Doug Casey: The Gold Crash Is Not What Either Bulls or Bears Are Telling You

Louis James, Chief Metals & Mining Investment Strategist

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, the news of the week is the big meltdown in the gold market. Some people are saying the bear is here to stay, and it's time to sell everything gold-related and look for greener pastures elsewhere. Others are saying the is the buying opportunity of the decade, and it's time to go "all in." What do you think?

Doug: I'd say it was neither. It could be that just as in 2008, when gold went down a lot at just the time you might think everyone would be panicking into it. But a lot of people had to sell their gold to meet their other obligations that were denominated in various paper currencies. That may be happening at this very moment in Cyprus. There are conflicting reports, but they may end up being forced to sell something on the order of half a billion euros' worth of gold – and if that happens to them, it could happen to other much larger countries that are in trouble, like Greece, Italy, Spain... or France.

L: That is an interesting explanation. A lot of people have been pointing at the lower price target and guidance issued by Goldman Sachs – but why anybody would listen to those guys after all they've been wrong about, at taxpayers' expense, is beyond me.

Doug: Yes. It makes no sense that anyone would listen to Wall Street analysts about gold. Insofar as these people have an education in economics, it's invariably something they've gotten from a conventional university program, which is to say that their economics degrees are worth nothing, and their economic thinking is both totally askew and totally conventional. You can always rely on conventional thinking from the Establishment. The moment someone looks like he's thinking independently, he's seen as a danger and asked to go away. Which means getting off the gravy train. And who wants to both be ostracized and lose a fat income?

L: That's what Walter Block said last week. Did you see my interview with him?

Doug: I did, and I liked it. That was a very good interview. How rare to have a conversation with a university economics professor and have it not only make sense, but be entertaining.

L: It was fun. But that's exactly what he said: "My credentials are worthless."

Doug: [Laughs] That's one of the many reasons why I like Walter; he's not only extremely smart, but very intellectually honest. He looks at reality and calls it the way he sees it, no matter how politically incorrect. That's immediately obvious to anyone who reads his book Defending the Undefendable, which is a hoot; it's like hitting someone between the eyes with a mental 2 x 4... one of my all-time favorites.

He recognizes that a Ph.D in economics from Columbia is a sham. I'm not sure if it's worth more or less than a doctorate in political science, sociology, or education. Or a degree from a Bible college, for that matter. Actually, I'd assign a negative value to all of them. They only prove that the recipient was naïve enough to spend the time and money it takes to get them. There's a lot more I could say. Those who are interested can read more in our conversation on education.

L: Right. But back to the matter at hand. You're saying that at least the proximal cause of the big selloff in gold was Europeans getting hit by the demands of their obligations and being forced to hit the bid on gold – or fear of this happening in a big way?

Doug: It's hard to say. I think that's part of the puzzle. Once a selloff starts pushing investors into panic mode, that negative momentum can seem to take on a life of its own, making the downturn longer and deeper than a rational response to the situation merits, or indeed than most people can imagine. In other words, it's a normal – albeit radical – market fluctuation in abnormal times. The sellers are apparently treating gold as a speculation, which is a mistake. They should view it as a bedrock financial asset, something you buy and put away for the very long haul. It's not a trading sardine.

There are, of course, plenty of theories that flood the Internet every time gold sells off when it seems like it should be advancing – mostly conspiracy theories. The proponents don't like it when we call their theories conspiracy theories, but that's what they are. They allege it's all because of the bullion banks, or the Bilderbergers, or the Trilateral Commission, or the Council on Foreign Relations, or the Fed's crash team, or some other nefarious agency. I have good friends who are otherwise quite knowledgeable and rational who sincerely believe that such groups are constantly knocking the price of gold down. I know they mean well, but I have to put these theories in the tinfoil hat category.

L: Some people are saying the Fed hit the market with 500 tons of naked gold shorts. I'm not sure how they could prove that, but the argument that the government wants to see the price of gold go down does have a certain appeal.

Doug: Of course governments want the price of gold lower. They want the prices of everything lower: silver, copper, iron ore, soybeans, corn…everything but housing, which for some reason they want higher. But gold is the least important commodity to these people. Not only don't they understand its monetary role, they don't believe in it or even really care about it.

It's true that the US government tried to suppress the gold price back in the late '60s, back when it was $35. But that was because the Treasury had to redeem its paper money for gold at that price; since 1971 it no longer does that. Actually, if anything, the US should want a much higher gold price now; with a reported 265 million ounces in national reserves, the US is by far the world's largest gold owner.

But the price-suppression theories are quite ridiculous from a practical standpoint as well. The US couldn't even suppress gold's price 40 years ago – when there was only half as much gold in the world as there is now, and twice as much was owned by governments, and it was 1/40 of the price that it is now. And governments were far more solvent than they are today. Yet they are somehow supposed to be able to keep the price of gold down now. So, whatever else it might be, I do not attribute gold's retreat to an official price-suppression conspiracy. The idea gives conspiracy theories a bad name…

L: They have successfully suppressed the price of gold from $250 an ounce all the way down to $1,600 or $1,800 an ounce... until recently.

Doug: [Chuckles] Yes, exactly. Nobody, not even the US government, is stupid enough to fight the biggest bull market in history for the last 12 years. Especially when it's bankrupt; exactly how are the losses being accounted for? And especially when traders talk like high-school girls about who's winning or losing in the markets. They don't get paid bonuses for losing money. I wonder when the conspiracy guys suppose the government will stop trying to suppress the price… at $5,000? $10,000? I wonder why the US would be trying to help the Russians, the Chinese, and lots of other governments buy gold at lower prices? None of this makes any sense.

L: Okay, we may never sort out all the imponderables relating to why, but perhaps the more useful question now is what to do now as gold investors.

Doug: Well, this environment is full of buying opportunities. That said, I'd be careful about backing up the truck and going all in. It's not as though gold has dropped all the way back to where it started its current bull run, back under $300 an ounce.

L: So what should people do?

Doug: They should stick with their plans, buying consistently and lowering their dollar cost average. The lower it goes, the more gold at better prices they will own.

L: And that's still a good thing?

Doug: Yes. All these governments around the world are still printing up trillions of dollars' worth of new currency units. At this point, all that new paper money is basically just sitting in the financial system – not entirely, but most of it. At some point it's going to get into the economy. It's going to cause much higher prices for consumer goods. And it's definitely going to create more asset bubbles. One of the most certain of those bubbles is gold. That in turn will create an even bigger bubble in its old friends the gold stocks, which, relative to the price of gold, are about as cheap as they have ever been in history.

As you know, the reason why I like junior mining stocks – well, mining stocks in general, but especially the juniors – is that they are the most volatile class of securities on the planet. It seems to me that everything is lining up right now for a perfect bear-market bottom in these stocks. That's despite the fact that mining is a terrible industry that has gotten nothing but worse over the years.

L: More regulation, taxation, and confiscation.

Doug: That's right. There are thousands of NGOs running around the world trying to put miners out of business, and lots of native tribes who see the recent mining boom as an opportunity to hop on the gravy train and perform a righteous shakedown. That's in addition to the fact that young people see it as a 19th-century choo-choo train business. You have to spend huge amounts up front on an Easter egg hunt to find deposits, then billions more to build a mine with no certainty you'll ever get even a return of investment – forget about return on investment – many years later. Plus the fact that the world has been picked over for both large and high-grade deposits. It's a horrible business. Despite these things – or in some ways because of them, actually – I think there's going to be a super bubble in mining stocks. Which means a fantastic opportunity for those with the courage to buy now, because true market capitulation is shaping up in the sector, as we speak.

L: Is there a price below which you would advise throwing caution to the wind and going all in?

Doug: No. Almost no matter how low it goes, it can always go lower. If it dropped below $800 or $900 per ounce, that would be below the average cost of production today, and would rationally signal that gold would have to rise eventually. But the new supply of gold is unimportant to moving its price. About 80 million ounces are mined annually these days, but there are about six billion ounces estimated to remain above ground. So supply only increases about 1.3% per year – it's fairly trivial, especially after industrial consumption. What determines the price is the desire of current owners to buy, hold, or sell it. It's not like wheat, or even copper, where new supply is critical.

So, no; if the negative momentum were strong enough, it could fall well below the cost of production. I'm not saying I think it will go that low, just that the only point at which it can go no lower is zero. Now, I don't expect it to drop much more, and I'd be very surprised at a drop below $1,000 an ounce, but there is no law of nature preventing it from doing so. All markets fluctuate. People who get panicked are overcommitted... or maybe they shouldn't be in the market because they're not psychologically suited for it. The problem is that government currency debasement practically forces everyone to be in the market, just to try to stay ahead of inflation.

You can't time market bottoms, but you've got to play the odds. If I were going to sell anything now, I wouldn't think of selling my gold or gold stocks – as we said already, I'm a buyer today – but I would absolutely sell any government bonds, if I hadn't been paying attention and still owned any. I'd also get out of most common stocks, which are very overpriced, based on very unsound economic fundamentals.

L: On the other hand, you say that all these trillions of new currency units are flooding the market and have to go somewhere – clearly a lot of them are going into stocks. We just saw that in Japan, with the government announced it would be printing a lot more yen, and the same thing sure seems to be happening on Wall Street. This can be a new super-bubble forming in stocks; might a speculator not want to buy before that happens?

Doug: Well, that might work, at least if you buy the kind of stocks Warren Buffett buys, as they represent ownership in real productive assets. But that's a bubble that could pop at any time, and I view it as extremely high risk. I want to re-emphasize that we're just in the eye of the biggest financial and economic hurricane in history. The key in the Greater Depression is first and foremost to keep what you have. That's not going to be easy.

L: All right, I understand – the precious metals remain my favorite investment as well. But last week Walter Block said that as much as he likes gold for similar reasons, he hesitates to recommend buying it because it's subject to confiscation by desperate governments. It happened in the United States in the 1930s, by Executive Order 6201, issued by FDR.

Doug: That's why I have always recommended internationalizing one's assets. No place is perfect, no country on earth is completely safe, but you can mitigate political risk by distributing your assets across a variety of jurisdictions. Political diversification makes more sense than ever today.

Bluntly: all investments are dangerous these days. There are very few bargains anywhere, in any market, in any country. Governments around the globe are completely out of control – there is nothing so low that they will not stoop to it. They are predators, they are desperate, and they are hungry.

Oblivious people, mostly untraveled and unsophisticated US tax slaves, argue that one should not diversify internationally, believing that foreigners are more likely to steal from them. The amount of fear and antagonism that some quarters of the populace have toward libertarian ideas is actually quite disturbing. The people who think this way generally have the same attitude that medieval serfs had who could not be persuaded to go further than ten miles from their home towns, because they had heard that they were dragons over the hills. I pity the fools. They don't realize that their main danger is from their own government, which believes it owns them.

This is true of all governments, but most governments are generally not aggressive towards tourists. Tourists are treated as honored guests who come and spend money – and can pick up and leave if offended. Citizens, on the other hand, are commonly regarded as milk cows, if not beef cows. And contrary to what most people in the US think, there are countries that are more stable than the US is today. These people are living in the past, thinking that the United States is no different from the America of 50 years ago.

L: I scratch my head about that too. Anybody who thinks that what happened in Cyprus, for example, could only happen in Cyprus, is just not paying attention. It was the European Central Bank's idea to confiscate people's savings, not that of the Cypriot politicians or central bankers. That's First World politicians' thinking these days: "the people's money is our money to do with as we please." People are being naïve beyond reason if they imagine that such a thing could never happen in America.

Doug: That's right. It's been said that officials in Canada and New Zealand have talked about seizing bank accounts, if necessary, just like in Cyprus – and those two have long been considered among the most stable countries in the world.

L: Okay, well, Cyprus was a banking destination until a few weeks ago, and obviously won't be again for a very long time. Have your thoughts on where the best places in the world to internationalize changed any in recent times?

Doug: It really depends on who you are, what stage of life you're in, what you want, how much money you have, and so forth. If I were just starting out, for example, I would definitely do Africa. It's not a lifestyle destination, but a raw and rough place where people with courage, brains, and determination can seek and create their fortunes.

If a gracious and pleasant lifestyle were my goal, on the other hand, Europe is still a place to go – it's just bloody expensive. And the culture has been totally corrupted by ingrained socialist ideas, high taxes, onerous regulation, and extravagant welfare programs. The politics there will likely become even worse in the future, until the place collapses economically or has another war. I've lived in several countries there, but it's not for me.

I'm a big fan of the Orient, as you know, because that's where the future lies. The problem with the Orient, however, is that unless you were born there you will always be an outsider, regardless of how welcome a guest you may be.

So I remain a fan of Latin America. I spend almost all of my time these days in Argentina and Uruguay. Both are quite similar to Europe culturally, but with much lower population density. Also, they won't be on the front lines of the ongoing war with Islam. Of course, they both have completely insane governments – but that's true of most everywhere today. I'm here for the lifestyle, not to do business. From that point of view, it's impossible to beat them.

L: So, suppose you bumped into one of our readers who had just read our past interviews, and wanted some advice on the first steps to take to internationalize his or her life. What would you say?

Doug: The first and most important thing is to uproot and destroy any remnants of medieval serf thinking you may have lurking around in the crevices of your mind. Second is to open a bank account or a brokerage account in some country – any country that you like spending time in and has reasonable banking laws – where you are not a citizen/resident/ milk cow. This is both hard and getting harder for people carrying US passports, but it's very important and well worth doing. Political diversification is even more important than investment diversification at this point.

Just start traveling. Explore the world. Look for countries you truly enjoy, that are friendly to foreigners, and are open to investors – especially as regards real estate.

L: Because buying a farm in the Congo isn't likely to turn out well, unless you actually plan to live in the Congo and keep an eye on it? Better to build a house on the beach in Thailand or Costa Rica, if that sort of thing is your cup of tea.

Doug: Precisely. But today, it's important to think as a speculator, not an investor. Personally, I probably wouldn't pick Costa Rica these days, because it's totally overrun with gringos and way too expensive. Thailand makes it quite hard for foreigners to buy real estate, but it's one of the best choices in the world for lifestyle. But to each his own.

L: Would you say that Costa Rica is more expensive than Uruguay?

Doug: Nothing is more expensive than Uruguay, it seems… I think Uruguay is now about three times as expensive as Argentina, all in. It's 50% more expensive than the US. Uruguay is no bargain, although it is pleasant.

L: Well, maybe Costa Rica is a good starter country for people new to internationalization; people might find it more comfortable and less frightening to be in a place where they hear English as much as Spanish. Sort of like San Diego, but just a bit farther south.

Doug: Maybe that's not a bad idea; sometimes you have to start with baby steps. It's not a bad place. Panama might be my suggestion, from that point of view.

L: Very well, then… anything else?

Doug: I guess I should tell our readers that we're going to be moving these conversations to monthly editions of The Casey Report. I'm pretty busy practicing what I preach down here in Cafayate, and I've pretty much said the most important things I wanted to say, at least in this format.

I am, however, working with my friend Dr. John Hunt on a series of six novels, reforming six very politically incorrect – but unjustly besmirched – occupations. I'm not crazy about preaching to the choir anymore, but there are lots of things you can show and say in fiction that you don't dare talk about in a format like this one. I expect they'll be quite fun.

I also think we'll have a second volume of our conversations, a sequel to Totally Incorrect, out in a while as well. I trust many of our readers liked our first volume.

As for our conversations going forward, I'll keep on commenting on the passing parade in The Casey Report, so I encourage readers who really like them to sign up for TCR. But regardless of their choice on that, I urge them in all sincerity to think like contrarians, and implement our strategy: Liquidate, Consolidate, Speculate, and Create.

May we all live long, and prosper.

L: Thanks, Doug!

Doug: You're very welcome.

Starting next week: Fresh perspectives from our extensive network of financial and economic experts. You won't find any recycled Wall Street Journal articles here – only exclusive, closely circulated, or premium content from some of the brightest minds in the financial world. Stay tuned for Midweek Matters, beginning next Wednesday, from The Casey Report editor Dan Steinhart.

Apr 17, 2013
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