November 25, 2015; Your Questions Answered 2015 – Part 1

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“If you’re not asking questions then you have to reflect and say, ‘Am I feeding that curiosity which ends up driving where I go in my educational pursuits?’ And I look at these questions and I see an entire cadre of people who are infinitely curious and want to learn and want to grow and want to do the right things. And Kevin, that’s just very encouraging to me.”

– David McAlvany

Kevin: This is one of my favorite times of the year here on the show, Dave. We ask for questions from our listeners and this next two programs are going to be just answering the questions of loyal listeners who are saying, “I’d really like to hear what David has to say, or even what Kevin has to say, about such-and-such.”

David: We have not put them in any particular order. These are exactly as they came in to us from last week until the present. We will go through as many as we can this week, saving the rest for the following week and where there are questions that are almost identical we are just going to allow one answer for both of them to suffice rather than answering the same question twice. So, if per chance you don’t hear your name mentioned or your question, it’s because it was close enough to a question that came in within a 3-5 day period where we are just killing two birds with one stone, so to say.

Kevin: And we really want to thank the listeners for taking the time to type these out. It is just another indication that the people who are listening to the program, Dave, are very sharp. I read these questions and I think, “Yeah, not only is that a good question, but I think I’d like to know the answer myself (laughs).”

I’m going to start out. The very first question we got was from Bud. Here is what he says:

“Every since I bought my first gold coins and Morgan silver dollars from you all, I’ve seen your advice to keep buying more. However, even though you said five or six years ago the prices would be going up, they have continued to come down, about $700 an ounce from what I paid for them. My question,” Bud asks, “is when can I count on prices really going up enough for me to buy some more, or would it just be prudent for me to wait until gold and silver at least get back up to what I paid for it?”

David: As we looked at Bud’s client history, fall of 2011 when gold was basically at its all-time high, that’s when those purchases were made. Were those bad purchases? No. Let me put this in perspective. I think about a third of liquid assets should be in the category of an insurance mandate. We look at precious metals as an insurance mandate and it complements other things that you are doing, whether it is liquidity mandates, the cash or cash equivalents that you have or a growth and income mandate for other parts of your asset base, that physical, tangible precious metals represent, and should, about a third of your liquid assets.

And if you’re looking at that in terms of how it compares to the rest of your net worth, it pencils out to be about 10%, factoring in real estate and other illiquid assets. So, a third of liquid equals 10% of the total net worth. What I would suggest is lowering cost basis is not a bad idea. The difference between 1900 and 1100 is a significant difference. And at higher prices there was a logic for owning gold as an insurance position and it was a sound bit of logic. It is still sound. It happens that insurance is cheaper than it was and I don’t mind getting it cheaper.

You might consider this, too, and this is less of a cost consideration and more of just the reality check that you may not have been prepared for a context where gold was trading at $3,000, or $4,000 or $5,000 an ounce. Consider what the world looks like when the world is at those higher numbers. I would say time has been a blessing. You can also now objectively, out of the heat of the moment when prices are rising, still look at that same logic applied in terms of an insurance mandate and reassess, analyze, why you own it.

And yes, I think you should be adding to it, but you really didn’t own gold in the first place as a gain asset. It has gained from $250 to $1900, and we’ve given a good part of that back, and I think you will see gains in the future, but the primary mandate of owning gold and silver is as an insurance policy. That logic still holds. Again, insurance premiums are cheaper today. You may be able to layer in another bit of insurance at much cheaper prices, and that makes sense to me.

Kevin: There are two adages, one of them I brought up in last week’s program, Dave. And that is, every gold high that you’ve ever seen will be bested by a new high. I can say that after doing this 28 years with the company, you can say this after the family has owned the company 40 some-odd years.

David: The reason it is axiomatic is because we exist in a world where the total stock of paper money is being increased by at least 2% a year, if not a lot more than that, every year. And it will continue to because that is the stated objective of our monetary mandarins. So yes, adjusted for a changing monetary base, you can say that 10, 20, 30 years from now as they continue to expand the money in the system, you will see the dollar price of gold moving higher.

Kevin: And the other axiom is, whether it is up or down, no one has ever gone broke with owning an ounce of gold – ever – in the history of mankind. You can’t say that about paper.

On to the next question:

“Let’s say that the infamous hyperinflation actually happens and then gold hits $5,000 an ounce. Doesn’t hyperinflation also ensure that all goods and services rise in price accordingly? And in that case, it would seem wise that the wise gold-owner has merely the same purchasing power as he had before the inflation. But I assume that the real advantage would be to pay off a mortgage or a debt that had fixed dollar costs so that, in effect, he might be paying maybe 20 cents on the dollar or less, and that his other advantage is that a non-gold/silver investment like gold detractors have, would become worthless.”

David: Does that sound about right? Yes, that sounds about right. John, you’ve hit the nail on the head. I agree whole-heartedly. The maintenance of purchasing power over time, that is, asset preservation, and what we described a moment ago as the insurance mandate. Gold gets that job done. Now, you say, “But if we are in the context of inflation and everything is more expensive, how have I gotten ahead?” And maintaining purchasing power is the first thing that you want to accomplish with owning gold.

The second is, because it is a very liquid asset it allows you to consider other assets at a discounted price, and that’s exactly what you are talking about, John. As and when you are paying off debt, you are doing so with the advantage that you have described, or looking at other assets that are priced at a discount. Not all assets move to the same degree at the same time. And you will find that some assets, even in the context of an inflation or hyperinflation, are still discounted. Look, what is the value of being able to feed your family versus the value of a grand piano? When push comes to shove, quite frankly the chicken is worth more than the Steinway. And so you do have this reappraisal of “what is stuff worth?” And in that moment, even though you may like a $25,000 Steinway, no one is going to give you $25,000, ergo the opportunity to own it at a significantly reduced price in a particular context.

Kevin: As we work further through the questions I know the same question will come up with a deflation. We’ve talked about you do not need hyperinflation, you just need gold to hold buying power whether the dollar goes up or down in value.

David: My final point for John is that gold is money. As such, it is maintaining two things that are very critical to you. Number one, purchasing power, and number two, liquidity. And it is that opportunity to make a lateral move under any circumstances out of gold into anything else that is one of the primary benefits of owning it. There are lots of other assets that you could own and may even preserve purchasing power, but the question is, how liquid are they?

For instance, if you owned a famous painting there may be two other people that can afford to buy it, and they may not have the liquidity to buy it when you need to sell it. So, you may maintain purchasing power in fine art, but can you actually move it into another asset when you deem it appropriate. That’s the value of gold. Again, gold is money, it’s maintaining purchasing power through time, plus giving you liquidity when you need it.

Kevin: The next question. Don asks:

“Who understands Agenda 2030?”

David, just looking at that, that is more than just a quick answer. I would imagine that you would want to do an entire program or series of programs on something like that.

David: Absolutely. And to the degree that we can answer that question in 2016 we will, and to the degree that we need to bring in experts to help fill out, in a robust fashion, what agenda 2030 entails, and some of the nuances, we will do that. Wouldn’t want to give that a two-minute answer. You’re right, it’s worthy of an entire program. So Don, hold with us and we’re committed to giving that answer to you in full next year.

Kevin: This next question actually applies to Greece, the terminology, “Greek syndrome,” so let me read it to you.

Do you foresee a “Greek syndrome” happening here? Example: Deflation, with only paper money in hand and no centralized credit, in essence disappearing before a one-world currency or a Quantitative Easing 5 or 6, or ad infinitum. One scenario is cash in hand versus metals in hand, or both, while metals are now a bargain.”

Now let me take a pause on that question, would you go ahead and answer that portion of the question, Dave.

David: Yes, yes, and yes.

Kevin: Yes, so cash in hand, gold in hand. Right.

David: And I think you still are stuck between the horns of a dilemma, inflation and deflation. You have central banks, whose primary tools are inflationary, by nature, and the boogie man that they are fighting with those tools is the specter of deflation. So, do we have the potential for both, or to some degree, one and the other almost simultaneously? I think that is the reality and so that nuance position of cash and gold is absolutely important.

Kevin: I’m off the question for a second, but the retired class has found that they don’t really have any source of income because of interest rates not being there, so reading on in the question you will see that Glen is looking toward a reverse mortgage. He says:

“Preparing to get a reverse mortgage, as I am 71, in order to convert equity to investment in paper money (deflation) and/or metals (inflation). In other words, what is your what, when, who, where, why? And he finishes up saying, “Hey, I love your dad. He’s still the hero in our house. Thanks, man. Keep up the good work.”

David: One of the problems with a reverse mortgage is that you are giving up an asset. And for most people it ends up funding a lifestyle. So, the idea of monetizing your house to spend it on groceries and medicine, or whatever, you could spend it on a dozen things, a trip to the Caribbean. That, I think, is generally a bad idea. It is interesting juxtaposing a paper position and a gold position with the proceeds from a reverse mortgage. I think, at the end of the day, I would prefer a much more conservative tack than that, and that is, own what you can own in terms of precious metals, and keep what you can keep, in terms of cash. And if you are debt free, maintain that status. I don’t know that I would pursue the reverse mortgage.

Kevin: We’ve gotten a number of questions through the years. Do I use a reverse mortgage to buy gold, it’s the only liquidity? And the answer to that question is, 99 times out of 100, no, don’t do that. The next question is from David. His question is:

“Do I start selling silver now to help with my income, or do you see any hope of silver going up in the near future? Then, would I sell the minimum and wait for the increase because I’m really taking a big loss as it is?”

This is a man who needs income and he is wondering when he can start selling his silver.

David: Right, and has probably as many ounces as he can own in the hope that the price will go up. I guess part of the answer, Dave, is you need to define what near future is. If you are hoping that the price of silver goes up in a massive way in the next 30-60 days, then you need to define a course in that the reality of your financial needs in the present trump your ability to wait for the future outcome in the metals space. If you have a longer time horizon and near future includes anywhere from two to three years, then I think you should sell the minimum at this point and wait as long as you possibly can.

I think that the powers that be, the world central banks, have done all that they can to create normalcy in the economy, the global economy and the domestic economy here in the U.S., and to a large degree they have failed. You look at the global picture and certainly that’s the case, and the U.S. picture is a mixed case, because if you are looking at official statistics they’ve done a great job. If you are looking critically at those official statistics, then maybe they have not done such a great job after all here, either.

So all that to say, what gold and silver and their price appreciation are predicated upon is a decline in confidence amongst the general public, and I think that could happen at any time. That doesn’t have to happen in the next three to six months, but I think it is very likely to occur over the next 18, 24, 36 months, which again, that two to three-year time is how I would define the near future.

I think one of the things that you have to be aware of as a precious metals owner is when you have outside pressures which begin to force action it can begin to change the calculus of why you made the decision to own the asset in the first place, and you need to understand the difference between the reason you owned it in the first place, and what those outside pressures were. If you were able to, theoretically, remove those outside pressures, whether it is bills or other things like that, would you still be comfortable owning it?

And what I’ve found is that many clients who have an outside pressure are now asking the question, “Should I continue to own gold or silver? But if asked the question, time is not involved, take away the expectation of needing it today, “What else would you like to own?” The answer always come back to, “I’m perfectly happy owning exactly what I have today.” So again, it is these outside pressures that seem to be recalibrating an expectation. The need for money now is a very real issue, and Dave, I appreciate that circumstance. Again, I would say, “Sell the minimum and wait.”

Kevin: A repeating theme as I read through the questions, Dave, is an understanding, almost a normalcy, of the control of the markets. This is in reference, even, to the last question that you just answered. A lot of people are wondering when the manipulations will stop, and so I’ll read this question:

“What is being done about this government controlling the price of gold?”

David: I think a lot of detail and granularity on that, light has been shed by GADA, and they have done a good deal of research proving there has been manipulation in the gold market. Here are some of the things that have me confident that this is not a permanent state of affairs. Number one, Asians love gold, and they look at $1100 and below and say, “This beats $1900, and anything in between is very attractive.” So what we’ve seen as a shift, as the price has been manipulated in the futures markets there has been a radical shift in terms of physical supplies into the Asian market.

And I think there is a second point here. Number one, as I just mentioned, the supply and demand dynamics in the physical precious metals space have already changed. Number two, price manipulation schemes have gone from being fairy tale conspiracy theories to being identified and prosecuted. So you have the foreign exchange scandal. You have the commodities manipulation scandal. You have the LIBOR manipulation scandal. And it is tougher and tougher to continue those manipulation schemes when getting caught now has consequences.

And that’s the environment we’re in today that we were not in two, three, four, five years ago. People are being put to the wall in the FX commodities and LIBOR scandals, and I think you really have to weigh the cost and benefit and do a real analysis on that if you are going to continue manipulating. What is the cost, and what is the cost, not only in dollar terms, but could you serve time for it? It is a very interesting equation and I think it has changed dramatically in the last few years to our favor.

Kevin: Wouldn’t you say the government probably is not going to do anything about it in the long run? It will be the markets that overwhelm that manipulation at a point.

David: That’s exactly right.

Kevin: The next question that we have, Walter says:

“I’ve often listened to you talk about the need to own silver and gold as a hedge against the future, losses on paper money. I’m confused as to the need to own mining stocks that are held in our portfolio that you manage and are severely depressed, against owning more gold and silver. Please explain.”

So he is asking, why wouldn’t I just own more physical? Should I own mining stocks?

David: Absolutely. Gold represents that hedge, so that is a particular mandate of a particular position in a portfolio. The miners are a totally separate mandate. They are related to gold, and will travel the same path, but will do so on an exaggerated basis. So they do, if you assume that gold is going to have its day in the sun, they represent an excellent growth play. And of course it is predicated on the move higher in the price of the metals. When you take a position in the gold and silver miners, there are a few things that you need to keep in mind. You can mitigate risk, and we have certainly done this by limiting the number of positions that you have in that sector.

So, position limits the size and scale. The total allocation to the sector is important. And then also, you are looking at sort of a broad cross-section of companies in that same way. So, with the miners, you have leverage to move in gold and silver. Leverage certainly works both ways, so as much as it helps on the upside where you can see an 8-10 fold increase in the miners with a strong up-move in gold.

So again, an 8-10 fold increase in the miners relative to the underlying metal, guess what? When the price of the underlying metal is in decline, they will tend to be far more depressed. So they do not meet the meat and potatoes allocation. They are to add something extra to the dish. Again, you would not want 100% of your assets in miners, absolutely not. But a small exposure salted into a larger portfolio does, in our opinion, make sense.

Kevin: The next question is from Kevin. He says:

“Why should we worry endlessly about the dollar price of silver and gold?”

Why don’t you start by answering the beginning of this question? Should we worry about the dollar price of silver and gold?

David: This is why we had Charles Vollum on the program. If you don’t know that name, he runs a website called pricedingold.com. If you’re not familiar with it, you need to be familiar with it. You need to start thinking the way that Sir Charles does in terms of pricing things in real money terms as opposed to fiat money terms. So why should we worry endlessly about the dollar price of gold and silver? We shouldn’t. It goes up and down, but what we’re really getting is commentary on the temporary strengthening and weakening of our fiat money.

And so, yes, right now it’s very popular to believe that the dollar is high and going higher. On what basis? If you assessed the United States economy, if you looked at our national balance sheet and our income statement, how are we doing? Is it a good bet? Should you bet on the “stock” of the United States, that is, the U.S. dollar, appreciating from here, and do you assume that like Apple it is going to somehow split 7-to-1 and give you infinite wealth just by being exposed to the U.S. dollar. I think that is a fool’s errand. So the reality is, to the degree that we are fixated on the dollar price, we are missing the larger theme, which is how to value other assets in light of real money.

And through time there are opportunities to take you a real money position, gold, and put them into other assets. But if you are not thinking in terms of that relative value equation, you will not be able to identify what good value looks like. So I absolutely implore you, spend some time on Vollum’s website, pricedingold.com and I think you will begin to see your perspective radically changed. This is no different, I think, Kevin for you, this is the point of your question. And we agree with you wholeheartedly.

Kevin: The next question Gary asks is:

“Why is most of the media siding with the government? Why doesn’t the media hold the feet of the politicians to the fire? There is no greater question of this kind of importance in the United States today. Where is the media? Why are they not doing their job by chasing down politicians, bureaucrats, and other people who are destroying our nation?

David: I think at a practical level a part of the issue is who grants the licenses. So, you go along to get along. I think the other issue is that we’ve seen a transformation in the media space and it’s really not their understanding of their job to seek to know and reveal the truth. That’s no longer what they do. You don’t see investigative journalism really happening on a grand scale anymore. Why? Because they’ve become an entertainment arm. That’s essentially what they do. They entertain with a tease of a bit of information so that they can sell advertising.

And really, it’s just about entertainment. Breaking news this, breaking news that. Everything is breaking news, and everything is an imperative, but really, they’re not seeking to know, they’re not seeking to analyze, they’re not seeking to reveal the truth, and so I think we cannot hold them to account when they don’t even understand who they are in the current context.

Kevin: Anyone who has been in mainline media will tell you that they have sensed that there is always an agenda, there still is a political agenda, that is hard to fight. I heard Dinesh D’Souza talk a month ago about how you fight back, and one of the ways is, you go into the media yourself. Dinesh D’Souza has made several movies that have had strong impact on more of a non-agenda type of basis.

David: And speaking of agenda, I think of that same kind of documentary, and a gentleman I know very well, Curtis Bowers, made a movie three to four years ago called Agenda, where he looks at the move toward the left, culturally. Actually, he has just finished a second one and I’ve ordered it, it’s on its way, I should have it in the office today or tomorrow, Agenda Two (I forget the subtitle). But again, what is he trying to do? He’s trying to use media to basically do what media used to do.

Kevin: To expose media.

David: Not entertain. But again, we have the older style in mind – and Gary, I really appreciate your perspective on this – we have the older style in mind of investigative journalism, and I guess what we’ve come to accept is that schools have had something of a numbing effect on culture, and actually, we’re not as interested in the deeper knowledge, we’re not interested in deeper analysis, we’re not interested in nuanced understanding of issues. We are content to be entertained, in part, because that’s what we have been prepared to accept as normal by our educational system. So, again, I agree with you that this is the state of affairs that we have. But number one, who grants the licenses? Number two, we’ve already seen a transformation of purpose.

Kevin: This next question from Roger is about the IMF, including the yuan as a reserve currency, as part of the SDR, Special Drawing Rights system. Here is what he says:

“The IMF will certainly include the yuan for a reserve currency status at some point and reveal that decision sometime this November, with an effective date of October of 2016. My question is two parts: If this is true, is the delayed effective date to ease us into that new paradigm, as opposed to the dollar falling off a cliff? And will such an action benefit my Brazilian real and Russian ruble bonds with a cheaper dollar, or will they continue down respectively?”

David: My understanding of the delayed date is that the IMF viewed the yuan as overvalued and the Chinese, at a point in time, were unwilling to let go of a very tight fix to the U.S. dollar. And what has happened in recent months is, devaluation of the yuan has provided evidence to the contrary and gives the IMF the idea that, yes, they will allow their currency to float more freely, and not operate under that tight fix to the U.S. dollar, giving it tradable goods advantage. And so I think, actually, the recent devaluation speeds up the approval process.

The second part of the question: Real and ruble bonds, they should recover, if and when we see a declining U.S. dollar. So, that’s the environment where your ruble and real bonds would be in an uptrend instead of a downtrend. The IMF inclusion is not the primary issue. It is a slower burn issue, in my opinion, in terms of its impact to the U.S. dollar and our reserve currency status. What I would say is, to the degree that the yuan is included in central bank reserves, that inclusion will end up marginalizing the dollar and the dollar devaluation which ensues from the yuan being included, again, as a central bank reserve asset, that’s really the grave issue here. The IMF opens the door to what is ultimately the grave issue.

I don’t see IMF inclusion in the SDR system as somehow being debilitating to the dollar. What it does do is allow the first domino to fall. And again, what we witnessed with the EU and the euro when it was included as a reserve asset, it took market share from the U.S. dollar and precipitated a 30-40% decline in the dollar. I would expect the same from the yuan. As and when it is included as a central bank reserve asset, it will cause …

Kevin: It will take market share.

David: It will take market share, and if that market share is up to 10% of total central bank reserve assets, then I think you could expect to see a 30-40% decline in the U.S. dollar again.

Kevin: The next question comes from Marsha. She says:

“What do you recommend for seniors on social security income who are seeking housing in subsidized government housing? What type of low income housing do you recommend?”

David: This is a very difficult question to answer because I’m going to find myself inserting a philosophical view into a practical question. And it is this: For 18 years I was cared for and invested in, and the blood, sweat, and tears of two parents went into giving me lifetime opportunities. And I think it is only right for me to return the favor. And in the last 18 years, call it a ratio of 18 to 18. Our parents invested in us, we get to invest in them, and as an expression of gratitude I see no issue with that. I think it should be an honor for any generation to take care of their parents.

Kevin: So from 0-18 you were cared for and from 70-88, or from 80-90.

David: I recommend families care for each other and children provide as they have been provided for. The second issue, in terms of affordable housing, again, that is so localized in terms of what opportunities you have, that is difficult to answer outside of knowing all of your local options.

Kevin: The next question. I’m sure it’s on a lot of people’s minds. This one comes sort of biting, Dave, but that’s okay. We didn’t tell people that they couldn’t bite a little bit. He says:

“I remember you saying that at $25 silver will never see a lower price, and to buy, buy, buy. I stopped paying attention to you after that. Question: How do you win me back and believe what you say, or are you just another one of those?”

David: Well, listen, $25 – I was wrong. I was wrong.

Kevin: You were buying. I mean, you were buying with your own money.

David: I was buying. I was buying for my kids. I was buying at $25, I happen to be buying at $17 again, and I’m kind of anxious to buy again at $14, but that may be more of a description of my own neurosis. There is Defensive Dave, which answers this one way, and then there is more Reasonable Dave, which might answer it a different way. So, I will give you both. Defensive Dave would say, “Have you ever been wrong? And should I ask someone that knows you well if you’ve ever been wrong, because maybe they could give that answer better than you can.”

I know I have, and the reality is, credibility for any of us is not based on batting 1000, it is based on batting some reasonable number that is better than outright failure. Does that make sense? There is no way to be 1000 percent accurate all the time. What timeframe should we allow for, by the way, to be right or wrong? I’ve been wrong in a five-year time slice, I was right for a ten-year time slice. Taken on aggregate, I’ve been right two-thirds of the time. That’s very little comfort to someone who paid $25-30-35 an ounce for silver. I have cost basis as high as $38 silver myself, and am very glad, again, to be able to buy it at $14 or $15.

Now, there is the Reasonable Dave (laughs). Moving past the Defensive Dave, admittedly so, and I apologize, but the Reasonable Dave would say, we assume we will be wrong. You must be right more than you are wrong and that’s the issue of probabilistically, 51-53% of the time. If you are right between 51-53% of the time, you are a very successful money manager, which means you have to accept philosophically that you will be wrong 47-49% of the time, and you will still, in the end, be right.

Kevin: This is why you do not recommend margin for these types of purchases because you can be wrong, and way wrong, because you get washed out of your contract or washed out of your silver. But if you just own the stuff, it always goes up past the old high. We just talked about that.

David: Prices have gone lower than we anticipated, right? And so, number one, either some part, or the whole thesis was wrong. And if that’s the case, sell and move on. Just take your losses, forget it, it was a nightmare, it was a bad dream, and maybe your opportunities in the next 10-15 years will be different if you reorient your thinking. Or number two, the thesis remains valid and unprofitable for the time being. Unprofitable for the time being. Option A is, ride it out with your current holdings. Option B is, add and lower your cost basis. That’s my reasonable response.

Kevin: Dave, this question, you could probably take a long time with, or a very quick time. Here’s the question we all have:

“What is the single most effective thing that could be done to turn around, or even eliminate the entrenchment of corrupt career politicians?”

David: Well number one, term limits. Term limits, term limits, term limits. I am sick and tired of seeing lifetime politicians. In fact, when I look at who is running for president today, I almost consider them disqualified for the job if they have spent any time in politics because it says to me they’re hardly a citizen and probably not a statesman either. The idea of a citizen statesman serving their country for a short period of time makes all the sense in the world to me.

Kevin: And then having something better to do later.

David: That’s exactly right. Having nothing better to do other than collect a huge pension on the back of taxpayers and the next generation – this is very, very unappealing to me as a voter. So again, I look at current politicians and I think they are all disqualified for the job because of what they have been doing for the last 10-15-20 years. If they have been doing something other than politics – great! Let’s have a conversation.

The second thing, other than term limits, is a gold standard. You can’t promise what you don’t have under a gold standard. Under a fiat money system you can promise anything that you want.

Kevin: But you have to balance payments with gold.

David: That’s exactly right, so there is a high cost, a very high cost, and a political cost, when your balance of payments is out of whack, and it is much easier to see that with the gold standard. So, the deficit without tears which Jacques Rouffe described, you can’t run the deficit without tears under a strict standard gold system. In a fiat system, in a floating currency system like we have today, you can run deficits without tears. That creates all kinds of imbalances and we are dealing with those imbalances today. But back to the question – two things, term limits and the gold standard.

Kevin: Next question:

“If China does go forward with its plan to implement a new gold-backed global paper money system to replace the U.S. dollar, would that cause the USA to start World War III?”

David: First of all, no. I would say China is a piece of the puzzle. They really aren’t in charge and they’re not calling the shots. The U.S. at present is content to take a reduced role, but will still maintain a significant role in the world monetary architecture. And it is interesting. From this side of the pond it appears that the Chinese have a grand strategy that will upset the U.S. apple cart. If you go to the other side of the pond and talk to people in China, particularly economists in China, there is a lot more insecurity about the direction that China is going. They are very confident, but it’s confidence of a regional nature, it’s not confidence of a global nature. They want to walk before they run. Does that make sense?

Kevin: Sure.

David: And so I think they are a piece of the puzzle, but I don’t think we have to worry about the U.S. being completely thrown on our keisters yet.

Kevin: Eli continues the question. He has two more points that he wants to ask. He says:

“In that scenario, let’s say that it did challenge the dollar, would the USA allow using bullion coin, silver and gold, for purchases?”

And then finally he asks:

“In that scenario, would the U.S. confiscate gold bullion coins?”

So can you answer those two questions? One, would the United States allow for gold and silver to be used as a currency? And then two, would the United States consider confiscation like we had back in 1933?

David: The first part of the question, I think that the U.S. would not voluntarily, the Treasury Department and the Federal Reserve, if you are looking at the folks that are making our big picture decisions in relation to our finances, they wouldn’t voluntarily move back toward the precious metals standard and allow for the exchange to happen. If you are looking at Gresham’s law, then I think the powers that be have every reason to avoid gold and silver and the allowance of those entering into transactions because it would have dire consequences to the existing system, which they prefer.

This relates to our last question from Chris, and it is that the precious metal standard, or allowing gold and silver to trade as money on a day-to-day basis is too limiting to the way Washington, D.C. finances their activities. And if citizens can vote with their feet and opt out of the U.S. dollar for precious metals, they will. So, the option will not likely present itself.

And the second part of this question, the 1930s, the possibility of confiscation, I think that it is far more probable to see a shift in taxation as opposed to outright confiscation. I think the government knows full well they couldn’t handle the logistics of shaking down every Tom, Dick, and Harry for two ounces of gold. The gold ownership in the United States is miniscule compared to what it was in the 1930s when it was circulating in everyone’s pocket as a form of currency, coin of the realm. Everyone had gold because everyone had dollars. Does that make sense? Not everyone today has gold, very few people do, and so I think the logistics involved and the payoff is absolutely insane, even at a $3,000, $4,000, $5,000 gold price.

However, ask the Treasury Department, ask the IRS, as the pie gets larger, if they wouldn’t like to increase their slice, and I think you will find every time they will. Windfall profits? That kind of a tax penalty applied to gold? That could very well happen. So my encouragement to you is to think, not about maximizing your gold exposure and getting every last dollar, but to the degree that you have bought precious metals incrementally over time, so you should be selling them incrementally over time and not looking for the perfect price, because by the time you get to the perfect price the big surprise may be that gold has garnered enough attention from the Treasury for you to get to that point to where, again, there has been a shift in taxation. That’s how they get you – not by taking it, as in the 1930s.

Kevin: This next question from Amelia says:

“Given the evidence that the country, economically, socially, the structure is coming apart, the threat of Islamic terrorism, that type of thing, what would you recommend as a safer place to live in the U.S., and if we heed the call and leave for foreign shores, where would that be? Name the best moves to make with cash, and thanks for being one of the few trustworthy human beings in my world. Sincerely, Amelia.”

(laughs) There’s some pressure there, Dave.

David: There is some pressure. One of the things that I tend to orient myself to – I grew up with a man by the name of Otto Scott, who was a historian, a brilliant man, multiple PhDs, and as a historian he said, “Basically, any time you see people move or migrate they are at a disadvantage in the new culture.” And his classic phrase to me, I remember hearing this when I was 12, 14, 16, 18 years old, up until the time he passed, “Language is very important. Having a cultural understanding is important, and moving to a new place, if you are not linguistically skilled, reduces you to the level of a child, that is, the dependency of a child on others.” So again, getting out of dodge is not all it’s cracked up to be unless you are moving to a place that speaks the King’s English. Does that make sense?

Kevin: It does. I’ve had a number of clients who have moved, mainly to Latin American countries, and not known the language, and you can count on it, within a year, or two, or three, they’re back.

David: Right. My preference is to focus on small communities. That’s where you want to be, small communities, where you have, number one, common interests, number two, common beliefs, number three, common language, a community where you have access to resources – food, water, energy. The kinds of places that you want to avoid – big cities, high density populations, places that are subject to weather extremes where again, if you lose some part of the grid you may find yourself fried like an egg on the sidewalk. I would hate to be in Phoenix, Arizona on a hot day without air conditioning. Do you see what I’m saying? And so, without electricity, you are that fried egg.

I would make some critical decisions like that, places that are dependent on the grid. Again, the other extreme, at least the other extreme, if you go to Alaska instead of Arizona, it may be colder than all get-out, but you can chop down a tree and burn it and stay warm. There is just a different calculus. So what I would say is, we need people. We need people. And the focus should be on building community, and that community is best built around common interests, common beliefs, common language, and resources that are mutually beneficial.

Kevin: Well, isn’t there a greater goal in life than survival? And this may really offend a lot of people but we all have a position that we occupy. I know I do, you do here in Durango, Colorado. And if things get tough here in Durango, there may be a reason why I’m still here, and maybe I shouldn’t flee.

David: I just started a book by Jean Vanier called Becoming Human. And he shares his experience of living in community with mentally disabled people. I may not be saying that in a perfectly correct way.

Kevin: So it’s like working here.

David: (laughs) Could be. And what he says is that over 40 years of living with people you find that your own rough edges get worked off and you discover parts of your humanity that grow and develop and flourish in ways that they couldn’t outside of that relationship where there is friction, where there is loss, where there is disappointment. And it is an interesting case that he makes, but again, I would bring it back around to, we need people, we need community, and that’s where I would put my resources and energy into is, how do we make the communities that we are in better places?

Kevin: This is a question that I referred to earlier. This has to do with deflation. Here’s what Gary says:

“I’ve always heard that gold goes up with inflation. It has always been billed as a stable entity when buying power of the dollar degrades due to inflation. Most experts now believe that we have low inflation and many, especially those who follow the Chinese economy are concerned about deflation. Why would gold rise if the experts are correct about the upcoming fiat to deflationary cycle?”

David: Gary, that’s a great question. I think gold, first of all, does not have to rise to be of benefit. If it falls less than everything else, then it has proven its strength and provides a reason to be owned. Granted, this may be difficult to conceive of, but this is a common theme in deflation, the declining price of lots of assets. If gold declines by 10%, real estate declines by 30%, stocks decline by 50%, bonds decline by 40%, on a relative basis, you’re the winner.

Kevin: Yes, because the gold buys that much more of each of those other items.

David: That’s exactly right. If you’ve seen a 10% decline in your gold, and you’re looking at stocks that have declined by 50%, your financial footprint has improved considerably. Now again, I’ll tell you, this is the ideal circumstance. Even though everyone talks about inflation being the reason to own gold, and everyone celebrates a higher gold price, I will tell you that is wrong thinking, for this reason. Buy the time you get to $5,000 gold as it’s chased by changing inflation expectations …

Kevin: You’re going to be paying the tax man a big part of that, actually.

David: Exactly right. So in the case of seeing a decline in the price of gold, but relative to other assets doing well, guess what? You can improve your financial footprint multiples from what it was before and have a tax write-off as opposed to a tax bill. Does that compute?

Kevin: A good example of that, Dave, is when silver drops dramatically relative to gold, and gold has dropped. A lot of times our clients will say, “Yeah, let’s go ahead and sell some of that gold and go into silver.” Well, they take a tax loss, and they accumulate that much more metal in the silver. Now, down the road the silver goes up and they may do the same thing again, but if they are both falling together against the dollar, yet against each other there is this relative change, you’ve got the best of all worlds.

David: I anticipate that completely, and I think a part of the reason we have not seen that in the stock market and the bond market is because they have been targeted to be propped up. Look, the value of a bond is determined by what is happening in the interest rate market, and if the Fed is sitting on interest rates, forcing them lower, guess what happens to the value of the bond? It is forced higher. The price of the bond is forced higher. So, we are living with a certain artificial pricing in stocks, and in bonds, because of shenanigans being played in the interest rate world. I think we see that game come to an end and we see both the bond market and the stock market take a hit, certainly the bond market where you’re talking about poor quality credit.

Kevin: Next question. Edward says:

“First may I say thank you for your weekly broadcast. It’s been so educational and informative.”

Well, thanks, Edward. The question he asks is:

“Earlier this year you were in Argentina, and as we are headed down the same path, could you give me any insight as to how the real estate market has done in that country? I assume that financing is expensive and hard to come by and therefore I would think it has not been a good investment, or has it been more of a store of wealth against the Argentinean currency?”

David: It is interesting, because you do see a lot of Argentineans buying property and they would rather sit in something that is illiquid than sit in their domestic currency and lose value. The problem is this. You have to be able to pay cash because in an environment where you have radical inflation, the banker doesn’t want to be paid back with a devalued currency and so what happens in an environment where there are high rates of inflation is that there is zero bank financing that occurs. So the only people who can buy real estate are people who have a sufficient amount of cash to put all of it on the barrel, and pay for it, lock, stock, and barrel. So, if you don’t have the money, you can’t transact.

There are a couple of distinctions, I would say, that are important when you are talking about property. If the property does not cash flow then you may be in a position where taxes on that property may force a sale at some point. That’s point number one, looking at the property tax implications and whether or not you have sufficient cash flow to maintain that property. Does that compute?

Kevin: Yes.

David: I think the second part is, let’s say for instance you own ag land, and you have a commodity that you would like to sell, and can sell, and therefore you have cash flow related to the property. That should be great, right? Well, in Argentina they’ve restricted exports and put a cap on the prices that you can charge for your commodity.

Kevin: For agricultural.

David: Right. So, your expenses may be rising at the same time you’ve got a ceiling on what you can charge for your food.

Kevin: Price controls.

David: Price controls, which means that again, you may own property which is better than owning cash in that environment, but you may be forced to liquidate the property because of those external factors.

Kevin: I don’t want to sound like a broken record, it doesn’t all boil back down to gold, but your dad used to have a saying. He said, “Gold is real estate that you can put in your pocket.” There is a liquidity aspect to gold in your pocket versus, say, Argentinean real estate that you just can’t beat.

David: I totally agree. I think real estate is a reasonable store of value. I think it is a very reasonable store of value. And relative to that local currency, it makes a lot of sense. You point something out that is very interesting. It also is an asset that has low liquidity. There is a smaller audience that can pay cash and get you out of that property if you want to, when bank financing has gone to zero. It can’t be done. So, I think the other issue is that it is an asset that is high profile. It is recorded with the state. You want it recorded with the state. That way you know you have clear title to it. But it does make you something of a financial target, having a real asset that has a high profile. On the other hand, you mentioned gold and real estate in your pocket. It is a real asset with a low profile.

Kevin: I didn’t even plan on this but I’m looking at the next question from Don, and this ties directly in. He says:

“If we have a financial crisis will my silver and gold have liquidity or marketable value? Will I be able to convert it to cash?”

That ties right in to what we were talking about.

David: The answer is, yes, it’s liquid. Where is it liquid? Anywhere in the world. The caveat is that governments around the world are moving against all cash transactions and so you may find it more and more difficult to walk into a Bureau de Change on the Bahnhofstrasse in downtown Zurich and hand over three krugerrands for X number of Swiss francs or euros. There is greater and greater scrutiny on the cash component of that transaction, and it is government trying to wrap their hands around every possible transaction.

This gets to a topic of conversation we have had on the Commentary at least two or three times relating to moving toward an entire credit and debit system, a cashless society, if you will. We are moving that direction, the machinery is in place, the Treasury Department would love it, I think world governments would agree that it is a better way of casting a tax net and cash transactions on the other side of a gold liquidation are going to become harder and harder. But I’ll tell you, today you could go to almost any city in the world and convert gold to cash in a New York second. It’s that liquid, anywhere in the world. What Jim Rickards describes as “money good” all over the world.

Kevin: My daughter likes to watch Dr. Who, which is about a time machine, it’s called the TARDIS. I’ve thought about this. If you had to get in that TARDIS and randomly go anywhere in time, not just any city, but anywhere in time, what money would you take with you? You’d have to take gold. So, it’s not just anywhere in the world, Dave, you are talking, it’s anywhere in time.

Going on to the next question, you’ve answered this question to a degree, but I think it’s worth reading again from a different point of view. This is Don writing. He says:

“I’m retired and I have acquired some gold and silver, most of it in the $900 range [of course that’s gold]. I live on social security and it’s tight. How long do I hold the gold and silver before losing what I have left?”

I think he is asking how long he should have to hold it before he has to start selling it to pay income.

David: Right, so time is an issue here, and this relates back to an earlier question relating to the manipulation of the metals prices in the current environment. If you can imagine an arm wrestling match, the market is the muscle-bound practiced, prepared competitor. You have the central bank community, a bunch of PhDs with pocket protectors, and they’re trying to figure out how long they can talk themselves out of this competition with the muscle-bound arm wrestling competitor. Because the market will beat them.

Kevin: And the market is the muscle-bound competitor.

David: That’s exactly right. And so they’re trying to match the market using cleverness as a substitute for muscle. And so, yes, they are trying to postpone the match. How will the market vote? Will we end up in this competition? Will it be postponed six months, 12 months, 18 months? Listen, I’ve assumed that the timeframe 2016 to 2018 would be the timeframe where we would have already worked through some major structural issues, and most of the decline in key asset classes, stocks, bonds, real estate, what have you, would have already occurred.

That has yet to occur, it doesn’t mean it won’t, but a 2016 to 2018 timeframe may be that critical period where you want to hold your gold, hold onto it. Why? Because again, what we’re up against is this period of time where the market wants to compete and win, and the PhD pocket protector guys and gals are actually postponing the conflict. I know who wins. Would I wait around 18-24 months to see if that materializes? Indeed I would.

Kevin: It just goes to show that trend is much easier to identify than timing. No one really knows timing, do they Dave?

David: That’s right. And it is one of the reasons we prefer physical metals to something like futures and options where timing is the critical variable. Even if you are right on trend, if you are incorrect in timing you can be taken out of the game.

Kevin: Manny asks:

“Gold miners such as Barrick are near historic low levels. Do you the miners providing value at that price point, or do you foresee further widening of the gold to XAU ratio? Presumably, you still like Barrick?”

David: Well, that’s interesting. I think it is a value. It is a value at these prices. Barrick faces certain headwinds because of the amount of debt that they have on their balance sheet. So I would say that other companies would be preferred. I do not own Barrick because I think there are better alternatives. When you look at a gold mining index, Barrick’s gold mining index, for instance, relative to gold is at the lowest levels we’ve seen in 50 years. I think it is a good time to be adding to positions, or initiating those positions. This is like another question that was asked by Lou. “I’ve been killed in the precious metals miners. Should I bail out?” Well, I’ve been killed in the precious metals miners, too.

Kevin: We all have, yeah.

David: So, if you must, then by all means, do. But I’m not. And I think what is often forgotten in a moment of stress is how these kinds of assets behave when they’re having their day in the sun. Clearly, they are not having their day in the sun today. That does not preclude them from having their day in the sun again, and the growth trajectory is pretty significant. I think that there are other Canadian companies, other U.S. based companies that I prefer over Barrick. It’s a matter of balance sheet integrity, how much debt do they have, can they service their debt, what is their debt service to income coverage ratio? And I would be looking for the strongest. Barrick doesn’t fit that bill.

Kevin: And nobody gets killed in a 10-15% investment of their overall portfolio. If you’re getting killed in mining stocks, it means you put too much in in the first place.

David: Again, 10-15% allocation is not a big deal. Even a 20% allocation, if you are looking at just the paper assets that you manage, 80% doing something else, even taking a significant haircut on that, the rebound potential in those shares is immense, assuming that you have chosen the ones with healthy balance sheets and good management, I think you will do very well over the next few years.

Kevin: Craig, the next question, asks a definition type of question. He says:

“When I hear people talk about deflation, they talk about falling prices as being deflation. I though deflation occurs when the money supply decreases. Falling prices can be a symptom of deflation. To me, when they mention falling prices I assume that it is just market adjustments and not changes in the money supply.”

There seems to be a misunderstanding, Dave, about the definition of inflation and deflation, from a monetary standpoint.

David: So, a debt unwind, you are reducing the quantity of credit, which today is the same thing as money. With a debt unwind you are reducing the quantity of credit in the system. That is the deflationary threat that our central banks are trying to prevent. They are fighting for one team and one team only: the banking community. The bank, any bank, puts out loans, and those loans represent the assets of the institution. They have a very leveraged balance sheet, and so if those assets are discounted very much the solvency of the bank comes into question. So it’s imperative that the Fed fight a deflationary threat or a debt unwind and thus a contraction in credit in the system.

You are correct, lower prices are the market indicator, they are a symptom. With a shrinking supply of money and credit comes a collapse in demand for goods and services. And when there is a collapse in demand for goods and services you end up with an over-supply, which forces prices lower. So yes, you are making the proper distinctions. Price deflation is different than credit or monetary deflation. They happen to be connected, but it’s an indirect connection.

Kevin: Dave, before we end this week’s program I want to restate that we are going to continue the questions and answers into next week’s program, as well. But I want to end with a question that has caused a lot of confusion with people out there who would like to have their IRA at home. Wouldn’t we all, wouldn’t our company love to have that availability? There are companies out there who are very aggressively soliciting people to try to move their IRA gold to their house. So, I’m going to read you the question from Randy. Randy says:

“I’ve recently been receiving an increased number of unsolicited emails about holding physical metals in an IRA in my own home. The process centers around creating a legal entity that has a custodian paid for separately for a 401k. The metals are held wherever the owner likes. I would be curious to hear your views, Dave, on the pros and the cons of this approach.”

David: Randy, it’s great to hear from you. It’s been too long since we’ve gotten to sit down and have a conversation. I look forward to that, so next time I’m in your neck of the woods, I look forward to that. The appeal of this is control. That’s the appeal, is that you lower your risk and increase the control quotient in terms of the assets that you have. Lower risk, because you may have a concern that government is going to take your IRA, what have you. There is an unspoken, but fairly obvious current in conversations that I’ve had with some clients who have gone this route, and it is that they desire to evade taxes, and they want to basically get control of the asset and then just let it disappear into the woodwork. That is dangerous. That is ill-advised. What I would say is the process described by you, Randy, is one that, let’s say that there are a thousand things that you need to do, a thousand boxes that you need to check, in order for this to work for you. It can be done, but if you don’t check a thousand boxes, if you only check 999, then you are in big trouble. We have industry lawyers that will tell you that the tax code requires a bank or trust company to hold the assets. We agree with that.

Kevin: We agree with that. That’s right. You’ve paid good money for review on this.

David: That’s true. We have legal opinions that say, very specifically, a bank or trust company must hold the asset, so if you are holding the assets, even though you’ve gone through this little shell game of setting up an LLC that then owns shares of this company, and this company has assets, but you’re in control of the assets, you’re going to find that, A, it’s been treated as a distribution, and it will be back-dated in terms of the cost to you. Here are the real cons. The cons of doing this, if it’s not done properly, again, every “I” dotted, every “T” crossed, out of a thousand boxes check, not 999, one thousand must be. If you miss one, here’s what it costs you. It will cost you one-third to two-thirds of the value of your retirement assets.

Here’s how it works. First of all, you have a taxable distribution, which means you owe tax on the entire amount. That may not be convenient, taking it all in one single year, because it will jump your tax rate considerably. Number two, you’ll have penalties to pay. Number three, you’ll have interest on top of the penalties, and I think at this point, again, you’re looking at a reduction between one-third and two-thirds of the value of your retirement account, which means even though you were after control, and after lowering your risk profile, to get it done you just slaughtered your retirement future.

Kevin: And it’s not just that, Dave. The main motivation, it seems, for a lot of the dealers that are trying to do this is actually just to churn the account, to generate a commission for themselves, not on the IRA itself, but on changing the type of gold or silver that a person has into another type of gold or silver.

David: I am saying this with great accuracy. Half of the guys that I know who are promoting this have spent time behind bars. Half of them have spent time behind bars, and the reasons they’ve spent time behind bars is because they conducted themselves in business in a very self-interested way, in a way that was detrimental to their clients. So I would be very, very cautious. One in a hundred can do it properly, and it’s very expensive to do it properly, and if you don’t dot every “I” and cross every “T,” again, you’re giving up one-third to two-thirds of your retirement assets. Is that worth it?

Kevin: I’d like to go ahead and wrap the program up for this week, but I want to invite our listeners back next week. So far, these questions are great.

David: I find one of the things that’s critical to continuing education is feeding curiosity, and if you’re not asking questions then you have to reflect and say, “Am I feeding that curiosity which ends up driving where I go in my educational pursuits. And I look at these questions and I see an entire cadre of people who are infinitely curious, and want to learn, and want to grow, and want to do the right things, and Kevin, that’s just very encouraging to me.