The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“I believe, personally, that my gold and silver stocks that I own today will go up 20-40 times in price. I believe that. And I believe that because I’ve lived through it and I’ve watched the price of gold go from $35 to $800. So having seen that, there is no doubt when money loses its value, or loses its perception of value, gold can be $20,000 or $30,000 an ounce, as far as I’m concerned, because all you’re saying, in truth, is that people lose their confidence in paper money.”
– Jim Deeds
Kevin: David, Jim Deeds called me the other day and he was fired up. We talked about it last week on the program. Jim said, “Kevin, Kevin, it smells like something that I’ve smelled before, the beginning of, maybe, a gold rush.”
David: And this is not new for Jim in the sense that he sees things, typically, before others do. I can recall other periods in time – we’ve known Jim, who has been in the financial industry for 40, 50, 60 years.
Kevin: The family has known him just about that long.
David: We’ve known him for decades. And it’s interesting because he will say something like, “Look. Platinum – you should be looking at it.” And it’s $250-300 an ounce and no one is looking at it but Jim. Or three years later he’ll say something like, “Uranium. You need to look at uranium. Look at this, look at this, look at that.” And again, it is something that no one else is looking at, and lo and behold it develops into just an absolute uranium rush of sorts.
Kevin: Jim sometimes scares me because when he says to look at something, he has already loaded up on it. He calls himself a position broker. He takes a position in whatever he believes in and then rides it out.
David: That’s right. I’m not sure that this is the case, but just as conjecture on my part, I think Jim comes from an era, the 1930s and 1940s, where it is more common to find people who thought for themselves, who had to think for themselves, and developed, at a young age, an ability to process information without being spoon-fed. This is a truly great generation, people who could see the future before it occurred, in part, because they were thinking about what was happening, and synthesizing. Again, I don’t that everyone in that generation was that way, but there were more people of that generation that were that way.
Kevin: I remember Jim telling me, “You know, I went to high school with the command module pilot of Apollo 13.” It was that generation that you’re talking about, where guys are going to the moon, they’re looking at things going on in the markets, and they’re making their own decisions.
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David: Jim, as you know, we have done the Commentary now every week for eight years, and in the first year or two you were a part of that. We’re glad to have you back. There are a lot of similarities between the 1960s when you started in the business, and now. What do you see? What are your reflections now with your experience in the financial markets?
Jim: Actually I started investing when I was in college, in 1956, and started picking my own stocks even back then. I worked for brokers, but I started investing in the market and picking out what I wanted to do in the market in 1956. I went to work for Dean Witter in 1968, to answer your question. That was in Denver. That was the start of that sector of my life.
David: 1968 is interesting, because we had a bull market from 1949 through that period where you were beginning your own individual investing, and then went into an equity market winter between 1968 and 1982. So, you’re cutting your teeth professionally in a fairly difficult environment, low rates of inflation on the front end, and picking up speed as you move into the late 1960s and early 1970s, seeing the cumulative effect of Johnson Administration policies. The father you go along, the more you can see the ripple effects of previous policy choices.
Jim: You can see more government coming in, right.
David: So what did you see? What was that like?
Jim: It was really an amazing, opportune time, which would seem to be an argument with what you just said, but it was in the regard that, if you look back and think about it, actually, from 1955 or 1960, up through 1987, were great growth years in America. There were a lot of new things happening, and a lot of new businesses. And what you just said was right, there were a lot of ups and downs, I think more than you might have even imagined, because back then the cycles were usually four-year cycles, and there was a four-year cycle in the market that would match up somewhat with the election cycle, and when somebody was running for president they would try to have loose money the year before they ran for president, and the first or second year they were in office they would try to get all the bad things out of the way. So you were in a different world entirely. But for me, as a broker, it was neat because there were a lot of small new companies starting. They had the nifty fifty, which was the fifty top growth companies, which would have been people like Polaroid, IBM, and Simplicity Pattern. I can name names now that wouldn’t even be around, but there was a lot going on, to answer your question, David, and it was fun.
David: There was an old school approach, and I describe it as old school because more familiar today, anyone in the investment environment or who has worked with a financial advisor only knows the new school. And that is, today’s financial advisors are hired on the basis of their ability to communicate. So if you have a communications degree, your resume goes to the top of the list. The older model was, you have to be analytical in your thinking, you have to be able to synthesize data, come to some hard conclusions, and then ultimately present that to a client base. And you’re right or wrong, and you will sink or swim depending on the integrity of the thought process that went into those choices. So when I think of where you were versus where we are today with financial advisors and what happens today, it is a totally different world.
Jim: That’s right. Exactly. Those days, and I don’t know why, I was there, and that was just my nature, there were 32 brokers in the Denver office for Dean Witter, and I would say at least 30 of those people, most of the time, were following the Dean Witter research. We had 50 analysts in research. At a broker’s firm, you followed what they said and recommended the stocks that they said. And for some unknown reason, and I think as I have thought it over, I am a contrarian, and you know me well so you know that’s right, but for that reason alone, perhaps, I was different and didn’t even know what I was. But in later terms I found out that I was a position broker. What that meant was that I would look and find something that was undervalued, or out of favor, or had great management, or was a new idea that people hadn’t really caught on to yet. When they were building bowling alleys everywhere I saw Brunswick-Balke-Collender on the corner and I knew that would be a good investment. My broker didn’t know what Brunswick-Balke-Collender was when I said, “Can you buy me some stock?” So you were looking for something either new or out of favor completely, and then you would build a large position with your clients in that one stock, one at a time, and in time you would have five, six, or seven of these positions working. Then the idea behind each one was, honestly, in my case, trying to double or triple your money in the next two or three years. It was about that kind of a timeframe. And it seemed to work pretty well.
David: What it means is that, again, there is analysis, there is a thoughtful appraisal of the environment that you are in, and there is also the willingness to take action. And it is not just taking action on the basis of company research. Now, things were changing in the 1960s. Not only a lot of political chaos globally as we got to 1966, 1967, 1968, but also a pretty interesting revolt monetarily from the dollar standard and what we knew as the Bretton-Woods system. And of course, during those years there was a massive amount of gold leaving the United States. The French were responsible for a good part of that being pulled. And so change was occurring. And here you are taking some interest in gold, which wasn’t even legal here in the United States for another seven years.
Jim: This is really amazing. I’m looking at the book right now because I wanted to mention that to you. I don’t know why I got this book. I think I know, I probably was interested. But I got a book named, The Death of the Dollar. (laughs) There have probably been a hundred of those books written since that time, but this was written by William F. Rickenbacker. He worked for Bill Buckley. He was an editorial writer at National Review for Bill Buckley and he wrote this book. And it was an amazing book. I’m looking at a paperback, it was only about a half-inch thick, but he laid down all the reasons why within the next few years we were going to be in a lot of trouble and why you therefore had to own gold. He was a gold bug back then. When his book came out, if you said, “Why would you look at that?” I’ve been thinking about it. At that time I was at Dean Witter downtown, and I would go out to buy some gum or a candy bar and I would always get my change. And in 1968, this was right after Connelly came out and said, in response to a question at a conference one day, “I will never remove silver from the United States money.” And then, believe it or not, six months later the clad coins came out and the silver coins were disappearing and believe it or not, David, reading that book and seeing silver coins disappear and keeping all my silver coins whenever I got one in change, from that point on I just thought gold and silver were the best money. I have believed that since then all my life. I should say, the last money, the money of last resort, perhaps, or whatever you want to call it.
David: Yes, money of last resort. It is certainly not preferred by the establishment. It brings certain disciplines that don’t fit with the easy money trends that we have seen of recent decades. But when you began to see those changes, what did you advise to your clients?
Jim: This was neat, and it was really exciting, because I did, right or wrong, I was thinking for myself, so I started to look, and looked at the gold mines, and at that point in time, in 1968 and 1969, gold mines and Campbell Red Lake mines were the leading gold producers up in Canada, and so I started to buy them. I’m a position broker and I started buying these for all my clients at Dean Witter. I got a pretty a good start on that and then the Chicago office of Dean Witter called one day and said, “Why is this guy in Denver buying gold stocks? Nobody else in the country is doing that. Why is he doing that?” (laughs) And the only answer would have been that I had read the book, The Death of the Dollar, and I thought since gold had been out of favor and no one had looked at a gold stock, to my mind, for years, that they might offer some value. And it worked out well.
David: So they offer some value, and you see that, just like Brunswick looked like good value to you when you were in college.
Jim: Oh, when you see bowling alleys going up all over the state of Colorado, you say, “Golly, the guy that sells pinsetters might make some money.”
David: (laughs) So it’s an interesting psychological profile, to be able to do something before anyone else is, and without the affirmation or approbation of your peers. And in fact, you are talking about compliance who is watching the trades go through, and they are asking questions. “What is this? What’s going on? “
Jim: That’s right.
David: A similar experience, Jim. 2000, 2001, 2002, I was working for Dean Witter. Of course, it had become Morgan-Stanley Dean Witter, and I had the same calls from compliance. “What are you doing buying gold shares? Why are you doing this?” And of course, I wasn’t reading Rickenbacker’s book, I was reading Don’s newsletter, or a whole host of other things (laughs). It’s kind of in my blood.”
Jim: You were brought up in that atmosphere, for sure. I think that is the interesting point which I would make is that way back then there were people who looked at what was going on and said, “This doesn’t add up, and I do see that if things don’t work out right, gold and silver are only an answer because they are in limited supply, they are valued highly around the world, and they have worked for 5000 years. When we have a stress in a financial system, some people, not all, will return to gold and silver, thinking it is the safest place to be.” That’s easy. I think we know that from history, don’t we?
David: We do. But it was the same folks in Chicago who I am guessing were very enthusiastic at some point in that cycle, and wondering why you were selling those same gold shares that you had been buying early on in the cycle.
Jim: I can’t remember how it happened, but I don’t remember pain in 1973 and 1974, except in the market in general, which was just awful. And so it was a very difficult time because a lot of clients – in those days stock brokers had 50-100 clients and you talked to them every other week, and they were good friends, and you had something going in common with all those people. And in 1974 it all fell apart. Truthfully, the market went down to such a degree. And the gold stocks – I wasn’t in it at that time. I went to South Africa in 1974 because I was still very interested in gold, and went on the conference over there, and I remember Vaal Reefs was trading at $28. It was the biggest gold miner in the world at that point. And in 1974 it fell as low as 7. I started buying at 10 and watched it go down to 7. But then four years later it was up to $140 a share, and I had sold all mine out, I was following my pattern. I would hold it for about two or three years and I sold all of our clients’ and mine out at $28 a share and thought I was really doing very well. $10 to $28 was a pretty neat deal in a couple of years (laughs).
David: (laughs) It was.
Jim: And as a stockbroker I guess you knew that was about how it worked, right?
David: Well, and $140 would have been nice for at least a few shares, but no, you can’t cry over that spilled milk.
Jim: In retrospect, I would have liked to have held it all the way to $140 (laughs). But I went from Vaal Reefs to other gold mining. I went to ILS Rand, I went to [unclear]. And the smaller and younger South African golds, I have worked with Peter Miller who was the best analyst in South Africa, and he had great ideas. And his plan was simple, David, which doesn’t fit today, but it is interesting. Back then, South Africa was English and Afrikaners – Dutch – and they invested for dividends. So Peter would come out every quarter and update his ideas on what the dividends would be from these gold stocks as the price of gold went up. And he would guess which ones would raise their dividends the most and those were the gold shares we would own. And sure enough, they would go up the most. So isn’t that strange in relation to what we see today?
David: Well, dividends are not quite as popular (laughs).
Jim: (laughs) No, I don’t know many gold shares that are paying much of a dividend, do you?
David: 2-3%, which is better than nothing, and it is actually, for some of those miners, even with a decline in the gold price, they have continued to pay a dividend, they are making some money, and it is a dividend that is comparable to what the S&P is paying. So you have one pocket that is under-valued and paying out something, and the other extreme, the S&P 500, let’s say, and NASDAQ, which is paying out a pittance, but is over-valued – where would you want to be?
Jim: Oh, that’s right. And see, I woke up a week ago today with an answer, for me, as to what all of a sudden, at about 4:00 in the morning made a lot of sense. But what you just asked is the million-dollar question. And that is, in today’s world, it really is difficult to find value, or to find something with a perceived ability to retain its value over the next two, three, or five years, because most of the assets at that time are either overpriced or have no return whatsoever. They have a higher degree of risk, it would seem.
David: Well, we live in a very interesting timeframe. We have the Fed, who claim to be data-dependent and are going to make decisions for our betterment from a central planning perspective, to drive the economy forward. And yet the data they base their decisions on, even that is faulty. You may have seen this last week, the Bureau of Labor Statistics, gasoline prices were recorded at about a 7% gain from mid February to mid March, which is interesting because if you are looking at gasoline futures, gasoline futures were up 15-40%, depending on the month contract you are looking at, and retail prices were up 15%!
So they impute what they want into the statistic to tell exactly the story they intend for the audience that they are communicating to, and then we’ve got this amazing faith in a group of Ph.D.s, men and women who are, admittedly, bright, and have done some hard work at some point intellectually. And yet, they are data-dependent, and we are depending on those who are data-dependent, but their economic forecasting is only as good or as bad as the data they are relying on. How crazy is this?
Jim: And actually, we both know that the database has been changed so many times that whether it relates to anything that you and I knew 20 years ago or not is really a question mark, I think. And I think the other question is, government has entered into the markets and entered into the statistical taking and actually, in my opinion, manipulating the whole financial game, one, to try to keep it going, and two, to try to keep it going in their favor. So the free market that I used to know, and the one that you mentioned, that was so different back in the 1965 or 1970 era, is gone. It is a totally different market which is managed by governments, all of them hoping to stay competitive and to somehow increase some growth in their economy to keep the thing going, right?
David: Right. Which makes interest rates such an important part of the equation, because we have a mountain of debt. It’s not just government debt, which we know is breaking all imaginable records, but if you go back to the early 1980s, households had about 1.9 trillion dollars in debt. They had disposable income that was 50% higher than that. And now households have 14 trillion dollars in debt, and they have disposable income which is about 10% less than that number.
Jim: Right. That’s right.
David: So we’ve completely changed how we operate as individuals, but it’s almost a micro-picture of what has been done by corporations, highly leveraged, the government, highly leveraged.
Jim: That’s right. I think – and I don’t believe in collusion, particularly, but I think you can tell when you watch television any night that government policy – really, ever since 2008-2009, government policy is that we have to spur consumption. We are a consumption country. That’s a change in my life completely, David. In 1965 we were a producing country. We produced anything you wanted, whether it was a Polaroid camera or a GM car, we were the leader in whatever you wanted to mention – IBM, name it. And today, everything on TV, and everything else coming out of government is trying to hike consumption. Would that not be right? And that is a really scary deal if you think, just in a big picture, if all you’re going to do is consume and live on debt it doesn’t work out well, it doesn’t seem like.
David: In the stages of a consumer society we’ve gone past the initial stages and are now consuming more than we can afford to, which is why those debt numbers are so out of whack. And it puts us in a very precarious position because we are assuming, the average man in the street, that the interest rate market is just what it is going to be. The Fed is sitting on rates and we don’t have to worry about an interest rate increase. But with 64 ½ trillion dollars in aggregate debt – private, corporate, governmental – a rise in interest rates, you are really talking about a financial game over.
Jim: Oh, it would be over. I think that’s true. I had written an article about the fact that the ETF market was three trillion dollars in size and that it was easy to get into but it might be impossible to get out of because the ETFs, in turn, would go out and buy individual stocks, which was easy to do going up, but might be impossible if they ever tried to sell them off. Then I looked at derivatives, and that’s anywhere from a 700 trillion to a quadrillion dollar market, which is insurance policies written back and forth by banks. Obviously, there is no way out of that, no bank has a way to pay off a quadrillion-dollar loan.
And then you look at the bond market, which we know has been supported in Europe and in Japan, and in the US with quantitative easing with the governments buying back their own bonds. And then in Europe and Japan they are buying back not only their own bonds, their own sovereign debt, but they buy corporate bonds. And in Japan they buy back stocks in the stock market to keep everything going up.
So you look at that whole picture and say, it’s really awful. But the thing that got me, David, which is why last week all of a sudden, I think we’re in a gold rush. I came to the conclusion I’m going to be in the biggest gold rush ever. And that came about after reading Bill Gross, which I’ve done for years. I was reading Bill Gross and thinking about what he was writing about, and he a bond man so he was very calm and peaceful about it, but he went through, of course, the negative interest now being paid in Europe and Japan on sovereign debt, on government bonds. That’s a nightmare, it just plain doesn’t work, and I can spend the rest of the morning talking about it, but in my mind, all that says is, when you buy a $10,000 bond it pays you no interest for ten years, and then when you get your money back, you get back $9600.
I think in my mind, I can visualize how that will destroy the insurance industry, it will destroy the pension funds who have all been designed to make 8% a year. It will destroy the banks who used to operate on the spread between what they could borrow and what they could lend. The whole structure of what we do, it struck me, is vulnerable to a total collapse, at some point, because they trade the bonds and as long as negative interest rates get bigger and bigger you can make some money on the bond, but the last man holding is like musical chairs. He ends up with a giant loss because there is no way to get back to his original investment. Does that make sense, or does that seem crazy?
David: It makes all the sense in the world. And if you’re looking at the history of interest rates, we’ve had interest rates and loans going back a good 4000 years, maybe more than that, but that’s what is recorded. This is the first two years out of 4000 that we’ve used negative rates. (laughs) So this is a brand new experiment, and we have to see exactly how people respond to this. But I think your reaction, gut level, and mine too, whether it is gut level or just at an intellectual level, the math doesn’t work.
Jim: The math doesn’t work. No.
David: The math doesn’t work, and you say, “That’s not fair.” That’s what you say at a gut level. “That’s not fair. I give you money, and you are supposed to give me my money back plus interest.” What is appealing about giving you money if I’m going to get back less than I gave you initially? That’s not right.
Jim: They talk theoretically about some day raising interest rates back. They say someday we’ll get back to the good old days where you can actually earn 5% interest in a bank, but right now we have to use zero or negative interest rates just to spur the economy to go on. Think for a moment, governments – Japan, the EU, and the United States – have been buying up all of the bonds that people can’t hardly sell anywhere else in the market. All of the bad bonds, all of the corporate, everything that looks like it can’t be sold, the governments, the EU, or the Fed, in Japan, they have been buying those bonds back and they have a yield on all those bonds, and they are buying a portfolio as the bonds go down in value because interest rates have gone down and down and nobody wants those bonds.
Now, if interest rates go up then their whole bond portfolio that they have been accumulating over the last four years as interest rates go down, if interest rates go up, then I would assume that means that their bond portfolio starts losing value if they ever start to raise rates. That means the government’s big pile of bonds loses value over and over and gets cheaper and cheaper because as interest rates go up then their 1% bond, or their 2% bond, or their -1% bond is worth nothing and just goes to zero very rapidly as interest rates go up. So then you’ve destroyed the whole basis of the Federal Reserve or the Japanese or the EU, their central banking system, it strikes me. Is that wrong?
David: I don’t think it is incorrect. I think one of the things they may be assuming is a certain privilege, being monetary elites, that whether it is a mark-to-market rule where they don’t have to tell you what those bonds are worth and they can just hold them indefinitely and not have to face the music, there are a lot of presumptions on the part of the monetary elite today which don’t necessarily match up with history, because what you just described has happened in the past and monetary authorities have had to face the music. We had a central bank #1, central bank of the United States #2 – we let their charters both expire because the American people deemed that what they were doing was nefarious and dishonest and self-serving and we just said go away. And we could do that again, but I think the monetary elite are basically saying, “No, we’re bullet-proof, we’re above scrutiny.” Obviously, the Fed has said, “We’re audit-proof. You can’t look at our books.” So there is an interesting attitude, I think, when you say, “Well, we need some accountability and transparency,” this is the great age of transparency and the Fed says, “Not just no, but heck no. You’re not looking at our balance sheet.”
Jim: Well, see, you’re different from most people, and that would be the other thing that really concerns me. Everything concerns me, to be honest, because it has all changed, obviously, in my lifetime. But really, when you look at people, and if you look at how people act and what they do nowadays, and you just say to yourself, “This is not the same group of people at all,” what you just described, I would say nine out of ten Americans could care less what the Federal Reserve does and don’t even know what it does, and don’t know what interest rates are and couldn’t care today. And the knowledge and the culture of our country has changed dramatically over the last 30 years, for sure. I believe that. So I’m not sure that the people at the Fed are even questioned on what they do. I’m not sure the president is questioned very often on what he does. People just go along with the flow. You’ve got to go along with the flow. At least, that’s the way it looks to me.
David: So if you’re part of either the political or monetary elite, you get to play off of the ignorance of the people up until the consequences of your policy choices catch up. For instance, looking at fiscal policy, Market Watch ran this great story last week. “We’re paying 4.9 trillion dollars in federal and state taxes.” That is our tax burden for 2016. That is more than we will spend on food, housing and clothing.
And what it suggests is that, again, playing off of ignorance, is there a threshold at which the ignorant general public looks and says, “Wait a minute. This isn’t working for us.” Is it a percentage of income that goes to the government that is a trigger for that? Is it in the context of a currency war where the dollar devalues by another 5%, 10%, 15%, where all of a sudden the cost of goods and services is significantly higher, reflecting that devaluation, where the people say, “This isn’t working for us.” It’s not necessarily an intellectual recognition of what went wrong, it’s just an experience of, “Something’s hurting, and someone is going to pay for this.”
Jim: Well, I mentioned this to Kevin when I was talking with one of your friends down there the other day, I think we will get there, David. In fact, I think we’re just about there, and that is why all of a sudden I think we’re at the first few days of a giant gold rush, and I’ll explain that in a couple of reasons, because I think it’s really important. One reason is just what is happening in our lives. I bought the home I live in for $300,000 back in 2000. It is a nice home, it’s on about ¾ of an acre, and it faces Pike’s peak. Home prices were half the price here that they were in Denver because we’re in between Denver and Colorado Springs. But we’re in the trees in a beautiful spot. Today, a lot in this same neighborhood that is ¾ of ½ an acre costs $250,000, and the water tap fee costs $60,000. That’s a fact. See, that’s doesn’t make any sense whatsoever. I went out to lunch with a friend two days ago at the Washington Park Grille which is over in the center of Denver, had a great lunch, and I said, “I’d really like to have that Key Lime pie that you had, it’s the best I’ve ever tasted other than being down in Florida. He said, “We’ve still got it.” I said, “Well, if it’s under $10 bring me a slice.” He said, “No, it’s only $7.” Seven dollars. My bill for lunch was $23. I used to go to the Wash Park Grille and have lunch for $7 and have the same thing to eat.
So I think, whether we recognize it or not, many, many people are getting pinched. I would feel that way, wouldn’t you? And I think the only reason they don’t feel it yet is that they have such a great source of credit. They have nine credit cards and when they go buy a car they say, “It’s nothing down and you have seven years to pay. Take the car. It’s yours.” So society has changed completely to a debtor society. But how far does that go? I think that was your question. How much longer can that go?
David: So gold rush. (laughs) I was too young to fully appreciate the last gold rush. What does that look like? What is the character of it?
Jim: This is what I mentioned the other day. All of a sudden it dawned on me. All of a sudden it was right there in front of me. I just mentioned, back in 1968 and 1969, my clients and I did very well by owning Campbell Red Lake and Dome Mines at a time when nobody knew what the name was, they were on the New York Stock Exchange. And that was prior to gold going up, which I did, from $35 back in about 1965, to close to $200 by 1974. So it had a heck of a run. And then again in 1975, it was amazing, because I was a stockbroker, so I was watching the price of gold but I was investing in stocks, which I’ve done all my life. And again, the stocks starting going up before the price of gold did. So a long story short, in 2000 when I left my job in Durango and came back here, I started, in a tiny way, because we had just purchased a house and put some money down on a house, I started in a tiny way buying gold stocks. And again, amazingly, the gold stocks in 2000, we bought Coeur d’Alene, which is a silver stock, at a buck. By the time it got to three, silver started to move up, and by the time it got to seven, silver was the rage. Everybody wanted to buy silver. So you saw that move.
Now, I’ve seen that move over and over, and it’s amazing. And gold stocks, or silver stocks, in my lifetime, have generally led the move in the physical metal, itself, each time I’ve watched.
And so, I was looking this time, and as you know, this year, since January 1st, gold is up about 15%, silver is up about 10%. The XAU, which is the index for gold stocks, yesterday was up 70% so far this year. My son and I are involved in investing in gold stocks, and we have some gold stocks that were sold at $10 in 2011, then have fallen all the way to 35 cents last year, if you can imagine that. They are proven gold resolves, they have a mill, they were operating and they had to shut down because at $15 they couldn’t make any money and so they closed the mine. But it’s standing there ready to go again. And those stocks have already gone from 35 cents back up to $1. And if you look at the low end of stocks, which sounds like penny stocks, but they once were $3, $5, $8, $10, $15 dollar stocks, they sold off in this huge bear market, which lasted four years, anywhere from 70-90% from their high on their prices.
And the only thing I can say is that, amazingly, in the last three months, all of a sudden all of these stocks, not just one or two, but the whole bundle, no matter where you look, the leading stock, which would be Franklin Nevada. That’s Pierre Lassonde’s company and that’s probably the best run and the best recognized gold stock out there. It sold off from a high of about $60 during this four-year period, down to about $42-$43, from my memory. And two days ago it was trading again at $69 or $70, which is a new high on the stock, a new all-time high. So, in answer to your question, the thing that all of a sudden dawned on me, I thought, “I’ve been here before. (laughs) I think I might be getting into a gold rush.” Because the stocks are acting that way.
Now, the last part of that, of course, is even more exciting because we looked at a 40-cent stock that was trading at 40 cents and all of sudden it comes across the wire that Paulson – and last time, Paulson and Soros bought some of the stocks that we owned back in 2009, and the stocks would run from $3 to $19, one of them did, Nova Gold did, and Paulson and Soros were in that stock. And we’re looking, and here again Paulson is buying a 40% interest in a 40-cent stock and putting two of his people on the board of directors. So some of the high institutional people would appear to be looking, and putting a little money back into that sector of the market, which again would be favorable, I would think.
David: And it is consistent with what has been occurring for probably six months, a migration slowly. Not everybody on Wall Street, and not everybody in the rarified air of the billionaire class, is moving that direction, but a few are. And of note, Stanley Druckenmiller has put about a third of his assets in a more physical form of gold, close to 300 million dollars.
Jim: Goldman-Sachs, they say, has bought four tons of gold. They say Chase-Manhattan has bought so much silver. You know all of those numbers better than I do, I’m sure, because you’re in the business. But some of the people who have been shying away and actually shorting that on the paper market for the last four years, all of a sudden appear to be appearing on the long side of the market, right?
David: That’s right. And I don’t know what the future holds. As you started the conversation by saying, “We don’t know where the price of gold goes, or where the price of stocks go, particularly in a market where government has become a significant player, and has left a very large footprint, not only manipulating bond prices lower through various asset purchase schemes, but as you illustrated earlier, even stepping in and buying equity ETFs to prop up prices, what in earlier periods we would have considered gross and maybe even illegal manipulation is now status quo, what direction do prices go? I think it is right for you, and for me, both, to take on a certain degree of humility (laughs) and say, “Look, anything can happen from here,” which quite honestly is one of the reasons why I take some comfort in owning the physical metals because anything can happen from here, and to have something that is no one’s liability is important.
Jim: I would agree with you 100% and I should qualify it. I’ve always participated because the leverage is much greater by owning a gold or silver share than it is in a gold or silver coin, and so just by nature, and by starting way back in the 1960s, I’ve always looked at these markets and have been awfully excited by the stock market. I have cautioned my son, and anyone else – I don’t talk to many people about it, but anyone who is buying stocks now – that the biggest problem I see, and you might or might not agree with this, would be that since all governments – we’re talking about the United States, but you can talk about Japan, you can talk about Germany, you can talk about France, you can talk about Spain, you can talk about England, you can talk about Brazil, who is going to have the Olympics and I don’t know how. You can talk about any country around the world and they are all going through a different, but same debt financial crisis and leadership problem. All of these countries are at one time. The debt problem that Rickenbacker wrote about, which was the death of the dollar, is now the death of money, obviously. And of course Rickards has written about that, The Death of Money, and we’re there.
So your point, I would like to think, I believe, personally, that my gold and silver stocks that I own today will go up 20-40 times in price. I believe that. I just do. And I believe that because I’ve lived through it and I’ve watched the price of gold go from $35 to $800. That was a 25 times increase in the price of gold, itself, in a coin. So having seen that, there is no doubt when money loses its value, or its perception of value, gold can be $20,000 or $30,000 an ounce, as far as I’m concerned, because all you’re saying, in truth, is that people lose their confidence in paper money, which is what you and I both know. But if that is true, then the gold stocks, to me, have high risk, and I would say that. And I would say what you just said, that gold or silver, or even a platinum coin, and then you can say, or a cow standing out in Nebraska, will have the greater long-term holding value, perhaps, than even the paper money.
David: Last week Kevin and I, on the Commentary, talked about the interesting reflection, the comparison between the 1970s move from $35 to $196, back to roughly $102.50, $105, in that range. And if you look at where the gold market came from circa 2000, 2001, we came out of a bear market in gold which average, let’s say, $350, on a low $250, on a high $450, but it stayed in that range for a good 15-20 years. So we said we came out of $350, went to $1900, dropped to $1050. All we’re talking about is adding a zero to the exact thing that we saw in the 1970s.*
Jim: That’s exactly right, and I’ve gone through the same thing. I think you’re right. Now see, I would pass on to you what you already know, I’m sure, but I’m reading The Black Swan for the second time (laughs) and Taleb in The Black Swan says these events are so big and beyond your belief that an event that large, you say, “Oh, it couldn’t happen, gold could never go to $5000 or $10,000. Well, it would have been easy a few years ago to say, “I would never see the Twin Towers fall down. They would never crash two airplanes into them.” You could have gotten any kind of money you wanted on a bet that would never happen. So these things do happen, and we’ve already lived through it in the gold market several times, and in history they have lived through it over and over, I think you would agree.
David: That’s what make it less of a black swan event because there is a cyclicality to history. Why is there a cyclicality to history, because you are dealing with people, and people tend to have short memories and have a continual return in terms of a greed dynamic. And so whether it is Wall Street or politicians, we’re making the same mistakes today that were made in ancient Greece and Rome, and in every government in between for the last 3000-4000 years. So there is nothing new under the sun, to quote Solomon. And so, yes, we could say that there is an element that is black swan-ish. Why? Because the vast majority don’t see it coming. But the reality is, there are plenty of things to sink your teeth into and say, “Boy, this looks awfully familiar.”
Jim: I’ve read the same history you have, and you look at the culture in France when everything was going right, you look at England, and you look at the South Sea bubble, and it really is fun when everybody is prosperous and living well. And if you look at America today and what I’ve lived through in my lifetime, which are the best years ever for anyone on earth, for sure. I’m more blessed, and that enters in to what we’re talking about. This was a Christian nation, it was formed as a Christian nation. It is an amazingly innovative nation. And in the past, at least, people really knew how to work because they knew that if they worked they could see things happen. And I think the culture has changed slightly so I would say today if there were a gold rush that nine out of ten of my neighbors would never know it.
David: That’s interesting. Well, one of the things that might be different, too, is that, at least rolling the clock back to, let’s say, that period 1968 to 1982 where gold started from $35 and ramped up to $875, we were dealing with U.S. dollar concerns, we were dealing with monetary and fiscal policy issues here on a domestic basis, and certainly at the tail end by 1979 you began to have some Middle East concerns about the Russians coming through Afghanistan and disturbing the mineral resources there and the oil resources there. What is different, perhaps, today, is the global audience for gold. You’re right. My neighbors and yours might not see this, and might not participate in it, but we are talking about, as you said, all governments are dealing with a debt, financial and leadership issue, and we’re all dealing with this thing called a currency war, where people are trying to keep the old slice of the pie in place, even if it turns into a beggar thy neighbor policy.
Jim: They competitively lower the value of the currencies to try to get their labor costs down so they can compete with the guy next door, and that can go on for some time. And it doesn’t work out too well for anybody who is trying to save money.
David: But you do end up with people, even if it is just a few people in each of those countries, who say, “This isn’t going to turn out well,” which to me suggests that there is a swelling of the audience, and it’s a global swelling of the audience, for gold. So perhaps, a 21st century gold rush looks different.
Jim: If you’re English, and really have any memory, you know that I have some money in gold, and if you’re French, you know that, too. If you’re in India, you wear your wealth around your neck in India, and have done that for the last 100 years, as far as I know. And if you’re in China – I was thinking about it the other day, China invented paper money so they have been up and down this cycle about six times. But if you’re in China, the Chinese have actually encouraged their people to buy gold and silver coins, I know that. So you have parts of the world who are attuned to the business that you’re in, and that is, they want to accumulate gold and silver – physical. And they will overwhelm anything we do here, anyway. What we do here doesn’t really make much difference in the physical gold market or the physical silver market. I believe that.
David: Right. So there is a point in time where even if you want it, you can’t have it. Or if you want it, you’re going to pay such a premium that it would be shocking. That is really the dynamic. When you talk about Vaal Reefs going from $10, where you bought it, to $7, and then to $140, you’re talking about the same dynamic. What drives a stock from $10 to $140 a share is more people wanting it, and being willing to pay more to own it. That’s just supply and demand.
Jim: That’s right.
David: And so to see gold go to higher numbers, or silver for that matter, instead of trading at $15 or $16, maybe it’s $100, maybe it’s $150, maybe it’s $250, it’s just a matter of who wants to own it, and the price they’re willing to pay for the privilege of ownership.
Jim: You’re in that business and you’ve seen it already in your lifetime, the cycles. I think recently, which was amazing, you would look at numismatic coins, gold Double Eagles, and the premium was down to something you would never have thought you would have seen 10, 15, or 20 years ago. The point is, if you look today – I asked the other day about the premium on silver one-ounce coins – if premiums go up, and you know, and you could probably explain better than I – I think it is Singapore, isn’t it, or wherever it is, the Chinese are planning to open a new physical gold market in the next week or two, and many people have already written about the fact that that physical gold market will be a rival to the paper commodity gold market in New York. And the amazing part, where you could have a lot of fun arbitraging by buying physical gold over there and getting the short people in the gold market over here in trouble, you could do it very quickly because the supply of physical is a very tight market already, I believe. Isn’t that right?
David: It is. And it’s one of those strange things. How can silver at $16, how can gold at $1200, $1250 – how can you have a right physical market and the price be so low? The reality is we’ve been playing games in the paper market with futures contracts, and the volumes there overwhelm the dollar volumes in the physical market.
Jim: They say they’re 100 times the physical market, the paper market is, paper futures. Right.
David: So that game is going to be played until the music stops. It is the same idea that we were talking about with debt earlier. It works until you’re the last man. And then you go and you reach for the seat.
Jim: (laughs)
David: And the seat is gone, and you realize that you’re the one who gets to take the hit.
Jim: You remind me of Last Man Standing. I think you’re right. (laughs) So, very interesting and very exciting times, and I don’t know the future any better than you, but I do know history, and I do know people, and I do know a lot of things. Everything in my lifetime has changed, David, I am aware of that. And I’m not quite sure what to make out of it. But I’m excited because I’ve been in the gold market – I was out of it for 20 years, actually. I didn’t do much in gold or silver stocks at all between 1980 and 2000. But I’ve been conscious of that, and I think when I’ve seen the ruin that took place between about 2011 and 2016, it didn’t really change, in my mind, until around the first of this year – it was a disaster. And I understand that most people would say they don’t want anything to do with gold. And I understand why many people who managed a gold portfolio, my son was one of them, had a lot of clients leave, in that four-year period of time. Even though they really believed what he said was right, they didn’t want to take it anymore. And the losses got bigger. They didn’t just stay stable, they were going down during that four-year period. So I would say the market, on the stock side, was as over-sold as I ever saw. And you know the physical side better than I do. But I would mention one last thing, and you already mentioned this, too. I’ve been thinking about it. I think most of the people in America who own gold are over 60 years old. I think that they are the people who actually know what you and I are talking about. And I would say most of the people under 60 don’t know. You know, in your business, whether you are seeing a lot of 30 and 40-year-old people buying gold and silver coins or not. I don’t know. What do you think?
David: They’re only exposure to gold is what the Kardashians wear.
Jim: It’s jewelry. See, that’s right. I’m with you. But that has changed. Back in 1965 and 1970 – you asked what I did at Dean Witter. On the side I was buying bags of uncirculated silver dollars and I told each of my clients they ought to buy a bag of uncirculated silver dollars, which they did. Then those went up, as you might imagine, five or ten times in the next four to six years, so it was amazing. And my clients understood what I was talking about. They said, “Sure, I’ll buy 1000 silver dollars, that sounds like a good idea.” If I were a broker today and my clients had managed money in the market, and I said, “I think you ought to buy a bag of silver dollars,” I don’t think they would know what I was talking about.
David: (laughs) You’re right. You are right.
Jim: I might be right, and that’s kind of scary, because that shows how far off the course we’ve gone, I think.
David: Jim, we started a conversation, Kevin and I did, eight years ago. We’ve been doing the Commentary every week for eight years, and you have joined us a couple of times, year one, year two. We’re really glad to have you back, it’s a breath of fresh air. I always enjoy our conversations, have really enjoyed getting to know your son in recent years, and we share a lot of common interests. I have to tell you, as a son – you know my father very well, and have for, I don’t know, about 30-40 years?
Jim: Since the mid ’60s, right.
David: We’re two boys who are incredibly blessed to have fathers like you, and like Don. So, we appreciate, not only what you have shared on the Commentary today, but your life experience as it has trickled down to us, the next generation. It is greatly appreciated.
Jim: Well, it’s been a great trip, and I appreciate you calling, and us having a chance to visit today. I’m really excited about the markets, because I know we’re in the midst of a giant change, which I think will be bigger than any I’ve ever seen. I don’t get scared, but I am really discouraged about what I’m afraid we’re going to see in the financial markets when it comes to people around me, because I think it will be very disturbing to a lot of people, and will be hard to get through. That’s what I think.
David: I appreciate you joining us for the Commentary. This was a great conversation, I appreciate it.
