As the gold price is set to appreciate for the ninth consecutive year, investors that have accumulated investments tied to the gold price such as gold-backed ETFs and gold stocks have been amply rewarded. The gold sector has been one of the best performing asset classes over the past decade as investors have pushed gold to record highs above $1,200 per ounce in an effort to diversify out of the U.S. dollar and other global fiat currencies - which have been debased by both politicians and central banks through persistent deficits and rising debt levels. One of the oldest and foremost bulls on the gold price and gold mining stock sector has been Sprott Asset Management, the Canadian-based hedge fund controlled by Eric Sprott. In the latest edition of Investor’s Digest of Canada, John Embry, Sprott’s Chief Investment Strategist, wrote a piece titled, “Gold bull has many years, thousands of dollars to go.”
Mr. Embry begins by providing a history lesson on the volatile relationship between the gold price and central banking. He argues that for the past 15 years, central banks such as the U.S. Federal Reserve have been flooding the market with very large quantities of the yellow metal in order to suppress the price of gold - thereby allowing the U.S. dollar to maintain its preeminence as the world’s reserve currency while easy monetary policies are pursued. While this strategy worked exceptionally well in the 1990s as the gold price held below $400 per ounce, it has been particularly ineffective over the past decade, as a huge amount of fund flows has pushed the price of gold from below $300 per ounce to an all-time nominal high of $1,226.50 per ounce in early December.
Embry goes on to reiterate his disdain for the actions of the central banks, stating that history has demonstrated that in the long run government intervention in the free market does not work. As evidence of this, he cites the successful efforts of central banks to depress the gold price during the 1960’s - which was followed by a subsequent 2,300% rise during the 1970s. Accordingly, “markets that have been artificially capped tend to catapult upwards when the suppression ultimately fails. In my opinion, the last experience in the 60s and 70s was a mere bagatelle in comparison to what is happening today,” argues Embry. To support this claim, he suggests that as much as 15,000 tonnes of gold have hit the market in the past 15 years, relative to just 3,000 tonnes in the 60s and 70s.
For those who claim that gold is in a bubble phase, Embry strongly disagrees and argues that gold has received very little attention from the general investing public and not anywhere near the level of coverage from the financial media that would exist if gold was a bubble. Furthermore, according to Mr. Embry, in a true gold bubble gold mining companies and gold producers would be generating extraordinary earnings - a situation that is not occurring, despite the strong rise in the gold price over the past decade.
Going forward, Embry believes another chief factor for the ongoing gold bull market will be the lack of gold mine supply. He cites an absence of quality projects ready for gold mining, further environmental and geopolitical issues, continuing capital constraints, and a “chronic shortage of skilled miners and competent mine builders.” The decline in gold mine supply will continue “for some time, irrespective of what the gold price does.”
Embry highlights recent commentary from Aaron Regent, the CEO of Barrick Gold (ABX), the world’s largest gold mining company, who stated that global gold production was in terminal decline and went so far as to use the term “peak gold.” In addition, Embry provides comments from the research and technical director of a Cape Town, South Africa-based consultancy, who stated that the famous Witwatersrand goldfields - the largest goldfield ever discovered and one that constitutes roughly 10% of the world’s gold supply - are approximately 95% exhausted. Add to this backdrop the declining supply of central bank gold and heightened investment demand for gold, and the Sprott team opines that the necessary ingredients for a significant rise in the price of gold are in place.
Embry concludes his piece by boldly stating that “I now firmly believe that the chances of gold ever trading below $1,000 per ounce are becoming increasingly remote.” He does add one caveat however - if the global economy suffered a “catastrophic deflationary collapse, gold could briefly be swept under but would then emerge with even greater relative strength as the only true safe haven.” Nevertheless, Embry believes the chances of such a deflationary collapse are very small given the pure fiat currency environment that exists.
He believes that gold is “going to stage a parabolic rise from current levels shortly” and that gold “remains one of the best supply-demand imbalance stories I have ever encountered in my career.” Such a bold claim by an experienced, successful money manager indicates just how much upside potential could remain in gold’s bull market.