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 $250 million Royal Precious Metals Fund, the #1
ranked fund across the country for its 2002 net performance of 153%.
TGR: Do you see gold as
becoming a unique, untethered asset class by itself? I think most of us look
at gold as a counter-play to the dollar and to inflation. But do you see it,
at some point, becoming an independent asset class?
EMBRY: Unquestionably. It’s
not always a monetary asset; but it is a monetary asset when paper money
comes into some sort of disrepute, which it appears to be doing at this
point. In that environment, gold becomes the hard monetary asset, and I would
say most assuredly it’s in its own category. Once it breaks free of all
these tethers, like being in direct relation to the weakness in the U.S.
dollar. . . I think without question, it will probably achieve prices that
will shock most people.
TGR: What sort of pricing?
EMBRY: Before I used to say that
we would get to four figures, and that was regarded as pretty brazen stuff. To
me, I think that’s a lay-up in the reasonably near future. I’m
very comfortable with the notion that it could trade between 2000 and 2500
some time within the next two to three years.
TGR: So, saying that you look
for a four-figure price up to 2500
in the next couple of years, would you recommend a
basket of ETF Gold stocks? And if so, what sort of combination, what sort of
EMBRY: Well, I am sort of an
iconoclast. I am not nuts about the ETF because
I am still a little skeptical about whether it is totally backed with gold
the way they say it is. But I would certainly have a representation in
bullion. The individual can choose his own vehicle. I own personally a lot of
gold bullion, physical gold bullion and coins. I also own an entity that I am
the co-chairman of, the Central
Gold Trust (GTU -AMEX:; TSX GTU.UN(Cdn.$); 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
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
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
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
TGR: Why don’t you give
us maybe three or four large-cap names that you think would be a core
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
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
(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
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
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
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
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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