In the January BIG GOLD, I interviewed a
plethora of experts on their views about gold for this year. The issue was so
popular that we decided to republish a portion of the edition here.
Given their level of success, these fund managers are worth listening to: James
Rickards, Chris Martenson, Steve Henningsen, Grant Williams, and Brent
Johnson. Some questions are the same, while others were tailored to
their particular expertise.
I hope you find their comments as insightful and useful as I did…
James Rickards is chief global strategist at the West
Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and
director of the James Rickards Project, an inquiry into the complex dynamics
of geopolitics and global capital. He is the author of the New York Times
best-seller The Death of Money and the national best-seller Currency
Wars. He’s a portfolio manager, lawyer, and economist, and has held
senior positions at Citibank, Long-Term Capital Management (LTCM), and Caxton
Associates. In 1998, he was the principal negotiator of the rescue of LTCM
sponsored by the Federal Reserve. He’s an op-ed contributor to the Financial
Times, Evening Standard, New York Times, and Washington
Post, and has been interviewed by the BBC, CNN, NPR, C-SPAN, CNBC,
Bloomberg, Fox, and the Wall Street Journal.
Jeff: Your book The Death of Money does not
paint an optimistic economic picture. What will the average citizen
experience if events play out as you expect?
James: The end result of current developments in the
international monetary system will almost certainly be high inflation or
borderline hyperinflation in US dollars, but this process will take a few
years to play out, and we may experience mild deflation first. Right now,
global markets want to deflate, yet central banks must achieve inflation in
order to make sovereign debt loads sustainable. The result is an unstable
balance between natural deflation and policy inflation. The more deflation
persists in the form of lower prices for oil and other commodities, the more
central banks must persist in monetary easing. Eventually inflation will
prevail, but it will be through a volatile and unstable process.
Jeff: The gold price has been in a downtrend for three
years. Is the case for gold over? If not, what do you think kick-starts a new
bull market?
James: The case for gold is not over—in fact, things are
just getting interesting. I seldom think about the “price” of gold. I think
of gold as money and everything else as a price measured in gold units. When
the dollar price of gold is said to be “down,” I think of gold as a constant
store of value and that the dollar is simply “up” in the sense that it takes
more units of gold to buy one dollar. This perspective is helpful, because
gold can be “down” in dollars but “up” in yen at the same time, and often is
when the yen is collapsing against the dollar.
The reason gold is thought to be “down” is because the dollar is strong.
However, a strong dollar is deflationary at a time when the Fed’s declared
policy is to get inflation. Therefore, I expect the Fed will not raise
interest rates in 2015 due to US economic weakness and because they do not
want a stronger dollar. When that realization sinks in, the dollar should
move lower and gold higher when measured in dollar terms.
The looming global shortage of physical gold relative to demand also
presages a short squeeze on the paper gold edifice of futures, options,
unallocated forward sales, and ETFs. The new bull market will be kick-started
when markets realize the Fed cannot raise rates in 2015 and when the Fed
finds it necessary to do more quantitative easing, probably in early 2016.
Jeff: Given what you see coming, how should the average
retail investor position his or her portfolio?
James: Since risks are balanced between deflation and
inflation in the short run, a sound portfolio should be prepared for both.
Investors should have gold, silver, land, fine art, and other hard assets as
an inflation hedge. They should have cash and US Treasury 10-year notes as a
deflation hedge. They should also include some carefully selected
alternatives, including global macro hedge funds and venture capital
investments for alpha. Investors should avoid emerging markets, junk bonds,
and tech stocks.
Steve Henningsen is chief investment strategist and
partner at The Wealth Conservancy in Boulder, CO, a firm that specializes in
wealth coaching, planning, and investment management for inheritors focused
on preservation of capital. He is a lifetime student, traveler, fiduciary,
and skeptic.
Jeff: The Fed and other central banks have kept the
economy and markets propped up longer than some thought they could. How much
longer do you envision them being able to do so? Or has the Fed really staved
off crisis?
Steve: I do not believe we are under a new economic
paradigm whereupon a nation can resolve its solvency problem via increasing
debt. As to how long the central banks’ plate spinning can defer the
consequences of the past 30-plus years of excess credit growth, I hesitate to
answer, as I never thought they would get this far without breaking a plate.
However incorrect my timing has been over the past two years, though, I am
beginning to doubt that they can last another 12 months. Twice in the last
few months the stock market plates began to wobble, only to have Fed
performers step in to steady the display.
With the end of QE, a slowing global economy, a strengthening dollar, and
the recent sharp drop in oil prices, deflationary winds are picking up going
into 2015, making their balancing act yet more difficult. (Not to mention
increasing tension from poking a stick at the Russian bear.)
Jeff: Gold has been in decline for over three years now.
What changes that? Should we expect gold to remain weak for several more
years?
Steve: I cannot remember an asset more maligned than gold
is currently, as to even admit one owns it receives a reflexive look of pity.
While most have left our shiny friend bloodied, lying in the ditch by the
side of the road, there are signs of resurrection. While I’m doubtful gold
will do much in the first half of 2015 due to deflationary winds and could
even get dragged down with stocks should global liquidity once again
dissipate, I am confident that our central banks would again step in (QE4?)
and gold should regain its luster as investors finally realize the Fed is out
of bullets.
The wildcard I’m watching is the massive accumulation of gold (and silver)
bullion by Russia, China, and India, and the speculation behind it. Should
gold be announced as part of a new monetary system via global currency or
gold-backed sovereign bond issuance, then gold’s renaissance begins.
Jeff: Given what you see coming, how should the average
investor position her or his portfolio?
Steve: Obviously I am holding on to our gold bullion
positions, as painful as this has been. I would also maintain equity exposure
via investment managers with the flexibility to go long and short. I believe
this strategy will finally show its merits vs. long-only passive investments
in the years ahead. I believe that for the next 6-12 months, long-term Treasuries
will help balance out deflationary risks, but they are definitely not a
long-term hold. Maintaining an above average level of cash will allow
investors to take advantage of any equity downturns, and I would stay away
from industrial commodities until the deflationary winds subside.
Precious metals equities could not be hated more and therefore represent
the best value if an investor can stomach their volatility.
Grant Williams is the author of the financial newsletter Things
That Make You Go Hmmm and cofounder of Real Vision Television. He has
spent the last 30 years in financial markets in London, Tokyo, Hong Kong, New
York, Sydney, and Singapore, and is the portfolio and strategy advisor to
Vulpes Investment Management in Singapore.
Jeff: The Fed and other central banks have kept the
economy and markets propped up longer than some thought possible. How much
longer do you envision them being able to do so? Or has the Fed really staved
off crisis?
Grant: I have repeatedly referred to a singular phenomenon
over the past several years and it bears repeating as we head into 2015: for
a long time, things can seem to matter to nobody until the one day when they
suddenly matter to everybody. It feels as though we have never been closer to
a series of such moments, any one of which has the potential to derail the
narrative that central bankers and politicians have been working so hard to
drive.
Whether it be Russia, Greece, the plummeting crude oil price, or a loss of
control in Japan, there are a seemingly never-ending series of situations,
any one (or more) of which could suddenly erupt and matter to a lot of people
at the same time. Throw in the possibility that a Black Swan comes out of
nowhere that nobody has thought about (even something as seemingly trivial as
the recent hack of Sony Pictures by the North Koreans could set in motion
events which can cascade very quickly in a geopolitical world which has so
many fissures running through it), and you have the possibility that fear
will replace greed overnight in the market’s collective psyche. When that
happens, people will want gold.
The issue then becomes where they are going to get it from. Physical gold
has been moving steadily from West to East despite the weak paper prices we
have seen for the last couple of years, and this can continue until there is
a sudden wider need for gold as insurance or as a currency. When that day
comes, the price will move sharply from being set in the paper market—where
there is essentially infinite supply—to being set in the physical markets
where there is very inelastic supply and the existing stock has been moving
into strong hands for several years. Materially higher prices will be the
only way to resolve the imbalance.
Jeff: You’ve written a lot about the gold market over the
past few years. In your view, what are the most important factors gold
investors should keep in mind right now?
Grant: I think the key focus should be on two things:
first, the difference between paper and physical gold; and second, on the
continuing drive by national banks to repatriate gold supplies.
The former is something many people who are keen followers of the gold
markets understand, but it is the latter which could potentially spark what
would, in effect, be a run on the gold “bank.”
Because of the mass leasing and rehypothecation programs by central banks,
there are multiple claims on thousands of bars of gold. The movement to
repatriate gold supplies runs the risk of causing a panic by central banks.
We have already seen the beginnings of monetary policy divergence as each
central bank begins to realize it is every man for himself, but if that
sentiment spreads further into the gold markets, it could cause mayhem.
Keep a close eye on stories of further central bank repatriation—there is
a tipping point somewhere that, once reached, will light a fire under the
physical gold market the likes of which we haven’t seen before, and that
tipping point could well come in 2015.
Jeff: Given what you see coming, how should the average
investor position his or her portfolio?
Grant: Right now I think there are two essentials in any
portfolio: cash and gold. The risk/reward skew of being in equity markets in
most places around the world is just not attractive at these levels. With
such anemic growth everywhere we turn, and while it looks for all the world
that bond yields are set to continue falling, I think the chances of equities
continuing their stellar run are remote enough to make me want out of equity
markets altogether.
There are pockets of value, but they are in countries where the average
investor is either disadvantaged due to a lack of local knowledge and a lack
of liquidity, or there is a requirement for deep due diligence of the kind
not always available to the average investor.
The other problem is the ETF phenomenon. The thirst for ETFs in order to
simplify complex investing decisions, as well as to throw a blanket over an
idea in order to be sure to get the “winner” within a specific theme or
sector, is not a problem in a rising market (though it does tend to cause
severe value dislocations amongst stocks that are included in ETFs versus
those that are not). In a falling market, however, when liquidity is
paramount, any sudden upsurge of selling in the ETF space will require the
underlying equities be sold into what may very well be a very thin market.
In a rising market, there is always an offer. In a falling market, bids
can be hard to come by and in many cases, nonexistent, so anybody expecting
to divest themselves of ETF positions in a 2008-like market could well find
themselves with their own personal Flash Crash on their hands.
Unlevered physical gold has no counterparty risk and has sustained a bid
for 6,000 straight years (and counting). Though sometimes, in the wee small
hours, those bids can be both a little sparse and yet strangely attractive to
certain sellers of size.
Meanwhile, a healthy allocation to cash offers a supply of dry powder that
can be used to gain entry points which will hugely amplify both the chances
of outperformance and the level of that performance in the coming years.
Remember, you make your money when you buy an asset, not when you sell it.
Caveat emptor.
Chris Martenson, PhD (Duke), MBA (Cornell), is an
economic researcher and futurist who specializes in energy and resource
depletion, and is cofounder of Peak Prosperity. As one of the early
econobloggers who forecasted the housing market collapse and stock market
correction years in advance, Chris rose to prominence with the launch of his
seminal video seminar, The Crash Course, which has also been
published in book form.
Jeff: The Fed and other central banks have kept the
economy and markets propped up longer than some thought possible. How much
longer do you envision them being able to do so? Or has the Fed really staved
off crisis?
Chris: Well, if people were being rational, all of this
would have stopped a very long time ago. There’s no possibility of paying off
current debts, let alone liabilities, and yet “investors” are snapping up
Italian 10-year debt at 2.0%! Or Japanese government bonds at nearly 0% when
the total debt load in Japan is already around $1 million per rapidly aging
person and growing. I cannot say how much longer so-called investors are
willing to remain irrational, but if pressed I would be very surprised if we
make it past 2016 without a major financial crisis happening.
Of course, this bubble is really a bubble of faith, and its main
derivative is faith-based currency. And it’s global. Bubbles take time to
burst roughly proportional to their size, and these nested bubbles the Fed
and other central banks have engineered are by far the largest ever in human
history.
As always, bubbles are always in search of a pin, and we cannot know
exactly when that will be or what will finally be blamed. All we can do is be
prepared.
Jeff: If deflationary forces pick up, how do you expect
gold to perform?
Chris: Badly at first, and then spectacularly well. It’s
like why the dollar is rising right now. Not because it’s a vastly superior
currency, but because it’s the mathematical outcome of trillions of dollars’
worth of US dollar carry trades being unwound. So the first act in a global
deflation is for the dollar to rise.
Similarly, the first act is for gold to get sold by all of the speculators
that are long and need to raise cash to unwind other parts of their trade
books.
But the second act is for people to realize that the institutions and even
whole nation-states involved in the deflationary mess are not to be trusted.
With opaque accounting and massive derivative positions, nobody will really
know who is solvent and who isn’t.
This is when gold gets “rediscovered” by everyone as the monetary asset
that is free of counterparty risk—assuming you own and possess physical
bullion, of course, not paper claims that purport to be the same thing but
are not.
Jeff: Given what you see coming, how should the average
investor position her or his portfolio?
Chris: Away from paper and toward real things. If the
outstanding claims are too large, or too pricey, or both, then history is
clear; the perceived value of those paper claims will fall.
My preferences are for land, precious metals, select real estate, and
solid enterprises that produce real things. Our view at Peak Prosperity is
that deflation is now winning the game, despite everything the central banks
have attempted, and that the very last place you want to be is simply long a
bunch of paper claims.
However, before the destruction of the currency systems involved, there
will be a final act of desperation by the central banks that will involve
printing money that goes directly to consumers. Perhaps it will be tax breaks
or even rebates for prior years, or even the direct deposit of money into
bank accounts.
When this last act of desperation arrives, you’ll want to be out of
anything that looks or smells like currency and into anything you can get
your hot little hands on. This may include equities and other forms of paper
wealth—just not the currency itself. You’ll want to run, not walk, with a
well-curated list of things to buy and spend all your currency on before the
next guy does.
We’re not there yet, but we’re on our way. Expect the big deflation to
happen first and then be alert for the inevitable central bank print-a-thon
response.
Because of this view, we believe that having a very well-balanced
portfolio is key, with the idea that now is the time to either begin
navigating toward real things, or to at least have that plan in place so that
after the deflationary impulse works its destructive magic, you are ready to
pounce.
Brent Johnson is CEO of Santiago Capital, a gold fund for
accredited investors to gain exposure to gold and silver bullion stored
outside the United States and outside of the banking system, in addition to
precious metals mining equities. Brent is also a managing director at Baker
Avenue Asset Management, where he specializes in creating comprehensive
wealth management strategies for the individual portfolios of high-net-worth
clients. He’s also worked at Credit Suisse as vice president in its private
client group, and at Donaldson, Lufkin & Jenrette (DLJ) in New York City.
Jeff: The Fed and other central banks have kept the
economy and markets propped up longer than some thought possible. How much
longer do you envision them being able to do so? Or has the Fed really staved
off crisis?
Brent: As much as I dislike the central planners, from a
Machiavellian perspective you really have to give them credit for extending
their influence for as long as they have. I wasn’t surprised they could
engineer a short-term recovery, and that’s why, even though I manage a
precious metals fund, I don’t recommend clients put all their money in gold.
But I must admit that I have been surprised by the duration of the bull
market in equities and the bear market in gold. And while I probably
shouldn’t be, I’m continually surprised by the willingness of the investing
public to just accept as fact everything the central planners tell them. The
recovery is by no means permanent and is ultimately going to end very, very
badly.
But I don’t have a crystal ball that tells me how much longer this movie
will last. My guess is that we are much closer to the end than the beginning.
So while they could potentially draw this out another year, it wouldn’t
surprise me at all to see it all blow up tomorrow, because this is all very
much contrived. That’s why I continue to hold gold. It is the ultimate form
of payment and cannot be destroyed by either inflation, deflation, central
bank arrogance, or whatever other shock exerts itself into the markets.
Jeff: As a gold fund manager, you’ve watched gold decline
for over three years now. What changes that? And when? Should we expect gold
to remain weak for several more years?
Gold has been in one of its longest bear markets in history. Many of us in
the gold world must face up to this. We have been wrong on the direction of
gold for three years now. Is this due to bullion banks trying to maximize
their quarterly bonuses by fleecing the retail investor? Is it due to
coordination at the central bank level to prolong the life of fiat currency?
Is it due to the Western world not truly understanding the power of gold and
surrendering our bullion to the East? I don’t know… maybe it’s a combination
of all three. Or maybe it’s something else altogether.
What I do know is that gold is still down. Now the good news is… that’s
okay. It’s okay because it isn’t going to stay down. The whole point of
investing is to arbitrage the difference between price and value. And right
now there remains a huge arbitrage to exploit. As Jim Grant said, “Investing
is about having people agree with you… later.”
Now all that said, I realize it hasn’t been a fun three years. This isn’t
a game for little boys, and I’ve felt as much pain as anyone. I think the
trend is likely to change when the public’s belief in the central banks
starts coming into question. We are starting to see the cracks in their
omnipotence. For the most part, however, investors still believe that not
only will the central banks try to bail out the markets if it comes to that,
but they also still believe the central banks will be successful when they
try. In my opinion, they are wrong.
And there are several catalysts that could spark this change—oil, Russia,
other emerging markets, or the ECB and Japan monetizing the debt. This
“recovery” has gone on for a long time. But from a mathematical perspective,
it simply can’t go on forever. So as I’ve said before, if you believe in
math, buy gold.
Jeff: Given what you see coming, how should the average investor
position her or his portfolio?
Brent: The answer to this depends on several factors. It
depends on the investor’s age, asset level, income level, goals, tolerance
for volatility, etc. But in general, I’m a big believer in the idea of the
“permanent portfolio.” If you held equal parts fixed income, equities, real
estate, and gold over the last 40 years, your return is equal to that of the
S&P 500 with substantially less volatility. And this portfolio will
perform through inflation, deflation, hyperinflation, collapse, etc.
So if you are someone who is looking to protect your wealth without a lot
of volatility, this is a very strong solution. If you are younger, are trying
to create wealth, and have some years to ride out potential volatility, I
would skew this more toward a higher allocation to gold and gold shares and
less on fixed income, for example.
Because while I generally view gold as insurance, this space also has the
ability to generate phenomenal returns and not just protect wealth, but create
it. But whatever the case, regardless of your age, level of wealth, or world
view, the correct allocation to gold in your portfolio is absolutely not
zero. Gold will do phenomenally well in the years ahead, and those investors
who are willing to take a contrarian stance stand to benefit not only from
gold’s safety, but also its ability to generate wealth.
One other thing to remember about gold is that while it may be volatile,
it’s not risky. Volatility is the fluctuation in an asset’s daily/weekly
price. Risk is the likelihood of a permanent loss of capital. And with gold
(in bullion form), there is essentially no chance of a permanent loss of
capital. It is the one asset that has held its value not just over the years,
but over the centuries. I for one do not hold myself out as being smarter
than thousands of years of collective global wisdom. If you do, I wish you
the best of luck!
If you see the same risks these fund managers do, make sure your gold
portfolio is prepared for both crisis and profit. In tomorrow’s BIG GOLD,
I will tell you exactly how to position your entire gold portfolio for the
coming bull market, including specific stocks. It’s one of the most important
issues you’ll read, because we have research that will tell you why another
bull market in gold is virtually guaranteed—and it has nothing to do with
supply, inflation, or debt. You’ll want to get positioned now, so don’t miss
this edition!