US Downgrade Looms

Podcast: Play in new window | Download

Subscribe: Apple Podcasts | Google Podcasts | Spotify | RSS

About this week’s show:

• Debt Ceiling raises probability of collapse
• Goldman BUYS gold, tells others to SELL
• Call to action

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: Yesterday morning, I actually had forgotten to set my alarm. It’s true, I normally don’t do that, it’s been many years. I got to work about 15-20 minutes late, and I hope you don’t mind.

David: Didn’t notice.

Kevin: (laughter) But I looked at the gold market and it was down $30 and I thought, you know, with all the physical buying in Asia, what is this? Why do we continually see this? But you were up at 4:00 in the morning and you told me that something had happened that was worth noting.

David: I think because of my vacation from a few weeks ago, I must be so rested, I just don’t need sleep anymore. It’s quite common to be up early, early these days. It is fascinating because I get to watch the handoff from one market to the next. Gold trades almost on a 24-hour basis, and coming from Europe into the New York open in the futures markets, there is sort of a handing off of the baton, and lo and behold, we went from being down 80 cents to being down $35, almost $40, instantaneously. And we’re talking about the futures market. No concerns in Europe, no concerns in Asia, no concerns in Sydney, and the handoff from the U.S. was fairly smooth the day before, too. So the baton gets passed around, and then what did the guys in New York do with the baton? It’s like they threw it on the ground and started doing a dance on top of it.

Kevin: And they don’t even need gold to do it. They just do it with these contracts. We’ve seen this all year long. This has characterized the gold market here in 2013.

David: That’s actually quite illogical when you look at the other things that were going on, and are going on right now this week, and actually, over the next several weeks.

Kevin: A couple of days ago Mike Gallagher was asking you about the ramifications and the concern about this partial government shutdown. You made a comment on the Gallagher show that I thought was excellent. You said, “In a way, it would be nice to see a much smaller government. Do we really need, what is it, 16,000 plus employees in the EPA?” And you said, “What are they all doing?” I mean, could we do it with 600? Could we maybe save a little bit of money?

There are effects when the government shuts down and I think we should look at that and then maybe this upcoming debt ceiling, which is really not even tied to this.

David: This week really sets the tone for the more significant issue of raising the debt ceiling. We just got to the fiscal year end for government, and it’s very interesting, when you get to September 30th, the week leading up to that you usually see terrible spending habits by government groups. Why? Because many of them face use it or lose it provisions, where the money that they have been given, if it’s not used it has to go back to the Treasury. Do they buy things they need? They’ll spend it on anything!

Kevin: I have a client, Dave, who was disgusted. She is going to go unnamed, she’ll recognize herself when she hears this, (laughter) but she was just disgusted with the particular division that she was with in the government, because that’s exactly what they were doing. They were spending, because they know they will not get the same budget next year if they don’t spend everything, and a little bit more than they did the year before.

David: But to reiterate, the shutdown is not the issue. On the horizon is the debt ceiling, and all we’ve had is an acrimonious tone set, this bantering back and forth between the House and the Senate.

Kevin: It’s all politics.

David: The debt ceiling is a legislative limit on the amount of IOUs the Treasury can offer, so you’re really talking about a lock-tight limit on the federal debt. We have raised that ceiling 94 times since 1944.

Kevin: So, if it was a one-story building, a one-story building is now 94 stories tall.

David: Yes, so it’s not a new thing, but it’s just to say that we’ve been here, we’ve done that, many times over the last 50-60 years, and it’s not one party or the other that either favors it or rejects it, decisively. Democrats have raised the debt ceiling 40 of those 94 times, Republicans have raised the debt ceiling 54 out of those 94 times. The only difference is the degree to which each party moves the needle.

So you have Democrats which have raised it, on average, 16.8%. Republicans have raised it, on average, about 5.6%, they’ve just done it a little more frequently. If that average holds, we will see the ceiling here in the next few weeks, raised higher, again, that 16.8% number, to about 19.5 trillion dollars. And I think there is a good reason to expect it to stay under the 20 trillion mark.

Kevin: Sure, that’s just sort of a psychological barrier. Can you imagine saying, “Okay, now our budget’s 20 trillion?”

David: And it’s a PR issue, and that’s the prudent issue here. You don’t want to deal with a PR battle. So 19.5, not more than 17%, and again, that’s the average, maybe it will be less. I hope it’s less.

Here’s how it breaks down. We have discussed before that the ceiling has already been breached.

Kevin: That’s the thing. The ceiling was breached months ago, and so they’ve been borrowing from pension funds since then.

David: That’s exactly right. Jack Lew has allowed for the extraordinary measure to be in place since May, wherein he has borrowed from the government employee pension G-fund, nearly 200 billion dollars, and that amount will have to be repaid immediately when the ceiling is raised. You think you have a little bit more wiggle room once the ceiling is raised, well actually, you have IOUs that have to be taken care of instantly.

Kevin: What’s the burn rate right now already, if you look at it?

David: Sure, so the budget for 2013, 3.8 trillion dollars. That’s the current cash burn rate for all government expenses in this last fiscal year, so technically, we are now in fiscal year 2014, so for last fiscal year, 2013, 3.8 trillion. Actually, 2014 is virtually the same on revenues of between 2.7 to 3 trillion. That’s what they expect in tax revenues, 3 if you assume the economy is humming along nicely, and healthy, and maybe less if we see revenues decline as a result of a slower economy. That gives you a budget deficit of at least 750 billion next year, following this year’s trillion plus number, and we can imagine similar figures for 2015. So, the increase in the debt ceiling will basically cover our spending, or really, over-spending needs, for 2-3 years.

I guess there is one caveat, here. Interest on the national debt is rising with the increase in interest rates, and this is really critical. The 2013 official estimate for interest expense was 246 billion. The actual number, year-to-date, and this was actually before September gets factored in, is 395 billion, with one final month, September, still to be tallied. That puts us somewhere between 420-430 billion for the year.

Kevin: That’s more than 60% more than…

David: Yeah…

Kevin: Yeah, than what they had thought. So if we really are possibly in the beginning stages of a rising interest rate market, Dave, this could really look nasty, just on the interest payments on the debt.

David: And this is a really critical thing. This is not exactly a rounding error. When your estimate is off by 60% and that works out to be over 150 billion dollars, yeah, somebody needs a job review. Think about it. We paid 60% more on our interest expense than projected, with this most recent increase in rates, which came from the mere suggestion of taper. Taper, of course, is that limitation of spending, a reduction of the 85 billion dollars.

Kevin: The quantitative easing reduction.

David: Exactly. As an aside, obviously there are consequences in the real estate markets with rising mortgage rates, declining mortgage applications, etc. Those were several reasons why we strongly suspected the Fed could not end the monetization program of mortgage-backed securities and treasury securities.

Kevin: And David, one of the things that you covered in this year’s DVD, which if our clients haven’t gotten, they can still get it if they call us at 800-525-9556, is that you raised this issue in the DVD when you were first filming it, saying, “This could be one of the critical breaking points. When interest rates begin to rise, the debt that we have built up while they were low is unsustainable, it can’t be paid with interest rates at higher rates.

David: Even if you have seen it, I would go back and watch The Fuse Is Lit one more time. We suggest that that line item, the interest expense on the national debt, is a deadly killer in the fiscal stability equation. Remember, the higher interest payments for 2013, a near miss by 60% above what the government expected, that has been the result of only a portion of our debt, which has either come due in the last 12 months and needed to be refinanced at current interest rates, or the newly issued IOUs.

Kevin: That doesn’t count the whole of the debt. We have 17 trillion dollars in debt. This is just what has come due in the last 12 months.

David: Right, exactly. It’s staggered, we have more to refinance. The question is, at what rate? Here’s your treasuries, they’re bridging the gap between tax revenues and the promised spending from Washington, those are your total expenses. In other words, we have a lot more to refinance in 2014 and in all likelihood it’s going to be at higher rates, which means, whatever the government is assuming as a total interest expense may be too conservative a number. 150 billion this year, same for next year? We’ll see.

Let’s say we settle this year at 430 billion, with the final month included, and we’re assuming the average month’s interest expense to go up to 430 plus next year’s 150, so we’re just going to take a stab at it. 2014 interest expense of roughly 580 billion. That’s in interest. That is on tax revenues of roughly 3 trillion dollars.

Kevin: So we’re talking a fifth, right now, of our revenues, coming in on taxes, a fifth of it is going to interest. Think about that for a second, Dave. That’s like us paying a fifth of our income to credit card bills in just interest. It’s amazing.

David: Yeah, but you’re not actually making progress on your credit card bills, all you’re doing is paying the interest-only option, so that your creditors don’t adjust your credit score. You’re just keeping up with the interest payments. So, yeah, that’s not healthy, and what does this mean, exactly? What’s our take-away from this? Number one, you have wrangling over the debt ceiling. It will be acrimonious, and I think very disconcerting to our foreign creditors. Exit from the dollar, or more specifically, treasury bills, treasury bonds, and treasury notes. The exit from those assets is likely to increase.

Kevin: And it’s been going on, Dave. We had the reserve currency of the world. We still do, but that’s dropped, like you talked about last week, from a 70% holding down to 60% plus holding. So we’re seeing a reduction of the holding of dollars worldwide. Once you do things like this it trashes the dollar.

David: You have the potential to magnify what we would call a death spiral in the treasury markets, where more selling of that asset feeds the trend of higher rates. Those higher rates, again, adjust that one component, that one line-item in our budget, which is nearing 20% now or for the next year, and you end up with a larger fiscal gap, which results in, again, higher yields, lower demand for bonds, and again, that sort of death spiral.

We’ll offer an alternative to that scenario in just a minute, but there is a second point, there is a second thing to keep in mind. After the debt ceiling comes a reality of a still sobering fiscal decay. With spending high, revenue estimates are probably over-estimated. Again, we look at revenue estimates, and it is in light of what people expect, in the government, the economy will be doing. Is the economy healthy? Great, we’ll have great revenues. If the economy is weak, we’ll have a decline in those tax revenues. But the D.C. folks are hoping for growth, they’re hoping for recovery, and those hopes are embedded in 2014 expectations.

Kevin: Okay, but say I’m Moody’s, Standard & Poors, Egan-Jones, some of these people who are just paid to look at the value of credit. We’ve talked about this before. A lot of times Moody’s and Standard & Poors don’t really pay a whole lot of attention to this stuff because they are bought off. But Egan-Jones, these guys came under tremendous pressure when they started questioning the value of debt in the past.

David: Moody’s considered a downgrade back in 1996 when the government was shutting down then. Since then, they’ve been reluctant to put themselves in the government crosshairs. But Fitch, S&P, Egan-Jones, as you mentioned, they’ve already been candid about their concerns, and in all likelihood, will either reiterate what they call a negative watch, which is, basically, “We suspect something’s going wrong here, and we may downgrade.” It’s sort of the first step toward a downgrade. Or we could see an outright downgrade, which, as we just stated, adds to the reasons why international creditors would consider not rolling over. That’s a technical term for, basically, resubscribing once your debt comes due, just plowing that money right back into new issues. They wouldn’t roll over their IOUs that they already have, and they may accelerate outright liquidations.

Kevin: That’s the thing. Anytime you have a questionable safety rating on anything, you have to pay higher interest rates, and this is something that I think a lot of times folks misunderstand. The reason our Federal Reserve is having to buy so much of our debt already is because we’re not paying accurate interest rates as it is. But you continue to degrade and, Dave, is 85 billion a month going to do it?

David: Unfortunately, not. And this brings up sort of a technical issue that we have with the dollar. The more we do that, in terms of monetizing debt, the more pressure it puts on the dollar.

Kevin: But we could still have short-term rallies, right? There are reasons for short-term rallies in the dollar that are not necessarily the long-term trend.

David: And looking at a technical picture, a chart of the U.S. dollar, a robust rally is needed from these levels to avert a cascade into the low 70s on the dollar index. The dollar is perched, in our view, precariously above support, in the 79-80 range, and this is a time frame and the level where you would actually expect the usual suspects to come in, support the dollar, try to smash gold, to underscore the stability of U.S. denominated assets. And the question is, will that ploy still work? Will it work again? With current negotiations in D.C. offering more downward pressure on the dollar, I don’t know. Watch the chart, and with a break below 79, Katy bar the door.

Kevin: When we talk about complexity of the markets, Dave, we have the manipulators, which add complexity to the markets, but actually, we have a lot of other things that could affect the dollar market in the short run that don’t necessarily point to the whole picture. Look at some of the emerging markets. That has been where money has been wanting to go over the last few years, but it doesn’t look like that now.

David: No, in fact, there has been a real rout in the emerging markets, and that could move into high gear, with emerging market bonds selling off even more, some of that traffic, and this goes back to two alternative outcomes. To the degree that the emerging markets go from bad to worse, you could argue that some of that liquidation, both of emerging market bonds and emerging market equities, that money could come back into the U.S., into treasuries, into the U.S. dollar, and again, show itself as our friend, Ian McAvity likes to say, “The U.S. dollar is the best-looking horse in the glue factory.” That’s an alternative outcome. Given what is happening in the emerging markets right now and capital flight out, you could actually see a boost in the dollar. That could be temporarily gold-negative. We’d have to see.

Number two, as an alternative outcome, if emerging markets continue the declines off their peaks, which, yes, they are already off 29-30% in most markets, an atmosphere of fear in the financial markets could drive people to make decisions purely on the basis of liquidity needs, moving into cash, or the equivalent T bills, buoying treasuries, taking yields back toward their record lows. Although we would see a greater case for interest rates rising on a short-term basis, given what’s happening in the emerging markets, you could actually see a drop in rates. This would, again, offer a short-term reprieve for our fiscal issues, with the interest component temporarily coming down, and probably buy us some time to about 2016, and this is really what scares me, with all bets being off at that point. You don’t really want to imagine the Washington D.C. battle to raise the debt ceiling 2-1/2 years from now, getting above that 20 trillion mark, and in a rising interest rate environment. You are talking about absolute chaos.

And I guess there is a third outcome, which it appears the market is kind of front-running this week, getting out in front of, is what I mean. We have, of course, the kabuki theater in Washington, and they are currently raising the blood pressure of all market participants. Let’s say this all comes to an end, a deal is struck early this week, a relief rally ensues, the belief that the sort of insanity in D.C. can’t go on that long, somehow that translates, mainly for short-term speculators, into a decision to buy stocks now, on the opinion that concerns are overblown, and clearer heads will prevail. You buy now, before the solution is announced, and benefit more. It’s sort of on that basis, gold sells off, silver sells off, you buy stocks because the Fed is in control, and D.C. will sort itself out soon enough.

That would be looking back at 2011 and saying, “Listen, we got through the debt ceiling debate then. What happened to the dollar? What happened to the equity markets? Whole new lease on life. We’re on the cusp of a whole new lease on life for the dollar, and the equity markets, and honestly, Kevin, I think that’s where they are ignoring the bigger issues of the debt ceiling and our larger structural problems, which have yet to be addressed, in the least.

Kevin: We’ve done this now, Dave, for decades. As a family company, it’s four decades. As a career, it’s 2-1/2 decades for me, and about that for you. If we were to look at how many times people have looked back, like you were talking about, go back to 2011. “Hey, it really wasn’t a problem in 2011. Let’s go ahead and buy stocks. Let’s buy the dollar.” The problem is this: When people think, “This time it’s different,” they get burned. People thought, “This time it’s different,” in 2007 and 2008, and it wasn’t. It was very predictable.

David: And there are two differences between now and then. We’ve had a couple trillion dollars extra added to our debt obligations just in that two-year stretch, and on top of that, we’ve already seen the TIC flows, this is the measure of who owns what in the treasury market, we’ve seen a liquidation of treasuries from foreign central banks. That was not the case in 2011. That is the case this year, so you are in a different environment, and I think you are selectively looking at details if the conclusion you come to is “Buy stocks now on the basis of a Renaissance move, and Washington has gotten their proverbial poop in one pile.”

Kevin: So, your response, in this particular case, would be, look down the trail, like we have talked about with mountain biking, and when you are doing anything that involves motion, look as far down the trail as you possibly can, because if you are looking right ahead of you right now, you’re going to get confused on this one.

David: That’s right, keep your eye on the horizon, and I guess I would offer this as a response. There has never been a time in modern financial history, where the ownership of ounces, gold and silver, is more important, imperative, essential. What is the word I’m looking for?

Kevin: Real value.

David: And if short-term thinking causes you to dump ounces and buy stocks, you’re missing just how historical a pivot-point we are at. Major market shifts, they don’t occur in an instant. When they finally turn, they turn for long periods of time, and I think it takes a seasoned perspective, a historically grounded perspective, to appreciate this, and practice patience.

Kevin: David, you have always liked to talk to the oldest men in the business. I remember Alan Abelson, he passed away this last year, unfortunately, but Alan had been in the business 60-65 years and had written for Barron’s, and he just brought such amazing insight, because he brought perspective. It’s the looking down the trail perspective.

But there’s been somebody that you’ve recognized and really followed for years and that’s Dan Fuss, with Loomis. I know you just recently heard an interview with him, and hopefully we’ll get him on the show, but what did he say? He’s seen the full cycle – the up and the down on the bond market.

David: A grounded perspective, and certainly historically aware. Over the weekend, you’re right, I listened to a great interview. He works with Loomis Sayles. He is a bond guru. Dan Fuss is 80 years old, 80 years young, really, and one of the only talented bond fund managers to have been through the last bear market in bonds, that is, a rising rate environment.

Kevin: Let’s put that in perspective, Dave. A bond market actually rises for about 30 years, and then it falls for about 30 years, so a single cycle from rise to fall, from trough to trough, or peak to peak, is a 60-year span. You have to be 80 years old just to see one full cycle.

David: And that’s what I mean. Major markets shifts don’t occur in an instant, and when they do turn, they last a long time. Bill Gross is not a spring chicken, but he was learning to shave and counting cards when Dan Fuss was active in the marketplace, and Jeffrey Gundlach wasn’t even alive, yet, sort of following his demented ways. Both of these are younger, very talented guys. They would both look at Fuss as the more seasoned and historically grounded. His view is worth pondering. As many of you know, we live in Colorado, outdoor enthusiasts, we’re out of the office when we’re clearing our minds, that’s mountain-biking, it’s mountain-climbing. These are our regular pastimes. What Dan suggested in this interview is that we have just passed the first false peak with interest rates. That is to say, just when you think you have arrived at your destination at the top of the mountain, you realize you have much further to go, and you have underestimated the length of the journey.

Kevin: And I get the metaphor you’re going for, because how many times, Dave, have we been on rides that we think are just about over, the climbing, at least, and then you see the next peak.

David: You have that much more work ahead of you.

Kevin: Right. So what he is saying is, higher interest rates.

David: Well, exactly. Exactly. So what you had assumed was the top turns out to be a “false peak,” in his words. And yes, we should be preparing for higher interest rates. That’s essential. Now, is that over the next three months, is that over the next three years? Admittedly, I was 3-4 years early on this call, but the consensus amongst 80-90% of bond fund managers today is that higher rates are our inevitable long-term course.

But let me clarify one point. Interest rates. It’s not rising rates that are debilitating to an economy, it’s the speed of assent. It’s seeing higher interest rates at a slow rate of assent that the markets can digest, and of course, until they’ve reached double digits, high, high levels. But higher rates that you get to in a very quick pace, that usually causes internal market hemorrhaging.

Kevin: 1987 reminds me of that, Dave. It was a very formative year for me, because that was the first year that your company, your dad, brought me on here. I started in 1987. What made that formative was this: The stock market looked like it was doing fine. It was doing very, very well, thank you very much, and then interest rates got very volatile as we traveled into the fall of 1987. And of course, that’s when we had that huge crash in the stock market. 1987, most people who were alive or trading at the time, don’t forget that day.

David: Yes, and it’s sometimes written that it’s only the derivative insurance, or the portfolio insurance that was there at the time, that caused this decline in equities. Well, it was a combination of interest rate volatility and derivative products that gave us that massive 22% decline in one day, and frankly, we have the context set for that today. But it’s a little bit like a head-on collision. You and I have talked about this before. It’s not something that you can see coming. All you can see are the conditions which increase the probability. That’s why I say, there’s no guarantee that we have something like that happen this year, but certainly, we have the same set of circumstances, a rising stock market, disconnecting from rising rates, which ultimately are deflationary.

Kevin: David, just to put that in perspective, a 22% decline doesn’t sound like much, but if you took that off of today’s stock market, we’re talking 3,000+ points. So when a person hears 22%, they need to re-evaluate the point range that we’re in at the time. A 3,000+ drop in the stock market would get people’s attention.

David: And before we move on, think about that. 1987, we witnessed a spike in yields, and yet, the stock market ignored the implications. It continued to rise in price, setting up an October surprise, one of the nastiest on record. Perhaps the great difference today – perhaps – is that the Fed is already on Code Red. They’re fighting the market forces of deflation with every available tool, and perhaps they are averting what is a naturally deflationary effect in the economy when yields spike higher, as they have this year.

GaveKal Research, I met with these guys in Hong Kong the last time we were there. GaveKal Research put out a chart showing this year’s spike in rates, as severe as those during the Latin-American crisis, the 1987 crash, and the first oil crisis. And this is when yields are moving more than 18% in a very short period of time. The ones that were bigger, you had Lehman, which was bigger, you had the Iran crisis under Carter, which was bigger, larger rate increases in a very compressed period of time, and then you have to go back to 1932 and the secondary depression of 1937. Certainly, there is reason to be concerned, not panicked, but there is a practical solution, or step, that I think investors can take.

Kevin: Yes, if you own stocks right now and you’re hearing this kind of talk, you’re obviously going to be fearful if you believe what these interest rate reports are saying. But what could you do to hedge the portfolio?

David: If you own general equities, the general equities space, then yes, hedging your market position with shorts, I think, is prudent. That’s not an outright short, it’s just a hedge. And if tax implications can be swallowed, and shorts are not your thing, maybe you increase your cash, I think that would be advisable. Sitting on cash is something that most people just don’t appreciate and can’t stand. They feel like it’s sitting there idle, it’s not doing anything for them.

It is doing something for you. It’s your powder, and keeping it dry, unless you’ve been in a firefight, you have no idea how valuable it is to have a little extra dry powder. Go back to the Alamo. The one thing you can’t run out of is ammunition. Otherwise, guess what it turns into? It turns into a knife fight. Keep your powder dry (laughter).

Last week, we had an internal meeting here in the office. We looked at the current Wall Street perspectives, we talked a lot about gold, obviously we do in the office. And in particular, we looked at Goldman’s recent call.

Kevin: Goldman-Sachs, $1050 gold, that’s what they said last.

David: Yep. So I went to NASDAQ.com and I searched the institutional holdings for GLD and lo and behold, Goldman has been very active in the market.

Kevin: Well, didn’t they buy 3.7 million shares of GLD when they talked gold down the last time?

David: Yes, as the price projections move lower, their purchases are on the rise. Stop and think about that! (laughter) “Sell gold!” (whispering) “But we’re buying it.” Think about that; think about that. It reminds me of the Rothschild’s, knowing the outcome of Waterloo, a half-day before the market. They spread rumors, they drove share prices down, they bought all the way down, and when the news arrived of the actual outcome, those shares rebounded, some of which had sold off to as little as 5 cents on the dollar. They made a bloody fortune!

Kevin: It’s amazing. I’ve read those accounts. Nathan Rothschild was the guy they watched. He would be the Goldman-Sachs of the day.

David: Absolutely.

Kevin: And his couriers gave him information that Wellington was beating Napoleon. Now, if Napoleon had won, the British stock market would be done. It would be collapsed. But if Wellington were to win, the Kingpin of Europe would be England, at least in the financial markets, and he had the information that England was winning, with Wellington, and he leaned on, apparently, a pillar that was outside of the stock market, and he sold hundreds of thousands of shares.

David: And people looked at him, and said, “Well, he must know something we don’t know.”

Kevin: He’s the Goldman-Sachs of the day.

David: “If he’s selling, then we must sell.” It’s really interesting, with the Nervous Nellies in the market, then as now, treated as patsies, selling out, whether it’s Goldman-Sachs, today, clearly, Goldman continuing to add to their GLD position. Now they’re a top-ten holder. They were either number 6 or number 7 last time I looked, in the world. That’s just maddening. It’s maddening to know the truth exists just beneath the surface, but most people only read, and by the way, react to, the headlines.

Advice? Read less, think more, and realize that half of what you read is propaganda. The other half, you will find, delivers little to no value, even by the end of the day, going back to Rothschild’s day, what he or others in his day might have called twaddle.

Kevin: And that’s how Nathan Rothschild consolidated his wealth. He actually put out false information, false cues, and did exactly the opposite. So Dave, that brings me back to where we started the program. I was saying, isn’t it strange that the stock market actually rose when they knew the government was going to stop? Maybe that was an accurate reaction, but gold, just in the futures market, falling $30? Well you don’t have to have gold to knock the futures market down, at least temporarily.

David: Yes, it’s illogical behavior in the gold market. It sold off, equities moved higher on the closure of government. All the actions came early, as we mentioned, at the futures market handoff from Europe to the U.S. This was not ETF liquidations, not physical selling. Pure futures trading B.S.

The physical metals continue to move to the East. A great article on Friday, Bloomberg: Thailand expects a doubling in demand from last year. We still see the elevated levels of demand in India and China. Those have remained robust. We have official Indian imports, which are in decline, and the black market (laughter), that’s coming alive, as we expected.

Be patient. Don’t be unnerved. Don’t be Rothschilded. Don’t be a Goldman patsy. Hold on to what you have. It boils down to something very simple. Pad ounces on any discounting. That’s what’s happening, this is called a discounting, and there are constructive interests all over the world who look at it that way and buy hand-over-fist. If it’s going to be discounted, I’d buy it hand-over-fist.

Kevin: Because it’s real, it’s not easily manipulated, not in the long-run, though on the paper price it can be. As far as the dollar goes, sometimes gold actually rises and falls with the dollar. We just saw that.

David: Yes, this is not sort of a new lease on life for the dollar and therefore gold is going lower. In fact, this week gold is trading lower and the dollar was trading lower as well. I think, of the two, you have far more to be concerned with on a continuation of the dollar decline. It’s down considerably over the last 13 years, and it’s just 10% off of its recent lows. Okay?

Meanwhile gold continues to trade 380% above its starting point 13 years ago. It’s a third off of its recent peaks. It’s still nearly 400% higher than where it started. If you look at the 13-year track record, you say, “Which is the winner, which is the loser?” I think the trend will remain your friend. The question is, if you can remain on course. We’re in this together.

Simple advice. Go with the long-term trend. Average your cost on ounces, as and when weakness appears. If your cost basis is north of $1500, if your cost basis is north of $27-28 on the silver price, you need to think. You need to think strategically. Lower your average cost. This puts you in a position to be at break even that much quicker, and as the metals trend higher over the next several years, that improved cost basis will translate into a dramatically improved return on investment.

Think about it, and do something about it.