In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, what I would like to do today is look at the Fed and try to do a report card. Let’s look at before the time of the Federal Reserve, and look at inflation and some of those numbers, and say, okay, after we put an organization in that was very clearly mandated to stabilize crisis, how have they done so far? Let’s look at the before and the after.

David: I think we have our own opinions as to how effective they have been. If you roll the clock back, Ken Rogoff has reflected it this way, saying, “Inflation rose 20% in 138 years, until the Fed’s founding in 1913, then 3,000 percent since 1913.

Kevin: We’re not talking annual 20%, we’re talking 20% in the entire 138 years.

David: That’s correct. That’s sort of a net number. You have periods of inflation and deflation. When you go from beginning to end, where did you start, where did you end up? There was an inflation of about 20% in spite of some relatively volatile years in between.

Kevin: That sounds like we had more price stability before the Fed than the mandated price stability after.

David: The volatility that we have today is just in one direction. The dollar buys less and less with each year that passes. Our suggestion is, yes, the Fed should be graded, let’s say on a 10-year rolling average. Again, we just keep to their basic mandate. Price stability was the mandate. What part of 3,000 percent represents stability?

Kevin: I think of monetarism. We’ve criticized Keynesianism over and over and over, and Dave, I think it is worth criticizing. Keynesianism says, “Don’t save money, spend money. Don’t pay correct interest rates, go ahead and keep them at zero if you possibly can, to keep people spending and keep people going into debt.” Well, that’s ridiculous.

But there was monetarism. Milton Friedman came in and said, “You know, Keynesianism may not really work, but I’ll tell you what you can do. You can control monetary policy and that will solve all the problems, but Philadelphia Fed President, Charles Plosser, is denying that at this point.

David: Absolutely, when he looks at the situation today, and there is a growing number of people at the Fed who would say, “Listen, this isn’t working, we know it’s not working. It’s not like we have a better solution, and a part of the reason we don’t have a better solution is because the folks who are running the fiscal show don’t have their act together. Plosser said this: “A monetary solution to fiscal problems is a bridge to nowhere, at best, and a road to perdition, at worst.”

This is what they have been pursuing, the monetary solution to fiscal problems, we need to tighten our belt. And then that word, austerity, is almost like poison to those in Washington, D.C., and certainly it’s not popular because there is a real cost to austerity. The problem is, without it, what you have is what Plosser describes, the monetary solution being a bridge to nowhere, at best, and a road to perdition, at worst.

We have a bridge to nowhere here in Durango. Every time we drive underneath it, my 7-year-old son says, “Look, that’s the work of Obamanomics.” Why? Because we needed intervention at the time. We needed to spend money on infrastructure, they are suggesting spending more money on infrastructure today, and what did it get us here in our lovely town of Durango? A bridge. Do you know what? I have never seen a vehicle on that bridge, and it’s been there for three years now.

Kevin: You know, when you are a Fed president, or a Philadelphia Fed president, or any of the regions, you are indicting yourself when you say that monetary policy is not working. What is interesting is that the current monetary policies have this dual mandate that we have talked about before. It’s been contentious all the way along because they have price stability as their first goal, but then the second goal is generating economic growth so that you have employment. Well, it’s impossible to control the two.

David: I like Richard Fisher, I think he’s one of the best of the Fed presidents, there in Dallas, and, generally speaking, I’m not suggesting we cut off the West Coast and the East Coast, but where you have your money centers, and maybe Chicago fits into that, too, somewhat, but the major money centers have a positive inflation bias.

Meanwhile, you have folks who are dealing more with the working class Joe, and companies across the country, the mid section of the country, which are a little bit more grounded in their perspective, so you find the St. Louis Fed chief, you find Kansas City, you find Dallas, with a slightly different tone.

Fisher, this week, gave a speech in which he talked about how their policies have basically created a Gordian knot. He said, “I’ve been working for six to eight years to bring the nation’s economy out of the recession. The fiscal authorities have, for the most part, been AWOL during this time, having left the parking brake on during their absence. The result is that our balance sheet has ballooned to more than 3½ trillion. The efficacy of this effort is the subject of significant debate, even internally within the FOMC, any CEO or CFO worth their salt, running a company that is large, medium, or small, whether or publicly or privately owned, has by now taken advantage of this to restructure the liability side of their balance sheet.”

He is making some good points, but one of the things that he is basically saying is, “Listen, we’ve done this to fill a gap, but ultimately, you are going to have to do some heavy lifting.”

I think this is really what’s at stake. The current monetary policies have been more or less contentious since inception, and they are growing more contentious by the day, as the evidence of ineffectiveness is mounting.

Kevin: I think we should have a definition of terms here, Dave. For the person who doesn’t understand the difference between monetary policy and fiscal policy, monetary policy is in the hands of the Fed, this is what they are going to do, printing money. Fiscal has to do with the government. It has to do with tightening the belt.

David: It has to do with just keeping a budget. Just like you and your household may look and say, “This is how much money we make each month, this is how much money we spend. We either have a surplus, that is, extra money at the end of the month, or a deficit.” In other words, you didn’t have enough money, so you had to go into debt to finance what are your household needs. The government is no different. On the fiscal side, we are just dealing with budget issues, how much money is coming in, and how much money is going out. The monetary side has everything to do with the creation of money and credit, and that’s what the Fed is responsible for, the creation of money and credit, and then, the further distribution through their various central bank regional hubs, into the banking community.

Kevin: I don’t want to be sympathetic, necessarily, with the guys at the Fed, because I don’t much care for any of them, frankly, Dave, but the challenge of being a central banker is that you’re stuck between conflicting mandates. In other words, are you going to print money and keep the economy rolling, at the risk of ultimately turning into a hyperinflationary collapse of the dollar, or do you tighten things up and force the government into a conclusion?

David: I guess one of the reasons why I appreciate Fisher is because he continues to read, and I know he has been reading Ian McAvity. He quotes him: “The U.S. is the best-looking horse in the glue factory.” That comes straight from our friend, Ian McAvity, and his newsletter, Deliberations. Weak as we’ve been, we’re the best compared to all the rest. That’s how he concludes his speech and his position. On a relative basis, we probably are better off than Brazil today, or China today. We have a leg up in many regards.

But here’s what has happened. The challenge for the central bank today is that they are stuck between the rock of deflation on the one hand, and the hard place of suboptimal growth. So, between a rock and a hard place, deflation on the one hand, too much debt in the system that needs to be unwound, and slow-to-zero growth in the economy. GDP is averaging 1% and that does not explain the number of jobs being created.

Ordinarily, when you have GDP growth that is that low, that rate of growth, jobs that they are assuming are 185,000 to 200,000 jobs a month – they can’t be explained. It doesn’t match the economic input. There is not enough happening for those jobs to be created, which is to the point. These jobs are a statistician’s pipe dream. They are seasonal factors, they are birth/death modeling, they are part-timers replacing a once predominantly full-time workplace, and there is a large swath of Americans leaving the labor force, either due to discouraged efforts finding a job, or simply reaching the age of retirement and saying, “Okay, I’ve had enough.”

Kevin: David, if you’re with the BLS, you have to admit, these guys come in and they say, “Okay, we’re going to have to come up with birth/death models, we have to figure out how many guys are discouraged and coming off the polls. In a way, it’s a little bit like, “Okay, guys, it’s Monday morning, 8 o’clock, pick a number between 1 and 100,000, and we’ll use that.”

David: Well, that’s correct. It’s not as if this is just sort of creativity out of the right or left pocket. We’re not talking about folks that should have been creative writing majors. No, they were mathmeticians, they were economists studying econometric models, and so they do have a variety of mathematical assumptions as they creatively come up with these numbers, which end up being revised later on anyway.

This is the irony. No one seems to pay attention to that. We’ll talk about it in a minute, I suppose, but the GDPs revision of late, last quarter, were revised down steeply. Now we are dealing with, on the basis of expectations, 2.4%, now down to 1.1%, about a 53% reduction from what was expected in the first quarter.

So there is a trend of note, going back to the issue of retirement and unemployment, there is the large increase in the labor force at older ages, that segment that you would assume most people 50-70, there is at least a thought in the back of their mind, “Maybe at some point I want to retire.”

Kevin: But they can’t right now, Dave. Interest rates are too low, so they are staying in the work force.

David: And it leaves fewer openings for a younger professional set coming out of college. So let me reverse that and say, that does not take away from the ever-decreasing labor force. The major improvements and the most recent jobs numbers were due to this factor: The labor force participation has been shrinking. That is, even though more people are staying on to work, we are still dealing with that bubble in terms of population, the baby boomer generation, which is coming into retirement, and in spite of a lot of people staying on, there are massive amounts leaving the labor force, and that is what is shrinking that unemployment number.

Kevin: So, when you shrink the overall number then, when you hear the percentages, even if the percentage goes up, sometimes you are talking about fewer and fewer people.

David: Right. So the stats were 7.6, that’s where we began last week, and we finished the week at 7.4. How did we get there? If you take the pool of people that are at working age, and shrink the pool, and divide that number by those currently working, and as the pool shrinks, the percentage employed improves, boosting the percentage left, which is the unemployed category. So you shrink the total pool and divide by the same number of those employed, the unemployed number goes down, not because of new jobs created. In this case, it’s because of simple math. It’s a statistical reality, even if it is not a real reflection of the jobs market.

Let me illustrate. Let’s say you take 1,000 people that are in the labor pool, and 900 are working today. That gives you a 10% unemployment number. You keep the 900 still working, but shrink the pool to 950, so it shrunk from 1,000 to 950. Let’s just assume those 50 people retired. Guess what? The unemployment number drops to 5.3% from what was a 10% unemployment number.

Kevin: So it looks like a huge improvement.

David: Looks like a huge improvement, but you still have just the 900 that are working. So, no jobs added, yet the number was improved because the size of the labor force shrank.

Kevin: David, one of our favorite guests that we have on a pretty consistent basis is John Williams, he being an economist and a statistician who reports, accurately, the various numbers so that we see, after the revisions, what they really should be.

David: And it’s coming in about 10%. If you’re not looking at John Williams’ stuff on a regular basis, and you’re just looking at what you might find, even with disparate opinions on Bloomberg and CNBC, everyone would say, Keith Hall, others at the BLS, folks who have left the BLS, folks who are just sort of thumbnailing it and saying, “I think I have an idea where unemployment is,” it’s about 3-4 percentage points higher. That doesn’t get us quite to U6. U6 is 14%. U3, 7.4 is the most recent number. And then Johns Williams’ alternate measure of unemployment, which takes out all of those seasonal factors, all of the adjustments we’re talking about earlier, he comes up with a number that is closer to 23.3%.

Kevin: Which is shocking, because the Great Depression … those are numbers that are very similar to the 1930s.

David: Right, so I would probably fall into the camp somewhere closer to U6, between 10 and 15%, which I think is quite realistic, and a reflection of the real labor issues.

Kevin: Speaking of John Williams, something that shocked me this week, Dave, after they just added over 500 billion dollars to our GDP, just by changing the way they calculate it, we’ve seen little or no mention in the mainstream media that that was just a falsified number.

David: No, they were gleefully reporting a 1.8% growth number for the second quarter, that is, GDP growth for the second quarter.

Kevin: And they added 560 billion dollars out of thin air.

David: To the economy, they added 560, and that’s by recategorization and basically new accounting, things that were considered expenses now can be considered as investment, and an improvement to the overall economy. As we mentioned last week, the greatest absurdity, in my opinion, was counting pensions when they are accrued, as to when they are paid out. You have government investment now increased by 30 billion dollars, and that improvement in the economy is supposed to be a reality.

It’s a pipe dream. It’s a total fiction. And yet, this is the irksome part. The mass media says, “Look, we were surprised. We were expecting 1%, less than 1%, it came in at 1.8%. They’re neglecting the artificial source of growth, completely neglecting it, not even bringing it up, and neglecting to emphasize the reduction in first quarter GDP, because it was originally, if you recall, estimated to be 2.4 to 2.5, then reported at 1.8, and then revised to 1.1. But that revision gets ignored as a negative data point.

Kevin: Well, it’s not news anymore.

David: It’s not news anymore. And that’s the problem with statistics. You have to actually look as much in rear view, as look in the present and future, because they keep on revising things on a more or less constant basis. What they said yesterday, they can’t be held accountable for. Cicero said something like that. “My position today – I can’t be held accountable for what I said yesterday because things have changed.”

Well, you assume that there is some constancy when you are just doing math. It’s not just a rhetorical flare which may take you in a different direction, but this number is changing, and what we are finding is that it is becoming more politicized all the time.

Kevin: Well, an apple is not an orange, and an orange is not an apple. A full-time job is different than a part-time job. These employment numbers that are coming in are not really telling us, specifically, how many of these great full-time jobs are now being turned into part-time jobs. That’s 953,000 jobs that have supposedly been created in 2013. If you look at that, close to a million jobs, guess how many of them were part-time? 731,000, basically three-quarters. Three-quarters of the jobs created were part-time jobs.

So great, this is wonderful. The land of the free, home of the brave, is now the land of burger flippers and those working at Dairy Queen on soft-serve machines. That’s a brilliant thing. I love it. Where we’ve been, where we’re going, this is amazing.

Kevin: And David, even though we are Western-centric in the way we think, let’s look at gold price here for a second. Gold price has been struggling around $1300. Granted, it’s added about $100 over the last month, but people are asking, “Gosh, are we in a bear market in gold?” Nobody seems to be buying gold here in the West, but in the East, the numbers are coming in, and they are gigantic.

David: Oh, I know, and this is where if you don’t pay attention to the details, you assume that the price is actually relevant here, and it’s not. The value of gold is appreciated in other parts of the world, and the price, and certainly the price volatility, means nothing, except that there is a greater opportunity. That’s the way it’s being treated in Asia, delivered through the Shanghai gold exchange, through the month of May, 918 tons of gold. Year-to-date global mine production is about 1134. George Topping at Stifel Nicolaus notes that we are basically at a 50% annualized run rate. China is buying the equivalent of 50% of new mine supply. That is an appetite that seems to be growing with the eating.

Kevin: I think we have to look at why that appetite is actually consuming so much gold. We started, after World War II with a gold standard for the world under the Bretton Woods system. We said, “Look. You guys use our currency as a reserve currency. We’re going to pay you in gold if you need to redeem dollars.” Of course, we’ve talked about this many times before. We reneged on that promise, and for the last 40 some odd years, we’ve been running with a dollar that is purely fiat. At this point, the Asians seem to be accumulating their own gold. I don’t know whether it is for their own Bretton Woods system. This weekend there was a comment made that sent chills down some of our spines.

David: Right. That raises the issue of how we ended up with so much gold in the first place. Through World War I and World War II we were one of the only places that wasn’t completely bombed out, and of late we’ve been responding to requests from those that we had done business with, World War I, World War II, post World War II. There were gold deposits kept in our country by other central banks, Germany, specifically, and it was because we were a safe place. They wanted part of their assets someplace else. We ended up with over 21,000 tons, and from about 1950 to 1971 we whittled that down from 21-22 thousand tons, down to about 8,000 tons of gold. That’s why Nixon had closed the gold window and suspended convertibility of U.S. dollars and gold. That renege that you described was the end of the Bretton Woods era.

Last week, a member of the monetary policy committee at the People’s Bank of China, Yao Yudong, called for a new Bretton Woods agreement, called for the IMF to play an enhanced role, which is essentially a diminished role in the U.S., a nongovernmental body, essentially, to be coordinating and organizing this, and I can only assume that the yuan would play a larger role. Remember that you have the trade agreements, you have the currency swap lines already in place this past year between China and France, China and England, Australia, Japan, Russia, Iran, Brazil. Those are just a few.

Kevin: They are working around the dollar. The reserve currency status was designed so that you would not work around the dollar. Everything needed to be done, at least midway through, in dollars.

David: So the dollar’s reserve currency status, in the singular, is approaching an end, and we should all be thinking ahead. We should all be planning ahead, and hopefully we are not forced to be making decisions on the basis of an announcement. But I think one of the announcements we can expect in the not too distant future, is a new number being given to the PBOC, the People’s Bank of China, updating their gold storage, their gold holdings, from the number that they revealed in 2009. It was years before that, and it was out of date, and it more than doubled in 2009. They have been acquiring aggressively.

I know individual Chinese investors have also been acquiring gold aggressively, but the PBOC has, as well. Toward what end? Certainly a greater internationalization of their currency and acceptance in the world monetary system, to be a currency that runs in parallel with the U.S. dollar and the euro, in concert.

Kevin: And it goes without saying, there would be no Bretton Woods agreement originally if there was no gold standard.

David: And we would not have been the center of Bretton Woods. That would not have happened in New Hampshire, with us being the lynchpin of the agreement, had we not had the gold. That classic phrase from my dad, “He who has the gold makes the rules.” Now I’m beginning to appreciate just how much changes, from a geopolitical and geostrategic vantage point, when you undermine a financial authority by taking the gold away.

And it’s not being taken away. It’s being given away. That’s the tragedy here. Individuals in the West, as well as institutions, and even Western-oriented central banks, are only too happy to let someone else own these worthless barbaric relics, and the East is looking back at the landscape of history and saying, “That’s fine. What you’ve forgotten, we remember. We own the gold, we will make the rules.”

Kevin: I’ve always thought it would be fascinating to have a book out that would follow history from the perspective of an ounce of gold traveling through the world powers, through the centuries, through the millennia, because you could actually define world history by the flow of gold, like what your dad was saying.

David: You would journey through Spain, you would journey through Portugal, you would journey through the Netherlands, you would journey through Great Britain, and you would journey through America. The question is, as an ounce of gold, over the last however many hundreds of years…

Kevin: Are you now in China?

David: Are you now in China? Well, we await that announcement, but we think that is something we may see this year or even next year.

Kevin: To add fuel to the fire, Dave, we’ve talked about the difference in paper price versus the real price. There are a lot of mines right now, especially in Africa, that cannot mine gold for a profit.

David: The CEO of Gold Fields, one of the larger gold miners in the world today, has noted that African all-in costs are at about $1500 across the industry.

Kevin: So they are losing money right now.

David: I had assumed $1400. He is saying that no, across Africa, you are looking at average costs of about $1500. The problem is that there isn’t developed infrastructure on the continent, and as such, to operate a mine you are dealing with bringing in diesel fuel. Everything needs to be brought in, in order to do your work, as opposed to tapping in to the local hydroelectric plant and having an inexpensive way of operating. There are no inexpensive ways of operating in Africa. The net effect, and here is the real challenge, we’re watching the industry, this year marks the closure of many prospective projects, or even marginally profitable projects, which are now under water.

Kevin: So supply will be dropping just as demand over in Asia is increasing.

David: That’s precisely the point. You have a decrease in supplies coming to market from the miners because of these non-economically functional or viable projects. On the other hand, you have steep declines in recycled gold. Everyone has seen the We Buy Gold stores across the U.S., and now around the world. As the price of gold has declined over the last two years, less and less gold is going into the recycled market.

What, at its peak, was close to 1900 tons, I would guess, as we tally the end of the year, is about half of that. So you have a perfect and normal reason for gold prices to rise considerably. That is, supplies are dwindling. Demand has been relatively constant in the physical market. We continue to see weakness in price predicated primarily on selling in futures contracts, not mass selling in the physical market.

Kevin: Which is just paper.

David: Then, of course, there is the short-covering, which is one more propellant in the years ahead. Note that when projects are shut down, going back to the mine supply issue, it takes years to restart them. It’s not like closing a factory line, or flipping a switch, or adding a shift somehow restores previous productivity or production. It takes years to restart a mining project, so you have supply squeezes which are around the corner, and physical allocations, in our opinion, for the average investor, should continue to be a major priority.

Kevin: I think that lag time is sometimes hard to remember. I remember the old Doritos commercial where Jay Leno says, “Munch all you want, we’ll make more.” Because they could. You can make more corn chips pretty quick, but when you shut a mine down, like you said, the restart could be years before they get into that.

But let’s go into the price of gold, because even though it is trading mainly on paper right now, and even though the supplies probably are diminishing dramatically, we still have been in this $1300 range. Where should we look at gold as far as support, resistance, some of those numbers?

David: There are three perspectives that you can bring to any asset class: Long-term, intermediate-term, and short-term. Long-term, our view is that gold is still trading in the direction of $3500-5000 an ounce. What is long-term? 3-5 years? 5-7 years? I think 3-5 years is a healthy appraisal with those prices in mind.

Intermediate-term being 1-3 years, we have some hurdles to get through, but it wouldn’t surprise us to, as soon as 2014 or 2015, be in the neighborhood of $2200-2700 an ounce.

Then in the short-term, now we are talking about very different trading dynamics and something that, on a day-to-day basis, can be tedious, if not just mind-bending. And why does gold go up or down in a given day? Sometimes there is a very clear reason. Other times, it is more obscure. We have the first hurdle here between $1340 and $1360, and that still needs to be cleared. July was the best month since January 2012. We were up 7.3% for the month, that’s gold performing very well, that’s from the beginning to the end of the month.

A slowing of that pace is okay right now. I’m fine with that. It’s a little bit like eating. You stop, you chew, you swallow, you allow time to catch up with the movement, and this, I think, is a very healthy pause here in the first part of August. Add 7.3%. Do you want to do that? Of course, we’d love to see that happen, 7.3% every month from now until infinity, but listen, that’s not realistic, and it’s not healthy.

Kevin: And silver is a little bit different. Silver has numbers that you have been watching, as well. What are you looking at on the silver market?

David: It touched a 67-to-1 ratio with gold, and it has yet to really deteriorate further. It is sitting today at about a 65-to-1 ratio. 70-to-1 has been long, in my mind, as sort of an outside number. Will we see that? Don’t know. If we do, I think it would be very short-term. You would see that if gold stayed in the $1300s and silver rested its lows in the $18.60s. I’ve noted that silver has been added to my own holdings, we’ve talked about that here in recent weeks, and we’ve also done the same thing in our managed accounts, which has been to increase an allocation in silver, modestly, as this point.

Kevin: And sometimes there are strange and exotic things. I’ve always smiled a little when somebody says Indian wedding season, when they say that is really going to affect the gold market, but we have seen through the years that the wheat harvest in India can sometimes affect the gold price in the fall.

David: Right. This is the funny thing. You have wheat, you have rice, you have a number of agricultural products which are critical to the fortunes of an agrarian economy. The crops so far this year have had little in the way of surprise. There were some earlier concerns about monsoons, but with a healthy crop in that part of the world, there should be a healthy wedding season, and plenty of gold buying with it. That’s why there is this sort of classic seasonality to gold. By the time we get to the end of August, to see the price of gold picking up again on the basis of the Indian wedding season. We just finished Ramadan, not any surprise that we actually did see a strong little spurt in the gold price through Ramadan. And now there is some continuation as we head toward that Indian wedding season. There have been some concerns stated, and I think reasonably so, about the official imports being controlled, and the taxes being increased on the gold that is being brought into India.

Kevin: They were obviously concerned, Dave. When you have the government actually trying to control the flow in of something, there’s something behind the curtain there.

David: There is, and I think part of that is that the rupee has been the weakest we have seen in all of history. Relative to the dollar, it has put in new lows. To put in a historical all-time low against the dollar, which is not exactly the strongest currency in the world – that’s saying something.

Kevin: If you think about it, the officials would like to see full control over their currency, over the flow of gold, but we’ve seen other examples worldwide that there is a difference between street price and official price.

David: Right. So the more they increase the pressure on gold, either by an increase in taxes, or a limitation in imports, frankly, we could care less. The world doesn’t respect anything official, particularly if it seems arbitrary or absurd. Just think about this. Ask the Argentines today how they feel about the official exchange rate. People trade on the street for the real value of an item, not the mandated or controlled value. And if demand is strong in India, official constraints simply shift the supply chains into the black market.

We mentioned this recently, with Vietnamese imports in recent years, where over half of all their supplies are actually unregistered, and beyond that official quota. They’ve set the same kind of limitations, and yet the black market says, “Fine, that’s good, now we know how much to import to meet real demand, not just the demand that you are assuming is going to be limited by official edict.

Kevin: A society like ours is known for its rule of law. Now, don’t smile right now, because it seems like that is breaking down a little bit, but I was raised in a country where the rule of law was to be respected, so I’ve grown accustomed to following and obeying those laws. But it seems to be getting harder and harder, not just in India, but even here in America. I’m accustomed to obeying the law, I plan on obeying the law, but survival may mandate something different down the road.

David: Yes, there is something of an equation there, where rule following is something that we’re accustomed to, we expect, and by and large that is normal. The other side of rule following, in terms of the equation, the quid pro quo, if you will, is where the rule of law is respected at the top. You have those who are following the rules, you have those who are enforcing the rules, and to the degree that the rule of law is respected, then you will see more rule-following.

When you have a breakdown in the rule of law at the top, guess what you end up with, as well? There is less rule-following at the bottom, as well, and you see that all over the world. I think you will begin to see a lot more of that in the United States, as well.

These are observations which may seem like bad behavior, but consider the existential threat that government is willing to put its people under, by depreciating their savings and dishonoring the work of their hands. Think about this. Someone’s labor, what they do for a day and their compensation, is essentially extorted via our present day money system, our currency system, and it’s thus only natural to prioritize survival and prioritize family flourishing over and above the needs of, should we say, a capricious, or even rapacious government.

Kevin: So I don’t have to be patriotic and hold dollars. I can own gold and silver, but I think I should probably also point out that there is a difference between gold as money, and sometimes silver as an industrial metal, and I think that should be addressed, because many times people say that silver is the poor man’s gold, but it doesn’t always behave that way.

David: And to that point, you have those who are not respecters of the rupee, or of the won, or of the yuan, or of the yen. This is the case all over the world where people say, “When push comes to shove, do I trust our central banker to manage my savings effectively?” And where did we start the conversation today, Kevin? With the quote from Ken Rogoff, that inflation rose 20% in the first 138 years until the Fed’s founding, and now 3000 percent since 1913. You are asking a lot for people to put faith and confidence in the mismanagement, not even the effective and well managed system, but the mismanagement of our money system.

Going back to that notion of capricious and rapacious, that does describe the state today, and it does describe what individuals the world over, not just in the United States, do behaviorally, to accommodate what is otherwise a system that will chew them up and spit them out.

Kevin: Dave, going back to what I was asking on the gold and silver, gold has always been a great hedge against government mismanagement, but silver sometimes can behave in an erratic way, and I think it is important to see the definition between the two, especially in the short term. You were talking about the three rungs: The long-term, the mid-term, and the short. In the short-term you can see the industrial uses of silver moving up and down, completely different than the gold market.

David: Right, so there is a short-term caveat on silver. Even though I’ve just purchased some, should the industrial metals sell off very hard over the next 90 days – let’s say, for instance, copper is breaking that critical $3 level, and you have the other industrial metals which are rolling downhill from here – silver may not be immune to that kind of pressure, and so again, while I’ve bought a good number of ounces at $20 an ounce, I would be willing, and I am prepared, to lower my average cost again at $15 an ounce. The question is, which of silver’s two identities is it wearing in the months ahead?

Kevin: Is it monetary or is it industrial?

David: And if it is the monetary metal, then I have no worries. We’ve put in the lows, and silver is going to do just fine. If it takes on the characteristics of the industrial metal, we have more to give up in the context of a broad equity market selloff and growing realization of stagnant global growth.

Kevin: And one of the things that we’re seeing here, Dave, is premiums in silver, still, especially the junk silver, the 90% bags, the dimes, the quarters, the 50-cent pieces. People are still willing to pay, out in the marketplace, a pretty substantial premium because there is not a lot of supply.

David: And the same is true for 10-ounce and 100-ounce silver bars, too. So this week we’re not seeing any behavior in the silver market that is disturbing or concerning at all. Silver has yet to break down in any real worrying fashion. It does need to get, as we said, above $20, and then ultimately above $22.50, to really start that recovery process back toward $27, and higher prices.

But you recall that products are delayed on delivery. That’s what determines the physical constraints. Delivery of products is being delayed, and they are selling at unusual premiums. That, to us, indicates low volumes of liquidations into the market, and a fairly robust buying of the physical metals, themselves.

Again, I would strongly recommend the purchase of physical metals. I would, frankly, even more strongly recommend the placement of some of your assets outside of the United States. Not to scare-monger here, but our government is proving to be dangerous to our liberties and basic freedoms, and this has been noted by Ron Paul in a number of different things he has published this last week, but the NSA issue is really the tip of the iceberg for a state apparatus that is nothing short of totalitarian, even if self-justified along the lines of protecting the homeland.

We’re on the edge of going too far, and I don’t know that anyone has the courage to say, “Stop. It must stop. This is insane. You have infringed our rights.” Even those in Congress, we look at the last vote, dealing with the NSA, and it’s basically a 50/50 toss-up. Half think that we have no constitutional rights worth defending, and half think that this issue with NSA has actually stepped over the line.

So what do we do? We have half lunatics, in my opinion, in government, while we may have 100% lunatics with half of them falling in the right line on this issue, but if you recall our conversation with Professor Robert Higgs, you remember he wrote his book, Crisis and Leviathan. It was an Oxford University published book on the growth of government in America.

Kevin: He had studied the nature of what happens to a government when it grows to certain sizes, and it continues to grow.

David: And what is his conclusion? I don’t remember if this was in the interview or just off the air as we were talking. He basically said, “I’m not going to stick around for a personal encounter with a police state. I’m moving. I’m leaving. You won’t find me in the United States in future years.”

Kevin: And this was not some crazy nut that they have a prepper show about. This was a guy who was published by Oxford University Press. He had studied government, he saw that it was getting too big, and he started to realize it, even before the NSA thing.

David: I’m the turnip and they’re going to squeeze me for every last drop of blood. Everything he said on the phone, every email, every text, everything he has done, we are now finding out is recorded somewhere, and just in case it doesn’t match what is best in the government’s eyes at that time, I don’t mean to overstep, Dave, but we now have drones, we have a worldwide presence, in case we need to eradicate something. It’s a little bit like that bottle of Raid. I stand back 15 feet from the wasp’s nest and I just spray.

David: You have a real presence at that wasp’s nest, even if you are at a distance from it, whether it’s Langley, Colorado Springs, wherever the command and control center is of the day. I’m worried, but I wouldn’t go so far as Robert Higgs, “I’m out of here.” I certainly don’t want to ignore his insights. But I do want to leave all of my options open. And I think our listeners should, as well.

We live in interesting times. Why would I implore the discussion of the offshore storage solution for precious metals? I think you should get in touch with our office today. I think that’s something that you should explore, that’s something that you should do. Because if you understand the definition of capricious, if you understand the definition of rapacious, and you understand the context that we are in historically, and see where we are going in terms of the growth of government and where we go from here, you have to understand that you will be squeezed. The only people who won’t be squeezed are those who already live in poverty. Anyone with anything will be squeezed in order for the leviathan to be maintained and flourish. You are a resource, and if need be, will be spent. You will be spent, so that the leviathan can live on.

Kevin: David, I can’t help but think of the examples where we should be looking east right now. Cypress, with the bail-in, 47% of all deposits over 100,000 euros. That’s a bail-in, rehypothecation, call it what you want to call it, but, basically, it’s theft.

We’ve had shows in the past few years about Turkey, and how they were moving toward a more European type of community, a more civilized type of community. But now what we are seeing is, that law-abiding society, the rule of law we talked about, is being thrown out right now for totalitarianism.

David: Recep Erdoğan came into the system at a financial low, and there has been growth in the economy, not necessarily because of the policies he has put in place, but because, basically, he caught the market at a bottom. So the Turkish lira has done well, the Turkish stock market has done well, Turkish property values have done well, and he is, coincidentally, the man who was in office when that happened, and he is getting the credit for it.

And this is what’s interesting. There is a certain degree of instability with this man and his regime. That isn’t even the word, instability, it is really insecurity. You find that when his power is challenged, he not only throws the law book at you, but then it basically is punished onto the next generation. We are seeing what was supposedly a coup in their country, and instead of individuals being tried, mass trials of 300 people, where everyone is tried, and everyone is thrown in jail, a good many of these people jailed for life.

Basically, anyone in the military who represents opposition, or frankly, represents the old secular, as opposed to the new radical Islamic state, they represent a challenge to his power. This basic level of leadership insecurity, they’re just disappearing. They are flatly disappearing. That has the hallmarks, again, of totalitarianism.

I hope that we are never in that position, where somehow the judiciary ends up being a tool of the executive branch, because that’s what’s happening in Turkey today, and I hope it is not foreshadowing something that we have in the United States.

Kevin: And that doesn’t just apply to government, Dave. You were talking about the rule of law, and it needing to be kept at the top, on down. That, in our minds, would first be government, like what we are talking about with Turkey. But also, at the top of this society here in America, are companies like Goldman-Sachs and J.P. Morgan. The CFTC right now is asking, “Why in the world are you guys so involved in the control of the inventory of commodities?” It’s a good question to ask.

David: What is very interesting to me is that in a low interest rate environment, where basically these banks have free money thrown at them by the Fed, they have lots of new business opportunities that they can pursue, the warehousing of products, collecting a fee for the warehousing of products, whether it is copper, or nickel, or aluminum.

Kevin: Aluminum was the biggie here recently.

David: They never were in the business, but in a low interest rate environment, there are lots of things that aren’t very profitable, that become very profitable when you’re not using your money, in fact, you’re using someone else’s money to begin with. Bloomberg reported this last week that the top ten banks earned $6 billion in revenue from commodities in 2012. That’s a combination of trading, and of course, facilitating the trade for industry users, including warehousing, etc.

No one seems to pay attention to the fact that some of these banks are now collecting fines for malfeasance, and of course they’re not admitting to any wrong-doing, they just pay the fines and move on, without admitting any wrong-doing. Prosecution? Well, that’s pretty light, but it has become a good source of revenue for the regulators. Taking the cake, 12% of net revenues, J.P. Morgan has paid $8.5 billion in fines since 2009, $8.5 billion in fines. That’s greater than the market capitalization of many companies that you would consider to be sizeable, and yet this is petty change.

The point is, there are rules. Those rules need to be abided by. If the rules are not abided by, then there are penalties for breaking those rules, and that is normal. There should be prosecution when someone is breaking the rules. And you just wonder. Where do we see the re-emergence of the rule of law? If we don’t, the consequence will be a breakdown in cultural respect for those who pretend to be administrators of the rule of law.

We are at an interesting juncture. Either we begin to respect the rules at the top, or you will find the respect eroding at the bottom rung of culture and society, with no following of rules, whatsoever. Lawlessness, at the lowest levels of society, is simply a reflection of that breakdown and respect for the rule of law at the top. That, again, I hope is not where we’re going, but it appears to be that we are taking at least a few steps in that direction.

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