mamboni
11th November 2010, 07:26 PM
THE GOLD REPORT
John Embry: Die Was Cast Before Elections
Excerpted from: http://www.theaureport.com/pub/na/7829
TGR: In the October Investor's Digest, you said, "I firmly believe the primary reason Western central banks hold any gold today is for purposes of manipulation." If the government can manipulate the gold price, why are you so excited about gold?
JE: That's an excellent question. It's because they're running out of ammo. We'll know for sure when that time comes because the gold price will go up $100 in one day. I believe these banks don't have a fraction of what they purport to have because they have been lending, leasing and swapping it surreptitiously for years rather than selling it outright. Their gold has gotten into the markets through the back door, not through any overt policies that made it easy for the public to discern what they were doing. The vast majority of what has been leased or swapped will not be retrieved and, as a result, they're close to reaching the limit where they don't want to part with what's left.
The theory is that Western central banks own 30,000 tons of gold give or take. If they have a third of that, I'd be surprised. Many of them are starting to realize the error of their ways now. But their ability to influence the gold price is rapidly coming to an end. They're being pressured dramatically by the Eastern central banks that have made no bones about diversifying out of paper into gold. As far as I'm concerned, the Western banks already look extraordinarily stupid for what they've done; and they'll look even more stupid if they continue in this vein. I don't think they will. There's no better example than what's happened under the European Central Bank Agreement, where they were able to sell up to 500 tons of gold a year and after meeting their quota year after year, they slowed down dramatically in 2009 and stopped in 2010. They sold nothing, which indicates either they don't have it or have lost any appetite for selling it.
TGR: So, do the holders of that physical gold get all of the price appreciation or do the governments get some of it?
JE: No. When it gets loaned, particularly in a financial transaction, it goes to a bullion bank that sells it into the market; and the gold migrates to the Middle and Far East where the wealth is being created. It's gone, and the central banks counterparties can replace it only by going into the market and buying it from existing mining production or whatever inventory is available. But to do that would drive the price to the moon. I think a lot of these loans will be forgiven in the end.
TGR: In the Investor's Digest, you mentioned the IMF sale to Bangladesh. Obviously, the IMF is bearish on gold if it's selling that much, and people like Paul Walker with GFMS are also quite bearish on gold.
JE: To be fair, Walker's been wrong the whole way up.
TGR: But how do you respond to those who look at your argument and say, "No, the supply/demand fundamentals say this."
JE: Well, I think they hang that on two things. They say investment demand is transient, which means that paper money is going to regain its luster and people will want to hold it. That would require interest rates that give people a real return, though; and I can't see that happening in, say, the next two–three years. So the idea that investment demand is going to evaporate is preposterous. I would argue the other way. I think it will accelerate because, to this day, it's still the purview of only a limited number of investors. So, I think the demand side of their argument is dead wrong.
Conversely, on the supply side, I think two issues are debatable. For one thing, they seem to think there will be an unlimited mine supply of gold. Gold is a precious metal because it's hard to find, and most of the new stuff being found is around existing mines. Very few greenfields are being discovered. At the same time, existing mines—particularly the open pits—are being depleted at an alarming rate. So, I don't see any threat from higher mine supply over the next five years.
TGR: What's the other debatable issue?
JE: Scrap. This one is a little bit more controversial because if the gold price gets high enough, people might sell even more jewelry and anything else from which they can recover gold. But we see a lot of that today—all of these TV ads with jewelers screaming, "Sell us your gold, yak, yak, yak." Then they rip them off. I think people are wising up to that; so I don't see scrap—which is not that huge a factor to begin with—rising so dramatically it will have any significant impact on the overall supply/demand equation.
Over the last 15 years, central banks have pumped a lot of gold into the market and they've likely reached the end of their rope in that activity while Eastern central banks are becoming buyers. Rather than supply 1,000–2,000 tons a year into the market, the central banks will be taking gold out of the market. With everything else going on—namely more investment demand and no new mine supply—the supply/demand equation becomes enormously positive. The only way it can be balanced is dramatically higher prices. So, I don't see a negative aspect on supply and demand.
TGR: Point taken. But is there any way they could be right?
JE: They could be right if, suddenly, the world magically rights itself and the economy starts to grow with no inflation. I don't think that's going to happen.
John Embry: Die Was Cast Before Elections
Excerpted from: http://www.theaureport.com/pub/na/7829
TGR: In the October Investor's Digest, you said, "I firmly believe the primary reason Western central banks hold any gold today is for purposes of manipulation." If the government can manipulate the gold price, why are you so excited about gold?
JE: That's an excellent question. It's because they're running out of ammo. We'll know for sure when that time comes because the gold price will go up $100 in one day. I believe these banks don't have a fraction of what they purport to have because they have been lending, leasing and swapping it surreptitiously for years rather than selling it outright. Their gold has gotten into the markets through the back door, not through any overt policies that made it easy for the public to discern what they were doing. The vast majority of what has been leased or swapped will not be retrieved and, as a result, they're close to reaching the limit where they don't want to part with what's left.
The theory is that Western central banks own 30,000 tons of gold give or take. If they have a third of that, I'd be surprised. Many of them are starting to realize the error of their ways now. But their ability to influence the gold price is rapidly coming to an end. They're being pressured dramatically by the Eastern central banks that have made no bones about diversifying out of paper into gold. As far as I'm concerned, the Western banks already look extraordinarily stupid for what they've done; and they'll look even more stupid if they continue in this vein. I don't think they will. There's no better example than what's happened under the European Central Bank Agreement, where they were able to sell up to 500 tons of gold a year and after meeting their quota year after year, they slowed down dramatically in 2009 and stopped in 2010. They sold nothing, which indicates either they don't have it or have lost any appetite for selling it.
TGR: So, do the holders of that physical gold get all of the price appreciation or do the governments get some of it?
JE: No. When it gets loaned, particularly in a financial transaction, it goes to a bullion bank that sells it into the market; and the gold migrates to the Middle and Far East where the wealth is being created. It's gone, and the central banks counterparties can replace it only by going into the market and buying it from existing mining production or whatever inventory is available. But to do that would drive the price to the moon. I think a lot of these loans will be forgiven in the end.
TGR: In the Investor's Digest, you mentioned the IMF sale to Bangladesh. Obviously, the IMF is bearish on gold if it's selling that much, and people like Paul Walker with GFMS are also quite bearish on gold.
JE: To be fair, Walker's been wrong the whole way up.
TGR: But how do you respond to those who look at your argument and say, "No, the supply/demand fundamentals say this."
JE: Well, I think they hang that on two things. They say investment demand is transient, which means that paper money is going to regain its luster and people will want to hold it. That would require interest rates that give people a real return, though; and I can't see that happening in, say, the next two–three years. So the idea that investment demand is going to evaporate is preposterous. I would argue the other way. I think it will accelerate because, to this day, it's still the purview of only a limited number of investors. So, I think the demand side of their argument is dead wrong.
Conversely, on the supply side, I think two issues are debatable. For one thing, they seem to think there will be an unlimited mine supply of gold. Gold is a precious metal because it's hard to find, and most of the new stuff being found is around existing mines. Very few greenfields are being discovered. At the same time, existing mines—particularly the open pits—are being depleted at an alarming rate. So, I don't see any threat from higher mine supply over the next five years.
TGR: What's the other debatable issue?
JE: Scrap. This one is a little bit more controversial because if the gold price gets high enough, people might sell even more jewelry and anything else from which they can recover gold. But we see a lot of that today—all of these TV ads with jewelers screaming, "Sell us your gold, yak, yak, yak." Then they rip them off. I think people are wising up to that; so I don't see scrap—which is not that huge a factor to begin with—rising so dramatically it will have any significant impact on the overall supply/demand equation.
Over the last 15 years, central banks have pumped a lot of gold into the market and they've likely reached the end of their rope in that activity while Eastern central banks are becoming buyers. Rather than supply 1,000–2,000 tons a year into the market, the central banks will be taking gold out of the market. With everything else going on—namely more investment demand and no new mine supply—the supply/demand equation becomes enormously positive. The only way it can be balanced is dramatically higher prices. So, I don't see a negative aspect on supply and demand.
TGR: Point taken. But is there any way they could be right?
JE: They could be right if, suddenly, the world magically rights itself and the economy starts to grow with no inflation. I don't think that's going to happen.