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'Alleged lunatic fringe' sees $1,000 gold

Sprott strategist says metal will pass high

Special to The Globe and Mail

Bug -- it's not a bad word among those who believe gold is the uber commodity of all times, and will soon soar to rule world markets. Confident that the yellow metal will shoot past its high, achieved in 1980 at $872 (U.S.) an ounce, gold bugs labour to explain why it has not already done so and when it will break the record.

John Embry, chief investment strategist for Sprott Asset Management Inc. in Toronto, is widely seen as the leading exponent of the theory that it is not markets but governments that are restraining the price of gold from rising to $1,000 or more. Currently, he heads the $650-million Sprott Gold and Precious Minerals Fund, which produced a 73.4-per-cent return for the 12 months ended Oct. 31. That was a first-quartile finish among the 18 funds in the field. However, Mr. Embry's real tour de force was in 2002, when he piloted the RBC Global Precious Metals Fund to a 153.1-per-cent gain, double the median return of peer gold funds in the period and the top return among all 3,299 portfolios in the Canadian mutual fund industry for that year. He is confident he could do it again.

"We have prospects of having a triple-digit return year within the next couple of years," Mr. Embry said. His record gives him a credibility that is the envy of other gold fund managers who moil through mining company annual reports. Yet there is a difference between the Embry approach to gold investing and what the also-rans do.

In the Embry view, gold should have and would have reached a price in the thousands of dollars per ounce were it not for a cabal of central banks who hold down the price of gold. As he explained in an October article he wrote for the Northern Miner, a trade paper, too much paper currency and commercial credit ultimately debase conventional money. Precious metals, mainly silver and gold, "will soar as investors come to realize the decline of fiat money," he predicted.

Gold, currently at $647.90, should hit $1,000 an ounce once barriers to its correct pricing are removed, Mr. Embry has argued. "Some investors believe the price of gold has been and continues to be artificially depressed," he wrote in a report, prepared with colleague Andrew Hepburn in 2004 entitled, Not Free, Not Fair: The Long-Term Manipulation of the Gold Price. "As significant gold owners ourselves, we firmly side with the alleged lunatic fringe on this contentious topic."

A major rise in the price of gold is inevitable, Mr. Embry explained. But there will be costs. A leap in the price of gold would discredit central banks, create a flight from paper money to gold, destabilize world trade, and force the United States to pay its huge foreign trade bills with gold rather than cover its deficit with U.S. Treasury bonds that lose value against other major currencies. All that is keeping the price of gold from rising drastically is a so-called "Plunge Protection Team," or PPT, crafted by U.S. monetary authorities in 1989 to ensure world financial markets do not get too far out of line with the political needs of their masters, he noted.

Critics of the price suppression theory dismiss the existence of a formal PPT. According to Caroline Baum of Bloomberg News, the alleged power of the PPT gains credibility with repetition. "They swap the same fish tales back and forth with the stories acquiring respectability through frequent repetition among believers," she wrote.

For his part, Mr. Embry isn't budging. Gold stocks will thrive because the total being dug up and what central banks sell is falling behind demand for investment purposes. "The price of gold will head up over $1,000 when lack of physical supply held by central banks is insufficient to meet the mounting investment demand for gold," he said. "That should happen within the next six months. The gold price will swiftly head up over the 1980 high and go up to four figures," he added.

Among Mr. Embry's top bets:

Southwestern Resources Corp. is a Vancouver gold exploration firm that Mr. Embry bought at $3. The shares closed yesterday at $9.42. The firm has no cash flow but appears to have uncovered several million ounces of gold in China and has a promising site in Peru, he said.

Silver Standard Resources Inc. is a Vancouver silver miner that Mr. Embry bought at $20. The shares closed yesterday at $35.10. The firm is developing a deposit of 1.3 billion ounces of silver in Mexico. While the firm has no cash flow, shares should double, assuming silver, now at about $14, goes to $20, he said.

Wesdome Gold Mines Ltd. is a Toronto gold miner with mines in Wawa, Ont., and Val-d'Or, Que. Shares purchased at $1.30 closed yesterday at $2.27. Wesdome should be able to break even, Mr. Embry said. If gold rises to $1,000 or more, the firm can earn its current share price in the next year or two, he added, and the stock could go to $10 if gold goes to four figures.

The price of gold should head up as central banks run out of bullion to sell, Mr. Embry said. "There is very little gold left in Fort Knox and not much in other coffers. The curtain has to come down soon on this chicanery."

By the numbers


Record high price per ounce in U.S. dollars that gold hit in 1980.


Percentage gain that John Embry's Sprott Gold and Precious Minerals Fund achieved in the 12 months ended Oct. 31.


Percentage gain that John Embry achieved in 2002 when he managed RBC Global Precious Metals Fund.

© 2007 The Globe and Mail. All rights reserved.

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