Doug Casey: The
Gold Crash Is Not What Either Bulls or Bears Are Telling You Doug Casey Interviewed
by Louis James, Editor, International Speculator | April 19, 2013
L:
Doug, the news of the week is the big meltdown in the gold
market. Some people are saying the bear is here to stay,
and it's time to sell everything gold-related and look for
greener pastures elsewhere. Others are saying the is the
buying opportunity of the decade, and it's time to go "all
in." What do you think?
Doug: I'd say it was neither.
It could be that just as in 2008, when gold went down a
lot at just the time you might think everyone would be panicking
into it. But a lot of people had to sell their gold to meet
their other obligations that were denominated in various
paper currencies. That may be happening at this very moment
in Cyprus. There are conflicting reports, but they may end
up being forced to sell something on the order of half a
billion euros' worth of gold – and if that happens
to them, it could happen to other much larger countries
that are in trouble, like Greece, Italy, Spain... or France.
L: That is an interesting
explanation. A lot of people have been pointing at the lower
price target and guidance issued by Goldman Sachs –
but why anybody would listen to those guys after all they've
been wrong about, at taxpayers' expense, is beyond me.
Doug: Yes. It makes no
sense that anyone would listen to Wall Street analysts about
gold. Insofar as these people have an education in economics,
it's invariably something they've gotten from a conventional
university program, which is to say that their economics
degrees are worth nothing, and their economic thinking is
both totally askew and totally conventional. You can always
rely on conventional thinking from the Establishment. The
moment someone looks like he's thinking independently, he's
seen as a danger and asked to go away. Which means getting
off the gravy train. And who wants to both be ostracized
and lose a fat income?
L: That's what Walter Block
said last week. Did you see my interview with him?
Doug: I did, and I liked
it. That was a very good interview. How rare to have a conversation
with a university economics professor and have it not only
make sense, but be entertaining.
L: It was fun. But that's
exactly what he said: "My credentials are worthless."
Doug: [Laughs] That's one
of the many reasons why I like Walter; he's not only extremely
smart, but very intellectually honest. He looks at reality
and calls it the way he sees it, no matter how politically
incorrect. That's immediately obvious to anyone who reads
his book Defending the Undefendable, which is a hoot; it's
like hitting someone between the eyes with a mental 2 x
4... one of my all-time favorites.
He recognizes that a Ph.D in economics from
Columbia is a sham. I'm not sure if it's worth more or less
than a doctorate in political science, sociology, or education.
Or a degree from a Bible college, for that matter. Actually,
I'd assign a negative value to all of them. They only prove
that the recipient was naïve enough to spend the time
and money it takes to get them. There's a lot more I could
say. Those who are interested can read more in our conversation
on education.
L: Right. But back to the
matter at hand. You're saying that at least the proximal
cause of the big selloff in gold was Europeans getting hit
by the demands of their obligations and being forced to
hit the bid on gold – or fear of this happening in
a big way?
Doug: It's hard to say.
I think that's part of the puzzle. Once a selloff starts
pushing investors into panic mode, that negative momentum
can seem to take on a life of its own, making the downturn
longer and deeper than a rational response to the situation
merits, or indeed than most people can imagine. In other
words, it's a normal – albeit radical – market
fluctuation in abnormal times. The sellers are apparently
treating gold as a speculation, which is a mistake. They
should view it as a bedrock financial asset, something you
buy and put away for the very long haul. It's not a trading
sardine.
There are, of course, plenty of theories
that flood the Internet every time gold sells off when it
seems like it should be advancing – mostly conspiracy
theories. The proponents don't like it when we call their
theories conspiracy theories, but that's what they are.
They allege it's all because of the bullion banks, or the
Bilderbergers, or the Trilateral Commission, or the Council
on Foreign Relations, or the Fed's crash team, or some other
nefarious agency. I have good friends who are otherwise
quite knowledgeable and rational who sincerely believe that
such groups are constantly knocking the price of gold down.
I know they mean well, but I have to put these theories
in the tinfoil hat category.
L: Some people are saying
the Fed hit the market with 500 tons of naked gold shorts.
I'm not sure how they could prove that, but the argument
that the government wants to see the price of gold go down
does have a certain appeal.
Doug: Of course governments
want the price of gold lower. They want the prices of everything
lower: silver, copper, iron ore, soybeans, corn…everything
but housing, which for some reason they want higher. But
gold is the least important commodity to these people. Not
only don't they understand its monetary role, they don't
believe in it or even really care about it.
It's true that the US government tried to
suppress the gold price back in the late '60s, back when
it was $35. But that was because the Treasury had to redeem
its paper money for gold at that price; since 1971 it no
longer does that. Actually, if anything, the US should want
a much higher gold price now; with a reported 265 million
ounces in national reserves, the US is by far the world's
largest gold owner.
But the price-suppression theories are quite
ridiculous from a practical standpoint as well. The US couldn't
even suppress gold's price 40 years ago – when there
was only half as much gold in the world as there is now,
and twice as much was owned by governments, and it was 1/40
of the price that it is now. And governments were far more
solvent than they are today. Yet they are somehow supposed
to be able to keep the price of gold down now. So, whatever
else it might be, I do not attribute gold's retreat to an
official price-suppression conspiracy. The idea gives conspiracy
theories a bad name…
L: They have successfully
suppressed the price of gold from $250 an ounce all the
way down to $1,600 or $1,800 an ounce... until recently.
Doug: [Chuckles] Yes, exactly.
Nobody, not even the US government, is stupid enough to
fight the biggest bull market in history for the last 12
years. Especially when it's bankrupt; exactly how are the
losses being accounted for? And especially when traders
talk like high-school girls about who's winning or losing
in the markets. They don't get paid bonuses for losing money.
I wonder when the conspiracy guys suppose the government
will stop trying to suppress the price… at $5,000?
$10,000? I wonder why the US would be trying to help the
Russians, the Chinese, and lots of other governments buy
gold at lower prices? None of this makes any sense.
L: Okay, we may never sort
out all the imponderables relating to why, but perhaps the
more useful question now is what to do now as gold investors.
Doug: Well, this environment
is full of buying opportunities. That said, I'd be careful
about backing up the truck and going all in. It's not as
though gold has dropped all the way back to where it started
its current bull run, back under $300 an ounce.
L: So what should people
do?
Doug: They should stick
with their plans, buying consistently and lowering their
dollar cost average. The lower goes, the more gold at better
prices they will own.
L: And that's still a good
thing?
Doug: Yes. All these governments
around the world are still printing up trillions of dollars'
worth of new currency units. At this point, all that new
paper money is basically just sitting in the financial system
– not entirely, but most of it. At some point it's
going to get into the economy. It's going to cause much
higher prices for consumer goods. And it's definitely going
to create more asset bubbles. One of the most certain of
those bubbles is gold. That in turn will create an even
bigger bubble in its old friends the gold stocks, which,
relative to the price of gold, are about as cheap as they
have ever been in history.
As you know, the reason why I like junior
mining stocks – well, mining stocks in general, but
especially the juniors – is that they are the most
volatile class of securities on the planet. It seems to
me that everything is lining up right now for a perfect
bear-market bottom in these stocks. That's despite the fact
that mining is a terrible industry that has gotten nothing
but worse over the years.
L: More regulation, taxation,
and confiscation.
Doug: That's right. There
are thousands of NGOs running around the world trying to
put miners out of business, and lots of native tribes who
see the recent mining boom as an opportunity to hop on the
gravy train and perform a righteous shakedown. That's in
addition to the fact that young people see it as a 19th-century
choo-choo train business. You have to spend huge amounts
up front on an Easter egg hunt to find deposits, then billions
more to build a mine with no certainty you'll ever get even
a return of investment – forget about return on investment
– many years later. Plus the fact that the world has
been picked over for both large and high-grade deposits.
It's a horrible business. Despite these things – or
in some ways because of them, actually – I think there's
going to be a super bubble in mining stocks. Which means
a fantastic opportunity for those with the courage to buy
now, because true market capitulation is shaping up in the
sector, as we speak.
L: Is there a price below
which you would advise throwing caution to the wind and
going all in?
Doug: No. Almost no matter
how low it goes, it can always go lower. If it dropped below
$800 or $900 per ounce, that would be below the average
cost of production today, and would rationally signal that
gold would have to rise eventually. But the new supply of
gold is unimportant to moving its price. About 80 million
ounces are mined annually these days, but there are about
six billion ounces estimated to remain above ground. So
supply only increases about 1.3% per year – it's fairly
trivial, especially after industrial consumption. What determines
the price is the desire of current owners to buy, hold,
or sell it. It's not like wheat, or even copper, where new
supply is critical.
So, no; if the negative momentum were strong
enough, it could fall well below the cost of production.
I'm not saying I think it will go that low, just that the
only point at which it can go no lower is zero. Now, I don't
expect it to drop much more, and I'd be very surprised at
a drop below $1,000 an ounce, but there is no law of nature
preventing it from doing so. All markets fluctuate. People
who get panicked are overcommitted... or maybe they shouldn't
be in the market because they're not psychologically suited
for it. The problem is that government currency debasement
practically forces everyone to be in the market, just to
try to stay ahead of inflation.
You can't time market bottoms, but you've
got to play the odds. If I were going to sell anything now,
I wouldn't think of selling my gold or gold stocks –
as we said already, I'm a buyer today – but I would
absolutely sell any government bonds, if I hadn't been paying
attention and still owned any. I'd also get out of most
common stocks, which are very overpriced, based on very
unsound economic fundamentals.
L: On the other hand, you
say that all these trillions of new currency units are flooding
the market and have to go somewhere – clearly a lot
of them are going into stocks. We just saw that in Japan,
with the government announced it would be printing a lot
more yen, and the same thing sure seems to be happening
on Wall Street. This can be a new super-bubble forming in
stocks; might a speculator not want to buy before that happens?
Doug: Well, that might
work, at least if you buy the kind of stocks Warren Buffett
buys, as they represent ownership in real productive assets.
But that's a bubble that could pop at any time, and I view
it as extremely high risk. I want to re-emphasize that we're
just in the eye of the biggest financial and economic hurricane
in history. The key in the Greater Depression is first and
foremost to keep what you have. That's not going to be easy.
L: All right, I understand
– the precious metals remain my favorite investment
as well. But last week Walter Block said that as much as
he likes gold for similar reasons, he hesitates to recommend
buying it because it's subject to confiscation by desperate
governments. It happened in the United States in the 1930s,
by Executive Order 6201, issued by FDR.
Doug: That's why I have
always recommended internationalizing one's assets. No place
is perfect, no country on earth is completely safe, but
you can mitigate political risk by distributing your assets
across a variety of jurisdictions. Political diversification
makes more sense than ever today.
Bluntly: all investments
are dangerous these days. There are very few bargains anywhere,
in any market, in any country. Governments around the globe
are completely out of control – there is nothing so
low that they will not stoop to it. They are predators,
they are desperate, and they are hungry.
Oblivious people, mostly untraveled and
unsophisticated US tax slaves, argue that one should not
diversify internationally, believing that foreigners are
more likely to steal from them. The amount of fear and antagonism
that some quarters of the populace have toward libertarian
ideas is actually quite disturbing. The people who think
this way generally have the same attitude that medieval
serfs had who could not be persuaded to go further than
ten miles from their home towns, because they had heard
that they were dragons over the hills. I pity the fools.
They don't realize that their main danger is from their
own government, which believes it owns them.
This is true of all governments, but most
governments are generally not aggressive towards tourists.
Tourists are treated as honored guests who come and spend
money – and can pick up and leave if offended. Citizens,
on the other hand, are commonly regarded as milk cows, if
not beef cows. And contrary to what most people in the US
think, there are countries that are more stable than the
US is today. These people are living in the past, thinking
that the United States is no different from the America
of 50 years ago.
L: I scratch my head about
that too. Anybody who thinks that what happened in Cyprus,
for example, could only happen in Cyprus, is just not paying
attention. It was the European Central Bank's idea to confiscate
people's savings, not that of the Cypriot politicians or
central bankers. That's First World politicians' thinking
these days: "the people's money is our money to do
with as we please." People are being naïve beyond
reason if they imagine that such a thing could never happen
in America.
Doug: That's right. It's
been said that officials in Canada and New Zealand have
talked about seizing bank accounts, if necessary, just like
in Cyprus – and those two have long been considered
among the most stable countries in the world.
L: Okay, well, Cyprus was
a banking destination until a few weeks ago, and obviously
won't be again for a very long time. Have your thoughts
on where the best places in the world internationalize to
changed any in recent times?
Doug: It really depends
on who you are, what stage of life you're in, what you want,
how much money you have, and so forth. If I were just starting
out, for example, I would definitely do Africa. It's not
a lifestyle destination, but a raw and rough place where
people with courage, brains, and determination can seek
and create their fortunes.
If a gracious and pleasant lifestyle were
my goal, on the other hand, Europe is still a place to go
– it's just bloody expensive. And the culture has
been totally corrupted by ingrained socialist ideas, high
taxes, onerous regulation, and extravagant welfare programs.
The politics there will likely become even worse in the
future, until the place collapses economically or has another
war. I've lived in several countries there, but it's not
for me.
I'm a big fan of the Orient, as you know,
because that's where the future lies. The problem with the
Orient, however, is that unless you were born there you
will always be an outsider, regardless of how welcome a
guest you may be.
So I remain a fan of Latin America. I spent
almost all of my time these days in Argentina and Uruguay.
Both are quite similar to Europe culturally, but with much
lower population density. Also, they won't be on the front
lines of the ongoing war with Islam. Of course, they both
have completely insane governments – but that's true
of most everywhere today. I'm here for the lifestyle, not
to do business. From that point of view, it's impossible
to beat them.
L: So, suppose you bumped
into one of our readers who had just read our past interviews,
and wanted some advice on the first steps to take to internationalize
his or her life. What would you say?
Doug: The first and most
important thing is to uproot and destroy any remnants of
medieval serf thinking you may have lurking around in the
crevices of your mind. Second is to open a bank account
or a brokerage account in some country – any country
that you like spending time in and has reasonable banking
laws – where you are not a citizen/resident/ milk
cow. This is both hard and getting harder for people carrying
US passports, but it's very important and well worth doing.
Political diversification is even more important than investment
diversification at this point.
Just start traveling. Explore the world.
Look for countries you truly enjoy, that are friendly to
foreigners, and are open to investors – especially
as regards real estate.
L: Because buying a farm
in the Congo isn't likely to turn out well, unless you actually
plan to live in the Congo and keep an eye on it? Better
to build a house on the beach in Thailand or Costa Rica,
if that sort of thing is your cup of tea.
Doug: Precisely. But today,
it's important to think as a speculator, not an investor.
Personally, I probably wouldn't pick Costa Rica these days,
because it's totally overrun with gringos and way too expensive.
Thailand makes it quite hard for foreigners to buy real
estate, but it's one of the best choices in the world for
lifestyle. But to each his own.
L: Would you say that Costa
Rica is more expensive than Uruguay?
Doug: Nothing is more expensive
than Uruguay, it seems… I think Uruguay is now about
three times as expensive as Argentina, all in. It's 50%
more expensive than the US. Uruguay is no bargain, although
it is pleasant.
L: Well, maybe Costa Rica
is a good starter country for people new to internationalization;
people might find it more comfortable and less frightening
to be in a place where they hear English as much as Spanish.
Sort of like San Diego, but just a bit farther south.
Doug: Maybe that's not
a bad idea; sometimes you have to start with baby steps.
It's not a bad place. Panama might be my suggestion, from
that point of view.
L: Very well, then…
anything else?
Doug: I guess I should
tell our readers that we're going to be moving these conversations
to monthly editions of The Casey Report. I'm pretty busy
practicing what I preach down here in Cafayate, and I've
pretty much said the most important things I wanted to say,
at least in this format.
I am, however, working with my friend Dr.
John Hunt on a series of six novels, reforming six very
politically incorrect – but unjustly besmirched –
occupations. I'm not crazy about preaching to the choir
anymore, but there are lots of things you can show and say
in fiction that you don't dare talk about in a format like
this one. I expect they'll be quite fun.
I also think we'll have a second volume
of our conversations, a sequel to Totally Incorrect, out
in a while as well. I trust many of our readers liked our
first volume.
As for our conversations going forward,
I'll keep on commenting on the passing parade in The Casey
Report, so I encourage readers who really like them to sign
up for TCR. But regardless of their choice on that, I urge
them in all sincerity to think like contrarians, and implement
our strategy: Liquidate, Consolidate, Speculate, and Create.