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Canada's National Post reports at length on the Sprott report

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  • GATAComm@aol.com
    Price of Gold Manipulated, Embry Says; Central Banks Dumping; Sprott Manager Ruffling Feathers on Bay Street Again   Drew Hasselback Financial Post (National
    Message 1 of 1 , Sep 14, 2004
      Price of Gold Manipulated, Embry Says;
      Central Banks Dumping; Sprott Manager
      Ruffling Feathers on Bay Street Again
       
      Drew Hasselback
      Financial Post (National Post), Toronto
      Tuesday, September 14, 2004

      http://www.canada.com/national/nationalpost/financialpost/investing/st
      ory.html?id=b7c0524a-f822-4d75-a02f-4edf7c80daba&page=1

      John Embry, one of Canada's best known gold bugs,
      is ruffling some feathers again in the otherwise staid
      corridors of Bay Street.

      A couple of weeks ago he started circulating a report
      that details his belief the gold market is manipulated.
      It's a remarkable paper, given that it's rare to see any
      veteran member of Canada's investing establishment
      go public with such a potentially controversial position.

      Mr. Embry, chief strategist at Sprott Asset
      Management Inc., spells out his argument in "Not
      Free, Not Fair: The Long-Term Manipulation of the
      Gold Price."

      If it sounds familiar, it's because we've heard Mr.
      Embry make this pitch before. Mr. Embry's new
      report echoes a paper he drafted two years ago
      when he was a senior money manager at the
      Royal Bank. The internal report was leaked,
      causing quite a stir.

      "The bank ran away from it as fast as possible
      and most people just dismissed it as being from
      the idiot fringe," he recalls.

      "Now a little more than two years have passed.
      It's not the verboten subject that it was then. More
      people are prepared to say, 'Yeah there's
      screwing around going on in the market.'"

      While he sees evidence of manipulation, Mr. Embry
      avoids the word "conspiracy." He doesn't believe a
      coterie of bankers met in the shadows back in 1995
      and mapped out a devious plan to suppress the
      gold price. But he believes the gold price is being
      managed. Mr. Embry describes how in his new,
      71-page report.

      "Some people don't like the truth. I really like the
      truth. To me, in the gold market, the truth is that
      there's been considerable management of the gold
      price."

      Mr. Embry, 63, insists he was not pushed out of
      Royal Bank after his 2002 report made the rounds.
      He had expected to remain with RBC Global
      Investment Management until the end of 2003,
      managing such powerhouses as RBC's flagship
      $2.9-billion Royal Canadian Equity Fund.

      But in March of last year, Eric Sprott called him
      out of the blue and offered him a spot with the
      smaller firm. Mr. Embry traded in the big shop
      for a smaller one that better accommodates his
      passion for precious metals. He now manages
      the Sprott Gold and Precious Minerals Fund,
      which has assets of just under $300 million.

      "It's nice to work somewhere where you can
      express your opinions and not have your employer
      jumping all over you because your views really
      don't support their point of view," Mr. Embry says.

      Here's a condensed explanation of what Mr. Embry
      argues in the new paper.

      Central banks have been moving bullion out of their
      vaults and adding it into the supply chain, which has
      swamped the market and held back the gold price.
      Meanwhile, Mr. Embry believes central bankers
      have changed the methods they use to calculate
      inflation. This masks that amount of inflation that
      might actually be in the system, allowing central
      banks to pursue the low interest rates policies that
      are fuelling growth.

      "I call gold a thermometer of economic and financial
      health. The criticism I would offer the central banks
      is that basically they're trying to create a false
      confidence that everything's all right because the
      gold price doesn't do anything," he says.

      "If these guys (the central banks) stopped supplying
      additional gold to the market, the gold price would
      levitate. It would go up sharply. You'd be talking about
      moves of US$20 or US$30 a day."

      There's more at play than the supply from the vaults
      of central banks, he adds. That flow of central bank
      bullion gave rise to derivatives trades that took the
      market by storm.

      They worked like this: Central banks would lend gold
      at extremely low interest rates. Borrowers would take
      that gold, sell it short, then invest the proceeds in
      bonds paying higher interest rates than those charged
      by the central banks. The borrowers were therefore
      making two gambles: The gold price would fall, making
      it easier for them to cover the short position; and bond
      rates would remain higher, making it possible to
      generate a profit on the spread.

      "It was a great opportunity. It made perfect sense.
      Everybody wanted to do this transaction," Mr. Embry
      says.

      But there was a problem, Mr. Embry explains. Few
      speculators were thinking about how they would
      eventually be able to return the borrowed gold to
      central bank vaults.

      The gold that was originally loaned out has now largely
      left the system. It has been melted down into jewellery
      and bars. So the only way to replace it is to mine fresh
      gold from new sources. Yet because the gold price has
      been suppressed, mining companies have been
      hesitant to build new mines.

      If Mr. Embry's analysis is correct, the decreasing gold
      production should put pressure on prices to rise.
      Volatility should erupt once the dam bursts.

      "I think this is one of the greatest investment
      opportunities I've ever seen in my career," he says.

      "Do not be afraid of this. This is opportunity. When
      they push gold down, buy it and buy gold mining
      shares. If you feel the need, when they run gold up,
      take some off the table. We should always be
      buying on weakness, but human nature being what
      it is, people get scared and they sell on weakness."

      Not everyone sees things exactly Mr. Embry's way.

      John Ing, president of Maison Placements Canada
      Ltd., also has bullish views on gold, but believes
      bullion prices are influenced more by macroeconomic
      factors than by the interplay of central bank supply
      and related derivatives.

      "It's a factor out there, but it's only one of a bunch of
      factors that guys like me watch. It's the macro factors.
      I've been lately focusing on the deficits and the price
      of the U.S. dollar," Mr. Ing says.

      As for Mr. Embry, he has no problem if people
      disagree with his argument. His paper is available from
      Sprott's Web site:

      http://www.sprottassetmanagement.com

      "What we tried to do was take all the evidence and craft
      a story that would support our point of view," he says.
      "Read it. Think about it. We'll have a debate with anybody.
      Take us on. But just read it and think about it."

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