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[montage of speakers] President Bush: from my perch, from my perspective, the economy appears to be strong, and getting stronger. Newscaster: Oil jumped higher. Global influences are now going to change how our central banks make decisions. President Bush: The fundamental question that those of us in Washington have to answer is what we have to do to keep it that way? Newscaster: We’ve been seeing this tug of war in the marketplace between rising interest rates, soaring oil prices and a jump in equities. President Bush: How do we make sure we don’t put bad policies in place that will hurt economic growth. Newscaster: Stocks were flat last week because of concerns over the higher rates that we saw and higher oil. President Bush: A bad policy would be to raise taxes. Newscaster: Those tax cuts are due to expire in 2008. President Bush: There are people in the United States Congress, primarily on the Democratic side, who would be anxious to let some of the tax relief expire. Newscaster: Can you have good solid economic growth without generating any inflation? President Bush: One of the measures... [High speed chatter]
JIM: Well, did you get that? I don’t think they did. Hello everyone, I’m Jim Puplava. Welcome to a shortened version of the Financial Sense Newshour, our guest experts will be on holiday, and the markets will be closed on Friday, in observance of Good Friday, but coming up today on the program we’re going to have two guests: Peter Tertzakian who’s written a new book called A Thousand Barrels a Second will be our first guest; and then following him, Anatomy of a Bear by Russell Napier. And of course in Other Voices this week Ross Hansen from Northwest Territorial Mint will join us, and back by popular demand, Zapata George. JOHN: The best part of a roller coaster ride – and that’s assuming you’re not a white knuckle roller coaster rider to the point it’s bad stress instead of good stress – I like the ones that go inverted. I must be perverted or something like that, I really like that type of stuff. But there’s always that point right where you go over, and as you go over you’re looking down into the abyss. Such has been every time the economy has taken a rollover and gone down. So, we need to look at the next recession, we had something in 99 and then we’re headed again. JIM: Anytime the Fed embarks on a rate raising cycle the first thing you hear from Wall Street: “well, this is needed, it will slow the economy down, we’ll get the goldilocks economy.” The goldilocks economy is the first thing that you hear. In other words, the Fed is going to slow down the economy, it’s not going to be too hot, not too cold, just right. And then obviously just as things start to worsen they talk about a soft-landing. And John, you’re a pilot is there anything soft about a bad landing? JOHN: Well, there’s an expression in flying that says any landing that you can walk away from is a good landing, a great landing is one where you can reuse the airplane. JIM: Ok, well, anyway, as these cycles begin, and we’ve been in this cycle since June of 2004, so everybody’s talking about we’re going to get a soft landing that’s where we’re heading now as the Fed continues to raise interest rates. Historically, that has not been the case. I wrote a piece in my Captain’s Log this week, and I show the effect of the Federal Funds rate going back to 1954, and there are these peak bars at every one of these peak cycles in the Federal Funds rate and what these peak bars represent are recessions. 95% of the time when the Fed embarks on one of these rate raising cycles something bad happens. In other words, they keep raising interest rates until something breaks. And 9 out of 10 times the thing that breaks is the economy, and then along with the economy we get a bear market in financial assets and the stock market. And so, when you take a look historically you say, “wait a minute, 9 out of 10 times, this is a pretty good indicator when they embark on these things you’re going to get a recession, you’re going to get a downturn in stocks.” And I would say something that happens 90% of the time, I would rely more on that, than some optimistic talk that comes out of Wall Street that says, “hey, they’re going to be able to do this, nothing’s going to happen and we’re going to get this goldilocks economy.” I have never seen a goldilocks economy before. [5:26] JOHN: What would the history of that be anyway if you had to pull up a graph or something like that? JIM: We had a rate raising cycle in 1955, in 56 we got a recession, a couple of years later they raised interest rates in 1959, in 1960 we got a recession. Then we really embarked on a rate raising cycle towards the end of 68 – 1970 we got a recession. We start raising interest rates in 72 and 73, and in 74 we got a recession and a bear market. We were at it once again in 1979 and in 1980 we got a recession. We got another double recession in 1982, and then when they embarked on raising interest rates in 88 and 89, we got a recession in 1990. And this is the remarkable thing, it’s only been about 4 or 5 years ago that we just came out of the last recession, and the last recession began when the Fed started raising interest rates in the Summer of 1999, and raised interest rates all the way into the Fall of the year 2000. The first thing to break was the financial markets because they were way, way overextended – stocks were selling at looney-tune prices. But we got the break in the stock market, then eventually in 2001 we got a recession. So here we are 3 years later after the last recession in 2001, and in the Summer of 2004 the Fed begins to apply the brakes again, and here it is the year 2006, we’re still raising interest rates. And we use this analogy all the time – it’s not like this is a finely tuned digital system where you can tweak this knob and you can tweak this knob and then you can get things just perfect. It just doesn’t work that way. 9 out of 10 times they keep raising interest rates until they break something, and I’ve got a feeling what they’re breaking right now was the economy. [7:29] JOHN: Yeah, but when the break occurs though I would say they appear in the press as some other cause. in other words, it is not a direct “this was caused by the Fed raising [interest rates],” the ostensible cause is off loaded to some other source, is it not? JIM: Usually it’s blamed on the politicians. So the President usually takes the heat for a bad economy. Because when the economy stops growing and we head into a recession there’s a cry to do something about it because the government deficit goes up, because tax revenues fall as business declines, as business declines businesses lay off workers. As workers are laid off there’s less spending in the economy. Government expenses go up because of an increase in unemployment benefits and other things that go along with a recession, decreasing tax revenues, increasing costs. So there’s always a cry politically to do something about it. And so then we get the next reflation cycle. In 2001, after the events of 9/11 the Fed began cutting interest rates aggressively. They panicked and they brought the Federal Funds rate down from almost 6%, down to 1%. And the result is we got another bubble in real estate, we got another bubble in mortgages, we got a bubble in consumption, we got rising trade deficits, and once again we had rising inflation rates. So it’s like a car’s traveling down hill, it starts to pick up speed – in this case inflation – and then what happens is to sort of not get the car out of control, and in an effort to try to control it what they do is they start tapping on the brakes and applying the brakes. And at this point, the Fed has been doing that since June of 2004, they keep tapping on the brakes. And I’ve got a feeling after 5% the next couple of rate hikes that accompany that are going to be like slamming on the brakes. [9:28] JOHN: OK, but this cycle I would say has had some interesting things happen to it because normally when this type of thing happens stocks go down, and in reality they’ve been going up, bonds have been going up. So what’s different about this cycle? JIM: I think what’s different about this cycle is even while the Fed has been raising interest rates, there’s a global reflation that’s taking place. In other words, they’re raising interest rates in an effort to try to slow down the speed of the car, but at the same time the gas tank is just full of gas and they’ve got their foot at the pedal too. They put their foot on the brake and then they put their foot on the pedal. So what they’re really doing is reinflating, and it’s not just the Federal Reserve that’s doing that it’s central banks around the globe. They’re trying to keep the car from going over the speed limit, and getting out of control. One of the things that I look at and our listeners can follow this, is you can pick up a copy of the Economist and in the back section of the Economist every week they list the global money supply growth rates around the globe: Australia’s money supply growing at 9%; Britain’s money supply growing at almost 12%; Canada’s money supply growing at almost 8%; Denmark’s money supply growing at almost 15%; US money supply growing at over 8%; euro land growing at over 8%. They’re flooding the markets and the financial system with money. There is no restraint being put on credit right now. One of the reasons we’ve got lower interest rates is because of the carry trade; we also have it because of central bank buying. For example, in the last 3 months foreign central bank buying of government securities has gone up at an annual rate of almost 24% in the last 3 months. The last 6 months it’s been going up at an annual rate of 16%; and the last 12 months close to 16%. So, in the last 3 months we’ve seen acceleration of foreign central bank buying of government securities. If you look at euro land bank assets – growing at an annual rate of almost 8%. If you look at Commercial and Industrial loans here in the United States, they’ve been growing at an annual rate of 12 to 14%; and the last 3 months they’ve grown at almost 17 ½%. Commercial bank loans increased from an annual rate of a little over 7% to an annual rate of 10.6%. So, credit is still readily available. [11:58] JOHN: But let’s go back to the statement which you’ve been making for the last few weeks, isn’t the real measure of inflation the increase in the supply of money, notably, the M3 supply of money which the Fed isn’t reporting anymore? JIM: Yes, we tend to judge inflation by rising prices, which are more of a symptom of the root cause of inflation, which is increase in the supply of money. And so it’s the after effects and the symptoms of that increasing money supply and credit which we call rising prices. But the root cause, if they really wanted to stem inflation, government would cut back on its spending which means we wouldn’t have as big of a deficit, the Fed would stop printing money, they would increase bank reserves which would come down on the supply of lending. They could really accelerate. Now, the after effects of this is we go through a very, very painful recession. A lot of the excesses the malinvestments of the economy would be cleansed. But you know what? You would get a healthy patient. It’s kind of like somebody that’s gone on a drinking binge, instead of allowing them to go through a hangover, a headache, the pain, the vomiting, and all the things that accompany a hangover, they’re saying, “we don’t want you to feel that pain so what we’re going to do is give you more alcohol,” and unfortunately it takes more and more alcohol to keep the patient intoxicated. And unfortunately we get all these growing malinvestments, rising inflation. And I think right now central banks around the globe are panicking. [13:34] JOHN: And it is interesting to note that virtually all central banks now are inflating. We’re on a constant inflation across the board, it’s not just the US. JIM: Yes, and the thing that whether you’re looking at commercial and industrial loans in the US, or if you’re looking at Asia, you’re looking at it in China, or if you’re looking at it in Europe, credit is still readily available. And what I think is going to be more important now that the US has moved from a manufacturing economy to a service based economy. Now service jobs are being outsourced – so we’re becoming more of a financial economy. If you look at where all the jobs were created in the last 3 or 4 years: real estate and in the financial industry and construction industry – all related to an asset bubble. So I think that now we’re no longer reporting M3, and I think some very important measures to watch about what the Fed is really doing is look at the increase in lending – in other words, follow commercial bank lending, commercial industrial loans. I think also follow the financial markets, especially broker-dealers, because they’re the recipients of all this money. One of the things I wrote about in my Captain’s Log is that if we take a look at how much debt is having to be created to get one dollar of GDP, last year it took about $4.50 of additional debt to create one dollar of GDP. So you have to ask yourself the question, if all this money and credit is being created, and we only get one dollar for $4.50 of debt where does the other money go to? Well, the other money goes into consumption which doesn’t get shown up in GDP because it’s reflected by our growing trade deficit. Last year, our current account was $805 billion, and for the first time now our surplus in investment income is down to next to nothing. So, money that’s spent on foreign goods lowers GDP because that’s money that’s not created in our US economy. And then the second area where money goes is into speculation. [15:41] JOHN: Let’s bring this together because it’s sort of wandering in my mind. Let’s sum it and take a snapshot of right where we are right now. JIM: First of all, money is not tight, global liquidity is actually increasing if you look at the supply of money and credit that are being created globally by central banks. The second thing is by raising interest rates as they’re doing now, John I recall the head of research at the Fed in the 2000 minutes of the FOMC meeting he said, “every time we end up doing this – meaning raising rates – we end up sending the car off into a ditch.” And that’s what’s going to happen, they’re going to try to tap on the brakes too much, and they’re going to slam on the brakes, the cars going to go into a skid, and we’re going to end up in a ditch – in this case: a recession. And what is going to come afterwards is one of the largest reflation efforts that you’ve ever seen in the history of the world. That is what you need to prepare for next. [16:38] JOHN: Well, to every cause and effect, Jim, so if we have the causes which we’ve described what are the effects going to be? What will it look like? JIM: Well, let’s talk about where we’re at right now. I think the Fed is trying to slow the ascent of rising inflation. And if you look back historically at the Federal Funds rate over the last 50 years, it’s been the inflation rate –reflected by CPI – plus 1 ¾ to 1 ½ % above the CPI. So that would indicate that from where we are today, that even after the May Fed rate hike which is widely expected with the Federal Funds rate will be 5%, we’re still below the historical level of where the Federal Funds rate ends up before they get to that sort of neutral rate. So, it looks like we could get another rate hike in June. And if things aren’t possibly slowing down another one perhaps in August. In other words so they can raise rates probably about anywhere from a ¼ of a point to a ½ a point beyond what the markets are currently thinking. Then the problem that that’s going to create is real estate is now in a definite downturn – the froth is gone, the condo flipping, condo owners are bleeding right now, prices are going down, the rate of refinancing, the number of mortgage applications is dropping. The supply of inventory of new homes is now over 6 months; builders’ sentiment is dropping – you have a lot of the major home builders warning on profits. As they keep raising this, they’re going to kill the real estate market because what happens there isn’t much of a spread right now between adjustable rate mortgages and fixed rate mortgages – it’s only between maybe an 1/8 and maybe 3/8 max, in terms of what it’s going to cost you to finance – but we already know that real estate I think Peter Navarro said, “it’s like the Poseidon, it’s rolling over.” And once the ship rolls over you can’t stop it. And that’s where we’re going right now. So you have nearly one trillion dollars of mortgages that are going to be reset, And John, when you get these crises the problems always occur on the margin, on the tail ends of the curve: the 10 million people that got into adjustable rate mortgages that are due to reset; the people that are using interest only loans; the people that put no money down to finance 100%. These are the people that when rates go up they can’t handle the additional increase so they end up walking away from the property. I was just reading a story here locally where a lot of new home builders are experiencing a lot of people walking away before close of escrow. Maybe they’ve put some money down, maybe they’ve paid for some of the upgrades and the options, but by the time it gets to closing escrow, remember it takes about 9 months to a year to build a home you might have been looking at interest rates that were basically 1 ½% lower when you were looking at buying that home compared to where it is today. The other problem that you have is debt levels, we’ve been averaging about $2.4 trillion of additional debt we’ve been taking on in the United States economy since the year 2000. Beginning in 2004, that debt level began to accelerate: we took on $2.8 trillion worth of debt in 2004, and $3.1 trillion in 2005. [20:19] JOHN: This seems to be a train you can’t get off – I guess you could use another analogy striking an iceberg. Basically you’re condemned to this action and start with that. I want to address a couple of other things here too. JIM: Once the Fed goes beyond 5%, I think anything above that whether it’s 5 ¼, 5 ½, or even some who are saying it’ll get to 5 ¾. I doubt if we’ll make it to 5 ¾ without a full blown crisis. I think they risk taking us into a major financial storm, with implications for the economy – and remember, when the real estate market rolls over it’s not like the stock market where they can send the Plunge Protection Committee into the futures pit, and try to prop up the market. Once a person’s home is foreclosed on there’s nothing the Fed can do to alleviate that. So, I think once beyond 5%, they’re going to have to start cranking up the bilge pumps and bring in the US air force, we’re going to need more than helicopter money. Beyond 5%, I think we’ll go into freefall especially along the coasts. More likely, John, I think we’re already in a recession. If you look at the economic numbers we get we know that GDP for example is overstated because we understate the inflation rate. So we could already be in a recession right now. I think we’ve gone into one. We also know unemployment is understated because we use these bogus birth-death figures to account for these jobs. They accounted for almost 70-80% of the jobs created in the last employment report. So who know what those job numbers are? And this is the period of time normally between February and May when the birth-death model creates more hypothetical jobs. And we also know inflation is grossly understated. So if inflation is grossly understated that means GDP is grossly overstated. The bottom line beyond 5% one rate hike too far we’re going into a recession, and it’s unavoidable. [22:22] JOHN: There are a couple of things that concern me about this, if we head into this recession, - you know you talk about real estate falling down, and sooner or later people with ARMs that can’t support their readjusted mortgage payments – we now have this issue of the new bankruptcy law which basically says you can’t get out of the game. In other words you can’t win, you can’t break even, and now you can’t get out of the game, you can’t walk from the table very easily. I don’t know how long that law’s going to last as people realize this is where they’re at, they’re strapped. But this does not bode good things. JIM: No, I think the 2006 election and especially as we get into increasing foreclosures, as we get into bankruptcies I think there’s going to be a human cry for relief. And I wouldn’t be surprised if in the next couple of years they repeal that law with a new law that makes it easier to file for bankruptcy, and just basically walk away. I was just reading a couple of stories, and as everybody may recall the Day After Tomorrow, I just spent the last weekend out at the Big Sky Ranch talking to the lenders, talking to the builders. I was just curious because we’ve got these people with street signs that point to where the models are on every single corner around where we live – I think they’ve employed the entire local high school here. And you’ve got balloons, you’ve got tents with barbecues and things like that. We’re seeing incentives increase; the builders are covering closing costs; they’re increasing options packages to unload inventories. On the coast, one condominium projected is including a Honda civic if you buy. So all these kind of incentives are taking place right now. There has not been a shortage of credit. There are all kinds of different loans you can lock in, but the home builders are having a lot more difficulty in unloading their inventory. And that also one of the things I’ve noticed in just driving around our neck of the woods is we’re starting to see more ‘for sale’ signs going on the market. [24:26] JOHN: Yes, that’s what I was curious about because that’s the picture of what it’s going to look like when it comes around? And I tend to agree with you I think that bankruptcy law is going to bite the dust, there’s just going to be demand for that. But let’s talk about a larger bankruptcy, the bankruptcy of the United States, is there any way it’s going to get out of this debt situation, right now peacefully? JIM: No, I don’t think so. The budget deficit is government spending is now beyond control because over 60% of the government’s budget is on entitlements which are untouchable and are on automatic pilot. The only reason we tinkered around with the CPI rate was to bring down the cost of COLAs on entitlements – such as government pensions, Social Security – because if they could reduce the inflation rate by 2-3% they could save hundreds of billions of dollars. But now since that’s sort of untouchable, and now we’ve added the drug prescription bill which means our unfunded liabilities are, I think, $54 trillion now – there’s just no way, and you’re not going to see a politician that’s going to get up there and going to be brave enough and just say: “you know what, there is no money in the trust fund, you’re not going to get your Social Security. And even though you’ve worked all your life and paid into it, I’m sorry the jig is up.” So what you’re going to get in its place are inflated paper dollars. So, you know, the government has kept its promise, they’ve given you your benefits but your benefits are almost worthless when you look at what’s coming to the currency. [26:00] JOHN: Yes, but sooner or later people have got to figure out they’ve been taken, maybe I’m giving them too much credit or something, I’m not sure. JIM: No, I think eventually people wake up to the fact, and I think we’ll get to this in another segment where they realize that the inflation numbers that the government and Wall Street give them they don’t buy them anymore. Right now I think they’re just kind of puzzled: why are gasoline prices so high? Well, it’s the oil companies, or it’s OPEC. That’s a very simple answer, but it doesn’t explain why their food bills are going up, why there service bills are going up their medical premiums are going up, their utilities are going up, their education expenses are going up – you know everything you need to live is going up and there’s almost like a disconnect here where what people are experiencing on a day to day basis as compared to what is being reported in the media. [26:46] JOHN: It would also seem and I know you want to talk about this in the next segment that there’s going to be a lot of thrashing around in terms of let’s say local and state governments which can’t print their way out of this whole thing. They’re subject to the same pressures that everybody else is of inflation, but their only source of funding is the tax payer. So, as they suffer the pressure they have to turn around, taking the sticks out and beating their citizens to get more money out of them. We have fights here in Idaho going on right now over the whole issue of property taxes which are soaring because of all the building – and people are screaming about it. JIM: It’s one of the ways that for example here in California that we’ve managed to bring down our budget deficit is because of the real estate boom here, because when somebody bought a house for $200,000 and they turned around and sell it for $600,000, the new buyer comes in and pays property taxes on the $600,000 price not the $200,000. So governments are a beneficiary of inflation, and that’s where the states have benefited immensely is the increase in property taxes as a result of an inflating real estate market. [27:53] JOHN: Gordon in Vancouver, British Columbia, Canada – we seem to have a clutch of listeners up there for some reason, James, I’m not sure why. He says: Sometimes I think you’re going both ways at the same time when you discuss inflation, and interest rates. If you think inflation is and will be a problem, don’t you have to support the Fed when it increases interest rates? As far as I know, absent severe steps to limit people to borrow money there is no way to fight inflation that does not involve higher interest rates. And the same thing goes for increases in the money supply. As you point out inflation really is the increase in the money supply, so once again, if you think the money supply is growing too fast don’t you have to support the Fed when it increases interest rates? As far as I know, in a relatively free market there is no way to limit increases in the money supply that does not involve higher interest rates. So why the repeated mantra the Fed is going too far, they’re always increasing interest rates until they break something, they’ll have a full blown financial crisis on their hands? If you think inflation is too high and the money supply growth is too high, you must support the Fed program of increasing interest rates otherwise maybe you haven’t found a way to both push and pull at the same time. JIM: I disagree. The way that you fight inflation is to reduce the money supply. If there is a demand for credit, and it is not followed by increased savings, in other words, if people start saving more there’s more money available, interest rates could come down. But when you increase the supply of money and credit in the system that is what creates inflation. There is only one way to stop inflation creation, and that is to have a currency that is backed by something of substance and that is limited to its amount of increase, normally enough to allow the economy to grow. But when you create money out of thin air that was not produced from wealth creation – which is producing something, saving something – you get inflation. Interest rates are only a veiled attempt to slow down the rate of increase, but it’s not a natural way of increase. It’s like popping a pill to try to cure a disease when you find out there’s something that’s creating the disease – that maybe the food you eat, lack of exercise, drinking too much, or those kind of things. That’s where we go wrong here in trying to treat inflation. [30:20] This is Sam calling from Mississippi, I enjoy listening to the show every week, and I’m always fascinated by the vast amount of information that you quote from, be it a financial newsletter or a financial publication or book. I believe a week or so ago you mentioned you try to read 2 or 3 books a week to really drill down into a particular subject. And on that matter I was just curious what you have done to enhance your reading ability with regard to speed reading or something of that nature to enable you to read that much material on a weekly basis. Enjoy the show and look forward to an answer. When I was going through graduate school I took a speed reading course because the vast amount of information that I had to go through, and I suppose some of that has stayed with me from that period of time. But I don’t read in the same way I did in graduate school where I could just put my hand and go down a page and read it rather rapidly. I just spend a lot of time reading, that’s basically my main job, whether it’s reading a book to get more in depth into research, reading annual reports, reading newsletters, reading news stories off the web, that’s essentially what my job is. And when you’re in the financial business that’s what you do. But I think one thing that I try to do and that I enjoy doing and I would encourage anyone listening to the program as I mentioned before if you try to get your information mainly culled from newspaper or magazine articles they never really get into as much depth as if you take that same topic and subject and read about it through a book where the author can give you the roots, and the causes, and really get into depth in the subject matter. And so it’s like when I was looking at peak oil I read – the latest survey now because I got another book – 54 books. But you’ve got to cover both sides of the argument, somebody may come at it from a different perspective or you hear an alternative viewpoint and it’s sort of corroboration, maybe you’re picking up a trend and a theme and it’s corroborated by what somebody else says, so you get more evidence. Hi Jim, this is Daniel in Phoenix, and I love your show. Robert Prechter talks about safe banks and unsafe banks, and he talks about the big 5 American banks and their exposures to derivatives, and they’re not a good place to have money if there is indeed a dollar collapse. Would you speak to that a little bit, and possibly offshore accounts? If we have a bank holiday in the same way we did in the 1930s you’re going to have almost all the banks in the country shut down at the same time because they’re all part of the Federal Reserve system. There are a few banks that are not and there are a couple I can think of one in California here up in Orange County that thrived throughout the Great Depression, and that’s Farmer’s Bank. There are few of those around and Farmer’s Bank doesn’t make loans unless they have 50% collateral. So it’s probably one of the best run, financially sound banks in the United States. I think also you’ve got to be careful when you’re going overseas because just as the 5 top banks in the United States are heavily involved in the derivatives market so are Swiss banks – the Swiss are involved in it; some of the British banks are involved in it. So you really have to be careful. I would prefer if you’re trying to get a sound place to keep your money I prefer real money which is bullion. Yes, this is Edward from Idaho, and I just have a quick question bout the spot price of bullion. I remember in years past I believe it was on the show, I don’t remember exactly who said it but gold price under $500 is a good value and a bullion price of silver under $10 is a good value. At what point do we stop buying bullion and just enjoy the ride up? Thanks for the show. I would probably raise that figure to $750 and up on gold – 750-800 – and $25 on silver. There’s been a lot more inflation that’s been brought into the market over the last 2 or 3 years. Let’s put it this way, I’ve never seen money printing as what we’re seeing now. I mean this surpasses some of the things that we were doing in the 70s. So I would raise that benchmark. I think it was James Turk who said that, and even James Turk in his recent newsletters has raised his figures to somewhere in that neighborhood too. This is Peter on the left coast, hanging out with all the lefties. Some stock market breadth is looking awful, looking at the buying and selling pressure, hi and lows etc. It looks like a resumption of the bear market. Now you and Marc Faber say it may go to 35-50,000. Who’s going to do the buying? Hedge funds, mutual funds etc? Going into a depression, it looks like the public won’t be doing much buying. I can see both sides of the equation here, but what’s your opinion? Thanks. I think who’s going to buying is mainly institutions, it could be hedge funds, it could be institutions such as mutual funds, Wall Street investment banks, pension funds, insurance companies, and they’re going to be doing it with inflated dollars. And that’s what’s going to inflate the market to that level. I think we’re headed for hyperinflation, and if you look at the hyperinflation that occurred in other countries, you had inflated stock market that went along with deflating currency and hyperinflating currency. So I still think under hyperinflation we could see record levels in the stock market in terms of nominal dollars, but actually deflating stock prices when compared to gold and silver. Hi Jim, this is Bert calling from Yuma, Arizona. Something doesn’t add up in the energy market. While oil is knocking on the door to $70, natural gas is languishing around 7. How can you account for this huge discrepancy? I’m not sure that I buy the argument of Zapata George that nobody is reading the meter, and the natural gas supply numbers are strictly a computer projection. If 15-20% of the natural gas in the Gulf is shut in, shouldn’t we be looking at higher natural gas prices relative to crude oil? What am I missing here? Number one, I think there is a huge derivative short position that was put in natural gas in December when the government let JP Morgan come in and trade the natural gas markets. I mean if you look at December: increasing demand due to one of the coldest December s on record; we had decreasing supply because a lot of the Gulf of Mexico was shut down – and yet the price was just taken down. You also had people going out and telling people advertising that the price was going down. It was almost like it was a concerted effort to knock this market down, and to keep it from going to where it should have been going which was somewhere in the neighborhood of $17 to 19. The other thing is you have natural gas production declining both in the United States, and in Canada where they’re going to be going to unconventional method of natural gas production. A lot of the energy inventory levels that we get are much like all the other government statistics that we get: there isn’t anybody going out there reading the meters. And a lot of it is driven by perception. Matt Simmons has written several articles – and I recommend you go to the website – about the missing million barrels of oil where for example 97-98 you got oil prices down to $10 a barrel on the assumption that there was all this glut of oil in the market. Well, it turned out there wasn’t this glut of oil in the market, and as we got into an energy crunch in the year 2000 that’s when natural gas prices really spiked to $10. So, there’s a lot of misperceptions and I think it’s done sometimes intentionally. It is a very opaque market. The oil market is the largest market in the world, it’s a very opaque market, there is not a lot of transparency as Matt Simmons is fond of saying, whether it’s looking at oil inventories, or oil reserves. Hi my name is Cary, from Florida. The question I have is regarding the gold stocks. Recently you had been suggesting that the gold stocks were going to go through what sounds like a pretty deep correction, and I follow the HUI which had reached around 349, 350, had corrected to 280 and is now making new highs. Now, the last couple of weeks you haven’t mentioned anything about a correction whether it’s over or whether it’s still coming, and I think I’d like you to elaborate on that if you can. Thanks. Taking a look at the HUI we sort of got a sharp pullback that you referred to, and then we went right back up almost looking like a double top. One of the things that you have to be aware of in bull market is there is always sector rotation. One of the things that happened in the pullback in the HUI, which is the large cap unhedged gold stocks, at the same time the HUI was pulling back the junior mining sector took off like a rocket. A lot of juniors have double – I can think of one that went up almost 400% in a single day. That is occurring. Can we get a setback? Sure. Anytime we get around these round numbers in gold whether it’s 300, 400, 500, 600 we have sort of difficulty staying there, and it usually takes 2 or 3 attempts to kind of blow past that round number and take us to higher levels. So, we could possibly see a slight pullback from here but all I’m looking at this time, and what I would focus on which if you listen to the next segment in the program is the fundamentals for gold. And to me, regardless of whether we get a 10 or 15% pullback – I don’t know, I’m not the technician, I’d probably listen to Frank, or Tim in terms of what these pullbacks might be – but I think most of the surprises we’re going to see in the market this year are going to be on the upside. [40:26] JOHN: And don’t forget that our Q-Line is open 24 hours a day at 1-800 794-6480, it’s toll-free only in the US and Canada, but you can reach it from anywhere in the world and please keep your questions brief in order for us to use them here on the program.
JIM: Well, Zapata George, I just filled my tank on the way to work today where we’re paying $3.19 for premium which is higher than it ever got after Katrina and Rita, and I wonder if we might start our conversation with the insanity that’s going on with government energy policy that’s really driving the price of fuel up. ZAPATA GEORGE: You mean that thing where they take everything and do it backwards? That policy? JIM: That policy. GEORGE: Oh, that’s the one. Yeah, I’m familiar with that. JIM: Why don’t we begin with MTBE? GEORGE: Well, I guess you’re going to have to explain to me what that means. JIM: Well, that was sort of the additive that government mandated that they put into gasoline. Then we found out it polluted the ground water, so they passed a law last year where they’re going to require ethanol and what we have now is the refiners are saying, “look, if you’re not going to give us any liability protection, we’re getting rid of all the MTBE gasoline that we have because we’re not going to sit around here and leave ourselves open for the trial lawyers.” GEORGE: I don’t think you can blame them for doing that. JIM: No, but we haven’t even gotten to the hurricane season, and we’re looking at – I don’t know what gasoline is in your neck of the woods, George, but over here, $3.19. GEORGE: We’re $2.73 for premium, I just passed a pump a while ago. JIM: And how does that compare to let’s say September of last year. GEORGE: We did get – actually we got over $3 at one time locally. JIM: We’re a little bit different, we have the filet mignon version of environmental gasoline in California. GEORGE: Yup, yup. Well, everything’s different in California as the rest of us have figured that out. JIM: Well, you know the surprising thing, and here the government came out this week and talked about they were forecasting gasoline prices by this Summer to average 25 cents a gallon more than where they are today, and I think we’re going to surpass that. I wonder if we might talk about what’s going on in the Gulf of Mexico. We still have a ton of production that’s offline. GEORGE: 350,000 barrels of oil a day has not been restored to production. JIM: So that tells me our imports are going to go up which is obviously going to impact… GEORGE: They’re going to have to. I’m always amazed – they report the amount of crude oil we import. No one ever reports the amount of finished products that we import. This is growing by leaps and bounds. JIM: The other thing is it looks like, looking at demand statistics, despite the price of higher gasoline, Americans are still consuming more energy. GEORGE: It is bred into us. It is inherent in our being. We cannot get rid of it. It is the addiction that we all carry all of our lives. JIM: you know, George, spare capacity as we know is very, very tight globally, and we’ve got countries such as China and India that are scrambling and recognize that in order to fuel their economic growth they have to have more access to energy. With their economies growing at a faster rate than the United States economic, I just wonder where this excess capacity is going to come from? And then the second thing is if you’re looking at excess capacity even if we have some left in OPEC, what happens if we get into a conflict with Iran? What happens if [Hugo] Chavez decides he doesn’t like the US anymore, or there’s a terrorist attack on a Saudi oil facility which we’ve seen in the last couple of months? I mean these are realities out there that could throw any excess capacity out the window when you have 2 million barrels of oil taken offline. GEORGE: Or imagine this: a simple accident in the Straits of Hormuz where a loaded outbound happens to collide with an empty inbound, they sink simultaneously and block the Strait – just an accident, nothing to do with terror or politics or anything, just an accident. See, I ask people when they say well, “Steve Forbes says the price of oil going to $35.” I said, “well, Steve Forbes won the glass owl twice, but this time Steve Forbes dropped the owl.” Because it is a virtual impossibility – barring 300 million deaths from bird flu – that demand is going to go away. Demand is going to increase, supply is going to decrease. And I tell them, “Get your yellow pad – on the left hand side, list all the things that are going to make the price of oil go down – possibly. On the right hand side, list all the possibilities that could make the price of oil go up.” Well, see, the right hand side of the page gets full quick. And then they call me back and say, “I see what you mean.” [46:05] JIM: It’s absolutely amazing that nobody see any of this. I had an email from one of our listeners and he was talking to somebody about peak oil and this was a very educated professor at a college, taught economics, and the professor basically never heard of it, or at least didn’t acknowledge it. And when it was explained to him said it was ridiculous, that we’ve got more oil. And I think the one thing that kind of distorts the oil picture, George, is you hear for example in the Canadian oil sands they have I think 175 billion barrels of oil in the form of oil sands… GEORGE: It’s classified as bitumen, yeah. JIM: And so they take this 175 billion which is as big as Saudi Arabia and they go, “you know what, you divide that by annual production or what we need and we have enough oil.” But what they don’t understand is we’re only producing 1 million barrels – a little over a million out of the oil sands today, and by 2015 that’s going to go up to a little over 2 million barrels. So it’s not going to go 10, 15, 20, 30 million barrels a day even though the size of the reserves are enormous. GEORGE: Here’s the point. Even if it did, it will be unable to meet the demand. I’m going to give you one number. The number of cars per thousand people in the United States is 826. The number of cars per thousand people in China is 15. Now, their economy is not going to move their entire population into the middle class, but the point is it doesn’t have to. We’re going to see the greatest demand in the history of the world over the next 15 years – Canada can produce all the oil it can produce it still won’t meet the demand. I agree with you there is a limited supply of oil on this earth. I have written papers – in fact, you’ve published some of them that say that. But the thing that’s going to kill us is the demand. It’s not going to go away. There will be more people here in 2040 than there are now. It’s a fact, you can’t deny it. So, I mean we’re caught in the middle, we are where the curves of inevitability cross. We are there. And it’s that simple. [48:38] JIM: Well, George, I’m going to change topics on you for a moment, and let’s talk about a concept in the markets that was developed by a dear friend of both of us, Kennedy Gammage, who sadly passed away earlier in the year. And I can just tell you he’s going to be dearly missed. But it’s called the Hindenburg Omen, and I wonder if you might explain it and its significance. GEORGE: Folks will have to go to the internet to get the explanation because it takes about 30 minutes just to go through the dynamics of setting it up. It involves highs and lows on the New York stock exchange, and a whole lot of other things, but the statistically significant thing about it is that when it happens the reliability of the signal is exceptional, and this is what Kennedy pointed out to all of us – and my greatest respects to him. But, last week the omen was set up and Monday it was confirmed. So, if folks will go to the internet and type in Hindenburg Omen they will get all of the details, but take my word for it, Kennedy would be screaming at the top of his lungs, “hey, guys, hey guys, look at this, look at this!” And see, he was a believer in it as am I. [50:00] JIM: And the implications for the market when that signal is given, George? GEORGE: You can read several things into it, but the primary thing is many declines that exceed 10 to 15% start with this characteristic technical indicator. So, we have the potential of a significant correction. Well, I ran my numbers, I reran after the close last night for this show. Now you know that way back when, several months ago, I said the monthlies were topping out, and then a few weeks ago I said we had a couple of weeks left. Well we did, but in the middle of last week we ended that. The weeklies now have given what I call a G8 sell signal – that’s my proprietary indicator – and in the weeklies I have 3 indices and here they are quickly: 1,2,3…, all nine of them are down. 100% are down on a weekly basis. The only place you have any chance is on a daily basis but those are overwhelmingly to the down side. We are at a significant peak, now we’ve had the Hindenburg Omen confirm it, I’m a ragin’ bear. [51:21] JIM: And George, what are the implications for example outside the stock market for energy, and let’s say gold at this point. GEORGE: Well, it’s getting to the point and I tried to make this point a few years ago and nobody would listen to me but I think they will now. Folks, if you’re looking for gold, and you’re looking for energy it makes a difference where it is. My recent suggestion on your show of Chariot Resources was held back by the political implications in Peru. Well, yesterday, it exploded, it was up almost 40% in one day on 40 some million shares. But no less a point the fellow who may win the election – may nationalize everything in that country. It’s a possibility. So, now, if you’re looking for energy, if you’re looking for gold you better be looking for a company that’s in a stable atmosphere. [52:17] JIM: That’s something that we’re really starting to see. I know in the late 60s, and the 70s a lot of the major oil companies had their assets nationalized in the Middle East. And then we had the disruptive 70s, you had Marxism prevalent as the dominant political philosophy throughout South America, and it looks like once again the Marxists are on the rise, whether you’re looking at Chavez or this gentleman in Peru, but it is definitely on the rise. GEORGE: Yeah, it’s no question that that is the trend. And, oh, for those who don’t know it: China’s allotment of Venezuelan crude was raised from 170,000 barrels a day to 600,000 barrels a day. Well, guess whose share that came out of, folks? JIM: Well, we don’t have to guess, since we’re probably one of the largest customers of Venezuela. GEORGE: That’s right. Now, at the same time he did that he guaranteed – he did a tour of South America and he went to Paraguay and Uruguay – in Paraguay he was not quite so definitive, but in Uruguay he absolutely guaranteed their total need for petroleum. Well it isn’t a whole lot, but again guess whose share that came out of? [53:32] JIM: Well, the point being is since the United States is so heavily dependent of foreign sources of energy, Venezuela being the main source, if we need more energy to grow our economy through consumption of economy where are we going to get it? If we can’t get it from Venezuela because all their excess is going to the Chinese, or other places that leaves us with the Middle East GEORGE: Well, I tell you what, I’m going to suggest that we not offend Canada, OK. They may be the last hope we’ve got. You know we kind of ticked them off when we did that softwood thing a few years ago. And so what I would do if I was running the State Department, the first thing I would do is I would get a hold of the Canadian Prime Minister and say, “look, you tell me how to rewrite this thing, and you just type it up, and that’s the way it’s going to be.” And I’d mean it. Then I’d turn my eye to the South. Apparently Mexico has some recent, significant discoveries. Now, we may have to take that with a grain of salt, but they are leaning left. Well, we don’t need that right on our border from a political point of view, and we darn sure don’t need it from an energy point of view. So I would consolidate my North American positions, then I would begin to turn to others. Now, we’ve got – Iraq is a tar baby and I doubt – if you don’t know what a tar baby is well your momma didn’t read you the right stories when you were a little fella, Uncle Remus, Brer Rabbit – all those folks. We’re stuck, we can’t get out, now we’ve got to do the best of it – whatever that is, I don’t have the foggiest notion, but we’ve got to get out of there. If we have to cut and run like we did in Vietnam then cut and run, because we cannot stay there. It costs too much. Now China’s doing it right. When the new President of China got in – was it 3 years ago now? Next month isn’t it, I believe. He packed his suitcases and left town. Well, what did he do? Well, for one thing he went to Iran and he signed a contract for 115 million metric tons of natural gas per year for 30 years. And the other suitcase he brought had money in it, and he left that money with them. Well, you don’t buy oil and gas by sending a whole bunch of marines in a guy’s backyard. You buy oil and gas by taking a suitcase full of money and setting it in front of him. And our approach is just out of whack, but it’s too late now. Talking about it now is not going to do us any good. So, let the rest of the world take the Middle East oil. Oil is a worldwide commodity it has to be sold some place. Help the Russians with their infrastructure just to build up the daily produced oil. Help production everywhere we can in the world, so that we increase the supply by whatever means we can. I’m in your camp this thing in Ghawar with the horizontal well that Mr. Simmons called our attention to I have it on reasonably good authority from some of my old buddies that’s not the only place where folks are doing that. So they’re giving us a false water cut picture. They’re giving us false reserve numbers, and of course the key word in all this discussion is false. They’re lying about what reserves they’ve got, and they’re lying about the capability of increasing production. And when it comes to light that they’re lying if you think that oil going up 2 or 3 dollars a barrel one day is bad news, you are going to be looking at a phenomenon.[57:23] JIM: Well, I can tell you, I can see $100 oil, and $150, not too far off in the distance. George, as we close, if people wanted to find out more information how could they do so. GEORGE: Well, we finally have, and let me say it distinctly zapatageorge.com, up, running, taking subscriptions, selling books, offering the hedge fund. You know, we’re trying to sell everything we can, Jim. JIM: Well, listen my friend you have a great Easter weekend, and it’s always a pleasure to talk with you. I hope you’ll come back with us and speak with us again. GEORGE: Only if you ask me to. JIM: OK. Take care my friend. GEORGE: OK, my pleasure. JOHN: And this week’s stuck on stupid award goes to Donald Trump who wants to build a big golf course in Aberdeen, Scotland but oh my gosh, Aberdeen wants to put in windmill generators: I bought almost a thousand acres in Aberdeen, Scotland and they are the most beautiful acreage you’ve ever seen, all along the ocean, 4 miles along the ocean. And it’s something that’s very special, and I’m going to build what will be the greatest golf course anywhere in the world. Royal Aberdeen which is 125 years old has 9 of the greatest holes in the world, but then they ran out of land. This has got the most incredible piece of land, the largest dunes anywhere and it will be special. But they’re also talking about building the windmills here, the electric windmills, right sort of in the ocean very near the course. And I said that’s ok if they want to do that, but if they want to do that I’ll sell my land, make a profit, and go to something else. I don’t want to be looking at windmills when I’m playing golf, and neither do golfers, and neither do other people because it’s much bigger than a golf course. It’s going to be hotels, and houses, and everything else. I think it will be very destructive for Scotland if they do this. As the energy crisis deepens, build it anywhere but in Donald Trump’s backyard – or golf course. Donald, you’re fired. I know where we can put them, Jim, we’re going to put them in Antarctica – nobody wants to be there. We just haven’t figured out how we’re going to get the power back to the other continents but it’ll work, it’ll work. JIM: We talk about clean renewable energy but the problem is nobody wants to put it up. They don’t want solar arrays, they don’t want windmills, nobody wants energy. It goes back to this week’s interview with Peter Tertzakian where when I read from the chapter in his book. We want energy we just don’t want it around us. [1:00:17] JOHN: We are by no means done with the big picture, but we’re going to pause for an hour as a matter of fact. We’ll go into our experts segment of the program coming up in the next hour: Peter Tertzakian and Russell Napier – we’ve got two guests coming up. In the third hour we’ll continue with the Big Picture and hear another voice from Ross Hansen.
JOHN: Welcome back into the 3rd hour of the Financial Sense Newshour for this week, we’re continuing the Big Picture which we began in the 1st hour here, with Jim Puplava and John Loeffler. And right as we went into the break at the bottom – haha, I’m expecting our listeners to remember what we did at the end of the first hour – we were talking about Antarctica. It’s very cold in Antarctica, and there’s a difference between meteorologists and climatologists, and I think you’ve created a new term here : investment climatologists. So what’s the difference? JIM: If you take a look at the weather, and coming from a sailing background – I’m a sailor and I’m going sailing for the next the next 4 or 5 days, I can’t wait actually – and I’m always looking at weather conditions, I’m looking at the weather forecasts, what the wind is going to be like, what the sea are conditions going to be like. And meteorologists are the people who give us the weather forecasts, they’re going to tell you is it going to rain tomorrow, or is the sun going to come out, what’s it going to be like on Friday and the weekend. Climatologists on the other hand look at long trending weather cycles, are we in a cooling cycle; do we have an el Niño, la Niña, the decadal oscillator in the oceans, because these weather patterns affect long term weather trends. And what we try to do from an investment point of view is look at long term trends. There are a lot of people into day trading, or short term technical trading, they’re more concerned about what the market is going to do in the next hour, the next minute, or the next week. We tend to focus on what we call longer trending themes. So, we want to know, for example, what is going to be the next big thing, what is going to be around for a long time as a long lasting trend, and we want to be there before everybody else discovers it. So we believe for example John, in long trending investment cycles. For example, take a look at the stock market, from 1982 to the year 2000 – an 18 year cycle – all you had to do was invest in stocks. You could have picked a mutual fund, heck, you could have thrown darts at the newspaper and picked stocks, you would have made money. We were in a long trending investment cycle driven by supply and demand. Now as I take a look at the markets, and as we’ve written about in my Perfect Storm series, in The Next Big Thing, and in several other pieces I wrote in 2001, 2002, and 2003, the next big thing was the commodity cycle. And these cycles, as Jim Rogers and many others in the industry have pointed out, last between 18 to 20 years. They’re driven by supply and demand. We didn’t spend a lot of money looking for new mines; we didn’t spend a lot of money trying to find new sources of energy. In the meantime in the last 30 years, since we had the last commodity cycle, we have 3 billion more people on the planet. And in the next 10 years we’re going to add another ½ billion people on the planet. What that means is a half a billion more people consume more energy, they consume more food, they need more water; with an aging population globally we’re going to need more medicine – these are basic. And until we have invested enough money to discover a new source of energy, or to discover a lot of new mines that are going to bring copper production online, silver production online, lead, zinc, gold – it doesn’t matter – oil, natural gas we are going to have more demand for something than there is supply. So, looking at the big picture we see a commodity bull market that is only in its infancy. [4:00] JOHN: So far we have a bullish trend on that. Any other big picture items you’re looking at? JIM: One thing that we’re following that’s creating the inflation that we’re starting to see is Fed policies. And I think what we’re going to do that we’re focusing on now is they’re going to go a ¼ point too far, and that’s going to push the economy into a recession. In the Fed’s own words, every time they do that they end up in a ditch, and that’s where we’re heading, we’re heading into a ditch. So, what you should be thinking about is not just the recession that’s approaching – I already believe we’re in one right now – but get ready for the massive reflationary efforts that are going to follow once the Fed begins to panic, much in the way the Greenspan Fed panicked after the events of 9/11. So, I could see the dollar depreciating by 30 to 40%; I think you’re going to see some form of capital controls come into the United States; I think also you’re going to see higher levels of taxation. Even if they don’t raise taxes but just fail to extend Bush’s tax cuts, tax rates are going up. We’re already seeing them at the state level, and I think you’ll see that – we already have an initiative on the ballot right now to raise income taxes to 12% in California. And there’s another thing that you have to take a look at: government’s spending is now beyond control. We’re going to be experiencing higher deficits, and I think that there’s nothing you can do in the way of taxation to solve this; and the only choice that the government is going to have is to inflate their way out of it. I also think you’re going to see spot shortages in base metals, precious metals, and energy. And another factor to focus on, you are just starting to see the initial effects of money that is starting to come into the commodity markets. Yale’s endowment fund is investing in commodities – and I’m talking about actual commodities anywhere from timber to oil to soybeans. The California pension system is now moving into commodities, because it is now becoming acceptable due to a lot of research studies that have come out that commodities are negatively correlated to the stock market. And if you’re putting together an asset allocation model, and you want some balance - in other words you think something may go down, and you want to hedge against it – then commodities are being recognized by the professional community as a good asset allocation for a portion of anybody’s portfolio. You know, it used to be just stocks and bonds, or maybe international stocks and bonds, now commodities as an asset class is gaining widespread recognition. And you can imagine what would happen with the $40 trillion bond market, the almost $40 trillion stock market globally if even 5% of that money starts to move into the commodity markets – it’s going to be astronomical. So, this is something you have to prepare for. The other thing is I believe when big money wakes up to inflation you’re going to see a great flood, and the great inflation and peak oil are the two key things you need to understand from a bigger picture perspective over the next decade. If you can grasp those two concepts, which is higher levels of inflation and the impact of peak oil, that’ll guide you in your investment decision making. And those are the two driving [forces] that we see on the horizon that are going to drive investing and be the topic in the news. More people are talking about gold, yes, because gold is at $600. It kind of snuck up on everybody and they’re waking up to that fact; copper prices at close to $3; silver prices at close to $13; and these are the things that the professionals are now just being made aware of that more money now from the professional community – whether it’s a hedge fund, it’s a mutual fund manager, or it’s the manager of a college endowment fund, or an insurance company that has to manage its assets; look at Buffet’s role in energy and silver. So I think this is just a growing awareness that is just going to drive this market much higher than anybody now even can think of. [8:19] JOHN: Looking at what you were just talking about Jim, it would seem to me if we look at the fact that both inflation is going up forcing prices up, and governments are beginning to cause a tax rise, the little guy’s going to be running around in circles trying to keep himself together – with the pressures on him. JIM: It is going to be very tough. Inflation impacts the middle class and the poor the most because they don’t have the means and wherewithal to fight inflation. So, unless you can improve your income, increase your savings where you can have the ability to save and invest to profit from inflation, it becomes very very difficult at that point. So you’re talking about survival. [9:00] JOHN: There’s no way off this thing though, it’s going to be a real bumpy ride, and the pressure always seems to slam down squarely on the middle class. JIM: The thing about going forward in these kind of asset markets that are going to be driven more by fear – and what I mean by fear you wake up, you turn on the news, and you see two airplanes hit the Trade Towers, or you get up one day and you turn on the news and all of a sudden Iran is threatening to cut off oil supplies or [Hugo] Chavez says he’s going to cut off oil, or you see the President of Iran saying that he’s basically going to wipe Israel off the face of the map. These are the kind of things that you get these little fear driven cycles – all of a sudden the oil markets spike, gold prices spike. So it is going to be a bumpy ride, there’s no way to avoid it. And one of the reasons is today news travels instantaneously. John, you’ve been in the news business for 30 years. 20 years ago if there was a news item we might see it in the papers a day or two later. Now, you have a million eyeballs, a gazillion eyeballs actually, watching the same data on terminals all around the globe. So what happens is you get this instant reaction by markets globally, and so the impact is immediate and it’s more sudden. And it’s like the pied piper: people just follow the [crowd]; it’s kind of like don’t ask, just act; move now, and ask questions later. So, you’ll see these giant fluctuations whether you’re looking at the oil markets, the gold market, or the commodity markets. That’s just the nature of the beast, and that’s just something that you’re going to have to get used to. Because if you want something safe and stable you could put your money in a bank account or a bond, but bear in mind with 6 to 8% inflation rates the value of your asset is being destroyed.[10:56] JOHN: Well, OK, obviously we’ve instilled enough paranoia and fear in the listeners, and the question remains what do you do at this stage of the game? JIM: I would really start buying bullion and do it while you can, especially silver. In the future we may get to a point where it will be so scarce - people don’t realize how scarce silver is, and it’s actually much scarcer than gold, and in the future you may not be able to get it. So, silver prices I think are going to end up looking like gold prices in the last couple of years in terms of where silver is going. And finally start erecting a defensive portfolio for the money flood that is going to engulf the globe – it’s already doing it now, but it’s only going to get bigger. And if you go back to one of my favorite sayings: it wasn’t raining when Noah built the Ark. And from my perspective it’s time to start building. [11:46] JOHN: It’s a question given where silver is where it is right now, say we’re close to $13 an ounce this week, are we going to see a correction downwards again? Or is it just going to be constant upwards pressure? JIM: I’m not a technician, [but] when you have a parabolic rise such as we’ve seen in silver since the beginning of the year it’s very well that you could get a pullback. But I would continue to accumulate and do so on a monthly basis – dollar cost averaging. Quit trying to think to yourself, “I’m going to time the top and I’m going to time the bottom.” Even the best market technicians I know can’t do that consistently. The important thing is you want an accumulation program and accumulate while the price is cheap. [12:30] JOHN: Cheap meaning it’s going to be much higher than this even what it is now. JIM: Much, much higher. $13 in silver isn’t even close in terms of where we’re heading, because silver prices are going over $100 an ounce. JOHN: Speaking of precious metals it’s time we hear from another voice. [12:46]
JIM: Precious metals have been on a tear lately, in closing prices on Thursday silver hit $12.92, we had gold futures at $625.50. Should you be accumulating bullion in addition to bullion shares? Joining me on the program is Ross Hansen, he’s President of Northwest Territorial Mint. Silver is a precious commodity, very short in supply, we’re running supply deficits, if you have money, or don’t have a lot of money silver is one of the best precious metals to start accumulating. We get a lot of questions you know Ross, from guys saying, “you know, you talk about futures, you talk about this, but I’m a little guy.” And your minimum is 50 ounces, right? ROSS HANSEN: Right, we have the smallest minimums in the nation. JIM: So, we’re almost at $13 silver. So that’s going to cost what? $700. ROSS: Yes. JIM: OK, if they can save up enough they can buy 50 ounces and to start accumulating it now before everybody gets wind of this whiff of inflation that I think is coming forward. ROSS: One of the things I was thinking of, Jim, is I would explain the difference on precious metals itself, where you have two factors that determine the price. You have the fundamentals on the metal and that’s driven strictly as a demand issue. For gold: what’s the jewelry consumption, what is the hoarding consumption – where’s that demand coming from? What’s the supply coming from: central banks liquidating; what is the mining production? On the other side, you have people using it as a hedge against inflation, or to protect their wealth, and that’s emotionally driven, and there’s no way to factor that in. And in the past we’ve been focusing on gold and silver strictly from the fundamentals on the supply side. And I think with this economy headed in the direction it is with our deficit spending, with inflation coming back, I think we’re going to see more and more people retreat to precious metals as a hedge to protect their wealth. JIM: Well, you know you hear a lot of talk today, Ross, about central banks tightening liquidity, but each week I go to the back pages of the economic magazine that lists the money supply growth around the globe, and I can tell you it’s in the high single digits – in some cases it’s double digits. And I think that the break out of precious metals against all the major currencies is a recognition that we’ve got monetary inflation globally. ROSS: I think you’re correct. JIM: You know, the other thing about when you look at Gold Fields estimate for gold, or CPM’s group on silver, they always talk about these metals from an industrial point of view. So, they look at jewelry demand; they look at industrial demand for the metals; and then of course they get into how much was purchased on the investment side and that’s been leaping over the last couple of years. But you know I think you’re right the hard thing to really estimate is what happens one day, when you turn on the television there’s a crisis in the Middle East, or War in the Middle East, or you have a financial conflagration because of higher interest rates, you have a banking crisis or a hedge fund crisis? The first thing people are going to turn to when money becomes less valuable is precious metals. And Ross from your perspective since you deal in a lot of the precious metals – are you having any difficulty at this point in obtaining for example silver, or gold, or any of the precious metals? ROSS: The physical gold right now for such as the Canadian Maple Leaf, and the American gold eagle supply is tight, simply because production has been determined by those governments months ahead of time. So when we have a leap in prices which you know is driving demand, obviously the supply gets a little bit tight. We are seeing some dishoarding though going on right now – some people taking some profits. And that’s started to stagnate the price of gold, if you noticed gold has been hard to get through the $600 price range. On silver we’re some silver come out of the woodwork. You know, price have been holding silver for many years, they’re finally seeing silver come back to a level that it was at previously 20 years ago. But on average we’re seeing a lot more metal flowing out to the investor than has been coming back in – probably by a factor of 5 to 1. [17:35] JIM: And I think we’re just getting started, because I think if you and I were having this conversation in a restaurant or a coffee shop or at the country club, and you were talking about precious metals accumulation, I don’t think that thought would register with most people. ROSS: You know one of the most interesting people I ever spoke to was a fund manager almost 20 years ago, and he said that at the time he was responsible for about $80 billion worth of assets, and at the time he didn’t think silver and gold were a very good investment but his advisers were telling him that there was about a 5% chance that silver and gold would do something significant in that year. So, being the good fund manager he is he thought, “well let’s put 5% of our portfolio into precious metals,” so he instructed his people to buy $4 billion worth of precious metals. And they came back and they said there’s not $4 billion worth of precious metals liquid available, and he was bowled over. And he said, “you know if I want to buy $4 billion worth of General Motors I can do it, or Home Depot.” And he was just flabbergasted at by how thin the market was. And to him that added a whole new dimension into his investment philosophy on precious metals, because if the market is that thin and that he as just one of many fund managers that’s responsible for billions of dollars can’t cover 5% of his portfolio into precious metals then it’s going to be subject to some dramatic increases if people ever panic and start wanting to accumulate metal. [19:00] JIM: You know this is something that I saw when I came in the business in the late 70s, where you finally started to get – even with trust companies – where they were investing in for example the Exxons, the Schlumbergers, and then also maybe a Homestake and a Placer. Eventually when institutional money comes into this market, it’s going to drive prices I think higher than anybody that’s looking at the metals market is even imagining. I think you’re starting to see it’s become more prevalent now in the minds of money managers. I mean you have Yale investing in commodities, actually buying the commodities from timber to oil; you have the California pension fund now looking to diversify into commodities. I think institutions are now starting to recognize the reverse correlations to the market with either the precious metals or commodities sector. If you take a look at the stock market globally, the bond market globally you’re talking about $40 to $50 trillion, so imagine, as your story of that fund manager, if 5% of the markets or the dollars invested in financial assets now decide to exit the market and go into the metals market, boy, I’d hate to see where the price rises. I don’t think you could get it like your fund manager. ROSS: There is physically not enough metal to meet that kind of demand. And right now you’re seeing retreating from paper into all commodities like you said, look at the price of copper almost $3 a pound, where just a few years ago it was 60 cents a pound. Zinc, aluminum, nickel – all the different base metals are skyrocketing also. If you look at some of the fundamentals on the base metals, and correlate those with the precious metals and I think precious metals have always lagged behind the base metals if you look at that then we’re due for a major increase. [21:06] JIM: You know Ross let’s put two hypotheticals to you: if you had two customers, ,if you had somebody that had means, they have some money, what would you be doing in their case; and then secondly, what would you do if you were a little guy, maybe you could only save $50, or maybe $100 a month. If you were accumulating metals, what would you do in either of those two cases? ROSS: Well, in the noble metal group you have 4 major metals: you have platinum, palladium, gold, and silver. I look at which has the best potential – gold right now is just slightly under $600 an ounce as we speak; platinum is almost $1100 an ounce; palladium is about $350 an ounce; and silver is just under $13 an ounce. It’s going to be a lot easier for the lower priced metals which no only have the factor of them being noble metals, and precious metals which should be accumulated in times of crisis, but they also have a strong industrial demand. So I like right now my two favorite metals are /silver and palladium. I’m still bullish on palladium and I’m still bullish on silver, even though those metals have both doubled here recently. I think there’s still a lot more room to run. It’s a lot easier for silver to go from $13 to $20 than it is for gold to go from $600 to $1200 an ounce. Plus, in times of crisis the smaller denominations if things really get bad can then be used as currency. So, if I was advising a client with a lot of money I would say: mix up your portfolio a little bit, have some gold, put the majority of it in silver and palladium. But if you’re a small investor, silver at $13 an oz is still an attractive investment. Our minimum here at Northwest Territorial Mint is only 50 ounces for roughly only $700, you can make an investment. [22:53] JIM: You know this is something that I think people don’t realize because we’re at that point right now Ross where we know that we’ve been running supply deficits for gold since 1990; when it comes to silver we’ve been running supply deficits for an even longer period of time. And I don’t believe people understand how scarce silver is. I am not aware of other than one or two companies that I can think of that have large silver deposits, or who have made large silver discoveries. A lot of the silver we get today is produced as a byproduct of other metals. ROSS: 85% of the silver that’s produced in the world approximately comes as a byproduct of lead, zinc, and copper mining. And now, right now with those base metals at all time records you’re seeing a lot more tonnage in those metals being produced which will increase the supply of silver. But there’s also a factor where silver is being used less for photography, but that’s been made up by all the silver that’s been used for electronics; and there’s a lot of new exciting technology that have come out for silver. For example silver is being used woven into clothing to kill bacteria. People don’t understand all the new technologies that silver is being applied to is more than going to eat up any surplus that photography will create. So, I’m real bullish on silver. I think silver just as an industrial metal is really exciting. The factor of inflation or monetary crisis, those can’t be calculated, and those are going to be a very positive factor when and if they happen, but just looking at industrial demand it’s got to go up. [24:31] JIM: You know the other thing that makes silver unique unlike gold, a lot of silver’s use is consumed in this industrial process. If you put a micro amount of silver into some kind of electronics or electronics machine application you’re not going to be scrapping that machine to try to get the silver, unlike photography. ROSS: That’s the beauty of silver. Most of the silver that’s consumed in this country is consumed in a product [where] it is a small portion. For example, silver chloride is used in our water to purify our water, that silver is not coming back. The other computer has between ¼ of an ounce, and ½ an ounce of silver, but it’s not economical to recover that silver. When you go down to the medical center and they tell you need a chest x-ray, you don’t care what that x-ray costs, and there |
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