We're doing something a little different this week in Metals & Mining Monday. Jeff Clark interviewed Chuck Butler, senior vice president of world markets at EverBank at our last Summit, and even though a few months have passed, the information is just as valid today, if not more so. In this twelve-minute video, Jeff asks Chuck about inflation vs. deflation, why the US dollar is still holding up, how much gold and silver to own, the best currencies for diversification, and his best advice for investors. Enjoy the video or the transcript below…
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||45.34||41.70||60.74|
|Gold Junior Stocks (GDXJ)||20.58||18.65||35.90|
|Silver Stocks (SIL)||19.68||17.77||26.13|
|TSX (Toronto Stock Exchange)||12,032.58||11,571.19||12,579.61|
Jeff Clark: Hi, this is Jeff Clark, editor of BIG GOLD. I'm here with Chuck Butler of EverBank. Chuck is one the people I look to when I want to find out more about currencies – which ones are strong and which ones are not. This is someone who is widely regarded as an expert in currencies, something he's been doing for twenty years now. Chuck, thanks for taking a few moments to spend with me.
Chuck Butler: Jeff, thank you very much for inviting me.
Jeff: Let's talk about the inflation/deflation debate. Harry Dent here at our conference made a compelling argument yesterday that deflation is what's actually coming next. He bases that belief on demographics, since the population is aging – not just in the US, but in other countries as well. I know you study these kinds of things, so what's your response to that? Do you see inflation ahead? And are you afraid of deflation?
Chuck: I'm not afraid of deflation. Deflation is really not that bad of a thing. It just means that you get to buy things cheaper. But inflation to me is something that each individual experiences. The government may tell you that inflation is only 2%, but you personally feel that it's running around 10% because you buy things like tuition and ballpark tickets and movie tickets and stuff like that. So to me, inflation is already bad here in the US.
Now, we do have deflation in some asset classes like housing and wages – those have been pretty deflationary. But for the most part we really are seeing more inflation. We can see that in food prices and in just about everything that we use. I think that we'll tend more to inflation because of the money supply that's being generated by the central bank.
Jeff: One reason I buy gold is because of my fear of what can happen to the dollar. But the dollar is kind of hanging in there; it's not really falling that much. What's your prognosis for the dollar? Is it possible the dollar's going to be fine?
Chuck: Well, we have currency trends, just like you have other types of trends. The trends start for a particular reason – a fundamental reason – and they don't end until that fundamental reason has been corrected or is at least on the road to being corrected. The dollar entered this weak trend about 10 years ago, based on the fact that we had reached a level of indebtedness in the country that scared people. We've not gone anywhere down the road to correcting this debt problem; in fact, in the last four or five years, the debt has exploded even higher. So the trend for a weak dollar is not over.
However, a trend is not a one-way street. You can have volatility within that trend. You can have periods of time when the dollar is strong, like we had in 2005 – the dollar spent most of the year trending up against other currencies, but the underlying trend remained in place. And so until we see the US's navigation system steer them on the road to correction, I just don't think the dollar can correct itself for a multiyear reversal of the trend.
For now, the dollar has been kind of hovering around 80 on the Dollar Index – it goes down to 79 or 78 but then it comes back to 80. I think that has more to do with all the questions in the marketplace these days. People aren't really sure which way we're going to go. There has been a lot of volatility for the last couple of years– no clear direction as to where things are going to go. But when all that starts to settle down – and I do believe it will, with the problems in Europe and the problems elsewhere – then people will start to focus on fundamentals again. We haven't really focused on fundamentals for the last couple of years, so once those become the focus again we'll see what happens.
One question I'm asked all the time is that if everything is so bad in Europe, why is the euro still stronger than the dollar?
Chuck: Well, the way to look at it is that the euro did fall from like a 1.60 level – 1.60 to the dollar – down to 1.30. That's a very large move. So it has already lost a lot of value to the dollar during this time. What I think you're seeing now with the euro staying around 1.30 is that the market sees this as an "ugly" contest. And they view the dollar's problems as being uglier than the euro's problems. So until you see the euro fall to parity with the dollar, you're going to see that the markets believe this is what's going on. And I was taught many, many years ago that the markets are never wrong.
Jeff: [Chuckles] Right. If the prognoses for the US dollar and the euro are not good, then what are some strong currencies? If someone wanted to diversify outside of their own currency, what are some of the stronger currencies right now around the world?
Chuck: The idea here is that you really do want to diversify your investment portfolios so that a portion of it is outside your base country's currency. So if you're a dollar-based investor, that means you need to invest outside of the dollar.
You want to look at a currency like the stock of a country. Use the same criteria you'd use to value stocks on that country. So look at the country's balance sheet, look at their leadership, their yield, their attractiveness to buy, and their ability to attract investors. When you do that, you come up with just a handful of currencies that really make sense to own. You'll see China on that list; you'll see Singapore on that list... Australia, Canada, and some emerging countries like Chile and Colombia.
Those two are very good emerging countries. The emerging markets are going to have their own problems in the coming years, because a lot of money is going home – in other words, people in Germany that would make loans to people in the emerging markets are taking that money home. So the emerging markets are going to have to live on their own, but I think those are two countries that can do that.
These are some of the countries that I would look to diversify.
Jeff: And then my favorite, gold. Or gold and silver.
Chuck: Well, I believe that gold and silver are currencies, and I shouldn't have left them off my list of currencies to buy. I'm probably one of the few bankers in the world that looks at gold as a currency. Gold was a currency thousands of years ago, and it still is today. Silver has its own issues, because it has not only an investment side but also industrial uses. So gold is the main feature when you're talking about precious metals. People really just look to gold.
Gold to me is the anti-dollar. As the dollar continues its weakness and the central bank keeps printing more and more money, I think gold will get back to being on what I call the "rally tracks" and start heading up again.
Jeff: Good. With the kind of world you see ahead, how much should an investor have in gold and silver?
Chuck: We're probably some of the most conservative people in the world when it comes to asset allocation. We believe that investors should look to have about 10-15% in precious metals in their portfolio, and no more than 20% in currencies. So if you have a liquid net worth of $100,000, that would mean no more than $20,000 in currencies and no more than $15,000 in metals.
Jeff: If you only had time to give someone one piece of investment advice, what would be the most important thing that you think investors should do right now?
Chuck: I think they should make sure they are diversified – that their investment portfolio is diversified and not just in their home base currency. If I was in Australia or Switzerland, I would tell those people the same thing, because it just doesn't make sense to have all of your portfolio in one currency. You don't buy just one stock; you buy multiple stocks. So you shouldn't own just one currency.
What this does for a dollar-based investor here in the US is that it gives an insurance policy against further dollar depreciation caused by stupid tricks that the central bank plays. They did two rounds of quantitative easing, then they did what they call "Operation Twist." Now they're talking about doing "sterilized" bond purchases – all of it is just printing money and buying bonds. The Fed bought 61% of the Treasury's auctions last year – 61% bought by the Fed! Where did the Fed get the money? They had to print it. So that's why I think the dollar will continue to go down and why people need to make sure they're diversified.
Jeff: I couldn't agree with you more. And that sounds very bullish for gold and silver.
Chuck: Yes, it does.
Jeff: Thanks for your time, Chuck.
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Gold Demand Trends in Q2 2012 (World Gold Council)
Q212 gold demand of 28.9 million ounces was 7% down year on year. Weaker demand was recorded across all the major sectors – jewelry, investment, and technology. One exception was world central banks, which generated the largest quarterly net purchase since becoming net buyers in Q209 – 5.1 million ounces.
The decline in demand is mostly attributed to India and China, which accounted for a combined 45% of total jewelry, bar, and coin demand in Q2. Outside India and China, however, retail investment demand grew by 16% year on year to 6.3 million ounces, as investors in many regions bought on dips.
Gold demand for the first half of 2012 comprised 67.2 million ounces, which is down 5% on the previous year but 14% above the five-year H1 average of 58.8 million ounces.
Is this a worrying turn of events? No, because the amount of money invested in gold remained essentially the same – US$51.2 billion compared to $51.6 billion a year ago. The same amount of cash bought less metal since the price was 7% higher. And it's important to note that particularly strong investment demand came from Europe, where monetary and economic issues are at the forefront, growing 15% over last year.
Soros and Paulson Buying Gold ETF Again (Mineweb)
Famous hedge fund manager John Paulson increased his position by in the SPDR Gold Trust by 26%, from 17.3 million shares as of the first quarter of this year to 21.8 million shares as of the end of Q2. This was first addition since Q109, when his investment firm initially acquired 31.5 million shares.
Second-quarter SEC filings reveal that another prominent figure raised his stake in gold. Billionaire George Soros doubled his position in GLD to 884,400 shares in the second quarter from 319,550 in Q1. Last year, Soros offloaded his ETF holdings and called gold "the ultimate bubble."
At the same time, Reuters reported that Eton Park Capital – originally one of the top investors in the gold ETF since 2008 – eliminated its shareholdings in SPDR Gold Trust. Some speculate it needed the capital.
These position changes, while interesting to observe, ultimately don't tell us a whole lot about gold's future. Gold fundamentals remain as favorable now as they were before well-known investors started (or stopped) taking positions in the metal or related paper instruments.
Miners Send TSX to Three-Month High (Reuters)
Reuters reports that the Toronto Stock Exchange's S&P/TSX Composite Index, GSPTSE, rose 127.14 points (or 1%) to 12,032.58. TSX crossed the 12,000 barrier for the first time since May 3.
The resource-heavy main stock index rose sharply on Thursday as "mining shares were boosted on raised expectations of further stimulus moves by central banks in China and Europe."