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Nov 30, 1999

Exclusive Interview: John Embry

By Andrew Mickey, Q1 Publishing

Is gold the next ďhotĒ investment? Or will it never break through the $1,000 threshold?

Some of the worldís leading investors are currently placing their bets.

For instance, hedge fund manager David Einhorn recently bet big on gold. Einhorn manages $6 billion at Greenlight Capital and has averaged a 20% annualized return by booking only one losing year since 1996 (last year). His fund recently bought more than $200 million of SPDR Gold Trust ETF (NYSE:GLD) and more than $75 million worth of Market Vectors Gold Miner ETF (NYSE:GDX).

On top of that, the big money managers have already pumped billions of dollars directly into gold mining companies to fund takeovers and new mines and expansion.

Itís looking like a lot of smart and big money is betting on gold. And as the financial markets, economy, and future outlook worsen, gold is holding up as a last bastion of hope for many investors.

How can you get in on it? Is it just gold? What about silver? Where are the real values to be had? What about other hard assets Ė water, agriculture, etc.?

Itís best to start getting prepared now. To help us do that, Q1 Publishingís own Andrew Mickey, editor of the Prosperity Dispatch, recently had a private one-on-one conversation with John Embry, one of the leading gold investors in the world.

Embry has been following the gold sector for 35 years (thatís since the early 1970ís) and is one of the leading authorities on gold. Embry is currently the Chief Investment Strategist for Sprott Asset Management Ė a legendary name to long-time gold investors.

Prior to joining Sprott, Embry oversaw more than $5 billion in assets including the Royal Precious Metal Fund as VP, Equities and Portfolio Manager for RBC, a top-tier Canadian bank. Under his watch, the Royal Precious Metals Fund returned 153% in 2002 and was ranked #1 across all funds in Canada (remember 2002 was a horrible year for stocks as tech stocks continued to fall).

Now, gold is springing back to life and youíd be hard pressed to find anyone more knowledgeable about gold than Embry. In this exclusive one-on-one, youíll learn:

- What Embry calls ďan extreme bright spotĒ

- The one metal which might even be better than gold

- The asset class which has ďfallen off a cliffĒ and how the decline ďis a great thingĒ

- The #1 problem facing gold miners in the years ahead

- Why gold production will actually decline if gold continues to climb

- Could we have hit peak gold

Itís not just all precious metals for Embry and the folks at Sprott. In a few moments youíll also learn about the one investment Embry says, ďWe havenít done as much as we should have.Ē (Hint: itís not gold, silver, potash, oil or platinum)

Weíve got a lot to go over so letís get right into it. Hope you enjoy.

Regards,

Your Q1 Publishing Investment Research Team

---------------------------------------------------------------------------------------------

Andrew Mickey: Precious metals have been getting a lot of attention lately. But it seems like there has been a divergence between gold and silver. Weíve been watching the gold to silver ratio (the number of ounces of silver which can be bought for an ounce of gold) get wider and wider. Gold to platinum too. Do you see the divergence tied to the industrial aspect of metals like platinum and silver, gold is the supreme precious metal, or is there something else going on behind the scenes?

John Embry: No Ė itís a very strong manipulative aspect at work. If you go to the COMEX and look at the trading patterns and the short positions and such, clearly the prices are being messed around with.

Silver is a smaller market and can be messed around with more easily. I think silver probably has a bit more upside potential because the price is so far behind where it should be.

Andrew Mickey: So do you see silver as one of the bright spots?

John Embry: Oh yeah, itís an extreme bright spot. I could easily see it three times where it is now in the not-that-distant future.

Andrew Mickey: As far as gold supply, there is one period in the world gold supply where gold production kind of crested around 2007 or 2008. Are we facing a ďPeak GoldĒ kind of situation?

John Embry: Yeah, we have most assuredly crested in terms of mine supply without question.

Andrew Mickey: So, when you look at five, ten years outÖletís say in a world where gold is $2000 or $3000 or higher, how much more gold can realistically be produced in a year?

John Embry: Zero, I think. In fact, I think you probably need a lot more lead time - maybe five to ten years.

Just look at what happened in the Ď70s. The gold price went from $35 to $800 and, believe it or not, gold production was at a lower level worldwide after that 10-year period.

Now, the big question is what will happen this time? Number one, a lot of the existing mines are being depleted quite rapidly. Number two, when the gold price goes up a lot, mines generally tend to sort of drop the grade they mine because they can make a lot of money with lower grade and they can keep the good stuff for the bad times.

So by definition, they will be mining in the same number of tons but they will be taking the gold grade out of it, so collectively they will be mining less gold. They will make more money because the price is up but they will be mining less.

The other problem is that so many of the new interesting deposits that may or may not be developed in the future are located in these God-awful third world countries. They are having a real battle now with the governments, getting permitting, deciding who makes the money out of the mine, environmental issues etc. The gold deposits are all over the place and the governments are going to delay projects.

Say you find an ore body today. It would probably take a minimum of five years before the gold hits the market with all the attendant problems there are getting it into production. So all thatís already baked in the cake. The gold price could be doing anything it wanted for the next four or five yearsÖgold production isnít going to increase much Ė if any - at all.

Andrew Mickey: Amazing, gold production declining in the last great bull market for gold. So what does this mean for gold stocks, from your perspective? Where should we focus our investments across the whole range - from explorers all the way up to the majors?

John Embry: Right now, I think the majors are reasonably priced compared to the overall list.  People have sort of focused on liquidity so they have gone after the majors and they bid them up aggressively and left a lot of the more illiquid situations behind.

That will all change. As gold becomes more popular and the price rises, at that point, money will filter down the food chain from the larger companies and they will go looking for the good quality smaller ones.

I particularly like some of the smaller producers now for a lot of reasons.

For one, they are going to make a ton of money in the current environment, particularly if they are producing outside the United States. Like some of the ones that are producing in Canada. The gold price yesterday was I believe $1,230 Canadian.

Another reason is because all of the costs of gold mining are dropping right now. Energy costs, steel prices, and all the things that went up so much and really hurt gold minersí profitability. They are all going the other way now and at the same time the price of gold is going up. So I think that people are going to be pleasantly surprised going forward by the profitability of some of these mines, which have struggled up until recently.

So I am pretty bullish on small producers and anybody who has got a legitimate ore body that can be exploited sometime within the foreseeable future. I think they are going to be viewed positively too.

But the key thing to focus on is when their production will begin. If they donít have to worry about getting through the environmental hurdles and getting the finance and et cetera, et cetera, they are going to make a lot of money.


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Andrew Mickey: What do you see as the potential risks of politics and environmental concerns preventing anyone from starting production?

John Embry: They are not necessarily preventing a company from going into production, but they are certainly delaying it.

My favorite example is that probably the best ore body thatís been discovered in the last 10 years is Aurelianís in Ecuador; which was subsequently acquired by Kinross. But the fact is, as long as the current government in Ecuador stays in powerÖI just donít see the thing entering production.

So thatís what I am talking about. Itís such a fabulous mine if it were in a good geopolitical environment. It would be being built as we speak, but there is no progress towards building it at this point.

Andrew Mickey: The gold ETF (like the GLD) has been the number one recommended way to invest in gold in the U.S.

Itís a hot subject of debate by those who are new to gold and those which have been following it for while. The new people to gold always recommend the GLD. What are your thoughts?

John Embry: Well, they are just plain wrong in my opinion.

I think gold and silver are the ultimate insurance policy. When things got really bad in the system you want to make sure the vehicle you own has the gold and silver that it allegedly is supposed to have.

Now, I may buy gold and have it in my own possession. I know I have it. And then there are other gold and silver vehicles like Central Fund of Canada (NYSE:CEF) or Central Gold-Trust (NYSE:GTU), to cite a couple, where the gold is allocated. Itís in a vault and there are regular audits to prove everything thatís behind the vehicle is in fact there. So you are getting what you pay for.

Now, in the case of the ETF I am not totally sure. I mean if you read their prospectuses closely enough youíll see there is some wiggle room. What they are trying to do is just track the gold price so you donít necessarily need the physical gold. They could be using paper derivative types of products to back the stock.

What really made me kind of uncomfortable recently, was there was this dramatic ramp up in the amount of money going into the GLD ETF in particular. I looked around and I am going like, where is gold coming from?

As you know, the gold market is acknowledged by virtually everybody to be tight. I know mine supply is falling, I know that - I didnít see any appreciable change in any of the inventory levels or any of the recognized exchanges like COMEX etc., and there was no particular acceleration in the Central Bank dispositions. So my question is, if suddenly all this new buying appeared because of the ETF having to sort of stock up, where did the gold come from?

I am not sure it bought any gold. I think they might have gone to COMEX and just bought a paper contract.

I donít know. I just think there are better vehicles than ETFs.

Andrew Mickey: Switching gears a little bit here, letís talk about the big picture. Everyone wants to know whatís going on.

Itís a crazy time. Whatís your take? What going on in the general markets and where are we headed?

John Embry: I think we are probably headed for the worst economic debacle since the Depression - if not worse than that.

And the response for that by governments around the world is going to be, I think, a blizzard of paper money creation. They will run massive deficits, trying to prop up these economies.

So I think the major development is going to be ongoing issues of currency debasement. The value of paper money against real tangible assets is going to fall considerably. Right now, we are going through this deflationary scare. It wonít last. It will change into a hyperinflationary environment in the not too distant future.

Andrew Mickey: A kind of stagflationary situation like we saw in the 1970ís?

John Embry: No, worse than that. I think the inflation would be more intense. The decline in economic activity will probably be worse.

Andrew Mickey: What are the kinds of conditions that bring us to that state? Is it avoidable?

John Embry: Basically, we have already put the conditions in place. We ran economies with constantly too much leverage and debt.

Eventually, you reach a certain point where you canít really add any more debt because the capacity for the system to handle it has been exhausted. Once it reverses, itís very hard to change. They are going to try to change it by simply debasing the money.

Andrew Mickey: You seem to focus on the debasement of currencies as a government ďsolutionĒ Ė for lack of a better term Ė to the problem. What are some of the best ways to protect ourselves from this situation? Which are you employing?

John Embry: Our strategy is pretty simple. What we really like is the monetary precious metals gold and silver. We donít like anything in the financial sphere at this time. The companies that we like are the more solid companies providing basic services and what have you. We like the ones which donít have overly leveraged balance sheets.


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Andrew Mickey: What about other real asset classes. There are other sectors I know you follow outside of precious metals like agriculture. Thatís the one thing that Iíve been completely excited about for years, but had to turn and run from over the summer. Whatís your take on it now? Is it time to wade back in?

John Embry: Well, I am with you on agriculture. Itís a necessity that we must eat.

I guess one of the positive aspects of global growth is that the third world became a bit more affluent. Improvement in their diets put more demand into the world for basic food stuffs. Now thatís slowed down a bit.

I think the real arbiter in the short run might be the climate. I see a lot of industry people bringing this up, changing sunspots. These changes in the sunspots suggest that we may be facing drought conditions in a lot of the world all at the same time.

If thatís the case, I think you are going to see massive food shortages which would underrate a considerable price appreciation in the food because there will be a real fight for it.

Andrew Mickey: So, I donít want to get too technical with this subject, I assume that youíre referring to increasing activity in sunspots?

John Embry: Yes, there is increasing activity in sunspots; which apparently, sort of cools the world out. Itís really interesting because there has always been, as you know, there is debate about global warming.

I do believe that all this carbon release is creating global warming, but at the same time, we have this mass of long cycles in nature which sort of move from the ice age then back to a period where it gets too hot. In that cycle, we are headed towards cooling again and the sunspot is just one aspect of it.

Andrew Mickey: Can the sunspots cause some of the farming areas to change?

John Embry: Yes, they do. They have a role - for whatever reason Ė they have a major impact on increasing odds of getting hit by a drought. We have a lot of droughts going on in the world currently. There are droughts in Australia, South America, Northern China and Africa. But Africa has always had a drought.

There is a lot of food supply interruption. If a drought were to strike North America then that would really create a problem. I have seen some work suggesting that we are due for a drought based on certain cycle work.

Andrew Mickey: Okay, this is more or less an agricultural cycle that you are referring to I imagine. How long is this kind of agriculture cycle? Is it like an 80-year almost Dust Bowl scenario type -?

John Embry: Well, yesÖI hesitate to go there becauseÖitís like Murphy's Law, ďeverything goes wrong at the same time.Ē And with the financial world right now in a mess the last thing we need is a sort of replay of the Ď30s in the agricultural space.

The pessimists among us think that there is a good probability that drought conditions could strike North America, and that would be the last thing I want to see.

Andrew Mickey: What about farmland then? Itís an asset class which has had extremely consistent returns over the past 50 to 60 years. But, weíve been waiting for a time like this.

John Embry: Farmland prices have fallen off a cliff. I just saw a guy in Minneapolis; again, he was saying that farmland is on offer everywhere right now.

This is a great thing. I am now in favor of buying farmland at the right price and that price is probably - as we are cleaning this whole mess up - the right price is going to be reached.


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Andrew Mickey: The same is true for all kinds of natural resources. Oil, natural gas, copper, iron ore, uranium, etc. Theyíre all over the world and the government s which control them are in position to really inhibit or assist private companies who want to exploit them.

Recent US policy changes favor certain alternative energies. The one that really concerns me is uranium. In your opinion, when we look at uranium, should we look at it as declining uranium supply from current mines and or how new power plants can come on line if they canít get it? Which is the real problem? Or is it both?

John Embry: Excellent question. I do think there is a problem. The Cigar Lake up in Northern Saskatchewan has gone through all sorts of problems. Another major problem area is with the Olympic Dam mine in Australia. It has been having problems too.

So again, thereís an issue with existing production.

In that light, I think thatís going to make new discoveries. Quality discoveries in uranium which are really worthwhile and the problem, again, is how long itís going to take to exploit them. There just arenít too many good deposits. We had that huge run in uranium a couple of years ago, but a lot of the deposits were really junky.

The great advantage in uranium is that the true cost of producing the power, is in building the reactor. So, thereís a lot of flexibility there. They donít care about what they have to pay for uranium just as long as they can get it.

So I think thatís one of the aspects I like about uranium. The price is sort of inelastic in that sense. Just because the price goes up doesnít mean itís going to start to reduce demand.

Andrew Mickey: With respect to potash, nitrogen and phosphate, where do you see opportunities there? Most people are familiar with potash, the high capital costs to build a mine and the like. Are there any opportunities in nitrogen and phosphate because itís too easy, how do you guys kind of look at those

John Embry: Well, we actually Ė we meaning our Sprott Resource Corp - have been looking around for interesting opportunities in phosphate and what have you. We believe that as this whole agricultural thing unfolds that it will be a good business.

But right now, farmers are having trouble getting money like everybody else is. So really, there is a bit of a low in the fertilizer business. Looking for longer term opportunities, the short term is going to be a little problematic.

Andrew Mickey: Are there any other things that you think individual investors should keep in mind as this is the first time in a long time that any of us had to go through a downturn like this?

John Embry: Well, itís downright ugly out there. I was born in United States and I am a huge admirer of the U.S. I think whatís happened is tragic. Consequently, people are looking to protect themselves and I really do think that precious metals in particular and solid commodity opportunities are going to be one way thatís going to pay off in the end.

Andrew Mickey: Whatís your take on all the stimulus packages and infrastructure building and everything thatís going on there?

We have been really bearish on infrastructure companies. How can the government support these businesses which are mostly private?

John Embry: I think that you are right. Typically, the market overacts to these things and obviously the infrastructure spending is partly implied; because, itís been neglected to such a great extent in North America.

We have the same problem in Canada. Our roads are falling apart. Really, they could spend a ton of money in the sector. Problem is, they donít have the money. They are going to have to create it out of thin air.

Andrew Mickey: One last thing. Are you currently looking at or investing in water? If so, would you be looking into water rights or a pipe manufacturer for example?

John Embry: We havenít done as much as we should have. I think water is going to be a major issue going forward.

As for ways to invest in water, Iím more interested in water rights. The good thing about Canada is, there is lots of water up here. The problem is going to be down in the U.S., particularly in Southwest and other areas. I just look at that and I shake my head.

Andrew Mickey: Well, thanks very much for spending some time with us. Is there anything else that you would like to add?

John Embry: Just that I think that itís important that your readers know all this. The world is a lot different than it was 10 years ago.

Andrew Mickey: And probably it will be a lot different in another 10 years.

John Embry: Well, it would be a lot different looking back from five years from now too, you bet, but I think we will be stood in good stead, certainly being in precious metals and end products, I think those are the two that I like the best.

Andrew Mickey: Well, thanks for your time, I appreciate it.

John Embry: My pleasure. Anytime.


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