The Gold Report caught up with John Embry, Chief Investment Strategist, Sprott Asset Management, to get his thoughts on gold and some mining stocks he favors. Embry, an industry expert in precious metals, has researched the gold sector for over 30 years and has accumulated industry experience as a portfolio management specialist since 1963. He joined SAM as Chief Investment Strategist in March 2003 with focus on the Sprott Gold and Precious Minerals Fund and the Sprott Strategic Offshore Gold Fund, Ltd. Prior to joining Sprott, Embry was Vice-President, Equities and Portfolio Manager at RBC Global Investment Management, a $33 billion organization where he oversaw $5 billion in assets, including the flagship $2.9 billion Royal Canadian Equity Fund and the $250 million Royal Precious Metals Fund, the #1 ranked fund across the country for its 2002 net performance of 153%.

TGR: Do you see gold as becoming a unique, untethered asset class by itself? I think most of us look at gold as a counter-play to the dollar and to inflation. But do you see it, at some point, becoming an independent asset class?

EMBRY: Unquestionably. It’s not always a monetary asset; but it is a monetary asset when paper money comes into some sort of disrepute, which it appears to be doing at this point. In that environment, gold becomes the hard monetary asset, and I would say most assuredly it’s in its own category. Once it breaks free of all these tethers, like being in direct relation to the weakness in the U.S. dollar. . . I think without question, it will probably achieve prices that will shock most people.

TGR: What sort of pricing?

EMBRY: Before I used to say that we would get to four figures, and that was regarded as pretty brazen stuff. To me, I think that’s a lay-up in the reasonably near future. I’m very comfortable with the notion that it could trade between 2000 and 2500 some time within the next two to three years.

TGR: So, saying that you look for a four-figure price up to 2500 in the next couple of years, would you recommend a basket of ETF Gold stocks? And if so, what sort of combination, what sort of weighting?

EMBRY: Well, I am sort of an iconoclast. I am not nuts about the ETF because I am still a little skeptical about whether it is totally backed with gold the way they say it is. But I would certainly have a representation in bullion. The individual can choose his own vehicle. I own personally a lot of gold bullion, physical gold bullion and coins. I also own an entity that I am the co-chairman of, the Central Gold Trust (GTU -AMEX:; TSX GTU.UN(Cdn.$); GTU.U (U.S. $) in Canada, which is a publicly traded trust that owns only gold.

 It currently trades right around its net asset value. Generally, the public hasn’t cottoned on to this, because when they do it trades at a significant premium.

TGR: So it’s taxed differently, if I remember correctly.

EMBRY: Yes, it is taxed differently – as a security rather than as a commodity. And that is a distinct advantage for people who are confronted with that tax issue.

TGR: And they recently came out with another product that has silver in it as well, right?

EMBRY: They’ve got Central Fund of Canada (CEF-AMEX), which is gold and silver. I‘ve been bugging them to just consider doing a silver trust along the same lines as the pure gold trust because there are fewer silver vehicles available. I’m surprised that they’ve been a little slow off the mark because the Central Gold Trust hasn’t caught on as well as they would have hoped. My attitude is that if had been a silver trust, it would have caught on a whole lot better. I think the competition in the gold space is more extensive.

But I would say that anybody who believes in gold – and I believe everybody should believe in gold these days – should have some bullion as the core of their portfolio, in whatever form they choose to hold it.

TGR: As far as a percentage, what would you suggest?

EMBRY: I would say maybe 20% to 25%. And then the rest I would have a mixture of big-cap stocks for some sort of solidity, but for the real home-run potential, a diversified list of good quality juniors.

TGR: Before we get to those, we’re watching the Dow flirting with its mid-August bottom.

EMBRY: Yes, Richard Russell's Dow Theory breakdown number, 845, which everybody’s watching with great interest. I like Richard Russell [Dow Theory Letters]. I would say that he’s been almost my guru for many, many years. I’m a little concerned with him right now, though. I think the U.S. stock market is heavily manipulated. You can almost bounce it whenever it’s close to Richard’s PTI [Ed. Note: The Primary Trend Index (PTI) is an index invented by Richard Russell in 1969. It is made up of eight "action of the market" indicators.], breaking through the moving index, or when it gets to the Dow Theory sell signal. But we’re going to see whether they can hold it this time. There are a lot of real problems in the system as you know. Unless you get some better news backdrop, and I don’t see how that’s going to happen. It’s going to be tough.

TGR: And assuming that happens, that’s the signal for a bear market. We saw the meltdown in August where they were throwing out everything.

EMBRY: Including the junior gold stocks. With gusto.

TGR:  Do you see that happening again?

EMBRY: No. I don’t. I think that this time it will have a much more difficult time controlling. They’ve got the gold price held in pretty well, considering the attrition and everything else. It certainly didn’t apply to the gold stocks, but now I think the gold, the junior golds in particular, are pretty well sold out. I think most of the people who were sort of “weak handsers,” as I would call them, probably have discarded them. The vast majority of people who have owned these things own them because they know why they own them.

And so, I think it’s much less likely. There will be some general weakness, but nothing like we experienced in August. My goodness! That was awful.

And if gold really starts to assert itself – and I think there’s a really decent probability that’s going to happen – then with the other parts of the market being unattractive because they are in a bear market, I think conceivably what cash is available could be directed toward the gold. So I think actually there’s a reasonable probability that they could do spectacularly well in the event that the big market melts down.

TGR: Why don’t you give us maybe three or four large-cap names that you think would be a core holding?

EMBRY: The one that I like the best in terms of its exposure is Gold Fields (NYSE & JSE: GFI), the South African entity. I am not nuts about South Africa, but on the other hand, I think it’s more than discounted in the price, and they have the biggest reserve base of any company in the world. So, I like Gold Fields as a core holding in the big cap. One of the ones I liked was Meridian (NYSE: MDG), but as you know it got taken out by Yamana (NYSE:AUY). I am not nuts about Yamana; I own it, but I am not as crazy about it; it’s not as clean a play to me as Meridian was.

But if you’re going for the best bang for your buck, I would guess that a Kinross Gold Corporation (NYSE: KGC) or an Agnico-Eagle (AEM) are interesting. But that’s not my space; I am not particularly adept at that. The other one I like is Goldcorp Inc. (NYSE:GG; TSX:G). Goldcorp . . .would be a core holding in the big companies.

So, again it's a quality thing, I would go Gold Fields, Goldcorp, and one of Kinross or Agnico or Yumana. Even though I’m not crazy about the assets, Yumana has sort of a cachet with the investing public and in a higher gold price environment, it will do well.

TGR: Yes. And again, the institutional investors that I think will come to this space, those are the first names they’re going to look at.

EMBRY: Well, actually you’ve seen that because, even after the August bottom, even though the juniors have continued to languish, there was a huge rally in the stocks that drove the HUI and the XAU. And that was just sort of big money seeking an outlet as a proxy, and it was the gold stocks.

TGR: What about some junior names?

EMBRY: Right now, most of them are extremely inexpensive. You could almost choose any decent-quality junior with a six-month timeframe and I think you will be very pleasantly surprised.

EMBRY: I own a lot of Minera Andes Inc. (TSX:MAI;OTCBB:MNEAF). That’s a solid situation. I like the guy behind it, Allen Ambrose. I like the fact that they’re going to be involved in a good producing entity. They’ve got good exploration potential. They’ve got Rob McEwen involved in the periphery; he’s a large shareholder. In fact, I think he’s probably maybe the largest.

TGR: Okay. What about Aquiline Resources (TSXv: AQI)?

EMBRY: Aquiline I love. I’m a large shareholder. I think that the rate at which the ore body is expanding is impressive. There still is some discount because of previous court issues, but having said that, I still think that this thing will be acquired by a large silver entity at some point, sooner rather than later.

TGR: And African Gold Group (TSX-V: AGG)? You said you were disappointed, but –

EMBRY: I am only disappointed in the price action; I am not disappointed in the company, like what they’re doing in getting the joint venture going with Randgold Resources Ltd. (Nasdaq: GOLD). And the quality of the properties – Greg Hawkins [Founder and Director, Exploration] has worked over there for a long time, and he’s sort of tracked some of these properties and he’s wanted to get them for the longest time. One thing he seems to have is patience because he sticks at it, and he gets these properties. It’s just a great address; Mali and Ghana are two of the hottest places on the planet for finding gold. So the fact that this thing doesn’t have a bloated market cap in the sense that it doesn’t have a zillion shares outstanding and the fact that it has these projects with a legitimate guy sort of pursuing the thing, I am actually surprised. I am not quite sure; I sort of think that they had problems with their shareholder listing; they had the wrong shareholders.

It’s been a very frustrating stock for me, but having said that, I really like it from a fundamental sense for a junior, particularly at this point in time. I think it will take very little redirection of cash into the sector to have outside impact on the price of the stock. And I think African Gold would be a classic beneficiary with any good drilling results.

EMBRY: There’s another small company in Ghana, Birim Goldfields Inc. (TSX: BGI), which has really good land. They’ve got a terrific guy out of Gold Fields. It trades under 40 cents. I think it has all sorts of potential, but again, it needs a defining hold, and I think that would have a sort of dramatic impact on the stock. Again, I like the area it’s in, but it languishes.

TGR: Any other ideas?

EMBRY: Well, one that I’ve really been keen on is an upper end junior. It is something called AXMIN (TSX-V:AXM). It’s got probably three million ounces in the Central African Republic. It would probably make people uncomfortable, but a major shareholder, Audax (SYD:ADX), which is large Swiss oil operation, has extremely good contacts in these East African countries, and so consequently, AXMIN is extremely well placed, I think. It has just over 200 million shares and trades about 80 cents. But given the number of ounces it’s got in the solid resource category in Central African Republic, as well as they’ve got unfolding resources in both Mali and Sierra Leone, it’s a fascinating African play. As I said, I’m sort of revealing my biases; I love West Africa as a destination. They find gold, and the governments over there are very supportive.

TGR: Any plays in Nevada?

EMBRY: One that I’ve been interested in is Victoria Resource (TSX-V: VIT), which is being sort of reconstituted. They brought in a guy, Chad Williams, to run it; he’s a bright guy. It’s folded into, I guess, Kinross now, but to me, it’s got a good suite of properties in Nevada. And they’re gearing it up. They just raised some money; they’re going to get going on it. So, that’s one that I think has some short-term potential.

TGR: Any other last thoughts?

EMBRY: I can’t think of a better time to buy juniors; it is one of the very best times. I think the best time was at the bottom in 2000 and 2001. But given where the gold price has come and the way some of these juniors are trading, I think we’re being presented with another unbelievable opportunity. I’d be really shocked if my fund didn’t at least double over the next 12 months. And I think it’s going to be good in all currencies in the next 12 months. That will be my final word. (11/29/07)

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