by Kyle Woodley | April 18, 2013 10:47 am
That eye-popping term serves as both a price target and an upcoming book title for Bullion Management Group president and CEO Nick Barisheff, who talked to InvestorPlace early last year about his lofty expectations for the yellow metal.
Since that time, gold has embarked on a precipitous decline, from $1,653 then to below $1,400, thanks in part to the sledgehammering of the past few trading days.
So we talked to Barisheff again to see whether much has changed his opinion in the interim. The opposite is true: He’s as convinced now as he was then that his high-water mark will stand, and that the same pressures he cited before — primarily concern about governments’ fiscal management — are in place and eventually will propel gold higher.
Here’s what he had to say about the recent action in gold, as well as its future prospects:
Q: Did any of the points central to your thesis last year fall apart, or has gold’s decline come amid other influences?
A: Not only do they hold, but they’re getting more pronounced — unless I missed the announcement that Republicans and Democrats have all kissed and made up, and the U.S. deficit and debt problems are solved, and the 47 million people on food stamps are back at work.
Obviously, none of that has happened. The debt is growing, they’ve kicked the can down the road about the debt ceiling. So the primary factor is simply that gold has been rising because currencies are being devalued. Whether it’s the U.S., or Japan, which has jumped into the fray saying they’ll double their monetary base and the yen is going to decline. And other countries are going to have to react accordingly in the race to debase.
Then there’s the issues of the retiring baby boomers. We’re going to have a major economic shift. During the ‘80s and ‘90s, baby boomers were driving the markets … but as you get closer to retirement, you don’t need to buy any more stuff, and instead of investing, you’re starting to liquidate your investments. Spending is slowing down, Medicare bills are rising. So you’re highlighting more and more government expenditures to support the retired baby boomers, with less and less tax revenues.
And the last thing is the issue of peak conventional oil, notwithstanding the discoveries in shale. But the production of shale is slow, expensive and environmentally unfriendly — so we might have tons of reserves, but it’s not something you can necessarily have come out of the ground as fast and as cheaply as conventional oil. So as availability drops, price will go up. Other than printing money, the price of oil is the only other thing that causes inflation across the board since we use oil for everything.
Q: So what has been pressing on gold prices?
A: Consider on Friday, there’s various estimates as to whether the total sale of Comex futures was 400 or 500 tonnes, the ballpark figure was $24 billion. When you do that, you start triggering sell-stops, and when that momentum picks up, the next stage is margin calls, and those happened Monday. And then everyone’s forced to liquidate. So this is an entirely paper issue. People aren’t running to the coin store to sell their physical bullion, but to buy. You can call it orchestrated, manipulated and so on, but it’s certainly not a “normal” event. What happened Friday was suspicious. People just don’t dump that much — that would be like, you wake up Friday morning and the Dow goes down 1,400 points.
Q: Who would’ve been selling?
A: The only possibility is the Federal Reserve through various commodities brokers. The other central banks across the rest of the world are buying gold. This is giving an enormous gift to China, who will be buying with both hands.
Q: Why would the U.S. sell off such a large position in gold?
A: When you have gold going up, it’s a non-confidence vote in the currency. People no longer trust the currency. They want out, and into gold. China has … I’m losing count, because it’s well over a dozen trade deals with different countries, from Brazil to Russia to Saudi Arabia to Japan to Korea to France to Australia, where they’re settling differences in their respective currencies and bypassing the U.S. dollar entirely.
Q: Some say the recent selloff in gold and other commodities is a sign of deflation. What are your thoughts there?
A: Gold is not a commodity. It’s money. If you don’t believe me, go to the Canadian government financial statements, the U.S. government financial statements, and when you look through the footnotes and it says monetary assets, there are two things — currency and gold. Gold is not lead and zinc and copper.
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.
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