In the
January issue of BIG GOLD,
I interviewed 17 analysts, economists, and authors on what they expect for
gold in 2015. Some of those included what we affectionately call our Casey
Brain Trust—Doug Casey, Olivier Garret, Bud Conrad, David Galland, Marin
Katusa, Louis James, and Terry Coxon. The issue was so popular that we
decided to reprint this portion.
I think
you’ll find some very insightful and useful reading here (click on a link to
read his bio)…
Jeff: The Fed and other central banks have
kept the economy and markets propped up longer than you thought they could.
Has the Fed succeeded in staving off crisis?
Doug: I’m genuinely surprised things have
held together over the last year. The trillions of currency units created
since 2007 have mostly inflated financial assets, creating bubbles
everywhere. There’s an excellent chance that the bubble will burst this year.
I don’t know whether it will result in a catastrophic deflation, extreme
inflation, or both in sequence. I’m only sure it will result in chaos and
extreme unpleasantness.
Jeff: Are we still going to get rich from
gold stocks? Or should we face reality and start exiting?
Doug: The fact so many people are
discouraged with gold and mining stocks is just another indicator that we’re
at the bottom. Gold and silver are now, once more, superb speculations. And I
think we’ll see some 10-to-1 shots in gold stocks—if not this year, then
2016. I can afford to wait with those kinds of returns in prospect.
Jeff: The crash in the general markets we
warned about didn’t materialize. Have those risks dissipated, or should we
still expect to see a major correction?
Olivier: Last October the risk of a very
severe market correction was indeed very serious; hence our call to
subscribers to batten down the hatches, tighten their portfolios, and have
cash and gold on hand. We warned of further downturn across all commodities,
including oil. We also highlighted the dollar would be strong and that an
excellent short-term speculation was to be long 10- to 30-year Treasuries, as
they would be considered a safe haven.
Let’s
look at where we are today. Clearly, the S&P did not extend its
correction after its initial dip in mid-October. In light of the possibility
of a perfect storm coming, the Fed announced that it may not end QE in early
2015 as anticipated if the economy failed to continue to pick up. Then the
Bank of Japan announced its version of QE infinity, followed by the largest
Japanese pension fund’s decision to invest in equities worldwide.
The
bulls were reassured and came back with a vengeance; the crash was averted.
That said, fundamentals are still very weak, and market growth is
concentrated within the largest-cap stocks. Mid- and small-caps are hurting,
and many economic indicators are still concerning.
Jeff: What about lower energy
prices—aren’t these good for the economy?
Olivier: In theory, yes. In practice,
there is another crisis brewing. Most of the development of new shale
resources in the US has been financed by debt based on oil prices of $80 and
above. This easy debt was immediately securitized, just like home mortgages
were in 2003-2006, and we have a monstrous bubble about to pop with oil
around $55. The potential risk of another derivative crisis is as high or
higher than in 2007.
Jeff: Does that mean the inevitable is
imminent?
Maybe,
maybe not. We know central bankers will do whatever it takes to provide
liquidity to the markets. That said, I do not believe central bankers are
wizards endowed with supernatural powers that enable them to stem all crises.
Bernanke told us in 2007 and 2008 that there was no real estate crisis and that
he had everything under control—will Janet Yellen be better?
My view
is that our subscribers should be prepared for the worst and hope for the
best. Sacrifice a bit of performance for safety, and use money you can afford
to lose to speculate on opportunities that could bring outsized upside. I
believe subscribers should continue to hold cash (in dollars), gold (the
ultimate hedge against crisis), and stocks in best-of-breed companies that
are unlikely to collapse during a financial meltdown.
For
speculations, I still believe that we should be invested in the best gold
producers, in well-managed explorers with good management and first-class
resources, in long-term Treasuries, and top-quality tech companies.
Jeff: As a former turnaround professional,
what would signal to you that the gold market is about to turn around?
Olivier: Two things: market capitulation,
and valuations for the best companies not seen in decades. The cure for low
prices is low prices.
Cyclical
markets do turn around,
and I would rather buy low and hold on until the market turns around than buy
in the later stage of a bull market. At this point, the gold market presents
amazing value for the patient investor. In my opinion, that is all that
matters. The gold market may take longer than I want to turn around, but I
know I am near an all-time low.
Jeff: What role do big banks and
government currently play in gold’s behavior? Is this role here to stay?
Bud: I’ve looked at the huge demand for
gold from China, Russia, India, and private investors and been surprised the
price has eroded over the last three years. My explanation is that the “paper
gold futures market” sets the price of gold, with very little physical gold
being traded. There are two parts of futures market trading: one is the
minute-by-minute trading of only paper contracts that dominate 99% of the
trading, in which every long position is matched by a short position. That is
why the futures market is called “paper gold.” Almost all trades are unwound
and rolled over to another contract. Only a few thousand contracts are held
into the second process, called the “delivery process.” Just a handful of big
banks dominate that delivery process, so they are in a position to affect the
market. There is surprisingly little physical gold used in the delivery
process compared to the 200,000 ongoing paper trading of the contracts not
yet in delivery every day, where no physical gold is used.
Big
players can place huge orders to move the “paper price” for a short term, but
eventually 99% of these paper positions are unwound before delivery, so their
effect in the longer term is canceled. The delivery process is the only time
where physical gold is actually sold (delivered) or purchased (stopped). The
gold price can be influenced in one direction in this process by bringing
gold to the market from their own account (or the reverse).
Big
banks gain a big benefit from the Fed driving their borrowing rate to zero
with the QE policy. Banks lend that money at higher rates and have become
very profitable. If gold were soaring, then the Fed would be less inclined to
keep rates low, as it would be concerned that the dollar is purchasing less
and inflation is returning. So banks are happy to have the gold price
contained so the Fed is more likely to keep rates low.
The
above chart shows that in the delivery process for the December 2014
contract, only three banks—JP Morgan, Bank of Nova Scotia, and HSBC—handled
most of the transactions. Big banks can act as either traders for other
customers or as trading for the banks themselves in their in-house account. In
the December contract, 90% of the gold was purchased by HSBC and JP Morgan
for themselves, and Bank of Nova Scotia provided over half of the gold from
its in-house account. With so few players, the delivery market is prone to
being dominated and price being set.
Jeff: So if the big players influence the
market, why should we own gold?
Bud: I see the regulators issuing big
fines to banks who have been caught manipulating foreign exchange, LIBOR, and
even the London Gold Fix (which is being changed) as evidence that the
methods used to influence the futures market will be curtailed by the regulators.
So gold will become the recognized alternative to paper money issued in
excessive amounts to fix whatever problems the governments want.
I also
see the collapse of the petrodollar as leaving all currencies in limbo, which
will lead to big swings in the currency wars, where ultimately gold will be
the winner. Governments themselves are recognizing the value of gold, as I’m
sure Russia does after the ruble collapsed in half since last summer.
Jeff: What personal benefits have you
achieved from living in Argentina?
David: Most important, my stress levels
have fallen significantly. Even though I wouldn’t consider myself a
high-stress type, I used to be on meds for moderately high blood pressure and
for acid reflux… both of which I take as signs of stress. After a few months
back in Cafayate, I am med-free.
Second,
living in the Argentine outback provides perspective on what actually matters
in life. Life in Cafayate is very laid back, with time for siestas, leisurely
meals, and any number of enjoyable activities with agreeable company. There
is none of the ceaseless dosing of bad news that permeates Western cultures.
After a week of unplugging, you realize that most of what passes as important
or urgent back in the US is really just a charade.
Finally,
my personal sense of freedom soars, as life in rural Argentina is very much
live and let live.
In
sharp contrast, returning to the USA for even a short visit reveals the
national moniker “land of the free” as blatant hypocrisy. There are laws
against pretty much everything, and worse, a no-strikes willingness to
enforce them. That a person can get mugged by a group of police over selling
loose cigarettes tells you pretty much everything you need to know.
Jeff: Gold and gold stocks have been
hammered. What would you say to those precious metals investors sitting on
losses?
David: I doubt anything anyone can say
will prove a panacea for the pain some have suffered, but I do have some
thoughts. Like many of our readers, I have taken big losses as well, but
because I have long believed in moderation in most things, especially the
juniors, I have taken those losses only on smallish positions.
Specifically,
about 20% of our family portfolio is in resource investments, with about half
in the stocks and the rest held as an insurance position in the physical
metals, diversified internationally. So a 70% loss on 10% of our portfolio,
while painful, is not the end of the world.
I guess
my primary message would be to continue to view the sector for what it is:
physical metals for insurance, and moderate positions in the stocks—big and
small—as speculative investments.
I
remain convinced the massive government manipulations that extend into all
the major markets must eventually begin to fail, at which time investors will
come back into the resource sector in droves. When the worm begins to turn, I
anticipate the physical metals will recover first—and $1,200 gold is starting
to look like a fairly solid foundation. The BIG GOLD companies, which I’m starting
to personally get interested in, will rally soon thereafter.
When
the producers decisively break through resistance levels on the upside, it
will be time to refocus on the best juniors.
But
regardless, per my first comment, while these stocks can offer life-changing
returns, being highly selective and moderate in the size of your positions is
the right approach. Then you can sit tight and wait for the market to prove
you right.
Jeff: I loved your book The Colder War. And I liked your
concluding recommendation to buy gold. Are events playing out as you
expected? And does the fall in the oil price change the game at all?
Marin: First off, thank you. A lot of
personal time was spent completing the book. And yes, most of the events are
playing out as expected in the book. I expect this trend to continue over the
next decade, as the Colder War will take many years to play out.
As I
stated to all our energy subscribers and to attendees at the last Casey
Conference in San Antonio, we expected a significant drop in oil prices, but
it has happened a lot faster than I expected. I think we will continue to see
volatility in oil; we’ll probably get a rally to the mid-$60s for WTI, but I
think it will hit $45 before January 1, 2016.
This
definitely makes Putin’s strategy harder to implement—but we are in the
Colder War, not the Colder Battle, and wars are made of many battles. Putin’s
strategy is still being implemented, and it will play out over many years.
Jeff: You’re calling for the end of the
petrodollar system. This is very bullish for gold, but won’t that process
take many years? Or should investors buy gold now?
Marin: The process is well underway, and
yes, as I point out in the book, the demise of the petrodollar will take many
years—but it will happen.
Each
investor must evaluate his position and situation, but I don’t believe anyone
knows when the bottom in gold will happen, and I see gold as insurance. You
never know exactly when you need health insurance, but speaking from personal
experience, it’s good to have, and good to have as much as you can afford,
because when you need it, trust me, you won’t regret it.
Resources
are in the “valley of darkness” right now—but this is part of the cycle. The
key is portfolio survival. If you can get to the other side, the riches will
be much greater than you can fathom. I’m speaking from personal experience.
I’ve been through this before, and while it was stressful, what happened on
the other side blew away my own expectations. We are in a cyclical business,
and this bottom trend has been nasty—longer and lower than most have
expected—but I am excited, because this is what I have been waiting for and
what will take my net worth to a new level.
I see
no difference in the outcome for yourself, Louis James, and all of those who
follow you and survive to the other side. I believe there will be significant
upside in gold stocks, especially certain junior gold explorers and
developers. Subscribers are in good hands with you and Louis in that regard,
and I always read my BIG GOLD
and International Speculator
when I get the email, regardless of where I am—the most recent being in an
airport in Mexico. Keep up the great work, Jeff; even though it’s a difficult
market, you’re doing the right things. It will pay off—maybe not on our
desired schedules, but it will pay off.
Jeff: The junior resource sector tends to
progress in cycles. Is the current down cycle about over, or should investors
expect the recovery to drag out for several more years?
L: That’s essentially a market-timing
question—literally the million-dollar question we all wish we could answer
definitively. That’s not an option, and I’m sure your readers know better
than to listen to anyone who claims to be able to time the market with any
precision or reliability.
That
said, I don’t want to dodge the question; for what it’s worth, Doug Casey and
I both feel that gold has likely bottomed. Yes, it’s true that I felt that
December 2013 was the bottom—but it’s also true that most of our stocks are
up since then. So, gold may have put in a double bottom, but our stocks
outperformed the metal and the market.
Either
way, if we’re right, the next big move should be upward, and that’s as good
for BIG GOLD readers as
it is for International Speculator
readers.
I
should also add that precious metals are not just “resources”—gold is money,
not a regular commodity like pork bellies or corn. It’s the world’s most
tested and trusted means of preserving wealth. So even though resource
commodities tend to move as a group in cycles, gold and silver can be
expected to act differently during times of crisis.
And
2015 looks fraught with crises to me… I am cautiously quite bullish for this
year.
Jeff: Where will gold speculators get the
biggest bang for their buck in 2015?
L: If you mean when, statistically the
first and fourth quarters of the year tend to be the strongest for gold,
making now a good time to buy.
As to
what to buy, it depends on whether you want to maximize potential gains or
minimize risk. The most conservative move is to stick with bullion, which is
not a speculation at all, but a sort of forex deal in search of safety. For
more leverage with the least amount of added risk, there’s the best of the
larger, more stable producers that you recommend in BIG GOLD. For greater wealth-creation
potential, as opposed to wealth preservation, there are the junior stocks I
follow in the International
Speculator.
As to
where in the world to invest, I’d say it’s easier to get in on the ground
floor investing in an exploration or development company working in less
well-known countries—you always pay more of a premium for North American
projects where the rule of law is well established. That’s obviously riskier
too, but that doesn’t mean you have to go to a kleptocratic regime with a
history of nationalization. There are stable places off most investors’
radars, like Ireland and Scandinavia. Africa plays may be oversold in the
wake of the Ebola outbreak, but that story isn’t done yet, so even I am
waiting before going long there again.
Jeff: In spite of profligate money
printing over the past six years, there’s been minimal inflation. Should we
give up on this notion that money printing causes inflation?
Terry: No, you shouldn’t. As Milton
Friedman put it, the lags between changes in the money supply and changes in
prices are “long and variable.” I’m surprised we haven’t yet seen the
inflationary effects of a better than 60% increase in the M1 money supply.
But the Federal Reserve has essentially guaranteed that those effects are
coming, since they are committed to keep printing until price inflation shows
up. And when it does appear, the delayed effects of all the money creation
that has occurred to date will start to take hold. There won’t be “just a
little” inflation.
Jeff: What do you watch to tell you the
next gold bull market is about to get underway?
Terry: Beats me. I won’t know it is
happening until it’s already started. But because high inflation rates are
already baked in the cake, so is another strong period for gold. That’s a
reason to own gold now, and the reason is compelling if you believe, as I do,
that there’s little downside. At this point, given the metal’s weak
performance since 2011, virtually everyone who lacks a clear understanding of
the reason for owning it has already sold. So it’s safe to buy.
10
other analysts were also interviewed, plus Jeff recommended a new stock pick.
Tomorrow’s BIG GOLD issue
has another new stock recommendation—an exciting company that has the biggest
high-grade deposit in the world. Now is the time to buy, before gold enters
the next bull market! Check it out here.