Podcast: Play in new window
This week we answer your questions from the last few months covering topics like the eroding confidence in the US Dollar. What are the consequences of debt in an infinite money supply environment? If we have a monetary collapse will coins rule the day? Will banks ever accept bullion? We’ll talk about gold and silver storage, the risks of confiscation, and the differences between mining stocks and the physical asset.
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“I may ultimately get a play in terms of the price of silver moving higher, but in the interim I’m expanding my asset base, my ounce base. That’s something we do, it’s something that we can help facilitate for a client. If you don’t know us, that’s a way that you should get to know us because it’s how we add value. Cheapest in the industry? Absolutely not. Best at adding value? I think so.”
– David McAlvany
Kevin: Well, I hope everybody had a great Christmas a couple of days ago, and we’re also wishing everyone a Happy New Year – all of our listeners.
David: Yes, that’s been an interesting thing going through 2017, now looking at 2018, and we are in that period of reflection, I guess, when we want to know what to anticipate for 2018, but also take account of what this year held for us. I would say, some of the highlights for us were the conferences, getting to see our clients and spend time with them. It is the first time in a decade that my dad has been back in the states and meeting with us and our clients. So that was a real highlight for me.
Kevin: I loved doing that. Another highlight is the show just keeps growing. Our subscribership on the YouTube channel and in other places – more and more people are listening to the Weekly Commentary. We are very grateful for that.
David: And at these conferences, we met a lot of people that we have never known before, so the listeners to the Commentary that are now sort of checking us out as a company to do business with, having vetted us for years through listening and getting to know us that way, now spending some one-on-one time with us. That was great, too, to get to know new friends.
Kevin: It is interesting to sometimes look back and say, “Is my perception matching reality? I heard people calling me this week and saying, “Gosh, when is gold going to go up?” It’s like, well, it really wasn’t a bad year. Gold putting on about a 10% gain is not necessarily a bad year. But we had a real win in the market that I think most people don’t actually get a chance to see. We saw a tripling, using one of our ratio traits this year, Dave – the palladium to platinum swap.
David: Yes, it is interesting, being in the business now for 45 years in the precious metals business – we go back to 2008 and 2009, and the market was not particularly friendly, particularly in the fall of 2008, but in that timeframe we had the opportunity to put two things in place, one of which we harvested this year, and one of which was actually harvested there in November/December of 2008. In the middle of the global financial crisis premiums on junk bags went to 35%, and we did our classic bag-to-bar swap, netting a large number of ounces for clients, which we had positioned for ahead of time.
Kevin: Just getting more silver, going from silver to silver, but just gaining almost a third extra silver.
David: Exactly. To me, I think as people get to know us, not only through the Commentary, but in terms of the acumen of the guys and gals in the office, what value they can add, that would be an example. You mentioned something that we did this year, which, in spite of silver being relatively flat and gold “only” putting up 10%, what do we have? We have the platinum/palladium trade, which has allowed us this year to harvest a tripling in ounces.
Kevin: That is amazing. So without having to go out of the metals a person could have tripled from palladium to platinum just by owning from 2008 to 2017.
David: And that’s the point. In the context of that crunch, 2008 and 2009, we were doing things proactively. Now, how long did it take to benefit from that? We are patient, and these are the things that we do look for as opportunities. But a tripling of ounces from palladium, now going to platinum? These are the kinds of things we like to put in motion as we structure a portfolio, and I’ll tell you what – if you don’t know someone in our office, call it a shameless plug, but I think you should get to know some of the best guys and gals in the metals industry in terms of adding value. Appreciate the idea of stacking ounces, but how you do that can be done in such a way that adds value, and ultimately adds ounces to what you have if you structure a portfolio correctly on the front end.
Kevin: There is nothing wrong with buying and holding. Gold has been a great investment if you just buy it and hold it. But there are ways, like you said, that you can compound – that’s what we call it, compounding ounces. Granted, maybe you’re only going to get a compounding ounce opportunity a couple of times a decade, but if you can double or triple – just like we were talking about, the palladium to platinum swap. Yes, it took eight or nine years to triple the platinum that a person owned.
David: That’s triple.
Kevin: That’s tripling. But what are we doing? We actually set the client up for the next doubling or tripling in the next five to eight years, because we’ll go back into that palladium when it falls back down.
David: The beauty is we’re tripling on what was already tripled, so you begin to see the monstrous gains in terms of compounded ounces as you go.
Kevin: This takes me to the first question that our listeners are asking. We promised last week that we would read some of the YouTube comments that have been coming through. We often do read them, we just don’t have time to reply to them online. But today we want to address some of the questions that some of our loyal listeners have. I’ll just start with this first question because it ties right in to what we were talking about with 2008. The question says:
“Tell me something. In 2008 gold and silver ETFs and miners went down just as much as the stock market. So is gold and silver really a safe haven?”
That is an interesting question, Dave, because initially when the stock market did crash, gold and silver miners went down, just like it did in 1987.
David: And gold and silver miners also went down in the 1929 crash as much as the stock market did. By 1937 they had recovered far more than the Dow Jones Industrial Average, so they did take on something of a safe haven appeal with a few more people stepping in and buying them. So from bottom to top, you had the Dow Jones Industrial Average from 32 to 37 at 400%, and Placer and Homestake and some of the other miners at the time up over 500%, outperforming. We saw the same thing in 2008 and 2009. The initial sell-off in gold was a consequence of indiscriminate selling. What immediately returned after October/November as we headed into December was more discriminate thinking. So again, from indiscriminate selling to more discriminate thinking, as soon as people regained some rationale, and it wasn’t just panic selling, then all of a sudden they said, “Well, what do I want to own? And oh, by the way, if this includes counter-party risk and the potential demise of the financial system, where do we want assets? We want assets in a financial product that is not subject to the financial system. In other words, it is outside of the financial system.”
So, I guess related to the question, and this is Arturo’s question:
“Is gold a perfect hedge?”
No, it’s not. And it’s not supposed to be. But that’s different than being a safe haven. And a safe haven can be sold off, again, in the context of indiscriminate selling. What we count on with a safe haven is that any, any at all, discriminate thinking returns rational thinking, and returns a rational buyer back to the marketplace, who says, “Wait a minute. What are my real risks here?” So where we saw a buoying of price in the tail end of 2008 and into the first quarter of 2009, gold and silver did prove themselves a safe haven. I think the question, then, is really, is gold and silver a perfect hedge? And you would have to say, no, it’s not a perfect hedge, but it is a safe haven.
Kevin: Right. And I do remember those crashes. 1987 gold went down and then it immediately came back up and gave gains by the end of the year – the October crash. Same thing with 2008. If you wanted gains you needed to be in gold. This is probably one of the reasons why we don’t encourage leverage for gold shares or gold because if the market were to crater, if you were leveraged you would get wiped out like everybody else, even though gold turned out to be the better investment weeks later.
I’m going to go with a question, Dave, that a lot of people have been asking now that Janet Yellen has given her final speech:
“What impact will Powell have at the Federal Reserve in 2018?”
David: I think I would reference the Credit Bubble Bulletin, if people want to go to our Wealth Management website, our sister company, McAlvany Wealth Management. Read Doug Noland’s comments on Powell. This goes back about a month ago, and I think he did a good job of exploring the positives and negatives of Powell. My view is that this was a reasonable decision by the central bank community to say, “We don’t really want much to change, we don’t want any real radical shifts. What has been in place should probably stay in place.” So Powell is most likely going to continue on the same themes that were put in place by both Bernanke and Yellen before.
Kevin: This is definitely not a Volcker coming in, and even John Taylor would have represented more of a Volcker type of entrance, but Powell is more of a “don’t rock the boat.”
David: That’s exactly right. And given the connection between monetary policy and current asset pricing, the asset markets have said essentially the same thing. They would agree with me that there is really no disruption that is going to occur in 2018. Had we brought in John Taylor there would have been a certain number of disciplines, perhaps, introduced, and that might have been disruptive to the current props that are in place in the asset markets through monetary policy.
Kevin: Going to a question from Mina. She said:
“I look forward to your Weekly Commentary and I appreciate all that you do to help us understand that is going on with the economy. However, I still have a problem understanding if there is unlimited supply of currency to prop up the various segments of the economy, how can things possibly change for the better here in the United States? If I had a legal currency printing press I would not be concerned about how much debt I was accumulating because the debt can be paid with the currency I create out of thin air. If you think about it, it’s like me choosing to charge a purchase to my credit card when I have more than enough currency to pay for it up front. In other words, I could have used my debit card, but chose to use my credit card instead. What do you guys think? I can see there being a problem globally because other countries could decide not to accept our currency, or vice-versa. Thanks again.”
David: When you look at the debt markets, and you look at our currency system, there really is a common meeting point, and it is that people continue to have confidence in that system. And so you can do a lot in terms of an increase in expansion of the monetary supply, monetary base, that you can increase the total stock of debt and it really is just feathering around that perception by the investment community and other central banks as to whether or not you are still stable, if you are going to stay in some sort of a stable trajectory. So that is what you are playing with is confidence. You can’t do too much on the debt side, or too little. You can’t do too much on the currency printing side, or too little.
And to the last point, where there is a suggestion of currency repudiation where countries might not accept our currency, I think one of the things to think about, too, is that we already have close to 65% of our currency float which is outside of the United States. That is roughly 580 billion dollars in actual currency which is in circulation in other parts of the world. And part of that is that it is a favored currency. We have had the world reserve currency status. And a part of that is the consequence of what is called dollarization. Dollarization is where a country looks at its own currency and says, “We don’t really do a very good job of managing our own currency, why don’t we just use the U.S. dollar instead of our currency?” They literally get rid of theirs and use U.S. dollars on a domestic basis.
So that brings in a huge number – again, 65% of all of our currency outstanding is overseas through dollarization and just sitting in banks. Certainly, it is a part of the trade relations that we have with China, and the petro dollar relations that we have had into the Middle East. That float is pretty significant.
Kevin: So there is a necessity to maintain confidence. It’s not just here in America they have to maintain confidence. They have to do it worldwide.
David: That’s right. And where you begin to see a change in the currency structure is when that confidence begins to ebb. So go back to an earlier period of time and in the late 1960s you began to see confidence erode with the U.S. dollar because what we were saying and what we were doing were two very different things. The French financial attaché to Charles de Gaulle, whose name was Jacques Rueff, had been around for the sterling devaluation in the 1930s, and so he was an older codger at that point and sort of bellowing – not just whispering, but bellowing, into de Gaulle’s ear – that what we were saying was not consistent with what we were doing – that is, the United States – in our monetary and fiscal policies, and ultimately, this promise to pay, gold or dollars, we would renege on. He saw it coming.
Starting at about 1966 or 1967 de Gaulle wouldn’t pay attention to him so he started publishing his thoughts in Le Monde, the daily paper there in Paris, and all of a sudden de Gaulle was listening because he had a popular public audience for these ideas, and they started pulling gold from the U.S., which ultimately precipitated the 1971 closure of the gold window.
Why do I mention that? Because it really is a confidence game, and whatever system it is, whether it is the post-Breton Woods system, the monetary system that Rueff and de Gaulle were responding to, this is a foreign country who is now saying, “We don’t believe you anymore. And we don’t like what you are doing in terms of fiscal policies and monetary policies, and we have to protect our interests. We are willing to jeopardize being a “friend” of the United States and become, theoretically, an enemy by not complying with your wishes, as long as we protect our own interests.” So it was a nationalist-driven thing.
Kevin: Wouldn’t you say, Dave, that debt is a lot like gravity? It can’t be defied forever. Mina is talking about, what if you could just go into debt forever since you can print the currency and print your way out of it? I think it is important to look at history and see that there has never been a paper currency that was based on debt that has survived the long term. Debt is just like gravity. At some point it is going to pull things back down to their normal levels
David: Yes, and I think this is really dealing with thresholds, again, whether it is thresholds of confidence, or what you and I have talked about in the past. You put enough sand on a pile and the pile grows and grows and grows, until you have a sudden seemingly spontaneous collapse. And what is the trigger? Well, frankly, you could say it’s just gravity. You put too much mass onto a pile and there are all kinds of fractures and fissures unperceived under the surface, and ultimately, you see a slide off of that sand pile. That is what you would call catastrophe math.
So when you have a catastrophe, everything seems normal until the moment when it is no longer normal. That is where you don’t want to tempt the fates. Yes, Mina, you can do this. You can continue to print money to pay, or if you choose, which would be your choice, credit or debit, but in either case, you don’t want to tempt the fates. Printing and expansion of debt both have limits. Do I know what those limits are? No, because it is not just a monetary threshold. You can’t say, according to the math, this is where it collapses, because the threshold is a sociological or psychological – maybe we should reverse that – it’s a psychological, and then ultimately it expresses itself as a sociological phenomenon where people en masse begin to say, “Okay, we’re going to change our behavior because of what we see.” And again, it goes right back to that erosion of confidence.
Kevin: There are two questions sort of tied side by side. I’m going to ask the first one and then lead you into the second one, as well. They are from two different listeners. The first one said:
“I wonder, if we had a monetary collapse, will coins rule the day, and will paper money end up worthless?”
Now, before you answer that, let me ask the second question because I think you can tie it together. This one is from Eli. He said:
“I’ve bought both American Eagles and silver rounds over the last three years, but in your opinion, does it make sense to just start buying trusted silver generic rounds over the American Silver Eagle, just thinking of a more bang for the buck movement?”
So, two questions: Will coins rule the day over paper money, and if we were bartering on the street, is it better to just have silver rounds or American Silver Eagles? Dave, what is your thought?
David: I think on the first question, yes, in the final analysis, coins rule the day. But there are stages at which that would not be the case. What makes the current economy and the world as we know it operate used to be strictly oil. You could look and say oil was this dominant factor and it kept the economy going. Now you could almost say that information is more important than oil to the modern economy. But information has to flow, and it is not through newspapers and news channels, Fox or CNN, we’re talking about fiber optic cables, we’re talking about data transfers, and these are areas of real vulnerability because, when you talk about a monetary collapse, our current monetary system is an information-driven monetary system. Compromise that at all and all of a sudden you see the popularity of paper cash emerge.
We’ve mentioned this in the last year or so where, actually, here in Durango, Colorado we have lost connectivity for a 48-72 hour period, given the remote nature of where we live. It’s a small town and occasionally somebody hits a fiber cable and you don’t have connectivity anymore. And even a large bank like Wells Fargo can’t check your balance and won’t give you your money because they can’t verify what you have on account.
Kevin: So you couldn’t charge, you couldn’t use your debit card, and you really couldn’t even get cash. If you didn’t have cash, you didn’t go to the movies that night.
David: Right. And the ATM is not going to deliver anything to you, either, because they can’t verify your account balance. What I’m talking about is stages of monetary collapse. The first stage is one that is informationally driven where you may see a migration to, actually, paper money, and a resurgence of popularity, or required use, of paper assets, paper money.
Kevin: And that may last a week or two like we saw in Egypt when Mubarak was being overthrown.
David: Yes, and there is nothing that says that that doesn’t either cause additional problems or maybe that solves the problem. But if it doesn’t solve the problem and you go to the next stage where there is a compromise of integrity or a loss of confidence in the paper money system, now you’re looking at alternatives. What are your alternatives to the paper money system? So, digital is dead and the information-driven system is no longer working, paper money is compromised just on the basis of people’s belief or lack thereof, in that system. What comes next? It doesn’t have to be coins, it doesn’t have to be gold and silver. It could be something else.
I think what we’re dealing with is the reliability through time of gold and silver. You can take this back to Genesis Chapter Two and the first mention of gold, and God saying, “This is good.” There has been an understanding of gold for 5,000 years of recorded history as a means of stored wealth and an object that allows you to convey that value from one party to the other. So, do I think that you can convey value in other terms? Sure, you can, with whiskey, cigarettes, tampons, toilet paper. You tell me what you need and there is going to be a value exchange which occurs, and it doesn’t have to require gold and silver.
Kevin: It’s just that gold is a little bit more universal.
David: And it is also something that is relatively indestructible. That is, I think, one of the reasons why it has been – as Alan Newman said – the cash of last resort. So if we’re really talking about the cash of last resort in the context of a monetary collapse, where would I want to be? Yes.
Now to go to Eli’s question. If it is bang for the buck movement that Eli is asking about, I would approach it in a different way completely. I like Maple Leafs, I like Mexican Onzas. Two of my boys came in with greenbacks two nights ago and wanted to exchange for silver ounces again, and they’ve figured out my matching program is really the sweetest deal going.
Kevin: It’s a great program.
David: It’s a 100% gain for them out of the chute. They’re no fools on that one. Maybe I am, but they’re not. So, best bang for the buck. Unfortunately, I can’t extend that offer to our clients to immediately double your ounces, but I would keep that mindset there because what we mentioned just a few minutes ago, Kevin, about owning junk silver versus 100- or 1,000-ounce silver bars, I don’t like junk silver necessarily. I would much rather look at a Maple Leaf or an American Silver Eagle if it was just coming to a beauty contest. But pragmatically, if we’re down to bang for the buck, why wouldn’t you own cheap silver that also gives you the ability to capture the premium game and translate that into new and free ounces? So my opinion – you’re never going to get that with a generic silver round, whereas occasionally you do with junk silver.
So, if it’s bang for the buck, it’s going to be dimes, quarters and 50-cent pieces. If you want to know what is in my portfolio, it’s dimes, quarters and 50-cent pieces. I converted, this year, my last 100-ounce silver bars into junk silver because the premium was near spot, and I know that the premiums on junk can rise to 15, 20, even 35%. That means, on the next go-round, I’m going to increase my total stock of silver by 10, 15, 20, even 35%. That, to me, is bang for the buck, because I may ultimately get a play, in terms of the price of silver moving higher, but in the interim I’m expanding my asset base, my ounce base. That is something we do, it’s something that we can help facilitate for a client. If you don’t know us, that’s a way that you should get to know us because it is how we add value. Cheapest in the industry? Absolutely not. Best at adding value? I think so.
Kevin: And it does take experience. A lot of the guys here have been here longer than 30 years.
I’m going to go on to the next question:
“When will banks accept bullion, Dave?”
Is that a necessary question, or do banks even need to be involved in the transaction?
David: I think it is unlikely. Returning to a gold standard is not likely. If you look at today’s zeitgeist, or the ideas that are behind our monetary and banking system, they don’t really like gold. And a lot of that zeitgeist has been influenced by Barry Eichengreen, whose book Golden Fetters – we have a generation of Ph.D.’s and even if you didn’t study economics formally, I can tell you the economic impressions that you get by the practitioners as it trickles down to the man on the street through media and other sources, is ultimately an anti-gold bias that comes from Barry Eichengreen in his book Golden Fetters. He basically says we wouldn’t have had the Great Depression if it hadn’t been for the gold standard, which is totally, in my opinion, a specious argument, and he conveniently lines up some facts to support it. Ignores much of the 19th century and the benefits of the deflationary, which just last week we talked about. There are benefits to the common man, the man on the street, to have prices coming down. That’s okay. It’s like an increase in purchasing power for the dollars that you have. But the banking system is dead set against that. The banking system is in favor of an expansion of debt. Why? Because debt, to a banker, is an asset. And the more assets that he has out in the system, collecting interest on those assets – he’s in favor of it. When you go back to the idea of bullion being a part of the system, it is inherently limiting to the banker, whether it is the commercial banker or the central banker.
Again, maybe in the context of a monetary free-for-all and the need to establish order again within the monetary system, do you remember the conversation we had with Giulio Gallarotti? Brilliant guy, teaches on the East Coast. What he said, I recall, is, “No, we’ll never go back to a gold standard, but we might, out of necessity, given the circumstances, be required to accept disciplines that reflect the same kinds of disciplines that were present under the gold standard.”
Kevin: Under the current banking system, it reminds me, if you are actually trading in bullion, it is because the bankers caused the problem in the first place, and so it reminds me a little bit of an Alcoholics Anonymous group meeting in a bar. That just doesn’t make a lot of sense, if the bar caused the addiction, if the banks caused the addiction to debt. Why in the world would you need to go to a bank to transact? The banking system is an addictive system and they want to keep that control.
There is a bias, though, Dave. We have all been trained that when we have extra money we go put it in the bank. But the banking system is not necessarily the end-all. Like you said, there may be a discipline that comes down the pike, down the road. I think part of the cryptocurrencies is that very deep within the cryptocurrency movement is this need to get away from a debt-driven currency.
David: Right.
Kevin: And that is the banking system.
David: And so the fascination is with some sort of limits being placed on that expansion.
Kevin: Exactly.
David: My view, though, still – and I’m going to side-step the cryptocurrency thing for a second because to me, still, if the system is not going to provide a gold standard for you, I think it is incumbent upon you, the investor – don’t wait for the banking system to accommodate and accept bullion.
Kevin: Put yourself on a gold standard.
David: Put yourself on a gold standard. The banks might not be willing to accept gold, but I think we can save and denominate our savings accordingly. Frankly, I do know of a few small regional banks in the southeast who are considering using the product that we are introducing to the market this year and next, which is a digital savings program which allows you to save in gold ounces, and you can access that digitally, you can create liquidity for yourself instantaneously. Your settlement is in less than three days, better than a stock settlement.
Kevin: So it’s like owning cash in gold, it’s not necessarily owning physical gold in your hand, but it’s like owning cash in gold.
David: That’s right. Now, the fascinating thing for us has been to see banks who are interested in the product because they do have savers who occasionally want a different “denomination.” So, is it a gold product? Yes, and no. Yes, it’s gold – that is the product. But the mechanisms and the styling of it are such that it is simply a cash alternative, and ultimately, a banking system alternative, and I think those banks who are courting this product, and us on it, are really saying, “We recognize that sometimes confidence wanes, and we want to maintain legitimacy with our clients regardless of normal times or abnormal times. These are bankers who are thinking outside of the box, and it will serve them well in years and decades ahead.
Kevin: Dave, that takes me to the next question, and it has to do with storage facilities, storing gold and silver. He says:
“Just one question. Just wondering, if you buy gold and silver and then decide to store it in one of the several storage facilities available, then what stops the government sending the army to confiscate that gold and silver, probably saying, ‘This is good for the country, and it’s good for the people?’ That’s just a thought, I’m no expert, but let’s just take Bitcoin? Where do they confiscate that?”
So, start with the gold and silver, and then he’s asking, “Is there going to be a bitcoin confiscation, as well?”
David: Well, I want to reverse it and actually start with bitcoin, and then move to gold and silver, because I think you actually have the same kinds of vulnerability, whether you know it or not. Bitcoin has to be stored someplace. So, you’re talking about servers and mainframes which contain these digital units. And you can prevent hackability if you’re willing to take those servers or mainframes offline. And that is really your only protection. Now, the reality is, that code is still sitting in a spatial location and is just as vulnerable. If you had a million dollars in bitcoin on your office computer here, Kevin, and you left it unplugged in order for it to be unhackable, I could walk away with your computer, and I could walk away with your million dollars in bitcoin.
Kevin: Guys keep it on their thumb drives and it could happen, too.
David: That’s exactly right. So, there is the hackability issue, and as we have already seen, one of the largest holders of bitcoin is the FBI. Why is the FBI one of the largest holders of bitcoin? Because they took it from the “dread pirate Roberts.” Back when they had the whole Silk Road issue and people were funding, “You want to snuff somebody out, we can do it.” There was sort of a black market in all things (laughs), whether it was drugs or guns or you need to kill somebody, that is essentially what this person under the pseudonym, “Dread Pirate Roberts,” was facilitating, and bitcoin was the currency of choice. That’s why the FBI has it.
Kevin: The FBI has confiscated it.
David: Wait a minute. How was it confiscated? How did they get it? Did they get it digitally, or did they get it because they took the mainframe? My point is that you have the same exact spatial vulnerability with bitcoin as you do with gold and silver. The question is, do people know where it is? And I’m willing, to a certain degree, to say, “I’ve got silver in Toronto, gold in Ottawa and in Zurich, silver in Delaware.” These are things that I’m okay with people knowing. Now, there is some gold and silver I have that people don’t know about. If you don’t know where it is, you can’t find it. And I think this comes down to willingness to cooperate. In the 1930s when gold was confiscated, 10% of the outstanding gold was handed in. That is an interesting thing because you were threatened with ten years of a prison sentence and $10,000 fines. Again, 90% of the gold outstanding stayed outstanding. 10% was handed in. That says to me that in spite of confiscation and the threat thereof, it still was a question of, “Are you going to go looking and find it?”
Kevin: And that was a national confiscation. If you think about it, the whole world is probably not going to comply with a United States confiscation.
David: Right. And it always is going to be a question, going back to the point of, couldn’t our army just go and get it?” Well, sure, if they wanted to. But the question is, at what cost? And you can go even back for historical precedent here. Hitler knew that there was enough gold in Switzerland to fund the moves of the Third Reich, and he needed that gold. But he also knew that it would cost him six months, and that the Blitzkrieg could not afford a six-month delay picking up the gold necessary to fund his organization operation. Did he make the right move or the wrong move? Well, eventually, he started to run out of cash which debilitated his ultimate victory.
Kevin: By the time you get to gold confiscations, like you’re talking about with Hitler, you probably have already had a currency devaluation or a complete destruction. So, you have to look at things like a series of dominoes falling. Yes, anything is possible, but how many steps down that process? Like you said, the sixth-month delay – that was an issue. You want to try to find ways of having a backup plan. The Apollo space program used triple redundancy for any of the life systems. They said, “We don’t know that this system will go out, but we have two backup systems behind that.”
David: And for me, it’s quintuple redundancy, because what I want is gold in five places so that if I ever do face this particular risk of a forced seizure of the asset, they may get 20%, whoever they may be. This could be the Swiss government, it could be the Canadian government, it could be the U.S. government. But that is what they will get – 20%. The other 80% remains. So I’m going to limit my risk to this threat by creating enough geographic and institutional diversification. You mentioned triple redundancy. I prefer quintuple redundancy when it comes to my hard-earned assets.
Kevin: Right. Okay, next question:
“Wouldn’t gold stocks give you a better return than gold?” He says, “Selling stocks is easy, selling physical gold looks more difficult, and you could have large fees, especially if you are using eBay.”
Is that a fair comparison? Are gold stocks a substitution for gold, Dave, or should each one be used for what they are best for?
David: I don’t think they are a substitute, in the sense that gold is a store of value. Gold stocks are no store of value. Gold stocks are a speculation on the demand for that store of value. And so if you have an increase in demand for gold the price goes up. And the speculation in gold stocks is that as the price of gold rises the profitability of the companies mining it goes up on an exponential basis, because of supply inelasticity in the gold market. So, I look at them as two different, but complementary assets. I own gold and silver shares, and those companies will not do well in the context of a stagnating gold market or silver market, and they will do extraordinarily well, typically three, five, ten, even 20 times performance, depending on the company, relative to bullion.
But wouldn’t gold stocks give you a better return than gold? That’s a question I just gave an answer to. Yes, they would. But you first have to ask the question, “What are you asking your dollars to do for you?” Because it’s a totally different mandate, rank speculation, which absolutely, gold shares are a rank speculation. They can be a reasonable rank speculation. They can be very reasonable. But that is different than the mandate given to gold, which is preservation of value. I think too many people think they must speculate to see gains, versus, as one of our friends, Rand Crawley, used to say, “Let it come to you.” What do I mean by that in this context? Well, to own gold, and see a deflationary collapse in various asset prices, you maintain an increased purchasing power.
Going back to the 1929-1932 period, what you had was, because of the compression in values in stocks and bonds, an increase, relatively speaking, to gold, of nearly 250%. If you want to read on this, you can, through Roy Jastram’s book, The Golden Constant, where he documents better than six instances of gold holding its own in the context of deflations, anywhere from a 50% increase in purchasing power to 250% increase in purchasing power. So you can see gains by buying quality assets at depressed prices, moving from gold, which has represented stability for you in the context of that crisis, just moving laterally out of gold into depressed assets, and allowing those assets to return to full value.
Case in point, if you bought the Dow in 1932 and rode it to 1937, you had a 400% gain. So not only a 250% gain in purchasing power between 1929 and 1932 for the gold-holder – increase in purchasing power, but then if you made the lateral move out of gold into shares, you had a 400% gain on top of that by buying the under-valued asset and riding a cyclical bull trend in regular Dow-Jones Industrial Average shares. So, to me, gold gave you one of the best offenses, but it was inherently defensive in nature. And it was not a speculation to ultimately see, in a decades’ time, 500% to 1,000% gain. Does that make sense?
Kevin: It makes sense, too, Dave – physical gold. If a person is in physical gold in any generation since the beginning of mankind, they still have an ounce of gold. It’s doesn’t go away. Now, you know how many mines have gone out of business through the years, so yes, gold shares can give you a better return, but what you are saying, just like with compounding ounces, you want to look for the better value, and you want to make sure that you are not trying to just speculate, or just hedge, or just retain value.
David: Here is one of the reasons why gold shares can go down in the context of a crisis. If they are sold off indiscriminately, as the stock market sells off, what if gold goes down, too? Gold can go down, and that would be one of the reasons why gold shares would go down, too, because they would say that the profitability of these companies is in freefall. I’m looking at gold relative to the Dow-Jones Industrial Average on a relative basis and see that opportunity to increase on the basis of purchasing power. That doesn’t mean the price of gold can’t go down in the context of deflation. I know this may sound like a bunny trail, but gold stocks have their place, you just have to recognize they are a speculation. Gold is a different animal altogether.
Now, to that last issue of large fees, especially if you use eBay, sure, eBay wasn’t designed, first and foremost, to be a broker of gold and silver. That is something that we have done since 1972, when my mother started the company, and then my father ultimately came back and joined her in the endeavor, and the two of them ran that business. We’re talking about a mom and pop business run out of our basement in 1972, now with a large office and more people than you can shake a stick at. We have grown through 45 years, considerably. The question is, why would you be buying metals on eBay?
Kevin: We’re selling them on eBay.
David: Yes, but you have no proof of provenance. There are a whole host of issues. If I was afraid of corrupted bars or something that was counterfeited by the Chinese, I would not be buying on eBay. Ebay is not guaranteeing that this product is not counterfeit, whereas our sources, all of them are mints, governments, who are directly accountable to us and must replace faulty product if, in case there is ever faulty product, and last time I checked, we’ve never had an issue.
Kevin: Not to mention our onsite, in-house numismatist who has been here for 36 years, Drew Crowell. Dave, for the sake of time, I would like to give you the next question that we are going to actually answer next week because we have plenty of other questions that we would like to get to. The next question from Terry says:
“If gold does go up, like Mr. King says, (she’s writing this after the Bill King interview) what do you buy?”
David: That’s a good question. I know exactly the answer to that, but let’s save that for next week. We have about a dozen or more questions for next week, as well, from our YouTube channel, and we appreciate those coming in. We have all that we can take right now, but hopefully, this sort of scratches where you had an in itch in terms of wanting some specific answers to specific things that are lingering on your mind.
Kevin: We wish you a Happy New Year before we talk to you next.
