Silver ETF should be up to 23 million ounces


Embry Sees Trouble for Paper Money;
Gold Headed for US$1,000, Sprott Strategist Says

By Levi Folk
National Post, Toronto
Monday, May 1, 2006

We are "in the early throes of paper money getting seriously
debased," warns John Embry of Sprott Asset Management, and the price
of gold is headed to US$700 this year and US$1,000
conceivably "within two to three years -- maybe quicker."

This story is finally gaining traction because of the remarkable
deterioration in the financial position of the United States, he
says. Confidence in U.S. paper money is starting to ebb, "and, boy,
when it really starts to move, you'll be shocked, I think, at how
fast the prices will move."

"I think what you've got here is a perfect storm," he concludes. The
United States has shown "very little interest in any fiscal
responsibility," and has created, in the face of declining
savings, "an enormous debt pyramid" that can be sustained only by
ever-greater credit expansion, he explains.

The supply of money is ever expanding, whereas the supply of gold is
relatively scarce, hence the "perfect storm." Insufficient
exploration for at least the last five years suggests "at best a
flat production profile" for gold, says Embry -- this in a situation
where demand already outstrips supply by roughly 1,500 tons/year.

Behind this "perfect storm" is a conspiracy theory advanced by Embry
that points to the U.S. Federal Reserve Bank doing whatever it can
to hide the truth about its debased currency. To give one subtle
example, the Fed recently stopped publishing a broad measure of the
money supply (M3) because it suggests that the money supply remains
accommodative despite the rate hikes in the United States. To take
another, central banks have been selling gold over the past decade
to make their currencies appear stronger.

The problem with conspiracy theories is that they can be used to
dismiss any evidence that does not corroborate one's view of the

For example, inflation is the smoking gun that Embry cannot find. In
fact, expected inflation, which can be calculated as the difference
between current yields on real-return bonds (Treasury Inflation-
Protected Securities in the United States) and nominal bonds,
remains muted. Embry explains this conflicting evidence by
suggesting that the bond market is also being manipulated, this time
by the U.S. Treasury.

Conspiracies aside, the fundamentals for gold and silver are strong.

"The fund has been managed on the premise that gold and silver were
going materially higher in price, and that they're going to go far
beyond what most people think is possible." Investors simply do not
understand the "upside magnitude" implied by the supply-and-demand

Other factors are kicking in to bolster gold stocks, otherwise a
high-beta play on the actual commodity. For instance, the gold
sector is witnessing a spurt in merger and acquisition activity as
the majors are snapping up juniors with proven finds.

In addition to hedge funds and futures markets fuelling speculation
in precious metals, there are also now mainstream investment
vehicles like exchange-traded funds (ETFs) that are whetting the
appetite of investors. ETFs are providing a much easier mechanism
for people to invest in precious metals, he says, potentially "a
huge positive."

Barclays Global Investors iShares Silver Trust ETF (SLV on the
American Stock Exchange) came to market Friday. Silver had been
climbing for months in anticipation of the fund's launch.

Silver, in Embry's view, is the much more interesting story. True,
there is no central-bank silver reserve, but the supply-and-demand
equation is also working in favour of silver, as the enormous above-
ground inventory has been largely depleted and new sources of demand
mushroom (e.g., in the health sciences).

For these reasons, Embry thinks we'll see silver at US$20 in the not-
too-distant future. Accordingly, the fund has a 10% allocation to
silver bullion, and a relatively high exposure to pure silver plays
such as Silver Wheaton, Western Silver and Bear Creek Mining.
Meridian Gold should be included here too, he adds, because of the
high silver content in their ore.

Beyond the above-average exposure to silver, the fund is also
characterized by an emphasis on juniors over seniors.

"The way I've made my money through the years has been to put
considerable emphasis on juniors: emerging companies, exploration
vehicles." The juniors have "much more leverage to the upside," he
explains. "They're still relatively well-priced as per ounce in the
ground" -- but that will change, he adds.

Embry also sees value in gold producers in strong-currency countries
like Canada.

"I like small producers who have really struggled to survive:
They're lean and mean to the extent they can be; and now they're in
a position to benefit, and their stock prices don't reflect it,
because they're still not making much money." This has become a
secondary theme in his stock selection.

The emphasis on juniors, however, translates into higher risk,
especially in light of today's price volatility. Embry manages this
risk by maintaining a diversified portfolio of 70 names with an
emphasis on careful selection of juniors. Among his juniors,
Southwestern Resources and Greystar Resources have consistently
played a prominent role.


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