The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: David, we were talking just a couple of days ago about the pain that we are feeling in this market. It reminded me of some of the conversations that I’ve heard between you and your dad about the pain in the 1970s when the Treasury was taking down the market, trying to manipulate the market. People felt like they were losing money, but that was right before gold went parabolic.
David: And the IMF was certainly involved. There were a number of factors and we can maybe look at that with Don today, but it’s been a week since I’ve talked to you, Dad, and I’m glad we can catch up.
Kevin: Since you have him on the line.
David: Exactly. This is kind of a little catch-up for us. You just got back from Mindanao, one of the southern islands in the Philippines. I know the last six weeks you’ve been traveling all throughout Asia, Hong Kong, Singapore, Indonesia. You will be continuing that over the next several weeks.
What you see in Asia, I think, would be helpful for folks here just to sort of create a contrast, the markets, as we see them here versus there, and then let’s maybe start there and then we can come back to the 1970s and explore what the gold market and volatility looked like back then.
Don McAlvany: Well, David, as you know, I split my time between thinking about gold and writing my newsletter, and also going around to 11 orphan homes that are scattered around Asia, and working with the orphans. It is interesting, I get to see both sides of Asia out here, the very, very, very poor side of Asia, and also the wealthier side of Asia in the financial markets. So there is an interesting perspective that I think we get being out here in Asia.
As I read the U.S. press, and I do, I read it like you do every day, the contrast between the reality of life, and what is happening in the financial world out here, and what you hear about it in the States, oh my gosh, it’s like black and white.
I can give you the view from Asia and it is so different, especially in the metals markets. Oh my gosh, there is an explosion of bullishness in the precious metals out here. Of course, they are buying in the real world. They are buying in the physical markets out here, and there has never been more bullishness, and this recent take-down, which I wrote about in my last newsletter, which probably is an interesting letter, The Great Wall Street Gold Robbery, The Recent Take-Down of Precious Metals. The bearishness that is being spread by Wall Street and the big bullion banks, the big firms on Wall Street, and of course, the Fed, and the media in the States, is diametrically opposite out here. People are lining up to buy physical gold – amazing.
David: We just got the statistics in for the first quarter, and Chinese gold usage was 320 metric tons in the first quarter, significant purchases of coin and bars. Really, the only weakness that we saw in all the statistics was in exchange-traded fund liquidations, or swelling in the exchange-traded funds, which followed on the heels of close to a million contracts sold in a two-day period. A million contracts, as we have noted before, is greater than the entire year’s worth of gold production. In a two-day period, there was just a massive gold dumping.
Meanwhile, we also have first quarter numbers from central banks. This is the 7th quarter in a row where central banks have added over 100 tons of gold and we’re on track to be right in line with 2010, 2011, and 2012 numbers, in terms of annual consumption by central banks. When you describe weakness, really, the only weakness we’ve seen in the metals markets, I guess, would be a description of holders, not the product. There are certain holders in the market who simply cannot hold onto the metal, or don’t want to. Or maybe they didn’t buy it for the right reasons in the first place, or are just panicked at this point because of the price declines.
But not only have you been there and done that, seen price declines actually far worse than we’ve seen now, but as you say, this strength of purchasing in the physical markets, is really centered in Asia, and that’s a massive shift. Ultimately, isn’t that a massive shift of power, as well?
Don: Absolutely, Absolutely. David, if you look back in world history, whenever you have seen a huge movement of gold from one region or area of the world to another, you have seen the political, financial, even economic military power shifting to the area where the gold is going. That’s been going on for at least ten years out here, but it has accelerated dramatically over the last year or two. The world’s physical gold is moving in this direction.
Speaking of central banks, I think China actually acquired, over the last month or so, I just put in my new newsletter, about 96 tons. China, of course, wants to have the next world reserve currency. They want a gold-backed renminbi, so they are buying gold like there is no tomorrow. The Chinese government is picking up all of the gold production in China, and that’s going into reserves, and then they are going out on the market and buying more and more. The physical gold is moving out here, the economic power and you’ve been out and traveled this region with us. I think of places like Detroit and Cleveland, and St. Louis, and other places in the United States where the economic malaise is huge. In fact, that’s an understatement.
And then if you go to Singapore, Kuala Lumpur, Bangkok, Hong Kong, Jakarta, Manila, and you see this economic boom. It’s not a bubble, it’s a boom.
With the physical gold movement, that’s the real world. This is a fairyland in America where people think it’s the futures markets. No, no, no, the physical market is what they recognize. With the acquisition of massive volumes of gold out here, is also tremendous boom. I’ve traveled in the last six weeks, I’ve been to Jakarta, Singapore, Hong Kong, Kuala Lumpur, Manila, and this is a real-deal boom, this is not a bubble, and the economic growth in this part of the world is unbelievable. Compare that to America and then compare the physical gold that is all moving out here. This is one of these epic changes that takes place about every hundred years or so, David.
David: Earlier this week we saw massive overnight volatility, and it was a pretty astounding thing to see the price of silver move up 10% off of its lows. Gold finished again earlier in the week, up $30 for the day after being down over $45. I guess when we look at volatility today, we’ve gotten more and more volatility, given the ease of access to the markets, given the amount of leverage that is in the markets, and wouldn’t you say to some degree that volatility is magnified by central bank activity?
Don: I think the volatility is, certainly, in part, central bank activity, and I think most of that is on the buy side. There are probably a few European central banks, and maybe even in the U.S., that would be selling gold, but most of the central banks, especially in Asia, are buying gold, but I think a lot of the volatility is coming from the hedge funds to the big bullion banks, and they have a vested interest in the short side of the market, they are massively short.
David: Right, but it’s the central banks with zero interest rate policies that are making liquidity available to the hedge funds. It’s one thing to play with your own money, it’s another to play with your money, plus a leverage factor, and you don’t get to do that with interest rates at 10%, 12%, or 15%. You tend to see higher degrees of speculation in periods of time where central bank interest rate policies are set at the zero bound.
Don: Oh sure. Sure you do. The hedge funds and the big bullion banks make a tremendous amount of money by coming in and shorting, shorting, shorting the market. I think this whole take-down started probably as early of January of this year when they started shorting and taking huge short positions in January and just kept adding to it, and there was a very, very, sophisticated strategy, much more sophisticated than anything we saw in the 1970s on black Friday and Monday, April 12 and 15, where they then dumped about 500 tons of gold, all this in the futures markets. So they make massive money on the way down, billions, probably tens of billions of dollars, and they come in and they buy, and they make massive money by running it back up.
You mentioned volatility. That’s where the massive volatility is coming from in the markets. I think most of it is coming from the games that are being played in the paper gold market, in the futures market, primarily in the United States. Meanwhile, like ants, just about their business, the people in Asia, whether it is India, China, Hong Kong, just continue to buy gold, and buy gold. They are just steadily buying gold. So you have this game that is being played where there is great volatility over here, and they’re just smiling and saying, “Thank you.”
And David, I have to point out something. The people out here are not stupid. Even down to the man on the street, I have talked to jewelers who buy physical gold, and by the way, when they buy gold they are paying a premium, 3%, 4%, 5%, or more, to buy gold out here above spot. They understand the manipulation in the market. They understand the corruption on Wall Street, in the Fed, and their government. They know this is massive manipulation, and they are just smiling as they watch all this going on in America, and saying, “Thank you. You’re letting us buy more gold at cheap prices.”
David: It is interesting that it’s obvious to someone else, because here in the U.S. there is a panic on, and it translates into this sense that, although it’s been bad, it could get worse, and there are commentators out there who love, at this point, what they consider to be a lay-up trade, being short the gold market.
When you were doing this in the 1970s – this is not your first rodeo, you’ve been through both bull and bear markets in the metals – what did it look like, what did it feel like? If you could go back to 1973, 1974, we got into the business in 1972 as a family, what did that look like? Both the run-up from $35 to nearly $200, the volatility, and then the swings from that. Because at some point there were basically tons of people throwing in the towel, saying, “I can’t afford to take any more losses.” Gold got to a peak. It was going back to the cave it rolled out of just so many years ago, into a cave of irrelevance and obscurity. What did it look like then, and is there a parallel, do you think, today?
Don: Yes, I think there is. David, if you remember the Rocky movie and Rocky III, they asked before the big fight with Rocky, “What’s your prediction?” He said, “Pain, much pain.” I went through the bull market of the 1970s and I must say that during a lot of that bull market when gold moved up 25-fold, we experienced a lot of pain. And if you didn’t understand the fundamental reasons why you were in gold, you would sell out your position.
I can remember when gold went from $35 an ounce, started moving right after Richard Nixon, in 1971, announced that they were closing the gold window and foreigners could no longer redeem their dollars for gold, and they devalued the dollar almost 20%. Boom – right there. And gold made its major move from about $35 an ounce, they devalued it to $42 and change, and then gold made its major move over the next couple of years, all the way up to $197.50, almost $200.
Then when gold was legalized, on January 1, 1975, thanks to the efforts of the great Senator Jesse Helms, they started this propaganda campaign in the media. “Gold has been demonetized. Gold is no longer going to be part of the financial system. Gold is for idiot speculators. Get out of your gold.” Wow, the pain began. Gold had just been legalized, and they took gold down over the next six months from $197.50, I think down to about $102.
And then they announced a series of IMF gold auctions. “See, we’ve been approved, we’re demonetizing gold, and U.S. Treasury gold auctions.” They did auction off some gold, and not surprisingly, central banks came in, it never hit the streets, and bought all that gold up at the low prices. I was there, and I was holding hands with people who were gold stock investors. I was the national sales manager for the largest gold share mutual fund in the world at that time, and I was going around with stock brokers and investors, holding their hands as their gold stocks, and gold, were dropping, saying, “You know, this is short term, this is short term.” Well, they’d look at me, and there was pain. We were all in pain. I can remember we were all thinking, “Is this the day we should hold hands, get up on the tall building and jump off?” And that’s when gold hit $102.
But I will share what is a not so amusing story. People told me, “When your psychology breaks, Don, we’ll know that it’s the bottom of the market drop,” and I called my boss in New York on Wall Street one day and I said, “I can’t take it anymore, I can’t take it anymore. I gotta get out.” I was like the mouse that got caught in the trap. He has the cheese in his mouth, but the trap is getting him. Then all of a sudden it dawned on me and I said, “No. I think this is it. They are breaking down the bulls, and this is going to be the term.”
Gold marched from that point forward. That was in August of 1976. Gold started marching upward and ultimately, between August of 1976 and January of 1980, gold then went from $102 up to an inter-day high of $875. Now, there were massive gut checks in there, where they would come in and they would hammer gold. At that point, they weren’t as sophisticated, and they couldn’t manipulate as much as they are able to do now. They are much more sophisticated now.
But between the Fed and the Treasury, and Wall Street, and the big banks, and all the anti-gold propaganda – I remember in September of 1979, gold got up to around $400, maybe it was August of 1979, and boom! They took, it down from $400, a substantial amount. And then during the fall of 1979, it marched from there straight up to $875. If we stuck it out during those painful years when they were definitely manipulating the gold market and propagandizing, just like they are doing today, we stuck it out by just going back and looking at the fundamentals.
Now, what are the fundamentals? Well, they are printing money like there is no tomorrow. We know that the physical demand for gold is very strong and it is growing all over the world. We would just have to go back to the basics, review the basics and say, “Wow, is our thinking straight on this?” And we concluded that it was. And so the people who had the intestinal fortitude to hang in there, golly Moses, we saw a 25-fold rise in the 1970s, and even a bigger percentage rise in silver. But it took nerves of steel to ride out the manipulations. It feels and acts exactly like that today, except their sophistication is much larger, and the physical demand for gold, especially out here in Asia, is 10 times greater than it ever was in the 1970s.
David: When you and Mom started the business in 1972, we were selling bullion, medallions, 1 and 2-ounce gold medallions, $35 over that for the 1-ounce medallions, and just over $72, or thereabouts, for the 2-ounce medallions. This is a remarkable thing, to from, literally $35, not hypothetically, as if just looking at a chart, you could pick a point and say, “If you could only have ridden this bull market from its beginning to its end.
You sold thousands upon thousands upon thousands of ounces at that level, I don’t know, maybe tens of thousands, but at $35 an ounce, to $875, when you describe intestinal fortitude, and that 25-fold move, there is a temptation amongst investors to, with hindsight, look at a chart and say, “Well, I could have sold at $200, and bought it back at $102. Why didn’t I do that?” Let me ask you. When you were there at $197 an ounce, why didn’t you sell every gold ounce and wait to buy it back at half its cost?”
Don: Well, I have to honest about two things: One, it’s not true that I bought the medallions at $35 an ounce, David. I have to confess. I started buying them at $38 an ounce, and it was very, very frustrating. I had missed the market. I thought, “Oh my gosh, it was $35, now it’s up to $38 or $38.50. I’m paying way too much.” But I went ahead and I bought them anyway, and I did hang on to them.
David: We still have them.
Don: We still have those medallions. By the way, I must say, they were legal. A friend of mine had found a legal loophole, if you will, in the Treasury law, because gold wasn’t legalized for another almost 3 years, but these were religious art objects. You’ve seen them, you know what they look like. They are beautiful. They have a bible verse and a bible picture on one side, and a bible verse on the other. We were able to buy gold legally, religious art objects, if you will, before gold was really legalized.
I suppose, if they had told me that they were going to take it down from $197.50 to $102, would I have sold some more at that time? The honest answer is, I probably wouldn’t have, because I believed so strongly in the story. But what I will tell you I did do is that I hocked the family farm. I think I basically cut the food budget at home in half to be able to buy some more. (laughter) You would probably have starved at that time, but we bought everything we possibly could when it got back down to $102. So, I’m a greater believe in dollar cost averaging.
David: In fact, there were multiple times growing up when we would go through months on end when it seemed like red beans and rice was more than a January 1st tradition. It was somehow what they’re serving for dinner. It was the other red meat. Yes, I think you did scrimp and save and do everything you could to add on a lower-cost basis, and the story was not over. Again, you’re talking about intestinal fortitude.
Let me just challenge that with this notion. Let’s say that I am 75-80 years old and I have a healthy allocation to gold and silver, but really, I’ve decided that that’s what I wanted to denominate my savings in, and to be honest with you, I’ve benefitted from the increase in value, but I can’t really afford to see a decrease in value, and maybe I should take my winnings and go home, sort of take my marbles and go home. If I have a lower-cost basis, I don’t want to lose any more than I’ve already lost, at least in terms of those hypothetical, unrealized gains that were on the table, now are lost.
If I have gold ounces that I’m spending through, what’s at stake here, and tying that to intestinal fortitude, we don’t know the timing, we don’t know when the gold market resumes its uptrend. Is it tomorrow? Did it already happen this week? Is it 90 days from now? Is it 120 days from now? Maybe it’s not even 2015? What is it that you would say to someone who is in that kind of a circumstance?
Don: Where am I going to go with my money? I’m that guy, and I’m nervous, and it’s my whole retirement assets. Let’s say I put 100% in gold, which by the way, would have been pretty healthy over the last few years, I kind of wish we’d all done that. But where I am going to go if I sell out of my gold? Into paper dollars? We know that they are inflating the dollar, no matter what the official inflation rates are. The real-world inflation is 10% or more.
David: By the way, in the interview today with CNBC, I said 2014 we expect to see a re-emergence of concern about inflation. It was unbelievable, “You mean that thing which does not exist at all? What are you talking about?” It was so funny. Inflation is just so not on people’s radar. They don’t see it, they don’t get it, they don’t understand that 9 trillion dollars’ expansion of the Fed balance sheet, not ours, but all the world’s central banks balance sheets ultimately does create inflation on a lagging basis.
I’m sorry to distract you because you were addressing this issue of the 75-80-year-old with all that money in gold, and real concern, palpable concern today. But in 1976, wasn’t the same thing being said? “There is no inflation, the dollar is strong.” It seems like almost a peat and repeat of the period.
Don: It’s tough to live in a world of propaganda where the official media, and government and Fed, are telling you one thing, and then there’s the real world out there. As far as today’s inflation, good grief, look at your cost of living. Look at your groceries. Look at anything. Look at your gasoline, your fuel, your college education, your medical bills, and tell me we have 2% inflation. Common sense will tell anybody it should be over 10% or more, and I think that’s an understatement.
Yes, back in the 1970s they did exactly the same thing. They massively understated inflation, and we all know, you’ve talked about it, and Kevin and I have talked about it so many times. They take out anything that’s going up fast. They just take it out of the calculation. So, they were saying 1-2% inflation when inflation was rising to 8-10%. I think inflation, at real-world inflation, got up into the 15-20% range, 18-20%, by 1980 before Volcker came in and really tightened things down.
My guestimate is that we are talking close to 10% inflation here, and by the way, that’s true all over the world. In Indonesia, where I’m going later this week, the price of food has doubled in the last 12 months. Now, that’s just unbelievable, because they have a lot of poor people and how are they going to feed themselves?
So inflation is not just in the United States. It’s on a global basis, and all governments lie about inflation statistics. I think ours lies better, is more sophisticated, and more believable, including our media. But real-world inflation is at least 10%, I think, and it’s a lot higher than that out here, so people do understand that.
Back in the 1970s, you had to be a contrarian, you had to be a maverick. You had to see through the propaganda of low inflation. Let’s just go back to the guy. I’m 75 years old. What do I do with my money? Well, you could go into dollars. Well, interest rates are close to zero percent. We know the bond market is extremely volatile. The long-term bond market, if interest rates do up-tick in here because of free market pressures, then the bond market is going to totally crater. We are looking at a massively overpriced stock market, which does not line up with the fundamentals in the economy and the real-world unemployment, and so the stock market, the bond market, Treasury bills, bank savings accounts – those are not good alternatives for me. They weren’t good alternatives back in the 70s, and they’re really not good alternatives now.
So where do I leave my money where I have a better chance of doing really well? I believe it’s in gold and silver, even with the volatility, even with the corrections. Look at where gold went from $253 up to $1925 and silver from $4 up to $49 dollars. Yes, they’ve pulled way back in here, but where is the greatest potential for making money? I can tell you what all my friends out here in Asia think. They think it’s in gold and silver.
For the 75-year-old, what are his options? He doesn’t have very many options. He can go into real estate. That’s down, certainly, and we don’t know how long it will stay down, but that’s very illiquid. So I think the best option is going to be gold and silver, and if you believe that there is going to be more political turmoil and instability – we have political turmoil and instability, and geopolitical wars.
I must say this, in late 1979 and early 1980 the Russians invaded Afghanistan and the people in the Middle East said, “Good grief, Charlie Brown, we’re next, those tanks are going to head south, so they bought gold like there was no tomorrow. There was geopolitical demand for gold at that time, and there was also inflation demand for gold at that time.
What do we have today? We have the potential for war in several places in the Middle East right now, we have that situation. My gosh, just look at the Middle East, look at the potential for war between Israel and Syria, Israel and Iran. So you have the geopolitical turmoil. You have global inflation that is off the charts, and everybody but the people in America understand it.
I will tell you that there is a growing belief and awareness out here in Asia, that not only is the American government and Wall Street and our financial system about as corrupt as you will find in any third-world dictatorship, but there is a growing feeling among knowledgeable, thinking people out here in Asia that the average American is dumb as a rock, and will believe anything their government or their media tell them.
So there’s a lot more reality in our part of the world, and people out here are saying, “Hey, we’ve got one really good option.” They don’t really trust their governments out here, either. They’ve got one good option. They’re going to gold and silver. And I think that’s the only option for your 75-year-old who is left. Where else are you going to go? Where do the fundamentals say that over the next 2, 3, or 4 years, in spite of massive manipulation on Wall Street in the short run, in the paper gold market, where is the best likelihood that I’m going to preserve my assets? It’s in gold and silver.
That’s what I would say to the 75-year-old, but I would also say I feel his pain, I’ve been there before, I’ve seen my gold drop by 50% back in 1975 until about August of 1976, for about 18 months. I know what that pain feels like, but I also know that just as strong as the fundamentals were screaming that gold was going to go really high in the 1970s, those same fundamentals are screaming even more loudly today that gold is going to go really high, I think $3500 to $5000 gold, and maybe higher, and I think silver is going to go $150 to $200 because of those fundamentals that exist today.
David: There is an old phrase on Wall Street. “Be right, sit tight.” Sometimes the hardest thing for investors to do is just to sit on their hands and do nothing. I often talk to folks who just feel compelled to change something in their portfolio, not because it’s called for, not because it’s necessary, but just because sitting there and doing nothing feels like nothing, even though that 25-fold move was not a traded move, it was a static move. It paid for itself. Patience paid for itself, I should say.
I think that is one of the things that, today, is eerily similar to that 1975-1976 period, and maybe what was most painful for you then is what is most painful today, not the price volatility, but the time. 19 months, 18 months, what if it stretches on, another 4-5 months? There is a grinding on the nerves, and the question is, can people endure? You return to the fundamentals, as you say, looking at money-printing, looking at physical demand, looking at the shift toward Asian demand, away from European and American metal liquidations.
Yes, this is an interesting period of time. What does it take for an investor to do that? What are you looking at? How do you sit through the pain 18 months, 24 months, 6 months? Speak to what it takes to sort of enter a mature place as an investor?
Don: It has been said that the best predictor of the future is to go back and study history, because as we know, David, history repeats itself over, and over, and over. Let’s go back and look at the 1970s. In the 1970s, oh man, they pounded the gold market. The propaganda in the media, the selling that was taking place, the IMF, the U.S. Treasury, they really pounded it. And there is no doubt that they did, in large part, break down the psychology in the United States. That’s what they intended to do, and they pretty well did it. There was only a small percentage of gold bugs back then, 1-2%. They totally demoralized the gold bugs. There is no doubt about that.
But what they did when they pushed gold down to $102 is they triggered massive global gold-buying demand. Foreign central banks, as well as the man on the street, in Europe and Asia and the Middle East, said, “Oh my gosh, this is a great buying opportunity.” It was an unintended consequences type scenario, where they thought they were going to break the psychology, and they definitely damaged the psychology among American investors, no doubt about it. There was a handful of us who said, we’re not going to give up, they’re never going to take us to the wall, and we believe the fundamentals will bail us out, though we don’t know how soon.
The same thing has just happened with this take-down in the last few months. History is repeating itself. With this take-down in the last few months, they thought they were going to totally break the psychology. Of course, they were making billions and tens of billions of dollars with their manipulation in the paper market, no doubt about it. In a better day that would have been illegal and a lot of these guys that were doing this, like Bernie Madoff, they would have spent the rest of their lives in jail. By the way, what they just did on Wall Street, if they did that in China or in Russia, very simply, they would have just taken them out and shot them.
But what they didn’t understand was going to happen is that they were going to explode global demand. They didn’t break the global psychology, they erupted the psychology, like a volcano going off, and now you turn the whole world outside the United States. Understand, Americans don’t get it. We’ve been so brainwashed and dumbed down by the media, the educational system, the government, the Fed, to be against gold, that the great majority of Americans don’t get gold and they won’t buy gold until it hits $3000.
Let’s go back to the future, way back in time. I was a national sales manager, traveling around the United States giving dozens of lectures per week to stock brokers and their clients on gold and why it was going to go up. And of course, Wall Street hates gold. They hate gold, they hate gold, and they pan it and they pan it and they pan it. Well, by about the fall of 1979, all of a sudden I start getting invitations from Merrill Lynch offices, and Dean Witter offices, to come in and give gold seminars. And I told a couple of my friends, “Oh my gosh. We must be getting close to the top, because all of a sudden, Wall Street is beginning to push gold and gold stocks.”
As you and I both know today, and Kevin, they’re not pushing gold and gold stocks at all right now. That’s a ways down the line. You’ll kind of know, and David, I know you talk with people about strategies. When do we finally lighten up on gold or get out of gold as the market tops? I will tell you, when Wall Street finally stampedes into gold and the majority of, and pardon my expression, the “dumb as a rock” investors out there, decide they want to buy gold because it’s the greatest investment in the world, that’s when you and I and our clients and listeners and my readers of my newsletter probably need to start lightening up. That’s exactly what happened in the fall of 1979 when Wall Street did finally get on board. We’re a long way from that happening. I would say, if that happens again, that will be years away.
In the meantime, I would just say to the discouraged folks out there: been there, done that, lived through that in the 1970s. It’s a great buying opportunity if you’ve got any assets left to buy more with, but a lot of us don’t, and it’s a time, as I said in my new newsletter, to just sit on the sidelines and watch and see what they do.
The fundamentals are very much against Wall Street, the Fed, the U.S. Treasury, and the rest of the world knows it, even if Americans don’t. The fundamentals, just like in August of 1976 when gold was sitting at $102, and the blood was running in the streets for the gold investors, the fundamentals hadn’t changed and gold was destined to make the major news.
I would just caution people who are listening today, and maybe discouraged and thinking, well maybe I should just bail out, I remember one of my friends, a good friend, who was a very well-respected advisor in the 1970s, when gold was at about $400 and he basically told his people there was going to be a major correction of $100-150, and we need to trade out of the metal, and then we’ll come back in at this lower price. And a bunch of his people did sell. And it wasn’t that they were bearish, they thought they could trade that market. They thought, “Oh, we’ll be smart enough, we’ll pull this deal, we’ll catch this pullback.”
You know, a bull market, I don’t believe is totally capable of being predicted with technicals because there is so much manipulation in it, and there are so many events that are going to take place out there that are not in the charts, like the Russians invading Afghanistan in the fall and late 1979. Instead of dropping from $400, and a lot of those people had gotten out of the market, and it went straight forward. It just kept moving up and up and up, up to $875, and a lot of those people were sitting on the sidelines. You have to have the courage of the boy on the burning deck during these times, during what a friend of mine used to call these gut checks. This is a major gut check.
David: Totally agree, totally agree. This notion of trading in and out is interesting, because since I came back to work with the family business in 2003, I remember it was early 2004, maybe even late 2004, silver had gotten up to about $6 and we had a client who was both a doctor and a lawyer – talk about poison for an investment portfolio, that’s the kind of person who knows everything about everything, and in this case, didn’t know that much about the silver market – traded out of several hundred thousand dollars, about a $250,000 position in silver at $6, knowing that he was going to buy it back at $4. Well, it never went back to $4, and he never re-established his position, and he had an original cost basis of around $4.50, and he gave it up, and he never came back. What people don’t realize is their own psychology. Stepping out of a market sets you up for the next hardest decision you have to make which is when to re-engage. It is a very challenging thing to do with any success.
As you have noted, you don’t know, not everything is in the charts, and in this case, the fundamentals are not very well reflected by the charts. The charts in 1976 would have argued that the bear market was going to be a permanent state of affairs. You broke the back, technically, from $35 to $197. The fact that you gave up 50%? Arguably, there was nothing left except decline ahead. From a technical standpoint, you would have had the best case possible that, in fact, you were already overpriced and heading back to $60 or even $40 where the journey began post 1971 and the reappraisal of gold $35 to $42. That is what the charts said. The charts said very clearly, “The bull market is over.” And yet, in four years, and a 750% move, it turned out to be dead wrong.
Don: Yeah. The charts in precious metals markets can be useful tools, and they can certainly tell you where a lot of the traders have put in their stops, and of course, the big, bad guys who did this manipulation over the last month or so knew exactly where all the stops were, down in the 15¼ range, so they knew exactly how to break the market down.
But charts are not capable, in my opinion, of analyzing and predicting manipulations and future events. Let’s say that Syria attacks Israel, or vice versa, or Iran attacks Israel, or vice versa, in the next ten days. Are you telling me that that is really going to be in the charts? The technicians would say, “Oh, everybody knows, it’s always in the charts.” And I would argue no, and I would argue that all manipulation is not also totally predictable in the charts.
I got an email this morning, David, from a reader of mine who said, “Why didn’t you tell us back in January that this was all going to happen?” Well, number one, I have to be honest, they didn’t tell me exactly what they were going to do, and when they were going to do it, and the fundamentals were strong then, they remain strong today.
But one has to steel themselves that there will be massive volatility and drops in these markets because of the manipulation in the paper market and if one understands that going in, and I feel for any poor investor that invests in gold and thinks it’s just going to keep going straight up, it’s going to go up a lot higher, but there is going to be this massive manipulation-based volatility in the market, and if you don’t have the stomach for it, then fine, stay in Treasury bills, stay in a savings account, stay in the stock market.
By the way, David, I’ve gotta mention this. It just really bugs me, really badly. Wall Street has convinced the great majority of American investors to keep the great majority of their assets, and I’m not talking about real estate people, and so forth, in the stock market over the last 10 or 12 years. And of course, we know that a tiny percentage of the American people have been in gold. And of course, they said, “Don’t buy gold, don’t buy gold.” The same people who are telling people to get out of gold today, that the gold bull market is over, it was just a bubble, are the people who, during the 7-fold rise in gold, and 12-fold rise in silver over the last 12 years, told people, “Don’t dare go near gold and silver. Stay in stocks.”
Let’s look at the record. Over the last 10-12 years, if you had been 100% in stocks, on average, people would be about flat, unless they were mostly in NASDAQ stocks in the early part of the last decade and then they are probably down. Let’s just say that people are pretty much flat. Not a lot of gain, not a lot of loss. Well that’s great for 12 years, I hope people are happy with that. They didn’t even keep up with inflation.
Today, gold is still up, close to 5-fold, 5½-fold, and silver is still up, probably 7-fold, even with this massive correction, manipulation, take-down. I would just say that the people who told you not to buy gold 10, 12, 8, 7, 9, 6 years ago, when gold went up 7-fold and silver went up 12-fold, are still telling you it was a bad investment the whole time. My gosh, folks, who are we going to believe? Are we going to believe the people who were wrong, or lied to us, for the last 12 years?
I go back to the same old thing, David, and it’s just like where we were in the summer of 1976. You go back to the fundamentals. Why am I doing this? Have the fundamentals changed? Well, yeah, they have changed. They have become more bullish than ever for gold and silver. They have become more bearish than ever for the U.S. dollar, and for currencies all over the world.
So I would say, for people who are down in the mouth and they are depressed, and I understand it, I got that way myself in the summer of 1976, go back and look at the fundamentals. If you think everything is now fine, if you trust the government and Wall Street and the Fed to continue to do the right thing that they haven’t been doing, then fine. Go back into stocks, go into bonds, go into whatever. But if you continue to mistrust the government, if you continue to mistrust the Fed and what the folks on Wall Street are telling you, then I would suggest you stick with your gold and even buy more.
I’m kind of an American-Asian now, or an Asian-American, and I’m beginning to think more like my friends out here in Asia, and they love gold, and I love it too, and silver, so if you can buy – buy. If you can’t, just sit there and smile on the sidelines and say, “Okay, our day will come.”
David: If you can’t, maybe you could consider the red beans and rice diet, and looking at your cash flow a little bit differently – ounces for beans, or beans for ounces.
In addition to that mistrust of government and of Wall Street, I think you could throw in mistrust of the media, as well. Just to illustrate that, in the last several weeks, we’ve had reports, once again, of George Soros selling out of physical gold. What was not reported by the media, which was in the same filing that he had to make public, in terms of his holdings, was the fact that that he bought ten times the amount that he sold in physical gold, in call options on junior minors.
This is not only a doubling down, but when you think of the junior minors being a leveraged position in the gold space, and then he is buying call options on a leveraged position in the gold space, yet he increased his position 10-fold compared to what he liquidated at the same time, you get a very different picture.
This is why I say mistrust the media, because the only piece of information that was reported, so selectively, was that, yep, the best and the brightest are liquidating gold. You only have one guy that’s hanging in there, and that is John Paulson, stubbornly. Everyone, including George Soros, is selling their gold. You don’t buy call options on the junior minors unless you are roaringly bullish, unless you want a very leveraged position in the metals market, and expect to see significantly higher prices, because to be honest with you, the junior minors don’t stand a chance of survival unless there are higher gold prices. They will not survive a 3-5 year down-tick in the gold price. And obviously, call options have their own shelf life.
So yes, this is a very interesting time in which the media should be mistrusted, government should certainly be questioned, but that is from the founders forward, a healthy position to have taken of any government. And we know that Wall Street, they wet their beak in every way, and at every opportunity, and whether it is short the market today, long the market tomorrow, it really doesn’t matter to them how they make their money.
Just in the last few weeks you had ABN AMRO, a significant European bank, who instead of covering their own short positions, decided to drive their clients into cash settlement on gold that they were supposed to have on account. This is a very interesting time, because what it revealed was that you have significant banks taking the wrong side of the trade at given times, and not be able or willing to go into the physical market and drive up the price. We are very close to having these fickle banks, who, today are short, tomorrow being long. And maybe it’s two banks, maybe it’s three banks, who all decide that they want to own it, for whatever reason they want to own it, and you find yourself at $2300, $2500, $2700 an ounce. This is where we are at today.
I spent a good bit of time with a friend this morning, talking about the oil market, and the volatility in the oil market, and he pointed out that losing a third off the top in the gold market was nothing compared to oil, that routinely, routinely, you would see 75% moves, one direction or the other, and this is very common. And he pointed out that, no, the charts are not helpful. When gold went from $20 to $40, and this was the $40 time frame going back to the first Persian Gulf War, it wasn’t in the charts. A doubling in a very short period of time was not in the charts. And it went from $40 back to $20 in a very short period of time, before it then went to $147, and it was not in the charts. And it went from $147 to $30 a barrel in one month, and it was not in the charts. And now we’ve gone from $30 back to $100, where it is at present. The charts, if you were looking at oil, were less than helpful.
However, looking at the fundamentals of supply and demand, and understanding who was buying what, and who was trading what, and who was involved, both on Wall Street, and in the physical market, itself – that’s where you gained an edge. If you know your business as this gentleman did, then you gain an edge. I think that is also where we gain an edge, as well, with the sensitivity to the physical market, seeing the trajectory higher. This isn’t pie in the sky, this is not some chart point we are picking. It’s based on fundamentals.
Don: David, I want to go back to something you said a few minutes ago regarding the media propaganda. To underscore what you said, we all know about the Cypress debacle and the fact that they came in and basically raided the bank accounts of a lot of the depositors, and there are a lot of people who think that is the wave of the future, that your bank deposits are not going to be so safe.
In the middle of that, or at the tail end of that, they announced in the media that the Cypress government was going to be forced, because of the big settlement with the EU, to dump 400 million euros of gold. This was part of a whole campaign to take gold down, so that was also very, very negative for the gold psychology. This made the press, certainly in the United States and all over the Western world, and immediately, the Cypress government comes out and denies that and says, we never even talked about that. That’s not on the drawing board. We had no plans, forget it, for doing that at all. No. None of that retraction, or denial, that they were going to dump gold was covered in the U.S. media. Another classic example of the fact that they are in bed, and I’ve always said, that the media was in bed with Wall Street, it’s in bed with the Fed, the Treasury, and so forth, that they manage the news to keep the American people really dumb.
Don: David, there is one thing that we haven’t talked about at all, and it is a question that is being asked all over the world, and it’s a good question. Where’s all the gold? I think this question should have come to the headlines, but it didn’t, when Germany kept its gold stored at the Federal Reserve bank in New York during the Cold War, because that was safe keeping. We all know that everything is safe in the United States. Germany, a few months back, asked to get their gold back, and America said, “Uh, er, uh, um, uh, well, well, we, we can’t give it to you now, but not to worry, we’ll give it to you in 7 years.” Well, 7 years is the amount of time it takes to mine that much new gold, which means the gold was not there. And a lot of other countries now have begun to ask, “Where’s our gold?”
A lot of us have been asking for years. I had a friend who was a subscriber, a client, a dear friend, the late Edward Dorel. He was an industrialist from Ohio, and a really a good man. He spent the last 25 years of his life researching the missing gold in Fort Knox, and his position was, and other people’s positions have been, is all the gold that we say is in Fort Knows, which is over 8000 tons, supposedly, in Fort Knox? A lot of that was the gold that was confiscated from the American People in 1933. “It is still there?”
He asked the question, and I’ve asked in writing a hundred times, “If it’s still there, why, over 50 years, have they not been willing to do an audit of the gold? If it was there, then there’s nothing to hide. Let’s prove to the world it’s there.” Of course they haven’t done it.
Going back in history to August 15, 1971, when Nixon closed the gold window, foreigners had started coming. I think they knew there was going to be a devaluation of the U.S. dollar, even though the U.S. government denied it. Foreigners had come in and started cashing in their dollars for gold. Americans couldn’t do that, but according to Bretton Woods, 1944, if you were a foreign holder of gold – institution, central bank, whatever – you could bring your dollars in and we would give you back gold. We closed the gold window because a lot of gold was going out of the country at that time.
From about 1975, for about the next 20 years after gold was legalized, we, as gold coin dealers, had tremendous demand for U.S. $20 Double Eagles. People were buying Krugerrands, and they were buying other coins, but U.S. $20 Double Eagles were very popular. For over 20 years, most of the supply of $20 Double Eagles that we got, David, came from Europe. These were the Double Eagles that were seized by the U.S. government in 1933. Some of them were melted down into bars, and some of those may still be here, we don’t know where they are. They won’t let us have an audit, so they’re hiding something, I think.
But most of those gold coins ended up in the hands of central banks in Western Europe, and in the 1960s and 1970s they began to lay those off to large commercial banks and financial interests across Europe. For about 20 years, as one of the larger coin dealers in the country, our supply of $20 Double Eagles came, primarily, almost 100%, from Europe. Isn’t that strange that the American gold, which was allegedly kept by our government, in safe-keeping for We The People, ends up in the hands of Europeans?
The question is being asked all over the world today, though you’ll not see it in the U.S. press of course, the question is being asked, “Where’s the gold?” Is there really gold in the depositories in the New York Fed? The German gold doesn’t seem to be there. Is there really gold in Fort Knox? Is there really gold in a lot of the depositories, like the one you mentioned, the bank in Europe? Or has most of this gold been spent, leased out, to other people who have come in and gotten hold of the gold?
There is a growing sentiment around the world, never talked about in the U.S. press, that a lot of the gold that is supposedly there, is not there. If the world ever gets wind, and really begins to understand this, and there is a growing awareness of this, at that point you will have a flight from the U.S. dollar, and a collapse of the U.S. dollar like nothing you have ever imagined.
I ask the question in my newsletter, David, and I would encourage people who want to read a little bit more about this and read the contrarian or fundamentalist view of what is going on, it is called the Great Wall Street Gold Robbery, The Recent Take-Down of Precious Metals. If they are interested in getting a copy of this and reading our views on this, they can call us at our 800 number, 800-525-9556, and we will send out a free copy, or they can check with us on mcalvany.com.
The question is coming up and we address this in detail in this article. Where is the gold? And if the gold is not there, then is a lot of the gold leaving the United States? We know that there is a 30% decline in the inventories at the COMEX right now, and that people are gradually taking more and more delivery of their gold, and a lot of this gold is moving out of the country to Asia. That is another one of the questions that nobody wants to talk about in the media, or on Wall Street, or in the Fed. I just leave that, I throw that out for people to at least ponder. Where is the gold?
Kevin: Well, guys, if I can just re-enter the conversation here, I’ve got to tell you, I’ve had a smile on my face this entire time, because for 26 years I’ve listened to the McAlvany family conversation, and it’s a sound conversation. I’ve seen assets saved, and preserved, and grown with this mindset. Don, I really appreciate that you took your time. It’s early, early in the morning in Asia right now. You’re in the Philippines. It’s late for us, it’s early for you, but I appreciate you taking the time.
Don and David, with this conversation in mind, would you just reiterate the high points as we close the conversation out and just put fresh in the mind of the person who has listened to this program what they should go to bed thinking on tonight?
David: Sure. We’ve been here before. I think that’s what Don said, having been there before. And the issue of short-term volatility trumping fundamentals is just not possible. It doesn’t happen that way. That’s not the construction of any bull market. Fundamentals work their way through to a conclusion, and that’s a process. That process does involve volatility. That’s where we find ourselves.
Don, you mentioned a 25-fold increase. Again, that’s something that you could have missed, considerably, had the volatility of the 1970s thrown you off of the bull market, off the back of the bull, so to say, in that period. The summer of 1976 was really a critical time for you. Maybe that’s the critical time we’re moving into now, the summer of 2013, and maybe your final words for our listeners, given the summer of 2013, reflecting on 1976.
Don: David, back in the summer of 1976, it took the guts of a brass monkey to stick with the market, and I will admit there was a time when I thought maybe I should be throwing in the towel, too, and then I began to think, “No, go back and look at the fundamentals. The fundamentals are with us. The propaganda was against us. Oh my gosh, it was so strong, so negative against gold then, just as it is today. The technicals were against us, oh my gosh, so strong. You had the big, bad guys on Wall Street, the Fed, the Treasury, etc., knocking gold, doing everything they could. They were actually selling gold. They were auctioning gold off in the markets, which is worse than they are doing today, if you will, except now it’s Wall Street doing it by shorting in the futures markets.
Everything was negative except one thing: The fundamentals. The fundamentals were so strong, and they kept screaming, “There’s going to be more inflation. There’s going to be geopolitical turmoil. There’s going to be financial turmoil. There’s going to be economic turmoil. Inflation’s going to go screaming. The dollar is going to drop.”
Those of use who believed in the fundamentals, and admittedly, we were a minority at that time, we stuck in there, and we not only did that, but we bought more, and we scraped around and…
David: Yes, the two things that I’m left with is that it takes the guts of a brass monkey, and if you can’t afford more gold, then consider a diet of red beans and rice, because you should be adding, whatever the cost. (laughter)
Don: David, you grew up, you look very healthy, and a couple of years you really ate the red beans and rice a lot, as we were investing more in the gold and silver markets. Those gold medallions are still around. I remember sitting in a vault, looking at them one day when you were about five years old and you saying, “Dad, when you die, can I have all your gold?” (laughter) And I said, “Well, that’s going to be a while, David, that’s not going to be any time soon.”
Folks, we are in the same position we were in back in the summer of 1976. The negative news is out there, the technicals look bad. The advisors, many of the newsletter writers, many people that I know and respect and I think are very smart, are all saying, “Oh, gold is going go down, it’s going to go down.” All I’m saying is that, hey, the fundamentals are stronger than ever. There is more physical demand for buying gold now. There is a gold rush happening in Asia. I see it. I’ve seen the lines outside of banks and dealers out here where people are lining up and they are paying a big premium for gold, and a big premium for silver.
I know the economy in the United States. I don’t believe it’s anything like as strong as they are saying. I think unemployment is huge, I think inflation is coming, and globally, of course, we may have a war anytime in the Middle East, and will you find that in your charts? No.
Well then you have to look at the fundamentals and say, “Wow, this situation is going to turn really ugly worldwide, and gold is my best protection. Bonds – vulnerable. Stock market – massively overpriced. Interest rates – almost zero. Where can I put my money? I’m 75, I’ve saved my money all my life. Where can I put my money?
I’m going to bet with the fundamentals, and I’m going to bet with gold and silver. That is our position, and so I always lick my chops and say, “Wow, I think I’ll try to buy a little bit more gold.” But that’s harder than ever now, because if you are running out of money at the bottom, then what do you do? But I would say, hang in there right now, because the fundamentals are on our side, and you have to see through the propaganda. You have to see through what the media, and Wall Street, and the banks, and the Fed are telling us.
If you want to get more detail on this, I would encourage you to call our office and get our newest letter, The Great Wall Street Gold Robbery, The Recent Take-Down of Precious Metals. We go into it in a lot of depth, and we’ll send it out free if you want a copy of it, 800-525-9556 or you can contact us at mcalvany.com. I would encourage people to get that letter and hang tough.
I want to pose one story, David. I was telling this to a guy who was pretty discouraged out here a few weeks ago. Just remember John Paul Jones. The British shot his ship out from under him, and as the ship was going down, I guess he was standing up on the mast, or whatever, and he said, “We’ve just begun to fight.”
And I would say the same thing. We gold investors have just begun to fight, and we are on the right side. We have truth on our side, and we have the facts on our side, the propaganda is not. So hang tough, and just remember John Paul Jones. We’ve just begun to fight.