With no easy solutions to the globe's debt problems visible, Sprott Asset Management's John Embry expects gold and silver to be significant beneficiaries but the road ahead will not be easy.
Posted: Wednesday , 24 Aug 2011
GRONINGEN -
For many commentators, gold is considered not only a constant store of value but, also, a barometer for the health of the global economic system and the currencies that pump through its veins.
For, John Embry, chief investment strategist at Sprott Asset Management, the current parabolic rise in prices, which have beat even his optimistic performance expectations this summer, is indicative of the unsustainable debt situation in which the world now finds itself.
Speaking on Mineweb.com's Gold Weekly podcast, Embry explains, "We've reached a stage in the debt cycle where it doesn't appear we can move forward and on that basis you need more and more debt creation to generate the same dollar real GDP growth - and I don't think we can get that kind of debt growth. So to keep these systems stuck together they [governments] are going to have employ quantitative easing in massive quantities, and if they don't, the current softness in the economy is going to turn into a rout."
Given the current levels of growth, Embry says, any halt in the funds propping up the banking system will result in significant deflation in "fairly short order" because the deflationary pressures within the West are huge.
But, he says, it is not just the West that is likely to suffer. "The Chinese miracle is grinding to a halt, they've dined out in the West for years and they paid for it by taking back our crappy paper but the fact is that they kept their economy going at breakneck pace and I would also say it is probably one of the most unbalanced economies I have ever seen.
"They have depended so heavily on exports and capital spending and now the export markets are weakening at the same time they have massive over capacity. So those two engines are coming to a halt and the hope is that they can do lateral arabesque into consumer demand to keep the thing going. I think that will be a hard act in the short run and consequently China faces some fairly difficult economic problems going forward.
What this means for prices?
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