In this exclusive
interview with The Gold Report, Louis James, Senior Editor of Doug
Casey’s International Speculator, describes a currency crisis of
historic proportions that is dragging our economy down a dark and treacherous
path lit only by the shining star of gold. James expects twists and turns in
the precious metals sector and maintains his focus on the long-term bull
trend. What stuns him, though, is the fact that Americans aren't
"shouting in the streets" in panic now that the dollar is on death
row with no pardon in sight.
In Part II,, he talks about how the big downhill
slide in the junior sector has a real plus side for investors—a bounty
of incredible bargains and gives the names of some of his top picks and
explains why their prospects are so bright.
The Gold Report: When we last spoke in December, you talked about
the gold market being governed as much by market psychology as by demand and
supply fundamentals.
Louis James: I still see it that way. Ninety-five percent of
all the gold that’s ever been mined still exists somewhere on the
earth's surface. Supply and demand is not limited to production and
consumption. Market psychology plays a critical role.
I don't want to disparage calculations about how many ounces the
mines are producing vs. how many are being bought, but what matters more is
whether people are feeling inclined to buy or sell gold. We’re talking
about a psychological phenomenon, not something calculable or predictable.
Zeitgeist can change suddenly. When things go bad in a very obvious and big
way, gold will make a major move.
TGR: You're saying that the price would have to go up substantially for
people to put existing gold back into the market.
LJ: Yes. There’s been a lot of turnover. Many people holding gold
now bought during the up cycle and they want a higher price. Those who bought
gold on the downside of the bear market in the late '90s and are not in it
for the long haul would have been content with an earlier exit point. Those
with a higher cost basis have replaced those who are not long-term holders.
When gold corrected sharply in August, I went down to my local coin
shop, but this time something was different. Usually, when the price goes up,
some people are taking profits—but, because gold looks like it's
trending up, others are buying. So there’s been a balance. Dealers
could hold inventory because the price movements have enticed both buyers and
sellers. But that really changed in August. The U.S. Mint failed to predict
the demand for gold bullion. There was a physical shortage of bullion product
in smaller units, which is different from saying there’s a gold
shortage.
That caused a big disconnect. People were saying, “The price
of gold is going down, but you can’t buy any physical gold.
What’s wrong here?”
Well, the price of gold is set in New York and Hong Kong and
elsewhere by big players. It's not determined by people buying gold bullion
coins at their local dealer or even at a bigger dealer like Kitco. The point
is that both higher and lower prices had been balanced throughout most of
this cycle, but in August almost everyone was buying. Result: my dealer had
no inventory. If I wanted to buy I had to keep calling because it’s
first come, first served. And if he had any product, then I had to hop in my
car and buy right away, or else I didn’t get any. That was different.
TGR: Why are the big players not as worried about getting physical gold?
LJ: They’re not buying the same thing. If the U.S. Mint
miscalculates the demand for one-ounce Eagles, that affects the smaller
player who buys at the corner shop. For people buying 10-kilo bars in an
allocated account in Switzerland—let alone futures contracts,
etc.—the Mint's miscalculation doesn't affect them at all.
TGR: Right now we’re paying over spot price at our corner market.
Will that change?
LJ: I doubt it will any time soon. The Mint could see that demand was
growing and increased production, but not enough. To me that’s very significant.
All we hear in the news now are hair-pulling stories of the
financial woes of venerable institutions. If there’s anything that
actually surprises me in this market, it’s not so much that juniors are
beat up or that gold goes down. I am dumbfounded that there can be so much
economic turmoil and people aren't shouting in the streets. This stuns me
because this is America. We don’t have one or two bank failures every
month. That’s a third world phenomenon. I would have thought that the
level of anxiety on Main Street and Wall Street would be much higher than it
is now. I cannot fully explain that. People have a lot of faith in the
"powers that be" to fix things—more faith than is justified,
but the bad news we’ve already seen is of historic proportions.
TGR: Do you think that kind of anxiety could boost the precious metals
sector, specifically gold?
LJ: The guy on the street is becoming more aware of gold. Bullion
dealers are running ads in airports now. You hear more about gold on TV than
ever before. I suspect that many Wall Street traders are very desperate to
some new high-yielding sector—anything will do, even a barbaric relic
like gold, if the yield is right. So unless the price of gold drops even more
and stays down for a long time, the majors are going to reap the kind of
record profits they've had over the last two quarters. If gold comes back up,
in the next month or two, the realization will dawn on Wall Street that
here's a sector showing record profits quarter after quarter. How long can that
happen before they figure out that maybe mining is no longer an 18th century
business? If only one percent of the traders on Wall Street make that leap,
that's huge—it’s much larger than the entire gold market.
[Editor’s note:
This interview took place on Sept. 16, which was before gold’s
record-breaking gain of more than $100 in less than 24 hours.]
TGR: Will Wall Street take an interest in gold or the precious metals
sector?
LJ: Gold mining will be the bright shining star. We are going to see a
lot of eye-catching profits across the metals sector. Copper is one
that’s most watched because it’s seen by some as a kind of
economic indicator. But there’s something irresistible about gold.
People will take notice if Newmont Mining Corp. (NYSE:NEM) or Barrick Gold
Corp. (NYSE:ABX) can generate more profitable quarters, as they’ve had
already this year.
TGR: Some speculate that a U.S. recession would drag China down and that
would hurt copper.
LJ: Some believe that our economic woes are no longer relevant. But
look at the worldwide repercussions of the sub-prime mess so far. Chinese
exports are around 35% of GDP, with a little less than half or a third of
that going to the U.S. A significant drop in exports to this country could have
a significant impact, and a global recession could have a huge impact.
That having been said, most of China's growth engine is internally
driven. There are a billion-plus Chinese who want refrigerators, cars, and
all the goods associated with a better life style. And, unlike Americans,
they have savings. So I don’t see China going into reverse being
likely. Demand for resources will be great even with modest growth.
They’re still building their infrastructure and will require more
copper. Demand-side fundamentals in the Asian sector are very robust for the
long term. There will be more short-term volatility.
We sometimes get a bad rap at Casey Research for having a bearish
outlook on base metals. That's not our position. We believe that an economic
blow up would result in a sharp correction over the short term and that would
represent a great buying opportunity.
TGR: What do you think will happen with the paper assets and the fiat
currency combined with inflation?
LJ: Doug Casey, my boss, our resident guru, made a most succinct
statement on that. He thinks the current problems will lead to a depression,
and he thinks it will be worse than the Great Depression. He calls it the
"Greater Depression." He believes that there may actually be a new gold-backed
currency established at some point following the very painful corrections
ahead of us. The unfolding currency crisis is staggering. The magnitude of
this crisis is historic and it won't just go away.
TGR: We did have a gold-backed currency in the Great Depression.
LJ: That's true, but there were many government interventions that
created and then exacerbated the depression. Even with sound money, a
determined government can still mess things up. One of the most interesting
things in thinking about the Great Depression and now is to look at CPI data
over the span of the 20th century. There is a blip in the early 1930s. It
really is, at most, a blip during the Great Depression. It sounds simplistic,
but it’s true that the government couldn’t just print as much
money as it wanted to, and that was very important.
Then look at what’s happened to the CPI since 1971.
That’s what is frightening about this. Every time we've veered out of
control, the people pulling the levers have managed to steer the Titanic away
from the tip of the iceberg. Each time they’ve been barely missed it.
But the iceberg’s still there. These attempts to avoid foundering were
all inflationary. That hasn’t been the case now for several decades.
That's how this crisis has grown to such monstrous proportions
TGR: So what does a "Greater Depression" mean for investors?
LJ: Whoever thinks this talk of a serious economic
correction, currency regime change or maybe even a "Greater
Depression" is overblown probably shouldn’t be in the sector. The
volatility will just give you heartburn. But if you think there is potential
for a big blow up, then you expect a lot of volatility along the
way—it’s confirmation that the trend remains on track.
As we confront the popping of this monstrous bubble, there will be
unexpected kinks and curves ahead. We haven’t been calling it a
currency crisis for years just to sell newsletters, but because we expected
things to get truly critical, as they have. We also call it a “currency
regime change” because the hegemony of the U.S. dollar is coming to an
end. That can't happen without a lot of thrashing about as the old system
suffers its death throes. As that happens, you can’t lose sight of the
basic trend; the main thing is to focus on the long term.
TGR: Is that primarily a currency trend or an equity trend?
LJ: The currency crisis is driving equity market fluctuations, among
many other things. We get questions about buying Euros and other currencies.
Foreign exchange (forex) is not really our focus. That's a game for the pros
and the big banks. Little players just get eaten alive.
I don’t recommend forex to the part-time speculator. But if
you think the dollar’s going to go south or north, and you want to make
a bet, it’s not unreasonable to wonder where else one might put
one’s cash. We think the Euro is really no more solid than the dollar
and will be the next domino to fall. That's not to say that the Euro wouldn't
make a good short-term play.
TGR: A currency regime change here will clearly have international
repercussions.
LJ: Absolutely. The dollar is the de facto reserve currency of the
world and that’s what makes this a historic occasion. The consequences
of the dollar’s fall won’t be like when the Argentine peso lost
two-thirds of its value. If that happens to the dollar, it has globe-shaking
consequences.
TGR: So if we’re looking then at protecting our nest egg through
this currency regime change, then gold is an incredible buy in the high
$700s.
LJ: Absolutely. I’m personally buying all I can get with both
hands.
TGR: Are you buying bullion or are you buying through Central Fund of
Canada (CEF:AMEX), whose shares serve as a bullion proxy ?
LJ: Bullion. I still have some cash now for buying because, when we get
a double on something (even if I still see a lot of upside) I usually take
profits right away (unless I think the upside is highly imminent). And if it
goes five times higher after that, I don’t get bent out of shape
because I could've gotten more, I’m just glad my initial investment is
still working for me, at no risk to my initial capital.
I believe gold will rebound in the short term. It may not go to new
highs in the next few months, but it won't stay this low for long, not with
all the disastrous economic news.
Gold will come back, and a rising tide will lift ships—but not
all ships this time. There are a lot of burned hands out there and
they’re not going to jump into any old stock.
Focus on the quality companies—specifically those that have
the cash for at least a year’s operation, ideally for two years of
exploration. They have projects of real merit and 43-101 compliant resources
in hand. Their management teams have a proven track record.
When all these advantages line up, and a company like that is on
sale because the whole market is wiped out, that’s a screaming buy. I
don’t care whether tax season could actually make the thing cheaper in
a couple of months. That could happen if the market doesn’t recover.
But if it does recover and you didn’t take advantage of it and buy at
the cheaper price, you’d be kicking yourself. Quality companies with
staying power will come back.
Louis James has a
background in physics, economics, and technical writing, which prepared him
well for his role as senior editor of the International Speculator and Casey Investment Alert.
Louis constantly travels the world, visiting highly prospective geological
targets, grilling management and company geologists, and interviewing natives
to find out what they really think (it helps that he's fluent in French and
Spanish, and speaks a little German and Russian).
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