In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: We’re going into the second half of the program recorded in Costa Mesa a couple of weeks ago, David. Is there anything you wanted to say to the people who were there, or to some of the issues that came up?

David: Well, it’s just nice to be expanding the audience. We had several hundred people come to these conferences, now several thousand people can know exactly what was said, and most importantly, the questions that were asked, what was on people’s minds. So yes, we look forward to the continuation from last week.

Kevin: Let’s go to that recording now.

Mike: My name is Mike Gallagher. I’m a syndicated radio talk show host, and a Fox News Channel contributor. Every week when Dave was on my radio show, we would do a segment where we would take calls. And I’d have to say, half to three-quarters of the callers want to know about gold. They want to talk about gold. There is a lot of information out there about gold. There is a lot of misinformation about gold. Talk about the McAlvany philosophy, about the rule you have about gold as an insurance policy. I think that’s very, very unique. It’s not like much of what you hear out there. Before we start talking about the exciting news about McAlvany and gold right now, and gold coins, tell me a little bit about your philosophy, about what we should be doing with gold.

David: Our perspective is certainly different from anyone in the industry. You are probably bombarded, whether it’s on Fox News, or Bloomberg, or any of the financial news stations, a lot of our competitors spend millions of dollars a year in getting time on those stations. Now, what are they doing there? They’re basically saying that you own gold and it’s going to go up 300%, 400%, 500%, and it’s going to be fantastic, and you’ll be richer, beyond the dreams of avarice, this is a fantastic thing.

We tend to view it a little bit differently. We look at gold as real money, and if it’s real money, then the question is, how does it relate to any other asset class? And if your savings are in ounces, ultimately, we’d like to see you redeploy those ounces into something that represents good value. So you buy straw hats in winter when they’re on sale, right? So, it’s just a question of keeping a part of your resources allocated in what we would consider to be the only form of real money that’s lasted for 5,000 years. Every other paper monetary experiment has failed. It’s failed. And this is where, I think, people have been duped into thinking that it’s simply a commodity, like pork bellies, or orange juice contracts, or zinc, or nickel, lead, and it’s the issue of: It’s volatile. Sometimes people need it, sometimes people don’t, and gold has been lumped into that commodity basket.

It is a commodity, clearly. But it’s the only commodity that for 5,000 years has been the default, the go-to, for real money. So, again, looking at it in those terms, to us, in a portfolio today, it plays the role of insurance. It plays the role of your best bet on opportunity. When we think of selling gold ounces to buy equities, to buy acres, to buy square feet, it’s on the basis of that value exchange. So today, how many ounces does it take to buy a house? Average single family home, costs you about 180 ounces of gold today. In the year 1930, it cost you around 200 ounces of gold to buy the average single family home. So, it hasn’t changed. It’s boring. So for all the hucksters out there selling gold for whatever percentage return, it may have that return relative to the currency that it’s denominated in. But it’s irrelevant.

It really has to do with how you’re spending your cash, and you want to get rid of your cash when things are cheap. You want to hold on to our cash when things are too expensive. And we would look at the world environment today and say there are a lot of things that are overpriced. And a lot of those things are overpriced, in large part because of the Fed’s activity, not only the Fed, but the ECB and the Bank of Japan. And you see this universally. You look at French debt today, you look at Spanish debt today, you look at Italian debt today, and their 10-year treasury, they’re trading within a stone’s throw of U.S. treasury rates, within about 20 or 30 basis points of U.S. treasury rates. That is too expensive, given the credit risk. That is too expensive, given the fiscal problems which have yet to be resolved in the eurozone. These are bought rates just like the U.S. treasury market today is artificial in nature. It’s utterly artificial.

Looking at the seesaw, when rates are low, bond prices are high. That’s just the way it works. Do I want to be buying foreign government debt? No. Do I want to be buying U.S. government debt? No. Do I want to be buying equities today? Not particularly. We’re left with very few good options, and so for us, we are left with the conundrum of – gold you can’t spend, you can’t write a check from it, right? So there has to be some balance between actual liquidity, cash, and our preferred form of liquidity, gold, and I sort of assume silver in the mix, slightly different variables in terms of things that we like and don’t like about silver, but when I talk about gold, it’s usually precious metals as a basket. That’s a form of cash. It’s a form of liquidity. It is real money, and we think that having a neutral position in the market – that’s insurance.

Insurance is, we don’t have all our eggs in one basket, we’ve taken our money out of, to some degree, the financial system, and being out of the financial system, eliminating counter-party risk, gives you something of a guarantee of preserving value through time, as and when there are issues with the financial system, as and when there are issues with counter parties.

Mike: Was this position – the McAlvany philosophy of gold – was that an evolutionary position? Because, as you said, this is very unique in your field.

David: Well, you know, it did evolve. My dad was a stock and bond guy in the mid 1960s, and he worked for two small brokerage firms, first in Houston, Underwood Newhouse, and then Betcher and Company in Denver, Colorado. Betcher was very involved in municipal underwriting, so when you looked at Betcher’s client profile, it was basically 90/10. 90% fixed income, most of it tax-free municipal debt, and 10% equity exposure, and maybe there was over-exposure to fixed income, but they were “conservative” and it was tax-free income. Their clients started howling in the late 1960s, witnessing the guns and butter policies that preceded the 1970s, basically saying, this is going to have an inflationary impact. I don’t know when, I don’t know how, but how do we protect our fixed income portfolios from rising inflation and rising rates. And there was no way, because as you recall, you couldn’t legally own gold in the late 1960s and early 1970s. It wasn’t until January 1, 1975 that gold was made legal again.

So this was the problem. The problem to solve was, how do we insure? So the evolution was, Mr. Equity and Fixed Income, who is servicing the client, and the client is saying, “I think we’ve got an issue here.” And at the time there was virtually no way to solve the problem. My parents solved the problem in a unique way, and someday I’ll bring these around, or if you come visit us in Durango I’ll show them to you. We started our company in 1972 with medallions, 1- and 2-ounce gold bullion medallions. The only way to work around the legislation that was put in place in 1933, making it illegal to own gold, was to either sell rare coins, or religious relics. My dad was interested in bullion. But this little nuance of the religious relic allowed us to take bullion bars, recast them as 1- and 2-ounce gold medallions with religious themes on them, Jesus feeding the 5000, Noah’s ark, and we’re in the bullion business three years before anyone else is in the bullion business in the United States. And it’s one of the reasons why we still have a dominant position as a wholesaler to the financial planning and brokerage industry. We have both the wholesale and retail business, and both of those, again, started in 1972. We had our first move or advantage, if you will, because we found that little niche. 1972, we started selling gold. Was it as a get rich quick scheme? Absolutely not. It was looking at the macro picture and saying, this doesn’t all add up, and we don’t think it’s going to end well, and the fact that the powers that be say there is no inflation, a) doesn’t mean that it’s not there, and b) doesn’t mean that it’s not going to get worse. And in fact, it was there, and it did get worse. So by the time Volcker took office in 1979, he was fighting inflation in a major way. The struggle that we have today is that we can’t fight inflation in the same way. If and when we have inflation, in our lifetime, we can’t fight it. Why? Seventeen trillion dollars in debt argues against raising rates to 17, 18, 20%. You can’t raise rates without bankrupting the country.

Mike: You were sharing with me some good news about McAlvany and gold, and what your buyers are doing right now. If you don’t mind, share with us what is happening, which is a pretty exciting opportunity, I think.

David: Yes, well, 5-6 months ago, we were contacted by a group in Europe, and it was interesting, again this was sort of benefits of the Fed. We want to thank Ben, and now Janet, for offering us this opportunity. They’ve lowered rates so low that the gold lease rate – banks can’t make any money having gold as a reserve asset and leasing it out and creating an income from it. The gold lease rates have dropped so low, a lot of banks have reconsidered even having gold on the balance sheet. This is a new mindset. These are gold assets that were purchased 80-100 years ago, and have been on the balance sheet, and it’s only now that they would say, “Well, why would we have it, anyway? If we can’t get an income from it, why don’t we get rid of it?”

So that’s the zeitgeist today. That’s the worldview today, that gold is an irrelevant asset if it’s not creating an income. So here they come to the market and dump 200 million dollars’ worth of gold on the market, and it gives us the opportunity to buy product that is 100-120 years old, near bullion prices. This is original bank vault – it went from the central banks of the Netherlands and England straight into these bags, and straight into the bank. They are in perfect condition. Again, it’s sort of compliments of the Fed, that they are dumping this gold and we have the opportunity to buy it. We have bought, and will continue to buy tens of thousands of these, and we’re not running out any time soon, it’s a fairly large purchase for our company. But, the interesting thing is, the quality is there. The age is there, the scarcity is there, the price is right. We have gold, not at $1900, but at $1300. The formula was right.

So, it’s something we’re excited about just as a value play, and I think something to keep in mind, one of the values of having smaller product, as opposed to, say, a kilo bar, which you can actually save money on. Buying a kilo bar is cheaper on a per-ounce basis. You have to think in terms of, what is my exit strategy? I can tell you, at $3,000, $4,000, or $5,000 gold price, it’s a lot easier to get rid of a coin that costs a thousand dollars versus a bar that costs 3 million. Nobody wants to take it in inventory. And if they do take it in inventory, they’re going to skin you alive because if they’re not turning that inventory regularly, you’re going to be paying for their borrowing costs and/or hedging costs for whatever they determine to be an appropriate time frame. So you may get 10% less when you sell that product that you saved money buying, as opposed to the smaller type products which are a lot easier to inventory, a lot easier to liquidate at higher prices.

It’s something we started thinking about 20 years ago, in terms of offering something that was smaller, certainly forward-thinking, when you could have bought those coins in 1999 for $60, $70, $80, they’re now $300 and plus, so they’ve grown inside but we still think we could see them trade at $1000-$1500, which is a good 3- to 5-fold move. Let’s just remember that I’m not saying that’s real growth. I’m saying that is asset preservation. To see a 3- or 5-fold increase in the value of your gold, it doesn’t really mean anything. It’s commentary on the demise of the U.S. dollar. So, in essence, what you’ve done is preserve purchasing power. Now the question is, how do you take that preserved purchasing power and put it to work for you? That is going to mean having to poise the buoy on the burning deck. You sell gold at a higher price and buy another asset, and we think that opportunity is just around the corner.

Mike: In just a few minutes we are going to, again, open up the floor for questions, and if you have questions about this gold philosophy or that formula, feel free to ask away. Care to get into the Bitcoin story at all? Your thoughts on Bitcoin, which we keep reading about every day in the Wall Street Journal and USA today?

David: I don’t have many thoughts on it. The interesting elements, it certainly has raised the issue in a lot of people’s minds, what is money?

Mike: Yeah, what is real money?

David: What is real money? So the contribution there, I think, is helpful with the young generation, for the first time thinking about what is real money. Now, I think there are issues with Bitcoin in terms of how it’s produced. The coding of it is very complex. I think it was ingenious how it was done. You can use Bitcoin as a means of transferring value, using it basically as an escrow service, where if these conditions are met, then ownership is transferred, and that is a part of the coding of Bitcoin. But, when you look at any currency, its legitimacy on a global basis does have to do with its ability to be used universally. Can this be used universally? Sure. I suppose it can. Is it a store of value? Certainly not. At this stage in its development, the volatility is radical in nature, from single-digit to four-digit, and now back to a few hundred dollars per Bitcoin. It’s lacking in maturity. The big contribution from Bitcoin is that people are thinking about, what is real money? And it’s interesting, because people will say, well, it’s a lot like gold, except it’s sort of for the modern digital era.

Mike: Not tangible.

David: But I think that fact that gold is even referenced … but you’re right, it’s not tangible. It would take us back to an era, maybe before we had Federal Reserve notes, where we had individual banks created their own currency and circulated their own currency. That’s the way it was in the 1700s here in the United States. You would get a currency issued by your local bank. Because there is nothing stopping me from starting Bitcoin-II, and you starting Bitcoin-III and we would compete with the original Bitcoin, and now it’s sort of a free-for-all for market share. Yes, there is a limitation in terms of how many can be produced. But again, that, I think, fails on several fronts. Number one, the reason I would not put money into Bitcoin, never have, and probably never will, is that when I’m looking for something that is a store of value, that tangible nature is something that is really important. No one thinks is terms of Cold War threats or EMP blasts or things that would take down an electricity grid, but how do you transact business with Bitcoin when you have no electricity?

Mike: Right.

David: When you’re going to the grocery store on your bicycle because your car electronics are fried. I don’t live in that world of threat, but nonetheless, I like the tangible nature of gold. It’s scarce, and that’s why we’ve reverted to it for 5,000 years.

Mike: We’ve talked a lot about banks this morning, Dave. You told me before that you feel banks have strayed from their original purpose, that public policy has a lot to do with why that has happened. You say there is more systemic risk in the system right now than there was in 2007. You touched on that a little bit, but can you kind of expand on that?

David: Sure. The original purpose of a bank was to keep a deposit, and keep it safe. Depositors put their money in the bank, and they didn’t want that money to disappear. So I walked into our local bank, Alpine Bank, with my son the other day, and he’s been raising some cattle. He is 8 years old, not quite a cattle baron, probably still more hat than cattle, but he has some aspirations. He sold a cow last year for about 650 bucks, and put it with Alpine Bank. And we walked into the lobby and he said, “This is where my money is.” And I said, “Well, technically, that’s not true. Your money is not here.” And he looked at me like, “What do you mean, where is it?” And he has a strong sort of justice bent in him, and he was like, “Well, then, is it gone? Who stole it? Where is it?” He wants to unpack this. And I said, “No, no, no, no. They can get it for you, but they’re making money with your money, and they’re making as much money as they possibly can with your money, and then they’re going to give you just a little bit of it.” And he looked at me like, “That’s not really fair.”

Mike: Well, he’s 8.

David: He’s 8, but I think he might be on to something.

Mike: I think he is.

David: Well, it’s interesting, 1834 to 1916, Hetty Green inherited quite a bit of money. She inherited about 6 million dollars, turned it into 100 million, investing in stocks, investing in real estate, investing in bonds – very famous in that era. She put her money with Chemical Bank, which used to be called Old Bullion. You actually paid money to keep your money at Chemical. They didn’t pay you any interest. They did their job, which was, “I’m going to keep your money safe, and you’re going to pay me to keep your money safe. And when you want your money, we’ll give you your money, because it’s here, and you never have to worry about a bank run, because we can’t run out of money that we haven’t lent. It’s all here. So if you want it in the form of gold, great. If you want it in the form of greenbacks, good. We have it for you.” And so Chemical Bank, which ultimately was subsumed under Chase, and then absorbed by J.P. Morgan Chase, the banking practices of J.P. Morgan and their penchant, or thoughts, on gold, certainly migrated. They’ve changed. They are not the old Chemical Bank. They are not the Old Bullion, as it were.

Where have we come from? Where are we today? We treat banks, and extend them a lot of trust, and I don’t know that it’s necessarily warranted. That’s not to say that we are going to see complete collapse in the banking system. But you know, you look at how much money they are required to keep on hand, reserves of 6%. That’s a lot of leverage. That’s a thin margin for error. That’s a thin margin for people who want their money back, like Declan, and people who are happy keeping it in play. And you know, sort of borrowing short, lending long, that mismatch, there is a tension there in the banking system and they’ve managed that tension very well, partially because they’ve managed perceptions of stability, partially because the FDIC has convinced the vast majority of Americans that their deposits are completely safe. And I think this is one of the reasons why we see the Fed backing up the truck and spending trillions of dollars to keep this game going, because in fact, in 2008 and 2009, the wheels did come off in the banking system, and we saw how razor thin the degree of protection is between the depositor and the banking system as a whole. So we’ve got to keep that intact. And I can appreciate, on a pragmatic basis, why they are doing what they’re doing. I’ve encouraged my son to explore other options, and he was very open to them once learning that his money wasn’t actually in the bank.

Mike: (laughter) I like this conversation and this theme about tangible. Let’s talk about real estate for just a moment, because you argue that is more about paper than the actual land or housing, itself. You say it’s driven by interest rates. Talk about real estate in the context of the paper economy, David.

David: Well, and as we mentioned earlier, the mortgage-backed securities market last year was bought 100% by the Fed. And so what does that mean, exactly? It means that when you are refinancing your home, or buying a new home, that mortgage paper has to go somewhere, someone has to buy it. The bank is not keeping it anymore. The bank is not lending their money, or the depositor’s money, anymore. They’re originating a loan, passing it on down. That loan is being securitized, which is to say, bundled with a basket of other loans and sold off to an investor so that they can derive some of that income stream personally.

So the paper market is very, very relevant to the real estate market, and the cost of capital is very, very relevant to the paper market. If you can drive down the cost of capital, you can continue to feed the paper market, and continue to feed interest in the real estate market thereby. When you lose control of interest rates, I think you have a very, very strong argument for lower home prices, and I don’t know when or if that happens, but you look at where we are today, a 30-year fixed rate mortgage of under 4.25, maybe 4.22 percent, and that is, historically, very low. I think there would be a number of people in this room who would say they remember 12, 13, 14, 15% mortgages.

So, when you think of the bond market, and you know that it’s like a see-saw, and you have interest rates on one side and bond prices on the other, so low interest rates equals very high bond prices, and vice-versa. High interest rates equal very low bond prices. And the same is true of real estate. What was it like when you were buying a home and the mortgage rates were 10, 12, 13%? The house was a lot cheaper. That’s the issue. Again, we’ve gotten ourselves into this issue. One of the first things we were talking about today was debt, and our dependence on debt. We’ve gotten ourselves in a position where to keep this game going, to keep interest in housing moving forward, at this point we have to keep rates low. So what is the consequence of buying down mortgage rates? They’re not doing it with money that hitherto existed. They are creating it ex nihilo, out of nothing. Printing it, or digitally creating it, and applying it to the purchase.

So 100% last year, as Richard Fisher says, 40% of the aggregate mortgages will be owned by the Fed, it seems to me that the paper side of the real estate market is now the dominant side of the real estate market, and you look at real estate and you say, well, no, it’s a tangible asset. I want to own the real things. It is a real thing, so in that regard, you have something that may not go to zero. I suppose if you’re in Detroit, it may be a little bit different.

Mike: Slightly (laughter).

David: Five dollars. There are some interesting very low strike prices for a home in real estate. But all that to say, your value can be affected by interest rates more than you know. And by the flow coming into the securitized mortgage-backed securities market. That flow is being guarded and protected by the Fed because they prize stability. I don’t blame them for prizing stability! It’s just important for you and me to see how vulnerable the financial system is, and frankly, how vulnerable the real estate market is, and directly tied to the financial system in that way.

Mike: I want to remind you that a lot of the contact information is in the materials you have in front of you at your spot. Dave has some slots, tomorrow, I think for private consultations or personal consultations, so talk to the good folks here at the McAlvany team at the table, and feel free to book the slot. If you can’t get in tomorrow, certainly, contact the office again. All the contact information is in front of you. Before we open up the floor for questions, what have we missed today? Is there anything that you want to focus on that I haven’t asked you about?

David: Why don’t we open it up and see what we have missed, according to…

Mike: Because they’ll know, this group will know. Feel free to walk up to the microphone, any questions you may have, just go right ahead.

Questioner: You know, you’re talking about keeping interest rates low. That also determines what we pay other nations for financing our party here. So what are the implications of, when are they going to get tired of getting such low returns and shut the party off, and not buy our bonds anymore? What are the implications of that, and do you have any timeframe? I know it’s already happening. They’re already getting out of the dollar. What do you think are the implications?

David: There are two things: Number one, interest rates being low isn’t necessarily a discouragement from our foreign creditors. We tend to look at low rates and say, “Low rates. Why would you put money in something that’s not giving you any return?” And maybe risk gets factored into that. If we’re taking risk, and we’re not being compensated, why would do that? I think some of our foreign creditors will buy our bonds for different reasons. Number one, they like the fact that treasuries offer them liquidity. The return is less important than having something that is very deep, and they know that if they ever need to sell it, they can sell it. There are a lot of other asset classes that are sort of like a six-lane freeway coming in, and like a goat trail going out. You can put lots of money in, but the day that you want to get money out, you can’t. And so, people like treasuries because of their liquidity, not just because of their return. One of the factors that I think does bear directly on what you are saying is that when you combine a low rate of return and a creeping rate of inflation, now it’s not just a question of settling for something that looks meager, it’s taking losses, and now there is a threshold. What are we willing to lose just to maintain liquidity? Because if they bought it for liquidity purposes, they may prize the liquidity motive, right? But if they lose 2%, you may have their attention. If they are losing 10% a year via inflation, what is the threshold? Somewhere between 2 and 10 there is a threshold, and when you cross it, in terms of a negative rate of return, negative real rate of return, our foreign creditors do begin to look at other options. And it doesn’t mean that they necessarily have to dump our treasuries. It may mean that they are not buying as many as they used to. And that’s one of the reasons why the Fed has had to step up with QE-III and buy quite a few bonds.

Questioner: I do have a question. It’s a tough question, I think. I’d like to know the answer. I’m one of those devoted, fanatical, religious people that seeks after truth – biblical, financial, and economic truth, and you’re the one I use for, basically, financial truth. And you’re very reliable, that’s what I would recommend to everybody here. I learned some hard lessons in the 1980s. I bought some food from you guys, so I knew your dad, and got involved with the McAlvany organization back in 1979, really. I would recommendation this organization – I dealt with a lot of mavericks out there, a lot of Premexes, and things that went bankrupt, and learned some really hard lessons through my own just being an individual, not listening to a counselor, not listening to somebody that really understands how the markets work. So I made a lot of mistakes. But that’s not what I came up here for. I have one question. There have been articles written about the manipulation, the rigging of the gold and silver markets by the central banks, in conjunction with the bullion banks, the IMF, and the BSI, and the LBMA. How are we, the small investors, able to win with our investments when they must suppress gold and silver, real money, to have the masses trust in the fiat money, and when do you think the rigging will come to an end?

Mike: Good question. When is the rigging going to end?

David: There are a couple of things. The price of any asset can be manipulated. The question is, for how long? And it takes capital to move prices, so in larger markets it takes more money, in smaller markets it takes less money. Easier to drive the price of silver down than the price of gold, because gold is a larger market. Even with that being said, you will find that the trades which are suspicious over the last several years had to be orchestrated in areas of the market – gold trades almost 24 hours a day, and it’s usually in the transitions from one market to the next, and it’s usually in the areas of the world where volumes are fairly low. So low volume, a little bit of money coming in to a low-volume market creates a bigger impact. So you haven’t seen the same manipulations in the New York market. You haven’t seen the same manipulations in the London market, in part, because the volumes are much higher there. That’s a part of it, even the size – the gold market is vulnerable. Think about that. It is vulnerable. But even with that vulnerability, they’re having to pick and choose very specific timeframes. And I think it’s very important to look at the progress over the last several years. We’ve had the LIBOR scandal, we’ve had FX scandals, and now we have a number of banks that are being looked at for manipulation of the gold market. This is all public, and this is being driven by regulators now, not groups like the World Gold Council, or GATA, or what have you.

So I think what we have is, the folks who have benefited, to some degree you’ll recognize them, but they’re going to get their hands slapped if they do it again. If you can get away with the manipulation, get away with it. But if you can no longer get away with it, if the game has changed, then that begins to go away as an option. Barclay’s has just left the commodities space, Deutsche bank is largely getting out of the business, and part of it is because they are dealing with greater regulatory scrutiny than ever before. And so, what they could benefit, versus what it costs them, plus the potential regulatory penalties, which could be, as with LIBOR, into the billions – it’s not worth it anymore.

So I think the market is maturing in that regard, and the manipulations, even, that we saw in the 1970s were more powerful early on in the cycle, and less powerful as time went on, as people wised up, as the orchestration became harder and harder.

Questioner: Can I have a follow-up question? Real short one. J.P. Morgan and Goldman-Sachs continue to pay fines in the billions of dollars. What can we, the people, do to see that the real justice is implemented, no longer a slap on the hands, as you mentioned, and a back to business as usual. What I want to know is, what can we do to stop this Goldman-Sachs getting fined and then they are back in business?

David: It’s been good today, I think, to have a little bit of an historical context. We talked about the first and second central banks of the country being shut down because there was a lot of chicanery, and people started putting two and two together. The same thing happened in 1929. With the stock market coming to pieces, people started to say, “Hey wait a minute, was everything done right? Were the relationships in the banking community wholesome?” That was the question being asked, and so by the early 1930s they came up with legislation to make sure that there was a more even playing field. Glass-Steagall was very important for them. In 1999, under the direction of Robert Rubin, we had Glass-Steagall repealed. You could look at, and I don’t think it is without coincidence, we’re in the third bubble phase in a 15-year period. This will be the greatest concentration of major financial bubbles in any historical period in U.S. history, and the fact that it comes post-the repeal of Glass-Steagall, I don’t think is an accident. There was accountability with Glass-Steagall. There was a separation between your investment banking and your commercial banking functions, and it kept people pretty honest. They couldn’t package the garbage and then sell it to their clients, knowing full well what was in it. It appears that financial companies did not have their clients’ best interests in mind. They would create a package, sell it to their client, know how bad it was, and benefit from selling short. And as that asset went down in value, not only did they collect a fee for selling it retail, but the house benefits from the decline in price. None of that was possible with Glass-Steagall in place. It’s real simple. Why not re-implement it? Re-implement Glass-Steagall. It brings accountability to it. We don’t need new legislation. We just need to enforce the good legislation that we had, and have had, on the books. Dodd-Frank, and a number of things that are being put through as necessary today, I don’t think are necessary, and I don’t think they do anything to eliminate systemic risk.

Questioner: One of your guests on the podcasts indicated we should always have some cash, as well as gold and other assets. If it is fiat in nature, where do we keep it where it where it is safe? But then, if it’s not safe, like Greece, are we going to have a Greece situation? And, secondly, if we have gold, are we going to have a 1933 all over again downstream? Two types of confiscation.

David: So, you have the bail-in concept, if you pile away your cash in a local bank, that has been a stated concern. We’ve had a number of questions come to us, like with Cypress, do you somehow become a bank-owner by default, 10% of your deposits are being translated into bank equity instead of just cash. I think one thing that is interesting about the idea of cash confiscation is that we already have it and this goes back to your earlier question of, what is the rate of inflation? We have the equivalent of a bail-in. Maybe it’s only 2%, but we have 2% bail-in per year, that takes us five years to duplicate exactly what happened in Cypress, only we don’t have any equity ownership. We just lost out via the inflation tax. If inflation is, in fact, 4, 6, or 8%, then we have something that is on par with Cypress every year. It feels ominous to have the government taking your stuff. The government is already doing it. They’re already doing it. This is the challenge, again, of perception. We feel like everything is happy-go-lucky, we live in a perfectly healthy world. If they’re lying about the inflation statistic, then they have found a way to rob you, and keep a smile on your face. So, that’s a part of the issue, the challenge, Tom, with keeping cash. It’s an institutional challenge. Anyone in this room can call our office anytime and subscribe to a service that looks at the stability of banks all across the country. Or if you want an A rating, a B rating, a C rating, whatever your expectation is, you want the best quality bank, how safe is your bank? You can look at that.

Mike: And that’s real valuable, that bank rating aspect. A lot of people are doing that now, and it’s in the packet there.

David: Just call our office and we can tell you how your bank is rated. That covers a part of the risk. It doesn’t cover what happens if the dollar is continually devaluated. You have enough of an offset if you own precious metals. Just very simple math, Jim Rickards wrote, in his most recent book, The Death of Money, he said, “Look at gold as insurance.” Well, that has a familiar ring to it. (laughter) He said, if you had 20% of your liquid assets in gold, that covers 100% of your assets, in terms of [unclear]. He is assuming that gold goes up 5-fold in the context of an outright inflation. Something like a 30, 40, 50% decline in the value of the dollar, he thinks gold could go up 5-fold. So a 20% allocation to gold covers 100% of your currency risk. Again, creating that offset, you don’t have to over-allocate to gold to be safe. You just have to adequately allocate. That’s important.

On the confiscation side, there was a unique set of elements in 1933 that led to the confiscation. The main thing that the government wanted to do was wrap their arms around the money supply. What was 1933? Again, think of the financial context that you are in – banking catastrophe, stock market crash, and John Maynard Keynes, as we talked about, was already winning the popularity contest amongst politicians and financiers. Print more money, was the solution. Print more money. And they couldn’t print more money because they were limited by the relationship between gold and the dollar. So by confiscating gold, essentially, what they did is orchestrate a 65% devaluation of the U.S. dollar, while at the same time creating a two-tier currency system where it was illegal to own gold in the United States, but could be settled for international transactions with our creditors overseas. So we didn’t want to create a panic from the dollar in the international markets. So it’s not like gold went away, in terms of its relationship to the dollar. It did. But domestically, we experienced a 65% devaluation.

My point is this, Tom. They wanted their arms around the money supply. It accomplished that. They already have their arms around the money supply. So it would have to be on a very different basis if they confiscated gold today. Now, we can think of a number of reasons why they might confiscate today, but they would, in fact, be different than what happened in 1933. For instance, what have we seen government do in response to oil going above $100 a barrel? When we got into $120-$130 a barrel, all of a sudden the talk amongst the Washington guys and gals was – windfall profit tax. At $2,000 an ounce, still, nobody cares, it’s such a small part of the financial universe, nobody really cares. At $3,000, $4,000, or $5,000 dollars an ounce, all of a sudden there are revenues to be generated, and the question is, how much can you generate from revenues. You already have gold penalized at a 28% tax rate compared to the long-term, short-term cap gain distinction with any other asset class. In the tax code it’s treated as a collectible and there is no distinction between long-term and short-term cap gains.

So, we’ve already seen one penalty applied. Why couldn’t they turn 28% to 50%? Or 28% to 75%? So if you want to keep more, or if you want to discourage ownership with the stroke of a pen, take more in terms of capital gains and put the onus on you to accurately report your taxes every year. So the penalty shifts, they don’t have to worry about the logistics of confiscating gold, they get to capture a larger slice of the pie, but what they don’t realize is that when government asks for too much, you end up creating a new market called the black market. And that’s just a question of the difference between guys who have studied a lot, and guys who have spent a little bit of time on the street. And we should have folks who have studied a lot spend a little bit more time on the street. And you see this happen – right now, we saw tax increase on the imports, gold coming into India. Premiums on Indian gold are about $100 an ounce. It has fluctuated, it has been as high as $200 and as low as $10. But to the degree that taxes are increased, what we basically saw was official sector buying and official imports into India decline, and trade between Dubai and Pakistan increased, with folks packing gold on camels and horses and anything else they could get their hands on, and importing it, smuggling it through Pakistan and into India. So, you can push, but you can only push so far, and I think this is what most politicians and most bureaucrats don’t understand, that at the end of the day you have a line. We had a line when we threw the tea into the water. Right? They found a line. Tax our tea? What? No. I don’t drink much tea, wouldn’t be a big issue for me, but we all have a line in the sand, and I think that’s where, looking at those two issues – cash in hand, yes, have some in hand, 3-6 months in hand, yes, at an institution that is safe, but don’t exceed the FDIC insurance limit. You know that doesn’t mean anything anyway, but it’s still just at a practical level, doesn’t make sense.

And confiscation? I’m not really concerned about confiscation. I am concerned about a raise in the tax rate, which forces me to do two things. When I’m buying metals, I want to buy metals inside a tax-deferred structure, and I want to buy metals outside of a tax-deferred structure, so that you accomplish two things. As and when it comes time to sell gold at higher prices, you can do it in a tax-advantaged way, in a retirement account, a 401k, in an annuity structure, not a U.S. annuity, they are far too plain vanilla here. But a tax-deferred structure is one way of protecting yourself against an increase in the capital gains tax rate on gold, if that should ever occur – if, that should ever occur. And what you’ve done in taking possession of physical gold is, you’ve basically earmarked that as an intergenerational asset. It gets a step up in cost basis when you’re done. You don’t have to worry about the capital gains tax rate if you’re holding onto it, and passing it on. So create the flexibility in your own portfolio of liquidating and moving onto greener pastures, on the one hand, it takes IRA assets to do that, and on the other hand, having assets that you plan on keeping intergenerationally, and you’re not concerned about the capital gains tax rate. Now, that stuff, let’s say there is a confiscation like 1933, just taking the worst-case scenario. The curious thing is that in 1933 only about 10% of the gold outstanding was handed in. So you get a different picture in terms of the American spirit. The rules changed and Joe and Suzy Lunchbox basically said, “Dear Uncle Sam. Go pound sand. Signed, Yours Truly, Joe and Suzy Lunchbox.” So you don’t always get compliance. And that was with a ten-year jail sentence and a ten-thousand dollar fine hanging over their heads. Right? So 10% of the outstanding gold came in with that being the case. You have some moral choices, ethical choices, however you want to frame them, if that is the case. Low probability. I prefer to look at things that you can control, and those are X factors that aren’t necessarily determinable at this point. What you can control is how you allocate assets and how you use the resources that you have. Retirement assets are a great way to offset what is a higher probability risk.

Questioner: I’m wondering what your projections are for the price of gold over the next few months and years.

David: Interestingly, my colleague, Kevin Orrick, just this last week on our weekly commentary, we were talking about his trip to Los Alamos. They have a supercomputer down there that is trying to determine the weather, and it can determine the weather fairly accurately if the timeframe is years ahead, because there is some cyclicality to it and they can do pattern studies, and what not, and they can tell you what the weather is going to be tomorrow, basically, by looking at it from a satellite, where it is halfway around the world, and where it is going to be the next day. But as you move into the interim phase, two weeks, three weeks, four weeks, the best supercomputer from the folks that brought to you the atom bomb, and maybe some other productive technologies along the way, you can’t determine it.

When you look at gold and silver, I think it’s important to apply patience to the equation, and actually hope that it never goes up, because as and when it does go up, there are far more problems that come with it. It is an indication, it’s a barometer of change in the financial system, it’s a barometer of change in the political system, and these things are sort of in the line of, be careful what you wish for. We may, as owners of gold, fancy the idea of $5,000 or $10,000 gold. What comes with that? Kevin and I were talking about it. He comes from a very musical family, and we were reflecting on Weimar, Germany the other day, and the fact that what happened between 1919 and 1924 is that a lot of the families let go one of their prize possessions. They sold their piano, which was the mark of an educated family. It was the mark of a well-established family. When you went into society, you went as a polished person who probably knew another language, played the piano. This was just a part of a sort of cultural integrity. And so it was very significant to go to a farmhouse and find two or three grand pianos, because the well-established city family was trading their piano for a little chicken scratch, a little something to eat, and literally giving away something that had defined cultural status.

The circumstances that bring higher gold prices come at a very grave cost, not something that we’re too interested in seeing. I’m going to get, June, as precisely as I can to your question, which is to say, the dollar sits on a cusp at 79, compared to the euro index. It has bounced off that level five times. It continues to get down to 79 and bounce considerably, so considerably that, to me, it looks like intervention. To see, in the last three days, the dollar up, basically, 0.8, it was, basically, 7.06, and we’re now at about 7.86. Those are huge moves in the dollar index in about a three-day period. We’ve gotten down to that level, I think, because you have a good number of people, here in the United States, and around the world, who see the problems for what they are, and they want out of dollar assets. The dollar continues to languish at a fairly low level. If we break 79, let’s just put that as the condition, if we break 79, there’s no reason we can’t see $2,000 an ounce by the end of the year. If we don’t break 79, there’s really no reason for it to go anywhere. Not this year. In which case, I think 2015 ends up being a year with some fireworks in the metals.

We’ve said, starting in about 2007-2008 that we thought the ultimate projection for gold would be about $5,000 an ounce. You take its inflation-adjusted value and double it to an unsustainable level. It won’t be a level that we think will hold, but we think we could get to an inflation-adjusted value, economically justifiable, and double it from there. That’s sort of your maximum stretch. That assumes strong, or high, levels of inflation, but not super-inflation or hyper-inflation. Super-inflation or hyper-inflation, you start redefining what anything is. An ounce of silver in Weimar, Germany sold for billions of marks. What’s the significance? All that is, is sort of the death march of the currency. It’s just telling you about the demise of the currency. So we’re assuming 30-40% in terms of dollar decline over the next 3-5 years, and with a 30-40% decline in the value of the dollar, we think we could see gold 3-5 times higher.

Questioner: Hi, my name is Sharon, and I want to start with a comment. David, I feel so grateful to you and to your father, not only for your being here today, but for everything that I’ve learned from you over the course of 7 or 8 years. I’ve been a McAlvany client since 2005, I think. I first bought gold at $500. So, if it hadn’t been for you guys I’d be totally in the dark, as far as the way things are going in the world, so I just want to take this opportunity to express my gratitude. Thank you so much.

David: Thanks, Sharon, I appreciate that.

Questioner: So, at the risk of kind of sounding maybe paranoid or very suspicious of my government, what is the real purpose of the Fed buying mortgage-backed securities? On some level it almost seems like, to me, anyway, if the wheels come off, there’s going to be this massive land grab, and who knows what happens beyond that. Could you maybe speculate for me what is the real purpose behind this?

David: So the obvious purposes would be stability within the mortgage market, within the real estate market. The guys at the Fed look at how significant real estate is to the overall economy, how effective home ownership is in terms of locking people in to spending money. Things break, you have to fix it. If you don’t own it, you don’t fix it. If you’re a renter, isn’t that interesting? It’s not your problem. But as a homeowner, there’s this sort of life cycle. We just had to replace a dishwasher. We only had it for three years. It drives me crazy. But it would have driven me more crazy to do the dishes by hand, so we bought one, right? That’s the curse of the homeowner. What’s great for the economy is that it forces consumption. Home ownership forces consumption in a way that … renting is just a very different system altogether. So, looking at stability in the economy, that’s certainly a part of it, creating normalcy in the interest rate market, where people can still afford to finance homes. The most recent numbers were a little awkward. For March, I think those were the most recent numbers, home ownership refinance applications were down 74%, new home purchases, again, mortgage applications, down 21%. And that’s with interest rates not really going anywhere. They continue to buy mortgage bonds to drive the price down, and keep people interested.

We had a great friend who just recently bought a house, and they bought the house for one reason. They were afraid interest rates were going to go up any higher and they would be priced out of the market. They looked at what they make – and this is never how you should buy an asset, on the basis of cash flow – they looked at what they make, and they knew what they could afford on the percentage that they were going to spend on the mortgage. And they knew if interest rates went up another half percent, or any higher than that, that they would be out of the real estate market. So it stimulated a purchase. And if it had been lower, they would have taken that, too, but that, I think, is the obvious part. It’s a little disconcerting. And maybe there is a concentration of ownership which is concerning. I don’t know what you can do with it. As long as people stay current on their mortgages, what happens? I don’t know.

Let’s play this out a little bit. Sharon, let’s say you have $200,000 in debt on your house, and you think that inflation is going to be your friend. You’re not going to pay it off right away, knowing that over the next ten years, even at a low of 3-4% rate of inflation, you’re going to pay it off with cheaper dollars. But let’s say we get into a position where the government owns 40%, as Richard Fisher has suggested, of the mortgage-backed securities market. They hold the paper. Let’s assume that inflation rates are 20% a year, and it’s to your advantage, big-time. Your strategy is now working. You get to pay off the debt with very, very inexpensive dollars. But, what if they index the debt? Not unprecedented. And instead of $200,000 in debt, or whatever you owe on it at that point in time, they do the inflation calculation and say, actually, you owe a million dollars. And because of inflation, you owe the original amount. All’s fair. You owe the original amount. Currency is worth less, makes your mortgage worth more, in terms of your nominal obligation. Now how do you feel about it? Does it feel like the borrower has just become servant to the lender? And have your wages kept up in such a way that you have any way of ever paying off the debt? To me, it looks like you’ve just moved toward permanent serfdom. If you wanted to put it in terms of, again, servant to the lender, there is no way out. You are a controlled person at that point, and I don’t know if that is an intended outcome, or just an accidental outcome, but politicians, as we have heard from Rahm Emmanuel, never want to let a crisis go to waste. And if the crisis creates an opportunity for them, consolidation of power is always of interest in statecraft.

Questioner: My name is Ron. I have a question about how much gold we really have. We see that Russia is accumulating, China is accumulating. Ron Paul has been asking for an audit of Fort Knox, how much gold is really there, has it all been leased out, are we ever going to get it back? When Germany tried to pull out their gold, they said, well, we’ll give it to you over a period of time, and I think that implies we didn’t have it at the time to give to them. Other foreign countries are now asking, also, to retrieve their gold, so can you give me kind of a feeling of where the gold is, do we have much of it left, or is it all gone?

David: Ron, it is interesting, and I’ll sort of dip my toe in the conspiratorial waters here and there. This is one of the points where I do dip my toe in. The volatility that we saw in gold, the major hits that it took over the last 2-3 years, if you look at the calendar, when Venezuela requested their gold, when Germany requested their gold, you are talking about within weeks of those requests being made, that gold just gets blistered. Hundreds of dollars down in just a few days, downside volatility that gold had never seen before. Coincidental? Maybe.

Questioner: Not likely.

David: We’ll never know. We’ll never know. But when it comes to the gold that has been requested, Venezuela requested it from London and got it in fairly short order, Germany requested it from the U.S. and the Fed, and they were put on a 7-year logistics program. If there is anybody in the room that would like to buy a billion dollars’ worth of gold, or 10 billion dollars’ worth of gold, I can have it delivered to you, anywhere you want in the world, within about 7 days, and I’ll take that order, if you’d like to place it. (laughter) Germany is just wanting their gold back, and they’re saying that logistics preclude them from delivering it, except over a 7-year period. I don’t know what smells, I don’t know what it smells like, but there’s something not quite right there. In addition, the gold that they have received so far from the Fed is all recast bars. In other words, they were just cast. And maybe it’s unimportant, in terms of product in, product out, we give you our gold, we want our gold back. I know that this deal that we are doing in Europe, 200 million dollars in old fractional European coins, it is very, very relevant that what was put in is now coming out, and it’s the old stuff, it’s not the new stuff, you see. So the fact that they are sending new stuff, I think, frankly, what they have done, and I have no way of proving this, I think what they have done is, they’ve taken their gold and a lot of gold which has been stored with them for safe-keeping…

Questioner: You’re talking about the Fed.

David: The Fed, yes. And I think they have created an income stream from it through various leasing programs. It helps suppress the price of gold, and it also creates an income stream on what, for them, is otherwise a dead asset on the balance sheet. The fact that the gold that they have, whatever is there, is encumbered, now creates a bit of an issue. When someone wants gold that is already encumbered, which gold do you send? And I think the fact that they sent new bars, the narrative, as history discovers in the future, may be that there was just a question of robbing Peter to pay Paul.

Questioner: I’ve been listening to your commentary for probably over ten years, and especially since 2008 I’ve learned from you that you said every financial crisis turns into an economic crisis, and then that economic crisis turns into a geopolitical crisis, and so where that ends up, a lot of times, is war. And we see what is going on in Russia and other places in the world. How do you see that playing out, as far as the geopolitical nature? Are we moving toward war, or how do you see that playing out?

David: Thanks, Troy. I think it’s probably more 2-3 years out before I’m really concerned, because we’re still at a place where most people don’t appreciate that we have problems. They are still of the belief that what they’ve been told is true, is accurate, that the economy has recovered, the dollar is on a stable footing, that our U.S. debts are manageable, and that the powers that be have it all well in hand. Most people are content with that. The only reason that we would sort of create a real fuss somewhere else is if we are shifting blame. And I don’t think we’ve gotten far enough along in a real political crisis for politicians to start blaming someone else. So, in terms of sort of the domino effect, I think you would need to see re-emergent concern about the economy and the financial system, and people’s growing sensitivity to inflation being voiced, and when politicians can’t work around that, and are about to have the finger pointed at them, that’s when I think you begin to see blame shifted someplace else.

If you want an interesting book to read, The Fourth Turning by Neil Strauss and William Howe, they do a great job in saying that this happens to us about every 100-120 years, and there is either a sort of a domestic blame-game, where you can choose somebody in the population to take the hit. Maybe it’s the 1%. Maybe the 1% are to blame for all our problems. And so, politically, if you can spin it on a domestic basis, it doesn’t have as much cost, and you are more in control of the outcome, because it’s a very small group of people. What if we did what they did in the 18th century in France, and the heads started to roll, and it was the nobility’s fault? And if you look at the assignat and the decline in the value of the assignat over about a 6-year period, right smack dab in the middle about a 50% depreciation happened in three years, and then the rest happened in the next three years, and the heads started to roll right in the middle of it, and it was a pretty easy game to play. It’s the nobles! It’s the nobles! So that blame game could be played, and you could end up with real divisive politics. And we are already, I think, beginning to see something of a polarization in U.S. domestic politics. If that doesn’t work or can’t work, then, then, you could see sort of an international blame-shifting. And maybe it’s the Chinese, because they’re manipulating their currency, and now we’ve got a flashpoint. Perhaps it’s with Taiwan, or perhaps it’s with Vietnam, or perhaps it’s with the Japanese, and we have to intervene, and that’s why we’re spending lots of money now, and they have a new excuse to run the printing press and sort of create a sense of, that’s normal and acceptable behavior. They get a free pass because of the international conflict. All eyes are on the international conflict instead of the levers that they are pulling domestically, when it comes to our economy or our money supply,

So, Troy, I’m not too concerned right now. I mean, anything can spin out of control. We could end up kicking a hornet’s nest a little too hard with Mr. Putin. We could. And I know what his response will be. It’s the eighth-largest economy. We’re treating him like he’s Syria. We’re treating him like we can devalue the ruble and get what we want. And I think he plays a pretty deep game. If he wants to damage our relationship with Europeans, he can. If he wants to destroy Europe, he can. The warfare that we face over the next 3, 5, 7 years, is not the old tanks and bombs and guns. It’s cyber. It’s economic and financial. It’s through currencies. It’s in the debt markets. And all of these things can be done quietly, but with very dramatic impact. We’ve been doing it to other countries. We did this to Iran last year, we created 100% inflation. We did. Our state department created 100% inflation in Iran, the same year we created 66% inflation in Syria. We did. We orchestrated it. So, when you look at pushback, and you look at the potential for international conflict, listen, we’re in a very interesting world. Don’t look for your normal warfare to be the warfare of the future. It could be there, but I think the far more dangerous is the stuff that can be channeled through capital, and through computers.

So I would encourage you to read both of Rickards’ books, Currency Wars, and The Death of Money. Both of those, I think, are instructive. But listen, I want to thank you for your questions, thank you for your attention.

Mike: Is that terrific, or what? David McAlvany. (applause)

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