Financial leaders stew over exchange rates while pretending to like free markets

By Dianne Maley
Toronto Star
Thursday, January 22, 2004

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John Embry's voice grows louder as he rails against American
profligacy and what it implies for gold and silver prices.

quot;It's a shocking monetary debasement,quot; the veteran fund manager
says. quot;They're just pouring money into the world. They're printing
money so the debt load doesn't fall on their heads.quot; He pauses a
moment, his voice growing hoarse, then adds darkly: quot;This will be
reflected in interest rates.quot;

It's a strange picture: A great economic power busily printing paper
money to pay its bills, which already add up to an unprecedented
three times its gross domestic product. So far, its creditors and
trading partners seem content with the paper notes even though they
haven't been backed by bullion for years and pay hardly any interest.

But that will change, Embry believes. When it does, it could spark a
crisis of confidence in the U.S. dollar and paper money generally.
Then real money gold and silver bullion will prove its
enduring
worth.

quot;Before this is over, people will be astounded at the heights to
which precious metals go,quot; he says. quot;In the early 1970s, when gold
began its slow but steady climb from $35 (U.S.) an ounce, no one
could conceivequot; that it would surpass $850, he adds. quot;I don't see a
big difference between now and the 1970s.quot;

Surely the difference is inflation, which nearly spiralled out of
control in the 1970s and is barely discernible now.

quot;That's the biggest lie on earth,quot; Embry says with obvious
disgust. quot;Inflation is all over the place. They just don't compute
the numbers right.quot;

That's why, tucked into his portfolio at the Sprott Gold and Precious
Minerals Fund, amid an assortment of gold mining stocks, Embry has
bars of gold bullion and silver certificates. Embry is president and
portfolio manager of the fund.

quot;Believe it or not, I think the upside potential in silver might be
greater,quot; he says. quot;Silver could take a shot at $10 (an ounce) over
the next 12 months.quot;

James Grant, esteemed editor of Grant's Interest Rate Observer, makes
a reasoned case for silver in a recent Forbes magazine column. Silver
slumped from a high of $49 (U.S.) an ounce early in 1980 to a low of
about $4.25 early in 2002; it is now trading in the $6 range.

More than a year ago, Grant made a persuasive case for gold. Bullion
for immediate delivery recently hit a cyclical high of $431 (U.S.) an
ounce before pulling back.

quot;Gold may well be a better monetary asset, but the white metal has
many more practical uses, from the arts to medicine,quot; Grant
writes. quot;But the major looming use for silver is the ancient monetary
one. The metal that used to be money will serve as a store of value
once again.quot;

Bob Hoye disagrees. Gold may rise to the heavens but silver will lag,
says Hoye, editor of Institutional Advisors newsletter in Vancouver.
He calls up a historical model dating back hundreds of years to show
that in a post-bubble contraction a deflationary environment
gold
tends to outperform silver. Proponents of silver, like Grant, are
biased toward inflation, he says. Indeed, Grant has said there's
nothing like a whiff of deflation to revive inflation.

Hoye adds: quot;We're probably going into another period of disappointing
economic growth, so silver will underperform gold.quot;

And gold?

quot;The Fed's going to depreciate the dollar against anything that
moves,quot; Hoye says of the American central bank, echoing Embry's
concern. The American Stock Exchange's HUI Gold Bugs Index could rise
to a high of 600 from about 230 now and a low of 35 in late 2000, he
predicts. He finds gold's recent retreat encouraging, having
predicted it months ago.

quot;First we have to get all the gold and silver bugs out of the market
before we can advance on financial reasons.quot;

In Victoria, too, long-time gold analyst Martin Murenbeeld is more
optimistic about gold than he has been for a long time. quot;Our medium
term forecast is for continued strength in the gold price,quot; he
says, quot;mainly because the U.S. dollar decline is not finished.quot;

Murenbeeld adds his voice to the growing concern about soaring U.S.
government debt because it quot;puts a lot of pressure on the monetary
authorities to print more money.quot; An indirect way of adding money and
credit to the financial system is to keep interest rates low, he
notes.

All that money has to go somewhere, which explains why gold bullion
and stock prices have been rising in tandem, Murenbeeld says. quot;That's
not normally what you would expect. If you put enough money out
there, everything rises.quot;

Richard Russell, editor of Dow Theory Letters, has been watching gold
and silver for longer even than the other seasoned analysts mentioned
above. His enthusiasm for the metals is barely restrained. In this
new, global world, there's only one global currency, Russell
writes. quot;That currency is gold.quot; Russell has been recommending silver
stocks for months and favours Pan American Silver Corp.

Russell, like Hoye, takes a dark view of the world
economy. quot;Remember, there are powerful deflationary forces operating
in the world today and they are world overproduction and the
almost
unsustainable levels of U.S. debt.quot; Against these forces, quot;the Fed is
inflating, inflating,quot; Russell notes. But will it be enough?

As Embry points out, a pumped-up money supply means a debased dollar,
which in turn means it will take more of them to buy an ounce of gold.

Mind you, not everyone agrees gold will rise substantially any time
soon. Pat McKeough, editor of the Successful Investor newsletter,
thinks it could trade in its recent range for some time and considers
gold stock expensive based on profit potential.

But suppose Embry and the others are right? How can one participate?

You could buy bullion outright and avoid the risks involved in owning
shares of a company. A better way, the analysts say, is to invest in
Canadian precious metal funds; Hoye recommends ones whose managers
have a good handle on the quot;exploration storyquot; analysts such as
Embry of Sprott Asset Management or Jonathan Goodman of Dundee
Precious Metals, a closed-end fund that trades like a stock on the
Toronto Stock Exchange.

Don't go overboard, Embry and Murenbeeld caution. Limit gold and
silver shares, coins or bullion to 10 per cent of your financial
portfolio.

quot;Ten per cent of your portfolio is enough,quot; Embry says. In the 1970s,
10 per cent in precious metals was enough to offset all the other
calamities that befell investors' portfolios as inflation and
interest rates soared.

Of his 15 reasons to own gold (see right) Embry says the quot;fundamental
underlying reason that has changed from the 1980s,quot; when the gold
price crashed, and the '90s, when it languished, is that paper money
is rapidly becoming worth less, quot;worldwide, not just in the United
States We're back to a decade like the 1970s, when you couldn't get
much for your money.quot;

Grant makes a similar argument for silver.

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