In PodCasts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“There are opportunities which, in the next few years, I think will present themselves as once in a generation, perhaps even once in a thousand year-type opportunities, and I think you will be the kind of person that is there to take advantage of them. To me, the route to that end is investing in that strange little asset class that I would call curiosity.”

– David McAlvany

Kevin: As promised, the continuation of Our Listeners’ Questions Answered, Dave. We did two programs, but we got such a response when we asked for the questions, we really needed this third program.

David: I’m looking at a stack that is almost overwhelming. We will dive right into the questions and see if we can’t get them all answered by the end of today’s session.

Kevin: Why don’t we go ahead and start with a question that we heard in the first two programs, but I think it’s worth discussing again. This was from Jenny:

The markets are manipulated. Do you see the end to the manipulation on gold?

David: Yes, she says GATA has shown that precious metals prices are suppressed through regular manipulation, their proof is fully developed, and the following three articles found on the website, under the left-hand sidebar, known as The Basics. The question is, do you see any end to this manipulation, or will gold always be suppressed by the world’s central banks working through compliant governments? And I think you will ultimately see market muscle overwhelm at some point. So, the market trumping central bank activity – that, I think, is certainly a possibility and a future reality. I don’t think we are going to see an end to the manipulation as long as there is a context that enables very little pressure to be put on the gold price for a very large impact.

And what I mean by that is this. The backdrop is confidence in the Fed. As long as the general perception is that the Fed, the ECB, the Bank of Japan, other world central banks, are able to float the world higher and move asset prices infinitely higher, without also running significant rates of inflation, then the investment community is going to ask themselves the question, “Why own gold?” That skepticism, in and of itself, is the context for a manipulator to come in and say, “That’s right. You shouldn’t, you don’t need it.”

And what it means is that there is an inherent vulnerability in the gold price, because again, you have skepticism from the investment community that is equals a weak-natured spirit, if you will, in the investment environment, and it means that anyone who wants to press the market any which way they want, it is much easier to do so.

Kevin: And Dave, this does remind me of the end of the movie The Sting, with Robert Redford, Paul Newman. It was all about con game, it was very, very convincing, but everything changed very dramatically when that con broke at the end. The con game with the Federal Reserve is that they can just continue to print money, leave interest rates very, very low, even with this quarter-point rise that we have seen, and until that confidence breaks it will continue, but boy, when it breaks, everything happens very quickly.

David: And I’ll tell you what. I think that the real significance of the 25 basis point move and the suggestion that they can raise rates another 100 points in 2016, I think this is the point where people begin to re-evaluate the commitments they have made financially and ask the question, “Will we see our asset prices continue to float higher on a sea of easy money and easy credit from the world central banks?” Because if the Fed is not going to do this, then our growth thesis is called into question. This means, in my world, that 2016 to 2017 end up being a very compelling time to own gold, and I think you will see a significant rise in the price.

And again, this has to do with confidence in the Fed. So you will see a continued expression of manipulation and it is in an easy environment to do it because there is really nothing fighting – there is no competing volume on the other side of that transaction. If you want to press the price lower, where is the competing volume to press the price higher? The investment community will rally around gold, as and when they see the reasons for thinking that all other asset prices are going to be pushed higher by Fed monetary policy. When that dissipates, then Katy bar the door, gold is going higher.

Kevin: This next question is from David, and it is just logistical. He says:

How do you transport coins across the state without fear of confiscation from police or the Fed?

We have typically used the U.S. Postal Service now, Dave, for 43 years. It seems to work.

David: Yes, I would boil it down to this. We live in an age where you have the incentivization of looting. Sheriff’s departments and police departments here in the United States are incentivized to confiscate your assets and keep them if they can, and try to create a story, create a justification for having done so. So, I would suggest, any time you are transporting large quantities of precious metals, U.S. Postal Service, registered and insured, or pay a Brinks or a Loomis, or what have you, to transport large quantities and high values of metals from point A to point B.

Kevin: Usually we find about half a million to a million dollars’ worth at a time – that’s the only time it really makes sense for a Brinks truck, right? Otherwise, U.S. Postal Service is fine.

David: That’s right. I would rather spend a few hundred dollars to ship assets from the East Coast to the West Coast, as crazy as it seems to not be able to carry that on your person, we live in a very corrupted age. We live in an age where the presumption amongst law enforcement officials is that if you have $10,000 in cash, or $20,000 in metals, or God forbid, half a million dollars in metals, there must be something nefarious going on. And it is up to you to prove that you are not a criminal.

And I know that is not the rule of law, that is not the way our laws are written, but guess what? They are incentivized because their departments get to keep the proceeds, or some percentage of the proceeds. So, I think at this point we have a corruption of the rule of law, and you need to be minding your P’s and Q’s. USPS or ship it secured. You can’t just walk across state lines anymore.

Kevin: So those rules don’t apply just in Paraguay anymore. Oh, I’m sorry, did I bring something up that stings?

David: (laughs)

Kevin: All right, next question. Steve asks a three-part question. I’m going to read the first part, then the second, then the third. Please answer in order.

I particularly enjoy the discussion about geopolitical events on the McAlvany Weekly Commentary. Therefore I’d like to ask you some “what if” questions. For instance, number one. What is the likely outcome if TPP is implemented, as President Obama has indicated?

Dave, we had a program on TPP. We have interviewed people who know more than we do about it. What is your thought?

David: Well, certainly I would suggest that you go back and listen to the interview that we did with Harold James. We talked not only about the TransPacific Partnership, but we also talked about the TransAtlantic Partnership, as well. And there are things that are beneficial and good about the TPP, and also things that are not so beneficial that seem to favor large multinationals at the expense of smaller businesses in terms of their impunity to investigation and accountability. So, I think that interview with Harold James would be most helpful, looking forward to the TPP.

The second part of the question, what is the likely outcome of the U.S. export-imports if China effectively shuts down, either to implied war in the South China Sea, or an effective collapse of manufacturing inside China, or if the yuan is priced out of sight, or any other reason. It is interesting, I think we are in a dependent relationship with the Chinese – they are to us, we are to them. They have continued to buy treasuries, though on a diminished basis, and in certain months they have even liquidated treasuries.

Why do they own those treasuries? They own those treasuries because of our export/import relationship. They are willing to recycle their trade dollar surpluses and basically print money to neutralize the inflationary currency effect of running those trade surpluses, and invest them in treasuries.

Kevin: Dave, I have the same question. Is there a breaking point? We think like westerners. We see these trade relationships, we see these economic symbiotic relationships as the trump for keeping peace. But you have a different mindset oftentimes in countries, especially communist countries, where there can be a breaking point that is different than the economic breaking point. Do you see something possibly occurring in the South China Sea, or something geopolitically?

David: I think we could have a two-tiered relationship that exists in parallel where we are in some small military skirmish with the Chinese while continuing to import goods from China, where there is a strained relationship politically, but business as usual continues on from an import/export perspective. They cannot afford to not export to the United States. They cannot afford to not export to Europe. You would be talking about internal chaos and social/political collapse if that were the case.

When you look at conflict you have to look at it not in terms of a severing of relationship, but in terms of a more aggressive conversation. You can see that some families are more volatile than others, but certainly you can see tones increase and arguments get to the point where you would say, “Gosh, that was really unpleasant.” And yet, relationship is not broken. And I think that is what you could see in the South China Sea where we see a tremendous increase in tension, maybe even a lobbing back and forth of missiles. And you think, well, that’s got to be an indication of the end of relationship. It’s not. From a diplomatic standpoint, every move and counter-move is a response and a rejoinder in an ongoing conversation.

Kevin: Right. And it is interesting how you have different intermediaries – it’s almost like a black market that occurs – if it is not politically correct for two countries to do business with each other. Sometimes it is through different intermediaries, like the sugar wars a few hundred years ago. And I hate to bring it up, but even like the oil that ISIS is selling that seems to be flowing through Turkey.

David: Yes, and could be landing in Japan. The indicators that we have are that it is being sold in Japan. So, the third part of that question is the yuan being priced out of sight. I think that implies the yuan trading up, and not down, and the natural course for the yuan seems to be down and not up. That is what they have allowed to happen is a devaluation of the yuan here in recent months. And a part of that is just them limiting the controls that they have on the currency, and allowing it to go its more natural course. So there is a third part to Steve’s question we haven’t read yet.

Kevin: Yes, the third part of the questions says:

The Fed only has three options, to my understanding – continued ZIRP, which is zero interest rate policy, or NIRP, which is negative interest rate policy, or to raise interest rates. What are the likely geopolitical outcomes of each of the three possibilities?

David: Let’s start with what has occurred already. We have a 25 basis point move higher from the Fed and I think it does raise tensions geopolitically, and it does underscore the rest of the world wanting to move to a less dollar-centric and U.S. foreign policy-centric environment. Why? Because our interest rate policy is immediately transmitted into the rest of the world, so we tighten and it tightens credit globally. And that is not something that is particularly popular, particularly for countries where politicians are already on the ropes.

I think of Dilma Rousseff in Brazil. She is already in crisis, she is already under pressure, and does this do anything to help the real, the dollar strengthening? Absolutely not. It takes a situation from bad to worse. Who does it help? I think it helps the United States, to some small degree, because the interest rate differential between the U.S. treasury and European paper all of a sudden is that much more attractive, so perhaps you could argue that it draws money into the United States. But keep in mind, that sucking sound of money leaving other parts of the world to get to the United States is, for those countries, inherently destabilizing.

Kevin: So, if you impoverish your customers you may feel like raising the price is okay, but if you are impoverishing your customers, they are not going to buy anyway.

David: It means that they are going to be much more skeptical moving forward as to the ties that they have to the U.S. dollar because they see that the flows in can also be the flows out, and those flows out are what are very economically disturbing. And as we know, when you have something that is economically disturbing, it can become politically disturbing, and then it can become geopolitically disturbing.

Kevin: We talked about interest rates rising. Let’s go back now. What if that doesn’t stick, Dave? We’ve seen a quarter of a point rise, but there are those who think that possibly in the next year or two we are going to see, actually, a reversal back down, not just to zero, but possibly to negative interest rates.

David: The intellectual groundwork has already been laid for negative rates, and I think that is the likely outcome over the next 24-36 months – a reversal of course and again, 25 basis points is not even a course. We haven’t made much progress toward normalizing interest rates, getting back to 2 or 3 percent. We are still at 25 basis points, which is barely up off the floor. So, we are still in what you could consider a zero interest rate environment. Look, in real terms, and this is the important thing, when you factor in inflation you have 25 basis points, which represents your current interest rate, but then your inflation rate is better than 1½, nearly 2% – that is the target. But let’s say it is 1½ percent.

Kevin: That’s using the Fed’s numbers.

David: In real terms you are still negative by 1.25%, and then the only discussion is, do they take, instead of real terms being negative, actually take nominal rates negative. That is where, I think, we are going. That is dollar-negative, which quite frankly, offers something of a boost to the emerging markets, and I think would be something of a boon, if you will, to the emerging market political regimes.

Kevin: This next question is an internal question, Dave. There is always this balance between technicians and fundamentalists. Let me read this from Dennis. He says:

I have been listening to the show for several years now, and one of the things that seems most challenging to me is how to balance fundamental analysis, which is the news, with technical analysis, which is the charts. There are those, like Robert Prechter, who teach and espouse Elliot wave theory as the way forward, while others suggest that technical analysis is so much silliness playing with the numbers, fitting theory to the past and extrapolating it to the future. How do you balance these two very different methods of forward thinking without getting stuck in one or two methods that have worked for you in the past?

David: Let me suggest that these two are not adequate. They are helpful at certain points, but fundamental analysis gives you some insight into, let’s call it reality. And then technical analysis gives you some picture of trends, and certainly, trend extrapolation can be helpful, looking backward and suggesting that what has happened in the past, as represented in this “picture” might be duplicated, because quite frankly, what has not changed through time is human nature. So, the suggestion that somehow the picture is repeatable over and over again to some degree, I think that is reasonable.

There is a third category of analysis that trumps both fundamental and technical, and it is liquidity analysis. Liquidity analysis is basically asking the question, how much excess liquidity is flowing into the economy from one or more central banks? And if there is excess liquidity flowing into the global economy, or a particular economy, you are going to see asset price inflation. And it doesn’t matter what the technicals say, it doesn’t matter what the fundamentals say, those become secondary in a period where there is excess liquidity.

When there is deficient liquidity, then you are either resting on the fundamentals of a particular company or a particular economy, in which case, on an absolute basis, you are going to see one economy shine above another. And on a relative basis, as well, you begin to see a comparison between the weak and the strong, but again, it doesn’t really matter if you are a weak economy, a strong economy, a weak company, a strong company, when the liquidity is flowing and it is sufficient to cover over technical trends and fundamental facts.

Kevin: That is fascinating. I would like to do a whole show on that, Dave, sometime if we could, just as a request. I think this is a new angle, a different way of looking at things. I am going to go ahead and go with a message from Robert and Theresa of Mesa, Arizona. They have a question that a lot of people have on their minds. It says:

Greetings. In light of gold going south, what do you see as a good alternative? We are retired. We are looking for a return on our investment? Do you think energy companies would be good, at this time, to invest in? Thank you. We enjoy your show.

David: That is a very good question. One, I think a part of the perception of gold going south is a misperception. And I’m not trying to obscure anything here, it is just to say that the dollar is moving higher as much as gold is moving lower, because if you recall, priced in other currency times, gold is not falling to the same degree, or at all, priced in those currency terms. So, what are we really talking about with the price of gold going down? You can just as easily consider it an increase in the value of the dollar in the short run.

So, if you are saying to yourself, “I think the price of the dollar and the stability of the dollar is something that is assured over the next coming years, decades, and centuries,” then obviously gold has no bearing and no relationship to your financial success in the future – you need to get rid of it. If you think that the dollar, in fact, is on shaky ground, on thin ice, and doesn’t have much of a future – and that’s not to say it doesn’t have a future, but what I am suggesting is 1913 to the present, for instance. Under the Fed’s auspices, under the Fed’s guidance, the dollar has lost 96-97% of its purchasing power. Even since the 1950s we have seen a radical decline in the purchasing power of the dollar. You only have about 5 cents of purchasing power from 1950 forward.

So, I think what we are really talking about when we look at the value of gold, is one benchmark, or plumb line, if you will, for dollar purchasing power. So, here in the last several years, dollar purchasing power has increased. That may seem counter-intuitive given central bank activity, but in point of fact, I think, given the amount of chaos in the emerging markets, and people fleeing other currencies, the dollar has been the beneficiary, that is more commentary on dollar strength than it is gold weakness.

Kevin: And it probably is an anomaly that is temporary.

David: That doesn’t speak to the long-term trend or trajectory of the dollar. As to the question, Robert and Theresa, dealing with energy, I think natural gas is cheap. Yes, oil is cheap, but it is not at a provable low. So, I think if you are looking at energy as an entire segment for your allocations, yes, I would start allocating that direction, but I would not make any full commitments.

Let me just give you an example. If you thought that ultimately you wanted to have $100,000 in energy-related investments, this would be a good time to begin with $20,000 or $25,000, so 20-25% of your total allocation. And I would probably slant that more in the direction of natural gas with an eye to adding to oil, to either a smaller degree now, or wait and see. The structural changes in the oil market, given pricing that we have today, that will be changing. I think you will see some of the structural changes in the natural gas market, as well, but we have been at lower levels for a longer period of time in the natural gas space.

Kevin: But like you said, limit your exposure. It is a volatile area. You don’t want to go in hog wild.

David: Right. I would say, start with partial commitments, and over time add to those. A perfect price doesn’t exist. A good price does. And I think that what you can improve over time is your average share price in the various energy exposures that you have, and I would dollar cost average in, you could begin now, and I would suggest that by the third quarter of 2016 you might be done with your energy allocations.

Kevin: Kyle asks the next two-part question. Number one is:

Are there wealth managers that you recommend, especially for those who don’t have much wealth?

And then the second part of the question. He says:

I really enjoy the financial insights in the McAlvany Weekly Commentary plus a lot of glimpses we get into the McAlvany family. Do they have a recommended reading or news source list that covers not only financial stuff but other realms of values, thoughts, education, politics?

Oh boy, Dave, put a quarter in right here. Do you have recommendations for reading, or what?

David: Let me start with that, the second question, because we do have in our resources section on our website, some suggested reading. It is a very limited list of books. There might be 50, certainly less than 100 books listed there, and if I had my druthers I would bore you with hundreds and hundreds of book titles. But understand that not all books are appropriate for all readers. It really depends on what you are interested in, what the questions are that are pressing, and I think you should always read where you are the most curious.

Kevin: And I would say, Dave, your book that is coming out, talking about glimpses into the McAlvany family and values and education, your book coming out on intentional families, I think, covers a huge degree of birds-eye view into your background and your generational background with the McAlvanys.

David: Nothing else represents probably better codification of our values as a family, how we have arrived at them, and the process of reverse engineering, we believe, is involved in developing a family that is intentional about becoming something. What is that something? What are the things that you most highly prize, as a person who wants to develop heart, mind and soul, who wants to understand and appreciate the times that we live in, and engage with politics and economics and public policy?

These are things that you will find glimpsse of, and Intentional Families: Reverse Engineering a Legacy from Finish to Start is the name of the book. Again, that notion of beginning with an ideal and working backward toward today’s choices and the things that we have put in motion to underscore within the family context what our values and highest ideals are.

There is another side project that I have in addition to Intentional Families, the book that – it’s done, it just has to be edited. Oh, my Lord, the editing process is a bear. And that is, what we have called the missing chapter. The missing chapter is a look at economics, politics, entrepreneurship, finance, current events, and it is meant to be dialog-starting for families. It is a curriculum. We have matched it to basically one per week for the school year, so roughly 35-36 different episodes, seven-minute videos which are accompanied with a study guide, which explore everything from the roots of ISIS, and how to understand the Islamic family, if you will, to understanding the difference between deflation and inflation. And it is broken down in such a way that is intended for parents or grandparents to lead the discussion on these issues around the dinner table.

Kevin: Right, but it is very much geared toward a younger audience understanding it. I was thinking after I watched it, “Gosh, I need to download that study guide, fill it out, and actually memorize some of the points, because even though we talk about them all day, I really hadn’t had it in the structure that you were putting it into.

David: This is intended to be for a wide range of ages. It is intended to be challenging enough for an adult to say, “My word, I just learned something.” But also empowering, given the nature of the study guide, for them to be able to ask questions sitting around a dinner table and lead a discussion on the points that are in it so that they are able to empower someone who is eight, nine, ten years old, on up to 18 years old, how to think skillfully and think well, about some of the most pressing issues of our day.

Again, if you are talking about values and education, politics and economics and entrepreneurship, if these are the kinds of things that are interesting to you, then I think that is a health resource, and we are going to, over time, continue to add to – this is maybe the last and final side project I’ll ever pick up (laughs). I have about a hundred books sitting on my shelf, I have already picked them out, and I am going to be doing 500-700 word summaries of these books. These are books that have really impacted my thinking and in the coming years I will be publishing those to, I don’t know which website yet. But that will be a helpful thumbnail sketch as to what the book is, why it is important, and allow you to choose if you want to use time and energy to invest in that particular reading project.

Kevin: The next question is from Brian. He says:

Would silver have the same chance, or likelihood of being confiscated as gold, and how do they determine the value in that transaction? Why not confiscate other metals – copper, platinum, etc.?

That is his question, Dave.

David: Silver is less likely to be confiscated, and a part of it is that it is predominantly an industrial metal and industrial demand will continue, not only in medical applications but in literally tens of thousands of different applications. Controlling the supply is a bit tricky. We have worked through our entire above-ground surplus of silver so what we have coming through now is direct mine supply. And the industrial markets are critically in need of that on a day-to-day basis. So confiscation of metals would throw a monkey wrench into, I would say, hundreds of different industries that depend on it.

Kevin: And wouldn’t you also say, Dave, that gold is what the central banks use as reserve, and when push comes to shove and you have monetary currency wars going on, gold is generally what is grabbed for that reason. Silver is not really a monetary metal when you get up into the central banking side of things.

David: That’s right. Now, try this on for size, because this is a potential reality. In wartime we have had, not only our government, but every government around the world implement price controls over what are considered to be strategic assets. Strategic assets could be the price of milk or the price of spam. Those become strategic assets when they are in limited supply. And so silver, I think, would be far more likely to be under that price control mechanism in the context of war than gold, because of again, it’s industrial nature and it is needed more now for electronics and other things than ever before. Other metals are less likely to be confiscated.

I look at the platinum group metal and metals and just like silver it is almost an exclusive industrial usage. And again, look at copper. There is a problem between the value and the mass. It takes hundreds of tons, and if you are thinking about moving and storing tons, that is equal to a very small monetary value in the copper market. So price controls? Possibly. Confiscation? Very low likelihood.

Kevin: Next question from Alexander in Denver, Colorado. He says:

I am a long-time listener. Everything you and your guests say makes sense. I just don’t get one thing. How come the economy is humming along, and has been, for so many years, and all my friends say that I am just a fool?

David: (laughs) Well, I feel that I am rather in the same boat. Alexander, I would make the contrast between a normal economic recovery and one that is artificially stimulated. And I would also make a contrast between the growth that we have seen, which has been in the financial arena, and not in the broader economy. So, when we talk about there being segments within the economy, you have the industrial segment, you have the service segment, you have the financial segment.

And the reality is that the interventions of the last five to ten years by various world central banks have brought about an amazing financial recovery. But it has not brought around a recovery in the normal economy, in the industrial economy, in the services economy, etc. So, the result is that you have the perception of recovery, but the reality, depending on what segment of the economy you exist in, can be very different.

Kevin: So, if you are a bank president, you have had a recovery, but if you are somebody who makes a Widget or a Caterpillar tractor, you have not had a recovery.

David: I think things are not always as they seem, so friends may say, “Oh, you’ve played the part of the fool in this.” And I think, quite to the contrary, they are playing the part of the fool, and you, the part of the wise man, in the sense that things are not always as they seem. To buy headlines, and to buy the jargon coming from a CNBC and a Bloomberg, that all is well, is to either hold your nose, or close your eyes and shut off your mind to a good number of inputs which suggest otherwise.

Kevin: Next question says:

I don’t get currency manipulation. If China is keeping the value of the yuan so low to boost exports, isn’t the market going to compensate somewhere else somehow? Can they do it forever?

David: Keep in mind, China keeping the value of their currency at a low level, and we accusing them of currency manipulation – their currency is pegged to the U.S. dollar, there are dozens of other currencies around the world that are pegged to the U.S. dollar. We generally don’t whine about all of those other currencies being currency manipulators. The hallmark of 2015 has been the People’s Bank of China, the PBOC, letting go of that dollar peg to some degree, letting their currency go where the market wants to take it, which interestingly enough, is toward lower levels, and that is not a result of the PBOC, the People’s Bank of China. The perceived value of their currency is at a lower level, and that is where it is drifting, as we speak. There is also the peg which we just described, which is in the process of changing.

Kevin: Yes, they are changing to a basket of currencies, commodities, what have you, but it is going to be different than just pegging to the dollar.

David: And it may be a transformation which takes several years, but the dollar peg is going to be a past tense issue. The market compensating for it, I think there is a balancing act that is always occurring in an arbitrage that investors are always taking advantage of, and you do see that. You see that in the currency markets, you see that in the tradable goods sectors. For instance, if things are out of whack, and the currency in China is too high, their goods are simply priced out of the market and you can buy the same goods from Malaysia, Indonesia, Vietnam, etc. So, markets adjust rapidly to under-valuation and over-valuation.

Kevin: The next question, from Gary, says:

I’ve heard that there are reports of a major bank that has accumulated a large position in the COMEX silver market. Are you aware of such, and if that were the case, how might you see that affecting the silver market, and prices?

David: It is important to recognize that banks do operate their own books of business. In other words, they are trading for their own accounts. But the larger portion of their exposures are positions which are typically futures positions, and they represent positions held for clients. So, they are on the books of the bank, but they are representative of their broad client base. And so, building a position, either long or short, isn’t necessarily what the bank itself is doing, but what they are doing for other people.

What I don’t like to see here, Gary, is that an institutional interest in the metals is typically a more fickle interest in the metals. Investors who are interested in the physical metals, themselves, typically are stronger hands with a rationale for holding it, whereas institutional interests can literally, from one day to the next, shift. And so I consider them to be much less reliable. What is there today could be gone tomorrow. It is unpredictable in terms of its addition to price trends. So again, the fickle nature of those interests is not something that I am encouraged by.

Kevin: The second part of his question says:

I’m hearing reports that the commodities are pretty much in a deflationary environment. Explain for us what you see during this period for the gold price.

David: Well, appreciate this. The best environment for gold to be in, as an investor, and this will be very counter-intuitive, is a deflationary environment. And it is for this reason. On a relative basis, your relative gains, in terms of what you are able to purchase with an ounce of gold, in the context of deflation, tends to be substantial. And when you look at the equation on a net of tax basis, it is far more compelling to be in a deflationary environment than an inflationary environment where prices are driven higher across the board and you may, in fact, improve your purchasing power in an inflationary environment, holding gold, but remember that whatever price you have in terms of an ounce of gold, a good, significant percentage is going to be given to Uncle Sam when you liquidate it to translate it into other assets.

Kevin: And just look Dave, the tax advantage is huge, but even if you didn’t have the tax advantage, look at how much more copper gold buys, even though gold has come down, look at how much more copper gold buys right now, and how much more gasoline, how much more oil. We can go right on down the list. And actually, gold has been rising relative to most of those deflationary commodities.

David: Priced in gold, some of these other assets are in a deflationary funk, and gold has been a great way of preserving and increasing purchasing power. I spoke at a Harry Dent conference a number of years ago, and he had me speak on deflation and the risks of gold in a deflationary context. And what I pointed out very clearly – and it is interesting because all his writing since then has completely ignored the facts and the historical documentation that I provided at his conference to him and all the attendees, 600 years of market data, including both U.S. and British market data, show gold increasing your purchasing power in every deflation…

Kevin: Without exception, right?

David: A minimum of 45%. The maximum was in the 1930s, of 240, almost 250%. Could you see a loss in nominal terms? Yes, you could. On a relative basis did you improve your purchasing power for the kinds of things that you live your life on the basis of? Yes. In fact, you improved your position financially, a minimum of close to 50%, a maximum of close to 250%. Gold did its job in the context of a deflation. Unfortunately, he is an economist that is all wet when it comes to reading history. I don’t know that he knows how to. It is in interesting thing because deflation is actually the preferred environment for a gold owner. Again, keep that in mind – on a net tax basis if gold goes to $5,000 you are going to give up a third of your gains to Uncle Sam before you start translating from one asset to another. That puts you at a tremendous disadvantage. In the context of deflation you may, in fact, have a tax write-off in a nominal loss, but increase your financial footprint two, three, four-fold.

Kevin: There is a concept, Dave, of who are your friends and who are your enemies? It is a good way of figuring out what side you should take. Actually, who really wants to see inflation? Honest to goodness, the central banks are the ones who are telling us we need inflation. The people who are getting lower and lower prices for everything, that actually is a bonus. Deflation, in the end, is for the people.

David: That’s exactly right. You are exactly right. The whole narrative has been corrupted, and the idea that we should be afraid of deflation neglects the value of your money buying more stuff. The Treasury has a vested interest in seeing the Fed improve the inflation statistics. Why? Because they get to increase their tax take every year. Consider this. In a deflationary environment, if the few dollars that you make buy more stuff, it is the equivalent of getting a pay increase without an increase in taxation. That doesn’t work for central bankers, that doesn’t work for central planners.

Kevin: I think that actually answers, Dave, a little bit of the third part of Gary’s question. He says:

For those people we all know that don’t believe in the value of precious metals, and do believe in the value of stocks and bonds, how would you recommend that we might explain to them the basis for the metal’s superior value during uncertain times?

David: I think you start with acknowledging that no one knows the future, and therefore, it is important to have multiple strategies in play. Precious metals are a defensive strategy, and a very good one. What we do know about human behavior is that it behaves in a certain way when faced with uncertainty. People seek to have greater and greater control in that context, and they want physical control, if they can get it, of the assets in question, as much as they can, wherever they can.

So, in times of uncertainty, all of a sudden you find precious metals in that defensive strategy representing almost the best offense, the defense being the best offense, where gains are had as people clamor for greater degrees of control. So, I would put it in the context of, “Listen, no one knows the future, and you certainly need a defensive strategy right next to an offensive strategy. It makes sense to have both.” That is how I would position it for someone who is a naysayer, in terms of the gold market.

Kevin: Next question from Chris, sort of tongue-in-cheek, Dave. He wants to see what a lot of people want to see, and that is, gold and silver come up. He says:

I have a very profound and intellectual question. Ha-ha. When is silver going to get out of the basement, and gold along with it, as well. I mean the price. Okay, I’m sure I’m the only one to ask that question.

David: (laughs) Thank you, Chris. I think one of the things we need to understand is that humor is essential. Without it, we tend to take ourselves and circumstances too seriously, and certainly, in the office we have a certain sort of macabre humor that has kept us sane, functional, healthy, working together as a team for over 43 years now. And Chris, I appreciate the humor there. It is a profound intellectual question. When is the price going up? (laughs) I think it ties to three different things: A confidence in the Fed, inflation expectations, and Dow pricing. Confidence in the Fed – that gives way to people having to reappraise the basis of which all assets have been priced here in recent years, and when confidence caves, I think you are dealing with a complete reappraisal of the marketplace, and gold all of a sudden is center stage, having more value than it currently does.

Inflation expectations? Again, the inflation number doesn’t have to change, it is the trajectory that people think that we are now on, and if people think the future is going to have more inflation than the present, that “expectation” is what drives interest in the price of gold. And last, I think, Dow pricing – as the Dow goes up people consider a defensive strategy to be irrelevant. Who needs it when you could be making a lot more money with your money. I came out of a meeting with our local college here. We help advise the management of their assets. I was advising – they were given a gift of about a million-and-a-half dollars. I was advising that it sit in cash for the next year. And everyone said, “Oh no, we couldn’t do that, we would be losing. You’re going to lose either way. We could lose if we’re in the stock market, but you are certainly going to lose sitting in cash because you’re not going to receive any income.”

And I thought it was interesting because there is this perception that we can’t afford to be out of the market. And that sentiment is very frail. That sentiment changes rapidly. But what you see in the Dow-Jones Industrial Average is really a cultural litmus for health in the economy. If it is up 300 points – track this on a daily basis. Next time you are sitting around the water cooler at the office, wherever you happen to work, if the Dow is up 300 points, gauge what sentiment is for the economy. I can almost guarantee you it is positive. Dow is down 300 points, guess what? You are going to tap certain underground insecurities of people saying, “Yeah, I do have some concerns.” Literally, from one day to the next, the movement in the Dow, which to me is a very false signal as to the course ahead, is going to tell you what people think and how they feel.

Kevin: Dave, just go back to 1987, my first year here. 1987 was a year that people couldn’t afford to not be in the market. And then after it crashed, you heard the same thing – we can’t afford to be in the market. It happened in 1987, it happened in the year 2000, it happened in 2007, it probably is going to happen in the next year or two again, where the people who could not afford to not be in the market – they sell at the very bottom because they can’t afford to be in the market after this sentiment changes.

David: Right. And I would say this. Chris, one of the things that is important as an investor is to bring patience into the equation. Why? Because patience is inextricably linked to time. And time turns big things into little things. So, a concern about the present price of gold – time will turn that concern into a very little concern.

I watched a special the other day on the creation of sand. It was about a two-minute – I don’t know if it was a Ted Talk, or what it was, on sand. And time turns big things into little things. And I was listening to that and I was thinking, “Yes, a granite peak is turned into a seashore over a long period of time. The big things are turned into little things and time is the equation. I think our concerns, too, as big as they are in the moment – add time, and I think you will find the stress of underperformance – that will go away, too.

Kevin: On a similar note, Darlene asks:

How much will so much global conflict affect portfolios heavily weighted in precious metals and oil and natural gas?

David: These are emotional assets and with higher levels of conflict and greater concern, what you end up with is the question of how will these commodities be delivered to the market? Think of all the geographic chokepoints. You have the straits of Malacca, Hormuz, the Cape Point, and you have the Panama Canal. These are all places that, geographically, with the right amount of global conflict, all of a sudden delivery of vital assets becomes a real question.

Kevin: They are choke points at that point.

David: They are choke points, and economies cannot exist without fossil fuels today. That may not be the case 50 years from now, but it certainly is the case today. Precious metals are similarly emotional, although they are not vital, as oil and natural gas are, to the healthy functioning of an economy.

So, the last point I would make on precious metals is that, as I mentioned in the last question, there is a desire for protection, there is a desire for control, when you see global conflict increase. People want more control of their assets, they want protection, they want portability, they want something that they can do something with that is outside the system. The classic case in point is the Russians rolling through Afghanistan in 1979, and sheiks in the Middle East saying to themselves, “Black gold is fine, but I had better load the 747 with kilo bars and 400-ounce good delivery bars and get it to Switzerland, because it may be the only thing that helps me rebuild.

And it is not the way the Saudis and those in the Middle East ordinarily think. But the plan B is, “Do I have something that gives me control, gives me protection, gives me the ability to, again, with portability, take it where I need to be, away from where I no longer want to be?” So I think, again, this notion of an increase in global conflict does underscore the importance of precious metals moving forward.

Kevin: The next question pertains to a cashless society coming. Frank and Ann ask the question:

What should we be doing now to get ready for cash being outlawed in the future?

David: What can you own that is like cash? That is the question that I would ask. Gold and silver represent a bridge asset to a new currency. And you don’t know what that new currency may be, officially, and gold and silver represent a very good bridge. We worked with a gentleman for years by the name of Klaus Buescher. He had lived through the German hyperinflation. And he explained to us that the currency, for his family, and what enabled his family to get through…

Kevin: A cellar full of Vodka.

David: That’s right. Maybe you fill in what your cash equivalent is in terms of cigarettes, feminine products, chickens that lay eggs, cows that give milk and calves, rabbits that can reproduce (laughs) very quickly, and represent a protein source. These are all assets that have currency-like characteristics in the context of a crisis. So, if you are asking the question about the outlawing of cash, then I’m asking you the question, “What represents black market capital?” And all of these things and more, let your imagination run wild and imagine at a practical level what you need, what you would want, and that is what you should have now in advance of other people asking the same question.

Kevin: This next question is about the flat tax:

I have been listening to all the debates, both Republican and Democrat parties. Some of the candidates talk about doing away with the IRS and replacing it with a 10-20% flat tax. In your opinion, Dave, can a flat tax be enough to sustain our country?

David: Yes, if you do away with all deductions, and if you bring corporations in and keep them on the hook where they have the same effective tax rate as everyone else. With deductions and with the ability to create – whether it is the double Irish or different tax strategies that corporations use to sequester earnings and keep them overseas, that allows them to lower their effective tax rate into the low single digits. If you look at a group like Apple, if you look at a group like General Electric, does it surprise you to learn that their effective tax rate is less than 10%, that their effective tax rate in some years is negative, and the U.S. government actually sends them a check for being in business for the year? That may seem insane, but that kind of behavior should be done away with. If it is done way with, then a flat tax applied to every man, woman, child, corporation, in the country, including on their foreign-earned income, yes, I think it would absolutely work, and it would simplify the code tremendously.

Kevin: So done right, you would be a fan?

David: Yes.

Kevin: Next question:

Do you believe the federal government will eventually take over IRAs and 401ks?

David: There are circumstances under which they would, but I think that that is a long way off. The notion of crisis compressing time is something you always have to keep in mind. In the context of crisis, that far-off, almost impossible event may become a real-time issue. I think the answer is to stay aware and stay awake. We are not at a state yet where fiscal policy measures have been exhausted. We have one of the lowest tax rates, at present, in U.S. history. We are well below the average tax rates of the last 150-200 years in terms of U.S. tax collection. So, I think before they start ruining their credibility, confiscating tax ways in a nontraditional way, you are going to see them increase taxes considerably, which is theft the more traditional way. So again, don’t look for them to do things that are out of the box until they have exhausted all their options in the box, and they are a long way from that.

Kevin: Next question:

Dave, would you agree that bank deposits are liabilities to the bank, and only when some of these deposits are lent out do they become assets to that bank? Deficits run by governments and the 4½ trillion Fed liability have crowded out bank lending, and the banks are refusing to accept large deposits by individuals and businesses.

David: Yes, I would agree with the first part of that. The second part is that a lot of loans are not being made because the incentive is not there. Not only do you have to meet a very high bar at this point in terms of qualifying for a loan, but banks can redeposit their funds with the Fed and be earning, risk-free, 50 basis points, that is half of one percent, doing nothing. So, you get money virtually for free from the Fed, give it back to them, and collect extra interest on money that is not even yours, and I think what you are dealing with is a very corrupted lending system to begin with.

The most important thing in this first move by the Fed in recent weeks has been the increase in the payment on interest held as excess reserves at the Federal Reserve. That proves more than anything that Janet Yellen is a puppet and that she is not in control of the Fed any longer. What is very obvious is the folks that make the decisions as to the payments made – it is a five-member team, including Stanley Fisher, that decides what interest is paid on excess reserves – they are the ones who are influencing the yield curve. They are the ones who are influencing, ultimately, lending from the banks, and ultimately the drip system into the larger economy.

Kevin: Next question is from the Netherlands. He says:

Hello from the Netherlands. Thanks again for the podcast. When will McAlvany accept Bitcoin as a payment method, and can you do a podcast on Bitcoin?

Dave, we did do a podcast on Bitcoin when we interviewed George Gilder.

David: That’s right, and we had a fascinating conversation, also, with a gentleman that runs He has been very enthusiastic about owning Bitcoin. It is nice having a cost basis in the single digits and he was very early in the Bitcoin issue. And so, yes, we will do one there. I am also on the advisory committee for a company that is a block chain startup, so we are working on moving toward receiving Bitcoin as a payment method here at Mcalvany, but our challenge thus far has been, there is no way to effectively hedge our “currency risk” in Bitcoin. So, when we can figure out how to hedge our currency risk in Bitcoin, we will address that as a payment method.

Kevin: That brings us to the next question:

I would love to hear you do a show on the war on cash and cryptocurrency. I believe Bitcoin will either be taken over, or put out, by the government, as the government does not like competition. They want to control every aspect of your life and monitor every transaction you do.

Do you agree with that, Dave? What is your thought on the takeover of Bitcoin by, say, a government entity?

David: On the one hand, it has been encouraging to see Wall Street firms take a greater interest in the block chain technology, which is the basis of Bitcoin. On the other hand, you think, well if Wall Street is involved, the government is not far behind, and so, co-opting and creating a backdoor look at the ownership is something that would be a key of Wall Street and Washington sorting out the use, and/or control of that technology.

What Wall Street is likely to do is create their own version, taking the technology, adding a few bells and whistles that are government approved and rolling out something that is marketable and accepted to a general audience. I think it will lose some of its value if that is the case, because a part of what people appreciate about Bitcoin, about cash, about gold, is the ability to transact business on a private basis, and it is being cast in society today as a bad thing to have privacy.

This is the only time in world history where privacy has been something that has been assumed to be evil. Oh yeah – no, that’s not true. Every time you have been dealing with a statist government in the history of the world, they have viewed privacy as something that is evil. So, there is that recurrent theme of statists of all persuasion not only don’t like gold, but anything that smacks of your ability to move and act independently or quietly outside of the system. So, I like Bitcoin for what it is today. We will have to see what it morphs into tomorrow, and what merits it still maintains.

Kevin: Next question says:

Should I cash my savings in and buy silver and food supply?

Pretty simple question, Dave.

David: Yes and no. It’s a question of degrees. How much is too much? How much is too much silver, how much is too much gold? How much is too much food? With food, you have a use-by date issue, so you wouldn’t load up on that. After 25 years all the food that you purchased is no better than dog kibble, so you don’t want to necessarily have too much, but decide how much does make sense. I wouldn’t cash in my savings entirely. However it is invested, it does give you a broader exposure to other things, other investments, other asset classes. Cash in itself is an asset class – underappreciated, but yes, I would own some silver, yes I would have some gold, yes I would have a minimum of a month or two of food supply for ever member in the family. These are just practical things, and I don’t think you need to overdo it. So, yes and no, it is a question of degrees.

Kevin: The next question says:

Do you see banks shutting down sometime in the near future? Also, do you think U.S. treasuries are still safe?

David: The simple answer to that is, no I don’t see banks shutting down in the near future. They feed the economy and support the vast majority of activity in the economy via debit card transactions, credit card transactions, settlement of payroll. And so, there is no economy without banks today, unless you are talking about a nuts and bolts barter economy. So, it is not in the interest of government to do that. You would see a destabilization politically, socially, as a result of the economic destabilization of losing the banking system.

The second part, I would say, is that using them will become more and more expensive, that is, banks. And I think you are going to see non-bank alternatives arise. Let me give you an example. Let’s say that a certain gift card gives you a 5% discount on purchases. Listen, buying those gift cards as a short-term cash alternative allows you to have a “cash alternative” and collect the equivalent of 5% interest in a zero interest rate environment. So, people who all over the world are constantly looking at things that don’t quite make sense, but are to their advantage, and that would be an example of creating a “cash deposit” outside the banking system, in a way that, just like a zero coupon bond has implicit interest to it.

So, I think people are going to discover these opportunities and corporations will create more and more of them as the cost of modern day banking goes up. So, would it surprise me at all to see WalMart start issuing these kinds of cash cards and see people buying them up as an alternative to sitting in a bank deposit with zero interest. You are moving your cash to WalMart instead of to your local bank, and getting implicit interest, as well.

Kevin: How about the question on treasuries, Dave? Do you still believe in buying U.S. treasuries, government debt?

David: Yes, for now. Ten-year maturity or less, five years preferable. And there, you are dealing with some interest rate volatility. So, let’s look at a hypothetical. Let’s say that equities sell off 25% or more this next year, 2016. What happens to the yield on ten-year treasuries? It would drop, let’s say, from a theoretical 2½% to 1.75%, and as you know, as interest rates decline the price of those bonds go up. You could actually see a ten-year treasury or five-year treasury be a profit center, a capital gain creator, even though the interest is modest – 2%. That, to me, does make sense as a diversification, and I do expect to see quite a bit of volatility in the equity market this next year.

So, as long as your maturities are at the shorter end of the curve, I think, in the short run, they still make sense. In the long-term? No way. If you had to say, Dave, are you going to hold those treasuries for the next 10-15 years? Absolutely not. What I am talking about is a short-term liquid position, in capital, in fixed income, that I am probably going to liquidate within the next two to three years, after that benefit has been accumulated. A drop in rates and an increase in the value of those bonds? I will be happy to take that capital gain to the bank.

Kevin: Next question is from Sally:

I heard that there was a proposal to make it illegal to hold gold and silver in safe deposit boxes. I can’t find confirmation of that, but feel it is smart not to use safe deposit boxes. What are your thoughts?

David: Banks ask you not to do that already. If you read the paperwork for any bank when you are filling out and signing up for a bank box, they don’t want you putting anything in there other than house title, car title, etc. For some people, it remains the best option, either because you travel a lot, or because you have a high profile in your community.

Kevin: Or if you live in an apartment in Chicago or someplace where there is really no place to hide something.

David: That’s exactly right. In recent weeks we have talked about the number of burials of gold throughout France and continental Europe and Britain, and I think that is the reality, for most people burying their gold, that’s what they have done through the millennia. Banks didn’t exist and offer us that opportunity. I like it as an alternative. Is it perfect? No. But again, this is where thinking flexibly, make sure that you have more than one strategy in play all the time. Have a part of your gold held overseas, have a part of your gold in your possession at home, have a part of it in the bank. Don’t try to play the genius and pretend to know more than you do. You don’t know how this is going to play out, and I think having multiple strategies in play is important.

Kevin: Kathy asks:

How will we know when it is time to sell our precious metals and what do we purchase in exchange? And how quickly can the selling and purchasing take place?

David: I look at this as an exchange of stuff for stuff, one resource for another kind of resource. It is a value exchange. So, if you have – and try to do this – if you see your precious metals as cash, it is not what price are the precious metals. That’s the wrong way to look at it. It is what can I get for them. In other words, what am I exchanging them for, directly or indirectly, and is it a compelling value exchange? So how long does it take, was the last part of that question. I was witness, when I was six years old to a young man that worked for our company at the time, and he took a cookie tin full of silver dimes and exchanged them for a Trans Am, and it was the most fascinating thing I’ve ever seen. I was absolutely riveted by this cookie tin of silver dimes being exchanged for one of the coolest carts imaginable for a six-year-old.

Kevin: Sure.

David: A convertible Trans Am, with the big eagle on the front hood and everything. So, in that instance, the exchange was instant. In the case of a house or land, it could be days to weeks, as fast as you can work through the change in title and the escrow process. If you are talking about moving from gold and silver to stocks and bonds, it is days. It is a question of how long it takes you to turn it into cash, and that cash to instantly be turned into stocks and bonds. And then, of course, it is an instant exchange when you are coming out of gold and moving into the currency of your choice. If you don’t like the currency of the realm, you could certainly choose Canadian dollars, Australian dollars, the Mexican peso, the Indonesian rupee. It doesn’t matter what it is, when you are going from precious metals to currencies, that is an instant exchange. So, again, to me it boils down to this. Not what prices are the precious metals and therefore we are moving out and moving on, but what is the value exchange when I go from my stuff to that other stuff, whatever that other stuff is that is of value to you?

Kevin: This next question, you may have already answered aspects of the question, but I’m going to go ahead and read it because it also deals with offshore storage. He says:

With the threat of possible terrorist or unfriendly government attacks against our country, such as EMP, etc., how should our investments be diversified? Options include offshore banking, precious metals stored offshore, a second home in another country, etc. Obviously, we must continue praying for God’s protection for our country against all of these possibilities.

David: Thanks, Rod. It’s good to hear from you. If it was an EMP, remember how much your world would shrink, and the question then would be, what do you have access to? Is the grid down? Do you have transportation? Does your car function, given the fact that all of its electronics have been fried? How do you get offshore if you need to? There are certain scenarios where the offshore options are irrelevant, whether it is storing metals, or having a second home – it becomes irrelevant because you can’t get there. So, I would say, do all of the above, offshore banking, precious metals, that second home abroad, etc. Do all of the above, but remember that your local resources may be all that you can access for several months, or for an indefinite period of time. So, keep in mind what you have close at hand, including the relationships that you have close at hand, which are going to be far more of a resource to you than practically anything else.

Kevin: You can take that to whatever extreme you want because we have a gentleman who works here, Dave, named Chuck, who keeps three to five different ways to start a fire on his person at all times. Now, I couldn’t start a fire with anything in my pocket right now, but if you need something to create a flame, Chuck is the guy you call. So, I guess you probably need to know, part of your list would be, know who Chuck is in the area, right?

David: Oh, that’s exactly right. Relationships do matter.

Kevin: Next question is from Steve. He says:

Why were the banking rules changed last November by the G20 countries?

He goes on to say:

Why has the Federal Reserve System been allowed to operate in secrecy for these past 100 years?

David: It is interesting, the changes at the G20 changed, really, the relationship between the depositor and the banking institution in a fairly dramatic fashion. And without most depositors knowing it, they are now way down the list of people who have access, or right, to their own money. In the case of a bank going under, or going into bankruptcy, being dissolved, you have creditors which are now categorized as a higher priority than depositors. Consider that. Whose money is in the bank? But a creditor being prioritized over a depositor – what this suggests is that the G20 and the banking community as a whole is very aware of the frailty within our financial system, and they are also very aware of how important it is to take care of creditors within the financial system. They are not interested in seeing a derivative domino implosion. So that, I think, is what you are seeing with the G20 is, in advance of a major catastrophe, they are putting the depositor on the line rather than those who are central to the banking community. So I think you know full well, the macro level answer is, in very broad terms, central planning is easiest to achieve under certain conditions. We have central banking which has enabled a huge growth in government by financing growth via the printing presses and very accommodative financing rates and it has created unhealthy growth, it has created unstable growth, it has created something that can implode on itself, and they are now trying to figure out ways to prop up the world that they have created.

Kevin: And the second part of the question, Dave, probably was answered by your first answer. The banking community, obviously, all decisions are not for the preservation of the depositor, it is for the preservation of the banking community and the power that they hold. It just seems that over the last 100 years this creature from Jekyll Island, as one of our guests has called it, has not only operated in secrecy, but always for its own self-preservation.

David: That’s right. If we take care of the few we will take care of the many, I think would be the credo of the central bank community. So, if it seems self-interested, they have spun it in their own heads as something that is actually quite generous to the rest of the world, and it may be punishing and harmful to the many in the short run, but again, you take care of the few, the best, the brightest, the most well connected, and they will be able to rebuild the world from the rubble. That is really the attitude that they operate within. I think that if people understood the corruption which has been implicit to the central banking community we would have it dissolved in a heartbeat. And I say that from a historical perspective, not even from current events, because it was with the first central bank of the United States, and the second central bank of the United States that the populace began to see how interconnected Wall Street and Washington had become via the central bank, via the nation’s bank, and they said, “You know what? We’re going to end the charter. This is just not good. We have politicians wetting their beaks in very corrupted, unsavory ways, and we have to put an end to this political corruption via the U.S. bank. And now we have the third iteration of that. If people understood how corruption is catered to via the central bank, we would do away with the third. And I think that is why they have existed and continued to operate, largely in secrecy, over the last 100 years.

Kevin: Bruce says:

In your Commentary you spoke about the cautious ducks who did not land. Remember your duck-hunting analogy. In other words, what action should we take to protect ourselves in the coming financial environment? I have been reading and hearing about an impending financial crisis. There was talk of a stock market crash in October that really didn’t happen. What has kept this from occurring, and when do you think it will occur? I realize setting dates is foolish, but a general sense, with the information you have, would be appreciated.

David: Sure. With reference to total net worth, the cautious duck is someone who is going to avoid stocks, or reduce to a minimal exposure, let’s say, 10-25% max. The cautious duck is the one who is raising cash, sitting on cash, looking at money market funds and short-term treasuries, separated across small and dispersed bank deposits, in other words, keeping under $100,000 minimum. I realize $250,000 is the official number, but I would go back to the pre-crisis number of $100,000. And so you are dispersed across several financial institutions, maintaining FDIC insurance, for whatever that is worth. And I would, for the cautious duck, also have a solid gold and silver position.

For those that are less cautious, the posture looks something like this. The non-cautious is landing and saying to themselves, I find value in equities and I want it to be 40-50% of my net worth. They are saying, I want to minimize cash because it pays nothing. And they are saying that I would like to avoid metals because they are cheap and they are likely to get cheaper, and no one likes cheap things. I would disagree with the non-cautious duck on that, I think quite the opposite. Fortunes are made buying things when they are not priced to the moon, and selling them when they are priced to the moon. So, on that basis, again, equities, you have to put a question mark. But here again is a cautious duck interposing his opinions onto the non-cautious.

Kevin: And so the careless duck gets eaten and the cautious duck lives to quack another day.

David: That’s right. And I think, to the last part of that question, in terms of dates, you are right, I don’t have a crystal ball so adding any dates to the equation guarantees some degree of humiliation. Maybe that is good for my character development. But I would say that from now to the end of 2016 we continue to see sort of a trend change as investors take into stride, take into mind, what it means to be raising rates in 2017. I think that by mid-year 2017 you have a very tough environment because as much as the Fed would like to perhaps even reverse course in the face of recessionary trends which I think emerge between now and then, you have something of a political hand-cuffing which has occurred.

Does the Fed operate dovishly or hawkishly with now just months leading to the election? So again, just to cap that idea, because of the political handcuffing in 2016 I think by mid-year 2017 you are talking about a very tough go for the economy, regardless of verbal or actual intervention from the Fed. Why do I say that? Well, just to cap this, profits peaked in 2015 and we begin to see a decline year-on-year, for corporations. Corporations, for all of 2015, have done their best to pretty up the pig and via financial engineering, whether it is share buy-backs or an increase in debt to do various things like share buy-backs, improve the picture to the general public. Meanwhile, we have seen a decline in revenues, a decline in sales on a very broad basis, and cracks creeping into the credit system. So, I think, quite frankly, 2016 could be a year of complete chaos. If we are able to escape it, 2017 seems to me to be an inevitable comeuppance.

Kevin: Robin writes:

Many are saying the greatest wealth transfer in history is about to occur. One mentions corporate bonds as where that may happen. I am a single mother on a set income and have acquired precious metals as a safeguard against the falling dollar. I have great reservations about investing in the markets. Exactly what kind of investments are they referring to with this great wealth transfer, and do you recommend these types of investments?

David: Well, I agree in terms of the greatest transfer in history. I believe that you are well positioned between cash and precious metals. The wealth transfer is from high-valued popular assets, ultimately becoming assets which are diminished in value, and the transfer occurs when cash and gold buy you, the cautious duck, multiples of those assets at much cheaper prices. The wind, here, is in expanding your financial footprint, and this means keeping things liquid. This means having assets which are cautiously positioned today, and the wealth transfer, is again, I think, for the overly optimistic, being surprised, and perhaps the overly pessimistic having opportunities of a lifetime, if they are, in fact, willing to make some mid-course corrections as time goes on. For the overly pessimistic, they might even miss the opportunity as they stay too long in a cash and precious metals position.

Kevin: This next question asks about stock certificates being delivered. Spencer says:

Should an individual have stock certificates delivered out of their brokerage account to be held privately in case something should happen to the financial system, and how would that be accomplished?

David: Perhaps, but I would suggest that you are losing a tremendous amount of liquidity. A lot can take place if you ever want to have those brought back into the system. Transfer agents which are responsible for the dispersal of those stock certificates, and receiving them back in to verify that they are legitimate and then have them put on deposit with the brokerage firm – they are penalizing that kind of behavior and so I think you are looking at, certainly two, as many as four weeks, from start to finish, in either direction. So, it’s going to take you some time to do it. It will also take you some time to get back into the system and again, I think I prize liquidity with liquid assets.

The only assets that I would give up liquidity on would be things like a privately held business, or real estate. Otherwise, whether it is cash, gold, securities – I’m going to favor the liquidity elements there. And just note that you shouldn’t be over-invested in those asset classes. And if you are, then make the mid-course correction by reducing your exposure rather the eliminating the liquidity variable there. And the second part of the question – how would that be accomplished? Brokers order them out. You would just call a broker and have them ordered out.

Kevin: The next question from Lionel. He says:

The world is deeply in debt. I’ve never owned any debt, and I don’t know anyone who has owned debt. My question is, who owns all this debt?

So, Dave, I think maybe people assume debt is something different than it is, but even the U.S. dollar is owning a form of debt, is it not? If you have dollars in your pocket, it is an instrument.

David: It’s an I.O.U. So who owns the debt? The banking system. So, from the top down, the central bank. Next in line, your commercial banks. And somewhere, either before or immediately after the commercial banks are your non-traditional financiers, what is known as shadow banking. And all the debt really just equals an income-producing asset to them. You put out an I.O.U. and you start collecting a revenue stream on the basis of that. You have central banks that are something like the Pretorian guards of the banking system, and they are the ones who make sure that it exists and survives another day. Why? Because, quite frankly, it’s fun to collect interest.

Kevin: This last question from Francis:

My question is, what can I do to further protect my precious metals IRA besides following the advice that you all give for buying and selling and maintaining my precious metals in a depository. Protection from the federal fingers is my main concern. Secondary to that is access in a less functional financial world. In other words, I’m saying, access limitations. Thank you for your assistance.

David: Well, let’s work with what we know versus what we don’t know. We know that retirement accounts are tax benefitted for a short period of time and at some point in the future you are going to have a huge tax hit, believed by some to be a smaller tax hit because perhaps your income tax bracket is less in retirement and so there is a benefit to waiting and paying taxes on those assets then versus now. My suggestion is this. One of the most effective tax strategies that you can employ today, if it is possible to take your IRA and convert it to a Roth, it gives you protection against an increase in the tax consequences to precious metals if it is every disadvantaged further, and it also locks in at what are traditionally low tax rates today versus what I think is virtually guaranteed higher tax rates tomorrow. So a conversion from a traditional to a Roth is something that I would very much consider if you are able to do that. And I think the biggest risk is a tax risk, it’s not a confiscation risk, when you are talking about precious metals. It is much easier for the federal government to say, “Hey, listen. Everybody’s got trillions of dollars in 401ks, they don’t have to look like the bad guys by going after retirees and going after that pocket of assets. They get to do it implicitly if they raise tax rates. If they move the entire spectrum of tax rates and the top effective rate goes from the upper 30s, let’s say, to the upper 50s, which, keep in mind it was in the low 90s less than 100 years ago. The top effective tax rate was about 93-94%. So, they will get what they want, and they will do it – they will fleece you – but they don’t have to appear to be the bad guy doing it. Circumstances will mitigate changing the tax code. Paying social security payments will require them to change tax levels for income brackets and what not, and I think one of the best things that you can do is not yank it out of a retirement account, but convert it to a Roth where it is still protected from tax implications moving forward, and guarantees that whatever benefit you have from appreciation of the assets internal, you get it tax free. You have basically said, “I’ll take my current tax rate and be done with taxes forever.”

Kevin: The second part of the question, Dave, had to do with, if a financial system is breaking down, maybe the markets are dysfunctional, is there a problem with access to that IRA?

David: I think if you really want to, if push came to shove, you could organize and schedule a trip to Delaware and actually pick up product. We are not dealing with phantom product or paper I.O.U.s.

Kevin: It’s not a zero or a 1 on a computer screen, it actually, physically, has weight.

David:When you are paying annual fees it is for storage of real allocated metals. There has been a trend in the industry to suggest that you can somehow take those assets into your physical possession and maintain them inside an IRA structure. And I will tell you that that notion of privatizing IRAs is something that is, in our opinion, a very bad idea. We have an industry letter, both the bank and trust industry dealing with retirement assets, but also letters from the IRS which would suggest that these are taxable events. And so, a conversion to a Roth, that is a tax event, but it leaves you in a tax advantaged position. Keep in mind that, in all likelihood, in the context of an audit, you will have penalties, you will have taxes, and you are likely, in addition to the taxes paid, and the penalties paid, you are likely to retain maybe 10-15% of your retirement assets. So, I think you are taking a huge risk in order to remove the protection from federal fingers, as many in the industry have recommended.

One last thing on that, because I think the motives need to be clear. For most people who are recommending that, all they are looking for is an opportunity to transform one product format, bullion, into something else which advantages them in terms of a commission generated. So, the vast majority of people who I have seen privatize their IRAs, they’re the patsies in this equation. And I think the more effective approach is, if you can convert from a traditional to a Roth, you have given yourself every possible advantage moving forward, looking at what is the most likely outcome for our federal government, nearly bankrupt, needing to raise taxes, you can go ahead and take care of your taxes today and guarantee that you pay zero as and when they raise the heat tomorrow.

Kevin: Dave, again, the questions didn’t disappoint. We have listeners that really do pay attention and think for themselves. And I just want to say, thank you, right now, for the response that we got.

David: I know it is difficult to think of curiosity as an asset class. But if you can feed your curiosity and invest in a greater sense of curiosity in 2016, I think you are going to find yourself more engaged – more engaged with the relationships around you, the current events which are occurring around you, with the changes in asset classes, actual asset classes, and I would just encourage you, in the same vein that you have sent these questions to us, continue to ask questions.

And live comfortably with the tension of not being able to answer them immediately, but pursue the answers relentlessly, as you grow in your understanding of the world that you are living in, and the ways in which it is changing, because there are opportunities which, in the next few years, I think, will present themselves as once in a generation, perhaps even once in a thousand year-type opportunities.

And I think you will be the kind of person that is there to take advantage of them, to the extent that you have trained your mind and heart to, not only identify them, but have the courage to do something about them. To me, the route to that end is investing in that strange little asset class that I would call curiosity.

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