It’s very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I’d see in my life. I’m shocked at the numbers in many places.

TGR: It’s been unbelievable. Now when you talk about gold, you’re talking about bullion. How do you see the gold stocks? Do you think we’re going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

JE: I don’t agree with them. As much as I love Richard Russell—he’s probably been as big an influence in my career as anyone—I don’t think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary ’30s, and they will move heaven and earth to prevent that outcome. And when you’ve got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I’m in the camp that thinks we’ll get hyperinflation first. We’ll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

JE: I think stocks will do fine. They may have a violent correction first because a lot of people don’t know what the heck we’re talking about here. And when they see inflation mounting and economic conditions being less than ideal, they’ll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you’re talking about stocks, you’re not talking just about gold stocks.

JE: No, I’m talking about good businesses. I’m not talking necessarily about banks and other stuff that’s more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it’s in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

JE: Gold stocks, maybe. I believe the next time everything goes down, gold isn’t going down. And if that were to be the case, I think gold stocks might surprise. They’ve been awful. Given what the gold price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it’s been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The gold price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

JE: Oh, I think the juniors. The whole thing is a matter of confidence. They’ve got so much volatility in the gold price. You get a good thrust up and you got a violent correction and I think they’ve got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I’m right and the gold price stages a dramatic breakout in the next 12 months—and I’m talking hundreds and hundreds of dollars on the upside—then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What’s the seasonality of this year?

JE: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that’s going on, I see no reason why it shouldn’t be a very good period this time. And there’s one other development. I don’t know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the COMEX. And if they ever put any teeth into those things and kept these bullion banks from what they’re doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They’re finally going to have to address this because there’s been so many complaints about the bizarre price action on the COMEX in both gold and silver.

TGR: What about some individual stocks? Any that you’d like to comment on?

JE: Gold Fields (NYSE:GFI) remains very cheap. It’s been under a cloud, I think, because there’s been a lot of conversation among some of the more radical factions in South Africa about nationalizing the gold mines. I don’t believe it’s going to come to that. I talked to a chap who knows South African President Jacob Zuma fairly well and Zuma is certainly not in favor of that. There’s always going to be radical factions. If they want to destroy their gold industry, nationalize.

TGR: That’ll do it.

JE: Hopefully, cooler heads will prevail. On that basis, Gold Fields is extraordinarily cheap based on its reserve base.

TGR: What about consolidation plays? Do you think the time is right for that?

JE: I think the big problem is that the guys that head up some of these gold companies don’t have the confidence in their own product that they should have. As a result, they’re reluctant to pull the trigger on acquisitions that to me would be brilliant at this stage in time. We’ve seen some activity, as you mentioned, in Mexico. I know Goldcorp (NYSE:GG, TSX:G) has been picking up a few around its big silver play down there. And I think that’s a great move. My attitude is that these guys, without exception, all have long-term reserve issues. If there’s ever been a better time, based on my outlook for where all this is going, to pick them up, I can’t think of one. These guys should be looking for anything that’s real and using their paper right now to buy it.

Another stock I like that I sound like a broken record on is a Canadian-based company called Wesdome Mines (TSX:WD). They’ve got two operating gold mines, one in Quebec and one in Ontario. You couldn’t be operating in a better geopolitical environment. They’re both profitable. They had a dividend last year; they will pay a dividend this year. I believe the Canadian dollar, despite other people’s belief that it’s going to be very strong, isn’t. Given the budgetary problems and everything that are coming up here, Canada will move heaven and earth to make sure its currency doesn’t move up against the U.S. dollar, so I don’t see any further cost pressures because of a stronger currency in Canada. They’re having success with extending their ore bodies and they’ve got absolutely blue chip mining facilities and the stock, which probably earned something like 20 to 25 cents last year when it reports, trades at just over two bucks. I just think the thing is dirt cheap. I look at a lot of stuff that’s years from production with market caps three times as big as this one. This one’s got a total market cap of $215 million. So I think, of all the small stocks that I look at, I like small producers that are basically overlooked and this, to me, is probably the most overlooked small producer. I’m always interested in profitability and the ability to extend their reserve life related to market cap.

TGR: Any others?

JE: One that I like up here in Canada that I’ve liked for years that’s just coming into production, and they are really adding to their reserve base, is Lake Shore Gold Corp. (TSX:LSG), which trades around three bucks. I think that they’ll eventually prove up multi-three, four million ounces just outside of Timmins, which is another great place to be operating because of its long mining history. I’m a little less adventuresome these days in the sense that my greatest concern down the road for gold stocks is if my maligned view of where this is all headed occurs, one of the few sources of revenue for governments may be taxing gold mines. So I want to be in a geopolitical area where there is some respect for law and people aren’t totally rapacious like they are in some of the third world countries.

They’ll always go where the money is and in this case they may be even more desperate for money, so that’s why when people ask me how should I be exposed to the gold industry, I say, well, the first thing you’ve got to have as the core of your portfolio is bullion, because that’s forever. You don’t have the same leverage to the upside necessarily, but on the other hand you know what you’ve got. The gold stocks are ephemeral, but if you hit them right, you’re going to make a fortune. You will get a three- or four-time bigger move than you will in bullion at some point in time. But the long-term hold is bullion, in my opinion.

TGR: Would you speculate? I read that the IMF is going to be selling some gold and India stepped up earlier. What are your thoughts on that?

JE: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we’ve seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tons to be exact. There’s speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don’t think they want to be seen publicly doing it. They’d probably rather do it more clandestinely because they’ve got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic to augment their reserves, where the Indians really don’t have that. So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there’s also sort of the suggestion that the Chinese wouldn’t want to be seen to be paying more than the Indians did, so they’re reluctant to step up with the gold price $50 higher currently than the Indians paid. If it was really a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It’s not much money. It’s $6 billion. They throw it around as if it’s a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

GR: That’s right. What do you think when Soros came out and said that gold was a bubble?

JE: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn’t like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn’t say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the gold price is going to go crazy and at that point I’d be worried about. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing. The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: Right. And, again, I think the financial talking heads used it as the negative.

JE: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn’t like gold. But I think George Soros’ remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was buying gold.

TGR: Alright. Any last comments?

JE: The only comment I’d make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody—and I have never been a table pounder—but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn’t something that’s just insurance for those who’ve got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

JE: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn’t buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

John Embry is chief investment strategist at Sprott Asset Management and Sprott Gold and Precious Minerals Fund. He also co-chairs the Central GoldTrust Board of Trustees. An industry expert in precious metals, John’s industry experience as a portfolio management specialist spans more than 45 years; he’s simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

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DISCLOSURE:
1) Gordon Holmes of The Gold Report conducted this interview. From time to time, Streetwise Inc. and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Gold Fields Ltd., Goldcorp.
3) John Embry: I personally and/or my family own the following companies mentioned in this interview: Wesdome Gold Mines, Lake Shore Gold Corp., Goldfields Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Read the full piece here @ MineWeb

We also wanted to prepare our readers and clients for the next leg of the gold bull market as it will prove to be extremely volatile. Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not.

The Gold Report: Bob, when they announced Ben Bernanke as the Time magazine’s Person of the Year, I was thrilled, because I knew I was going to be speaking with you. I just have to ask, how do you see Ben’s place in the 2009 economy?

Bob Moriarty: Actually, it really scared the hell out of me. What it means is that I can no longer go to college football games.

TGR: Why is that?

BM: You know the president was awarded the Nobel Peace Prize.

TGR: Yes.

BM: We have three-and-a-half wars going and he was awarded the Nobel Peace Prize and then Time magazine came out and made Ben Bernanke the Man of the Year. Now that’s the equivalent of being awarded the Nobel Prize for Economics. Stalin was Man of the Year.

It means that Bernanke had the most influence on the world last year, which is quite interesting because it means I cannot go to a college football game anymore.

TGR: Okay. I’m still missing the link.

BM: If I go to a college football game, at half time they give out awards and they do special things. If I go to a college football game, I’m bound to be awarded the Heisman Trophy.

TGR: I hate when they give those out.

BM: Ben Bernanke has done more to destroy the economy of the world. If there was one organization that is responsible for the financial chaos that exists today, it would have to be the Federal Reserve. Ben Bernanke has destroyed the financial system of the world and they’re thinking he saved it by creating all this money. Well, wait a minute. That money has to go somewhere.

If you actually look at the numbers, the most accurate number that I’ve been given is a $23.7 trillion increase in U.S. liabilities. It’s not necessarily the government that spent that. We’re just on the hook for that kind of money in one year and that has to have an effect. Dubai has defaulted; Greece is not very far away from defaulting; Ireland is very close to defaulting; the U.K. is very close to defaulting; Japan is very close to defaulting; the United States is very close to defaulting; Spain is very close to defaulting. And the one thing that we know is they’re going to. So we can either have a deflationary collapse where everybody says, okay, well, remember those $10 trillion that we owed the rest of the world? We’re just not going to pay them. Or we can go into hyperinflation. Those are the only two alternatives and either is pretty bad.

Bernanke has guaranteed a collapse of the financial system. We’re in the center of the storm, the eye of the storm right now. The hundred or so people in the world who actually understand what’s going on are all going, “oh, shit.” And Ben Bernanke’s sitting there with a grin on the cover of Time magazine. Well, I can guarantee next year he isn’t going to be sitting on the cover of Time magazine with a grin. He’ll be sitting on the cover of Time magazine with a noose around his neck.

TGR: Do you think these relatively smart people—granted, you stick them in Washington and weird things happen—realize they’re in the eye of the storm, and they’re just trying to keep the panic down now and try to maneuver things behind the scenes or do you think they’re totally oblivious to what they’ve created?

BM: There’s a lot of total oblivion. These guys have all studied Keynesian economics. Keynesian economics simply doesn’t work. Anybody who actually understands economics knows that, but that’s what they were taught and because everybody around them was talking Keynesian economics, they think you can somehow buy your way out of failure.

Obama came up with this really wonderful quote early in December saying we’re going to spend our way out of the recession. My question is—if we spent our way into this recession, how the hell are you going to spend your way out of this recession? Spending is what got us into trouble in the first place. There was another article released last week saying that the number of Federal employees with salaries in the six figures is higher than it’s ever been. This is insane. We have 22% unemployment and we have hundreds of thousands of Federal employees earning over $100,000 a year. The 22% unemployment, those people who have no jobs are starting to get really, really pissed. And when they do, we got problems.

The gap between government employees and employees in general is higher than it’s ever been. The unemployment in the United States is higher than it’s ever been. So not only is the government employment increasing, unemployment’s increasing for everyone else. Who do they expect to pay the taxes? And the answer to that is the 47% of people who pay no taxes at all are listening to Pelosi say, “Hey, I’ve got a great idea. We’ll make the rich people pay for the health care.” And then a week later she had another really great idea. “Hey, we’ll make the rich people pay for Afghanistan.” Unfortunately, nobody listened to her definition of rich people. Did you catch that? Did you hear what she said? “Rich people are those who still have a job.”

It’s the end of empire. Democracy works until the voters learn to give themselves benefits. We have gone into never-never land. For Barack Obama to be awarded the Nobel Peace Prize after being in office for two weeks goes beyond absurd. The fascination with the sex life of Tiger Woods is all over the news and my question is who cares? Are they kidding? We’ve gone crazy.

TGR: So how are we going to be protecting ourselves investment wise? I’m going to ask a little bit about gold because you’re a big gold bug. Gold ran up to above $1,200 and now had quite a decent pullback. You point out correctly that who wouldn’t have expected a pullback when it’s up for 13 days straight.

BM: We have not seen the top in gold, but corrections are perfectly normal and they’re a good thing. Now why should you own gold? You should own gold for two reasons. One is it’s an insurance policy. The things that Bernanke and the Federal Reserve and Tim Geithner have done are going to destroy the world’s financial system in the end. I know that sounds really catastrophic, but it’s going to be catastrophic. The United States is $100 trillion in debt. No sane person can come to me and say, “Bob, there’s a way out of that.” They can’t, there is no way out of that. We’re going to default. I don’t care if we default next week or next month or next year or 10 years from now. We’re going to default and it’s going to be catastrophic.

Gold is an insurance policy. It’s like an insurance policy on your car or your home or yourself. It’s not something that you want to collect on, but for 5,000 years it has worked to protect people’s assets. Secondly, as an investment, the general stock market would absolutely terrify me right now. It’s so over bought and the P/E ratio has hit historic highs. It’s just screaming to take everybody’s money away when people wake up to what’s really going on. So gold shares, silver shares, energy shares, food shares are a good, safe place to be. It used to be widows and orphans would buy GM and they would buy General Electric and they would buy Ford and Chrysler. Widows and orphans should actually be buying Canadian juniors right now because they might preserve their wealth. They own FAO and Ford and GM and General Electric; they own companies that are walking zombies just waiting to die and be buried.

TGR: If the stock market does take another correction and even a massive one, could it take down even the Canadian juniors, too?

BM: I don’t believe that’s true. The Canadian juniors have already crashed. It happened last year and everybody had it absolutely wrong except Bob Hoye. Including me. I believed the Canadian juniors were going to be a safe place. But if you look at the ratio of the XAU over gold, the ratio is lower than it’s ever been in history and it’s been lower for a year. So Canadian juniors are not going to crash; Canadian juniors already have crashed.

The market is going to do whatever it has to do to surprise the biggest number of people and people are expecting a crash in the juniors if the market crashes. I don’t think so. You have to have some place of safety. Last year it was gold and this year I believe it will be gold shares. I think that this year—this is a good time to bring it—I think that 2010 will be an extraordinary year for gold shares.

TGR: Does that mean it would be an extraordinary year for all gold shares and once the mania starts happening, will all gold companies rise in value?

BM: Well, that’s what’s really funny. The biggest piece of crap companies out there are going to go up fifty fold. I would be very hesitant to recommend that people buy into piece of crap gold companies. But when the wind is high enough, even the turkeys fly.

TGR: Do you think in a market place where most people don’t understand mining to begin with, they’re going to be able to differentiate the crap gold companies, as you call them, from the valuable ones? Why not just buy a market basket of gold companies?

BM: That’s a really good move. There are some great funds out there—USAA Gold is a good fund. Frank Holmes does a good job with the U.S. Global Investors Funds; Eric Sprott does a good job with the Sprott Funds. There are some great gold funds out there and that removes the risk of having to make decisions. The reason I spend eight months a year traveling all over the world is I’m trying to give my readers the house advantage and we think we do. I’ve been doing this for eight years and we pick some pretty good stocks. That doesn’t mean they don’t go down. Some go up and some go down, but that just proves I’m honest.

TGR: If we look at 2010 and it’s going to be this extraordinary year as you’re predicting, will the markets be smart enough to recognize and reward better run companies?

BM: Strangely enough, the ones that’ll go up the most are the crap companies run by absolute crooks that are selling for a penny and a half right now. You’ve got to remember going from a penny and a half to three cents is 100% climb. Let me give you an example. I wrote about the International Tower Hill Mines Ltd. (NYSE/AMEX: THM; TSX-V:ITH) a year ago and International Tower Hill, I think, was US$1.04 and it’s like $7.32 now. There are hundreds of companies that have gone up more than that and Tower Hill has one of the best deposits in the United States and its run by one of the best guys in the industry. A stock going from $1.04 to $7.32 is no different than a stock going from two cents to 12 cents.

TGR: You’re traveling around finding the good deals for eight years, which bodes well in that market place where better projects will reward. But in the market place, everyone’s going to get rewarded because you happen to be in the right sector. What’s your strategy?

BM: I invest in the best people that I can find. I try to find the best companies and the best people because, while you’re waiting for the piece of crap company go from a penny and a half to 15 cents, it may go to a quarter of a cent. You don’t know. I buy companies that I like their story, I like their management, I like their location, etc.

TGR: What do you see for silver?

BM: Silver is a commodity right now. When the financial system collapses—and it’s going to collapse—and we go back to the gold standard, the metal that you need the most of is silver because of its value as money. In a gold system the money you need most will be silver. At that point it would go back to a historic ratio, somewhere between 15:1 and 25:1. Silver is an investment. It’s very dangerous because there are always cheerleaders. The cheerleaders are the guys waving the flags and the pom-poms and showing their butt to everybody saying silver is going to go to $100 an ounce if we get into a war because this is the most critical war metal. Well, we’re in three wars and silver has not gone to $100. The cheerleaders say we’re going to run out of silver. We’re not going to run out of silver. It’s a commodity. At some price, it extracts itself from the ground. At $16 to $18 an ounce, there’s plenty of silver and silver’s supply and demand is in equilibrium. But to move it up relative to everything else, you have to have increased demand and the increased demand is only going to come from using it for coins.

TGR: So the increases we’re seeing in gold now through 2010 probably will not reflect on silver?

BM: Actually, the ratio of silver to gold will go up as the economic situation gets worse because people recognize gold as being a safe haven and they don’t recognize silver being a safe haven to the same degree. We could go back to a ratio of 90:1 or 100:1, but the idea that silver is somehow a better investment than gold, these guys have been wrong for 10 years. I can’t understand why they keep arguing the same thing when all the facts show they’re wrong.

TGR: So someone who’s looking to the insurance policy or hedging or putting money on the sure bet that the economy and the financials are going to falter should really focus in on gold, not silver.

BM: Focus on gold, but you want to hedge your bets, too. One of the possibilities that always exists is that maybe I’m wrong.

TGR: How would you hedge your bets?

BM: I own physical gold and physical silver and I own silver mining companies and I own gold mining companies.

TGR: You mentioned that you like to invest in the best people and so I’ll assume you have certain companies that you feel have management that represents the best of the best. Can you share those with us?

BM: Sure. If you look at the website, we write about them all the time. Animas Resources (TSX.V:ANI) came out with drill results as we’re speaking and the drill results didn’t appear to be good. The stock got hammered. Somebody sent me the drill results and I looked at it and said, hey, somebody’s making a mistake because those are pretty good drill results. They’re in the district and they’ve got really substantial management. In general, I tend to like Mexico. I like Timmins Gold Corp. (TSX.V:TMM), I like Animas, I like Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E). There are so many great stories there.

Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK) has got some good deposits down there. Great Panther Resources (TSX:GPR) has got some good deposits. Candente Resource Corp. (DNT:TSX and BVL) has formed a new company called Candente Gold Corp. (CDG.TO). With Mexico you could pretty much throw a dart; I don’t think you could lose there. There are some great companies and there’s some great management down there.

TGR: Outside of Mexico are there any plays that you’re looking at that are interesting?

BM: I wrote about one called EurOmax Resources Limited (TSX-V:EOX) in Eastern Europe, Serbia and Bulgaria and Macedonia. They’ve got a surplus of good projects and the stock’s real cheap now. There are hundreds of companies. I’m not an expert. I go to a gold show and I see half the companies there are companies I’ve never even heard of before, but there are some real good guys in the industry who cover these and some good subscription services. Greg McCoach has got a good service and Brent Cook has a good service. Lawrence Roulston has a good service. There are some guys who can give good tips.

TGR: Are there any small caps outside of Mexico that you have a few thoughts on?

BM: Oh, dozens and dozens and dozens of them. For example, I happened to be on a trip with some of the people who were investors in Richfield Ventures Corp. (TSX-V: RVC) before they announced their recent results. Richfield is up in B.C. and there’s another company right next to them called Silver Quest Resources Ltd. (TSX-V:SQI) and, they had absolutely extraordinary results. You’ve got to give them credit for that.

I’m always hesitant to list companies that I like because there are hundreds of companies out there who have done extraordinarily well. We got cheaper in relative terms last September, October and November of 2008 than gold stocks had ever been in history. You could have thrown money at companies and made money.

My very favorite company right now is an energy stock. It’s not one that anyone can buy. It’s still private but it’s going to be a very big deal. It will be the Google of investing. It’s a company called Titan Oil Recovery Inc. It’s run by one of the smartest and best managers I know, Ken Gerbino. Basically the company treats past their prime oil fields with a patented bacterial process that essentially lowers the surface tension of the oil, making it easier for it to flow. Their tests on dozens of oil fields show increased oil production by over 100%. That’s giant. In the oil business, most oil gets left in the ground. You can never recover all of the oil in a field. This process is going to be worth many billions of dollars. It’s not a total solution to peak oil but it’s sure better than anything else I’ve ever seen or heard of.

TGR: Well, you could have picked almost any of the resource stocks back then.

BM: Yeah, yeah—exactly. You could pick the worst company in the business a year ago and made money. There were companies that were two cents then that are 60 cents now. But in relative terms, here’s one thing I would like to point out. We started our website in the summer of 2001 and, like Frank Giustra of Endeavour Financial Corporation (TSX:EDV), we chose to get back into the industry right at the bottom and we said it was the bottom. We were very supportive of companies and we said this is a tremendous opportunity to invest. Of course, nobody believed us because gold was $252 an ounce. Well, people, we’re not in Kansas anymore and gold is not $252 an ounce. It’s $1,120 and change right now. It was $1,200 and change a month ago. The risk is out of it. Okay. There are some extraordinary stories out there and they’re extraordinarily cheap. You should invest, one, because it’s a safe place to invest—it’s the only safe place to invest that I know of—and, two, because it’s so cheap that you should have extraordinary returns.

TGR: Thank you very much for your time, Bob.

Wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet almost nine years ago, and later added a second resource site, 321energy.com, which covers oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot with more than 820 missions in Vietnam. A Captain at age 22, he was one of the most highly decorated pilots in the war.

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DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Animas Resources, Timmins Gold Corp., Pediment Gold, Great Panther Resources, EurOmax Resources and Richfield Ventures Corp.
3) Bob Moriarty: I personally and/or my family own the following companies mentioned in this interview: Canaco, Titan Oil Recovery and EurOmax. At 321gold.com, we receive money for advertising from the following companies: Animas, Pediment, Timmins, Endeavour Silver, Great Panther, Richfield Ventures and EurOmax.