In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, as we have done every year for the last five years, today we look back at our guests. We have had some incredible guests over the last year. We play clips from those interviews so that we can go back and try to take a perspective of 2012.

David: What we call “The Best Of” will encompass Mark Faber, Bill King, Ian McAvity, Steve Forbes, Michael Pettis, John Taylor, Richard Duncan, Russell Napier, Ambrose Evans-Pritchard, and this is just the beginning of the list. We won’t have everyone included, although they were all fantastic guests, but we are highlighting not only the people and some of the content that we think we need to carry over into 2013 as an impression, if you will, or the residual ideas that will help us better understand what 2013 holds for us.

Kevin: And I think, instead of the way we would read a book, Dave, where we would start at the beginning and go to the end, I think sometimes it is good to go from the end and work your way back to the beginning of the year. We ended the year with Steve Forbes, and it was an excellent interview. Steve had some great points on gold standards. He had some great points on the ridiculousness of a currency that continually fluctuates and why we shouldn’t stand for that.

David: That’s right, and it is important to remember that the effort in the weekly commentary is to better understand the world that we live in so that we can make perspicacious decisions, wise decisions every day, and year in and year out. To have a better understanding of the world that we actually are in – as it changes, getting the opinions of seasoned veterans in the marketplace, whether it is with an academic perspective, or more of a real-time action-oriented market practitioner’s perspective. This is what we hope to inculcate into our listenership so that they can be in a place where wise decisions are the decisions that are being made.

Kevin: Steve Forbes is interesting, in the respect that not only is he influential in the political realm, but he has the magazine that continually has worldwide readership, and of course, he has been talking about many of the items that we have had on our mind in his own magazine.

David: Through all of these interviews we will play a few minutes of a clip, comment for a minute or two, and then move on to the next clip, and have a rapid-fire session today with Mr. Forbes and John Embry. Welcome to The Best of 2012.

Kevin: Let’s go ahead and listen to Steve Forbes.

David: Steve, the last time we talked with John Taylor, he suggested that rates are too low by at least one percentage point. Doesn’t that frustrating set of circumstances increase systemic risk, as investors are more or less forced to higher-yielding assets – not forced, but they choose to go there – seeking to make ends meet? Again, as you say, ride the storm out, but it does appear that there has been a major push toward higher risk assets to compensate for a lack of real rates of return.

Steve: That is where investors are still going into bond funds, and that is not the place to be right now, because even though bonds have done relatively well because of what the Federal Reserve has done, that is an artificial bubble created by the government, and those things do not last forever, so this is not the time to be buying bonds.

If you want, you can go into stocks that have dividends, a good record of dividends, that is, you want profitable companies that pay a nice dividend, 2-4%, because at least they can be nimble enough to survive whatever destructive policies come out of Washington, and in the meantime, they give you some money. But again, don’t let daily stock prices influence you on this. You can get some yield, but don’t go into high-yield funds just because they have a yield that looks high by today’s standards. We know, historically, those yields stink.

Kevin: David, I think Steve Forbes was talking about something you have talked about over and over, and that is financial repression. We have a whole society of people who are retired, who wanted to live off the interest of their money, but they have no interest on their money, and that’s because of the Federal Reserve artificially keeping interest rates low. That gives an artificial boost to the bonds, but it is artificial, which means that rug could be pulled out at any time.

David: This will dovetail well with some comments that Bill King makes, which is that market prices today are not reflective of the overall economy and that is what you have with artificial levels being propped up by the Fed and the Treasury, collusion, if you will, to create the sense of stability in the Treasury market that these IOUs will ultimately be good, reasonable pieces of paper to own and collect interest on. We think that the market will prove otherwise over the next few years.

Let’s go to the next clip on the gold standard, and whether or not we will see it in our lifetime.

Steve: Yes, eventually, and I think within a few years it will happen. Eventually, we are going to have the dollar re-linked to gold. All that means is that the dollar will have a steady value, like 60 minutes in an hour, or when you go to the supermarket and buy a pound of hamburger, you assume it is 16 ounces, not 13, not 10, not 20. It doesn’t float each day, it is a fixed measure, and stable money is always a necessity for long-term prosperity, sustainable prosperity.

But that lesson, even though we have had 4,000 years of experience, is absolutely lost on today’s crop of central bankers and economists, and it is very, very destructive. Right now this country is consuming, thanks to Washington, more wealth than it is creating. The government gets all it wants, when we know government does not create wealth, and wealth-creators, entrepreneurs, job-creators, are pushed on the sidelines. Not a good thing.

David: Maybe you have seen Lewis Lehrman’s piece on establishing the gold standard, a workbook, if you will, toward that end. What probability do you see of that occurring, and is there a precipitating event, or a set of circumstances where the general public says, “This is what we want”? As you said, a fixed measure.

Steve: I think Lew Lehrman is right, that eventually we will get a gold standard, and you asked the right question. Is it going to be precipitated by crisis, or more happily, will it be done by a new set of policy-makers who realize that is the way to go, so that we don’t have to go through some horrific crisis that would be even worse than 2008, to do something we should have never undone in the 1970s?

As you know, the U.S. dollar, one way or the other, was linked to gold for most of its first 180 years of this country’s existence, but since the 1970s that has not been the case, and we have had these ever more destructive financial, currency, and banking crises. So, I would hope that after this president leaves office, and we get a new Federal Reserve Chairman, we will move to a genuine monetary stability and not have to go through some disaster to wake up our ever-ignorant policy-makers in Washington.

Kevin: Oh David, if Steve could only be listened to. He talks about trying to avoid what he feels will be a horrific crisis if we don’t do something the right way before it actually occurs. It would be nice, without the pain, to go back into the gold standard. Sure, it would cause discipline, and there would be a little bit of pain, but it certainly wouldn’t be a currency collapse.

David: But I think he is right in saying that it is going to take a different set of policy makers who would be willing to, on a voluntary basis, submit themselves to these natural disciplines.

In this final clip with Steve Forbes, we just ask, in terms of a legacy, “What do we want to leave for future generations?”

Steve: By leaving them with a set of principles and policies that reflect what made this country unique in the first place. One of those principles is sound money, an environment where people can do things to, as Abraham Lincoln put it, improve their lot in life. Right now, we are creating an environment where stagnation is going to be the norm, not progress. I think it’s not a new normal, I think it’s a new abnormal, and it’s not going to last. Obama doesn’t realize it, but the worst thing that happened to him was his re-election, because by the time his second term ends, it is going to be, unfortunately, fearfully clear even to his supporters, that his experiment in socialism was an abject failure.

David: That really does get to that issue of Maggie Thatcher saying that the game is up when you have run out of other people’s money.

Steve: Yes, and printing money is not real money.

Kevin: One of things I loved about that clip, Dave, was that he said it’s not the new normal, and that has gotten a lot of people down after this last election, but he calls it the new abnormal. Steve Forbes has hope that there will be change, and we are going to come out of this cycle, maybe with some pain, but we will go into something that will create something other than stagnation.

David, Looking back a couple of months ago, in October, we had John Embry on. We try to have John Embry on at least once, maybe twice, each year, because of his 40 years, four decades, in the gold area. He manages billions of dollars.

David: I had a fantastic lunch with him in Toronto just a few weeks ago, with my son, and he is a delightful human being, a wonderful, wonderful soul, and we had a great, lively conversation over lunch.

Here is where the interview began a few months ago, talking about gold, and who still is on the side of the skeptics.

John Embry: That’s an interesting observation because there have been so many skeptics for so long, and yet, gold is probably one of the few assets, if not the only asset, that is going to post a higher year-end close for 12 consecutive years, and that’s what seems to be in the offing at this moment for gold.

To me, the fact that they are still trying to paint it as a bubble is ridiculous. The fact is that gold is reasserting itself as a currency, and when you have all of the major currencies in the world subject to quantitative easing of some degree or another, to me, gold is just going nowhere but higher, and the pace of the ascent is probably going to accelerate.

Kevin: David, what John was pointing out is exactly what we have been trying to point out, that gold is not behaving like a commodity, like nickel, copper, or platinum. It is actually behaving more like the role that it has always played, and that is, money. But what is amazing is that the public is not there yet.

David: Amazingly, I think for many there is this conception that the public is in gold.

John: No, not at all.

David: Going back to the 1970s, if you looked at global equities, government debt, private investments, gold came close to 14% of the total value of all of those markets, so gold played a major dominant role in asset allocation within the market of the day in the 1970s. Today it’s between 2 and 2¼%.

John: I didn’t think it was that high, but that would just be splitting hairs. The fact is, the public isn’t there at all. I’ll give you a perfect anecdote. My partner, Eric Sprott, went down to speak to a group of reasonably sophisticated investors outside of Toronto, about 100-120 people in the room. He asked the question at the beginning of his address, “How many people in the room own gold?” One person put his hand up.

So the idea that the public is invested in gold at this point is wrong. They aren’t. And that will be one of the big factors going forward. There is a lot of money on the sidelines that will come into the picture before this is over.

There is a finite supply of precious metals, as there has been through all of history, and right now we are in yet another experiment with fiat paper currency where we have gone too far, and the only solution to keeping this thing afloat and moving forward, is quantitative easing to infinity, as my friend Jim Sinclair said, and I agree with him. I think that if they were to turn the taps off, and if they were to, heaven forbid, raise interest rates to any extent, the economy would literally collapse. And since nobody wants that to happen on their watch, what is going to happen is more and more quantitative easing in all of the Western countries, and to me, that means that there will be competitive currency devaluation going on everywhere. And gold stands out as a beacon of safety in that type of an environment.

Kevin: David, something John brought up is something that has also been a theme of this show, and that is, the new way of fighting war. The new way of fighting war financially is competitive currency devaluation, where you have countries worldwide which are trying to devalue their currency to stay competitive in the world markets and beat the guy next to them.

David: This is exactly what we see with the Japanese throwing their hats in the ring, considerably, with the most recent announcement being a 10 trillion dollar yen monetary expansion. Listen, when they are buying assets, monetizing assets, it’s not just government bonds. They’ve gotten more aggressive into all kinds of assets, and we may even see that in the coming years, where the Fed and the Treasury aren’t just working out between themselves how to keep us afloat in terms of the fiscal, but we may even see financial intervention, where stocks, and futures contracts, and things of this nature, are being bought through the Fed.

Listen, we are in an environment where not only competitive currency devaluation is a concern, but manipulation of markets in order to create a perception so that the general public does not panic, is of utmost importance.

Kevin: David, we talked about, in the last show, that manipulation may not be necessarily what we see on the surface, but it can be a much broader-scale type of thing. Is gold manipulated sometimes? Sure. Is silver manipulated? Are currencies manipulated? But in the long-run, the trend does not change.

David: And the long-run perspective is critical, because you can force prices one direction or another for a day, or for a week, but ultimately it takes an infinite amount of capital to do that on an infinite time frame. What we find as a helpful guide in the context of devaluations where we lose the anchor of price and we don’t necessarily understand what something is worth, is found in relative value.

Kevin: Like the stock market.

David: Which is another real thing, and that gives you a perception beyond, it gives you an insight beyond just the price of the asset. But how does it compare with another asset? That’s what we see in the Dow-gold ratio. That’s where John Embry picks up in this next clip.

David: What do you think is a reasonable relative relationship between paper assets and gold? Could the ratio go negative?

John: I think it could go negative, but I have no reason to believe that it won’t do what it has done several times in the past, getting down somewhere between 1-to-1, or 2-to-1. The question you can debate is whether the Dow is going to go down a lot so gold doesn’t go up as much, or if they are both going to go up, except gold is going to go up 6 or 8 times as fast.

It is interesting that you should bring that up, because I used to give speeches 8-10 years ago to disbelieving audiences, and I was using the Dow-gold ratio. At that time it was around 25 or 30-to-1, and I said, “This thing is probably headed for 2-to-1.” And they would just look at me like I had two heads. And guess what? We are already down to 8-to-1 and they still don’t get it.

David: And the amazing thing is that if they are doing the math, going from 42 or 43-to-1, to 8-to-1, which is a five times increase in purchasing power, but the difference, even on the conservative side, to 2-to-1 from current levels, is a greater increase than what we have seen over the last ten years.

John: I know. And I believe fervently that is going to happen.

Kevin: David, oftentimes we hear, “Is it too late? Is gold too high? We’ve seen it go up now for a dozen years, is it too high?” But actually, what John brings out is that you have to weigh it against something other than currency. You use the Dow-gold ratio. You look at what gold has done relative to real estate. But when gold does have periods of softness, like we see seasonally sometimes, even in December, when you have sell-offs for tax reasons, for instance, the investor who understands the trend, actually, can really take advantage of that moment.

David: And this next clip epitomizes a healthy approach to engaging the gold market in that way.

John: I have never recommended buying particular strength, particularly if the open interest has grown a lot on COMEX. But if you just dollar-averaged, or bought obvious periods of weakness, and bought physical, you would put in position a wonderful inventory at great prices. At this point I would continue to do that, but at some point it will break away, and at that point people are going to have to chase it. But it hasn’t happened yet. You can pick your spots and just keep buying.

David: It is interesting that you mentioned dollar-cost averaging. I’ll let you in on a family secret. My dad is notoriously bad in timing, and he made the mistake of buying at the peak at $400, made the mistake of buying at the peak at $700, made the mistake again of buying at the peak at $900, and again at around $1100. He keeps on buying at exactly the wrong time, though I look in retrospect and say that I’m glad he is consistent. I’m glad he is consistent. Building a position over a long period of time, doing so on a dollar cost-average basis, in anticipation of a parabolic move…

John: There will be a huge move. If you are not on margin, and I always recommend to people to eschew margin, do not go near margin in a market that is this volatile, intentionally created. You have a position you can always maintain, and when you have excess cash and there is an opportunity, buy more, and I think that you will be in perfect position when the big move occurs. I suspect that will happen probably within the next 12-18 months.

David: We have been doing this commentary for five years, and I think you have been on at least five times. We appreciate your addition to the conversation. You bring sage insight and we always enjoy having you in on the conversation.

Kevin: David, this is why this is one of my favorite times of the year, to go back and actually listen to what happened over the last year. There are gems in each of these interviews – John Embry, Steve Forbes. These guys were saying things that need to be heard more than once, and I think it probably needs to be pointed out, too, we actually go to our website, look up, and go to archives, for even ourselves to go back and listen to these clips, and we would encourage any of our listeners to do the same. If you hear someone that we play clips from that you want to hear again, simply go to, go to archives, and you can listen to any show from the past.

David: None of our guests are there accidentally. We have looked at things that we are exploring – ideas, concepts, trends in the market which we consider to be very important to have insight on, and our guests are part of the conversation, unraveling the mysteries, and helping us gain those insights, again, to drive us toward perspicacious action.

It is with that in mind that next week we will pick up with Ian McAvity, Bill King, Mark Faber, and this is just the beginning. We have, again, the opportunity to distill the gems throughout the year, and, for me, coming to work and listening to the Best of 2012, is a real treat, because it is not only my favorite conversations from the year, but these are the insights that I put into the back of my brain as I move forward into this next year and engage a new set of realities in real time.

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