The Gold Drop

Doug
Casey Interviewed by Louis James, Editor, International
Speculator

Recently:
Doug Casey:
Internationalizing Your Assets



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.

May we all
live long, and prosper.

L:
Thanks, Doug!

Doug:
You’re very welcome.

April
19, 2013

Doug
Casey (send him mail)
is
a best-selling author and chairman of Casey
Research
, LLC., publishers of
Casey’s
International Speculator
.

Copyright
© 2013 Casey
Research

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