June 5, 2013; Charles Vollum: See Everything Priced in Gold

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin:  David, before we go to our guest, Charles Vollum, we met him a couple of years ago in the Bahamas – fascinating guy.  He lives on a sailboat with his family for part of the year, and then, of course, he has other residences around the world, but he is fascinating, because he actually prices things the way we all should price things.  Before 1971, things were priced in gold, because the dollar was priced in gold.  But then we went off the gold standard, and somehow, some way, we just blindly continued to act like the dollar was some sort of pseudo-gold.

David:  With that different starting point, you see the world in a radically different way.  What is overpriced, what is underpriced?  I think this is where he breaks the monotony of dollar pricing and says that we have lost our way if we assume that something that is literally all over the map is somehow a constant.

This is where your education begins in earnest.  I would suggest that this is one of the most compelling commentaries we have ever done, and I say that because I think for those who will listen, those who will work through what we are about to discuss, you will be able to mark this down as a turning point in your stewardship of assets.  We are going to start with something that is slightly off-center.

Assumptions are absolutely critical.  Assumptions about the money we use are even more so.  When we consider the most basic characteristics of money, we look at money as a means of exchange, we look at money as a store of value, and these are the things that you assume about our money system, and we live as if our money has a constant value, and prices are moving up and down all around that constant.

You’ve probably heard yourself say that gas is getting expensive, or, very recently, food seems to keep going up in price, all of which is a fair assessment, if our money is a constant.  This is where, I think, when we look back in time we say that yes, it once was a constant, but under a fiat system, the system that we have today, we would be incorrect in assuming anything of a stable store of value, in greenbacks, in particular.

Thinking about relative values, years ago, that the stock market in gold was a topic of dinner conversation in our house while growing up.  Then in 2003 my family sold our house in Southern California and we made a choice to add significantly to a gold position.  The idea at the time was that gold seemed very cheap, and housing, both in California, and in Colorado, where we had just moved to, was very expensive, again, relatively speaking.  And the relative price seemed compelling.  That’s why we moved into gold at the time.  We rented for seven years before moving from ounces back into a home.

I met Sir Charles for a very mind-expanding exploration of the application of pricing things in gold, I would say, three years ago, and have been radically reassessing everything under the sun, not just the stock market, not just housing, but you could look at Yale University education, natural gas, crude oil, copper, coffee, food, platinum, palladium, the gross domestic product of the United States.  You name it, you price it in gold and it gives you a very different basis for understanding of long-term trends.

I think this is what we have lost over a time frame, probably since 1971, most decidedly, and it is not without coincidence that Charles de Gaulle said at that time, “There can be no other criterion, no other standard, than gold.”  Yes, gold, which never changes, which can be turned into ingots, bars, and coins, which has no nationality, and which is eternally and universally accepted, as an unalterable fiduciary value, par excellence.

Sir Charles, when we look at relative values, instead of the nominal pricing we are used to, there is more to the story, and I would like for you to expand our minds a little bit.  How did you come about seeing the world through this particular lens?  It’s an old lens.  It was actually the common lens that people looked through, but no longer.  How can we rediscover that?

Charles Vollum:  It is something that I came to kind of gradually.  I started thinking about the fact that prices move relative to one another and I was looking at gold and I thought of gold as an investment, something that I was buying because I thought it was under-valued and would go up, but the more I started looking at gold, stocks, houses, and other kinds of things, the more I thought, actually, these things tend to go up together often, and down together often, and I started thinking, why is that?  What is the common thing between these?

Then I realized, at some point, that the common thing was the dollar.  These things are both being priced in dollars.  And if you factored the dollar out and you just asked yourself how many ounces of gold does it take to buy the Dow, or whatever you are looking at, actually, volatility goes down.  And not only does volatility go down, but the long-term trend upward in, for example, the prices of stocks, or homes, or food, or gas, disappears, and prices certainly vary around relative to gold, because sometimes people would prefer to have gold, and other times they would prefer to have gasoline, or food, or stocks, or whatever, depending on their particular situation.

Nonetheless, those variations are much flatter, and they don’t have that long-term upward tilt to them that they have when you measure them in dollars, and it just suddenly made sense to me that our money is being manipulated.  The Fed exists to control, manipulate, and set the value of the dollar.

That is its job, and it does that with lots of different tools.  It creates new money.  It can buy assets with that money, so it can use that to push the value of the dollar relative to other things around.  It can control interest rates, which is the return on holding those dollars.  It can make them more or less attractive.  It can do all kinds of things, but all of the things that it does affect, primarily, the relative value of the dollar, itself.  Gosh, it would be so neat if we could factor all that out and just look at the actual values of the underlying stuff, without the distortions that the Fed is creating for its own purposes.

One day it just kind of clicked with me that that is really the thing that I need to be doing.  And you are absolutely right, prior to 1971, although people didn’t have gold in their physical possession, the dollars, on an international basis, were all exchangeable for gold and so there was an active feedback loop going there to force the value of the dollar to a pretty close ratio with gold.

When Nixon gave that up, you can look on almost any chart of things relative to gold, they are pretty calm and more or less what you would expect up until the early 1970s, and then all hell breaks loose, and prices start going all over the place, and that is really reflecting the fact that there was a lot of pent-up distortion in the value of the dollar, itself, that the Fed had been working extremely hard to try to force the value of the dollar to be equal to 1/35 of an ounce of gold, even though we were printing massive amounts of money for the war in Vietnam and with the guns and butter programs, and all the things that were coming online from the 1960s and 1970s.

They were trying as hard as they could to force the value of the dollar to stay at $35 an ounce, despite all of that, and when they finally gave it up, it just went wild, and rapidly undershot its value, and then it slammed back this way and that way.  In 1980 you had a really high price in gold, and then you had gold falling, and the market readjusted itself and found a reasonable level for these things.

And then what we have seen since has been a massive expansion in the number of dollars and massive decline in the value of each individual dollar, but prices in gold have drifted around higher and lower.  Right now many things are very low in terms of their price in gold, so I think, undoubtedly, we will reach a point in the not-too-distant future where the prices of lots of things are rising with respect to gold, but I don’t think we are there yet.

David:  Looking at charts, you can see how inflationary the trend has been, on an accelerated basis.  Since 1971, it just so happens that the Fed was created in 1913, we are at the 100-year anniversary, so if you wanted to skip back 100 years, in essence, the increases we have seen in various asset classes, what you are describing when you look at a chart and you see an increase in the average single-family home, an increase in the Dow, an increase in the S&P, and what have you, it really is driven by money-printing more than any single factor.

What you are basically saying is, if you take out the money printing, you do see volatility in these asset classes, and sometimes they are overvalued and sometimes they are undervalued, relative to a constant.  Is it fair to say that you should stay in cash a good bit of the time?  Just choose the right denomination, gold being the old version of cash.

Charles:  I think gold is the ultimate version of cash, so if you go back 100 years, the early 1900s, before the time of the Fed, and you take the money that people had in their pockets, if they had $20, it could have been a 20-dollar gold piece, or it could have been two 10-dollar gold pieces, or four 5-dollar gold pieces.  Or it could have been piece of paper that said that there is, on deposit in the Treasury of the United States, 20 dollars in gold, payable to the bearer on demand.

You had a piece of paper that you could take into any bank and they would give you the 20-dollar gold piece, so the piece of paper really was as good as gold.  It was a gold certificate.  Or you could have a silver certificate that would give you 20 silver dollars.  But even the paper money was really a stand-in for the metal money.

And if you took that 20-dollar gold piece, which is around an ounce of gold, and you put it into a safe somewhere, you could come back in 100 years, and you would still have roughly an ounce of gold.  That gold piece would still be there.  If the bank that gave you the gold piece might have failed during the great depression, or had been gobbled up by some other banks, and disappeared, there is no intermediary between you and your money.  Your money is the 20-dollar gold piece and it sits in your safe, so there is no counter-party risk with holding that form of cash.  You have the money.  It’s done.  All you have to do is worry about somebody taking it away from you, and that is always a concern, but that isn’t the fault of the money, that is just a matter of protecting your assets.

But it can’t be inflated away.  No government edict can cause that one ounce of gold to be anything other than what it is, one ounce of gold.  So, it is a very safe form of money.  It has a little bit of a cost to holding it, because you have to put it somewhere safe, maybe insure it, if you are worried about that, especially if you are putting it in a vault somewhere else, you might want some insurance to be sure if the building burns down or something like that you are covered.

But basically, the cost of holding it is very low, it doesn’t change, though it doesn’t grow in any way.  It doesn’t pay any interest.  Warren Buffet is right about the fact that gold is just a big lump of metal.  It doesn’t do anything for anybody.  It’s not an investment.  It’s just a way of holding cash.  On the other hand, there are lots of things that you could trade that gold for that could go up in value, so those things are investments or speculations, depending on how well you understand them and what their pattern of return is.  You are just sort of hoping that they are going to go up in value and that is more of a speculation, but something that is earning a regular stream of income and paying you, and its value is something that is easy to understand, a business model you can understand, and maybe it really is a true investment.

And those things can grow in gold value, so if you take that 20-dollar gold piece and you buy a share of a company that you understand, that has a good business, then a few years later you might be able to sell that share of the company for two ounces of gold, or enough dollars to buy two ounces of gold.  Then you’ve grown your gold through that investment.  So I don’t think of gold, itself, as an investment.  It’s a form of cash.  And sometimes it’s wise to be in cash.

When everything is falling and the markets are crazy and everybody is panicking, you want to be in cash.  But a lot of the time you want to be in things that are going to be growing your gold value.

David:  When I look at the charts that are on your website, pricedingold.com, it’s an amazing resource, something that should be listed on favorites on everyone’s laptop or CPU.  It’s very important that you spend some time looking through, and what you will find is that whether it is natural gas over the last not just 4 or 5, but even 10, 15, 20 years, crude oil, an interesting trend, copper, going back whether it’s 10 years or 100 years, you see this declining value, and right now, we are getting to very cheap values in gold terms, for everything under the sun – coffee, food.

To have a discussion with my wife about how cheap food is, she says, “No, that’s not the case.  If there is anything under the sun that I would complain about most, it is the high cost of food, and how little we are getting for the same dollars we used to spend.”  And I explained, that’s the impact of inflation, it takes more money to buy the same things, and in a deflationary environment, or with a deflationary money system, if you will, your money buys more and more over time, and that’s what we have lost in moving to an entirely fiat system.  It will, inexorably, take more and more currency units to buy the same stuff.

It’s not the real story in terms of value, and if you have denominated your cash, your savings, in the right denomination, then what you are looking at is values we haven’t seen in a long time.  I’m fascinated, and I’ve used this in a presentation before.  What about a Yale University education?  Seems like $48,000 is a lot to pay, close to $50,000 per year.  Is it really that expensive?

Charles:  Yes, that’s one of the ones that really shocked me.  Somebody wrote and asked me about college education and I started doing some research.  I picked Yale because there is this resource called the Yale Book of Numbers.  I don’t know if it goes clear back to the founding, but it goes way back before 1900, where they keep all kinds of statistics about Yale University, and the costs, the various things, and the numbers of students and what they were doing, all this data.

I was fortunate enough to be able to scan back and pull out numbers.  I made my chart start at 1900 just to give it a nice, clean, starting point, and compare that with gold.  How many grams of gold did it take to pay for a college tuition, room and board?  They break it all out, but I just combined it to make a nice single number.

Back in 1900 it was just a little over 1 kg of gold, and at that time, of course, every ounce was about $30, so that would be something like 30 ounces, or about $600 in 20-dollar gold pieces.  It stayed pretty much the same.  It went down a little bit, going into the 20s, and then it started to rise.  It hit kind of a high point in the very early 30s, and then the depression the price went down to something like $1500 to $1000, so it was a pretty big price drop, actually, during the depression, and it was at a fairly low level during the later 1930s, and during World War II it started to rise a little bit.

In the 50s and 60s it rose quite a lot and it doubled to 2 kg by 1960 and hit about 3.4 kg in the 1970s just before we went off the gold standard, and then, of course, it crashed, along with everything else, as the dollar started seeking its proper value.  I think the actual fact is that the 1970s high was probably an overstatement because of manipulation by the Fed, and then the resulting 1980s low was an understatement because the market was trying to seek its level.

And it has had some wild swings since then, but now it’s back to a little over 1 kg, maybe 1¼  It’s been rising slightly in the last year or two, but basically, it’s not that different from what it was back in 1900.  And I expect, if you were saving for a good, high-quality education for a child, and you were looking out 10-15 years, and if you were to think in your mind, “I’ve got to set aside money for this, and if I set aside around a kilogram, or maybe a little bit more, of gold, chances are very good that it will be really close to paying what is going to be necessary, and that might be 500,000 dollars, or it might be a few thousand dollars, depending on what happens to the value of the dollar in the meantime.  Of course, dollars themselves may not even be accepted ten years from now.  Who knows?  They may have gone on to some other kind of currency.  But I suspect that that kilogram or kilogram and a half, whatever number you put in your mind, that something in that vicinity will probably be exchangeable at that time for whatever money is appropriate to buy a year’s worth of college tuition.

David:  Charles you just described maintaining purchasing power.  This is, I think, what is so basic and perhaps underappreciated about gold.  That is its primary purpose, to maintain purchasing power.  There are certain periods of time when it will actually increase in terms of your purchasing power, and it is those periods of time where you don’t want to own gold as much anymore, because there are better values out there.  Essentially, moving out of cash, the values become so compelling that you should be considering either other investments, other speculations, other venues for your resources.

Charles:  Exactly.  There are two components to everybody’s investments, whatever you want to call them – assets.  And you do want to have cash, you always want to have cash.  You never want to go all-in on some wild speculation.  You need cash.  You need it to operate, pay your daily bills, and you need a cushion, a reserve of money that is there, no matter what happens to the other things you are trying to do, because sometimes those things don’t work out, through no fault of your own, because of lots of different reasons.  There are all kinds of reasons.

You have to be prepared with a cushion that you can fall back on, to keep your family safe and care for them, and to give yourself another start if some things don’t work out, so that you have some assets that you can deploy to begin anew.  And that cash cushion, that preference for cash, is something that varies throughout time.  It depends a lot on the economy and how many jobs there are, what sort of quality of earnings that you can make at your job is, the state of, as you say, the undervalued or overvalued nature of the various investment options that are available.

You are always looking through the options and trying to sift to some balance, some mix which makes sense at the time, and what those levels are does change over time, and there is a pie preference for cash in times when things are tight and jobs are hard to get.  Sometimes people want to have the safety and security of knowing that their money is safe, and it’s theirs, and it’s there.  They want to grow that cash pile.

Other times, it makes more sense to put it out there, get it to work for you, get it growing.  You are taking a risk when you do that, but at the same time, you are opening yourself up to possible gains.  So I think gold, as the best ultimate form of cash, really wants to form the core of that savings that you have, but how big that pool of savings want to be, whether you should be all in cash because it is 1929 and you really want to be out of all these markets, and you want to have your money where you can keep your hands on it, then you may want to have a lot of your money in gold.

On the other hand, when things are booming, you really want to be investing in things that are going to grow the amount of gold that you have access to.  That trade-off is kind of an ebb and flow that is always going to be there.  I don’t see gold as an inflation hedge, where you hold a little of it because it will go up and make up for your losses everywhere else, and I don’t see it as an investment.

I see holding U.S. dollars as a speculation.  You may think that for some reason because of the way the world economy is working, people are very concerned about other currencies, they are all rushing into the dollar for safety, as they perceive it, and that can push the value of dollars up, and that is what has happened recently.  The dollar has become very strong compared to a lot of things, including gold, so you can make money by buying dollars, but when you do that, you are taking a real risk to hold a lot of dollars, because the dollar is a very volatile commodity, in my opinion.

It is hard to know, these things can turn on a dime, suddenly people can say, “Holy, moly!  Look at this deficit we’ve got and look at the student loan bubble, it could implode.”  And all of a sudden dollars could become anathema, and everybody wants out of them.  They’ll be looking for anything that they can get into that gets them out of dollars, and then the dollar’s value relative to these other things is going to collapse, so I don’t see holding the large amounts of dollar cash as a very safe thing, but it can be a very lucrative speculation sometimes.  But gold is more the core.

David:  When you see the relationships that you have and the charts you have constructed, it is over a course of time that these relationships are clarified.  It’s a little bit like relationships that we have.  If you have been married for a matter of weeks or months, there is a lot that may have occurred, but not a whole lot that has changed, in a very short period of time.  You step back and look at a 50-year relationship and you see the seasons of life, you have recollections of being young, married with no children, married with children, grown children, grandchildren, or even through a different looking glass altogether, your career, the early career stages, the middle career, the end of your career, retirement, the point being that time factors into the relief, allowing for contrast, allowing for reflection, and frankly, aiding in the navigation of what is happening in gold terms, and when you are looking at investing, I think the curse of our day is that people focus on a day, focus on a week, focus on a month, even a year, when reality shifts over a longer period of time.

Relational shifts between asset classes take years and in some cases even decades.  I think one of the things that I have appreciated in knowing you the last few years is that it is an issue of stewardship, and I think stewards guide that process of allocation on a non-time constrained basis.  Looking at the charts, all of a sudden the world comes alive to me, as I’m sure it has to you, and I really appreciate you facilitating all of this through pricedingold.com.  But what you begin to see is that there are times that you do want to have more cash/gold, or less in other things, but you are not constrained by time, you take away the pressure and the emotion of financial decisions, and it becomes a very dispassionate intergenerational process.

Charles:  I think on Priced In Gold, that probably as an investor, one of the things that has helped me the most when I started keeping these charts, I realized that pricing things in gold really makes the most sense over the longest time period.  So the longer the time period you are looking at, the more sense it makes, because let’s face it.  The bullion banks and the Fed, they can come in and push the price around for a day or two, or a week, or a month, or even a year.  They can sustain losses to push against the market to force the price, and in the case of the dollar being $35 an ounce, or 1/35th of an ounce, they did that for a long time, for decades, and it was probably fairly natural at the beginning, but it became more and more forced toward the end.

So there are tremendous resources that can push things around for extended periods, but as the time periods get longer, things tend to even out and these sort of perturbations, whether they are market excitements and panics, or whether they are actually caused by some kind of manipulation, eventually the forces of nature, the market forces, move things into their appropriate balance over time.

Of course, it’s nice to be able to take advantage of a dislocation that is happening at the moment for some reason, but when you are looking at sort of the overall sweep of things, I think the longer the time periods the better, and so on my site, about the shortest chart I have is 3½ years long.  I have a few things that I chart from 2010, but most of them I chart from 2006, so we are talking about more than 5 years, 6, 7, 8 years, and many of them are much longer than that.  I try to take them back as far as I can, often to 1900 or to the 1970s, because from the 1970s forward is where the action comes because the prices were more free-floating.

So when I look at these sort of long-term sweeps, it’s different from when you look at a short-term chart of the last three months, or if you look at a daily chart or a weekly chart, with all kinds of noise and activity in it, those are useful, and I think you can derive benefit from them if you have that kind of trader mentality and a feeling and an understanding for markets, but that is a very specialized thing.  It’s not really investment in the sense of trying to, as you say, maintain a stewardship with respect to your investment.

That’s a very different kind of economic activity, trading and arbitraging and looking for those disparities and taking advantage of them in a fairly quick way is a totally different economic activity from trying to decide on overall allocations, to try to move your wealth, preserve it, and grow it over time in a kind of a stewardship way, as you say.

I think those things need a much longer time frame.  And one of the things that maintaining this site has done for me is that I look at these things every day, but when I look at them, I tend to look at the charts and the charts always put me into this longer time-frame view and I found that to be very useful for myself, because it is psychologically calming to take the day-to-day noise out of the picture.

In some ways I think my best investing in the past was done where I didn’t look at all for extended periods at what the market was doing, and just checked in once a month, or once a quarter, or when I was sailing, even over the course of a year, not really looking at things very much because I didn’t have access to information.  I made my best guesses and then set it and forget it, and came back later, and in general things worked out very well for me.

I think looking at the longer time frame is really important.  It is calming and it says, “Well, okay, everybody is panicking.”  You read these things in the news.  I try to not read that much news, even, because so much of it is just noise.  It pushes people’s emotional buttons, but doesn’t really have anything to do with the true underlying values of any of this stuff.

David:  Many of the charts that you show have values relative to gold and they appear to be nearing a turning point in the markets where deploying cash or gold into other assets will make sense.  Maybe I can prepay Yale tuition today (laughter) for ten years from now.

Charles:  I don’t know, but you can certainly buy some gold for it.

David:  Well, maybe you can speak to the math involved in what appears to be small moves on the charts that you have drawn, these small moves, sort of the remaining stretch, and I’ll just give you an example.  You look at U.S. disposable income or the Dow-gold ratio – we’ve covered a lot of ground going from 43 to 44 ounces of gold to one share of the Dow, now to about 10 or 11-to-1.  Arguably, there is not much left in terms of this move, and yet, there is an interesting mathematical relationship, not much left, but a whole lot left.  Maybe you can explore that.

Charles:  Yes, exactly.  I think if you look at that chart, just take the Dow, because it is a convenient one.  There is a chart on my website for the Dow going back to 1900, and I do it in grams of gold, just because I find it easier to think in gram numbers, but obviously the price in ounces is the same sort of thing.  When you see 31 grams, that is the same as one ounce.  So, over and over again, the Dow has been in that vicinity of 1 ounce, 30-50 grams.

It was that way in the early 1900s, and then it hit the bottom, and the 1930s, and then again in 1980, and today we are not anywhere close to 50 grams.  We are at 200 or 250, something like that, so there is a long way down from 250 to 50.  It is quite low now, actually, compared to historical averages.

We are in the sort of bottom area of the chart, but there could still be a long way down from 250 to 50, in grams, or I guess that would be 5 ounces to 1 ounce, or let’s say, just in rough ounce numbers, you could lose 80% from here, to get back to the old bottoms that occurred at the other low point on the chart going back to 1900.  There is nothing that says we have to.  We don’t have to revisit those levels, necessarily, but certainly, I wouldn’t take it off the table at all.  It’s definitely a possibility.

And right now, for the last 18 months, we have kind of been in an updraft, even with respect to gold and the Dow, but we are kind of nearing, if you could draw a line across this chart, in the area where we are, there are a number of points where it has peaked, or had resistance there before.  So we may be getting near one of those, and maybe this will be another turn-around and we’ll move lower.

Some people are predicting a lower market.  I don’t know whether that is going to happen or not, but it certainly technically would make some sense from where we are.  But I don’t know.  Nobody knows the future.  We can say that we are in the lower part of the historical average, but we are nowhere near the bottom.

David:  It seems like what most investors want is definition – something determined, something guaranteed, and life doesn’t really work that way.  Life is full of uncertainties, it is full of ambiguities, and relationships, frankly, are in that same mix of things that are constantly changing.

So we think of relative valuations as maybe offering guidelines, more than hard and fast rules, and when you say, “The Dow/gold ratio could go lower,” meaning gold prices higher relative to stocks, but it may not, it doesn’t have to do that.  You are kind of expressing that same issue of, these are not scientific rules.  These are not natural rules that have to be axiomatic in some way — we will see this.  We may not, but we do over a course of time begin to see valuations and how they compare, relative to one another, whether it is the S&P, or whether it is the Toronto stock exchange.

When you look at all the charts that you have put out there, where, to you, do you find compelling value today?  You have your cash position in ounces, and is there a reason why you should be spending that cash?  Something that just says to you, “Man, I look at natural gas and it’s too cheap.  You should have some exposure there.”  What stands out to you when you look at the charts that you’ve put together?

Charles:  I think the things that are most interesting to me right now are probably gold stocks.  I only chart one index on my site, and that is the Amex Gold Bugs index, the HUI.  But I think it is just the one that somebody asked me for it at one time, and so I started charting it, and I think if you look at the other gold stock indexes, you would see they tend to follow a similar sort of curve, and we are nearing a very low level.

This was a long-term support and resistance level for these gold stocks, which was broken a while back, earlier this year, and it could still go lower.  There is an all-time low that we are still above.  We haven’t gone all the way back to that.

On the other hand, we are certainly down into what I would consider the bottom territory for these stocks, and recently, just in the last few days, we’ve kind of had what might be a little bottoming action, but there is no way to know.  I think the downside is somewhat limited for those, and the upside potential is tremendous.  And I think you could do much better than to just buy an index, like the HUI.

I think if you do a little research, look at specific companies and their management, and the assets they hold in the ground, and the productivity that they are getting, and so forth, and do some careful picking, you could do much, much better than just buying a straight-out index.  But I think there is a lot of value there, and I think we are getting close to a real bottom there, and it is something that is investable.

With a lot of things, it is more difficult.  If you take coffee or natural gas, not very many people can afford to buy those commodities and hold them directly, so they have to wind up buying some kind of a proxy, or a company that deals with them or something, and then you are adding in all kinds of other layers of complexity to your investment.  But many of these things are good potentials – cocoa, coffee.

As you said, there are lots of things that are near their all-time lows, and natural gas is one of the ones that, I think, bottomed in 2012, and seems to be making quite a strong comeback.  It has been rising since then and maybe getting into a kind of a little bit of resistance area, I don’t really know, but it certainly has established itself in an uptrend.  Some of these things like coffee may be a little bit of an uptrend, but it is a little hard to say for sure.  But I don’t know how you invest, exactly, in those, either.

One of the things I like about gold stocks is that there is something you can actually research and find, and get advice from people who are experts in them and track and follow these companies, and you are in an area, though, that has a lot of potential, I think.  Crude oil is another one of these things which is in a lowish area, but actually, crude oil has been in a very gentle uptrend since the 1980s and it had much higher levels in 2000 to 2008 and it has corrected back onto a lower part of its graph since then.  But I don’t know, with all the oil discoveries that are being made now in the U.S., in particular, with the next technologies that are coming online, those oil prices could be declining relative to gold.

There is no way to know, but from a fundamental point of view, I think there is good reason to think that prices will probably stay relatively low compared to gold.  They may go up a lot in dollars, if the world finds itself flooded with dollars it doesn’t need or want, but I think compared to gold, or some other objective standards of value, I don’t see it as a great speculation that it is going to go up a lot, as compared to something like gold stocks which I think do have the potential to go up a lot.

They have really been beaten down into a very low, low level, and many of these companies are either going to go out of business because they simply can’t survive the tough climate, and probably many of them will, but the ones that are good, strong companies with good assets and good business models will weather the storm and then they will be all the stronger coming out of it, so I think there is good potential there.

David:  It is an awkward thing to say, on the one hand, that gold doesn’t change in value, and it’s the constant, and then, yet, we talk about gold stocks and predicate their future value and potential success on an increased value in the price of gold, which we have just defined as a constant.

Charles:  Well, no, no, I don’t think that’s quite the right way to look at it.  Their costs are all in dollars, and so, really, their success depends more on how much people want, or reject, dollars.  You can restate anything that has to do with gold price into a dollar price.  So when most people would say, “The price of gold is rising,” what that means is that the value of the dollar is falling.

You can restate that the other way.  And if you do, the same fact, you say, “Wow, the costs of these companies are measured in dollars.  They are declining.”  So the companies become more profitable because their costs are being paid in this depreciating currency.  It makes it much easier for them to expand, to grow, to hire more workers, to acquire more properties, the prospects to work, and so forth, so their life becomes easier and their companies become more profitable.

I don’t know, you can sort of look at it from either way.  I guess that’s the thing.  And it’s really a mind game, it’s a mindset, a mind-changing thing, more than anything else, to think in terms of gold as the standard, instead of the dollar as the standard.  As you said earlier, it changes the lens that you look at things through. You can also say it the other way around, but I think it’s not as accurate as to think in terms of the value of the dollar fluctuating, and how does a fluctuating value of the dollar change things?

If you are an importer, and you bring chocolate from Switzerland and sell it in the market here, it makes a big difference to you how many dollars it takes to buy a Swiss franc, because you have to purchase that chocolate, and you have to pay shipping and packing, and you have all kinds of expenses that are involved in Swiss francs.  So it makes a difference to you what the value of that currency is.

The same thing is true for a gold mining company.  It has its expenses in this foreign currency called the U.S. dollar, and its assets really are its gold, and it can deploy that, but it has costs to do that.  It can market its products and the demand for those products are going to depend a lot on the value of the currency of the customers, which is the U.S. dollar, as well.  So if you think of it more as an exercise in some kind of international finance, even though it all may take place inside the U.S., and all be accounted on their official books in dollars, you can think about it in this inverted fashion, and I think you actually get a better picture of what is going to be happening with those companies.

David:  It’s an exercise of the mind, as you say, and it is definitely a mindset, something that has to be practiced, because following 1971 and the disposal of gold, altogether, from our monetary system, we have assumed a lot about the dollar, and we do this very thing.  We price everything in dollar terms, on the assumption that it is meaningful, and it is not as meaningful as we think it is.

It would be more meaningful, as we have been discussing, to practice pricing things in gold to see what their volatility is, what their real value is, whether they are over-valued or undervalued, in real money terms.  When you go to pricedingold.com, is there a place that you would have people to start, to look at first, to familiarize themselves, to refresh the idea, and then practice it a bit?

Charles:  That’s a really good question, and something I haven’t looked at.  I probably need to create some pages for that purpose.  I would probably go to the U.S. dollar page, and right away you start seeing the U.S. dollar priced in gold, and that is the biggest, more stark reversal that most people are going to undergo.

And then once you’ve looked at that, take a look at some of the others.  Silver is very interesting, silver priced in gold.  It is the gold-silver ratio, but plotted upside down.  How many grams of gold does it take to buy an ounce of silver?  It’s another thing where you see the curve for those two is much flatter, although if you go back in history, it is quite interesting, because the fact that this is based on the gold-silver ratio, it is probably the longest-term chart that I have on the website because there are good records for that ratio going back a long way.

There is one that goes back to 1700.  So the first part of the chart is pretty flat because the governments were manipulating the prices of the two things to keep them in a fairly constant ratio, but in the 1860s the U.S. government gave that up.  This was around the time of William Jennings Bryan and his cross of gold speech, and there was a big shift away from silver currency toward making gold the primary standard for the U.S.  At that point, silver fell in value dramatically, like in half, and it’s been pretty much a wild ride ever since then as the industrial demand for silver and the investment demand has gone back and forth, and the Hunt brothers cornered the market, (laughter), all kinds of exciting stuff that has happened there.

But silver prices are pretty low right now, and they’ve been rising gradually since the 1990s, they’ve been in something of an uptrend.  At the moment, an ounce of silver is another thing that has potential for future.  I don’t know if it is ever going to go back to 2 grams from the current half of a gram.  But maybe.  I think you just kind of start paging through.  Look at the things that you know something about.

If you are involved in a farm operation, for example, go take a look at the farm price of wheat, and priced in gold, and get a feeling for that.  Or if you have been a long-time stock investor, you might want to take a look at some of the stock charts, or if you are in another country, you might want to look at your currency priced in gold.  I don’t have every currency, but I have some of the major ones, like the Japanese yen, the euro, the Swiss franc.

I have just recently started plotting a few of the Asian currencies, like the yuan and the Singapore dollar, but on some of the South American currencies, like the Chilean peso and the Argentinian peso, you might take a look at those charts and see how they relate to your experience with your own currency, and then just kind of play around with it.

Postage stamps is a really good one, actually.  In the U.S. a lot of people are quite familiar with that since they have lived through it.  That was one of the ones that somebody asked me about, and I started charting it, and it was quite a shocker to me to see how the price of a first class stamp has changed over time.  It is very interesting, because for many years, it was actually a bad idea to buy Forever Stamps, and that was one of the things that really shocked me.  You think, “Gosh, this would be the perfect answer to inflation, right?”  You buy a stamp, and now it doesn’t matter how they inflate the price, you can always mail a first class letter with this Forever Stamp, so it’s inflation-protected, it will always be good for mailing a letter.

But in actual fact, most of the time that we have had Forever Stamps, it might not have been true of the last year, something like that, but for most of the time, the price of new stamps, in gold, has been falling, so buying a stamp at a higher price, the Forever Stamp, and then having them raise the price on the stamps, the price of gold has risen much faster than the price of stamps is rising, in effect, so you could have traded a little gold for a roll of stamps, and come out ahead of purchasing the forever stamps at a lower stamp price.

That was one of the things that really kind of rocked my world, and the more I thought about it, the more I realized it has to be that way.  It is almost a built-in feature of the way the postage service has misestablished this run, because they are not allowed to raise the postage rates more than the official inflation rate.  That’s written into the law.  And of course they are doing everything within their power to mis-state the inflation rate as low as possible, which we see in many, many ways and it has been documented by lots of other folks.

So the result is that they really are not allowed to raise the prices of the stamps as much as they need to, to maintain parity with their costs and just the general changes in the economy, and so the result is that the Forever Stamps are not a good deal.  In terms of purchasing postage, you are actually better off to buy your postage when you need it, by trading a little bit of gold for a roll of stamps and using those.  That kind of thing is very counter-intuitive, but it is something that I came to from looking at this chart, and thinking about what it means.  And it is quite interesting.

David:  You also on your site have a section where people can request charts be drawn, specialized charts, etc.

Charles:  I do have a custom charge service and anybody who comes to the website and signs up, which is free, just a subscription, I am happy to do a custom chart for them.  Many of those custom charts, because I find them interesting, I go ahead and add them to the site, as just part of its regular updates, but not always.

David:  And then beyond that, sort of one free, if they want you to do the labor for them, you are asking for some nominal remuneration for the task.  It is an interesting thing when you begin to look at investment decisions.  General electric is a company that we have talked about before, not because we love it, but because it’s been around a long time, and for the same reasons that you chose Yale, you can get data on it going way, way back.

In 2003, when I was making that decision I described earlier, coming out of the house in Southern California, we could have looked at the equity markets, and we could have looked at G.E., and 30,000 dollars’ worth of cash would have bought either 100 ounces of gold or 500 shares of General Electric.  Looking at that ratio was very helpful for me, because today it swung about a 16 times multiple, far more than the Dow has at this point, but a 16 times gain in terms of purchasing power, gold, in that time frame, compared to General Electric, and clearly, owning those 500 shares of General Electric would have been a losing proposition over the last 12 years.

Gold has been a winning proposition.  That won’t always be the same.  You cannot project this short period of time into an infinite future, and there will be a point at which exchanging ounces for shares makes sense.  I think for folks to know that that service is available, if there is something particularly interesting and you want to look at the historical relationship and assess out where it makes sense to be reallocating, it’s a pretty valuable insight to see where you stand in the light of history, and in the light of a longer-term trend.

Charles, I just want to thank you again for joining us, and for the work that you have done.  I love the way you are living your life.  We haven’t gotten in to this very much, but a lot of time spent with family, your kids, educating them how to think well, how to engage life well, how to take risks and make decisions.  The autonomy you are setting in motion, the free agency which you are empowering, I really enjoy, and I’m just an outside spectator on your life, but I see the same thing philosophically, oozing into the work that you have done in pricedingold.com, and it is appreciated.

I appreciate the work that you have done, and the intentionality that you bring into the life that you are living.  I appreciate you being our guest and I hope that every one of our listeners will visit the website, pricedingold.com, spend some time adjusting their mindset, and practicing seeing all the things that are of value, or of potential value to them, priced more accurately in real money terms.  Thanks again, Charles.

Charles:  Thank you very much.  I have really enjoyed the conversation.

Kevin:  David, obviously, we can’t recommend more, going to his website and seeing these charts, seeing the commentary of what things look like when they are priced in something, actually, that is a constant, like gold.

David:  Just to review, you assume the value of gold as a constant.  There is no growth in gold, just shifting values and assets in gold terms.  If you remember to think of gold as cash, it’s the same kind of pricing, the things that you do today.  We understand the volatility of wheat in dollar terms.

Yet the dollar, and every other currency, for that matter, has no real moorings or intrinsic value.  We are talking about paper and ink.  We still understand the volatility of things like gasoline, in dollar terms.  We think of the U.S. dollar as a barometer for changing values of the price of a home, whether it is increasing, or decreasing.

It is time to rethink that process, and price all assets in either grams or ounces.  How does an asset compare to gold through time?  Just as we are conditioned to think of price volatility in dollar terms, not associating volatility to the dollar, but to the items in question, this should be applied to gold instead.

Kevin:  David, he talked about this hypnosis that we are in where we just continue to look at the dollar.  I know you guys have talked about that in the past.  We go to the grocery store and we see everything priced in dollars.  We drive down the street and we see gasoline priced in dollars.

Yet the problem is, the dollar has lost over 90% of its value in our adult lifetimes.  I think of it as drawing a ruler of inches on a giant rubber band, and every time you measure something, stretching it at a different level.  How in the world are you going to know the size of something.  But gold is a solid ruler, it doesn’t change, and if we don’t change our thinking that way, we are probably going to be lost in the hypnosis.

David:  Yes.  Things cost either more than they should, and are thus expensive, or cost less than they should, and are valued, they are cheaper than usual, it represents a value.  You want to retain gold ounces, your cash position, when the world is overpriced and fraught with implicit risk, relative to that gold, and you want to exchange ounces when things are a compelling value, and essentially risk has been squeezed out of the equation, to a large degree.  That’s the concept, that is the practice, that is the shift in mindset.

As you go to pricedingold.com, just remember that it is a bit of an exercise, because we are so hypnotized into this notion of dollar values of everything.  What is your net worth in gold terms?  What is you house worth in gold terms?  What is your car worth in gold terms?  What is your grocery budget in gold terms?  How much has it shifted through time?

This you will begin to appreciate once it is practiced, and I would encourage you to take the time to do so.  I consider it a game-changer, where your education begins, and where you view stewardship of assets through a very different light, through a very different lens, and something that will help you, I think, on an intergenerational basis, do it even more effectively.

By | 2013-06-07T12:45:47+00:00 June 7th, 2013|Transcripts|