MATTERHORN INTERVIEW APRIL 2012 – Peter Schiff

This month we are extremely pleased to feature Peter Schiff in the Matterhorn interview. Peter doesn’t mince his words about Bernanke, who he says is either a “Liar or a Moron …. and worse than Greenspan.” Peter also sees a collapse of the dollar and advocates a return to the gold standard.

Egon von Greyerz

 

“There Will Be A Lot Of Pain”

In this month’s MATTERHORN INTERVIEW, the US-American investment broker, author and financial commentator Peter Schiff talks with German journalist Lars Schall about the failed policies of the U.S. Federal Reserve; the unsustainable American consumer economy; his expectations for the gold price; and what he would do if he was heading the Deutsche Bundesbank.

 

By Lars Schall

 

Peter Schiff, born 1963, is the President & Chief Global Strategist of Euro Pacific Capital and CEO of Euro Pacific Precious Metals, LLC. He began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. He joined Euro Pacific in 1996 and has served as its President since January 2000.

He is a highly recommended broker by many leading financial newsletters and investment advisory services as well as many major media outlets such as The Wall Street Journal, Barron’s, Forbes, The Financial Times, The New York Times, The Washington Post, etc. and appears regularly on CNBC, CNN, Fox News, FBN and Bloomberg.

He is the author of five books. His best-selling book, “Crash Proof: How to Profit from the Coming Economic Collapse” was published in February of 2007. In that book he wrote that the economic policies of the United States were fundamentally unsound, that the U.S. dollar would lose much of its value, and that the market would crash. Peter Schiff used for his predictions his understanding of the Austrian School, a heterodox school of economic thought. (1) His latest book, “The Real Crash: America’s Coming Bankruptcy” is due out in May.

Mr. Schiff is known for his bullish views on investment in tangible assets as well as foreign stocks and currencies. He is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. You can find Mr. Schiff’s regular comments in relation to gold under: http://goldscams.com/.

 

Mr. Schiff, let’s start with a joke: The financial crisis is over. Good joke?

 

Peter Schiff: Yes, that’s a good joke, because the crisis is far from over – especially with Ben Bernanke in charge. He is a very dangerous and very foolish man.

 

Well, I hear sometimes that he’s the biggest gold bug out there. (2)

 

Peter Schiff: Who, Ben Bernanke?! (laughs.) I mean, if you want the price of gold to go up, Ben Bernanke is your guy. He’s very good at that. But he’s not a gold bug personally, in the sense that he advocates gold.

 

No, nevertheless: when you analyze it positively from a gold bug perspective, what would you say about Mr. Bernanke’s policies?

 

Peter Schiff: Disaster. I think he’s the worst Fed Chairman ever, he is worse than Alan Greenspan, which is a very difficult accomplishment. There are one or two things that are hard to say because he is either a complete incompetent fool or he’s a liar. Those are the only options there are.

 

He just gave us recently some lectures. He said that the Fed’s low interest rates under the Greenspan period didn’t even play a part in the housing bubble. He said it was completely unrelated to it and that the low interest rates didn’t even contribute in any way to the housing bubble. In other words, Ben Bernanke is saying that interest rates don’t affect house prices, which is a complete lie.

 

In fact, Ben Bernanke’s current policy of zero percent interest rates and Quantitative Easing where the Fed buys bonds and mortgages – the specific goal of that is to keep interest rates lower to prop up the housing market. That is an admission by the Fed that low interest rates make housing prices higher than they otherwise would be. So the Fed is acknowledging that interest rates can determine house prices, yet the Fed is saying that interest rates had no effect on house prices during the bubble – which is nonsense: if it wasn’t for the low interest rates, there would not have been a housing bubble.

 

Again, the guy is either a moron or a liar. And it wasn’t even that interest rates played a part, it was the most important part. If interest rates had never been lowered, we wouldn’t have had a housing bubble. That was the fuel that kept the fire burning. So the guy seems to be completely incompetent. It is amazing that he can have that position.

 

And he also says that Fannie Mae and Freddie Mac didn’t play a part. He blames the entire housing crisis on Wall Street greed, and the only thing he says is that the government should have had more regulation.  He learned nothing. It is the complete opposite. And in fact, Ben Bernanke denied that there was a housing bubble even after it burst, whereas I was out there talking about the bubble in 2002, 2003, 2004.

 

I basically gave a play-by-play, and  I specifically said that the monetary policy of the Fed is blowing up a housing bubble, and that the Fed needed to raise rates to stop it – and by waiting so long, it let the bubble get much bigger, and I was talking about what was going to happen after the bubble would burst.  The guy could potentially destroy this economy, because he is destroying the dollar.

 

You see the collapse of the dollar coming?

 

Peter Schiff: Yes.

 

Why, for what reasons?

 

Peter Schiff: Look, Ben Bernanke and the Federal Reserve will keep printing money to try to get Americans to spend. Ben Bernanke said that the problem with the economy is that Americans are not borrowing and spending as much as they were before the crisis. Well, where were Americans getting all the money from to borrow and spend? It was from a real estate bubble.

 

And it was bad spending, it was phony, it was debt. But Ben Bernanke says that America needs to go deeper into debt, that we have to spend more, that we have to act like there was a housing bubble, even though there isn’t. He wants to create some sort of bubble. His goal is to get Americans to spend, and he’s going to do that. By that he will destroy the dollar.

 

We can never have a recovery until interest rates go up, but he won’t let them go up. We don’t need more spending, we have too much spending. We need less spending, we need savings, we need investments and we need production. But we won’t get any of that as long as the Fed keeps interest rates at zero and stimulates the government rather than the economy.

 

Aren’t you a quite lonesome critic of the consumer economy in the United States?

 

Peter Schiff: Well, I am certainly outnumbered by the fools, who are cheerleading the consumer economy, but these are the same people who were doing that in 2004, 05, 06, 07 – the same people who thought everything was just great, who didn’t see  the housing bubble, who didn’t see the financial crisis. The same people who got it completely wrong are the ones who are defending the Fed today. It’s the people who got it right who are criticizing the Fed.

 

Since three is a magic number, what are in your opinion the three most important lessons to be learned from this crisis?

 

Peter Schiff: You don’t want the government involved in the housing market, you don’t want the government setting interest rates, and the third one would probably be that you want sound money – you need to be on a gold standard which relates to the accurate setting of interest rates, because the Fed was setting the interest rates, not the market. The government was subsidizing housing prices. You don’t want that. You don’t want the government guarantee mortgages and loans; you want mortgages to be based on the market and loans to be based on the ability of the borrower to repay.

 

So get the government out of housing, get the government out of the economy, get the government out of money and setting interest rates – but instead we’ve done the opposite: we have more government involvement, more regulation, more central banking, more central planning, more support for the real estate market. They’re preventing the economy from restructuring in a manner that is required to have a real recovery. So when Bernanke is talking these days about structural unemployment – the reason there is structural unemployment is because of Bernanke, and also because of Congress and the rules of regulations that are making it for people so hard to find jobs. But we will never solve those structural problems until interest rates go up.

 

But Mr. Bernanke is not alone. Do you think that the Federal Reserve has a plan or follows some kind of vision?

 

Peter Schiff: No, the only plan that I can see is that they’re creating inflation. Their only plan is to try to postpone the collapse. They will not stop it, they will not prevent it from happening. In postponing, it means that it is going to be much worse when it happens. But they don’t care about that. And again, I don’t know whether it is incompetence or they’re just lying. Either Ben Bernanke is grossly incompetent or he is a flat-out liar. Those are the only two things that could be.

 

So you think they are buying time. But for what?

 

Peter Schiff: They are buying time so that they can have new elections and so that politicians can get re-elected without having to deal with the crisis.

 

And one essential condition for that is the dollar demand internationally?

 

Peter Schiff: As long as the world is willing to hoard dollars and prop up the US economy, they can keep it going for a while, yes. But the more money the world lends America, the more money the world will lose, because we are not going to pay anybody back.

 

What are your thoughts in this respect that India is willing to pay for Iranian oil with gold?

 

Peter Schiff: More and more transactions around the world will ultimately take place in something other than the dollar, whether it’s gold, or whether it’s euro, yen, or renminbi. The world is moving away from the dollar, and that should be of major concern for America, because our ability to survive is based on people accepting dollars, because we don’t have really anything else. We don’t have the production to pay for the things that we want; we have to exchange money we print.

 

Why is America destroying its industrial power?

 

Peter Schiff: Unfortunately that’s true, but I don’t think that the government is doing this intentionally. They are just trying to keep Americans spending money so that they can keep pretending that everything is great, so that politicians can keep get elected, that’s basically what it’s all about.

 

Yes, but people who have to spend something need productive jobs.

 

Peter Schiff: Yes, exactly: we need productive jobs, we don’t need to squander our labor. We have to actually make things, we can’t just pretend to work, and that is what we are basically doing.

 

Is the current oil price justified?

 

Peter Schiff: Yes. In fact, it will going a lot higher. All the central banks are printing money, and the more money they are printing the more things will cost, as reflected in the price of oil.

 

And gold isn’t in a bubble, either?

 

Peter Schiff: Gold is not in a bubble, it is the opposite of a bubble.

 

And why?

 

Peter Schiff: I’d say it’s under-owned, it’s under-invested, people are so skeptical of it; everybody is expecting the price of gold to fall. Gold stocks are at record lows relative to the price of gold. There is basically no speculation going on, it’s all skepticism. Everybody is just waiting for the price to drop, everybody thinks it’s a bubble, and yet no one is really buying it.

 

But when lots of people are already now talking about a bubble, what will they do in two or three years from now?

 

Peter Schiff: They will still talking about the bubble. Eventually, the people who are talking about a bubble will have to start buying some gold

 

You think mining stocks in gold are a good investment?

 

Peter Schiff: Yes, absolutely. I think they are a particular good investment right now.

 

And what are your thoughts related to the gold buying of central banks?

 

Peter Schiff: They are going to buy a lot more.

 

Will that be a good fundament for the price?

 

Peter Schiff. Yes, the central banks have to buy a lot of gold. They don’t have enough relative to the currency reserves. That will put a lot of upward pressure on prices.

 

Do you think that Western central banks intervene in the gold market?

 

Peter Schiff: Well, I’m not sure. They might. Sometimes they buy gold, sometimes they sell it. I don’t know how strategic they are. But one thing I know for sure: the price is going to go up, regardless of what the Fed is trying to do.

 

What are the advantages of gold, for example in relation to the dollar?

 

Peter Schiff: There are lots of advantages. It is real money, it has intrinsic value, and the government can’t print it. And the gold standard is much better than fiat money.

 

But is this realistic that a gold standard comes back?

 

Peter Schiff: Sure.

 

After the assumed collapse of the dollar?

 

Peter Schiff: Yes, it is much more realistic that a gold standard comes back, than that we stay on the fiat standard we have now. It doesn’t work. It will collapse.

 

What kind of consequences will this collapse have?

 

Peter Schiff: Hard to tell. It will look pretty bad for most Americans when prices will go way up and they can’t afford to buy stuff. It could also get very bad as far as loss of individual liberty. A lot of people will blame it on capitalism, on freedom, and they will claim we need more government. It could be used as an impetus for more regulation, which would be a disaster, or it could be an impetus to get rid of all the regulation that was causing the problem. But whether we will do the right or the wrong thing here in America, there will be a lot of pain first. We got some serious problems we have to deal with, but we are not dealing with the problems, we only make the problems worse.

 

What do you think about Ron Paul’s campaign so far?

 

Peter Schiff: Ron Paul understands the problems that we face, but unfortunately his campaign doesn’t get enough support to win.

 

One thing Mr. Paul likes to talk about is an independent audit of the gold reserves of the United States of America. Do you support this.

 

Peter Schiff:  Sure, it would be interesting to know if we still have the gold that we claim we have.

 

Roughly 66 percent of the German gold reserves are located at the New York Fed. If you would be the head of the German central bank, the Deutsche Bundesbank, would you repatriate this gold?

 

Peter Schiff: I would not hold my gold in the United States. I would be afraid that the U.S. might decide to seize it for an emergency. So if I was Germany, I would ask for all of my gold to be returned from the Fed, and I would buy as much gold as I could in the open market.

 

Why should Germany buy more gold in the open market?

 

Peter Schiff: Just to have more gold. Germany should get rid of its dollar reserves and other currency reserves. That would be a much better way to go.

 

Thank you very much for taking your time, Mr. Schiff!

 

 

Sources:

 

(1) Compare for example Dirk J. Bezemer: “No One Saw This Coming: Understanding the Financial Crisis Through Accounting Models.” MPRA Paper No. 15892, June 16, 2009, published under:

http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

 

(2) Compare for example Zero Hedge: “Bernanke Reprises His Role As a Gold Bug’s Best Friend”, March, 26, 2012 under:

http://www.zerohedge.com/news/bernanke-reprises-his-role-gold-bugs-best-friend

 

 

“Gold is about the furthest thing from a bubble that I can think of.“

 

We are very fortunate to feature my very good friend John Embry in this month’s Matterhorn Interview. John who knows more about the gold market than probably anyone I know, talks about the “chicanery” in the gold market and why.
He also explains why he is so bullish about silver, about the possible demise of paper money and much, much more.

Egon von greyerz

“The Current Financial System Will Be Totally Destroyed“

THE MATTERHORN INTERVIEW – February 2012

 

Mr. Embry, the perhaps best report I have ever read on the gold market was “Not Free, Not Fair: The Long-Term Manipulation of the Gold Price,” written by Andrew Hepburn and you. (1) I would like to talk with you at the beginning about the findings of that report. First of all, why do you think it is relevant whether the gold price is free or not?

John Embry: Thank you for the very generous compliment. It is essential that the gold market be free. It functions as the so called “canary in the coal mine” and its price should be allowed to reflect excesses in a pure fiat monetary system. The continued suppression of the gold price was a key factor in the many financial bubbles which have essentially wrecked the monetary system as we know it.

 

What has the evidence been that the gold market isn’t a free market?

John Embry: Our report which was written 7 ½ years ago revealed all sorts of chicanery in the gold market and we only used evidence which could be corroborated. Considerable additional evidence has piled up subsequently but two smoking guns are the repetitive counter intuitive price action and evidence of widespread clandestine leasing of western central bank gold.

 

Who are the ones that don’t like a free gold market and which objectives do they have in mind by preventing a free gold market?

John Embry: The western governments, their central banks and the allied bullion banks are the culprits. They view gold as a mortal enemy of the fiat currency system. Gold has been real money for centuries and every paper money system in history has ultimately collapsed. This drives them to continuously denigrate and manipulate gold.

 

Through which tools is the gold price “managed“?

John Embry: The worst damage occurs in the so-called paper gold market where derivatives, naked shorting, vicious margin hikes, etc. are employed to fleece the long side who don’t have as deep pockets. In addition, the western central banks have supplied the physical gold necessary to effect the plan through their leasing.

 

Recently, I was told by a former chairman of the Federal Reserve, Paul A. Volcker, that to his best knowledge “the U.S. has not intervened in the gold market for more than 40 years.“ (2) Do you think Mr. Volcker has the truth on his side?

John Embry: Mr. Volcker admitted that the U.S. had made a mistake by not intervening at one point in the gold market some 40 years, so to think that nothing has happened subsequently is extremely naïve. Technically he might be correct in the sense that swaps could have been employed and the intervention using U.S. gold could have been conducted by another party. Recently retired Fed Governor Kevin Warsh acknowledged U.S. gold swaps in correspondence with GATA just last year. (3)

 

Furthermore, Mr. Volcker seemed to suggest that central banks have some interest in the price of gold because of its effect on the currency markets. (4) What kind of relationship does exist between gold and the currency markets which are much bigger than the gold market?

John Embry: Very simple. Gold is a currency. Arguably it is the ultimate currency and the central bankers are acutely aware of this fact. Gold’s role as currency is once again coming to the  fore and the central bankers hate that fact.

 

Are gold swap arrangements between central banks a) important for the “management“ of the gold price, and b) do they represent a means of intervention in the gold market?

John Embry: They are most certainly important because it allows central bankers to technically tell the truth because it is always another central bank that is utilizing the swapped gold to intervene in the market.  It is a subterfuge.

 

Do you think the Western central banks have as much gold as they claim they have?

John Embry: I strongly suspect that they have materially less than they try to represent. The IMF permits a one line entry on their balance sheets which aggregates physical gold with gold receivables. That’s ridiculous and it is done to deceive analysts. For example, if the Americans had the 8,161 tonnes that they say they have, they would be delighted to submit to an outside audit and shut their detractors up. However, they stonewall all requests.

 

With its “QE to infinity“ program: would you say the Fed has exposed itself in a way as a hardcore goldbug entity?

John Embry: I believe they are fully aware of the extent to which they are debasing their money. We, the public, have to be the hardcore gold bugs to protect our wealth from their depredations.

 

It seems as if more and more gold is moving towards certain central banks and not away from them.  Is this a solid assurance that the gold price will remain high?

John Embry: I believe so. The eastern central banks (China, Russia, et al) have accumulated a lot of dollars and realize they are at risk. Ergo, they buy gold. At the same time, I think the western central banks have run their inventories down to levels beyond which they won’t go. Thus, I think central banks collective gold buying will have a salutary impact on the price going forward.

 

In the event of another market meltdown, which seems rather likely, do you expect a sell-off in gold?

John Embry: There could be a minor sell-off just because there are so many algorhythyms influencing the market.  It would be short lived because big money in the world now knows they need gold for protection.

 

Gold is in a bull market for ten years now. So an increasing number of people say it is in a bubble. Why would you say, in Gershwin’s words, “it ain’t necessarily so“?

John Embry: Gold’s price is directly related to the constant debasement of the currencies in which it is denominated. The creation of new paper money is dwarfing the amount of gold available. Gold is about the furthest thing from a bubble that I can think of.

 

What do you think in particular about Warren Buffett’s constant “Gold is in a bubble, I go for stocks“ talk? Does he serve here as an influential opinion maker in a specific role because he gets a lot of public attention? In other words: is he a fool or does he only act like a fool? (5)

John Embry: Warren Buffet sold out a long time ago. It’s too bad because he was a great stock picker once. Now he owns insurance companies, Wells Fargo and was a buyer of Goldman Sachs and G.E. in the global financial crisis. He is a member of the American establishment and has a lot to lose. He should have listened to his father Howard Buffett who was a U.S. Congressman and a true “hard money” advocate.

 

In your view, gold will gain in importance as a monetary asset in the years ahead, likely regaining an official role in the world’s financial system. Why do you think so?

John Embry: I think that the current financial system, as we know it, will be totally destroyed, probably sooner rather than later. The next system will require gold backing to have any legitimacy. This has happened many times in history.

 

The mining stocks both in gold and silver seem to me extremely undervalued. Do you agree?

John Embry: They are indeed, and they are being heavily manipulated by the same entities active in suppressing the gold price. In addition, many nefarious hedge funds now are active on the short side. The U.S. financial scene has become a  total cesspool.

 

Are there key levels in the XAU and HUI that one should pay attention to as starting points of a mining stock rally?

John Embry: I tend to pay more attention to the HUI because it is the pure gold index.  When the HUI takes out the 555 level with gusto, I think we are away to the races. However, this level is being aggressively defended by the bad guys. A higher gold price (through $2000 per oz.) will rectify this issue.

 

Why are you at Sprott Asset MGMT so very bullish related to silver?

John Embry: We think the supply-demand equation is ultimately better than even that of gold. New industrial and medical uses are exploding and because silver is “poor man’s gold,” investment demand for silver will go crazy when gold gets priced out of the average citizen’s capacity to buy. Given the small size of the market and very limited inventory, the price should go ballistic.

 

For your physical silver ETF you want to re-acquire physical silver in a big way. Do you think you could be pioneers (for other fund managers) in direct engagement with mines through direct and forward transactions, instead of going to the Comex? You certainly don’t want to “whoop” the silver price by your own buying, correct?

John Embry: I think that is a potential avenue particularly when the supply-demand equation gets progressively tighter in the future.

 

Is the silver market also subject of surreptitious interventions?

John Embry: Without question. In many ways it may be worse because it is a smaller market and J.P. Morgan Chase’s activities have been egregious. The fact that the CFTC has been investigating this for nearly four years without resolution is one of the great jokes of all time.

 

What is your information: to which extent the US silver ETFs are short and how many stocks of those have been used for covering future short contracts?

John Embry: I believe that they are but I can’t provide any information on the extent. When the very same organizations that have manipulated the market for years act as custodians for the ETF’s, it would be wise to be wary.

 

One highly interesting issue for me personally is the point in time when the Middle East countries will no longer sell their oil and natural gas for paper money. When do you think  they will be paid for it with precious metals?

John Embry: I suspect this whole phenomenon could occur very quickly. When confidence in paper money is lost and I think we are rapidly approaching that moment, something like that would undoubtedly come to pass.

 

How do you think about the conflict around Iran viewed from a perspective of the petrodollar?

John Embry: The whole Iranian issue is very disturbing and I think the U.S ‘s motives might have more to do with the petrodollar than Iran’s nuclear ambitions.

 

One final question. IF the financial system goes under, one can expect massive supply shortfalls and disruptions in goods and services, particularly in the energy sector. Would you recommend to our readers to take precautions for such a scenario instead of hoping for the best outcome of the global financial crisis?

John Embry: Unfortunately yes. I am a great believer in cognitive dissonance. Most individuals don’t want to face the truth, particularly if it is very unpleasant. Those that do not suffer from this condition should take precautions because the world situation is presently very dangerous.

 

Thank you very much for taking your time, Mr. Embry!

SOURCES:

(1) John Embry / Andrew Hepburn: “Not Free, Not Fair: The Long-Term Manipulation of the Gold Price”, published by Sprott Asset Management in August 2004 under:

http://www.sprott.com/Docs/SpecialReports/08_2004_NotFreeNotFair.pdf.

(2) See Rob Kirby: “Manifest Destiny Derailed: Treason from Within“, published at Goldseek on January 31, 2012 under:

http://news.goldseek.com/GoldSeek/1328037291.php.

(3) Compare http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf.

The relevant passage of Mr. Warsh’s letter to GATA said:

“In connection with your appeal, I have confirmed that the information withheld under Exemption 4″ — that’s Exemption 4 of the Freedom of Information Act — “consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

(4) See Rob Kirby: “Manifest Destiny Derailed: Treason from Within,“ Footnote 2.

(5) Compare for example in this context what Marshall Auerback has said in an interview about the supression of the silver price:

“It’s in contrast to the gold suppression, which is a central-bank orchestrated scheme. You’ve got a situation now where it seems to be being done amongst the banking community, but I have no doubt that it has being done with official encouragement, explicit or implicit. To give you an example, 10 years ago Warren Buffet bought a silver position, and he liquidated it a few months later. The story I heard from one of his dealers was that he basically told them, “Boys, it’s not politically correct to speculate in silver.” Now who told him that I don’t actually know; I suspect it came from government sources. More interesting to me is that he had had a significant position, and it was liquidated with a great degree of ease with a loss at time when it wasn’t easy to do. This suggests that there was an external agency involved. I have no doubt that there is some degree of government involvement as well, but the primary agents are the investment banks, the commercial banks here.”

See: http://resourceclips.com/2011/04/05/marshall-auerback-on-silver/.

We are extremely pleased to feature John Mauldin in this month’s Matterhorn interview.
The author and journalist Lars Schall covers a number of interesting topics with John ranging from how to solve the European problem, the fate of the Euro, gold and the gold standard as well as giving the world an extra injection of Jack Daniels.
We are pleased to publish, at the close of 2011, John’s more balanced and slightly more optimistic view of the world, compared to my own somewhat graver concerns.

May I wish all our readers Peaceful and Healthy 2012

Egon von Greyerz

“LET THEM DEFAULT“

Investment advisor John Mauldin explains his attitude towards austerity measures; a return of the gold standard; the euro crisis; and the willingness to bailout everyone that makes capitalism and monetary systems stop working.

John Mauldin, president of the investment advisory firm Millennium Wave Advisors, is a renowned financial expert, a multiple New York Times best-selling author, and a pioneering online commentator (see http://www.johnmauldin.com/). His weekly e-newsletter, Thoughts from the Frontline, is the most widely distributed investment newsletter in the world. He also edits the free weekly e-letters Outside the Box and The Mauldin Circle.

Mr. Mauldin, who is a passionate traveler with business partners all over the world, has been published in virtually all financial media and he is a frequent contributor to The Financial Times and The Daily Reckoning, as well as a regular guest on CNBC and Bloomberg TV. His latest book is “Endgame: The End of the Debt Supercycle and How it Changes Everything.“ He regularly speaks to conferences and private groups including The Money Show, The Annual Strategic Investment Conference, The Agora Wealth Symposium, and other investment related venues. John Mauldin currently lives in Dallas, Texas, U.S.A.

Mr. Mauldin, one interesting fact about you is that you’re the inventor of the phrase, “Muddle Through Economy.” Is what we experience in the Western hemisphere a “Muddle Through Economy” on steroids?

John Mauldin: That’s a very good question. When I think about “muddle through,“ I think about an economy that’s growing in the, say, two percent range in the U.S. and one percent in Europe, that’s below trend. Both the U.S. and Europe are certainly in a muddle through mode, it looks to me like Europe is getting ready to go into a recession. Depending on how bad your banking crisis is and how that fades into our system, it could be a recession year. Now, eventually we will get through it, all recessions pass, but I think the West in general is in for a muddle through, slow growth, sideways economy for most of the rest of this decade as we dig through the debt supercycle – we borrowed too much money on the country level, at a local level and at a personal level. De-leveraging cycles do not prevent growth per se. Nevertheless, leveraging is a wonderful thing on the way up, but it is a problem on the way down.

In your book, “Endgame: The End Of The Debt Supercycle And How It Changes Everything,“ you are making the case that we are reaching all over the world the limits of borrowing money by governments. If true, what consequences will that have?

John Mauldin: The consequences means that governments either have to cut back or they have in extreme cases to default on their debts. Greece is not going to pay 100 percent of its debt back; everybody knows that. It is not going to be too long before Italy will find itself in a position where they can’t literally afford to be able to pay 100 percent of its debt back, they will have to discount their debt in some way. There are possibilities how you can do that without actual technical defaults, but the whole process will have negative impacts on economies. When you start going into austerity, to use that word that you can read about everywhere, it will affect the growth of your economy. One problem is, for many economies it is not a one-time austerity deal and then the affect goes away after about a year. It’s like: we have to cut this year, then we will have to cut some more next year, and then we will have to cut some more the year after that, and then we will have to cut some more the year after that – so you put yourself in a permanent spiral of getting down to some place where you have balanced your budget.

This is done by cutting spending or raising taxes, depending on your ability to raise taxes. In the U.S. we have some room to raise taxes, I don’t think it’s a good idea, but we have some room to do so if we decided to. If you’re France, you don’t have much more room to raise taxes. So sometimes you will find yourself in a place where you really have to do cuts, and those cuts are difficult. When the biggest part of your economy is in transfer payments in forms of pensions, Social Security, Health Care or other government services and you have to cut them down, that’s painful. It comes as much as a political problem as it comes as anything else. It definitely impacts the growth ability of the economy. The transition period is very tough, and politicians like to back off from the inevitable as long as they can, but eventually the inevitable comes, eventually you will reach the end of the road.

Related to debt: is the bond market of the last decades a dying dinosaur?

John Mauldin: No, a dinosaur would imply that the bond markets are going to go away. There always will be bond markets. Governments have been defaulting for hundred and hundreds of years, yet there are still bond markets. It’s not a dinosaur, it is not going to get extinct. But people have again to come to realize that governments can in fact default and that there is a moral hazard to buying a sovereign bond. Let us look at what a sovereign bond investor really is. This is not a speculator, this is someone who wants to invest his money and get a guarantee of small amount of return back. He doesn’t want to take risk. And when the bond investors realize that there is risk involved in investing in sovereign bonds, they want higher interest rates and they want to make sure that they will get their capital back.

That’s why certain countries have to pay more. We have already seen that Italy had to go to 6 percent, and if it wasn’t for the European Central Bank (ECB) stepping in, I think the interest rates would be 9 to 10 percent – and Italy makes a big difference: it’s the third biggest bond market in the world. So if Italian rates go through the roof, then Italian debt becomes suspect, the losses are huge, and in fact too big for the private market to absorb, and then there would be a very disorderly crisis. To keep them going off that cliff, the ECB has to figure out how to give money to the Italian banks so that they can buy Italian sovereign debt if the ECB is not willing to do it directly itself. That is an interesting problem.

But can one solve the current debt crisis with more debt?

John Mauldin: No. It’s like I’m drunk and my solution is to get another bottle of Jack Daniels. The problem is that there is already too much debt. Though in the short term supporting debt can help as a bridge loan to have positive cash flow. In Italy’s case such bridge loans might help to get there. So another little drink of Jack Daniels could help, if you will.

Quite a lot of people like to forget about the exotic derivatives that were a major factor in causing the global financial crisis as if this problem did not exist anymore. Do you think that the roughly $ 1 quadrillion in various worthless derivatives alone could be enough to bring the global financial system to its knees?

John Mauldin: Well, you got to be really careful what you mean when you say “derivatives“

Yes.

John Mauldin: There are derivatives of this sort, and there are derivatives of that sort. An option for IBM is a derivative, something in the futures market is a derivative, and I don’t think that those types of derivatives will bring the system down. They can go exponential, and while it may not be a useful financial exercise they are not bringing the system under threat. That is a completely different thing than to say that a derivative as a Credit Default Swap is not a problem. This market could in fact bring the system down, and it could bring it down in a very ugly, disorderly manner, that’s true.

How would a healthier monetary system look if the choice was yours? And do you think that governments have enough sense to introduce such a system?

John Mauldin: Well, the monetary system that we got would be just fine, when you don’t have the leverage, the credit and the deficits that we have. We have to come back to the natural check in a capitalistic system, and that is bankruptcy and default. You should just let them do it. When you are stupid enough to put your money in a currency and debt where the government does stupid things, debases its currency and hurts the value and the buying power of that currency, you should lose your money. This teaches you to be more careful where you put it the next time. That is the tool that makes capitalism work. When you don’t allow defaults and losses, when you try to bailout everybody, that’s when capitalism and monetary systems stop working.

As you know an increasing number of people are stating that we should go back to the gold standard. What is your attitude towards that question?

John Mauldin: I have two attitudes. Number one: it’s a non-starter, it will never happen. We can talk about it all we want, it is just a nice theory. For all practical purposes, Greece is now under a gold standard, which is called the euro, and they are in a place where they can’t get out of their position, they can’t work out of it, they can’t print their own currency and devalue, their labor is overvalued, etc. That’s quite similar to the classical gold standard. If you want to go on a gold standard, fine –but you have to recognize the limitations that you will have. The main problem that you face with being on a gold standard or being not on a gold standard is the willingness of super-bankers and politicians to get rid of the limitations and debase their currency. And I think most people when they say: I want to be on a gold standard – what they are really saying is: I don’t trust central bankers and I want to have some neutral currency. I totally agree with that. I mean, I buy gold every month and take it in physical delivery. I hope I will never need it, though for me it’s an insurance, I don’t see it as an investment – I buy it because I don’t trust the banksters.

Yes.

John Mauldin: I am an optimist, I hope it all will work out well, but just in case I buy it, like I buy fire insurance and health insurance – I hope I don’t need either. Nevertheless, there are mechanisms of the growth of the money supply where you don’t have a debasement issue of your currency. It’s when you start to have Quantative Easings, when you start to mess with the system, then you’re running into problems. The Swiss haven’t had a problem, they don’t need a gold standard – they are the standard. The problems are rather Central Banks and Governments who want to fix something, because everytime the governments want to fix things, they create more problems to fix. It’s the fixing of the problem that creates the problem, if you will.

Do you believe the euro, that you have once called an experiment rather than a currency, is a thing to last?

John Mauldin: If the question is about the euro as it is today, the answer is certainly no. There is going to have to be some serious adjustments. An adjustment could be a fiscal union, if the voters in the various European countries vote to submit themselves to a central authority – or in other words:

if the German government get its will and create a father figure in Brussels, who tells the others how to run their budgets correctly and otherwise they got to do their homework.

But let’s assume you were a European citizen: would you like to have such a father figure that rules over a core element of the sovereinity of your country?

John Mauldin: Well, what the Germans are asking for is a balanced budget or you can only run a 0.5 to 1 percent structural deficit, and that’s a really good idea. This is what Keynes in his original work has said, not what is said about him today. Keynes’ original concept was that in the good times you pay down the debt, and in the bad times you can borrow money – but you pay it back when things get better.

Yes.

John Mauldin: So you don’t run up a never ending debts and built up a supercycle of debt. In the U.S. in the late 1990′s we had actually reduced our total debt, and if we would have kept on that path, if the Bush government and the Republicans – I say this as a Republican – wouldn’t have run ever increasing deficits, we would have entered the credit crisis in 2008 with very little debt. So I think it is a good thing when the Germans are saying in essence that they want a limit on the ability of governments to run deficits, a limit on the ability of governments to spend money in order to prevent the creation of financial crises. This is reasonable. But they have to do it themselves, too.

Yes, of course, that’s quite ironic right now.

John Mauldin: Yes, nevertheless, in theory it’s a good thing. Will they do it? No. That is one of the reasons, if I am buying gold as an investment, I am not buying gold in dollar terms, I am buying gold in shorting the euro, I don’t buy gold in euro or yen terms, because I think they are in a worst shape than the dollar. Given the make-up of all the major currencies around, the U.S. dollar is the prettiest girl in a ugly girl contest.

With what kind of emotions do you look at the housing bubble in China? Do you think the Chinese economy will receive a very rude awakening?

John Mauldin: Eventually yes. They haven’t learned to repeal the business cycle, but it can go on for a lot longer than anyone of us can imagine. If you have a close capital system, which they do, the bank lending that we observe there can go on for quite some time. Now do they try to bring their housing bubble down? Yes. Will they be able to bring it down to a level where it can’t lead into a crisis? They may. Do they in principal have more people that want housing than they have adequate housing? Yes. The question becomes: adequate housing at what price? So they may have to go through a pricing adjustment mechanism. But that will be really a short term problem. Do I expect China to have a bigger economy that’s more successful and more intimidating in ten years than it is today? Absolutely. But to think that they can go through without some type of serious slowdown or recession for ever and ever, that is just not a reasonable thing. You can’t grow to the sky. Eventually you have to begin to settle the debts out and figure out how you get into the balance.

What advice would you like to give our readers in order to survive the hard times we’re going to have?

John Mauldin: I think that the readers should recognize that the hard times will be over the sooner or later in the next five to ten years, it’s hard to say, because politicians can try to kick the can down the road a lot longer than we can imagine – but we’ll get through it. Your goal now as investors should be to try to go through with as much capital and as much buying power to the other side as you possibly can. Because when we get to the other side, when the dust settles, I believe there will be a tremendous boom in the world. That boom will be probably more in the emerging markets, but there will be tons of new technologies, there will be tons of new things within Europe and within the U.S.A., that you will be able to invest in. To give you an example: we used to think of Japan as a problem, but there is a market over the last few years within Japan that’s been up 50 percent, and it’s their robotic stocks. If you would have just invested in robotic stocks a couple of years ago when they were at the bottom, you would have done just fine. Why? Because robotics is a booming industry, and it becomes more and more profitable. So there are places where we will going to find to invest money, and I want to be as cautious as I can during this inter-period, I want fixed income, I want hard assets, I want things that going to pay me money and that are going to get me to the other side, but I think there will be a big booming bull market coming, and we want to get as much capital as we can, we want to save as much as we can in order to get to that opportunity when it does come.

Do you think it is “too late to jump on the gold wagon“ and invest in gold if one sees it as an investment? (1)

John Mauldin: If one sees gold as an investment, probably not, and certainly not when you are living in Europe, when you’re in the euro zone – no. But what you have to watch closely is: If you think that Greece, Portugal and Italy will leave the euro, then the euro will become a lot stronger and you should sell your gold in terms of euros. If you see Germany leaving, then the euro could be a real screaming sell in terms of gold, and so your gold would become quite valuable in terms of euros. So it depends what you believe will happen in the case of a break-up, if the strong countries are leaving or the weak countries are leaving, I don’t think it’s clear yet. My guess is that the weak countries would be the ones that leave, so in the long term, two years from now, three years from now, the euro will be stronger, but in the meantime it will go down against the dollar.

Thank you very much for taking your time, Mr. Mauldin!

SOURCE:

(1) Compare Egon von Greyerz: “TOO LATE TO JUMP ON THE GOLDWAGON?”, published at GoldSwitzerland on August 15th, 2011

“Money Drives Everything”

THE MATTERHORN INTERVIEW – November 2011

“Self-sufficiency is key”

In our Matterhorn Interview series, the German journalist Lars Schall talked with geopolitical trend spotter, natural resource expert and economist Chris Berry about the various factors that are pushing prices for precious metals and crude oil up; the short-sighted energy policy of the West; the rare earths industry; and the importance of pot ash to combat world poverty. 

Egon von Greyerz

 

By Lars Schall:

Mr. Berry, let’s start with gold. How do you summarize this year’s action in that market?

Chris Berry: We are in a ten year secular bull market for gold and nothing has changed in 2011 to alter my opinion. In terms of summarizing this year’s action in gold, , the yellow metal hit an all-time high of $1922 per ounce this summer, then has sold-off a little bit and traded sideways since. There is quite a bit of volatility associated with the gold price, however, the factors that comprise the secular bull market continue to provide a good floor under the price of gold and are still intact. These include flat new supply coming into the market, strong buying of bullion from India and China, and Central Banks becoming net buyers of bullion as they look to replace fiat paper currencies with a legitimate store of value. So despite the fact that gold has traded sideways in recent months, I expect to see higher gold prices in the future.

 

Do you think that short-term speculators are a factor?

Chris Berry: I certainly think there’s an element of speculation in the gold market. Recently, the London Bullion Market Association attempted to figure out the size of the gold market by looking at the gold futures trading in London. What they found was that every single day about 19.6 million ounces of gold is traded, which might or might not seem like a lot, depending upon your perspective, but when you think about the fact that last year only 86 million ounces of gold was mined globally, basically what this means is that every week during this year the entire stock of last year’s gold production was traded. Another story: I have a friend who traded gold futures in New York and happened to be at work on September 11, 2001. He said that none of the traders could understand what was happening as gold was up $10. Today gold routinely moves $10 and oftentimes more in a day which tells me there is more activity in the gold futures markets and opportunity for speculators.

 

What does this tell you?

Chris Berry: It tells me that speculation is certainly a factor in the gold market. The fact that just in London alone, last year’s entire stock of gold is traded every single week is telling. The volatility in the price of gold is another indicator. This ignores the activity in New York futures trading, in Shanghai, and in other futures markets around the world. Exchange Traded Funds have also given the masses a way to speculate in the gold bullion market as well. This type of speculative trading adds volatility to the markets, which adds to the uncertainty and direction of global economies.  Overall, however, the credit bubble and the resulting debt crisis that we now face in the Eurozone and also in the United States more than anything, I think, has pushed gold higher and will continue to do so as Western Governments “kick the can” down the road delaying any resolution of this crisis. I don’t see any short-term resolution for this. If you have a long-term view, gold bullion is a great place to be.

 

Given the development of gold during the last ten years, why would you say that gold isn’t in a bubble yet?

Chris Berry: Gold is not in a bubble for a number of different reasons. We’ve mentioned a couple of the reasons already, but they bear repeating. Number one: consumers in countries like China and India are now buyers of gold and silver because of their rising disposable income and rising quality of life. These citizens want to protect their newfound wealth by buying physical gold and physical silver. China was on a silver standard until the 1930s and so the idea of a currency backed by hard assets is not a foreign idea to them. Number two: Central Banks are net buyers of gold bullion. I have seen reports of Central Banks accumulating a net total of 500 tonnes of gold bullion in 2011. This is up from a total of 77 tonnes in 2010. Previous to this, Central Banks were net sellers. From China, to Mexico, to Kazakhstan, Central Banks around the world are rushing to a store of value – that store is in gold just as it has been for centuries. Number three: New supply of gold coming onto the market is flat and has been for the past several years. If demand continues to increase, senior mining companies will need to “replace ounces” which bodes well for junior gold mining and exploration companies going forward. Number four: Newfound interest on the part of investors in “owning” bullion through exchange traded funds. I recently looked at the size of GLD, the exchange traded fund which is supposedly backed by gold bullion. The fund has been in existence for seven years and has roughly US $64 billion in assets which is larger than the gross domestic product of 142 countries throughout the world. Number five: perhaps the biggest reason for gold’s ascent is the economic situation both the United States and the Eurozone find themselves in today. A sizable debt burden at both the consumer and federal levels shows no signs of abating. As Western governments attempt to inflate their way out of this debt crisis through printing paper currencies, gold and silver will continue to benefit as safe havens.

 

Would you like to name us your favorite three precious metals mining companies, junior or senior, both in silver and in gold?

Chris Berry: Sure. But these are in no particular order; they are just ones that I focus on. Also, please keep in mind that I am not an investment advisor, so thorough due diligence on the part of your readers is a must. Starting with silver, one company I like is Endeavour Silver. This is a Vancouver-based company run by Brad Cooke.

 

I know Hugh Clark, who is the head of their corporate communications.

Chris Berry: Hugh is a fantastic representative for the whole silver industry, a very smart guy.

 

Yes.

Chris Berry: Endeavour Silver has properties in Mexico, and I visited one of them in Guanajuato, Mexico in May of 2010. This is a company that is growing its silver production and reserves at double digits. They also produce a small amount of gold which lowers their overall cost of production. Endeavour is an emerging silver producer that is generating a tremendous amount of cash flow based on the fact that silver prices are now roughly about $33 an ounce. Last time I looked at Endeavor’s cost of production it was $5.03 an ounce net of gold credits.  In their most recent quarterly update, net earnings, EBITDA, operating cash flow and revenues all increased substantially as did their silver and gold production (all compared to the Third Quarter of 2010). To add to this, their cash costs fell which all combined for a very positive quarter and outlook going forward. Endeavour increased plant capacity at Guanajuato to 1,000 tonnes per day which clearly helped deliver these positive financial results.

Secondly, another company I like is Hecla Mining, which is a company that would be considered a senior producer of silver. This company is the largest silver producer in the United States and operates mines in Alaska (Greens Creek in operation since 1989) and Idaho (Lucky Friday in operation since 1942) as well as other properties which are undergoing exploration activities. The company has no debt, over $400 million in cash and pays a dividend according to their most recent corporate presentation. Hecla produces between 9 and ten million ounces of silver annually and is in the process of expanding their production capacity by roughly 50% over the next five years. I think this is an undervalued company based on production and their plans for future growth in the business. It trades in the United States now around $5.75 a share.

Another interesting producer is Alexco Resources. One of the two or three mining “hot spots”, if you will, for exploration and production globally is the Yukon in Canada. This is a territory that about a hundred years ago experienced the Yukon gold rush and is now experiencing a similar rush based on high metals prices and advances in mining technology making certain deposits legitimate candidates for advanced exploration. Alexco has been in the Yukon for some time, and they operate a mine that is called Bellekeno, which holds the distinction of currently being the only primary producing silver mine in Canada. The silver being mined here is also very high grade – thought to be among the highest grade silver in the world.  The company will produce between 2.2 to 2.5 million ounces of silver in 2011 and has an aggressive goal to produce 5 million ounces of silver in three years. Last time I looked, the company had about $50 million in cash on its balance sheet so they are clearly positioned to grow. Alexco is similar to Endeavour Silver: they are thought of as a “mid tier” producer with ample opportunity to expand their production. Additionally, both companies are in great jurisdictions for mining as well. A final aspect that I like about Alexco is the leadership, it’s a very well run company. The CEO, Clynton Nauman, is a gentleman with a wealth of experience in the mining industry and is the right person in the right place in the right job.

In terms of gold I would point out Midway Gold. Midway is a company that is involved in advanced exploration for gold, as their name suggests. They have properties in the Western United States, predominantly in Nevada. Their centerpiece property, if you will, is a 70-30 joint venture with Barrick Gold called Spring Valley. I believe the qualified NI 43-101 resource estimate is 2.1 million ounces of gold in the measured and indicated categories and roughly 1.9 million ounces of gold at a cutoff of .14 grams per tonne in the inferred category. Anytime that a junior can attract a senior producer to earn into one of their properties says volumes about the caliber of the company and also about the caliber of the asset. Midway has other properties that are in various stages of development including the Pan deposit in Nevada.  They have stated a target of 2013 for production  on this property which has a NI 43-101 qualified proven and probable reserve of 864,000 ounces of gold at various cut offs of .21 grams per tonne and .27 grams per tonne and a measured and indicated resource of 1,130,000 ounces of gold at a .14 grams per tonne cut off.  A feasibility study was completed on this deposit and the after-tax capital expenditure was $99 million and assumes production of 81,000 ounces per year at a total cash cost of $585 per ounce. I own shares in Midway Gold.

In terms of senior gold producers I have to say that they had a really rough go over the last year if you look at the price of bullion, it’s been up between 10 to 20 percent, and some of the senior producers just haven’t followed suit. That said, the senior gold producer that I follow right now is Goldcorp. This is a company that is paying a dividend, generating tremendous amounts of cash flow (over $680 million dollars worth in the Third Quarter of 2011), and has a cash cost of production (on a by-product basis) of $258 per ounce of gold. With gold trading for roughly $1,650 to $1,700 per ounce right now, you can see why the company is in a strong financial position. Goldcorp’s Penasquito mine in Mexico is expected to deliver strong cash flow going forward as the company will be producing gold, silver, lead, and zinc from the mine, again lowering the overall cash costs for the company.  Goldcorp stands to benefit from exposure to precious and base metal production and a strong development pipeline in the future. I own shares in Goldcorp.

The final company is a hybrid in the sense that it has both precious metal and base metal properties across North America, and that is Quaterra Resources. The company is involved in advanced exploration throughout North America and is run by Dr. Tom Patton. Dr. Patton has a wealth of experience in the mining industry with both senior and junior companies and as CEO of Western Silver Corp, was actually involved in the discovery of the Penasquito mine which I referenced above. I am most excited by this company for the potential it holds with its copper property in Nevada – specifically the Yerington property. This is a former open pit mine with a historical resource estimate that Quaterra is working to make NI 43-101 compliant.  I personally am bullish on copper going forward and want to find promising deposits in reliable political jurisdictions such as Nevada.

So those are a few names that I follow in the precious metals arena on right now.

 

Given the potential for a depression, do you think that silver would perform well under those circumstances?

Chris Berry: If we go into a depression, I would argue that silver will not perform well, and the reason why is because silver is predominantly an industrial metal. In a depression there would be very little economic activity or growth, if any at all. We would likely be faced with a scenario of perpetual economic contraction which would tell me to avoid silver.

 

Do you see a depression indeed in store for us?

Chris Berry: I’m looking at this from an American perspective, and I think in the United States we are headed for a deflationary spiral. Look at what Fed chairman Ben Bernanke has done to the monetary base. He has opened up printing presses and they have not stopped which has exponentially increased the money supply in the United States. Let me show you this chart which shows relatively steady growth in the monetary base in the U.S. economy – and then it just absolutely explodes when the Great Recession hits:

Next, look at what happened to Money Multiplier in the US economy:

Essentially, for every dollar put into circulation in the US economy, at least an additional dollar should be created through lending and economic growth. This chart shows us that every dollar injected into the US economy is now creating less than one dollar of growth. So while the money supply is increasing, the Money Multiplier tells us that that money is not being lent, suggesting sluggish economic growth going forward at best.

The theory behind this idea is that you flood the economy with money to stoke aggregate demand, credit, bank lending and, ultimately inflation. Inflation is a dirty word, generally speaking, but a little inflation in an economy is actually a good thing. There are, of course, differences between cost-push and demand-pull inflation, but that is another topic for another time. After all of this activity, banks are not lending which I think says something about the true state of their balance sheets. Basically what the banks in the United States have done is taken this money from the Fed and they are holding on to it. Nevertheless, the Fed continues to print more money, which is another reason why people around the world are running to gold.

There appears to be a little growth in the US economy with Third Quarter GDP growing at 2% but this growth is not robust enough to stoke aggregate demand in the United States.  This challenge is compounded by a high structural unemployment rate. You have tremendous slack in the economy, and that’s why I think deflation is what we will see before we will see any inflation. Every credit cycle has to clear itself and finish before a new one can begin. Every debt must be repaid. In the United States we are still muddling through a collapsed credit bubble. You have a gigantic debt overhang on the consumer and on the corporate level as well, and until that clears, until this deleveraging process that needs to take place is done, banks will not continue to lend at levels that can aid in economic growth. Most deleveraging cycles can take between five and seven years to complete. The Fed can print all the money it wants, it doesn’t appear that it’s going to do any good.

 

Why are the gold policies of the developing world fundamentally different compared to the gold policies of the West?

Chris Berry: Well, let’s take China. I mentioned earlier that as recently as the 1930s, China was on a silver standard. The idea of sound money is not a foreign one to the Chinese. China of course has $ 2.5 to 3 trillion of foreign reserves that consists predominantly of paper fiat currencies. The Chinese obviously realize this and that’s why they are diversifying out of dollars and Euros and into hard assets such as gold. Just as an example, in the year 2000 China was responsible for 6 percent of global gold bullion demand. Ten years later, in 2010, they were responsible for 18 percent, and that will increase allegedly again in 2011. Another example is India, which is the largest importer of gold bullion in the world. Last year they imported 958 tons. This year they will import more than 1000 tons. China and India have to support their populations with sound money. Paper currencies will not rule the day – they never have. Additionally, take a look at the recent actions of the Central Bank of Kazakhstan that has exercised what is known as “priority right.” That gives the central bank the right to buy all domestic gold production starting on January 1st, 2012. One final example is Mexico. In January of 2011 they imported 7.3 tons of gold, in July of 2011 they imported 100 tons – it increased in seven months by more than a factor of ten. These are just two relatively obscure central banks in the developing world that are running towards gold because they seem to have realized the folly of fiat currencies.

 

You’ve mentioned China. What are your thoughts related to the fact that China is not just the largest silver producer in the world, but is also importing a lot of it?

Chris Berry: This speaks to their voracious appetite for metals in general. China is the biggest producer and consumer of a whole host of metals. Gold and silver are just two of them. They are responsible for over 40 percent of global copper consumption as well. With respect to silver, China was exporting as recently 2005 100 million ounces of silver every year. Last year they imported over 100 million ounces. This dramatic reversal has to do mainly with economic growth and silver’s indispensible role as an industrial metal, but also again with the fiat currency argument and silver’s role as a store of value.

 

There are clear signs for a Sino-Russian “comprehensive relationship,” as Chinese president Hu Jintao called it.What are the reasons for that and what do you expect from that?

Chris Berry: I think it revolves around access to natural resources. China’s leaders are trying to keep their population happy, for lack of a better phrase, and they will do so by providing an increasing quality of life for their citizens. This increasing quality of life is built on the back of resources. Russia is a country that is blessed, similarly to Australia or Canada, with abundant natural resources. So this “comprehensive relationship” really revolves around access to natural resources. Furthermore, China and Russia don’t want the United States meddling in their back yard anymore, as it did in 2005 when George W. Bush went to India and signed a civil nuclear agreement designed to grant access and transfer of nuclear technology to India for civilian purposes. Recent moves by President Obama to establish a US troop presence in Australia are sure to raise some eyebrows in both Beijing and Moscow as well. It is also instructive to see Vladimir Putin recently call for a “Eurasian Union” bringing together various former Soviet states and leveraging their strengths. I think that is also a push-back against the United States and their military and diplomatic presence in the region.

 

Do you think that China and Russia will both issue one day maybe two gold backed currencies or even a common one?

Chris Berry: Well, if things continue the way they are, I absolutely do. One sign of things to come is the agreement that Russia and China signed to avoid the U.S. dollar in bilateral trade. The thinking here is that this is a small step in the direction of dethroning the US Dollar as the world’s reserve currency. However, the U.S. dollar right now is so liquid and it is so entrenched – about 85 percent of global trade is settled in U.S. dollars, and 60 percent of that has to do with trade which originates and settles in countries outside the United States. It’s an overwhelming percentage of global trade that is settled in U.S. dollars, and ultimately yes, I see that changing, but I don’t see it happening anytime soon. And to hammer that point home as to why, the United States has the strongest military in the world, and as long as it has the strongest military in the world it will have the reserve currency. These are the types of politically incorrect statements that politicians can’t make, but let’s face it, it’s true.

 

Since one could make the argument that the U.S. is using its military in order to ensure that it gets a large chunk of the global crude oil supply, which is priced in U.S. dollars: what are your thoughts related to Peak Oil?

Chris Berry: I think we have past the point of “Peak Cheap Oil,” so to speak. If that s not the case, then why is British Petroleum drilling in three miles of water off the coast of Louisiana? Or in Saudi Arabia, why do they have to pump more and more water down the oil fields like Ghawar? It appears to me that the easily accessible, or cheap oil, has been found. Peak Oil is a little bit of a moving target – if we haven’t reached it, we are certainly close. And that’s a problem when you consider economic growth rates emanating in the emerging world continuing at their current pace. These economies will need access to oil to aid in the growth their economies. Additionally, we in the West have become accustomed to a high quality of life that is built on the back of hydrocarbons such as oil. Are we willing to accept a lower quality of life so those in the emerging world can catch up with us? I don’t think so.

Therefore, you will see upward pressure on the price of oil, and it will be harder to find and more expensive to refine. So “Peak Cheap Oil” is the more appropriate phrase. The recent discoveries of shale oil and gas in North America with fracking technology and horizontal drilling offer hope, but the end game remains to be seen.

 

Are we in the West following a short-sighted energy and natural resources policy?

Chris Berry: Answering this from the U.S. perspective, I don’t think we have a clear policy at all.

 

Well, at least Richard Cheney had one in the past with his “National Energy Policy” that was published in May of 2001. (1)

Chris Berry: Yes. But in general the phrase here to use is “NIMBY” – Not In My Back Yard. We have a very high quality of life in the West, but to support this it takes an increasing amount of resources. People want to ignore some domestic sources of energy such as coal because it is dirty, and instead they want to focus on other forms such as renewable like wind turbines and solar. They certainly have their place as the energy mix in the future will involve renewable energy sources – but no one source is going to win out. In the United States our political class needs to realize that and needs to level with the electorate and say: Look, coal is going to be around for a long, long time, so is oil, so are hydrocarbons in general, and renewable energy sources have their place, but it will continue to be a very small percentage of electricity generation going forward in my opinion. We need to find a balance between “business as usual” and a sustainable future because right now, globally we’re headed for conflicts surrounding resources as billions of citizen strive for a better life.

 

Do you think that the oil market is really a free market driven by supply and demand?

Chris Berry: Predominantly, not entirely, but predominantly the answer to that question is yes, but again going back to what we’ve talked about a little bit earlier with gold, ETFs and futures trading, I’m sure there is also speculation in the oil markets. When oil hit $147 per barrel in 2008, you look at the chart and it just went too far too fast. There was a lot of speculation in there, no question, because as quickly as it went up to $147 it fell down $35. That said, coming back to the quality of life theme I have mentioned several times in this interview, this is the real driver of oil demand going forward.

 

Do you think that it is inevitable that continental Europe will have to built something like an energy alliance with Asia?

Chris Berry: I would change that question slightly, I think an energy alliance is inevitable, but it will be with Canada or with the United States., A lot of the gas and a lot of the resources that are being produced in Asia are being consumed internally. Europe is obviously very reliant on Russia for gas imports, but because of diplomatic snafus the Russians can literally “turn off the tap” and suddenly Europe starts to shiver during the winter months. This is a huge trump card that Russia holds over Europe and so if I were a politician in Western Europe I would actively be looking at closer relationships with the United States and the shale gas deposits that are now being discovered or with Canada and their oil sands deposits in Alberta and Saskatchewan.

 

You pay a lot of attention to the lithium industry. Why?

Chris Berry: Lithium is one of the lightest, if not the lightest of all metals and the lithium-ion battery is on the verge of revolutionizing the transportation industry and the energy storage business. China and the United States are spending billions of dollars on battery research. In fact, China is spending quite a bit more to innovate and develop intellectual property surrounding batteries and vehicle electrification. Lithium is at the forefront of this race for next generation technologies. It is a critical metal, and it will remain front and center going forward. Lithium is mined mainly in China, Chile, Argentina, and Australia by four primary producing companies. If electric vehicle adoption (both electric vehicles and electric bikes) really takes hold, lithium will be a very profitable metal as technological advancements are certain due to the research and development dollars governments around the world are pouring into battery research.

 

Another industry you pay close attention to is the rare earth industry. What are the keys to understand that specific industry? Do rare earths become increasingly subjects of geopolitical games?

Chris Berry: Yes, absolutely. Rare earths are politicized metals. Two years ago they were not in the news at all, and now they are routinely on the front page of many newspapers throughout the world. Politicians in Brussels, Washington DC, Ottawa, and Beijing are all aware of the strategic importance of a reliable supply of these metals for industrial and defense purposes. It has been a great ride for investors in the rare earth industry, but that ride is just about over. The issue here is you have over 300 companies globally that are involved in the rare earth industry searching for rare earth deposits outside of China, which controls 97 percent of a market of about 130,000 tons of supply. Those 300 companies are way, way too many. This industry, as quickly as it blew up, it will shrink down to five or ten core companies that have deposits outside of China and are able to set up a supply chain. That will take between five to ten years, so this supply crunch that I think we are seeing in rare earths is here to stay, but in terms of investing the easy money has been made. You should be very careful, focusing on deposits that are in safe geopolitical jurisdictions, for example Canada or Sweden, focusing on deposits that have a preponderance of heavy rare earth mineralization as opposed to light rare earths, and you should look for companies that have a good understanding of the metallurgy of the deposits, because you have to separate all seventeen rare earths one by one. This is key and is an enormously difficult task to accomplish, both technically and financially.

 

Do you think that the blackmail potential associated with rare earths will increase?

Chris Berry: I think so, but it will increase to a point. If the prices of these rare earths continue to go up by triple digits, like they have been, you will see companies like Toyota or BMW engineering around the use of rare earths in the motors and magnets for their vehicles. So rare earth demand will not vanish, it will be a very tight market and out of balance for a number of years for select rare earth elements, but you are starting to see companies engineer around the usage of these critical materials, and they really are critical for example in terms of magnets. The Chinese have instituted export quotas on rare earth oxides in recent years and I expect this to continue in various forms as the Chinese look to maintain their stranglehold on the rare earth market and build their own clean tech and defense industries.

 

The book author F. William Engdahl wrote a few months ago:

“‘A man can get used to pretty much anything with time, except dying…and even that with some practice.’ Well, as fate has it, it seems we, the vast majority of the human race, are about to test that adage in regard to the availability of our daily bread itself.“ (2)

How do you think will that test of a life without food turn out on a global scale?

Chris Berry: Feeding a hungry and growing population is key for any society, and I think this is an interesting question because on October 31st, 2011 according to the United Nations the 7 billionth human being on earth was born. You are seeing a global population that is increasing at an increasing rate. This rate of increase is not forecast to continue indefinitely, but nevertheless on the one hand you have population increasing and on the other hand arable land decreasing to the tune of 103,000 square kilometers every year. To put that in perspective, that is the size of the country of Iceland. So the next time you are looking at a map look at Iceland, this is roughly how much arable land is lost each year on a global scale. This trend makes the case for another one of my favorite elements which is potash. I am very interested in potash and its usage.

Why?

Chris Berry: Because of what it does for crops. It has a whole host of beneficial factors: it increases yield, it retains water in the soil, it produces fresher produce, all kinds of things. Potash and phosphates will be key in the future based on increasing and hungry populations and decreasing arable land.

 

Do you think Monsanto will target this?

Chris Berry: If they haven’t already, they will. The potash market is controlled by a small number of major players and can be thought of as an oligopoly. Monsanto isn’t included in this oligopoly, but is really more of an agricultural giant.

One of the uses for potash is in the growth of biofuels. This is sort of a question that opens Pandora’s Box: Is it right to take corn and use it to create ethanol or bio-diesel for transportation, when you have a billion people globally that live in poverty and need to eat? That is probably another conversation for another interview, but this is an open moral question that we have to ask ourselves as the population gets bigger and it gets harder and harder to feed everybody.

 

What advice would you like to give our readers at the end in order to survive the hard times we’re going through?

Chris Berry: Self-sufficiency is key. Relying on government, relying on anybody except yourself or your loved ones is a very bad bet going forward. Shall I tell you my own personal philosophy in that respect?

 

Please.

Chris Berry: I have about 5 to 7 percent of my wealth in hard assets, gold and silver bullion and coins and I continue to accumulate each. I have six months of living expenses readily available and not in a bank. Regarding investing, we practice what we call Discovery Investing where we use a ten point grid to evaluate micro-cap companies that have potential to make discoveries, whether they be a gold deposit or a cure for cancer. We believe that wealth is created through discovery. I welcome your readers to sign up for our free newsletter at www.discoveryinvesting.com.

I would try to avoid debt at all costs. Being liquid, staying liquid, staying debt free, protecting yourself and making wise investments in precious metals and select companies focused on commodities markets I think is wise.

 

And also the awareness that threats like a depression are looming.

Chris Berry: Yes, being aware is a great point. This is again what I do: I try to learn everything I can about how the rest of the world is living their life, I travel extensively and look at history as a guide, and I also consume information about resources, resource dependence, resource wars and resource nationalism because this is another theme that will continue to rear its ugly head with some potentially unfortunate consequences.

 

Thank you very much for taking your time, Mr. Berry!

 

SOURCES:

(1) Compare “National Energy Policy. Report of the National Energy Policy Development Group”, May 2001 under: http://www.wtrg.com/EnergyReport/National-Energy-Policy.pdf

(2) F. William Engdahl: “Getting used to Life without Food. Wall Street, BP, bio-ethanol and the death of millions”, published at Global Research on July 3, 2011 under:

http://www.globalresearch.ca/index.php?context=va&aid=25483

 

The interviewee:

Chris Berry (1974 – Phoenix, Arizona) holds an MBA in Finance with an international focus from Fordham University and a BA in International Studies from The Virginia Military Institute. He spent more than a decade working across various roles in sales and brokerage on Wall Street. In 2010 he founded House Mountain Partners LLC. The firm focuses on the intersection of three spheres:

* The changing geopolitical relationship between emerging and developed economies;

* The commodity and energy space;

* Junior mining and resource stocks.

 

Chris Berry is a member of the Canadian American Business Council and an active contributor to the Morning Notes email newsletter, along with his father Dr. Michael Berry (see: DiscoveryInvesting.com), and writes columns for various publications such as the Gold Report. He lives in New York City, U.S.A.

The content in this interview is for information purposes only. None of the information contained in this report is intended as or constitutes an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities. No investor should rely exclusively on the content in this report in making an investment decision and House Mountain Partners, LLC has made a concerted effort to present the facts to the best of their knowledge. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this report.

The material in this report is based on data from sources we consider to be accurate and reliable but is not guaranteed as to accuracy and does not purport to be complete. Opinions and projections found in this report reflect our opinion as of the report date and are subject to change without notice.

I, Chris Berry, certify that the views expressed in this interview accurately reflect my personal views about the subject, securities, and issuers. I or my family members and associates may, from time to time, own shares in the companies mentioned in this report. I own shares in the following securities mentioned in this report: Midway Gold, Goldcorp.

This interview does not constitute financial, legal, tax, or any other advice. Nothing in this report is intended to be, nor should it be considered, investment advice. All Investors are reminded to conduct their own extensive due diligence before making any investment decisions.

“Market Manipulation, Fraud, Corruption, and the Second Great Depression“

‘The Matterhorn Interview’ – October 2011

In an exclusive interview for Matterhorn Asset Management, Lars Schall discusses with financial journalist Nomi Prins from the United States and fund manager Wesley Legrand from Australia issues related to the precious metal markets, central bank policies, and the parallels between our days and the age of the Great Crash / Great Depression. Unfortunately, “we’ve just haven’t learned.”

Nomi, why should people pay attention to the precious metal markets?

Nomi Prins: Right now, in particular as the second Great Depression is in progress, many investors, banks, governments, and regular people look to the precious metal markets, especially gold, in order to have an alternative to the currency markets. What we’ve seen in the last couple of years in the money markets in general has been chaotic, volatile, and screwed up because governments have been creating money through printing it, as well as extending substantial loans to banks, which hit national economies as debt, in order for these banks to navigate their own problems; as the crisis they created and perpetuated wreaks havoc on the rest of the planet. Gold and silver offer a way that lies slightly outside of the chaos that’s occurring in that printed currency market.

Do you think that gold is an adversary to the currencies of Western central banks?

Nomi Prins: Again, as an alternative to printed, debt-backed currency, it is certainly viewed by investors and also by individuals as having more intrinsic value, with the potential of more appreciation as well, given our current environment, than Western currencies. There is a physical nature to it as opposed to the vapid printing machine nature of central bank created currency. On the other hand, every tradable entity in the global markets has a political underpinning and has the potential to be manipulated; in that respect, even physical gold is something that can be acquired or sold or leveraged in the futures and options markets, in large quantity by banks, central banks and governments far more easily than individuals can, which gives gold trading the potential for manipulation by these larger factions. Nonetheless, it is a viable currency alternative and given the chaos in today’s markets, there remains a value to having a kind of independence that printed currencies don’t necessarily have, from debt-based national economic policies.

Wesley, what is gold’s pivotal role in global politics and finance?

Wesley Legrand: Gold has always been the purest and oldest form of sound money. It really is now the barometer of faith in the fiat monetary system. It is very hard to measure confidence and faith, but that of course is what the whole system is dependent on. Gold is the best measure of that faith. There is no counterparty risk to gold, it is pretty much the only monetary asset in the world where there is no counterparty risk.

Why has the suppression of the gold price been a prime directive of the establishment and central banks?

Wesley Legrand: Effectively the underlying reason is to mask and therefore facilitate monetary inflation, which is simply money printing. They are stealing purchasing power away from the masses, it’s a stealth tax. Obviously all fiat paper currencies have lost significant purchasing power since the gold standard was abandoned in 1971, and the US dollar as the world reserve currency has lost more than 90 percent of its purchasing power in that time. So that is the underlying reason – to facilitate and mask the inflationary tax.

Do you think, too, that the suppression or “managing” of the gold price has been a prime directive of the establishment and central banks?

Nomi Prins: I think there is this fear. The central banks and the national economic establishment, first and foremost, want to maintain control over monetary policy with respect to rates, and thus, to the printing of money. This serves the purpose of backing the risk that banks dumped into the market through faulty assets, derivatives and excessive leverage. They seek to retain influence, to be able to offer debt in return for austerity measures in Europe, or debt in return for conversations about different kinds of austerity measures in the United States like cutting socio-economic programs like Social Security and Medicare. Suppression of the price of gold, as an alternative currency, is a way to keep that control and influence.

How important is short selling in the precious metals markets seen from the perspective of a fund manager?

Wesley Legrand: It’s of paramount importance, because this is the main tool that the bullion banks use in their price suppression scheme. The JP Morgan’s and HSBC’s are in effect the expansion arms of the Federal Reserve and the US government. They can create paper gold, which is obviously different to physical gold, and they can create as much paper gold as they like to short sell. They short more gold and silver than actually physically exists.

Do you think those short positions are illegal, because they are naked, not backed by anything physical?

Wesley Legrand: Correct, yes, I do, as there is simply no bona fide financial reason for these investment banks to be involved in precious metals or commodity markets in this way. Naked shorting is blatantly manipulative and should be banned completely.

What’s your take on short selling in the precious metal markets, Nomi?

Nomi Prins: We have to consider short-selling which is legal vs. naked short-selling which isn’t. The issue of simple short selling is when banks – or private equity and hedge funds – take a position that the price of gold will fall for some particular period. If they back that position with extreme leverage, they are effectively suppressing the value of gold. But this is legal. By naked short selling, banks – investments banks, private equity, hedge funds, etc. – can illegally manipulate the gold price by their short sell without even necessarily having a stock of physical gold to back their short, which is technically illegal. But because there is no real global reporting mechanism or requirement for indicating gold naked shorts, or silver for that matter, there is no real transparency for the banking system in terms of who is short or by how much and thus, how much they would have to possibly get in the form of physical metal in order to fill that short. And this goes for the Federal Reserve and European Central banks as well. It is difficult to trace that manipulation absent true transparency, and that becomes an even bigger problem.

What would you suggest should be done about this, Wesley?

Wesley Legrand: The bullion banks should be banned from the short side of the market. There is no genuine economic reason for these bullion banks to be involved. The LME and the COMEX were originally created commodities companies who used to operarate and hedge themselves in those markets. There is no room for Wall Street and asset banks to distort and control the markets purely for speculative gain . This is just not free market capitalism, as GATA famously says: “There are no free markets, only interventions.

Do you consider the entire gold and silver paper markets as fraudulent?

Wesley Legrand: Yes, as there is a hundred times more paper gold traded than is physically in existence and it’s similiar for silver. And again, these banks have no genuine role economically to be short. So yes, they’re fraudulent.

Would you invest in ETFs?

Wesley Legrand: No, I wouldn’t. I think a lot of the physical gold in bank bullion vaults is the subject to double claim. We know that central banks account for gold on their own balance sheets, but then when they lend that gold out the gold is also counted on the balance sheets of the institutions they lend it too – so it’s subject to multiple claim. I certainly think there is not nearly enough physical gold in the world to cover all the ETF paper claims in the world. A lot of people will get a rude shock one day when they will go to claim their physical gold with their paper entitlements.

Will the new Pan Asia Gold Exchange (PAGE) be a game changer?

Wesley Legrand: I’m not sure if it will be a game changer per se, but it will certainly help re-monetize gold and unmask the price suppression scheme, because it opens the physical gold markets up to the Asian economies much more readily. China and India have a culture of savings and a culture of encouraging their populations to swap their paper money for a physical store value like gold.

Since we’ve used the words “legal” and “fraudulent,” do you perceive the accounting practices of central banks related to their gold reserves as accounting fraud?

Nomi Prins: Since they effectively make their own rules, it’s difficult to classify the reticence of information with respect to gold as actually illegal. Again, there haven’t been publicly available records recently of how much gold is in reserve at various central banks, and because there is no true information there can be all sorts of accounting manipulation, fraudulent or not, that we can’t track. But certainly manipulation on price, on availability, on the amount of physical gold in storage, and so forth should be classified as a component of securities fraud. Before the real gold standard was dropped during the Great Depression, there used to be much more mechanisms, not only related to the accounting for the value of gold which was pegged to the value of various currencies, but also for the amount of gold in storage. Today, we don’t really have that aspect. Therefore, any time there is no real transparency, whether it’s in gold reserves at central banks or in governments, or in subprime mortgages, there is the potential for fraud.

Is a return of the gold standard realistic in your point of view?

Wesley Legrand: Well, I don’t know if it’s realistic, but I would argue that anything would be better than the current system and it seems as if the only thing that can impose the necessary discipline on governtments and central banks to stop them from printing money without limit and generate never-ending more debt is to have some form of gold standard. The best solution would be to abolish all central banks at the same time as returning to the gold standard, but sadly this is not realistic!

Do you think a return of the gold standard is realistic?

Nomi Prins: I don’t think it is realistic given that we don’t have that transparency in our central banking system and we do have this potential undercurrent manipulation of the market by the private banks, central banks, and investment community. A return under that scenario to a gold standard would be difficult for several reasons. One is that these institutions don’t want it, and would fight against it. They want to be able to manipulate the gold price in order to hedge the possibility of it ever becoming a standard, sure, and therefore retain the power of accumulation and evaluation to be in control of that possible process. But there is no real incentive for the central banks that have the gold or retain the control over what happens to it to go into a gold standard. It’s much easier in this environment, in this second Great Depression, to have money printed for banks if there is a chaotic financial crisis.

The Federal Reserve can print trillion of dollars of currency. The US Treasury department can issue trillion of dollars of Treasury debt at a whim. So can the ECB. So can any of the stronger governments and central banks – in order to supposedly facilitate a smoothing of this crisis when in fact what happens is that all they do is create an inflation of the crisis, because they are inflating debt, they are not dealing with the causes, and they are then sitting back assuming because they did this, that somehow things are better when they are actually not. So they don’t have the incentive for a gold standard that would reduce their power over this situation. What we are dealing with here is that the people who are most powerful and most able to influence currency, the financial system, the global economic system, the exchange of debt for austerity requirements – just have no interest in changing that easy ability that they have.

Wesley, do you think the financial crisis goes now into full gear

Wesley Legrand: It’s probably not going to be a case of a sharp, disastrous fall as we had in 2008/09, but I suspect it’s going to be deeper over a longer period of time, which is actually worse. You had really a liquidity crisis in 2008, governments worldwide bailed out their private sectors, and now you have a solvency crisis where the world’s governments actually can’t afford to service their own debts without resorting to trickery like suspending ‘mark-to-market’ accounting rules or printing money to buy their own bonds (effectively a ponzi scheme). So this global delevaraging process is by no means over, it gets a lot worse before it gets better. I am a naturally optimistic person, but you got to look at the facts and take the only logical course of action, and that’s to hope for the best, but be prepared for the worst, and I can’t see any other way how this bursting debt bubble isn’t going to be the most painful in history.

Do you think it is scandalous that the private banks transferred their debt to the populations?

Wesley Legrand: “Scandalous” is one of the more gentle words I have heard to describe the banks. Obviously, when you look at the advisors in government and the managers of the regulatory bodies, they’re all ex-Wall Street and all the centralbankers are ex-Wall Street, it really is a filthy cess-pool of corruption. When you print money (physically or electronically), only the parties that receive that money first actually benefit from the monetary inflation, and these parties are of course the elite, the establishment, the Wall Street bankers, etc. The rest of the world has the same amount of money as before, but has to deal with higher consumer prices (i.e. lost purchasing power). The establishment is kicking the can down the road, as obviously they want to retain their power for as long as they can, so they try to maintain the status quo and leave the problem for the next generation. But I think the end-game is fast approaching for these guys.

Nomi, you publish during this month a book on the Great Crash / Great Depression. Given that we are talking about some financial institutions here, could it be that those institutions back then are the same today like some member banks of the New York Fed?

Nomi Prins: Well, the book is actually a novel. Usually, as you know, I write non-fiction, but this time it’s a historical novel about the Great Crash of 1929, and as a novel it has many dramatic elements to it – romance, desperation, heroism in the face of great odds, and all that. The main character, Leila Kahn, does not start out to be a fighter against the big banks at all. She’s a girl in love, trying to figure out life in general. It is with great reluctance and internal conflict that she comes to take on that role. But the historical elements of Black Tuesday, very much focus on research I was doing around a group of six bankers that got together in a room five days prior to Black Tuesday, Oct 29, 1929, in order to put money into the markets, buy certain stocks (of their main corporate clients), and to give this false sense of confidence to the markets so that individuals would continue to invest their money and borrowed money. Those six bankers were sort of seen as saving the day by the media then, when in fact they were saving themselves, because their own stocks were involved, their own debt was involved and everything else. Of course, that only worked for a short period of time. The markets ultimately crashed anyway.

One of those fellows in that room also happened to be a Class A Director at the New York Fed. Likewise today, one of the Class A Directors in that same slot is Jamie Dimon, CEO of JPMorgan Chase. Back then the fellow’s name was Charles Mitchell, the CEO of what became Citigroup, at that time it was called National City Bank.

He had that front row seat to work with the New York Fed on keeping rates low into the speculative bubble leading up to the crash that lead to the Great Depression, because it served his own purpose and bank. So there was a lot of that going on then, and that is certainly going on now with what we see is taking place with people like Dimon and banks like Citigroup and Bank of America. These banks are largely insolvent in many areas, yet they have been able to navigate this crisis colluding with the New York Fed and the Federal Reserve and the Treasury department of the United States to effectively get cheap money that hasn’t found its way into the general economy in the United States or in Europe. And so the parallels between the type of men and their positions in the late 1920′s that lead to the stock market crash in 1929 and the Great Depression are very similar to today. In my novel, “Black Tuesday” I look at what was going on behind the scenes and how it impacted real people. Many people were really struggling economically even before the crash and didn’t have access to loans and everything else to grow their businesses after the crash, which was one of the reasons for the Great Depression, as is happening now with banks receiving cheap money and not lending it out.

Is it depressing to observe the similarities?

Nomi Prins: It makes me so angry. (Laughs.) It’s like we’ve just haven’t learned. I give you another example of a man in that room of six bankers, who was influential in creating the Bank for International Settlements, BIS, and that was a fellow by the name of Albert Wiggins, who at that time was the CEO of Chase. While he was working with those others bankers in October 1929 to pump money into stocks (his depositors money), he was sitting there and shorting his own bank’s stock, even though he was trying to get the market to buy it, because he knew his bank was unhealthy. And that is very reminiscent of today with Goldman Sachs shorting against their clients, and it really is sad that this kind of crime continues unabated and our governments in the US and Europe really don’t seem to get it. So yes, that is depressing and frustrating. Hopefully my novel, “Black Tuesday,” will provide a different way of seeing a story that centers around people and what they did and how they were impacted, without all the general statistics and numbers that I put into my non-fiction work. It’s a different way of looking at similar times, the human side of things.

Back to gold. Wesley, Nomi mentioned the word “bubble.” Can you as an equity trader give us your reasons why gold is not anywhere near bubble territory?

Wesley Legrand: There are several reasons. Of course, the mainstream likes to say that because gold has gone up for the last five to ten years in a row it is a bubble, but obviously things aren’t bubbles just because they go up in value. The all-time high in 1980 of the nominal gold price, I think, was $850 per ounce. We have surpassed that now, but when you look at the all-time high price for gold in 1980 adjusted for the Consumer Price Index (CPI) the way the US government measures CPI now, then the 1980 high was $2300 an ounce, and we are fast approaching that now. However, if you look at the all-time high for gold in 1980 adjusted for CPI the way the US government measured CPI in 1980, then the all-time high is closer to $7.500 an ounce. So this is one metric illustrating that gold is still very cheap. And if you equate the global gold stock to the global money supply, which has grown in unprecedented fashion in recent years, or to the level of debt in the world, also grown unprecedented, then it is very easy to make the case for gold in the five-digit range, so $10.000 plus per ounce. And even from a percentage of global assets and investments point of view gold is very under-owned across the world by asset managers and pension funds etc., particularly in comparisson to the level of ownership that existed back in the 1980s when gold was hitting nominal highs back then.

And how would you argue related to silver?

Wesley Legrand: Silver will outperform gold. Gold will go higher, but silver will go even higher in percentage terms. I think James Turk very correctly pointed out that we’re only entering stage two of the secular bull market in gold and silver now, and there are genuinely three stages of a bull market. We’re entering stage two now and that tends to be the longest and strongest.

Do you think that gold could go into permanent backwardation?

Wesley Legrand: Yes, I do. At some point, when the confidence, that intangible quality that we were talking about before is lost and you start to approaching hyperinflationary scenarios, where there is no faith in the paper money that people use, then absolutely gold will go into permanent backwardation.

Would this have dramatic implications?

Wesley Legrand: Yes, it would. As we’ve said the whole system is held together by faith, by confidence. It’s intangible and you can’t measure it. So a backwardation signal is the trigger or the canary in the coalmine that says the confidence has been lost.

Nomi, the final question goes to you. If you could choose three things to change – what would it be?

Nomi Prins: Well, I would first of all go back in time, when the crisis was unfolding, and when we were seeing firsthand that banks across the world, especially lead by the Wall Street banks, were engaged in fraudulent activity in creating assets that became toxic and leveraging those assets. I would have decreased the ability to manufacture $14 trillion of such assets, no the back of just $1.4 trillion worth of subprime loans, and instituted a separate evaluation mechanism to oversee the quality of those assets, independent from the rating agencies that rated them ‘AAA’ while collecting fee for that service.

If I ran the Fed, I wouldn’t have allowed the bigger banks to become bigger, n the fall of 2008. I would have denied rather than approved those mergers of Bank of America and Merrill Lynch, JPM Chase and Washington Mutual, Wells Fargo and Wachovia. I would have segmented – and would still segment – as the Glass Steagall Act did in 1933, the facilities of banks to engage with the population through regular lending and deposit taking and renegotiating things like business loans and refinancing mortgages to help individuals – from their asset creating and speculative activities. That would reduce banks’ ability to “pillage,” as I say in my book, “It Takes a Pillage,” people’s money into risky deals and trades. In that way, I have to be pumping up debt to the extent the Fed and other Central banks have, in order to sustain all the investors and the banks and their mistakes to such an extreme extent. Instead, I’d seek to repair, with less extreme forms of funding and strict requirements of the banks, the Main Street citizens get back on their feet, because that ultimately propels the rest of the economy.

Also, if I ran the Fed, I wouldn’t have allowed rates to become so low through QE, QE2 and what probably will be QE3, to basically sustain a flawed financial system where banks get all the benefits of cheap money, and don’t share them with ordinary customers. Unfortunately, what we have now, is continued economic Depression for the general population, as banks give the illusion of health through fuzzy accounting standards, which should be changed, and speculate with the free or cheap money that they continue to receive, on the backs of the citizenry.

Thank you very much for taking your time, Nomi and Wesley!

Nomi Prins, who grew up in the US state of New York, worked after her studies in mathematics and statistics for Chase Manhattan, Bear Stearns in London and as a Managing Director at Goldman Sachs on Wall Street. After she left the financial industry, she became a prominent financial journalist who has written four books including the highly recommended: “It Takes a Pillage: Behind the Bailout, Bonuses, and Backroom Deals from Washington to Wall Street,” that was published in September 2009 by Wiley. Her most recent book, the historical novel “Black Tuesday,“ is out now (and also available for the Ipad). Furthermore, she is a Senior Fellow at “Demos” (http://www.demos-usa.org/) in New York City, gave numerous interviews to international outlets such as BBC World, BBC, Russia TV, CNN, CNBC, CSPAN and Fox, and her articles appear in the New York Times, Fortune, Newsweek, the Nation, The American Prospect and the Guardian in Britain. The website of Nomi Prins can be found at: http://www.nomiprins.com/. She lives in Los Angeles.

Wesley Legrand, who was born in 1979, is a fund manager at Grand Private Equities in Adelaide, Australia. He studied Economics, Finance and Law at Adelaide University and has worked now for 13 years in the stock broking industry. In 2008 he set up with his father Grand Private Equities as a boutique advisory firm servicing high net worth private clients, with a particular focus and expertise on emerging miners in the precious metal space.