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BookmarkDaily Bell: Nice to speak with you again. Let’s jump right in. What’s going on with gold? Why are mining stocks down?
Doug Casey: I’m not concerned about gold being down because markets fluctuate. And considering that gold’s been in a bull market for a dozen years, I’m very unconcerned about the fact that it’s come off. All the fundamentals that underlie the bull market are still in place.
As far as gold stocks are concerned, they’ve always been a highly leveraged play on gold so when gold catches cold the gold stocks have always caught pneumonia, and that’s the case now. Of course, that’s amplified by the fact that costs in the mining sector have skyrocketed and it costs on the average $1,000 to $1,200 to get an ounce of gold out of the ground at this point. The world has been pretty thoroughly explored, and it’s not easy to find economic deposits. If you do find one, it will only be because you’ve spent many millions in high tech exploration. You’ll then discover that regulation is brutal, and you’ll spend more for lawyers and lobbyists than on geologists and engineers. NGO’s will plague you with lawsuits, and incite the natives. Governments will extract huge amounts in taxes and royalties. Capital costs are gigantic, usually now in the hundreds of millions, or billions. After all that it takes close to a decade to get the thing in production. There’s much more I can say, but mining is a crappy business.
The good news is that now is a superb time to speculate in these stocks. Their prices reflect all the negatives.
Daily Bell: Why did the price of gold plummet?
Doug Casey: Once again, I see it as just the normal, albeit large, fluctuation. It’s not like you shouldn’t expect a market that’s risen steeply for a dozen consecutive years to come off at some point. Especially since not only does everything look rosy in the stock and bond markets, but even real estate spears to be recovering. A lot of conventional – and foolish, in my view – people think that printing trillions of new currency units has solved the crisis, and obviated the need for owning gold. So there’s selling. Perhaps a big trader sold a bunch of contracts to set off a lot of stop losses and panic the market. If so, it was a smart trade, and it worked.
Now, I know that that’s not a very sexy explanation. But I’m a believer in Occam’s Razor, which hold that the simplest explanation of something is usually the correct one. However, I’m afraid it leads me to a pet subject of mine, one that will both take a while to explain, and will, regrettably, antagonize some of your readers. Many gold bugs (but not all, because I too am a gold bug) seem to think that a coterie of malefactors of great wealth sit around a huge boardroom table, perhaps chaired by Dr. Evil cradling his white cat, and send forth their minions, “Da Boyz,” to “smack down” the depressed and struggling gold and silver markets. A large number of gold bugs are also conspiracy bugs. They have all of these standard catchphrases for describing what’s happening. I’ve read their stuff for years and, frankly, it impresses me as little more than accusations, name-calling and conjecture.
I don’t doubt that the powers-that-be would prefer to have the price of gold lower – just like they would prefer to have the price of wheat and copper and lumber and everything else lower – but there’s no evidence that I’ve ever been shown other than, frankly, just assertions. They point out that large bullion banks are short a lot of gold. But in the past, at the beginning of the bull market, they were long a lot of gold so this doesn’t constitute a proof at all, from my point of view. Nor does the fact that central bankers have said they have an interest in controlling prices. Of course they do. That’s part of their mandate – and one more reason central banks should be abolished. Maybe they’ve leased out most of their gold to commercial bullion banks to collect some interest, and the bullion banks sold it in the futures markets to collect the contango. If so, wonderful. If they can’t give it back that will only serve to drive the price higher.
If there is, in fact, an orchestrated conspiracy to suppress the gold price, it’s been a total failure since the last bottom at around $250 in 2001. You’ve got to ask yourself: How stupid are these people that they would stay short in one of history’s great bull markets? I would be happy to believe that the price of gold is being manipulated as long as I’m shown some evidence for that fact. But these people are asserting that the powers-that-be have been short during one of the biggest bull markets in history. Nobody’s got that much money – not even governments; they’re all bankrupt. And while it’s a safe assumption that central banks would like to see a low gold price, I don’t believe they really care; these people truly believe gold is a delusion. To credit it with importance is counter to their education, to all their theories.
Another point. It is well known that during the days of the London Gold Pool, when gold was fixed at $35 an ounce, they were, in fact, trying to control its price. But in those days, in the late ’60s, there was only half as much gold in the world as there is now. In other words, as best we can tell there were about 3 billion ounces above ground then; today there are about 6 billion ounces above ground. Governments only own 20% of it. In addition to the fact they had a lot more gold to sell then, they were much more solvent than they are today. Today, all these governments are manifestly bankrupt and running gigantic deficits. So if it was ever possible to control the price of gold it would have been possible up to 1971, at $35 an ounce. But now, with all the other things I’ve brought up, it’s impossible with gold at $1400 an ounce. It makes no sense. Not only don’t they care; they don’t have the ability.
In addition, on Wall Street, all these traders who are actually putting in the supposed short-sale orders that are manipulating the price of gold like skilled yo-yo masters, all these traders talk to each other like teen-age girls. The word would have filtered out, informally, what was going on over the last decade. But there are no rumors about that, and never have been. All there are is assertions from conspiracy theorists. It annoys me because knowledgeable market players hear these assertions, and they naturally roll their eyes, seeing it as further proof that gold bugs have a screw loose.
One thing we do know is that the governments of developing countries – not just developing countries but Russia, China, India and many others – are buying significant amounts of gold at this point. What possible reason would the US government have to keep the price down? To make it cheaper for the Russians and Chinese to buy? That makes no sense, either. If, in fact, the US is suppressing the gold price, then I personally am grateful as a gold buyer.
I’ve never gotten any answers to any of these questions that I ask, nor do I hear any actual logical explanations from the people who are making this assertion. It’s like a meme that’s been created and everybody believes it because everybody else says it. Well, there’s no actual evidence that I’ve ever seen. That’s going to prove to be a very unpopular view because a lot of people have become very psychologically invested in the thought that government can control the gold price.
As I said, I can see some reasons why they’d want to do that because governments like to try to control everything and, of course, gold has always been like a fire-bell that goes off when there are monetary problems. But nobody’s showed me the evidence. All they say is that the big bullion banks are short a lot of gold. Okay, fine. They’ve been long a lot of gold in the past and there are good reasons why they would be short; one reason is that the mining companies deliver the gold to them. They’re always selling because they keep their accounts in dollars, not ounces of gold.
Anyway, I don’t want the GATA guys and their supporters to take this personally. I simply think they’re wrong, and those are the reasons why.
Daily Bell: Explain how there can be immoderate demand for physical gold and silver while the paper markets are signaling a slump?
Doug Casey: Perhaps the average gold buyer is fearful of what’s on the horizon. And he likes a bargain, which gold offers right now. Gold isn’t cheap, but it’s better value than stocks, bonds, or real estate.
Daily Bell: Why does the London gold exchange “fix the price” of bullion? Why not generate prices from free trading?
Doug Casey: Well, I think that’s a good idea. The London gold price is a bit of an anachronism anyway, but tradition is important. And, of course, London is one of the world’s financial centers, and certainly the most important in Europe, where a lot of gold is traded, deliveries are made and a lot of gold is stored. In a free-market world anybody should be able to set up a new gold exchange and get buyers and sellers together to determine the price as they will. But that’s hard to do. Why isn’t Tokyo or for that matter Hong Kong or for that matter Moscow major centers of gold trade? Perhaps Beijing will be some day, since China has become the world’s biggest producer, and the Chinese understand the value of gold. But there are already commodity exchanges in New York and Chicago where gold is freely traded. You as an individual can’t join in the London fixing, but you certainly can on the Comex.
But you make it sound conspiratorial. It seems that if you don’t believe in a conspiracy theory to do with gold today, it’s like being a religious heretic. Speaking to this, about conspiracies with gold or anything else, people constantly conspire. Adam Smith pointed this out in his book, The Wealth of Nations. Whenever a couple of people of the same trade get together, they always try to conspire for their interests and against the interests of the public. So it’s not that I deny that people conspire; it’s just that it’s extremely hard to conspire successfully, especially when we’re talking about people who are very wealthy and very powerful. It’s hard enough for me to conspire with a few friends and decide on what movie we’re going to see or what restaurant we’re going to go to after the movie. It’s extremely hard for wealthy and powerful people to come to what’s likely an illegal agreement, and keep it. So I understand the theory, but once again, I’d really just like to see some actual evidence as opposed to name-calling and assertions.
As an aside, I’d like to point out that while conspiracy theories have a bad name – in good measure because of the type of people that often deal in them – that’s not to say I accept conventional explanations of things, either. There are huge unanswered questions about many things in today’s world – the two Kennedy assassinations, what actually happened at Waco and Oklahoma City, the strange deaths of Vince Foster and Ron Brown, what happened to Building 7 on 9/11, what was really going on with the assassination of Osama bin Laden… it’s a long list.
Daily Bell: If the paper price and physical price diverge, will more and more transactions take place privately?
Doug Casey: There’s not a lot of trust in the futures exchanges on the part of the average person who’s interested in commodities, and with good reason, especially since the collapse of Refco years ago and then MF Global recently – which was a real fraud for which nobody’s been prosecuted. It was assumed that it was basically impossible for a clearing broker to go under and cost the public money. And the fact that all of the big banks and brokers that are out there today are only in existence because of government support and bailouts, it’s very understandable that there’s very little trust in public markets and financial institutions at this point. That’s been compounded by the collapse of Cypriot banks last month.
Personally, I’m no longer dealing in gold in the futures markets, but I do buy gold almost every month and sometimes significant quantities of it. I don’t see gold as a trading vehicle, but rather as the only financial asset that’s not simultaneously somebody else’s liability. I therefore buy it for safety, for security, for prudence; I don’t see it as a speculative vehicle. Anyway, it was a great speculation 12 years ago at $250; today, at $1400 it’s a prudent allocation of capital, but has less upside. That’s why I buy it for cash and I keep it in my personal possession or in the possession of another entity, like Goldmoney and the Hard Assets Alliance, that I really trust.
The futures markets are great things. But people who own gold through them – or through ETFs that use them – are missing the point. Gold is a hedge against paper assets. It makes no sense to own it as a paper notion, where you can’t take delivery for practical purposes.
As far as the prices of paper gold and physical gold diverging … that question again seems to imply the existence of a shadowy conspiracy, and we’ve discussed that. But it does appear that premiums on coins are rising.
Daily Bell: You told us during our last interview that confidence was breaking down in the dollar whereas themainstream media seems to believe that confidence is breaking down in money metals. How can that be?
Doug Casey: The US government is running deficits of a trillion dollars per year, and I expect those deficits will grow dramatically in the years to come. The Federal Reserve is, in addition, buying $85 billion a month in paper and monetizing it. In addition, there are $7 or $8 trillion outside the US held by people who don’t have to use dollars, but use dollars only because they’re liquid and convenient. Every country is desperately trying to obviate the use of US dollars, and trade with their own currencies – the Iranians and the Indians, the Russians and the Chinese. They don’t appreciate the fact that all their transfers have to go through New York. Furthermore, it makes no sense to use the unsecured liability of a bankrupt and unreliable government for trading. The dollar is a hot potato, and confidence in it is going to break down totally at some point.
As far as a lack of confidence in gold and silver, it’s as I said before: Markets fluctuate. Nothing goes straight up or straight down. But you certainly shouldn’t credit anything you read in the mass media about whether there’s confidence in gold or not. The writers know very little about economics, and even less about the metals. They’re just journalists who have no economic or financial skills, no personal money and about zero experience in the markets. So it’s just the blathering, the uninformed opinion, of somebody who was given a job by a newspaper or magazine, and has to write an article—today about gold, tomorrow about cats, the next day about diets; they feel like they always have to say something, no matter how inane. Their thoughts are meaningless, except as a contrary indicator. Somebody says something and starts a meme, and then other people repeat the meme. It amazes me, actually.
Daily Bell: Is it possible the physical price of gold and silver are higher than the stated price?
Doug Casey: What I hear is that many bullion dealers are sold out of gold coins, that there are a lot of buyers that have to wait a long time for delivery, and that the premiums on physical gold and silver are up considerably from the norm. If you’re a big buyer, and you find you can get a 100-ounce contract much more cheaply on the Comex, then perhaps you should buy it and take delivery. Personally, I prefer coins; they’re much more fungible.
Daily Bell: Is there a growing black market in gold and silver?
Doug Casey: You only have black markets when there are political controls of some type, in other words, when the government says the price is X but the market says the price is Y. A black market arises in the discrepancy between the real price and the government-mandated price. At this point, there is no black market in gold or silver. Most places in the world, they’re freely traded commodities. So no, I don’t see how one could say that there’s a black-market price because there’s not. Maybe there will be if the government attempts to illegalize gold, or set the price of gold.
On the other hand, governments are trying to clamp down on Bitcoin because of its growing use as an alternative currency. They’re claiming it aids in the artificial crime of money laundering. I have no doubt that the same thing will eventually happen to the metals. Governments want you to use only their fiat currencies, and only through banking channels. Even using cash, $100 bills, leads to suspicion of a crime today. They’re starting to see the metals in that light, as well.
Daily Bell: How will this affect gold miners?
Doug Casey: As I said earlier, mining is no longer a business suitable for prudent investment—it’s purely a speculation. The production of gold has been flat to declining for years and it’s likely to stay flat or, more likely, decline considerably. The gold mining industry in South Africa used to turn out two-thirds of world production when gold was $35 an ounce, now it’s about one-sixth; it used to be highly profitable at $35 and now it’s closing down with gold 40 times higher. It’s a portent of the future of gold mining. Worldwide production is about 80 million ounces a year; I think it’s going a lot lower.
But current production is trivial in determining the price of the metal. What determines it is whether the 7 billion people in the world want to buy or sell the 6 million ounces above ground. My opinion is there’s going to be a groundswell of buying as people try to get out of their governments’ rapidly degrading currencies. Certainly in Western countries only a tiny portion of the population own any gold. They’re ignorant of the fact that its main use isn’t for jewelry or dental fillings; it’s money. That perception will change. My belief is that in 20 years gold will once again be used in daily commerce as money. I’ve discussed why in previous interviews here.
Daily Bell: Enough about gold. Let’s move on to some other topics. Is Europe coming apart or is the crisis over?
Doug Casey: No, the crisis isn’t over. To the contrary, the crisis has a long way to go because all these stupid governments are not just doing the wrong thing; they’re doing exactly the opposite of the right thing. They’re all bankrupt and the only way that you can solve this problem is by radically cutting expenses, stop printing money, eliminating regulations, radically cutting tax burdens and getting rid of subsidies and welfare programs wholesale. But, instead, they’re raising taxes, increasing regulations, printing money by the carload and just marginally cutting some spending.
The European Central Bank, and the central banks of almost every country, for that matter, are attempting to keep old, unsustainable patterns of production and consumption going with more money printing. So no, things aren’t getting better. This is going to wind up in a catastrophic depression. And we’ve been in a depression since 2007. I define a depression as a period of time when most people’s standard of living drops significantly. But it can also be defined as a period when distortions and misallocations of capital in the marketplace are liquidated – that should be happening but it really hasn’t even started to happen yet. When that starts happening things will really get ugly. So no, this is not over by any means. It’s still early days. As Einstein said, after hydrogen, stupidity is the most common thing in the universe.
Things have seemed to have gotten better in the world over the last few years since they’ve had massive quantitative easing – which is to say currency printing. Sure, if you create trillions of dollars of currency units it makes people feel richer than they really are and it encourages them to continue living above their means. It just guarantees an even worse depression. What’s coming up is going to be the biggest thing in modern history. It’s not just going to be financial and economic. It’s going to be a political, social, and military earthquake, as well.
Daily Bell: Will the euro hold together?
Doug Casey: No. As I’ve said before, if the dollar’s an “IOU nothing,” the euro’s a “who owes you nothing.” It’s an extremely badly structured fiat currency. Money is just a medium of exchange and a store of value; it shouldn’t also be a political football and a form of taxation. The 19th century was the most peaceful and prosperous time in the world’s history. And the rate of growth was far higher, and sounder, than it is today, as well. That was largely because the state was a relatively minor influence in society. Inflation didn’t exist because gold was money – gold was the international currency – taxes were extremely low, regulations were low. The answer is to go back to something that actually worked, which was the economic system we used in the 19th century. It wasn’t laissez-faire capitalism, but it was far closer to it than what we have today, which is to say nothing but variations of socialism and fascism.
The reason these people want to preserve the euro is because it helps them to control and manipulate economies. But control and manipulation of economies is not a good thing. They will fail totally.
Daily Bell: What’s happening in South America?
Doug Casey: I live in Argentina, basically, and the government down here is criminally insane. That’s the bad news. The good news is that on an individual basis they leave you alone. And certainly once you’re out of Buenos Aires, in the provinces you hardly even know they exist. The currency controls that they have actually work to the benefit of people who have a strong foreign currency to buy things. It’s very, very cheap here in Argentina now. It’s a fantastic place to live.
But frankly, all over South America they’re going the wrong way. Uruguay is very socialistic. Brazil is almost like the movie “Brazil,” where it is almost impossible to do anything because of the bureaucracy, the taxes, the regulations. Venezuela – everybody knows that story. From an investor’s point of view there are only two countries in South America that make sense – Colombia and Chile. But I’m not here in Argentina for that reason; I’m here for the lifestyle. And from a lifestyle point of view, Argentina’s still number one on the list. You’ve got to decide why you’re in a country and that’s why I’m here.
Daily Bell: What’s going on with China – slowdown or steady as she goes?
Doug Casey: Actually, I just got back from two weeks in the Orient and the Middle East. It seems to me that the Chinese are riding for a huge fall. They’ve made tremendous advances from being one of the most backward and primitive countries in the world 30 years ago. The country’s been transformed. That’s the good news. The bad news is that there have been a lot of distortions and misallocations of capital in the process, largely due to the intervention of the Chinese state and politically driven lending by their banks. I suspect their banking system is completely bankrupt, having made lots of uneconomic loans to state enterprises.
The thing to remember is this, however: The world at large should keep getting richer over the years and decades to come, notwithstanding what I call The Greater Depression. That’s for two reasons. Number one, the average person will continue trying to produce more than he consumes because even if he knows nothing about economics, he understands that he’s got to produce more than he consumes on a personal level just in order to improve his standard of living and have savings to rely on in the future. Even if he thinks the government’s a magic cornucopia that will supply everything for him, in the back of his mind there’s something that tells him that. So the average person is working to improve himself and build capital. That’s number one.
Number two is that there are more scientists and engineers alive today than have lived in all of the world’s previous history put together, and technology is going to continue growing and improving for that reason. So I’m optimistic about the long term.
All I’m saying is that we’re going to go through a period when the distortions and misallocations of capital that have been cranked into the market place for political reasons are going to be liquidated. That’s going to be unpleasant and it’s going to have a lot of political consequences, and probably some military consequences as well. So even though the long-term trend is for mankind to ascend from the gutter to the stars, I expect we’re going to have some really scary times over the next decade. What we’ve seen in Cyprus and what we’re seeing in Syria and what we’ve seen in Libya – we’re going to see a lot more of that type of thing.
Daily Bell: What’s the wisest thing people should be doing right now to be in the best shape for the coming decade, then?
Doug Casey: What should one do, indeed? My advice really remains the same. On a personal level, try to produce more than you consume. Keep your savings in gold, not in currencies. Diversify internationally because your biggest risks today are political, not market risks, not investment risks. The investment risks today are huge because with governments all over the world creating trillions in new currency units they’ve driven stock markets to what I think are unsustainable levels. They’ve driven the bond markets to become the biggest bubble in world history. The bond markets are in a bigger bubble now than tech stocks were in the year 2000 or real estate was in the year 2007. Think like a speculator, because they’re going to ignite lots more bubbles − including one in gold and gold stocks. Diversify internationally so that all of your assets aren’t under the control of one government. And for your savings, keep those savings in precious metals. Also, although it’s not a bargain anywhere in the world today, I think well selected, productive agricultural land makes a lot of sense. Also, it is critical to have a crib outside of your native country.
Daily Bell: What about at a personal, lifestyle sort of non-economics level? For instance, perhaps, the reasons you’re in Argentina?
Doug Casey: This is perhaps the most European country in the world, from a lifestyle perspective. It’s more European than Europe but although it’s got all kinds of economic and political problems, it’s kind of out of harm’s way, down here in the South Atlantic. And it’s very corrupt, so that although the government is a kleptocracy, they’re in it for the money more than the power. The Argentines are accustomed to chaos, so they’re primed for the coming decade.
I’ve been to 175 different countries in the world and I’ve lived in 12 at this point and I had to think on what I wanted and where I wanted to go. I pretty well ruled out Europe for all kinds of reasons. Africa is definitely where I would go if I was 30 years younger and wanted to make a huge amount of money, but as a lifestyle choice it’s a nonstarter. I really like the Orient and have lived there, but the problem with the Orient is that unless you’re a native of a country – unless you’re Thai or are Chinese or whatever – you’re always going to be an outsider, even if you marry a local.
So basically, for me it boiled down to South America. And having been to every country on this continent, including Guyana and Surinam, both of which I’ve spent of a lot of time in, incidentally, Argentina, with it’s down at the heels elegance and it’s corrupt but incompetent government, was just the best place to be. It helps that I played polo for 20 years, too. Also, of all the countries in Latin America, Argentina has by far the longest and best tradition of classical liberalism. There’s much more in the way of classical liberal values in this country than in any other in Latin America. So it’s got problems, but every place has got problems.
Anyway, I spend most of my time here in the delightful little town of Cafayate, in the wine region of the northwest. We’ve developed what I feel may be the best resort in the world. Golf, polo, tennis, a world-class gym and spa, a great clubhouse with a big library and video collection is in the works, and about every amenity you can imagine. Plus, the homeowners are from 25 different countries, and they’re great folks, very like-minded. I urge your readers to come down and visit. Here’s the website: lec.com.ar.
Daily Bell: Why is it the case that there is such a strong base of classical liberal values in Argentina? What brought that about, do you think?
Doug Casey: An excellent question – and one I am not sure how to answer. Perhaps it’s because Argentina used to be one of the richest countries in the world, and by far the richest in Latin America. That was due to a free market, and a lot of people remember that – notwithstanding the current government. Perhaps it’s because it’s always been by far the most international and sophisticated and best-educated country on the continent, and always exposed to ideas from abroad. Perhaps it’s because it’s a country of immigrants, opportunity seekers, like the US.
Daily Bell: How will all this – The Greater Depression – end? Government confiscations of everything?
Doug Casey: Let me put it this way. The prime directive of all living entities is to survive. It doesn’t matter whether we’re talking about an individual or a corporation or a government or anything else. The prime directive is to survive. In the case of governments, they will do anything that they can or need to in order to survive. That means that you can expect more taxes, more inflation, more regulations so that they can keep their personal boats afloat. Of course, the way I see government, it is a parasite upon society so eventually, some of these governments are going to kill their hosts.
I think things are going to get worse before they get better because trends in motion tend to stay in motion until a real crisis turns them around. The chance of any of these US government agencies disappearing voluntarily is slim to none. And this is true of any government anywhere in the world. Perfectly useless, even counterproductive agencies, like the SEC, OHSA, FDA, DOE, HUD, FCC, FAA, FTC – there are hundreds of them – all that purport to serve useful purpose but nothing the market couldn’t do vastly better and vastly cheaper. The only way you can get rid of them is by pulling them up by their roots. But that’s impossible because their employees would raise hell, and the average person in the public thinks he’s being protected by them.
So the only way this is all going to come to an end is when it’s completely unsustainable, the government’s bankrupted and these things go away because they collapse. They’re not going to end voluntarily. So I’m not optimistic about the way this is going to evolve over the next decade. I think you’re going to see something that was actually foreseen by Ayn Rand in Atlas Shrugged.
Daily Bell: Any last thoughts, things you’d like to share with us? Anything new that you’re working on now?
Doug Casey: Well, I’d mention this – I’m tired of writing nonfiction and investment stuff. Essentially, that’s preaching to the choir. If you want to promote a worldview, you have to do it through fiction. So along with a friend of mine, John Hunt MD, I’m doing a sextet of novels that trace the progress of a normal, middle-class boy as he goes through six unjustly besmirched occupations, occupations that people think only a bad guy would engage in. He first becomes a speculator, then he becomes a drug lord, then he becomes an assassin, then a terrorist, then a warlord and eventually, he turns out to be the anti-Christ. But I’ll demonstrate that he can remain a good guy all the while and that all of these things are actually good, not bad things. I find it personally amusing and perhaps I’ll develop a cult readership. That’s what I’m doing now. It will be Lord of the Rings for a modern audience, Harry Potter for adults…
Daily Bell: Oh, great. That should be interesting. Thank you for taking time with us again.
Doug Casey: Thank you very much.
