Introduction: John Embry is a legend in the both finance and mining for his ability to straddle the worlds of precious metals and mainstream investing. An industry expert in precious metals, he has researched the gold sector for over thirty years and has accumulated industry experience as a portfolio management specialist since 1963. He has spent much of his career supporting the integration of gold and silver into personal and institutional portfolios, and today his insights continue to be sought out by the industry's major private and public players. Embry's career expanded once again when he joined Canadian-based SAM as Chief Investment Strategist in March 2003 with focus on the Sprott Gold and Precious Minerals Fund and the Sprott Strategic Offshore Gold Fund, Ltd. He plays an instrumental role in the corporate and investment policy of the firm.
Daily Bell: You are regarded as one of the best minds in the hard-money and mining business. How did you become interested in finance and specifically in mining?
John Embry: When I was graduating from college in the early 60's, I realized that an abiding interest in women, alcohol and sports wasn't going to pay the bills. I also subscribed to the old adage "if you want to make money, go where the money is." Fortunately, a close fraternity friend of mine was in the investment department of a large insurance company in my hometown of Winnipeg and he convinced me that it was a good place to get started in the investment industry. He was following the mining industry at the time and when he left two years later, I took over his responsibilities and I have been involved in the mining game ever since.
Daily Bell: Can you give readers some background about yourself? Are you contemplating any new ventures?
John Embry: At my age (68), the only new venture I'm planning is making sure I wake up every morning. I have spent 46 years in the investment business and I have been in the pension fund business, the mutual fund game and now I am Chief Investment Strategist at Sprott Asset Management, Canada's largest hedge fund manager. I was heavily involved in gold in the 70's and convinced the insurance company to get involved, which was regarded as very avant-garde in those days.
While, in my mutual fund incarnation at the Royal Bank in Toronto, I took over management of a precious metals fund in early 1994 and gradually became a full time specialist in the sector.
Daily Bell: Certainly you have worked for many prestigious investment and banking firms. How have your views about the industry evolved?
John Embry: The industry today has evolved so much that I can barely recognize the business I originally started in. One of the many changes is the instantaneous availability of massive quantities of information compliments of the Internet. However, I certainly don't think all the changes are for the better. There is far too much leverage, infinitely too many toxic derivatives, way too much program trading and the morality in the industry is at an all time low. There is going to be a huge price to pay for these abuses.
Daily Bell: Is it this sort of leveraged finance that caused the economic crisis in your opinion?
John Embry: Very simply, excessive leverage spawned by inappropriately low interest rates and exacerbated by derivatives. The sub-prime lending with Liar's Loans, No Documented Income, false appraisals on which 100% or more was lent didn't help either. I believe history will judge Alan Greenspan to have been the worst central banker of all time and hearing him attempt to weasel out of his past mistakes makes me ill.
Daily Bell: How will the financial crisis end?
John Embry: We are currently facing a huge deflationary problem due to the excess debt but with absolutely no restraint on money creation in a pure fiat currency system, I firmly believe the ultimate outcome will be hyperinflation, which is a true human tragedy.
Daily Bell: Will the dollar still be the reserve currency?
John Embry: Not a chance. The U.S. dollar is doomed. The Chinese, America's largest creditor, are already making their discontent known and are doing unilateral deals with other countries, that effectively eliminate the dollar. When a country that has the responsibility of managing the world's reserve currency has a federal budget deficit that amounts to 13% of GDP (this year's projection which may be underestimated) the end is near.
Daily Bell: Will there be increased centralization of banking and regulation worldwide?
John Embry: I believe there will be a move in this direction but it remains to be seen how effective it will be.
Daily Bell: Is this a good thing, in your opinion – the various remedies that have been put forth?
John Embry: In a situation this dire, I question whether there are any remedies in the near term. There is an element of locking the barn door after the horse has escaped in all the current sound and fury. The fact they now want to regulate OTC derivatives is a classic case. This should have been done before they totally poisoned the system.
In the end, I'm afraid we will have to experience a horrific clean-out of most of the world's excess debt and I expect that we will reintroduce many of the restrictions, which originated in the thirties. The fact that a number of these restraints will be the same as the ones that were removed during the Clinton and Bush administrations (Glass-Steagall et. al.) tells you all you have to know about that era.
Daily Bell: Would you like to see a return to a gold standard of some sort?
John Embry: I expect when the full catastrophe of the pure fiat currency system is realized, gold will have to be reintroduced into the monetary system to restore confidence.
Daily Bell: In your analysis, do you use an Austrian free-market approach?
John Embry: I most certainly do. I believe the Austrian School of Economics explains the whole subject of economics much more rationally than anything else. If people had paid attention to the tenets of the Austrian School, this whole mess could have been averted.
Daily Bell: Do you utilize technical analysis?
John Embry: Only from a timing perspective although if a technical opinion is sharply at odds with my fundamental analysis, I tend to closely review my fundamental assumptions to make sure I'm not missing anything.
Daily Bell: Where do you see gold headed pricewise?
John Embry: The extent of the debasement of all the world's currencies will be the ultimate determinant of how high gold can go. In reality, gold is a constant and it is the value of paper money that declines. In this instance, the world's reserve currency is doomed and I don't see another currency that appeals to me. Thus, I expect gold priced in U.S. dollars to trade at many multiples of the current price before this saga comes to an end.
Daily Bell: How about silver?
John Embry: As much as I love gold, I actually think silver will outperform it pricewise, at least in the next few years. Known as the "poor man's gold", I think it will reassert itself as money and with continuing robust demand from industrial and medical uses, I suspect it will be in very short supply. Unlike gold, most silver is consumed so shortages could develop very rapidly.
Daily Bell: Are you pleased with the state of the mining industry in Canada?
John Embry: Relative to most other constituencies, absolutely. Canada has a long history of mining and government is very supportive of the industry, most particularly in Quebec.
Daily Bell: Are there any regulatory aspects you would like to see improved?
John Embry: I think Canada's regulations are, by and large, pretty good, although I think the requirements of the 43-101 designation for emerging ore-bodies can be unduly detrimental to exploration companies.
Daily Bell: Is the industry generally over-regulated?
John Embry: From a regulatory aspect, no. From a prospectivity point of view, yes. A lot of the low hanging fruit has been plucked in Canada over the past hundred years so more and more of the exploration activity is taking place in areas that were previously discovered in the world. The obvious problem is the large, new ore-bodies discovered in unpalatable areas.
Daily Bell: We agree. Unfortunately, there may be better regions in the world to look at then Canada for mining these days. China comes to mind.
John Embry: China is fascinating from a prospectivity point of view but I'm still a little uncomfortable with their totalitarian government. It remains to be seen how successful foreigners will ultimately be as the Chinese gain more expertise in the sector.
Daily Bell: What would be an ideal portfolio in the current environment?
John Embry: I would always have bullion at the core of a portfolio, to the extent of perhaps 20-25%. However, I would not use ETF's in general because I'm not sure the gold is all there. Today, I would be putting more emphasis in the stock portion of my portfolio on smaller producers and advanced exploration plays because I think they are dramatically cheaper than the seniors and have far more upside.
Daily Bell: How long will this leg of the business cycle continue?
John Embry: If you mean "the green shoots" recovery, not all that long. There will be periodic economic rallies but this is going to be a long, slow workout and we will be very fortunate to avert a serious depression before sustainable growth can be restored.
Daily Bell: What is going to happen in the near future regarding the current financial system?
John Embry: I'm not totally sure but with the number of toxic derivatives still in the system that have not been recognized, I'm not at all optimistic that the current banking system will survive.
Daily Bell: What can people do to protect themselves?
John Embry: I would suggest having ample exposure to gold and silver bullion and lots of quality shares in both industries. Besides that, get out of debt as fast as possible and own hard assets not financial assets.
Daily Bell: Do you see foresee better times ahead for junior mining stocks?
John Embry: I think we are coming into a spectacular period for junior mining shares. When money comes to this sector and we're on the cusp of that happening, it is going to have an outsized impact on any junior stock of merit.
Daily Bell: On behalf of all of our readers, we thank you for sharing your views with us.
We are gratified to bring you this interview with John Embry because he makes statements that are very much in line with the sorts of insights that the Daily Bell regularly provides. Like the Daily Bell, Embry is able to parse both the deflationary and inflationary aspects of the current crisis. Indeed, the two elements of monetary direction can exist both simultaneously and serially, though this seems to strain the brains of most economic commentators.
Additionally, Embry identifies derivatives as one of the severe dangers the system faces. We have been fascinated to see how little coverage derivatives receive in the mainstream media, even though a flavor of these derivatives imploded at AIG and cost the American federal government (and taxpayers) some $100 billion, and counting.
Embry is fairly scathing when it comes to the current regulatory regime, and we agree with him that it has been lamentable. He also expresses skepticism when it comes to the regulatory correctives that have been announced by the G20, etc. We only part company from him when it has to do with any affection for what was.
We don't believe that America's Glass Steagall (the one-time separation between commercial banking and investment banking) was ultimately responsible for the current economic crisis. Here, for instance, is a narrative on Black Friday in 1869. Once again, monetary stimulation is involved in financial destabilization. We can go through a laundry list of such incidents – proving only, we guess, that you don't need a central bank to muck things up so long as you've got an aggressive central government and greedy politicos.
Black Friday, September 24 1869, also known as the Fisk/Gould Scandal, was a financial panic in the United States caused by two speculators' efforts to corner the gold market on the New York Gold Exchange. After the war ended, people commonly believed that the U.S. Government would buy back the "greenbacks" with gold. In 1869, a group of speculators, headed by James Fisk and Jay Gould, sought to profit off this by cornering the gold market. Gould and Fisk first recruited Grant's brother-in-law, a financier named Abel Corbin. They used Corbin to get close to Grant in social situations, where they would argue against government sale of gold, and Corbin would support their arguments. Corbin convinced Grant to appoint General Daniel Butterfield as assistant Treasurer of the United States. Butterfield agreed to tip the men off when the government intended to sell gold. … Henry Adams, who believed that President Ulysses S. Grant had tolerated, encouraged, and perhaps even participated in corruption and swindles, attacked Grant in an 1870 article entitled The New York Gold Conspiracy.
The more things change, the more they remain the same. Regulations, or lack thereof will not make a great deal of difference in our estimation. But central banking is an invitation to Black Fridays on a regular basis. It is in our opinion the institutionalization of financial instability. We have seen once again in the 2000s that its remedies are insufficient and its dangers continuous.
Unfortunately, Embry himself thinks there may be no recovery this time around from what has occurred. It must be time, therefore, for a new monetary regime. Given the depth of his experience and the breadth of his wisdom, who are we to disagree?