January 21, 2015; Swiss Franc Shock!

Weekly Commentary • Jan 22 2015
January 21, 2015; Swiss Franc Shock!
David McAlvany Posted on January 22, 2015

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“There are many reasons – market volatility, central bank artificiality, and now you have an increase in class warfare incited by the oval office. Quite frankly, the danger of the president’s narrative is that it solidifies a governmental commitment to keeping as many citizens as possible on a Keynesian consumerist hamster wheel.”

– David McAlvany

Kevin: David, I have mixed emotions this week. I have to admit, I’ve been getting sick of central bank control and this certainty that has been built into the system, and prices being completely wrong, whether it is the Swiss franc, whether it is the euro, whether it is gold, whether it is the stock market. I have to admit, even though there was mayhem last Thursday, and a lot of people just took a real huge haircut, I was happy that the Swiss disconnected from the euro, and at least their currency went back to what it was supposed to be.

David: Listen, it is a direct democracy. It is a country that has practiced sound financial management for decades. It is a country that, up until recently, actually had quite a bit of gold backing their currency, which they don’t today. But the Swiss franc shock, which happened last week, I think, is consistent with the Swiss bank seeking their own best self-interest, and getting back in line with reality. I don’t know if this is because they sort of drank the Kool-Aid, so to say, and joined the central bank community for a certain period of time, devaluing along with the rest, that they felt like that was the popular thing to do, or the thing that they must do to support their manufacturing sector – but it’s gone. And this was, frankly, the most significant currency move since 1992.

Kevin: And Dave, I remember the week that we were in Switzerland when they decided to start monetizing their debt. This was four or five years ago. And we talked on the Commentary, which we were recording from Switzerland, about this change in mindset in Switzerland, that all of a sudden they were monetizing their debt. Then, of course, not too long after that, they pegged the Swiss franc to the euro, which basically was saying they would support the euro, they would buy euros and keep the franc from becoming too expensive relative to the euro.

David: Well, so what happened? Here is basically a brief synopsis. Starting in September 2011 the Swiss National Bank committed to supporting the manufacturing and export sector of the economy. It is worth about 50-53% of Swiss GDP, and by pegging the Swiss franc to the euro, with a target exchange rate of 1.2 francs to the euro, they were going to buttress the manufacturing and export sector. The argument was that the Swiss franc was extremely over-valued. Again, we are talking about September, 2011. This is what the argument was. It was over-valued, and it was threatening a deflationary outcome, with the Swiss manufacturers being unable to compete in the marketplace because of the currency’s over-valuation. One of the primary export markets for Swiss products is the eurozone, so the devaluation game began then. Three years later, we also remember September 2011 for another reason.

Kevin: Right. Gold peaked.

David: That’s right. It was the month that marks the peak of the gold market, $1920 an ounce. And here is what is fascinating to me. The same realities which were compelling the Swiss National Bank to devalue were driving the price of gold to fresh heights as investors from around the world sought safe haven assets in the context of global financial instability, and it was, at that point, felt most acutely in Europe. You ask, is this a flashback? Do we have current re-run of that same period of time? You know what’s happening this week?

Kevin: Yes, this week, actually, is probably something the Swiss saw coming, Dave, and they didn’t like what they saw. Mario Draghi is probably going to just open up the coffers and start printing money like there is no tomorrow.

David: It’s back in focus, three years later, to the week. It was three years ago that he promised to do whatever it would take to revive the European economy, and three years later he is still dangling the carrot of easy money from the central bank, or, as it turns out, probably going to be the national central banks, acting as conduits to monetize European government bonds. And so, again, for us, from our perspective, it is no small irony that as we now witness the markets treating the free-floating Swiss currency as a safe haven currency – notice the price has gone up 30-40%, demand has increased – we also are seeing strength in the gold market.

It remains to be seen whether the current move in gold is more than a dead cat bounce – that would be the skeptic’s view, but quite frankly, if we clear $1347, that would give us an all clear signal. Last week we progressed above the first hurdle, which was $1250 dollars, and our guess is that the Swiss franc, which closed its valuation gap in a day, moving up 30-40%, gold will close that same valuation gap returning to its old highs, within a year.

Kevin: Let’s talk about valuation gaps for a second, Dave, because when something is controlled unnaturally, whether it is the gold price, whether it is the stock price, whether it is interest rates, which are artificially low, there is a phantom gap that starts to occur. In other words, the phantom is what the price really should be, versus what the price is being controlled to be. What you saw last week in Switzerland, and worldwide through the euro, is that phantom gap got filled instantly, and the Swiss franc at one point, Dave, was up 41%. That could take years for a currency. And this all happened within a couple of hours.

David: That’s right. And if you look at the way the world is constructed, as you expressed the frustration earlier about the central banks of the world controlling prices in so many different areas, this is what we are seeing, and anticipating more of in Europe this week, because deflation is alive and well, because the eurozone economy has dipped into recession for the third time. You, again, have an Italian central banker, that is, Mario Draghi, in charge of the ECB, who has primed the investment public for what Italians have had a long history of doing, which is, when things are down and out, you just print.

Kevin: Print money.

David: You print like mad. And that announcement is due out this Thursday. What, when and how? We can stay tuned. But they’ve already floated a number, about 635 billion dollars in purchases, and that has been reiterated by several different sources. So, they are floating it to get the market used to it. If they want to see a surprise on the upside, in terms of market pricing, maybe they will introduce a slightly higher number.

Kevin: Just like a bad penny turning up over and over and over. Or, I’ll give you another example. I never got rid of all my Argentine currency, my change, and it keeps turning up, because I just don’t feel like throwing these little coins away, though I’m probably not going to use them before they are completely valueless. Greece, like a bad penny, continues to turn up in the news. For a few hours, Dave, a couple of days ago, there was a story that said that two Greek banks were asking for a bailout. Strangely enough, that story got pulled off the Internet. If it weren’t for Zero Hedge having sort of a screen picture of that story, it would have been gone.

David: It’s fascinating that they are back to the same dialogue and the real possibility of choosing to leave the European Union, and this is the same dialogue that was hot and heavy in the summer of 2011. And we discussed last week that the Greek banking sector, which for us is something of a small window into the efficiency of the market there – we’ve already seen three billion dollars in deposits yanked from the system; that’s in a two-month period.

And as you mention, those Greek banks, Eurobank Ergasias and Alpha Bank, both have requested access to an emergency cash facility run by the central bank. These things, you would say, were straight out of the press in 2011, except they are not. This is 2015. And Mario Draghi’s promise in 2011 to do whatever it takes – this is like a broken record. He has been saying this now for four years and is ready to deliver on the promise, yet again. To what end? Are we really talking about a solution, or are we talking about a Band-Aid? Because it would take significant structural reform for there to be a long-term workable solution.

Kevin: So, this was a three to four-year Band-Aid, in a way. Let’s say that you were a freshman in college in 2011, and the situation at the time was that people were very worried, they were buying Swiss francs, the franc was over-valued, supposedly. Gold was over-valued, supposedly. Greece was in trouble, supposedly. Then a Band-Aid came along and now you are in your senior year in college and it looks exactly the same.

David: Right. The Band-Aid is being torn off.

Kevin: Exactly.

David: You have the Swiss franc, which is back at 2011 levels overnight, as investors, who have now been given the opportunity to own the Swissie, and not just a euro proxy, have come right back in for the safe haven currency characteristics which that currency has long enjoyed. And we are seeing something of a bid in gold, too, on the same basis.

Kevin: Well, the Swiss did take action, though, to try to keep the currency from going up even more. They did lower rates into negative territory, did they not?

David: To make sure that investors were not interested in owning the Swiss franc, they lowered rates aggressively. Investors were still flocking to the Swiss franc even though Swiss franc bonds, of all maturities, out to nine years, are all negative in their yield. So, the nominal yield on short rates went from 0.25, that is, negative a quarter percent, to negative 0.75, three quarters of a percent. They’ve got three-month LIBOR, which is fluctuating between negative 0.25 and 1.25. And again, they lowered rates so that investors would say, “No, we’re not getting paid to own the currency, we’re not going to own the currency.” They didn’t want to see an appreciation of their currency, and yet, you did see an appreciation of the currency. What does that tell you about people who do want a liquid pool of safe capital? Who is it that is judging today that there is a need for liquidity and safety?

Kevin: What just occurred is a picture of what is free, what has been set free, and what is still under control, because they controlled their interest rates.

David: You’re correct. Currency rates are now set free. Interest rates are still subject to the manipulation and control which the last seven years have allowed to become commonplace, and in fact, now the market expects it. And that was the big surprise. The market expected, with sort of a hindsight bias, the Swiss National Bank to keep on playing the game that they had been playing. And that is what most of the world assumes will be the case, with all the world’s central banks keeping rates artificially low. The Swiss National Bank is still doing that. Global central banking elites are continuing to do that. What happens if or when they step away from the control panel, and allow the market to be a market?

Kevin: Well, let’s talk about that. What are the ramifications of the choice that the Swiss National Bank made last week?

David: You mentioned it earlier. This is in advance of Thursday’s QE announcement, so central bankers are preparing for QE. There will be ramifications. It was the Dutch Central Bank, I think it was the economist, if not president, who said, “You know, one of the consequences of this next round of QE is going to be that there will be asset prices that don’t reflect reality.”

Kevin: Right.

David: It’s honest, it’s true, it’s factual. We would have said the same thing. QE distorts asset prices and changes the landscape. That’s good for somebody. In this case, the other ramifications, corporations in Switzerland, as a result of the change in the value of the Swiss franc. They quickly moved back toward reality. They had been living in the sort of artificial environment of being highly competitive over the last three years because the currency was set low, making their products that much more affordable in the international markets, and so, they are dealing now with the hard adjustments. Yes, reality is sobering.

Here is what is involved. You have production costs, which are largely in Swiss francs, and you have sales, which quite often, in foreign currency terms, puts them at a disadvantage. And this was immediately recognized last week, as even the largest Swiss companies – we’re talking about companies that are worth tens of billions of dollars in terms of market cap – are off 10-20% within a 48-hour period. That, by the way, was the largest drop in the Swiss market in 25 years.

Kevin: But it was built with the assumption that the Swiss were going to continue to peg to the euro.

David: That artificial reality was going to be the only reality from this point forward.

Kevin: And when I read reports – I was just reading a money manager’s annual report and he was just saying, “Ho hum, interest rates will stay low, the United States is in a recovery, we’re going to see new highs in the stock market, we’re going to see gold stay relatively low.” His assumption is based on, really, this artificial fix of interest rates…

David: Being normal.

Kevin: Being normal. Now, there is another anomaly that has entered this picture. It is not just the Swiss franc rising, but look who has been buying many of the euros to support the euro.

David: Yes, and this goes back to the ramifications of the choice by the SNB, the Swiss National Bank. The euro just lost one of its largest buyers. That central bank support for the European currency – that’s been very strong – the Swiss National Bank has been aggressively buying euros to maintain that 1.2 peg, which is why the Swiss National Bank records its base money as having expanded from 80 billion Swiss francs a few years ago, to now, 400 billion. In essence, the Swiss National Bank has been printing Swiss francs to buy euros, and has begun to question the sustainability of that commitment, which, in our view, is very reasonable.

So, you have the Swiss National Bank, who is also anticipating this week’s European Central Bank, the ECB announcement of quantitative easing, or debt monetization, and was likely afraid that the euro would continue to drop in value to levels that would raise the ire of Swiss citizenry. Because think about this. They have been buying euro paper, and that has been to diminish the value of the Swiss franc and support the value of the euro. Well, as the euro has been declining, they have lost 60 billion Swiss francs on this particular investment, if you will, in euros. And the point is, this could get a lot worse, if you are dealing with a larger base of Swiss francs that have been converted to euros. The ECB has essentially pre-announced 635 billion dollars in purchases. And again, we look at that as something the Swiss National Bank simply wanted to avoid.

Kevin: Dave, there is also the concept of the carry trade, which is just simply, you find a country that you can borrow money in at a very low rate, and then you go out and loan it to someone else at a higher rate. Your worst nightmare in a carry trade is if the currency that you borrowed originally rises. Now, usually, a carry trade is broken if the currency rises 1, 2, or 3%. We’re talking about a rise of…

David: Of 20-40%. So overnight, the Swiss carry trade ended, and that is exactly the mechanism – borrowing in a depreciating low interest rate currency, and taking those funds and going and buying other assets. And that came to a halt without warning mid-week last week. As a result, you have liquidations in other asset classes, and that should come as no surprise. The impact of this is primarily in the hedge fund community. The large short positions in the Swiss franc were absolutely destroyed, and I think anyone who is paying attention should be very cautious.

Those playing the same games in the yen have to be aware of the fact that the Bank of Japan sees the possibility for a sharp rise in yen, because you have yen carry-traders and short positions out the wazoo, which, if they had to be covered, would cause a significant spike in the Japanese yen, in the same way we have seen in the Swiss franc, which has been one of the funding currencies for mass speculation around the world.

Kevin: The wrong people probably were short francs, but I do know of a couple of people that were long Swiss francs. I’m not sure if I’m allowed to say that, but I do know someone in the room who just happened to be long francs.

David: I happen to own a few Swiss francs, and yes, the benefit might be enough for a schawarma next time I’m in Zurich, or something like that. Not enough Swiss francs to matter, but better to be long, than short, mid-week last week.

Kevin: Okay, so let’s talk about the people who had taken these loans out. The currency that they are paying back in now is 30% higher; they are going to have to pay 30% more for it. Who has those debts? Who is going to take the pain for that?

David: Well, there are two. On the one hand, you have the foreign currency traders who are taking leveraged bets, and they just got wiped out. They owe money if they want to come back to the table. The second category, and this has been happening for years now, Swiss banks have loaned money to Eastern European countries with individuals and corporations taking advantage of the low Swiss franc interest rates, now negative interest rates. It’s kind of like free money. You can see the appeal. I’m thinking specifically of Hungary here. Then lo and behold, the currency moves higher. What was a cheap interest rate is now an expensive principle repayment. You see how it works? And the principle having to be repaid because of the currency move is 20-40% or more. This, in essence, – there are differences, of course, but in theory it is like debt has been indexed.

Kevin: It reminds me of what Bill King has been saying for a long time. I was talking about filling the phantom gap, but this absence of correct pricing in all of the markets, at some point, is going to probably be filled, and filled violently.

David: Right. Bill King, our friend, said that, basically, this is a template for the coming adjustments in other asset classes. I quote: “Central banks’ incessant manipulation and interference in the markets in order to keep the welfare state and the big banks afloat is increasingly distorting the markets and making a return to normalcy more onerous. There will be no easy adjustment to normal markets. With each central bank intervention, the odds of a violent adjustment jump. The Swiss franc chaos is a template for coming adjustments in other asset classes.”

Bear in mind that, collectively, the global central bank community is now up to 12 trillion dollars that have been thrown at the markets to promote the idea of a return to normalcy, and yet, we still have the results which remain elusive.

Kevin: Sometimes you have to go back and remember early years. Dave, back in 1992, I remember September of 1992, there was a sure bet in Europe, as far as great interest rates. I know at the time U.S. treasuries were yielding about 4-5%, but you could get double that in Europe, and the reason you could “safely” get that, is because of a commitment that all the countries had made with each other to keep their currencies within about a 6% band. It was very similar to what we are seeing with what Switzerland had decided. Even England, who at the time was not part of the European Union, had agreed to go ahead and set the pound so that it would stay within that bound, as well. It’s called the Exchange Rate Mechanism.

David: Because currency volatility was essentially taken out of the equation, it was a question of choosing treasuries in the U.S. for 4-5%, or choosing treasuries overseas for 8-10%, because the volatility, again, of the currency fluctuations was taken out of the equation, given the ERM.

Kevin: And then it was broken, and the only person who made money on that trade, I think, was George Soros.

David: He certainly was one that made the most, other than the guy with a little pocket change in another currency. Now, slightly different than what happened, but the same mechanisms involved, an artificial value was being maintained. And when that artificial value could no longer be maintained…

Kevin: It was violent.

David: In 1992 it was the British maintaining the value of the sterling at a high level, and it should have been lower. And so, Soros, basically, seeded the storm, if you will, and in the process of seeding the storm, caused a central bank decision to occur which took them out of the exchange rate mechanism and caused, or forced, an immediate devaluation of the pound sterling. The opposite occurred, but again, we’re dealing with artificialities in the Swiss franc. There was the suppression – instead of the support of, there was the suppression of the value of the Swiss franc. And when the Swiss National bank stepped away, we returned to normalcy.

Kevin: I think for those who are trying to maintain perceptions, the last thing they want to see is gold rise, yet in 2015, Dave, gold is up 7-8%?

David: Gold is up 8% in 2015. Germany has successfully received, last year, 120 tons of gold – 35 tons from Paris, 85 tons from New York. Gold, in euro terms, if you are looking at a chart of gold in euros, has finished its consolidation and is moving higher, so resumption of the bull market trend is in play in euros. It is in play in Japanese yen. It is in play in virtually every currency, and lo and behold, in U.S. dollar terms, we are sitting at the downtrend line, at about $1282.

Getting above $1282 breaks that downtrend line as we have mentioned in the past, the technical levels that we have been looking at, as hurdles to mark progress. $1250? $1347? These are prices that, for us, open the door to a 2015 return to $1500-1600, with a potential for $1900 by year end. Our long-term price target of $5,000 is still expected, and we still see $165 silver. That is a 30-to-1 ratio, and there are certainly people who would think that 15-to-1 is a more appropriate gold-silver ratio, at an extreme.

Kevin: And there will be volatility. There are going to be ups and downs before those levels are hit, but the other thing that we have measured in, Dave – through the years, we have encouraged clients not to just look at the dollar versus gold, but also, what is the value of the Dow? How many stocks can you buy for an ounce of gold?

David: And that trend, I think, is in the process of resuming. We went from a 43-to-1 Dow-gold ratio at the extreme in the year 2000, to about a 5-to-1 or 6-to-1 ratio in the fall of 2011. Since the fall of 2011, and this is the irony throughout our conversation, we had artificial decisions made in the fall of 2011 which both impacted the Swiss franc and gold, and we’ve seen the artificiality come out of the Swiss franc and a return to normalcy occur there. We think that you will see a return to normalcy in the gold market, as well. That Dow-gold ratio is now back in the double digits and we think that it will shrink to 8-to-1, that’s our target for this year, 5-to-1 next year, 3-to-1 by the end of 2017.

My suggestion is that you own what you are going to own. If you are a conservative investor and you want to wait for price confirmation, then wait for gold to get above $1347 before backing up the truck. Aggressive investors would add between $1220, which is strong support, and $1350, a breakout level. As I mentioned, we are at the descending trend line this week, at $1282, and we may consolidate here before we move to $1350. But I think it is time that we dust off the cobwebs of our minds and begin to look with different expectations to the gold market. Reality is impinging itself. Just as we saw in the Swiss franc, also, we will see that this year in the gold market.

Kevin: And we are seeing the impacts on central banking and some of these artificial price levels. But we now have a split government again, and many people would say, “Hurray. Let’s try to keep them from being able to make any decisions.” Always arguing. But we do have a State of the Union that probably is going to have to be addressed as far as, the smell of higher taxes seems to be back in the air.

David: A lot has changed in the last several years in terms of Swiss Bank secrecy, so don’t take this the wrong way, but money is looking for a place to hide, and that is why you are seeing money go into the Swiss franc, and into gold. And again, there is no place to hide from a reporting standpoint, but there is a place to hide when it comes to extreme market volatility, and the fragility which we see in the global financial system.

Money is looking for a place to hide and there is no doubt that after the State of the Union, and the reiteration of redistributive policies here in the United States, there are many reasons – market volatility, central bank artificiality, and now you have an increase in class warfare incited by the oval office. Quite frankly, the danger of the president’s narrative is that it solidifies a governmental commitment to keeping as many citizens as possible on a Keynesian consumerist hamster wheel.

Kevin: You can’t save.

David: No, they don’t want you to save. And they want anyone who is saving capital to be fleeced, to redistribute that capital to those who will be forced, by economic necessity, to spend every dime. So we have this intergenerational thinking among the wealthy which is questioned by those in power today. And in its place, the toxic seeds of envy and redistribution are being planted. I just wonder, can anyone imagine a statesman casting a vision for this country which has inherently unifying characteristics instead of being inherently cannibalistic?

Kevin: It seems like war is being incited from all angles, including, like you said, class warfare. But let’s go ahead and talk about recovery here, because there are many people who have been buying into the unemployment numbers. There was a lot of celebrating. We talked about it on last week’s program, about the unemployment number, but actually, without adjustments, it was bad news.

David: That’s right. We had the nonfarm payrolls number, which turned a negative 65,000 into a positive 255,000, and everyone was excited with the end number, so no one questioned it. What is interesting – we stand corrected. We were very critical last week saying that street pundits don’t like to look at seasonal adjustments. Well, they do, they just look at it selectively. So, here we have a Barclay’s economist who ignored the nonfarm payrolls adjustment, that seasonal adjustment, but looking at the more recent initial jobless claims, which spiked higher to September highs, said this: “We attribute the spike in benefit requests to the seasonal adjustment process.” So, when you have bad news it is explainable, and you can make it go away, but when you have good news, please don’t use the same measuring stick. And that’s what we do continue to see, is that the light is cast in different ways at different times by the Wall Street pundits.

Oil? What can be said? Last year in May most people were thinking that the price was only going higher. As we neared $100-114 per barrel you had 91% of traders who were bullish on oil. In fact, last May, large speculators had their biggest net long position ever.

Kevin: Right at the top of the market.

David: Right. According to my friend Robert Prechter – he discussed this in this week’s missive – the number is now, in terms of trader interest and trader bullishness on oil – between 3 and 5%.

Kevin: Well, doesn’t that mean, Dave, when most of the people are thinking one way, that the market is going to go the other? Are you looking for higher oil prices?

David: I think we are looking for considerably lower oil prices, but given the consensus that it can only go lower, you are probably going to see it bounce, maybe a sizeable bounce. We may have 1, 2, 3, 6 months of a move higher in oil. Our conjecture, as we mentioned last week, you have convergence of oversupply, which is not a permanent state of affairs, but it is the state that we have for now, and probably the next 12-18 months. You match that up with decreasing global demand and I frankly don’t care about the demographic arguments of who is consuming what in Asia, we see a declining trend in the short run, as you see declining growth virtually everywhere on the planet.

Kevin: And that would include copper. We talked about Dr. Copper last week. Copper is going down like oil has been. Are we going to see a bounce in copper?

David: And that is probably a supply and demand related thing, too. You have the LME inventory, which most recently showed an increase, so you have increase in supply, and meanwhile, you have lots of uses which are down – industrial demand, housing demand, etc., which is down given a slowing global economy. Of note, because the Chinese have a tremendous stockpile of copper, it is worth reflecting on volatility this week in the Chinese stock market. They decided to limit margin purchases, and they went ahead and penalized a number of banks who were getting excessive in their lending for margin purchases in the equity markets. I came to work a day or two ago listening to the National Public Radio explanation of this and they brought on their economist. He was incensed by how much money was being borrowed to buy stocks, and how artificial this was, and…

Kevin: “Those darn Chinese.”

David: … it was normal to see an 8% correction, the froth was coming out of the market – good for them. Slap, slap, they’ve learned a lesson. And I’m thinking to myself, is he oblivious to the scale of U.S. margin balances?

Kevin: It’s higher than any time in history right now.

David: Any time in the history of the U.S. markets, not only in nominal terms, but as a percentage of market capitalization, or as a percentage of GDP, the amount of margin debt that is in play is near records here in the United States. And the same thing which occurred in China is not going to happen here. You know why? Because the Fed has taken it upon themselves to make sure that banks are lending cheap money, and that margin debt is available, and we continue the gravy train of progress in the stock market toward an infinitely higher number. But again, this goes back, Kevin, to what we have been talking about all day today, which is, isn’t this artificial? And what happens when reality comes back in, and the markets have to reflect just reality, not the artificial inputs.

Kevin: Dave, we’ve talked about shocks to the system. Obviously, very few people expected Switzerland to do what they did, when they did it, and it had huge ramifications. What we are seeing with Russia right now – people need gas, people need energy, and frankly, in the middle of the wintertime, in Ukraine, they need energy. And Russia is cutting a huge percentage of the gas feeds into Europe.

David: Again, most of us don’t have family in Bulgaria or Macedonia, but that doesn’t change the experience for folks in Bulgaria, Greece, Macedonia, Romania, Croatia and Turkey. The gas that has been shipped through Ukraine, 60% of it has been shut off, and the Russians, through Gazprom, have basically said, “We’re not going to pump this through anywhere but Turkey because we’re sick of Ukrainians stealing gas, basically, siphoning off the pipeline and not paying for it.” So you have, again, a subtle form of control, the Russians flexing their muscle, and a number of Eastern European countries being pressured. You realize that without gas they are subject to the pressures of a variety of political interests. And so, the game continues to intensify and increase in interest there in Russia.

Kevin: Isn’t it interesting? This is the same country, though, that may be cut to junk bond status by Moody’s.

David: Last week, Friday, Baa3, with junk bond status on the horizon, and it’s not out of the realm of possibility that in 2015 we see a default. What happened to the global markets the last time we saw a Russian default? Does anyone remember? Does anyone realize that there were hedge funds that simply got it wrong just a little bit? That almost brought the entire financial system to its knees?

1998 – you need to replay that in your mind. Very little changed in 1998 except that the entire financial system of the world almost melted down. And we were in a reasonably good position, if you are looking at the global economy at that point. We have the same issues of fragility and vulnerability now that we did then, whether it is Russia, whether it is looking at a declining growth rate in China, as we have mentioned in a past podcast – fingers of instability.

You can pick a dozen different things that just don’t look quite right, and could, actually, in 2015 turn out to be quite wrong and uncomfortable. And you do want to be liquid in that environment. You do want to have a cash position in that environment. You do want to have a gold position in that environment. And the fears and concerns which we saw peak in 2011, and then just dissipate because of central bank intervention – they are re-emerging. For anyone who is paying attention, the concerns of 2011 are back again.

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