May 7, 2014
John Embry said last month that the rally at the beginning of the year was encouraging, but to remember that sentiment for gold was still extremely negative. He says that the stock market’s new highs are a result of the Fed ‘jamming cash into the economy.’ With nowhere else to go, cash is creating bubbles in stocks, real-estate and bonds, he warns.
Hello John. Gold has fallen back down over the last month. Do you think optimism for a fast recovery in gold has fizzled out?
John Embry:I believe that is probably a fair assessment of what has happened since. I think that the decline in the last month has hurt confidence in the West. But I can assure you that the Eastern interests are rubbing their hands and piling into all the physical gold they can get. Once they realize that there is a limited amount remaining for them to pour their U.S. dollars into, I believe the price will move up sharply.
I think that people should be focusing more on the eventual upside — which is going to be huge–than on the short-term downside which is due to the paper markets.
What is your view of gold in the next few years? What if we continue to have low inflation, or even deflation? How will gold fare?
Well, I don’t think that the situation that we have here is sustainable. We are going to have to create a sufficient amount of money to keep the debt load afloat. We are going to have to keep interest rates low because if those basic requirements are not met – that is lots of liquidity and maintenance of low interest rates – the system is going to collapse.
I think that’s why you own gold; because the odds favor something going badly wrong – a ‘black swan’ if you like. And to continue they will have to jam liquidity, and at some point there will be a massive recognition that the money is no good and people will want out into real things. So I don’t worry about low interest rates and low inflation keeping gold low.
Low interest rates suggest that there is a low demand for capital in the economy. High amounts of cash on corporate balance sheets also indicate that companies are no longer finding profitable opportunities to deploy cash. Do we need to see a higher demand for capital in order to see higher inflation and rising interest rates?
Well, yes, companies are finding it hard to re-deploy capital – and for good reason. There are just not enough credit-worthy borrowers or investment-worthy opportunities to exploit. This happens because the economy is so weak. I don’t believe it for a minute that the economy is as strong as people suggest. As the economy continues to weaken, inflation becomes a currency event.
It’s not inflation like in the 70s’, where a higher demand for things led to prices going up. This time, it’s the currency that is being severely debased and that is what will lead to – I believe – hyperinflation before this is over.
In a weak economy, where there is nowhere for companies or banks to deploy capital, could cash continue to accumulate in banks and corporate balance sheets, preventing this cash from causing inflation?
Well, I guess that could happen. But the question becomes: Why would you want cash, when it generates no return?
I mean, I don’t accept the fact that there is no inflation anyway. I am a big believe in John Williams’ShadowStats. I think his inflation number may be too high at 5 percent or so right now.1 But the real number is probably somewhere between that and what they report. So if you’re putting your money in bonds, particularly in the short-term ones, you’re losing purchasing power every single day that is sits there.
This article was posted: Wednesday, May 7, 2014 at 3:50 am