John Embry 4.23

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					  V O T E D             T H E         W O R L D ’ S               B E S T          I N V E S T M E N T                     A D V I S O RY

April 23, 2010                                                        Vol. 42, No. 7

                         Gold seldom ‘allowed’ to
                           rise more than 2 %
By John Embry                                   of a surprise to some ob-     ther upside action is capped at a       the massive stimulus, both fiscal
                                                servers because a public      one per cent gain. Following that,      and monetary, provided by the

               arch was an                      airing of such views has      gold is held in check until the long    world’s governments. To suggest
               exception-                       been systematically avoid-    speculators who propelled the           that this is sustainable is folly be-
               ally    dull                     ed by the mainstream          original rise lose patience. At that    cause an unfortunate corollary to
               month in                         from the very beginning.      point, the cartel looks for an op-      this is the utter destruction of gov-
the gold market and, as a                           Perhaps, of greatest      portunity to clean them out. I re-      ernment balance sheets through-
result, gold only posted a                      interest, was Murphy’s        alize this sounds pretty Machi-         out the western world.
marginal advance in the                         reference in the question     avellian but I can only point to the        The focus most recently has
first quarter of the year.     John Embry       period to some informa-       trading patterns as confirmation.       been on Greece, whose finances
This was attributable, in no small    tion provided by a London metals            Changing course, there is           are admittedly disastrous, but my
part, to the considerable efforts of  trader, Andrew Maguire, which           more and more concern develop-          advice to the optimists out there
the anti-gold cartel which appears    revealed, in dramatic fashion,          ing with respect to the sanctity of     is not to look too closely at the fi-
to be prepared to move heaven         some very incriminating evidence        sovereign debt and I, for one, be-      nances of most western govern-
and earth to ensure that gold         concerning a large banking enti-        lieve it is totally justified. As the   ments because they just might be
doesn’t break out.                    ty’s activities in the silver market.   global financial crisis unfolded        horrified at what they discover. To
    It was particularly active near       The following day, in a James       between 2007 and early 2009, it         me, the most annoying trend to-
the end of March to make certain      Bond-like twist, the car in which       became readily apparent that the        day is for these governments to
that a very large option book ma-     Maguire and his wife were driving       private sector was fully loaned up      announce yet another outrageous
turing at prices between US$1,100     in downtown London was broad-           and the world’s leading lenders         budget deficit and then state that
and US$1,150 per ounce wasn’t         sided by a hit and run driver who       were overloaded with bad paper.         next year’s deficit will be lower
triggered. The price was driven       barreled out of a side street. Was      In the world of Austrian eco-           and that they have a plan in place
below US$1,100 on expiry date.        this a coincidence or, in fact, an      nomics, this is a fatal situation be-   to eliminate the deficit over the
To suggest that its chicanery is be-  ominous warning? Fortunately,           cause it signals the end of a cred-     next five, eight or 10 years.
coming more blatant and trans-        Maguire and his wife suffered           it cycle. Since this had been the           The sad inescapable fact is that
parent would be a considerable        only minor injuries but he was re-      largest cycle in history, the after-    the private sector throughout the
understatement.                       portedly shaken up.                     math could only be devastating.         western world is still severely im-
    This was underscored by the           While on the subject of ma-                                                 paired and far too many unwilling
fact that its most egregious behav-   nipulation, last month I referred                                               lenders and unworthy borrowers
ior took place at the very time that  to the cartel’s specific modus            If strong buying propels              are fouling up the credit-creation
the Commodity Futures Trading         operandi on those days when its                                                 machinery. One immutable law in
Commission was holding its long       members choose to take gold
                                                                              gold higher, massive selling            Austrian economics is that, as a
awaited hearing on position limits    lower. However, this is only one of     inevitably appears when it              credit cycle matures, ever greater
in gold and silver on the Comex.      their ploys.                            has risen two per cent and              credit creation is required to
This event went about as expect-          Another page in their play-            continues until gold is              move the economy forward. It is
ed with the usual cartel apologists   book relates to keeping enthusi-         stopped dead in its tracks             almost axiomatic because the
insisting that there was no manip-    asm in the gold sector as subdued                                               imbedded debt continues to ex-
ulation and that position limits      as possible. Gold is seldom, if                                                 act a greater and greater toll.
would detract from liquidity and      ever, allowed to rise more than             To sustain the world economy,       Heaven help us if interest rates
siphon business off the Comex.        two per cent on a given day.            the various governments were            ever reflect the true risk in debt
    However, there were some dis-         If strong buying propels gold       forced to step in and create de-        instruments in this market.
sident voices heard, most notably     higher, massive selling inevitably      mand by accelerating their spend-           So, at this moment, we have
Bill Murphy of the Gold Anti-Trust    appears when it has risen two per       ing at the very time their revenue      governments propping up the sys-
Action Committee, and these fo-       cent and continues until gold is        streams were collapsing due to the      tem while in the process of de-
cused on the blatant market ma-       stopped dead in its tracks. The         travails of the private sector.         stroying their own finances. Their
nipulation that has become en-        next day, to ensure that there is           Today, we have a semblance          optimistic projections of eliminat-
demic. This may have come as a bit    no follow-through fervor, any fur-      of economic recovery because of         ing the deficits rest on a robust,
sustainable rebound in private-            the tubes either. The federal gov-       fair and give credit where credit is       I couldn’t agree more with the
sector demand. In my mind, this            ernments will just create more           due, I must compliment it on its       WGC’s views on this matter and
clearly isn’t going to happen due          money out of thin air. We got our        recent study pertaining to the         would only add that a similar phe-
to the fact that the past excesses in      first glimpse of what’s coming           gold prospects in China.               nomenon is occurring in other
the private sector haven’t been            when the Europeans cobbled to-               The study suggested that gold      eastern countries where wealth is
addressed to any extent. I think we        gether a de facto bailout for            consumption there could double         being accumulated. In fact, I find
will hear more and more of what            Greece although they went to             in the next 10 years with booming      it amazing that the anti-gold car-
Fitch Ratings said when it recent-         great pains to obscure that reality.     demand from both investors and         tel, which is largely Anglo-Saxon,
ly downgraded the state of Illinois:           I have little doubt that our fu-     the jewelry industry. It actually      continues to suppress the price as
“The latest budget is unlikely to          ture is going to see a blizzard of       used the incendiary statement          its own finances deteriorate at an
sufficiently address the annual op-        paper that is going to be truly          that “China has an insatiable ap-      alarming rate. What it is essential-
erating deficit or accumulated lia-        mind boggling and fortunes will          petite for gold.”                      ly doing is allowing those with
bilities.” In fact, I expect this to be-   be made and destroyed depend-                On the other side of the coin,     growing wealth to accumulate
come a constant refrain.                   ing on the asset category owned.         the report noted that, although        gold at bargain prices as gold, as it
    Thus, the most likely outcome          Obviously, in my view, real assets       domestic mine supply had grown         has done throughout history, mi-
to all this is ever greater deficits       will prevail with gold and silver,       by eight per cent annually from        grates to where the true wealth is.
with more and more of them be-             representing the only money you          2006 to 2009, this would taper off         I think we are at a major in-
ing funded by mounting moneti-             can trust, being at the front of the     due to higher mine-development         flexion point which will see gold
zation of debt. Does anyone be-            queue. Those that are trapped in         costs, potential supply disrup-        and silver move markedly higher
lieve for a moment that the gov-           rapidly depreciating debt instru-        tions, tougher safety regulations      into the fall. The current remark-
ernment of Canada will stand by            ments will suffer.                       and depleting ore reserves. Thus,      ably negative sentiment in the
idly and watch the province of                 Last month, I took the World         the Chinese will be forced to          sector only reinforces my view.
Ontario implode? Similarly, the            Gold Council to task for its inane       source considerably more gold
U.S. isn’t going to let California,        statements relating to events un-        internationally, contributing to a     John Embry is chief investment
Illinois, New York or any of its           folding in the gold world and its        much higher floor price for the        strategist at Sprott Asset
other state basket cases go down           lack of positive initiatives. So to be   yellow metal.                          Management.

© Copyright 2010 by MPL Communications Inc., Reproduced by permission of Investor's Digest of Canada, 133 Richmond St. W., Toronto, ON M5H 3M8

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