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debasement, conventional institutions and

the average citizen remain largely unaware
of gold’s utility. When the next leg of the

global financial crisis arrives and stocks
and bonds come under severe pressure,
investment demand for gold could
potentially rise exponentially. To facilitate
this demand, new gold investment vehicles
are being created including the very well
received Sprott Physical Gold Trust (see
Sprott Asset Management LP

The role of gold in society was succinctly

By: John Embry,
Chief Investment Strategist,

Updated June 2010


summed up by J.P. Morgan in 1912 when
the renowned financier stated that “Gold ULTIMATELY RESULT NOT HAVE THE GOLD BACKING
is money and nothing else.” Ironically, IN HYPERINFLATION THAT THEY PURPORT TO HAVE
he made that comment one year before As the result of the global financial crisis At the March CFTC hearing with respect
the U.S. Federal Reserve was created. which enveloped the world between to position limits on gold and silver on the
There have been long periods (1980- late 2007 and early 2009, the world’s Comex, Jeffrey Christian of CPM Metals,
2000 being one) when this immutable governments were forced to step in advertised on his firm’s website as “an expert
fact was dismissed. The fact remains, and bail out the financial sector while on precious metals”, openly acknowledged
however, that every fiat currency system propping up overall demand in the face that transactions on the London Bullion
in history has ended in ruins. Our current of the collapse in the private sector. Market Association (L.B.M.A.) are minimally
experiment seems to be headed down the This unfortunately occurred as their own backed by available physical gold. Given
same disastrous path, thus allowing gold revenue streams were under severe that the L.B.M.A. has long been regarded
to reemerge as a currency once again. pressure due to the issues in the private as the exchange where physical gold is
2. THE INEVITABILITY OF A sector. To combat the massive deficits transacted, that qualifies as a remarkable
COLLAPSE IN THE U.S. DOLLAR that inevitably resulted, widespread admission. Investors should also have
quantitative easing (i.e. unfettered money strong reservations about gold ETF’s,
The U.S. dollar is the world’s reserve
printing) was undertaken. That policy is gold pooled accounts and gold certificates
currency and thus anchors the world’s
here to stay and the fiscal deficits in many where the gold is unallocated and thus not
monetary system. Unfortunately, by
countries have now reached percentages specifically accounted for.
virtually any measurement we look at,
of GDP that have almost always resulted
the United States is beyond ‘the point 8. MINE SUPPLY IS NOT
in eventual currency collapse. Thus, the
of no return’ with respect to its financial ANTICIPATED TO RISE FOR
frightening term ‘hyperinflation’ is now
position. Imbedded federal government SEVERAL YEARS, IF AT ALL
being heard with increasing frequency.
debt of nearly $13 trillion, unfunded future
Despite gold prices surging from a low of
liabilities in medicare, social security, etc. 5. THE TRUE IMPACT OF THE
$252 per ounce in 1999 to over $1,200
well in excess of $50 trillion and a current MALIGN SIDE OF DERIVATIVES HAS
recently, mine production has been eroding
budget deficit of over 10% of GDP virtually YET TO EXPRESS ITSELF for nearly a decade. This suggests that mine
ensures ongoing massive monetary
Remarkably, the notional value of supply is insensitive to higher gold prices,
debasement. When the near bankruptcy
derivatives has continued to grow, both a fact confirmed in the 70’s when mine
of the majority of the fifty states in the
throughout the global financial crisis and supply actually fell as gold made its historic
union is factored in, the situation looks
during the ensuing recovery period. The rise from $35 per ounce to $850. Aaron
even more dire.
fact that derivatives played a major role Regent, the head of the world’s largest
3. OTHER SIGNIFICANT WORLD in the financial meltdown seems to have gold company, Barrick Gold, was quoted
CURRENCIES OFFER NO REFUGE been conveniently forgotten. Attempts at a conference in late 2009 lamenting
The current travails of the European Union to regulate OTC derivatives, which the state of the gold mining business. He
are well advertised. The recent pledge of Congressional committees have been went so far as to suggest that global gold
nearly $1 trillion in potential bailout money warned are “ticking time bombs” and production was in terminal decline despite
by Eurozone members and the IMF in the “financial weapons of mass destruction,” record prices and the Herculean efforts
wake of Greece’s problems, coupled with surprisingly continue to meet resistance. by mining companies to discover new ore
the fear of contagion throughout southern The fact that many derivatives are bodies in remote areas. He actually alluded
Europe, effectively disqualifies the essentially worthless but are being carried to “peak gold” by implying that production
Euro from serious consideration. Great on the books as ‘marked to model’ is has already reached levels that can’t
Britain is in such disarray that it doesn’t creating an extremely distorted picture of be exceeded, an expression that is now
even deserve comment. Japan has a the health of the financial sector. commonplace in the oil industry.
rapidly aging population and embedded 6. INVESTMENT DEMAND FOR GOLD 9. CENTRAL BANKS ARE NEARING
government debt that already exceeds AN INFLECTION POINT WHERE THEY
200% of GDP. Even China, that paragon
of all things financial and economic, is
suspect. As the result of its bank lending
spree in 2009, the country is dealing with Despite the fact that gold has been rising KEEP THE MARKET IN EQUILIBRIUM
considerable overcapacity, an emerging steadily for ten years and sophisticated The western central banks, who have
inflation issue and a potential bad debt investors are climbing aboard to protect supplied massive quantities of gold to the
crisis in its banking system. themselves from the ravages of monetary market over the past fifteen years, both
updated June 2010
OWN GOLD extremely problematic due to the increasing the constant negative propaganda emanating
physical shortage of gold. from its mainstream apologists.
to meet burgeoning demand and to suppress
the price, are running dangerously short. Their
FACT THAT THE GOLD PRICE HAS BEEN Gold is indestructible, possesses a high value-
activities were reminiscent of the late 60’s
SERIOUSLY SUPPRESSED to-weight ratio (which makes it easy to store
when central banks expended over 100 million
ounces in an ultimately failed attempt to hold More and more members of the financial and transport), is not anyone’s liability, can be
gold at $35 per ounce. We believe that this establishment have been forced to concede easily hidden (which has been a considerable
time they disposed of far more gold and did so that gold has been subjected to constant price attribute in the past) and, most importantly, has
clandestinely, employing swaps, leases and management by western governments, their provided protection against the destruction of
opaque accounting. This era’s central bankers central banks and their bullion bank surrogates. wealth for centuries.
have obviously learned nothing from the past but The increasingly egregious activities in this area CONCLUSION
are clearly considerably more desperate due to are forcing any thoughtful person to acknowledge
The fundamentals for gold are impeccable,
the dramatically worse situation on the financial what is occurring. The work of the Gold Anti-
the long term technical picture is exceptional
and economic fronts. It is telling that the annual Trust Action Committee (GATA), which has been
and gold remains very inexpensive when
selling quotas under the European Central Bank remarkably accurate over the past ten years,
compared to almost every other alternative.
Agreement are 400 tonnes per annum and the is finally receiving belated acknowledgment
I expect gold to trade at several multiples
banks, after meeting their past quotas for years, following years of being studiously ignored. The of the current price before this bull market
are selling nothing. extent of the suppression has been so great breathes its last breath.
10. INCREASING LIKELIHOOD OF that it virtually guarantees a far greater upward
ACCELERATING PURCHASES OF GOLD explosion in the gold price than would otherwise
The enormous concentration of U.S. dollars in 14. THE SUPPRESSION IS EVIDENT
the reserves of a number of Asian central banks IN THE CONTINUING EXTREME
in conjunction with low gold exposure virtually UNDERVALUATION OF GOLD
ensures that they will be more aggressive Measured by any number of metrics (gold price Royal Bank Plaza, South Tower
purchasers of gold in the future. Russia and in relation to the staggering amount of money 200 Bay Street, Suite 2700, P.O. Box 27
China have already revealed their intentions Toronto, Ontario M5J 2J1
and credit that has been created over the past Toll Free: 416.362.7172
and India may have stolen a march on everyone several decades, gold’s extreme undervaluation Toll Free: 1.866.299.9906
when it announced late last year that it had relative to platinum, the gold producers’ pathetic Facsimile: 416.362.4928
purchased 200 tonnes of the well advertised
returns on capital at the current price, etc.), gold
IMF sale. What appears to be a huge swing
is far behind where we believe it should be. If
from collective heavy selling by the central bank
gold had merely kept up with the reported rate
community to net accumulation is going to have The opinions, estimates and projections (“information”)
of U.S. inflation since its peak price in 1980, it
an extremely salutary impact on the gold price. contained within this report are solely those of Sprott
would presently be trading in excess of $2,300
Asset Management LP (“SAM LP”) and are subject to
per ounce. change without notice. SAM LP makes every effort to
15. THE RELATIVELY SMALL SIZE OF ensure that the information has been derived from sources
THE GOLD MARKET believed to be reliable and accurate. However, SAM LP
The U.S. has long been the world’s largest gold assumes no responsibility for any losses or damages,
In the past, gold’s small market footprint has
holder with a current reported position of 8,133 whether direct or indirect, which arise out of the use of
actually been a negative because it more this information. SAM LP is not under any obligation to
tonnes (over $300 billion worth). However,
easily facilitated the price suppression activity. update or keep current the information contained herein.
there have been recurrent rumors that the
This is about to change, however, as gold The information should not be regarded by recipients as a
U.S. has mobilized an unknown portion of their
becomes the asset of choice for more and more substitute for the exercise of their own judgment. Please
gold reserves via swaps to facilitate leasing, a
investors for all the aforementioned reasons. contact your own personal advisor on your particular
key component in the gold price suppression
All the gold mined since the beginning of time circumstances.
scheme. The absence of any outside audit of the
is worth less than $6 trillion currently and the SAM LP is the investment manager of the Sprott Mutual
reserves since the 1950’s and the Fed’s current
total capitalization of all the world’s gold stocks Funds, Sprott Hedge Funds, Sprott Offshore Funds and
intransigence towards being subjected to an
barely exceeds that of Walmart. This pales in the Sprott Physical Gold Trust PHYS PHY.U (collectively,
audit only heighten suspicions that the U.S. does
comparison to the amount of paper money that the “Funds”). Commissions, trailing commissions,
not have nearly as much gold as they claim.
could seek refuge in the world’s eternal money. management fees, performance fees (if any), and other
12. LARGE SHORT POSITIONS expenses all may be associated with investing in the Funds.
Despite dramatic de-hedging by the gold Please read the prospectus or offering memorandum
producers, whose original excessive hedging carefully before investing. The indicated rates of return
Gold is in the tenth year of a powerful bull for series A/class A securities of the Funds for the period
was ostensibly the reason for the proliferation of
market since it double bottomed at just over ended May 31, 2010 are based on the historical annual
gold derivatives, the notional value of OTC gold
$250 per ounce in early 2001. It is most compounded total returns including changes in [unit/share]
derivatives still remains elevated. This suggests
definitely a stealth bull market as the sentiment value and reinvestment of all distributions or dividends
either a major legitimate bet against the secular
remains remarkably subdued, a fact illustrated and does not take into account sales, redemption,
trend of the gold price or ongoing nefarious distribution or optional charges or income taxes payable
by an extensive worldwide poll conducted by
activity (i.e. price suppression by the usual by any securityholder that would have reduced returns.
Commodities Online in the spring of 2010 that
suspects). The existence of large concentrated Investment funds are not guaranteed, their values change
revealed that 93% of the respondents expected
short positions on the Comex held by a few the gold price to fall. Gold has been climbing a frequently and past performance may not be repeated.
bullion banks makes it reasonable to assume classic “wall of worry”, a climb made steeper by This communication does not constitute an offer to sell or
that it is the latter. If the longs were to ever to the stout resistance of the anti-gold cartel and solicitation to purchase securities of the Funds.
call for delivery, the shorts’ position would be