In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, there are so many signals coming out right now that seem to be real, that our senses, and our gut feelings, and our training tells us is wrong, but it still feels real.

I’m talking about the market. I’m talking about the talk of recovery. I’m talking about what is happening in Washington right now, where Congress is completely unnecessary for the direction we are going.

David: And we have so many things in the mix, it is worth looking at the fundamentals. This is really what we must do, focus on fact and not on fiction. The fictional view of the market is that we are in recovery. Why do we say it is fictional? Well, look at a few facts: For one thing, we have deficit spending. If you look at our total gross domestic product, the totality of our economy, it is about 16 trillion. Government deficit spending is 1 trillion. That is about 6¼ percent of the total number.

Kevin: So that’s not real productivity, that’s just borrowing into the ether.

David: It keeps us feeling like we are doing just fine, but the reality is, we are on some sort of life support. We have a zero interest rate policy here, and frankly, all around the world, and this is something that creates a reality but it is not actually a reality. There isn’t real economic activity happening. Even though there is massive credit creation, there is no real economic activity that is improving in the economy.

This is one of the things that we see as we talk to people all across the country, this sense of frustration that, yes, they have a rise in prices, and living on a fixed income, they are not able to meet their needs, which drives them into taking more risks in their investments to fill the gap. They have to do something to meet their income needs, and they are told at the same time that there is no inflation. They are told that it is tamed, that it is controlled. The Fed, actually, Ben Bernanke, thinks that it is well anchored, we don’t have inflation today, that’s not a concern.

Kevin: Well, I’ll tell you Dave, it reminds me of navigation. You’ve had some flying experience, and I’ve got my pilot’s license, and if you look at the accident reports, oftentimes the reason a person will crash is that they are trusting the wrong signals. Navigation is an interesting way of making an analogy as you walk through investment life, because what you are doing is setting a particular course and you are getting a lot of false signals while you are navigating.

I’ll use flying as an example. JFK Jr., when he crashed, he did not trust his instruments, he trusted his feelings instead, and actually, they think he fixated on a particular star, thinking it was the horizon, ended up stalling the plane, unfortunately, tragically.

David: Even though he had the training to trust his instruments, he was going with something that he considered to be more valid at the moment, how he felt, and what his instincts were telling him. This is where you have to come back to facts. You have to come back to things that are rooted and grounded, the realities. What do you know? What do you remember? What did you learn? What was your training? This, I think, is imperative.

As I look back at what I have learned from my father, this is where if I have an instinct, it’s not a feeling, it is a training process that I’ve been through, to look at things that are of fundamental value, to look at things as basic as supply and demand, to understand the movement of money, the movement of credit, the impact of credit in a given economy, expansion or contraction of credit. These vital and very basic, even mundane or boring things, when you look at them, when you weigh them, frankly, what you feel is irrelevant.

Kevin: That’s why you are trained in the first place. The reason your father passed it on to you and you are going to pass it on to your kids, is because the feeling does not necessarily match the correct action. I think of a book that I had been reading called The Last Navigator, about the last Polynesian navigator before he shared his knowledge with the Western world. Before that, all knowledge in Polynesian navigation was passed down from grandfather, to father, to son.

Here is what Piailug said about navigation. He said, “To navigate you must be brave, and to be brave you must remember. If I am brave, it is because I remember the words of my fathers. When I voyage I forget everything else, and think only of my grandfather, father, and what my master taught me. Then I am not afraid.”

We get a lot of false signals. Dave, let’s say you get out in the middle of the ocean, you don’t have a compass, and you don’t have a sextant. This is Polynesian navigation. You have to sail. That’s it. You’re out there, you can’t see a thing, and you’ve got to find an island hundreds of miles away.

David: Hopefully you can see the stars. If you can’t you can certainly feel the currents in the water and the change of the waves and what you see in terms of the changing dynamics there. It tells you something. What does it tell you? What do you know on the basis of fact, and what will your actions be? How will they be directed in light of that?

Kevin: So David, if I’m a person who doesn’t believe the stock market should be where it is right now, if I’m a person who does not believe that the economy is actually recovering, and that we are actually borrowing our way into just padding over it, what do I do?

David: I think this is where you have to be aware of false signals. If you are following the wrong signals you need to return to what the right signals are. Here is the problem. In the markets today, we have the granddaddy of them all in terms of false signals. Fed rate policy was really the standard bearer, when Alan Greenspan moved rates to 1% to accommodate a very fragile economy and stimulate growth. That was in the Greenspan era. His protégé, Mr. Bernanke, has taken it a step further and demonstrated to the world how now these policies seem uncontroversial. What was controversial is now uncontroversial.

Kevin: Printing money, zero interest rate policy, that’s not controversial any more.

David: Because it works! What we really need, to get to the point where we can say, yes, we have recovered, is to have sort of an after-game analysis to see if we really agree with that. We see the game at half-time, and we haven’t gone far enough to know if – again, these policies have transitioned from being controversial to now uncontroversial, but the game is not over. We can’t really weigh in as to whether or not they are successful.

Kevin: And the crazy thing about Bernanke right now, as with Alan Greenspan, we aren’t living in a bubble, Dave. It’s not the United States just isolated, doing our own policies. We are starting to see copycat killing of currencies.

David: And that’s what we are really talking about here, because Alan Greenspan once was a stand-alone standard bearer, but Bernanke has morphed from the head of the world’s largest central bank to the global central bank choirmaster. As he experiments and breaks new ground, nonconventional becomes conventional monetary policy, not just in the United States, but the world over.

Kevin: There are central banks overseas right now that are doing the same thing.

David: How many central banks are there, running a low-to-negative rate policy at present?

Kevin: What are there, 10, 15?

David: 3? 7? No. 40 in total.

Kevin: 40 worldwide central banks.

David: 40 central banks in harmony…

Kevin: Copying Bernanke.

David: …with Ben Bernanke and now believing that the course that they are on is the best, if not the only, course, even if there are a few side effects.

Kevin: Dave, what are the side effects of central bank printing? John Williams is a regular guest of ours and he calls for it. He says you cannot print money, ultimately, without having inflation.

David: It affects almost every asset class. When you manipulate rates lower you alter the yield curve at the short end, which eventually alters the yield curve in total. Long-term and short-term bond prices change and their interest rates change, as well, being the other side of that equation, and it doesn’t end there. By lowering rates, you create cheap money, even if the distribution of that said money is uneven. So you create cheap money, you don’t necessarily know where it is going to go, but we see signs today of huge leveraged buyouts.

And again, you make cheap money and it’s going to go somewhere. It has to find a home. We have private equity deals, I mentioned the LBOs where debt financing is a key component, and again this is just one example: you create too much cheap money and it has to find a home.

Kevin: We have talked about before, the person who really does need to rely on interest, the older retired person, the pensioner, those people right now are being forced into speculation for those same reasons, the low rates.

David: Frankly, whether it is someone living on a fixed income looking to supplement their income, or someone who is doing a leveraged buyout deal, you are talking about paying a price, and in most instances, when you have money that is cheap, the price of the asset in question gets distorted, and you are usually paying too much for the asset.

Kevin: So speculation increases, which increases the price.

David: Exactly. So you have greater levels of speculation and riskier assets, again, a consequence of lowering rates. Why and how, and again, investors are either primarily geared toward growth, or, as an alternative, they are geared toward income, and income in a low-rate environment can only be met by increasing risk. That is where the higher yields still exist, so the entire fixed-income field is shifted in the process and risks are largely ignored in order to achieve that primary need: more cash flow to supplement daily living requirements.

Kevin: David, if you watch the news media right now, they are all smiles. They are saying, “Recovery, recovery, recovery. We’re going to have growth this year.” But we are already seeing cuts in that estimated growth.

David: What you are seeing is a movement in the markets, not necessarily a movement in the real economy. That is where you are not really in good shape. The real economy is not in good shape. The markets are in good shape.

Why? Because of price. We don’t think they are in good shape because of value, but price. Certainly you can’t argue with $14,000 on the Dow. That is a lot better than 13 or 12 or 10. But again, how did you get there, and is it sustainable? That is where we would return to the real economy to determine whether or not it is a sustainable course. The CBO slashed its long-term growth estimates from 3% to 1.9% per year, and we see that as closer to the reality, frankly. 1 to 1-½% growth rates are where we would be comfortable saying, “Okay, they can engineer that.”

This is the problem. You can engineer it, but it does cover over two very important variables. Recall that if you distort the inflation gauge in the GDP statistic (that’s called the deflator), then you overstate GDP growth figures. So, in all reality, your 1 to 1½% engineered number is actually a 0% number by the time you factor in the deflator.

Kevin: And that is just the deflator. We’re not talking about borrowed money.

David: It doesn’t end there, you’re right. GDP is the all-in number for economic activity. You get 16 trillion in activity, that’s what we talked about earlier. You’ve got a trillion of that which is spending from the government, and they are using borrowed cash. Again, that’s deficit spending, not just government spending, but government deficit spending, money they don’t have.

If you really want an honest to goodness, where the rubber meets the road, idea of economic viability here in our economy, what you have to do is take out that government deficit spending from the GDP figure, and realize that 6¼% contribution to GDP, again that trillion, represents 6¼% of our GDP. Without that, you’re in depression territory.

Kevin: So we’re shrinking, we’re losing 5% a year, we’re not growing.

David: This is the point. So again, you come back to your signals, and what the economy is telling you and what it is not telling you. Be careful of stepping too far out onto the limb. The mass media paints a very easy, sell-side view of the world, which is, “Things are in recovery, we have nothing to worry about. Look at central bank activity. It’s healthy, it’s bringing us back on track. It’s the Draghi promise, it’s the Ben Bernanke put. We’ve got the wind in our sails.”

This is where we would say, “Listen, this is not exactly recovery. This still describes a life support scenario.” And this is why we have long argued that if real economic activity doesn’t pick up and doesn’t replace that government contribution of 6¼% of GDP, then we are, as previously suggested, on life support – stabilized, but we’re not in recovery.

Kevin: That’s a great analogy, Dave. You have used life support in the past, and we’ve had guests talk about the same thing. But if you have a patient in the hospital that is hooked up to a bunch of machines and a lot of drips, they may look just fine laying there in bed, but they are still on life support. They are not obviously able to get up, walk out of the hospital, and maintain that same degree of health without it.

David: If you check a patient into the ER, and if they have been moved to a recovery room, that’s fine. But if they are still in the Intensive Care Unit, you may have stabilized the patient, but how far down the road to recovery are you? You haven’t even moved rooms yet.

You kind of have an indication when you have moved on from your basic supports that the person is past the point of critical detriment where something bad could still happen to them and they need to be monitored minute by minute. That, really, is where we are, when you look at the zero interest rate policy that we have set – that 40 other central banks around the world have set. This is life support. This is not normal.

All you have to do is look at a chart. We did this when we were at our last two conferences down in Orlando and in Phoenix. We looked at the Fed funds rate going back to 1940, and what you have is the Fed moving the rate constantly in light of their economic inputs to accommodate, to add a little bit more heat if they need it, or cool the economy off a little bit if they need to, and what we have had now for almost two years is the same thing, and it actually looks like what you get when a patient is dead – a flat line.

This is the reality, not only with us, but with 40 other central banks. This is not recovery, this is dependence on credit, at a level we’ve never seen before, even in the Great Depression, frankly.

Kevin: This dependence on credit – you would think that the gold market would just be exploding. The gold market feels tired. It always does toward the end of a consolidation. But what is amazing is that the gold market, as we saw it slip some last week, at that same time we were seeing reports come out of Russia that Putin was buying more gold than China, and China was buying more gold than they ever had.

David: This is where we turn our attention to the gold market. Of course, we have had several weeks of slippage. Go back in time a little bit, roll the clock back. There was a mid August Gallup poll in 2007, and it showed that 34% of those polled thought that gold was the best long-term investment, nearly twice the number that were interested in, or pursuing, equities.

Kevin: Wait. August of 2011, 34% thought it was the best investment. That was the month we hit the high.

David: Within days, you could say within a 30-day window, gold put in an all-time high at 1920. And this is really the point. Sentiment follows price.

Kevin: So Dave, when the shoe-shine boy does like gold, that’s a time, maybe, that you want to settle back and let it give you a better price.

David: Maybe you want to be cautious. As many a successful investor will tell you, sentiment is a dangerous guide for investing. How you feel about something is almost never reflective of reality when it comes to investing. Listen, feelings may have a very strong role to play in the rest of your life, but when it come to investing, I can tell you, the difference between greed and fear, you will be played the fool, you are the patsy if you allow your emotions to speak in the investment process. I’m telling you, that is where the patsy is played, and plays a vital part in the market. People win and people lose, but the losers are the ones who are determining their course according to their emotions and not the facts.

Kevin: So when you are writing poetry, you can go ahead and tap into the heat of emotion, but you want to be cold, calculating, and remember your basics, when you are investing.

David: Right. So that issue of price action. When prices are moving higher, regardless of the asset in question, and this is not just gold, this could be equities, this could be real estate, it could be anything, when the price of an asset is moving higher, there is a self-reinforcing enthusiasm, and it is often distanced from the fact. This we have had in spades today, but on the opposite end of the emotional spectrum.

So when it comes to gold, yes, 17 months of a price consolidation, and it is wearing on investor sentiment, and if the Gallup poll was taken today, rather than 34% thinking that it was the best thing since sliced bread, what you would probably see is 30-50% enthusiasm for stocks. Why? Well listen, 14,000 on the Dow, you can’t argue with that. “Let’s get in. Let’s go all in.”

And in fact, guess what, Kevin? Just here in the last 30 days we finally begin to see the needle move a little bit, we finally begin to see the average individual investor start buying equity mutual funds again. Timing couldn’t be better. Tell me investors aren’t driven by their emotions. Tell me price action isn’t self-reinforcing in terms of the feel of the market and what people do. I’m telling you, Kevin, people do the wrong thing at the wrong time.

Kevin: Dave, it cracked me up. When you were in Phoenix, I got a USA Today every day at the hotel for free, and the headline in the money section of USA Today talked about reasons to buy the stock market, and it said, “Investor sentiment has not been this high since 2007.”

David: No, that’s a reason to sell the market!

Kevin: What happened after 2007?

David: Well, exactly, that’s how the general public translates the data. Investor sentiment hasn’t been this high. I will tell you, when investor sentiment is high with any asset class, be cautious. If investor sentiment is high for gold, you probably don’t want to be a buyer, on a temporary basis. If the fundamentals are still supportive, you may want to own it, but you certainly don’t want to add to a position, if it’s moving at a fever pitch in the market.

Do we have that right now? No, in fact, we have people making the mistaken step of assuming that gold is not desirable given its current price level. Nothing could be further from the truth. That range of $1550 to $1650 is an ideal range to be purchasing gold. Investors usually work against themselves by prioritizing their feelings over the things that they know. And frankly, I don’t know if this is self-doubt in the investment process, that may be what is common. Or it may be just that they are not reviewing the facts, and they begin to move in the wrong direction at the wrong time.

Kevin: David, we have talked in the past about looking at the gold chart for the last 12 years, and what you see is three consolidations, now a fourth, where the line will go sideways for about 15-17 months. That $1550 to $1650 range is that sideways line, and that always represents, after a consolidation, the lowest price you could have purchased.

David: And if you can buy at the low end of the range, you are better for it 6, 12, 18 months out. So allow the consolidation to run its course, double check and make sure that the fundamentals are still supportive, and that you should still own the asset class in question to a large degree. Keep on looking at the instruments, but your feelings may tell you something very different.

In fact, in the right environment, I’ve been in a plane before where I was getting dizzy and I wasn’t sure what was happening. Why? There was so much cloud cover, I couldn’t tell if were turning left, banking left, banking right, going up, or going down. My body was confused, and, not being the pilot, I didn’t have the instruments to tell me that I was either doing the right thing, the wrong thing, going the right direction, or going the wrong direction.

Kevin: David, not just checking the instruments yourself, but the Bible says there is wisdom in a multitude of counselors, and you need to check a broad range of opinions. Barron’s does that with the Roundtable. We’ve talked to several of those guys on this commentary – Zulauf, Marc Faber. We’re going to have Marc on in a couple of weeks.

David: Right. In this Barron’s Roundtable, I would suggest that all of our listeners get the last couple of copies of Barron’s and look through it, because you get a broad spectrum of people who are generally perma-bulls on equities, and they still are perma-bulls in equities, and then you have folks that, depending on what is happening in the market, will be bullish or bearish, and that is where you begin to see some divergence.

Actually Marc Faber couldn’t make it this year, but as you mentioned, another one of our Weekly Commentary contributors, Felix Zulauf, a well-regarded Swiss banker, sees gold ownership now as an imperative. Those sentiments were also echoed by Fred Hickey, who is a part of the group, and most notably, Bill Gross.

Kevin: Bill Gross, the bond king.

David: That makes the suggestion that much more curious, because in the world of bonds, if you buy the asset correctly, if you buy a bond cheap at a discount, you bought it correctly. If you bought the right credit, or if you understood the credit structure of that particular issue, you may have an advantage, and have eliminated a number of the risk variables in the purchase. One variable that you are really not in control of, and subject to, a risk factor for the bond-holder, is rising inflation. This is what is very curious. You have a bond guy suggesting gold as his first purchase, the most important purchase that you can consider…

Kevin: Of 2013.

David: …of 2013. What these guys do is make their recommendations for the year, and at the end of the year they do sort of a scorecard to see how they did. For a bond guy to be suggesting that you need to own gold – one of the smartest guys in the fixed-income universe – and he is concurring with our thinking, that when you put the world’s central bankers on task to reflate, inflate as it were, and generate economic activity via credit creation, yes, you ultimately get inflation.

Kevin: You don’t need John Williams for that.

David: No, and that’s what is being baked into the cake. You see, the facts are actually quite simple. Britain is still in recession. The eurozone is not yet on the road to recovery. China? Well, hey, actually China looks great, but only because the 2012 declining growth trend scared leadership – and that’s leadership in transition – into ramping up credit creation. We’re talking about 400 billion dollars worth of credit creation in January alone, for an economy that is smaller than ours. This is a lot of money in credit.

Kevin: That’s the copycat killing I’m talking about, the copycat killing of currencies. Maybe Bernanke started it, or Greenspan started it, or whoever. But we have even China doing it now.

David: But then there is the U.S. You can call a recovery, but frankly, we’re not there yet. In a recovery, you rarely need life support, which is what the credit markets and economy have via the steady flow of cheap credit from the Fed. Take that away, and you have a deflationary style collapse.

Kevin: But David, even if we were just looking at supply and demand fundamentals – let’s pretend like we’re not talking about gold here, we’re just talking about soybeans, or wheat, or whatever – you have to look and say, “Okay, how much is being produced, how much is being consumed?” And even taking all the inflation out of the picture, it still paints a rosy picture for gold.

David: Right. You have buyers and sellers on the one hand, and you have the question of how much product is available, so supply is a variable, demand is a variable, and I think that is one of the things that is most supportive at this point. Demand, on a value basis, increased last year to an all-time high. 236.4 billion dollars came into the gold market. 236.4 billion dollars – that is even as tonnage slipped by 4% from 2011 numbers.

Again, you can expect to see a decline in tonnage demand with an increase in price. Digging into that a little bit, the area of greatest strength came from institutional investors and central banks. Central banks, according to the GFMS group, added a net 536 tons for the year. That is four years running, of adding tonnage. Remember, the trend was, for 25 years prior to that, net liquidations from the central banks. That changed in 2009.

A part of the subdued gold price in the 1990s was because of central bank dumping of gold onto the market. That was, of course, the Western world’s central banks, the developed world’s central banks. It’s not the case today. It is the Eastern world, it is the developing world’s central banks that are moving into gold. They are moving in the opposite direction today, and that’s where a lot of the demand is coming from.

Kevin: So the big money, central banks, it is money that actually is very, very inside, because not only are they insiders, they are creators of money, but they are actually accumulating more gold than anybody right now.

David: And you have new entrants into the gold market, central banks that have never really participated much. Brazil added a lot of tons in the last quarter this last year, along with Paraguay, so the Latin American countries are jumping on board in ways that they haven’t for a long time.

Kevin: And when you say added, you are talking about added demand.

David: Exactly, they are buying tons. The Paraguayan government bought 7½ tons of gold. Again, relative to what we have in the U.S. of over 8,000, it seems like small potatoes, but unless you’ve been to Paraguay – it’s a small country, it’s a small economy, and that was a big purchase. And Brazil is adding now, too, 20-30 tons at a time.

Kevin: Simple economics. You don’t have to be a college graduate of economics to know that if demand is constant and supply is decreasing, the price is going to increase.

David: What about supply side then, because you had the totals for this year, which actually declined? Supplies of gold declined by 1.4% for 2012. The total is 4,453 tons. And of course, that combines both mine supply and recycled gold. The notable decrease came from recycled gold. That is really important to me, because it is the only elastic source.

Kevin: You are talking bangles and baubles, you are talking about jewelry.

David: I’m talking about jewelry. When someone says, “It’s out of date, I’m not going to wear it, it has been sitting in the safety deposit box, I want to keep my second car payment going.” For whatever reason, you end up monetizing it, you sell it, you melt it down, at the We Buy Gold stores all over the country.

It is very interesting, the World Gold Council suggests that the industrialized world, while they have been contributing sizably to the recycled gold area, are considerably depleted, and in a declining trend from this point forward. So there may be a case that the nonindustrialized world will continue to sell gold into the recycled part of that component, but in terms of the industrialized world, on a one-and-done basis, they have already melted down most of the gold that they wanted to, to keep that second car payment going, to make sure that they paid rent, etc.

Going back to mine supplies, they increased, in contrast to the recycled gold, which actually decreased. Mine supplies increased in China and Russia. They slipped yet again in South Africa and Indonesia. I think this is where we look and say that you can’t just decide that you want to increase by a thousand tons a year what is coming from mines. They’re running a full-tilt effort and are lucky to get what they are getting. They can’t find any new major ore bodies, and the new major ore bodies that they are finding actually aren’t that major and are either in politically compromised places, or are hung up with the EPA to date.

Kevin: You brought up China and Russia. Not only are they producing so much, but they are buying more than anybody, like we talked about before. So, in reality, they are not making much of an impact on supply worldwide because they’re just keeping it.

David: Exactly. It’s not coming to market, in other words. Yes, what we have is very price-positive, as we move into 2014, 2015, and beyond, is this recycled gold component coming down. Now it’s 16¼, we’ll see, maybe it bumps this year. If we see it move up higher in gold, if we get close to $2000 an ounce, maybe we will see a resurgence in supplies from the recycled market.

But the view of GFMS out of London, and the World Gold Council, is that in this period, 2012, 2013, we see the recycled component peak, and they argue for a peak gold scenario, in fact, when we just don’t have enough gold to keep up with demand. This is what I think is very, very healthy to look at. We have very healthy demand dynamics, and yet, we have had the price of gold drop since the beginning of the year. If you have healthy demand, how can you possibly have the price dropping?

Look at one thing: backwardation. Today, we have gold in backwardation, or we have in recent weeks, and essentially, what that implies is that the physical market is actually quite strong. Backwardation is when the front months, in terms of futures contracts, are selling at a premium compared to future months, which are selling at a discount, which is the exact opposite of what normally happens, because when you lock in a futures contract, in the future, the farther out you go, you have to factor in the time value of money.

This is actually working the exact opposite where you are paying a premium up front, but there is a discount in the future. That backwardation process does imply that the physical market is very strong. It also, on a secondary basis, implies that the futures market is being abused in terms of manipulation as you move into those longer-dated futures contracts. There is less volume, it’s easier to do, and you are seeing the price driven down by this manipulative tendency.

How long does it last? Not very long. But can it be discouraging the process? Sure. What you, as an investor, need to hold on to, is the fundamentals. What is on your side? Forty of the world’s central banks are printing like mad, or let’s put it more accurately, they are creating credit like mad. And then on top of that we have a supply and demand equation which is in balance, and it doesn’t take either much of a supply drop, or a demand increase, to see the prices move positively again.

Kevin: So basically, what we are seeing is, if we are looking at the dashboard in the cockpit, so to speak, and we are feeling something different coming from the press, coming from the prices in the stock market, people just need to understand the fundamentals.

I’m glad you brought up backwardation, because actually, the precious metals market, along with all the commodities markets, are traded on leverage, on paper. You know, that paper outnumbers the amount of ounces in gold that is traded on paper versus what is actually in reality.

David: Oftentimes 100-to-1.

Kevin: It’s crazy.

David: So what happens in the paper world impacts the physical world, even though the physical world is really the telltale in terms of the strength of the market.

Kevin: Well Dave, then we may be sharing company secrets, but I think you had better share what you shared with all of us, because there is a supply squeeze right now coming in the physical markets. We, as a precious metals company that has been around for 40 years, are having a terrible time getting gold in Europe right now from most sources.

David: And in the United States. I would say that compared to what we can usually go out and buy, we are at probably 25-30% levels. In other words, if ordinarily we could buy anything we wanted, we can only buy about 25-30% of that today. That is in the U.S. market. That is in the international market. There is more and more constraint on the supply side, the physical supply side, even as prices are dropping.

For a novice investor, you scratch your head and say, “How is this possible. It looks like mass liquidation. It looks like we are moving into a bear market in gold. What is happening?” And I can tell you, going back to the issue of backwardation, there is some manipulation in the farther contracts. That is a temporary phenomenon. Backwardation doesn’t last very long.

Kevin: Well, and let them do it. It makes the real stuff cheaper.

David: I’m not bothered by it, except that I’d like a few more dollars to put into silver below $30, and a few more dollars to put into gold below $1600. That’s great. This band between $1550 and $1650 – if you’re on the fence, what the heck are you doing there? If you want to shave pennies here and there just for bragging rights, fine. Save a few dollars, save a few shekels to buy at $1565 precisely, or $1580 precisely, or $1554 precisely. Pick your number.

But honestly, you may not get your number. So just do the smart thing and buy value. Going back to the distortion of value, if you look at what the Fed has done to manipulate prices, the stock market is a manipulated market today. It doesn’t reflect reality, it doesn’t reflect economic activity. It reflects money printing, it reflects easy money policies the world over. It reflects a hyped emotional state within the market, which frankly is very frail and can turn on a dime.

Kevin: Yes, it never lasts. It never lasts, unless it’s fundamentally supported. I think of silver, too, though Dave. Silver almost hit $50 a couple of years ago, and now we’re back down in that $30 range, or even a little shy of $30. That, too, would be a buy, would it not?

David: I would say that anything under $33 is a buy, anything under $33, if you look at the long-term growth projections that we have, supply and demand fundamentals, as well as its relationship to gold. We are talking about industrial uses, as well as a monetary characteristic, which it has taken on and will continue to take on in future years. We see $33 and below as absolutely vital.

I think, frankly, it’s a compelling story. $30 is mandatory on silver. Under $30 is mandatory. Find it. Go find some money and buy silver under 30 bucks. Gold under $1600? Are you kidding me? But you’ve got amongst these top big banks, huge derivative positions, huge derivative positions, and they assume they’ve got the tiger by the tail.

Kevin: David, I remember the exuberance in 1987, and the reason I bring that up is that was the year that your dad hired me. Back in 1987 ultimately, most people remember, the stock market crashed in October, but it didn’t look like that ahead of time.

David: No, no, in fact, there was exuberance in the market at the time, and a part of that exuberance came from a newly popular way – it had been around for a while, but it had just been popularized – of hedging risk in your portfolio. It was called portfolio insurance. We call it something else today. We don’t call it portfolio insurance. We, today, call it derivatives. But at that point, if you looked at all of the portfolio insurance that had been purchased, it was valued at roughly 2% of market capitalization – the total stock market compared to the insurance that had been bought for those positions? 2% of market capitalization.

Kevin: It was a minor position. It could completely go away, and it still would only affect 2%.

David: And there was this boldness. The market was ripping forward because they had this extra cushion, if you will. “If you begin to see a loss, we’ve covered that by having this insurance policy.” Well, we wonder, with record year-end margin borrowing, if you look at December 31st, where equity margin borrowing was, it was the highest levels on record at year-end. We’ve seen higher levels intra-year, but at a year-end number, this was the highest we’ve seen on record.

We wonder if, with year-end margin borrowing being at those levels, and a derivatives market, which is not 2% of market capitalization, but today, the equivalent of 13½ times market capitalization, we wonder if we are not moving toward a collapse in the market. Why? Because on the one hand, we have incredible confidence. On the one hand we have the world central bankers who are, on an experimental basis, assuming that they have it all figured out, and yet we are only at halftime, and we know there is a lot that can change in the second half. We know there is lot that can change in the second half. (laughter).

And that’s where we are concerned with leverage being this high, with mutual funds being all-in and cash balances basically being zero, with sentiment amongst the Wall Street professionals being frothy, with bears being dead or in deep hibernation, moving below that 25% level, bears are nonexistent today. Major turns in the market are highly probable this year, and investors need to proceed with incredible caution.

Kevin: Not only caution, but courage. Like we talked about before, you have to courageously follow what you think is right, even if you are hearing some other noise. That’s what that quote was from that Polynesian navigator that we talked about.

David: His confidence came from memory and the things that he knew. I don’t know that you would describe those as immutable truths, but he knew what he knew what he knew, because his father knew what he knew what he knew, because his grandfather knew what he knew what he knew, and he could always go from one island to the next, following the rules that he had learned.

If you ignore the rules, you are lost at sea. If you don’t pay attention to your instruments, and you decide to work off of strictly the emotion of the moment, this is a JFK Jr. moment. These are the times when you do return to the fundamentals and say, “Listen, has anything changed? Essentially nothing.”

Kevin: David, with all this in mind, the overwhelming favorite part of the conferences, both Orlando and Phoenix, was the Q and A. This is when people can stand up and get their questions answered. I know that not everybody can make these conferences physically, and so you are opening up an opportunity, Thursday nights, at 5:00 Pacific time, 8:00 Eastern time, to get their questions answered, Q and A right on the phone.

David: That’s exactly right. We’ll take about 5-10 minutes of just a preview, cover some basic issues, and then we will open up for Q and A. It’s a moderated thing, so you ask the question offline, the moderator comes on, asks the question, and then I proceed with an answer, and we move to the next. We had scheduled about 30-45 minutes last time we did this in June, and it was fantastic. It went about 2½ hours. Of course not everyone stayed on, but we had close to a thousand people on who wanted their questions answered and we took as many of those questions as we could. Very fruitful. If you have some specifics that you would like to dig into, we would love to hear them.

Kevin: And it is important that they register ahead of time. If you are listening to this and you think you want to listen to David and ask questions, you have to register, and there is a website to go to, and we will post that on or Both of those sites will have the link for registration to the Q and A. Again, that’s 5:00 Pacific time, 8:00 Eastern time, Thursday night, February 21st.

David, this is a perfect opportunity for people to ask the questions that they have for you.

David: We look forward to it.

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