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.
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.
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.
So we are waiting for investors to recognize this guaranteed loss in purchasing power from holding bonds?
Well quite frankly, Henry, I am amazed that people, given what is unfolding, are prepared to hold bonds. I my view, these things won’t buy a loaf of bread by the end of the experience. And yet there are trillions and trillions of these bonds in the hands of investors everywhere. Now, obviously, nobody wants to buy American bonds quite so much. That’s why the Fed has been forced to step in and buy so many of them.
I think that the next shoe to drop will be the geopolitical mess that is unfolding in the Ukraine and elsewhere. I believe there will be others: the Chinese have already stated their intention of diversifying away and pricing everything in Yuans. I think the Russians are going to head in that direction too. I believe there is going to be an overhang of U.S. dollars in the market, which is going to lead to the price of the Dollar declining. It’s not that the Dollar is particularly overvalued against Euros or any other currencies. It’s just that people are going to want to get rid of all of them, and I think the Dollar is extraordinarily vulnerable.
Why have we experienced new all-time highs in the stock market and record profits from big corporations when the economy is so fragile?
Well, I think it’s very simple. You alluded to it when you said that people don’t know what to do with their money. As more money is jammed into the system by the Fed, the money has to go somewhere. What’s happening is that it’s creating bubbles in lots of things – stocks, bonds, or urban real-estate. Sure, profits look good, but there is a lot of phantom accounting that can make profits look a lot better than they are.
I tend to look at the top line, which is not nearly as good in most instances as the bottom line, which you can tamper with through accounting tricks.
So, I think we’re doing what we did at the end of the 90s’ with the tech bubble. I think we are just having a more widespread bubble in stocks.
Full article: John Embry: Hold onto Gold as ‘Currency Event’ Likely (Sprott Global)