Citigroup regrets getting caught rigging a market without a government partner


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

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

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

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:

"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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