John Embry, Sprott Asset Mgt., writing in the Investor's Digest of Canada, says the fundamentals for gold couldn't be much better and the technicals look great.

        Gold finally broke free of its shackles at the end of 2007 and proceeded to go on a tear.
        After bottoming in the US$790s just before Christmas, gold moved steadily upward without a correction through the middle of January, reaching a London A.M. closing high of US$1023.50 per ounce on March 17th. What was particularly noteworthy was the fact that gold went through the all-time closing high of US$850 and the all-time high tick of US$875, both achieved in January 1980, like a hot knife through butter.
        Not surprisingly, a violent correction then ensued as gold dropped over US$113 per ounce by March 20th with virtually all of the damage occurring on the Comex and the New York Access Market, standard operating procedure for the anti-gold cartel.
        For those who might wonder how the gold market could be so explosive, a development totally contrary to the cartel's wishes, it is easily attributed to a confluence of events that were extraordinarily positive for gold. The financial fews was somewhat predictable, albeit far worse than anticipated, while the geopolitical occurrence came right out of left field.
        The ongoing collapse in the U.S. financial system was high-lighted by Bank of America's mind-numbing acquisition of the financially distressed Countrywide Financial, the nation's largest mortgage originator. However, the stunningly awful results from Citigroup, massive injections of foreign capital into formerly sound icons like Merrill Lynch and Morgan Stanley and the worsening travails of the monoline bond insurers, to name but a few, contributed to the blackening mood and drove investors to the classic safe haven, gold.
        The exogenous event that totally took the market by surprise was the unfortunate assassination of opposition leader Benazir Bhutto in Pakistan. This had clearly not figured into the equation. Pakistan, referred to by The Economist magazine as the most dangerous place on the planet, has been destabilized by Bhutto's death. Considering that the country borders Afghanistan, possesses a considerable nuclear arsenal, includes among its population radical Islamic elements and has long been at odds with India, it is a potential geopolitical nightmare. Following Bhutto's assassination, gold powered through the all-time closing high of US$850 per ounce, proving that while the anti-gold cartel may be powerful, they are not omnipotent.
        But if the unrest in Pakistan provided an initial geopolitical lift to gold, it was the Federal Reserve's emergency interest rate cut on Jan. 22 that truly solidified the record high prices. Having touched nearly US$850 per ounce overnight, bullion roared to US$890 after the Bernanke Fed capitulated in the face of a plunging stock market. By cutting interest rates by an astounding 75 basis points, the central bank sent the clearest of messages that the U.S. dollar will be sacrificed in an all-out bid to save a seriously faltering economy.
        In time, other central banks will also seek depreciated currencies when they find their economies afflicted by the American contagion. This will further entrench gold's standing as the one currency that can truly maintain its purchasing power. To quote John Pierpont Morgan, the brilliant U.S. financier, "Gold is money and nothing else."
        As this reality sinks in, more and more investors throughout the world should become cognizant of J.P. Morgan's stated wisdom and will increasingly seek gold (and silver) as alternatives to paper money. We have not even seen the tip of the iceberg of this coming phenomenon, so it is my strong belief that those pundits who are constantly calling for the end of the precious metals bull market anytime soon are sadly mistaken.
        Gold's fundamentals are so bullish that even some central banks are already clandestinely buying the metal, though a more transparent vehicle is receiving materially greater emphasis: the sovereign wealth fund. Hardly a week goes by without the announcement of a new entity in this field, with Saudi Arabia being the latest to enter the fray.
        And by no means are these insignificant pools of capital. A recent estimate put the assets of these funds collectively at more than $3 trillion, and Morgan Stanley, in a recent study, suggested that they could grow to $12 trillion by 2015. Their express purpose is to allow the various countries to more easily diversify their mountains of currency, primarily U.S. dollars, into more tangible assets.
        Thus, far, equity investments have grabbed the headlines, but I believe precious metals are on the radar screens of these entities. Given the relatively small size of the gold and silver markets, the lack of available inventory and the existing huge supply/demand imbalance, this phenomenon alone should have a salutary impact on gold and silver prices.
        For the foreseeable future, I don't think anybody will be constrained in their buying of gold because of the perception that it is overpriced, and we can credit that attitude to the effectiveness of the anti-gold cartel's price-suppression scheme over the past decade. By their cumulative actions, they have restrained the gold price to the extent that it is currently dramatically under-priced by virtually any metric you care to use.
        When one contemplates the unconscionable amount of paper money and credit that has been created worldwide since gold peaked at US$850 per ounce in 1980, it almost seems surreal that it has taken almost 28 years to reach that level again. To amplify that point, a gentleman named Ron Rosen recently noted in his Precious Metals Timing Letter that in the 28-year period that gold round tripped from US$850 to US$252 and back to US$850, the national debt of the U.S. grew by more than 10-fold from US$900 billion to US$9.2 trillion. Now tell me, in the face of that statistic, would you rather own gold or U.S. dollars at this point?
        Not to beat a point to death, but if the previous peak price of gold were adjusted by the official U.S. inflation rate in the intervening period to establish an equivalent price in today's dollars, that number would be in the neighborhood of US$2,200. So to think that gold has accomplished much by regaining its old nominal peak is, in my view, naive. Using a more realistic inflation rate for that period, minus hedonic manipulation, substitution, bogus imputed rents and all the rest of the distortions would suggest the previous peak in today's dollars might be closer to US$5,000.
        Editor's Note: John Embry is chief investment strategist at Sprott Asset Management. Views expressed are those solely of the author and should not be considered an indication of trading intent for any investment funds managed by Sprott Asset Management Inc. Sprott funds may hold above noted securities. Mr. Embry's article appeared in the Investor's Digest of Canada, 133 Richmond St., W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137.