The other thing when we talk about inflation and deflation, we can have both happening side by side. If you look at Zimbabwe, things you need like food, and all the necessities of life were skyrocketing in price, but the real estate and other aspects you couldn’t give away for obvious reasons. So you’ve got deflation in certain assets happening at the same time as you’ve got inflation in the elements other people need to survive on.
Q: Looking ahead, what do you see in the next, say, five to six months, and the next five to six years?
A: It’s about time we had another U.S. debt ceiling debate. The last time we had a debate, in summer 2011, gold went up 30% in two months. At this point in time, the debt ceiling has come off everyone’s attention, but once you get into the debate, you’re gonna have both parties arguing, and the magnitude and problems associated with $16 trillion in debt start becoming more evident to everybody.
At the same time, you’re going to have any number of events creating just as violent a reversal to the upside as we’ve had to the downside.
The important thing for people to understand is that the leveraged future markets are not for Mom and Pop. It’s for highly sophisticated traders. Mom and Pop need to own physical gold, safely stored. And when these events happen, you don’t sell your bullion, you just wait — people that do sell inevitably do buy back in at a much higher price. The example to this is in the ‘70s, when Nixon removed the “gold window” in August 1971, the price of gold was $35 an ounce. It went up to $200 an ounce in 1975. In less than six months, it then dropped to $100. A lot of people liquidated, threw in the towels, and said they’re never gonna buy gold again. Then by 1980, gold went to $850. Apply the same kind of math, and guess what the number is? $10,000. $10,000 from today’s prices. Why it dropped from $200 has never been properly explained, but it did, and then it reversed violently afterward.
Q: So what’s the difference between then and today? Why wasn’t gold’s rise catastrophic then, and is that different now?
A: When gold hit $850, the decline of the U.S. currency was stopped because all through the ‘70s, inflation was higher than interest rates, so there was no point in holding bonds, and equity markets were fluctuating and were going nowhere. So people started moving into gold because gold doesn’t have dividends or interest, but it doesn’t lose value. Volcker kept raising interest rates until you finally [got positive interest rates over inflation], so that’s what started the selloff. So in that case, there were fundamental reasons for selling. It made sense to say, “Now I can get the spread between inflation and interest rates.”
But at the time, the U.S. debt was $800 billion. Today, the cash debt is $16 trillion, and the unfunded liabilities are estimated to be between $120 trillion and $200 trillion. Interest rates are now a fraction of a percent. And for every 1% increase in interest rates, it would cost the U.S. government, based on the number of Treasury notes they issue, about $160 billion. So for every 1%, tack on another $160 billion to the annual deficit and the total debt. So at about 6% or 7%, you have more in interest payments than you have in total tax revenues.
But we’re not going back to 18% interest rates if the Federal Reserve has anything to do with it, but the markets may require it. For instance, in Greece, we got up to 29% interest in government debt. So once you get into those kinds of numbers, how do you solve the debt from a deficit perspective?
The answer to me is keep buying gold with every spare dollar you have. It’s the only thing not following this game.
Q: Any last thoughts?
A: A fantastic buying opportunity has been handed to everyone, and it’ll be short-lived.