Podcast: Play in new window
- How Don McAlvany bought & sold gold legally when gold was illegal
- Nixon Lied – “We will not devalue the Dollar”
- 5 Decades later we see central banks buying gold like it’s 1969
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Family Meeting with David and Don: Half a Century of McAlvany Gold
August 27, 2019
“We know that central banks manipulate, suppress gold, etc. Today, I believe, they’re buying gold because of fear. I believe that they see major looming problems in the world financial system, currency system, the trade war, potential for shooting wars, etc. I think there is genuine fear on the part of the central banks, and I believe that is why they are buying as much gold as they are buying today.”
Don McAlvany
Kevin:We will be joining David McAlvany and Don McAlvany in a moment. I started working for Don McAlvany 32 years ago, and I was just amazed at the type of company it was, very family oriented, very deliberate, not only in the business, but with the way Don raised his family. Both Don and David have a rescuer mentality. That was something I had never really encountered. When I first came to work for Don it was amazing how he truly just wanted to help people with, in that case, their savings – or orphanages. Now, he and Molly live in the Philippines at one of the nine orphanages that they help with around the globe.
Don’s main focus through the years, and you will hear this in this program, has been getting people to understand the times that they live in. About once a year, Don and David and the families get together and they go over to some exotic place. In this case, they are in Italy. Last week on his way over to Europe, Don stopped here in Durango. It was great catching up. We got to have breakfast together and we talked about the years of family meetings and business meetings. We have people here at this office who have been here three to four decades and so we feel, in way, like McAlvany family.
One of the things that we talked about when David and I were first starting the show was that this was would be a fulfillment of a yearning that I had had, actually, for several decades, that when we had these meetings with Don, and now with David, I just wished that the people who knew us could be a fly on the wall and listen in. And today, that is exactly what we are going to do.
Don and David are in Italy and they just had a family conversation, one of many that they have had in the past. They reminisce about the company, reminisce about 47 years in the gold business. Don started this business back when gold actually was illegal here in America and he found a way to legally place people into gold at a period of time when people were not allowed to invest.
So go ahead and listen in and enjoy this father/son meeting. You can imagine them sitting somewhere in Italy. And in enjoying the talk about the history of the family and the company, you will also get a good perspective on the history of the gold market over the last 50 years.
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David:Sometimes it is important to pause and reflect on how you arrived where you are. We are a second generation family business, and 47 years is a lot of time to be doing something – anything. In this particular case, it is precious metals brokerage and asset management. It has been 47 years since you and Mom, together, started our precious metals brokerage business. In that time, we have helped 50,000-60,000 investors, and they have acquired or sold billions of dollars in gold and silver.
What is interesting to me, and probably not well known, is how the industry has benefitted from your role in it. So perhaps in a little bit we can talk about the sort of things that happened in the 1970s. There was a time when owning gold in the U.S. was not legal, the time between 1933 and 1975, and for many of our listeners, they know we ran a two-tier monetary system and allowed for domestic inflation, inflation of our money in circulation, but we maintained credibility with foreign central banks that we dealt with, and foreign creditors, because we settled with them in gold. So gold is still a part of our system, but just not for the average guy or gal in the street. So we never suffered a significant credibility issue.
You are, uniquely, a man on a mission. Don McAlvany – there is only one of a kind, only one that I know, human being quite like you. And there has never been project or an engagement that you are involved in that didn’t involve a cause, or a rescue, or a deeper purpose. I do want to dive into the history of the times which were the background to our business being created, and some of the things that are the retrospective of our business, but before we do that, you chose to engage in the financial arena. Again, being a person who is oriented toward a cause, a rescue mission, a deeper purpose, there must be a why. Why the cause? Why the rescue? Why the fight?
Don:I went to Wall Street probably looking for a little excitement. I was quite bored (laughs) working for the Dow Chemical Company, and I realized that I liked interaction with people and the financial system definitely got my attention and excited me. So I went to Wall Street in 1968 in a New York Stock Exchange firm. But David, about 1970 I had one of my clients – I was in Houston, Texas at the time – and he was buying South African gold stocks, stocks that I couldn’t even pronounce. I said, “Why are you buying these stocks? This makes no sense. Who has ever heard of these stocks?” The guy spoke very kindly to me. He said, “You’re dumb as a rock, and I’m going to educate you.”
So the first thing he did was give me a book by Harry Brown, How to Profit in the Coming Devaluation, which was probably one of the most life-changing books I ever read. It was just on the simplicity of the financial system and how it was being ruined by politicians and central bankers and so forth, and what was coming next, and why there was going to be an explosion in gold. I read it and it lined up with my more conservative political philosophy.
So I said, “But gold is not legal. I can’t buy gold. I would like to buy gold, but I can’t buy gold.” And then a friend of mine came along and said, “I know how to buy gold.” This was five years before gold was legalized. I said, “How is that?” He said, “Well, I have a friend out in Wimberley, Texas and he has created a special loophole in the Treasury prohibition against gold whereby he makes solid gold religious medallions, one and two-ounce medallions.”
David:It’s bullion, it just happens to have a religious imprint.
Don:Yes.
David:And that was the loophole.
Don:It was a legal loophole before gold was legalized. So I met this man, started buying these medallions, and I continued as a stockbroker. I was visiting with a man whom I will never forget. He was a survivor of the Hungarian Revolution, a brilliant man. He was a top executive in storage technology up in Boulder, Colorado. I was just closing on a limited partnership, and I reached in my pockets and I said, “Let me show you what I invest in.” I pulled out two of these two-ounce medallions and I handed them over the desk to him, and he looked at them, and he looked at them, and his eyes got very big.
The background of this guy is that he had just come through the Hungarian Revolution. He knew the realities of the world, the financial system, of gold and so forth. He said, “Can you get me $50,000 worth of these, and how soon can you get them for me?” And I stuttered, because I had never even thought about selling them, I was just going to invest in them myself. So that was the beginning of our company, and yes, I did get the medallions for him. And then gold was legalized on January 1, 1975.
David:So the history, for kind of a background, you mentioned 1968 you were in the stock market. 1968 is when Jacques Rueff is pounding the table with the French government and saying, “Look, we don’t see this as going well.” He had been around for the British devaluation in the 1930s. So he was wanting de Gaulle to take very seriously the exposure the French had to the United States government. He said, make sure you are settling all of your transactions in gold. So in 1968, there were already things shifting in the marketplace, although it didn’t become acute until 1971.
Take us back a little bit. You have the Johnson era. Again, you studied chemical engineering. You figured out that the world of Dow Chemical was of less interest to you. Business and finance was of more interest, and the Dow Jones captured your imagination. That’s how you ended up in the stock market and investing. Maybe you could reflect a little bit on the Johnson administration of the late 1960s as we head toward Nixon, and just what the backdrop was, what the feel was in the marketplace was at the time.
Don:I think most people in the market were oblivious to what was happening and to some of the financial problems which were coming in the 1970s. Only a tiny handful of men, as now, understood the realities. Nixon was president. He had declared, as well as John Connolly, his Secretary of the Treasury, that we would never, ever, devalue the U.S. dollar. It never would happen. It was interesting after one of those strong statements…
David:Was it hours or days thereafter?
Don:It was less than 24 hours. I remember standing at the stock ticker and looking at the news come across as – I believe it was August 15, 1971, I could be off on the date – and I remember sitting there reading it and saying, “Wow, this is just incredible.” Most people had no idea what was coming next, and what was coming next was a lot of inflation and a lot of fundamental changes. I understood some of it because of reading Harry Brown’s book, How to Profit in the Coming Devaluation.
So it was an exciting time for me, and especially because in that timeframe I had found a way to invest in gold, and that’s when we started our company. Our company started helping people fight off the coming inflation and devaluation because we saw these things coming, and we were selling solid gold religious medallions, which were the only legal way to buy gold until January 1, 1975.
David:It sounds like Harry Brown was quite the influence.
Don:He had a big influence, plus this customer of mine who told me I was dumb as a rock and he was going to educate me, and he did. He did a great job of educating me.
David:So some guy says, “McAlvany, you’re stupid,” and he gives you a lecture on owning gold. And for a lot of people on Wall Street, whether it is ego or being wrapped up in the preferences of a given financial firm, that conversation would have been quickly written off. It would have been ignored, at least, soon forgotten. It sounds to me like you were listening, you were learning, and you had enough humility to engage in an area where he knew more than you did.
Don:He did, indeed, and I think it was a lesson to myself and our kids – you and me – we all need to learn to be teachable. There is always that comes along that is smarter than we are. I think one of the things that made the gold story so real to me is that I basically had a mistrust of big government. As I worked on Wall Street, I also developed a big mistrust of Wall Street. I saw Wall Street doing an awful lot of self-serving things. So that distrust, plus understanding some of the fundamentals of what was going to happen. They were opening up the printing presses in the 1970s. It was life-changing for me. I had this strong compulsion that I wanted to help people protect their assets, and that was the basic fundamental premise on which we started our company. We wanted to help our clients protect their assets and be prepared for hard and difficult times and many of them didn’t understand it, so if we could bring understanding, as we gained understanding and shared that understanding with people, maybe we could help bring them through what could be tough times.
David:The business started in 1972. You had already left the boutique firm that you were working with in Denver, Boettcher and Co., responsible for a lot of municipal bond underwriting in the State of Colorado – great company, great family. These we clients at Boettcher who had an issue – great tax-free income, but no real protection against inflation, so gold was a decent fit. Your move was next to a Wall Street mutual fund run by John van Eck. Tell us a little bit about van Eck and the gold share mutual fund. Actually, you were working there and Mom was running the precious metals business in those early years while you were still at van Eck. Give us some history.
Don:I left Wall Street and then a year or so later came back to Wall Street and went on to become sales manager for International Investors. It was the largest gold share money manager mutual fund in the world at the time. John van Eck ran it and was a very far-sighted guy who understood the economic financial system. I started traveling around the country at that time in 1973 and lecturing to stockbrokers and any groups of clients they would bring together about gold, inflation, and the world monetary system. Occasionally, these people would ask me, “We have clients that would like to buy hard gold and silver.” This was especially true after 1975.
So I said, “There is this little woman in Colorado, Molly Brown – that was her maiden name, Molly Brown McAlvany – who can help you help your clients.” So stockbrokers began to call her and place orders. So as the next four to five years went by and I continued to travel around the country and lecture and talk about the monetary system, more business began to filter in to Molly Brown out in California, and people wanted to know where and how they could buy the metals. So the day came when she was begging me to come home and run what looked like a blossoming little coin company. One day in the fall of 1979 that came about. I decided, “Okay, I’m going to go home and run the company.”
So that was the beginning of our little company. We had a very, very small, small beginning. I told my wife, “When you get to the point where you are doing a million dollars in business, I will strongly consider coming home.” Well, I guess I reneged on that promise because I waited until she got to almost two million. And then the day came when she was doing almost a million dollars a day in business. So as we were moving toward 1979 and 1980 and the top in gold, gold volume, interest in gold, rose dramatically, and so I decided I had better go home and help my wife run this company.
David:There is a certain character to the business flow and that volume and the interest at particular points in the market. One thing that you have said repeatedly when I was growing up is that investors have a hard time doing the right thing at the right time. They tend to move en masse. And in fact, you raised me with this idea that the majority is always wrong. 1979-1980 was when you saw the highest volumes in the business in that particular cycle, and yet, it really was the wrong time to be coming into gold, from a price perspective. We went into a 25-year bear market in metals thereafter, but you couldn’t keep people from rushing the gates and buying whatever they could.
Don:We tried to caution people that a pullback was coming, that a retrenchment had to come somewhere in there. A few listened, and some didn’t, and so the pullback came and we went through a 20-year slow period in the metals. They had their ups and downs, but basically, we went from an inter-day high in January of 1980 of about $875 – and by the way, that was a 25-fold rise from $35 an ounce. Silver did a little better, it did about 26-fold. So gold and silver had their day in the 1970s. But then we went into a retrenchment period and Paul Volcker raised interest rates through the roof – 15% plus. So gold went into a long-term downtrend and I think it bottomed around $253. Correct me if I’m wrong but I believe that is about right. That was over about a 20-year period.
David:When you go back to the 1970s, early 1980s,in the precious metals industry as a whole, there is a sense of solidarity between those in the gold industry in the early years. I say early because legalization was in 1975. A practical expression of a philosophical ideal – you mentioned it earlier, maybe it relates to limited government or a focus on freedom, individual liberties, individual empowerment, autonomy from the system, not counting on the system to take care of you. Was that what was drawing like-minded people together within this small space within the world of finance and investing, in the gold space, kind of a philosophical compatibility?
Don:There was. A lot of people who were buying gold back in the 1970s – and some continued to buy in the 1980s by dollar cost averaging – were probably politically more on the conservative side, had a bit of mistrust of government, the central banks and their printing press maneuvers. So I would say, I think they were thinkers. The people who were buying gold back in the 1970s and beyond were people who were thinkers who did not completely trust the system.
Now, you might say, if gold was in a long-term downtrend, and none of us knew how long the downtrend was going to last, and yes, there was manipulation along the way – we haven’t even touched on the manipulation, but in the 1970s I could tell you long stories about how the government, the monetary system, the central banks were manipulating gold – why did we think gold still made sense? I have life insurance but it’s not because I think I’m going to die tomorrow. I hope not. I have fire insurance. I’m not expecting my house to burn down, although the house that my daughter was in burned down last summer in a fire in California, so it can happen.
But why? Because I know that there can be sudden jolts in the system, sudden surprises in the system. And so through the 1980s and 1990s we sold gold and silver as long-term insurance against unexpected and very ugly events that we saw that could come.
David:The run-of-the-mill stock broker would still consider that a fringe idea, because if you buy stocks, in the long run you will be taken care of. So, in your mind, it is an issue of prudence and historical importance because if you look at the record, things go off the rails with some regularity. You mentioned the man from Hungary, essentially, our first client, going through the worst hyper-inflation of the 20thcentury, and here he was a business executive in Colorado, but the past is very much present for him, and he has an interest in owning the physical metal. I wouldn’t describe him as fringe. I would describe him as someone who is clued into the historical record and the perennial political tendency toward mismanagement of fiscal and monetary matters.
Don:I think, David, the underlying philosophy of our company, and the newsletter that I have been writing for 43 years now, is trying to help people understand the times. The times, and what people think they understand about the world – which they are told by the mainline media, the government, Wall Street – is not, in my view, what is really happening in the world. So our effort is to help people understand the times, and to understand that you can have periods of good times, but there are going to be some periods of real, real hard, painful times, and help people prepare for those.
Preparing for the difficult times has been our company philosophy, and I think if you could go back and talk to our many clients, some of whom have passed on now, they would tell you that we have helped them tremendously over the last 30-40 years to protect assets and grow their net worth.
David:You were involved with just a handful of other characters – and they were characters – when you were getting gold ownership legalized here in the U.S. This, I think, is an important story and one of the things that sets us apart as a business, and as a family business. Share the story with us. Gold being legalized – you had a direct role in it.
Don:We certainly knew some of the players in Washington, Senator Helms and others in Washington. Jesse Helms and his team basically wrote the legislation to get it legalized in 1975, written in 1974. So yes, we were in contact with them on that and other things, foreign affairs, things in South Africa, which is also where a lot of gold was coming from.
David:What was the gentleman’s name – Segermark?
Don:Howard Segermark was the legislative aid, a kind of director, for Jesse Helms – a great guy. Between him and Jesse Helms, they wrote the legislation which basically set us free. Now, I must tell you what happened thereafter. You say, “Yeah, that was really good news.” The day after it became legal on January 1, 1975 the government came in and said, “We are demonetizing gold once and for all. We’re getting rid of all of our gold and the IMF is going to dump its gold.
And they started. It was a massive manipulation. Gold had gone from $35 an ounce to $197.50. Oh, the manipulation in the media, and from Wall Street, and from the government, was incredible. So they knocked it down in half. Over the next year-and-a-half, gold had just been legalized and they had just now smashed it in the head with hammer. They knocked it down by 50% from $197.50 to $102 in late August of 1976.
I’ll tell you a story. This may be irrelevant, but I got so discouraged. I had people tell me, “McAlvany, you’re the last bull. When you throw in the towel, when you give up, when you say, ‘There is no more. It’s over. I’m getting out. I can’t stand it. I’m like the rat trapped in the trap. Forget the cheese, I want out, I want out.’ When you get to that point, we’re going to know we’ve hit the bottom.”
I can remember in August of 1976, gold was $102 and Wall Street was predicting it was headed back to $35 an ounce. I went up on a mountaintop in Aspen, Colorado and I joked that I was contemplating my navel. I don’t know what I was contemplating, but I was so discouraged, I said, “I’m getting out. This is it. It’s over. It’s over. It’s over.” I was halfway down the mountain and it hit me – an epiphany hit me. “Oh, my gosh, they’ve broken me, they’ve broken me. They said they would.” I ran down and called John van Eck on the phone and I said, “John, this is the bottom, this is the bottom.” It bottomed one day later, and from that point on, for the next three-and-a-half years it moved up from $102 to $875 inter-day high in early January 1980.
But so much of what happened was manipulation. It is important to understand, they manipulated it off and on throughout the 1980s and 1990s and they are manipulating gold today. When somebody comes into the paper gold market and dumps billions of dollars in gold in less than one minute, that is not how you make money as a trader. And they can knock it down $20-30 an ounce.
So they are still manipulating gold, but what I learned in the 1970s was, the world monetary free market forces will eventually overcome that manipulation. They knocked it down in half from $197.50 to $102 in an 18-month period, and from that point forward it rose 8½ times, free market forces took over, and that will happen again and again, including today.
David:Again, retrospective, and in current tense, Reagan was the man who broke the mold. He increased the national debt by over a trillion dollars. I’m not saying that was his greatest contribution, but he basically, in the process, bankrupted the Soviet Union. So from a strategic perspective, he did have a win in that. But previously, there was only a trillion dollars in debt. It had taken from George Washington to Jimmy Carter to accumulate that trillion, and in his short first period of his administration he doubled the national debt.
Now what is interesting is we add that amount, a trillion dollars, to our national debt every year. So I think when we reflect on what has been and what may be, the Bretton Woods agreement, 1944, it broke apart in 1971 and we have been in a post Bretton Woods period. But do we still risk monetary system repudiation? Even though we don’t have a formal agreement like Bretton Woods, we still exist on a dollar-based standard the world over. Don’t we threaten that at some point, playing with these debt thresholds, whether it is interest rates being the key there, or just the mass quantities of debt?
Don:Yes, we have the world’s reserve currency. That was the result of “to the victor goes the spoils” after World War II, and that has helped build America to the number one economic power position in the world today, which has been rivaled some by China and others. That is now breaking down as we see it. Right now a lot of people are turning away from the dollar. A lot of people realize that there are monetary authorities and politicians who have manipulated the world monetary system through the dollar, and I think that three to five years from now, maybe less, maybe a little more, I think the dollar will not be the world’s reserve currency.
Now, the world monetary system is destabilizing rapidly. As you know, David, they are running the printing presses faster and faster and faster. Everybody wants to lower their currencies for trade purposes, including the United States. So I think we are moving toward a world monetary crisis and there is a lot of talk, and I think some of it is reasonable, about gold coming back in some way into the global monetary system.
But in the meantime, what lies ahead? I can remember in one of the Rocky movies when Clubber Lang was asked what was going to be the result of the fight and he looked at them, and through his teeth he said, “Pain.” I believe, David, that’s what is coming. Pain is coming in the world monetary system. People are scrambling, and that is why central banks and people around the world – not the average dumb-as-a-rock American investor – but people around the world are buying more gold now than they have in the last 10-12 years because they see the painthat is coming.
David:The trend changed in December 2015, and there has been, not only gradual accumulation, but also an improvement in price. We were at $1050 in the gold price, above $1500 now, a better than 50% move, and I would guess that very few Americans are cognizant of that, primarily because Dow, the S&P and NASDAQ have all done well. And with fixation on those indexes, in part, with the cheerleading of the mainstream media, there really hasn’t been a lot of bandwidth for anything else or another conversation about other asset classes or what not.
And so the move this time around, this 50% move higher, has been pretty much under cover almost. I wonder if you would, there are very few I know who could share a perspective on five decades of a particular asset class, 1970s, 1980s, 1990s, 2000s, 2010s, and maybe we can speculate on what is ahead. But back to the 1970s, just kind of in a nutshell. We’re going to do this kind of rapid-fire. The 1970s – legalization of the metal, Bretton Woods, Kissinger – what was going on then?
Don:David, I think there has been a tremendous change in the thinking of people in that five-generation period. People in the 1960s and 1970s were more readers. They didn’t have the Internet and even so muchtelevision distraction, though it was there and it was growing. But I think you had a different generation. I think you had a much higher percentage of Americans – I’m going to guess probably 5-10%, never a majority – who were thinkers, who understood the times, who wanted to understand the times, who were mavericks.
I think that has gradually gone away over the last five decades, as a result of a liberal education system, a liberal media, government, Wall Street brainwashing. And my view is there are less deep thinkers who understand the times. It has always been a minority, for sure, but I believe there are a lot less deep thinkers now than there were five decades ago. I think that is one of the real differences.
David:Don, I want to focus on these particular timeframes, the 1970s, and we have been living off of the benefits given to us, you might even say, singularly, by Henry Kissinger, as he stabilized the dollar in the mid to late 1970s through creating oil trade in dollars. These are things that we take for granted, but actually, the dollar was in freefall, the Bretton Woods system was falling apart, the world monetary system was in collapse, as we know it. And we made an arrangement with the Saudis.
All of a sudden, fast forward to today. We are a larger oil producer than the Saudis. We are not importing what we once were, and there is a growing audience of people who are not interested in denominating the flow of commodities in dollar terms. We had it in the 1970s. We have that erosion today. Is that fair?
Don:Absolutely. People saw the petro-dollar, the dollar reserve system, post-war, as building America up, and it did. There is no doubt about it. But people have begun to think, “We don’t think that is such a good system. We don’t like to see America calling the shots, foreign policy-wise, war-wise. They want wars here and there, they want to re-arrange things, and so forth. So the masses out there, meaning the other countries, are beginning to rebel against the post war dollar reserve system, and I don’t think that is going to go back. It’s not a pendulum.
I think it is situation where, over the next five years, maybe ten years, but in the foreseeable future, we will no longer have the world’s reserve currency. I don’t know what will be – maybe it will be a basket of currencies. I don’t think it will be the Chinese currency, but whatever it is, it won’t be primarily the American currency. We are losing credibility all over the world. We have been a bully and have been pushing economically, financially, politically and militarily. We have been pushing people around all over the world, and people all over the world are saying, “We’ve had it. We’re through with this American-dominated system.
David:Right. So we’re now at the 1980s. We had the end of a bull market in gold, which for the average investor might be discouraging. To you it is certainly not because you think that owning gold is for insurance purposes against political stupidity and a variety of kinds of volatility which can emerge, and have emerged historically. So as a ballast asset within a portfolio you think it stays anyway. But there you are, at the end of a bull run in the 1980s. We did see some interesting ratio trades and things through that decade because there was huge volatility between gold and silver. Do you want to comment on what is the most important take-away from the 1980s?
Don:I think for me, the most important take-away is that gold is an insurance policy against massive disaster. And we were not just in the gold business, we were in the insurance business. And so, in a very real sense, we didn’t really care if gold went up or down, we were selling people long-term insurance. Well, let’s say that gold, effectively, is moving sideways, and it was moving sideways with a downward slant.
But because gold and silver would fluctuate in a ratio toward one another, there would be times when you could switch out of your gold and silver. Silver would be undervalued versus gold, and the ratio is adjusted in different ways at different times. When we did ratio trading throughout the 1980s and 1990s, we saw people literally double their money over a period of 5-10 years in a flat gold market. So we, by doing the ratio trading we helped people to continue to make money even in a flat market. So we were basically helping people make money on their insurance policy even before the disaster came.
David:Well, maybe that bleeds over into the 1990s in terms of there being opportunities even in the context of a bear market in metals, because it still was a bear market in metals.
Don:Sure.
David:Was the greater pressure in the gold market as you got through the 1990s, the central bank pressure, selling gold?
Don:Yes, I think you have central banks and governments always manipulating gold and then pushing it down. They thrive on paper. Paper is their modus operandi, and so, sure, you are going to continue, and you will continue even now to see them doing that. So central banks, of course, led by the U.S. Treasury, our Federal Reserve, the IMF, are always going to be biased against gold. That has never changed, was very acute during that time, but it is still acute. It is still there.
David:Richard Sylla joined us on the Commentary last week. He wrote The History of Interest Rates, 4,000 years of history on interest rates. One of the things that he has pointed out in the book is this shift in governmental interest toward bonds. You can see this, when you look at central banks, they shift in interest from gold to paper assets in a period of time when interest rates were contracting, and the value of those financial assets was going up. So the allure of making money on the paper side was too great for them to just sit there and watch what they would view as a dead asset, gold, as a reserve, sit there and do nothing while financial assets were just going bonkers. So Gordon Brown, who basically put in the low, dumping Bank of England gold as we head toward the turn of the millennium, and lo and behold, we entered into…
Don:That would be, by the way, at the bottom.
David:That’s right.
Don:At the bottom of the market.
David:Yes, we were around $257-$300 and with his pressure we get to about $252-$253 on the gold price. But then, all of a sudden in the 2000s we have a roaring bull market in gold for over a decade, and stocks do nothing. So the central bank timing in terms of dumping gold to get into financial assets may have been rewarding for a 1998-1999 period, but it ended up being a disaster. Of course, they don’t get marked, or graded, or fired on the basis of portfolio performance. But anything that you would say about the year 2000s in the early stages of the most recent bull market?
Don:I’m not sure what I would say about then, but let me ask you another question. I’ll answer that question with a question. What would you say about the central banks now piling into gold around the world today? Because today they are buying gold. They’re buying gold very rapidly.
David:Yes, well, on the one hand I’m not sure if that is good news or bad news for us.
Don:(laughs)
David:There is the skeptic in me who says they are rarely doing the right thing at the right time. But I think one of the things that it does suggest is a disaffection with the U.S. dollar, and the move is perhaps for different reasons – an insulation against currency decline, a diversification away from dollars. There is a motivation which is, I think, fundamentally different than what was in the late 1990s, moving out of gold reserves into paper assets, which was almost like playing the markets with governmental balance sheets.
But here we are, we spent the last decade 8-9 years, consolidating a five-times move in the price of gold, more than that in the price of silver from $4.50 to almost $50 dollars, a ten-times move in silver. And it looks like we have begun the next leg higher in the gold price. After a 50% move higher over the last three to four years, it looks that way.
Don:I would add to that, I think in the past we know that central banks manipulate and suppress gold. Today, I believe they are buying gold because of fear. I believe that they see major looming problems in the world financial system, currency system, the trade war, potential for shooting wars. I think there is genuine fear on the part of the central banks, and I believe that is why they are buying as much gold as they are buying today.
David:So we look at the next decade, the last decade in question, the 2020s, and speculate, where do we go from here? Why? How do we get there? What are the dysfunctional factors that are motivating investors, whether it is in the United States or abroad?
Don:Fear is a big factor in people buying gold. When they see instability around them or right on the horizon, they look at gold as a safe haven. I live in Asia now and I see it from a very different perspective. But people have concerns about China, which is amassing troops by the Hong Kong border now. The conflict in the South China Sea is a geopolitical conflict.
David:Let me interrupt you there because today you live pretty close to that area. You live in the Philippines. You are a couple of hundred miles, if you are looking at the Spratly Islands and the conflict that is potential, geographic, just sort of regional geographic conflict. The Chinese will stake a claim – Paracel Islands, Spratly Islands – this is off of the coast of Philippines. In a short summary, why are you there, and I think you’re going to stay, aren’t you?
Don:We’re planning to stay. I hope it’s not like the Japanese invasion back in 1941. We’re planning to stay. We work with orphans out there and we feel like we have a new calling in our lives to not exactly give up gold coins, but move from an emphasis on gold coins to an emphasis on orphans. So my wife and I are involved in eight orphanages with 500 kids scattered all over Asia, and so that is where we are. But we have a good perspective on the monetary, economic and geopolitical differences of opinion, differences in what people see. And I think people in that part of the world see the world destabilizing very rapidly. And we see it destabilizing very rapidly.
David:Have you seen the Chinese get more aggressive in recent years, and does that show up in the dialogue between Xi-Jinping and Duterte? What does that look like?
Don:They are getting much more aggressive. They are pushing forward in many areas, not just in the South China Sea, but they are making rumbles against Taiwan and this is a source of major concern to all the nations out there, and of course, to us, well. So geopolitically, things are destabilizing. Is it looking exactly like it did when Japan moved out across Southeast Asia? No, I wouldn’t say that. And there are pressures against the Chinese government from the American government with the trade war. So things are destabilizing and I think over the next five to ten years things could get quite unstable geopolitically in that part of the world. Does that cause us loss of sleep? No, but we keep our eye on it very, very closely.
David:We get together periodically and discuss business-related things. You’re still involved, not necessarily in the day-to-day operations of the precious metals brokerage business or the wealth management business, but still from a strategic perspective we chat. And the launch of our business, the wealth management business in 2008, came from a conversation that you and I had in 2005 about what we would do at the end of a bull market in metals, what kind of a message would we carry to our clients, what advice would we give them in light of what we, ourselves, were doing. The two words which were on the tip of our tongue and the front of our minds then, as now, were income and diversification. You still, from our conversation today, sound like you are an enthusiastic owner and purchaser of precious metals, but why would you consider something other than gold?
Don:Well, it is not wise to put all your eggs in one basket. I think we all know that. And there will be times when gold is moving forward like we see today. And then there will be times when it is very, very quiet, and other things are moving ahead. As we all know, we can agree, gold does not produce income, so I think a balance. Now, how much gold do you have, and how much do you have in other assets? I would say for most people it would be wise to have at least 25% of one’s net worth in gold. And I personally believe that at least a quarter of that should be stored abroad just in case our government would ever become more obnoxious.
With that said, what do you do with the other 75%, if 25% makes sense? I think income producing real estate in the right place – and we have actually looked at a little bit of that – I’m very cautious about the world’s stock markets. The bond markets look like a disaster waiting to happen. The negative interest rates are messing things up dramatically. I see a time when we may look back on this time right now and say, “Oh, my gosh, I wish we had had 110 % of our assets in gold.
But I think prudence says that we diversify. And yes, some stocks, right positions, maybe a short fund, maybe gold stocks at the right time, I think income-producing real estate. I think diversification does make sense, but I think that if you don’t have, as the basic foundation of your strategy, gold – and I mean physical gold – in your possession, or stored somewhere where it is very safe, I think that you would be in error.
David:One of the things that we have tried to anticipate is not only your needs, our investor base needs, in terms of income, but also just a reflection on where we feel most comfortable, which is with real things. After 50 years of dealing with hard assets, hard assets and real assets are something that are almost second nature to us. You mentioned real estate. That’s a real thing. It’s a hard asset. But owning things like pipelines and cell towers and water works, real things with cash flow, you can have the best of both worlds. It is not exclusively gold, but you can own real things with cash flow.
That has been our emphasis and greatest interest today with our wealth management group, and I think will continue to be a major theme in the years ahead, because real things, regardless of the monetary policy experiments which are going on, regardless of the fiscal profligacy which is repeated over and over again, whether it is in the U.S. or anywhere else, real things give you insulation to a degree, and income, certainly, in terms of the total return picture gives you some insulation to a degree.
Don:David, Wall Street, the government, the financial establishment, is both our friend and our enemy, and I would put the emphasis probably on the latter. Among other things they have created a situation where you almost cannot go in the normal way and make income. What do retirees do when interest rates are moving toward zero, when bond rates are very, very low? Therefore the need for a wealth management where people who understand the times and understand where you should be in the markets, and how to diversify in those kinds of times, the need for your kind of wealth management is greater than ever. So the government and Wall Street are creating, with their low interest rates, a new set of needs, and we need people who are smart and intelligent and understand these things, who can help guide things through a very complicated situation.
David:Getting the right team together is a challenge. Finding good people in terms of integrity and character, along with the right skill set and expertise in a particular area, putting all that together in a package, I’m glad we started in 2008 because it has taken over a decade to get that team together, but I’m pretty excited about who is on that team today and where we are going as an organization.
Don:I think your team is skilled. That is great, but I think that one of the greatest assets is we need people who are leading us, guiding us, who understand the times, who understand not just what we see on the surface, but understand the times well enough to see what is coming. That is one of the things I have tried to do with my newsletter, the McAlvany Intelligence Advisorthat I have written for 43 years. We try to help people understand the times, and your people are people who understand the times. Yes, they know how to maneuver in difficult markets. That is very, very important. But understanding the times and what is coming maybe is even more important.
David:Well now, to end where we began, which was the why – we’re interested in things as they evolve, I think, in terms of – my heart beats very similar to yours. We are interested in understanding the truth of matters, not as we want them to be to us, but as they actually are. And there is something of a pressing in to a different reality in that sense, and so why we do what we do is perhaps different than other Wall Street companies, or money management groups, or even gold companies, but I just want to say I appreciate the influence that you have had on our community, that is, the companies that we manage today, having a deeper purpose, being on a rescue mission, being involved in a cause.
Obviously, that is on evidence even today, although the management of the businesses is less of interest to you and the involvement in saving individual kids, getting them through college, giving them a different leg up in life that they wouldn’t have in life otherwise throughout Asia. It is still who you have always been, and I would encourage all of our listeners to look at their lives in some respects the way you have. Look at your gifts, look at your talents, look at your passions, and recognize that in different chapters they may have different expressions. But who you are was by design. And who you can be, the impact that you can have, it is important to take account of how you can impact other people’s lives.
Today, for me, the businesses and managing the businesses and that helps you and Mom be out there and doing what you are doing, but what you are doing is no different than what you have always done – you’re on a rescue mission. You have a deeper purpose, you have a cause, and working with those kids is great. If anybody is interested, the Asian Pacific Children’s Fund is the group that you put together nearly 20 years ago and is involved with the homes that you mentioned, eight different homes throughout Asia. And you would love to work with more. You would love to work with 80 if you could. And if you could find the right ones to partner with and have the resources – resource limitation is always a part of an expansion issue, but for those who are unfamiliar with Don’s work, Asian Pacific Children’s Fund. What is the website?
Don:It is apcfund.com, as in Asian Pacific Children’s Fund.
David:Life is short. We are reminded about it in many ways, and making sure that your life is of meaning and significance as it reaches into others’ is important. I wanted our listeners and our clients to be reminded of the role that you played in the legalization of gold because something that we take for granted is actually part of our company history and part of your contribution to the financial landscape. But your contribution is not limited to that.
Don:David, in our coin business, we have been in business for 47 years. With the newsletter we have been in business for 43 years. And that has actually been at a time when many, many of our suppliers, our competitors, have gone out of business. I think what has been the underlying dynamic behind what I have done, you have done, what we have all done together is, we want to help people understand the times. And second, we want to help people prepare for difficult times. Our goal is to help people. I believe, and I think we all believe, that there could be some difficult times out there on the horizon, and if we can help people navigate through those difficult times and come out well on the other side, that has been our almost half a century goal, and that will continue to be our goal for the next half a century.
David:(laughs) I have to say, there is certainly a personality difference between the two of us. There is a looming danger, always, in your mind, and that is a part of who you are.
Don:(laughs)
David:And in the language of options trading, in our family you have always been the put and I’ve always been the call. I’m the growth and the positive thinker, and you are the head for the hills, keep your bags packed, keep your options open, it may go wrong. And that may be the best case scenario.
Don:One of my most un-favorite people I have a favorite quote from – Lenin. I think we all know him. He was the father of communism. He said, “Worse is better.” I have always liked that statement because out of hard times, out of difficult times, comes great opportunity. Sometimes in normal, healthy times when everybody is comfortable, nothing really changes. But out of difficult times, when things get worse, you can have breakthroughs and you can make a difference. This is the way Patton thought in between World War I and World War II – worse is better. He savored the opportunity. When the crisis came, there were going to be breakthroughs and he could move forward, and that is my philosophy. Worse can be better.
David:This is probably where we do meet in the middle because whether it is volatility in the markets or hardship that people experience, there are moments to grow and opportunities that only open in those moments. So yes, on kind of a positive note we can wrap it there.
Don:(laughs)
David:We look forward to the next decade, two decades, three decades. We appreciate your persistence and your perseverance for the last 47. As a second-generation family business, hopefully heading to a third and fourth, we anticipate the next 47 years with great enthusiasm. Thank you for your contribution.
Don:Thank you.
