Martin Hutchinson on Mar 10, 2010 05:05AM

Sell the US, Buy Germany

Low debt, tight credit, and a genuine terror of money-fed inflation...

IF YOU ARE a U.S. investor, writes Martin Hutchinson for Money Morning, you can't be happy about the prospects for your portfolio.

After all, you're mostly trapped in an economy with a gigantic and dangerous financial-services sector, a central bank that can't stop itself from printing money and a government that overspends wildly.

But there is an answer: You might consider allocating some of that "at-risk" capital to a country that has none of those problems ? Germany.

Germany has a banking system, of course, but that banking system is not the overgrown financial-services monster that we have here in the United States (or, for that matter, in Great Britain). It's impossible to get a subprime mortgage in Germany: Even now ? and even after mortgage levels have crept up in recent years ? the average down payment for the purchase of a new home in this key Eurozone nation is 50%. As a result, the homeownership rate in Germany is only 43%, the lowest rate in the European Union.

That's actually healthy; far less of Germany's capital is tied up in unproductive housing and the savings rate is correspondingly higher. (Let's face it, most Americans don't accumulate 50% of the cost of a house in savings over their lifetimes ? unless forced to do so in a company pension scheme).

What's more, this more-modest home-ownership rate reduces the impact of speculative bubbles, since the wealth of most folks isn't tied up in rapidly escalating house prices.
So while the German banking system had its own real estate problems in the late 1990s, the only parts of it that got in trouble in 2008 were those banks that had rashly ventured overseas and got caught up in the US disaster.

Up until 1999, Germany had the most admirable central bank in the world ? the Bundesbank. This was a much better set up than the US Federal Reserve. It was owned by the states instead of by the national government, so political interference was much more difficult. It was a single institution, instead of a collection of regional banks, so it was much easier to manage. And it had the single objective of avoiding inflation (Germany having bad memories of the Weimar hyperinflation of the 1920s) so did not get sidetracked into attempting Keynesian management of employment. As a result, Germany's currency ? the Deutsche Mark ? was a beacon of stability during the inflation-ridden 1970s.

In 1999, control of Germany's monetary policy passed to the European Central Bank (ECB). The ECB is not as solid as the Bundesbank, but it still beats the Fed. The ECB expanded the money supply much less than did the Fed from 2002-07, and it has issued much less monetary stimulus since the crash. Consequently, there is far less danger of inflation in Germany and the Eurozone in general than there is in the United States.

Yes, there's the possibility that German taxpayers might have to bail out Greece, but the same possibility exists in the United States with respect to California, which is much larger.

However, the most important advantage for Germany over the United States ? in fact, over all the other major industrial economies ? is its superior fiscal policy. When the talk of "stimulus" first appeared in late 2008, Peer Steinbruck ? a Social Democrat who was then serving as Germany's finance minister ? rudely described it as "crass Keynesianism". As a result, Germany did very little stimulus, and so still has a budget deficit of less than 5% of gross domestic product (GDP), in spite of the recession.

Last September, the German electorate decided that even Steinbruck was too socialist, and so elected a coalition between Angela Merkel's Christian Democrats and the Free Democrats, a free-market party that is even more opposed to public spending than Merkel.

The effect of this has been to push Germany even more firmly into the fiscal-retrenchment camp. The German parliament lopped an extra ?5.8 billion ($8 billion) off public spending before finalizing the 2010 budget. No pork barrel waste there!

The result has been a very brisk economic recovery, with no inflation and no significant risk of "crowding out" the private sector. Manufacturing orders were up a strong 4.3% in January, far more than had been expected, and are now 19.6% ahead of where they were a year ago. Unemployment is 8.2%, well below the US level, while Germany's current-account surplus is a massive 5.2% of GDP.

With competitive manufacturing, a business-friendly government and plenty of domestic capital, Germany is about as healthy an economy as there is in the world today and is thoroughly underrated by US and British analysts. Its stock market is trading at a fairly demanding 19.7 times earnings, according to The Financial Times database. But that's lower than the US market multiple of 20.0 times earnings. And Germany has better near-term prospects.

You might want to think about owning some of Germany's promise.

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Dan Denning on Mar 10, 2010 04:55AM

The Case Against Deflation

The collapse of shadow banking adds up to massive inflation, not least for Gold...

SINCE WE have little interest in joining the speculative party going on in the stock market at the moment ? other than in the best precious metals and "disruptive technologies" stocks ? the task of this Daily Reckoning is to prove why the coming collapse of the shadow banking system is not deflationary but inflationary and, among other things, bullish for Gold, writes Dan Denning in Melbourne, Australia.

If that's not the sort of discussion that interests you, you might want to go take a powder or read a good book. These are murky waters we're wading through. So we'll do our best to clear them up for you, starting with the case against deflation.

All good debates begin with a proper definition of terms. Rather than defining deflation in our own way, we'll leave it up to one of its most consistent and articulate (and accurate) advocates, Robert Prechter. He's written about it for years, and in a recent video he says...

"The next big phase [in the cycle] is a credit implosion where people who are debtors are going to be scrambling for Dollars to pay off their debts and the creditors are going to be dunning the debtors to pay them back...The scramble will be for Dollars, not for things."

The investment outcome of Prechter's scenario is bullish for the US Dollar and US Treasury bills. Because, he says, "the chances of default are low."

Prechter's argument is based on the idea ? which we happen to believe ? that the US Federal Reserve is unable to prevent falling asset values. This would lead, by Prechter's reckoning, to falling stock, commodity, and real estate values.

All of that seems right to us here at The Daily Reckoning so far. The deflationary argument depends on the collapse of both the shadow AND the real (deposit taking) banking system. The shadow banking system is the murky world of credit, securitization, and derivatives which currently supports and/or holds some $600 trillion in assets.

Yes that's trillion with a "T".

Most of these are interest-rate and credit derivatives. As we learned in the last two years, the big risk here is to institutions which owe ? and also which own ? these obligations amongst one another. In our view, the degree of interconnectedness among these obligations (they still aren't unwound) makes the entire global financial system vulnerable to a systemic shock and/or total collapse.

It nearly happened last time with Lehman and frankly not much has changed since. A good old interest rate spike that's not in anyone's model might be the sort of thing that precipitates the next crisis. After all, that's the way these things generally begin.

Now, you could make the argument that it shouldn't really matter to the real economy if a bunch of global institutions find out they can't settle their obligations to one another. Why not just forget the whole mess and start other? After all, most of these derivatives are just insurance policies of some sort. Can't we just cancel the policy?

Probably not. These positions are held in conjunction with myriad leveraged bets on the direction of other asset prices. They are hedges. No one is going to walk away from them. But more importantly, the connection between the shadow banking system and the real banking system is much more substantial than you might first imagine.

So much of today's funding, financing, and lending is done by the shadow banking system through securitization and money markets and income and mortgage trusts. The real economy is tied to the shadow banking system in just the way that you are tied to your own shadow. And the real, deposit taking, depositor (taxpayer)-insured banking system is not much better off.

For example, my colleague Porter Stansberry reports that in the United States, some 7.1% of commercial real estate loans are more than 90 days overdue. The FDIC reckons that over 700 US regional and local banks are "danger" banks. The reason is that these banks own mostly commercial real estate. It's their main asset. And unlike their money-centre big brothers on Wall Street, these banks aren't going to be recapitalized or bailed out at taxpayer expense.

Students of the Great Depression will know that widespread bank failures led to a contraction in the money supply. Banks, more than the central bank, are the engine of money and credit growth in a fiat money system. Take away several hundred banks, and you get lenders not making loans. Money supply shrinks. Cash and Treasuries gain in value.

In fact, when you couple the wounded regional banks in the US, who are massively exposed to one dangerous asset class, with the potential collapse of the shadow banking system from another interest rate/liquidity/solvency shock, you begin to wonder how deflation is avoidable at all in the near future.

We have a labored three-part answer. We're going to lay it on you now. It begins with the destruction of the shadow banking system. It accelerates with the paralysis of the regular banking system. And it concludes with deliberate devaluation of the currency via monetary and fiscal policy to make up for a completely destroyed credit system.

Granted, it probably sounds absurd that you can have a $600 trillion wipe-out in the shadow banking system and somehow get inflation. But there are two points to make here.

First, it's hardly believable that an institutional panic and bank run in the shadow banking system (what happened last time) would actually boost confidence by individuals and consumers in the overall banking system.

True, it might increase people's preference for liquidity and cash. Stocks, real estate, and bonds would fall. But another swift collapse in the shadow banking system would be a hammer blow to already fragile confidence in our financial system, including the value of paper money itself.

But a more technical response is that as the shadow banking system is unable to finance economic activity and speculation, either that activity goes away (a Greater Depression) or someone else tries to fill the gap. We'll assume for the moment the regular banks won't do it. That leaves the government.

And in fact, that is what you had in the US following the last crisis. You got an alphabet soup of Fed-backed programs to provide all sorts of credit...to students, to money markets, to car companies, to corporations. This list grows longer by the day. And what it means is that the only provider of credit in a post-shadow banking world is the public sector: the Fed and the Treasury.

Whether these are loan guarantees or outright loans or the purchase of securitized mortgages (Fannie and Freddie) it amounts to the same thing: a huge transfer and burden to the public sector balance sheet. Whether it's monetization or guarantees that add to Federal liabilities, both are Dollar bearish. The transfer to the public sector then, results both in destruction of asset values and inflation in the currency.

But wait! You can't have inflation if there's no one to make loans and use the money multiplier to turn growth in the monetary base into new Federal Reserve Notes. That is, if the shadow banking system collapses, won't this lead to the same no-risk paralysis with the big banks that has led to their holding trillions of Dollars in excess reserves with Central Banks?

Why yes, it will. But this also argues for inflation. Here we're going out on a limb. But what we're arguing is that as the private sector is less able or willing to dole out credit into the economy, we're entering a world where the government is going to bypass the middleman and do the job itself.

This happens in three ways. First, the government can buy securitized assets to fund non-bank lenders. The AOFM does this in Australia to support housing prices and non-bank lending to first home buyers. It's done in the State at a much more comprehensive level. In effect, the entire American mortgage market has been nationalized with the government guaranteeing and buying trillions in mortgages.

This is the future. More nationalization of key lending institutions. If the private sector won't do it, the Feds will. But at great cost. Each new loan guarantee weakens the public balance sheet and the currency. Thus the retreat of the banks from credit creation hastens the day where fiscal and monetary policy are forced to be more transparently absurd and redistributive.

The second way in which the government becomes a lender is through extended unemployment benefits. The dole. In some States, it's possible to receive 99 weeks of unemployment benefits. This doesn't mean dole bludging has become a full time job. But because the structural changes to Western labor markets wreaked by globalization are wage deflationary, then to us (at least) this means a larger regular expenditure on the unemployed. The US is headed the way of Europe, with higher structural unemployment. Whether it can afford to pay for this while fighting two wars, spending a $1 trillion expanding health care coverage, and preparing for an increase in entitlement payments...well, you do the math.

The net result of the increased burden on the public sector in supporting private incomes is a weaker currency. It always comes back to that. And it's true for the Euro, the Yen, and the Dollar. It's true, in fact, for all paper money. This is why we believe the end of the super cycle in paper money is bullish for precious metals (not deflationary).

The third way in which the government bypasses the traditional banking sector to get money into the hot little hands of consumers has already been suggested by Ben Bernanke: via helicopter. And this really is the greatest argument against the deflationary theory.

In one sense, Bernanke was right. The Fed can create an infinite amount of digital Dollars. It can expand its balance sheet infinitely too. It can buy assets directly. It can buy gold mines. It can probably create a market that securitizes future consumer wages and pays you now for them. You literally mortgage your wage-earning future (or perhaps you get an early pay out on your social security).

The only real restrictions on the Fed's ability to create money are rising bond yields (market discipline on currency mismanagement) and political interference. On the first issue, the Fed has some covering fire. Global investors have to own something. And right now they prefer the Dollar. Unless the Fed does something radical and reckless, it can expand its role in providing credit directly to the real economy without doing huge damage to the Dollar...mostly because there are so few other good options.

Obviously we think gold is a good option. But for nations like China with trillions locked up in Dollar-denominated assets, what options are there?

You could argue that the US Congress and the President would not allow the wilful debasement of the currency via an expanded Fed role in direct lending. But we think just the opposite. Those ass-clowns will be begging for it.

When commercial real estate blows up regional banks, we predict you'll see the President declare victory in Iraq and Afghanistan within months, bring the boys home, and cut defence spending by 30%. The money will pour into new lending and "jobs" programs to support the economy. Fiscal and monetary policy will work hand in glove to pump funny government money directly into the consumer economy. The only result there can be is hyperinflation.

So, it's possible ? likely even ? that you're going to see across the board falls in stocks, real estate, bonds, and commodities....AND inflation. Whether we got the proper sequence right, we're not sure. But the combination of a shattered shadow banking system, a paralyzed banking system, and a terrified government certainly do add up to massive inflation.

Ready to Buy  Gold...?

Bill Bonner on Mar 09, 2010 03:43AM

Gold ? a "Real Bull Market"

People really are Buying Gold, but the GDP growth story is fake...

As I was floating down impassible rivers
I no longer felt myself steered by the haulers...
- Arthur Rimbaud, The Drunken Boat

The NEWS PUSHES against us like a gentle wind, writes Bill Bonner in his Daily Reckoning.

Pending house sales are bad. Consumer spending data is good. Unemployment is bad. Manufacturing is improving.

The Dow meantime rises, but without much conviction. It can't seem to make up its mind. We thought it had headed down decisively a few weeks ago...and then, it stabilized...and wandered about. Gold has more sense of destiny about it. It's been in a bull market for the last 10 years, and shows no sign of wanting to do anything else.

Yes, it lost $11 yesterday, but still trades at $1122...not that far from its all-time high. Gold is in a real bull market. As near as we can tell it is still in the developing stages. There are a few old gold bugs around. But the public is not yet talking about Buying Gold. Investors are not yet adding major positions in gold to their portfolios. Ordinary people are not yet expecting gold to go to $5,000 or $10,000 an ounce.

Still the news keeps coming ? the opinions, the rants, the data, and the theories.

This way and that...we begin to feel like a "drunken boat". That was the title to a poem written by a 17-year-old Frenchman named Arthur Rimbaud. It describes how we meander. We are driven by the winds...and pushed by the back-eddies. Turning our bow this way, and then that way...never quite sure what direction we're going...or what to think. No one is in control, and still, the current continues...and we keep heading downstream...carried by the great river...always moving along.

One day we're fascinated by what is going on in Japan. The next day it's China. Some days we think we might somehow muddle through...on others, we're sure something is going to blow up any minute. But that river just keeps rolling along...and we're on it.

Where does it lead? Well, that's the point. We're not sure. All we're sure about is that it doesn't lead where most people think. They think they see a 'recovery'. Forget it. Won't happen. We could have another speculative period...but it won't be like the Bubble Epoch of 2005-2007. Houses would have to go up 20% just to get homeowners' heads above the water. Then, maybe they could borrow and spend like it was 2005 again...but that's not going to happen. People don't have the incomes, or the credit, to bid up house prices again.

"Employment of Adult Males at Record Low," says a headline from the Wall Street Journal. here does that lead? We're not sure...but we don't think it leads to 'growth' in the US economy. Instead, it leads to bankruptcy, deflation...and maybe insurrection.

And what about the Chinese economy? Isn't that growing at breakneck speed ? over 10% per year? The trouble with breakneck speeds is that you do break your neck. China should slow down...or it's going have an accident. And if it slows down, the whole world slows down with it.

And as to that 'growth' ? it's counterfeit anyway. It's not real growth; it's ersatz growth, caused by greater and greater government involvement and spending. The feds (the haulers) pretend to be in control. They want us to believe they are in control. But they are out of control themselves!

Can increasing government spending really make people more prosperous? Show us an example!

Ready to Buy  Gold...?

Adrian Ash on Mar 09, 2010 03:36AM

Gold Demand Update

Down in tonnes, strong in Dollars, the gold demand story for 2009 isn't so simple...

WITH GOLD reaching new all-time highs against the Euro and holding well above $1100 an ounce for US investors, it seems one thing is certain, writes Julian Murdoch at Hard Assets Investor.

Gold demand has never been higher. Or has it?

Last month, the World Gold Council released its latest supply and demand report on the yellow metal, and it revealed more than a few surprises. Because in reality, total gold demand actually fell in 2009, down 11% year-over-year by volume. But due to the higher average price per ounce in 2009, the Dollar value of gold demand remained roughly the same from 2008.

Demand for gold comes from lots of different places: bars and coins, jewelry, dentistry, electronics, some minor industrial uses. And while some applications inherently drive demand more than others, it's interesting to see how demand has shifted from quarter to quarter.

For starters, as the World Gold Council's Gold Demand Trends report shows, investors in Gold ETFs just aren't having that big an impact on gold's overall demand. In fact, so far in 2010, investment into the big exchange-traded gold-backed trusts has been sluggish.

Gold Bullion held by the SPDR Gold Trust (NYSE Arca: GLD) has fallen to 1,115.51 tonnes ? down 1.6% for the year. That's a big change from the 45% inventory increase GLD saw last year. But that 45% figure is misleading. Taken as a whole, 2009 was a great year for GLD and other Gold ETFs, but new investment demand dropped precipitously over the next three quarters, and although it still rose 87% year-over-year in 2009, ETF demand long term was definitely on the wane.

Even those folks buying physical Gold Coins and bars backed off the gas pedal after the insane demand of the 2008/2009 fall and winter. As ETF investing dropped 67% from Q4 2008 to Q4 2009, so too did so-called bar hoarding ? down 55% year-over-year. Even coin sales, which remain constrained by greater supply concerns, were down 8% year-over-year.

In contrast to new Gold Investment demand ? at least by weight, which fell in 2009 while holding steady in cash terms ? we began to see some slight indications of recovery in jewelry demand last year.

Although the rebound remained slow, some areas such as China showed year-on-year growth; the country saw a 6% increase in gold tonnage demand, which translated to a 19% increase by value.  But we shouldn't get carried away. Most markets didn't fare nearly as well, with gold jewelry demand in tonnes dropping 20% for the year and 10% in value. In fact, electronics was the only sector that saw year-over-year gains in demand in Q4 2009.

The World Gold Council cites the economic downturn as a good thing in this case, as it led to a decline in overall electronics inventories. That, in turn, resulted in a modest uptick in semiconductor sales for 2009, which raised immediate demand for gold 25% over Q4 2008. Still, applications where gold remains optional ? like dentistry ? continued to suffer, given the high prices. Dentistry demand fell 5% year-over-year; other industrial applications were down 13%.

According to the World Gold Council, total gold supply was up 11 percent year-over-year in 2009, primarily due to a spike in recycled gold entering the market in the first quarter.

"Over the year as a whole, the supply of recycled gold exceeded historical norms," the World Gold Council says in its report.

That is, the flood of new cash-for-gold companies put 2009's supply near all-time highs, despite the fact that central banks once again were net buyers of Gold Bullion worldwide.

Gold Mining supply is also expected to continue rising this year, with major producing nations like Australia talking about 10-11% increases in production in 2010. The effect on prices? That's where the balance comes in.
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At this point, there's little question that ample gold supply exists to meet current demand, but most of the flexibility will come from scrap, which is hugely price sensitive. In its latest announcement, the  Australian Bureau of Agricultural and Resource Economics (ABARE) argues that gold will average $1080 an ounce across 2010, before dropping down to $900 again on oversupply. That's a far cry from HSBC's suggestion that gold could go as high as $5000 an ounce in the next five years.

So which is it? I tend to follow supply and demand, and right now, the market's coming off four straight quarters of oversupply. Given that fact, it's actually quite impressive the metal managed to rally $200 since last March. But I'm not inclined to think $5000 ? or even a more modest $1500 ? is anywhere in the cards until we see real demand start outstripping real supply.

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The Gold Report on Mar 09, 2010 03:26AM

Gold: How Much is Enough?

Five per cent...? Ten per cent...? Try nearer 20% says this four decades' veteran...

The GOLD REPORT recently caught up with John Embry, chief investment strategist at Sprott Asset Management, to get his thoughts on gold and Gold Mining stocks.

An industry expert in precious metals, John Embry has worked as portfolio management specialist for  more than 45 years; he's simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

Here he tells the Gold Report about his outlook for strong Gold Price gains in 2010...

The Gold Report: John, in Investors Digest of Canada you recently said you're expecting gold to gain another 30% this year...

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We've had nine years consecutive higher year-end prices and the best year in that span for a year's return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: Why is this year going to be the best year?

John Embry: I think we're getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can't depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people's eyes.

TGR: You might say the first leg down were the individuals who couldn't pay their mortgages and that caused part of the '08 collapse. And now it looks like it's the government...

John Embry: It's very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I'd see in my life. I'm shocked at the numbers in many places.

TGR: When you talk about gold, you're talking about Gold Bullion. But how do you see the gold stocks? Do you think we're going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

John Embry: I don't agree with them. As much as I love Richard Russell ? he's probably been as big an influence in my career as anyone ? I don't think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary '30s, and they will move heaven and earth to prevent that outcome. And when you've got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I'm in the camp that thinks we'll get hyperinflation first. We'll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

John Embry: I think stocks will do fine. They may have a violent correction first because a lot of people don't know what the heck we're talking about here. And when they see inflation mounting and economic conditions being less than ideal, they'll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you're talking about stocks, you're not talking just about Gold Mining stocks...?

John Embry: No, I'm talking about good businesses. I'm not talking necessarily about banks and other stuff that's more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it's in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

John Embry: Gold stocks, maybe. I believe the next time everything goes down, gold isn't going down. And if that were to be the case, I think gold stocks might surprise. They've been awful. Given what the Gold Price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it's been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The Gold Price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

John Embry: Oh, I think the juniors. The whole thing is a matter of confidence. They've got so much volatility in the Gold Price. You get a good thrust up and you got a violent correction and I think they've got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I'm right and the Gold Price stages a dramatic breakout in the next 12 months ? and I'm talking hundreds and hundreds of Dollars on the upside ? then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What's the seasonality of this year?

John Embry: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that's going on, I see no reason why it shouldn't be a very good period this time. And there's one other development. I don't know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the Comex futures market. And if they ever put any teeth into those things and kept these bullion banks from what they're doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They're finally going to have to address this because there's been so many complaints about the bizarre price action on the Comex in both gold and silver.

TGR: The International Monetary Fund is going to be selling some gold, and India stepped up earlier. What are your thoughts on that?

John Embry: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we've seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tonnes still to be sold.

There's speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don't think they want to be seen publicly doing it. They'd probably rather do it more clandestinely because they've got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic output to augment their reserves, where the Indians really don't have that.

So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there's also sort of the suggestion that the Chinese wouldn't want to be seen to be paying more than the Indians did. So they're reluctant to step up with the Gold Price some $50 higher currently than the Indians paid.

If gold really was a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It's not much money. It's $6 billion. They throw it around as if it's a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

TGR: What did you think when George Soros came out and said that gold was a bubble?

John Embry: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn't like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn't say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the Gold Price is going to go crazy and at that point I'd be worried. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing? The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: And, again, I think the financial talking heads used it as the negative.

John Embry: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn't like gold. But I think George Soros' remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was Buying Gold...

TGR: Any last comments?

John Embry: The only comment I'd make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody ? and I have never been a table pounder ? but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn't something that's just insurance for those who've got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

John Embry: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn't buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

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