If you've been riding the gold rollercoaster, you probably know every turn in the track by now -- how the precious metal rose from close to $400 an ounce four years ago to more than $1,000 in April 2008. Inflation, oil, currencies, jewellery demand -- they all have an impact on gold prices.
As we enter the end of the Great Recession, where is gold headed next? How should you play it to make money? Join our live online discussion at noon (ET) on Tuesday, July 28th and bounce your questions off John Embry, who has researched the gold sector for more than 30 years.
Get a head start by submitting your question here. Your questions and Mr. Embry's answers will appear in the space below. Please note that he prefers to discuss the outlook for gold as an asset, rather than specific gold-based stocks.
Mr. Embry has been Sprott Asset Management's chief investment strategist since March 2003, with a focus on the Sprott Gold and Precious Minerals Fund. He plays an instrumental role in the corporate and investment policy of the firm. Mr. Embry, an industry expert in precious metals, has worked as a portfolio management specialist since 1963.
After graduating from the University of Manitoba with a Bachelor of Commerce degree, Mr. Embry began his investment career as a stock selection analyst and portfolio manager at Great West Life. He then became vice president of pension investments for the entire firm. After 23 years with the company, he became partner with United Bond and Share, the investment counseling firm acquired by Royal Bank in 1987. Mr. Embry was named vice-president, equities and portfolio manager at RBC Global Investment Management, where he oversaw $5-billion in assets, including the flagship $2.9-billion Royal Canadian Equity Fund and the $250-million Royal Precious Metals Fund, the #1 ranked fund across the country for its 2002 net performance of 153%.
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Sonali Verma, Globe Investor: Hello, everyone. Thanks for joining today's discussion, and special thanks to John Embry for taking our questions. We're having some technical issues -- please bear with us as we resolve them.
Reader Osoborus writes: Once the derivatives market collapses early this fall, do you see the situation in the global economy further unraveling to the point where by money literally becomes worthless... All confidence is lost in the system.... and we return to a tumultous dark period of using gold and silver as means to partake in commerce.
John Embry: That's a rather apocalyptic view. I suspect that the derivatives market will be kept afloat by the government supplying whatever money is required to keep the losing side of the derivative trade whole so the winning side can be paid. This will ultimately lead to rapidly mounting inflation that will benefit gold and silver hugely.
A reader identified as T Horton writes: There is some concern that gold ETFs do not actual own the physical gold, does this mean that ETF companies can sell unlimited gold ETF units, and create an artificial supply of gold substitute?
John Embry: Unfortunately, yes. I strongly recommend that investors buy physical or paper entities where the gold backing is audited and verified.
The fact that a number of anti-gold organizations were the backers of gold and silver certain ETFs should have been the tip off. They most certainly want to absorb legitimate gold investment and thus mitigate the upward pressure on the price.
Ron Stickel writes: Are there any countries in the world that look like they may be considering backing their currency with gold. If so which ones?
John Embry: I believe that the Chinese, who think in terms of decades rather than quarters as we do in North America, are already contemplating this route.
They have a history of knowing what can happen to a fiat currency system and they aspire to be the world's number one economic power and a gold-backed yuan would assist in this goal. Russia is also a candidate but lack the financial muscle of the Chinese.
Bruce Roberts writes from Toronto: There are some who are predicting another significant bout of deleveraging this fall that might result in another marked US dollar rally. I'd appreciate your thoughts on the likelihood of such an event and what it could mean for both the gold price and precious metal equities in the short to medium term. Thank you.
John Embry: I think that is a legitimate concern but any further deleveraging would have such a catastrophic effect on the real economy that money creation by the authorities would go berserk, traditional financial markets would come under enormous pressure and real wealth would seek protection in precious metals.
A reader identified as Seeking Alpha writes: Lately there seems to be valid arguments from both the inflation and deflation camps on the economic outlook in the next year and beyond. Which side do you find more convincing and have the recent gold prices been reflecting one trend over another?
John Embry: I personally believe that inflation will prevail because in a totally fiat monetary system which we currently have, there is no restraint on money creation.
The existing deflationary pressures (too much debt, insufficient demand, etc.) will create the extreme monetary response that will ultimately create inflation.
People must remember hyperinflation is a currency even.
The gold market lurches from one side to the other, so I wouldn't say that it is currently favoring either to any great extent.
Anthony Kwong writes: What do think of the gold market in 3 months, 1 year and 5 year? My view is that the market is going to drop back to 700 - 900 within 3 months, and then back on. And the long run for the gold is positive, since China wants to buy gold as much as possible.
John Embry: I believe the gold market will be dramatically higher in all three time frames and I think there is a very small probability that gold will fall below $900 in the very near term. Monetary debasement is driving investment demand, western central banks are running out of available supply, eastern central banks, who are awash in dollars, want to buy and mine supply is cratering. We are close to lift off and the gold price at worst will trade at several multiples of the current price.
Nick Pankratz writes from St. Catharines, ON:
Gold stocks were pummelled last year in the October/November time frame including mine. (as was Sprotts gold and precious minerals fund)
My question is, if the March 2009 lows are re-tested in the general market in the months ahead as I believe they will be, will PM stocks experience the same fate as last time.
I used the beating of my portfolio as an opportunity to upgrade the quality of my gold stocks into a higher caliber of stocks, I only kept about 3 juniors that I believe in, and it wouldn't be the end of the world if I was wrong about them.
Should I hedge my positions with inverse etf's on the market, or some other strategy??? given that I feel the way I described about the general market going lower??
John Embry: I do not think there will be repeat in the gold share performance of last fall even if the general market undergoes a sharp fall. I say that because this time I believe the gold price will move sharply upwards in this environment unlike last year when it fell to $700. That isn't going to happen again. In fact, I suspect at that juncture, gold and silver will be seen as the only game in town and this should have a tremendous positive impact in their performance.
Don McAlpine writes from Elliot Lake, ON: Given current reservations about the stability of the American Dollar and considering China's concerns about American debt and balance of trade, is the yuan a better option than gold?
John Embry: Absolutely not. The yuan is a fiat paper currency. The recent Chinese bank lending orgy which has restarted their economy has, by definition, weakened the banking industry and this has implications for the currency.
I certainly prefer the yuan to most other currencies but in current circumstances, the entire world currency system in under suspicion and gold is a hard asset which isn't somebody else's liability.
Rob Ackerman writes: In the event that I decide to trade in my gold coins for cash, what is the way to get the best price? Would this method change in the event of a severe crisis?
John Embry: I would take them to a legitimate coin dealer. Unless, gold ownership were outlawed and you had to sell to the government (which I view as highly unlikely), I would say no.
L Davies writes: We heard from technical analysts to buy gold at the end of July. Do you agree and, if so, what do you consider a reasonable entry point for Barrick or Goldcorp?
John Embry: I think that we are very close to lift off. Today's downward thrust, which is, incidentally, orchestrated to make the U.S. bond auctions look better, may get rid of the weak speculators and clear the decks for a major upward move entering the fall.
I have never been a fan of Barrick due to its hedge book but I think buying Gold Corp. in the mid to high 30's represents a solid entry point.
Ed Wesetvik writes: Do you prefer gold coins to gold bullion? And if so, which ones? Thanks.
John Embry: I personally love gold coins and they tend to attract larger premiums, so I obviously prefer gold coins. I like the larger coins that contain at least one oz. of gold, Canadian Maple Leafs, Krugerrands, Austrian and Mexican coins. There are a lot to choose from. They are much more aesthetic to look at than a gold bar.
Radu Toma writes from Oshawa: It has always been your argument that physical gold is the Achilles' heel of those that would sell paper gold to 'cap' the price of gold. Now that it has been revealed that Comex rules allow 'settlement' in shares of gold ETF's (i.e. GLD or IAU) instead of phyiscal gold, how would this affect the ability of gold believers to increase the price of gold by buying up the physical supplies. What if they only get shares which surely are only partially backed by gold?
John Embry: Despite GATA's revelation of this information, the governor of Comex told a friend of mine that this in fact isn't true. To really believe Comex, I would like them to deny it publicly.
Nevertheless, one doesn't have to buy one's gold on the Comex, so this isn't a major impediment to physical gold demand overwhelming the paper sharks. However, it could delay the process as a Comex failure could be averted for a longer period if this, in fact, is true.
Brenda Dales writes: Is bullion better than gold stocks? I bought Kinross at $20.06 and Barrick at $52.48 . Do you consider them a sell or a hold? Would you suggest I keep both or is there more upside to one over the other. I am 68 years old and have some time to wait.
John Embry: I have preferred bullion over stocks over the past year and I believe you should always have some bullion in your portfolio because it lasts forever and stocks come and go. Having said that, I now believe that if bullion does what I think it is going to do in the next year (move up sharply), the shares at this juncture offer more upside, particularly good quality juniors.
Stefan Szary writes from Vancouver: In respect to fears of inflation, or even hyper-inflation, as a result of central government stimulus/bailout largesse and the (relatively) anti-climactic performance of gold, how or where do you see any inflationary pressures developing as North American job losses continue to rise and wages continue to fall?
Also, would it be a sound assumption that if serious inflation does develop, it would be more of a process rather than a event, that is, it will be a somewhat more gradual influence rather than an immediate one.
John Embry: I believe inflation/hyperinflation to be a currency event which historically has often unfolded in very weak economic climates which have led to excess monetary and fiscal stimulus. Thus, I have no problem with an inflationary problem developing even if unemployment worsens.
I believe inflation will start almost imperceptibly, then slowly gather steam before exploding. I would recommend you try and get a book called "When Money Dies" which is a graphic example of the process in Weimar, Germany.
D M writes: My question relates to protecting savings considering the world economic woes. Hypothetically if you had $100M in excess cash and wanted to protect yourself (at least in the short term) through this fall when many events seem that they will take place. potential interest rate increase, H1N1 peaking... What percentage of the $100M would you recommend investing in gold as apposed to staying cash savings?
John Embry: My approach personally has been to keep what I need for day to day cash necessities in cash and put the vast majority of the remainder in bullion. I personally view gold as a currency and with the paper currencies coming under increasing downside pressure, I want to be in the historic hard currency at this juncture.
Ed Wesetvik writes: It's good to see you here so that we can benefit from your tremendous knowledge of the precious metals markets. In your view, does current gold production meet demand this year, and next?
John Embry: Current gold production isn't remotely close to either this year or next year's demand. There has been a yawning gap between natural gold demand and mine and scrap supply for over a decade. Without central bank dispositions (mostly clandestine) the gold price would already be dramatically higher.
Yves Usereau writes from Montreal:
Yesterday, a person (who comes sometimes at tv show) told me this bearish opinion about gold:
1) USA would start to sell is gold?
2) Gold did nothing last year in the worst of the crisis
3) Gold will go lower, after the recession.
I don't agree with this opinion, but I would like to have yours.
John Embry: I think that the U.S. has already swapped or lent a significant proportion of their gold reserves (if they hadn't, they would willingly submit to an audit, which hasn't happened since the mid 50's) so I see this as a total non-factor.
Gold was actually up last year in one of the world's worst financial crisis.
This isn't a recession, it is more likely a depression.
I don't know who this individual proffering this advice is, but his knoweldge on gold doesn't seem extensive.
Elaine McEwen writes: My self-directed RRSP investment was affected by the downturn last year by about 25%. At that time, I decided to move most of it into precious metals stocks - AGF and Dynamic. Since October, this investment has gained about 77% and I am very pleased with that recovery.
However, now I have moved about 40% of my investment into guaranteed gold certificates (bank issue) and I am considering moving the other 60% into the money markets temporarily as my advisor doesn`t think I should have everything in my portfolio in gold and metals. We are in agreement that there will likely be another enormous dip in the market in September and October and the precious metals stocks will take a serious beating.
The question is whether to absorb the penalty fee and go ahead and move into the money markets for now and then buy back into precious metal stocks when the market bottoms again - or leave it as is and ride it to the bottom and up again.
John Embry: I personally would not be moving out of precious metals investments at this time. With the world governments prepared to move heaven and earth to keep things afloat, accelerating inflation is a far greater risk than a replay of last fall.
Zman writes: Last year you told us there would be a run on gold and a possible default on the Comex. I bought into bullion ....NO Comex default , but I am still holding bullion and want to buy more .
Where do you see the bottom for Gold in near future, where do you see it going to by years end and beyond?
John Embry: Sorry about that, these gentlemen at Comex are pretty resilient. I'm delighted you kept your gold and want to buy more. I believe that is the correct approach. I think at worst gold will bottom in the high 800's although I think that is the worst case not necessarily the most likely, will be comfortably in four figures by year end and will ultimately trade at several multiples of the current price. This is all about currency debasement because gold has been a constant for millennia.
Reader Bopwinkle writes: My question for John -- you think junior gold mining stocks are going to do very much better than bullion. Aren't the stocks caught up in how the economy does? if the economy tanks, the stocks tank with it?
John Embry: Not necessarily. Gold shares are often proxies for the gold price, although that wasn't the case last year. If the economy tanks, I think gold will explode as money creation will go berserk, and this time around I suspect gold shares will once again be levered proxies for bullion rather than just shares that go down with the overall market like last year.
Moez Esmaili writes: What is your outlook for silver?
John Embry: As bullish as I am on gold, I actually believe silver has more percentage upside in the intermediate term (ie. if gold goes to $1,500 per oz, I could see silver at $30 to $40 per oz).
Silver is poor man's gold and there isn't a lot of it out there. Thus, when the public makes a major move into precious metals, I think it might have a greater impact on the silver price. In addition, there is an obscene concentrated short position on the Comex and this could add fuel to the fire, if things really get moving on the upside.
Sonali Verma, Globe Investor: John, sincere thanks for all your time and for taking so many reader questions. We really appreciate it. And thanks to all of you who sent in questions -- it was very lively. Can't wait to do it again.