By John Embry

        It appears to be business as usual in the gold market as I pen this missive, with counterintuitive price movements that fly in the face of any logical thought. On a late June Monday morning, gold dropped over US$20 per ounce in less than a minute at the COMEX opening. Anyone who believes that this was the result of profit-maximizing sellers should be categorized as hopelessly naïve.
        In my view, this bizarre price action revealed the anti-gold cartel at its very worst because it occurred against a news backdrop that normally would have resulted in a sharply rising gold price.
        The news in a word was horrific and included an impasse in the oil market after the hastily called Jeddah summit to deal with the high price, devastating downgrades for the bond insurers, recurrent rumors of the impending collapse of a major European financial entity, the recognition that inflation was becoming a particular problem in developing nations, and an ominous technical breakdown in the Dow Jones Industrial Average on the previous Friday.
        Designed, as always, to discourage gold investors and to keep individuals away from the very asset they should be pursuing aggressively, these tiresome bear raids will most assuredly end badly for the cartel. I believe that it is, in fact, helping to set the stage for the coming explosive move in gold.
        On this subject, the remarkably prescient Bill Buckler, who publishes The Privateer in Australia, nailed it yet again in commenting on the underperformance of gold when compared to oil. He wrote:
        "But oil is 'merely' the commodity which powers world economies. Gold is more than that, it is the alternate MONEY which has the certain potential to destroy modern financial systems. That is why gold is lagging oil. A stampede into gold now would make the financial crisis which the U.S. faced at the end of the 1970s look like a mere bagatelle. It is coming, of that we are certain. But we are equally certain that the "powers that be" will fight it every inch of the way."
        I am certain as Mr. Buckler is about the coming stampede into gold and that is why it absolutely essential that investors keep their wits about them and ignore the current violent volatility. They should focus instead on using these periods of artificial weakness as an opportunity to buy more gold. At this juncture, people should not be concerned about the short-term price of gold, but rather should concentrate on the number of ounces they own. Gold is real money at a time when paper money is coming into increasing disrepute.
        On many past occasions, I have referred to the endemic weakness of the U.S. dollar as one of several catalysts that will underpin gold's upcoming price rise. I continue to hold that view.
        The U.S. is suffering from a myriad of problems, not the least of which includes a chronic current account deficit in the neighborhood of $750 billion annually, a burgeoning federal fiscal deficit which could reach $1 trillion shortly due to the impact of recession-induced revenue shortfalls, and the need to throw more and more money at its financial institutions, many of which are facing significant credit market losses. As a result, the world is awash in dollars, and this over hang is now a major issue.
        Foreign central banks are accumulating enormous reserves of greenbacks with no end in sight, and with China's reserves leading the way, having passed $1.5 trillion recently, this is the elephant in the room that can no longer be ignored. The proliferation of sovereign wealth funds, whose primary purpose I believe is to allow those countries with excess dollar reserves to discreetly diversify their exposure, is a reaction to this.
        This phenomenon and the accompanying downward pressure on the dollar recently elicited as fascinating series of responses from arguably the three most powerful public personas in the United States. While speaking via satellite to a financial conference in Spain, Fed Chairman Ben Bernanke broke the protocol that the Fed chairman does not comment on the status of the U.S. dollar. He boldly (and in my opinion, incorrectly) stated that:
       "Over time, the Federal reserve's commitment to both price stability employment and the underlying strengths of the U.S. economy including flexible markets and robust innovation and productivity - will be key factors ensuring that the dollar remains a strong and stable currency."
       Shortly thereafter, President George W. Bush, while touring Europe, added his voice to the chorus by saying that a strong U.S. dollar is in America's economic interest.
       Then Treasury Secretary Henry Paulson chimed in, saying he would never take currency intervention or any other tool off the table, thus implying central banks could intervene to support the dollar. I considered that comment to be spectacularly redundant because it just confirmed what has actually been happening for a considerable period of time.
       To my mind, this remarkable trifecta of remarks essentially validates the dollar's inherent weakness and represents an attempt to use moral suasion to address an issue where the correct policy responses are anathema to the authorities. If the U.S. were at all serious about addressing the issue of dollar weakness, it would initiate a draconian interest-rate hike, take steps to address the rapidly growing federal fiscal deficit and do more than pay lip service to its appalling current-account deficit.
       Despite Mr. Bernanke's thinly veiled suggestions about combating inflation, thereby implying an interest-rate hike, I firmly believe that there will be no meaningful policy response forthcoming for the simply reason that the U.S. is in far too fragile a state, both financially and economically, to withstand anything but a token tightening of monetary policy.
       In addition, it is virtually imperative that the federal deficit grows, effectively permitting increased government spending to substitute for shrinking private-sector activity as the recession intensifies.
       The current-account deficit will only recede significantly when the U.S. economy weakens dramatically more than the rest of the world for a sustained period of time, an outcome forecast by those who believe in the fantasy of economic decoupling (i.e., other countries can continue to grow robustly irrespective of what is happening in the U.S.). Unfortunately, the merging inflation problem throughout the world, but most particularly in the fast growing developing portion, threatens this fond hope.
       It is becoming readily apparent that the explosion in global liquidity, which derives in no small way from the U.S. financial profligacy, is now being reflected in dramatic increases in inflation everywhere. The influential magazine The Economist recently reported that, "If you measure the numbers correctly, two-thirds of the world's population will probably suffer double-digit rates of inflation this summer."
       Clearly the main cause has been rapidly rising food and energy prices, which are plaguing all nations, but a legitimate concern is that this could raise inflation expectations, leading to much bigger wage demands in rapidly growing countries. This could trigger a wage-price spiral, which was the essential problem in the developed world in the inflationary 1970s. Real interest rates are negative in most nations, a condition that most assuredly underwrites inflation, but very few countries have much stomach for raising them significantly so I suspect inflation is going to be a problem that persists.
       From gold's perspective, this should fuel demand for the yellow metal. This reality is readily apparent in the merging nation of Vietnam, where annual inflation of 25 per cent has spurred record gold demand. In fact, so much gold was being imported it was negatively impacting the current-account deficit to such an extent that the government had to shut down gold imports. Expect this phenomenon of inflation-driven gold demand to spread rapidly to other countries.
       Lastly, it has been suggested by one of the gold world's most respected voices that the horribly performing junior gold shares are being artificially suppressed. Legendary trader Jim Sinclair has alleged that there is a cabal of hedge funds that are controlling the gold and silver shares from the short side, utilizing extensive naked short selling among other nefarious maneuvers.
       Given the odd trading patterns of many of these stocks, I am inclined to agree with Mr. Sinclair. He is trying to organize a Chamber of Mines, comprising the junior producers as well as the exploration and development companies, in an attempt to combat the influence of the hedge funds. I totally endorse this, and if the initiative is successful, it could have a salutary impact in this sector, particularly in the event of a sharply rising gold price.
       Editor's Note: John Embry is chief investment strategist at Sprott Asset Management. His views appeared in the Investor's Digest of Canada. Views expressed are those solely of the author and should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management Inc. Mr. Embry is a regular contributor to Investor's Digest of Canada, 133 Richmond St. W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137.