Is the Plummeting Gold Market A Shake Out or Correction?
Without any further delay here is Dr. Stephen Leeb, Asset Manager, Investment Advisor and CEO of Leeb Capital Management. The author of a fascinating book ‘China’s Rise and the New Age of Gold.’ Stephen, so much to talk about today and we obviously want to talk about gold- perhaps to kick this off. We’ve had a plummeting in the gold and silver markets recently, can we talk about what’s unfolding here?
Dr. Stephen Leeb, Ph.D.
Eric, with the plummeting gold market, this has certainly been a week for the ages and just a major wake up call for everybody. Including, I hope and pray, for our policy makers who evidently don’t have any idea how sensitive of a topic this is to even a hint of a tighter economic policy. But the market has shown them very clearly that if they continue to go the way they are going, we are going to have a deflationary situation in this country before you can say, one, two, three…
There are two situations that do historically well. If you go back in history, if you look back to the 1500’s there was actually deflation in which gold is the star. That has been the historic record. Recently, it’s been inflation because deflation hasn’t really been on the agenda. If we get full fledged deflation in this country, we are going to need gold and that will be the only thing we will probably need. The Great Depression, that was as close to inflation as we as a nation ever came. If you take a look at the stock Home Stake, it went up by twenty fold, even when the market was crashing. This is not the time to back out of gold, this is the time to back into gold.
I’ve been saying this for a long time but I doubt that gold will break it’s lows in the 1680’s and that’s basically where we are at. The world will not accept the dollar as a reserve currency. That is basically what we are trying to say with what we are doing- that it’s either the dollar or nothing. And it won’t be nothing, it will be gold and China and the East. The more gold China has, the better off they are going to be. So first, you may have deflationary events in this country if we don’t get the message right in the end. The East accounts for 80% of the world’s population and they have to grow. Eric, their per capita income is ⅕ of ours. Everything about them is so much smaller than the room they need for infrastructure. The need for green investments are intense and everything you could say about what’s going on right now. Commodity stocks are just getting crushed and I mean crushed in the past few days. I’ve never seen anything like it. I’ve never seen a divergence between commodities and, say, tech stocks like you have seen in the past few days. Yet if you look at the broad base CRB index, the index and all commodities, it’s down from 612 to 603 after having risen by 60% which was the fastest in history that this broad base index has risen in the past 15 months and we are down by 2%.
That doesn’t qualify as a shake out on commodities, it qualifies as a small correction so far. At 550 you would think that is somewhere a correction would take us to and we are nowhere near that.
Eric King KWN King World News
Stephen, what about this take down in the gold market?
Dr. Stephen Leeb, Ph.D.
Gold has been the weak sister here all along which is completely contrary to what you would expect when you are in a market with a big commodity boom. Gold tends to be the outperformer for good reason because it’s a show that commodities are becoming scarce and people want that one commodity they can count on. It won’t ever get scarce and they can buy new commodities with it- that’s gold. The story and the bottom line is that gold and silver (which is both a monetary and industrial metal) are total survivors. At least they are total survivors in this country and whether this country gets its act together, nevertheless, gold is here to stay. Silver is here to stay. They are going to take over a major monetary role- there’s no doubt about that. I mean, you can go back and read speeches from China’s chairman of their central bank from 10 years ago, this is the way the world has to go. And it has to go in a cooperative fashion. Europe is cooperating with China and they have no problem going along with it. No one wants to go along with communism, I hate communism but there comes a time when you have to realize this is a global community- it’s not U.S. centric, it’s not China centric, it’s a global community. If the U.S. won’t cooperate, Europe will cooperate and gold will still have to play a vital role. It won’t so much be in the U.S. economy, it will be in the world economy.
The demand and need for this metal, gold and all other commodities will be tremendous, especially oil. I mean, it’s clear that we can’t build out infrastructure without oil. It’s not even clear if we have left on this earth the commodities to build out the kind of infrastructure that we’re going to need. The only way you are going to achieve this is with gold and a shared cooperative approach. We, as a country, are not willing to accept that as of now. I’m praying that we get some sense in our head, and realize that right now, the dollar is not going to serve our purposes. And whatever people want to do to manipulate the gold market– whatever they are trying to do to keep the dollar up there- which is just insane. When you see interest rates fall by 10%, long-term rates fall by 10%, that’s telling you something. You are doing things wrong and you’ve got to straighten out and do things right. And I don’t expect gold to go that much lower, I would be very surprised to see that it broke something like $1680. Even in that very unlikely scenario, there is no “across the street” from owning gold and using gold, it’s a necessity if this world is going to survive as a civilization. I cannot emphasize that enough.
Eric King KWN King World News
Stephen, where does that leave the gold market going forward?
Dr. Stephen Leeb, Ph.D.
In a case where the world cooperates, gold sets its sights on $20,000. It will back up all other reserve currency, which I suspect will be a basket of currencies. If worse comes to worse and we have a deflationary market in this country, gold will still be prized here as protection but it will be prized in the East as necessary for them to continue their growth. So, no matter what scenario you want to pick, the commodity necessary for everyone to own right now is gold. And maybe a transition to where we get much, much higher gold prices, the U.S. may be a shadow of itself by then. I hope to god that’s not the way it works out. However this works out, you want to have gold in your portfolio. At this point, if your portfolio were 100% gold, and you were 80 years old, I wouldn’t tell you to diversify- what else are you going to diversify into right now? You’ve got to get clarity if the U.S. is going to survive as a viable economic power. And the way we are going, that’s a real question. I never in my life dreamed I would ask that kind of question. At least I know what the answer is if you do have to ask that kind of question. The answer is that you have to have something that holds its value and then some- in the worst kind of economic scenario.
The only thing history shows, 600 or 700 years of history (a professor took this data back to the 1400’s) gold always holds its own in rough times, especially deflationary times. I will leave you off with one clear message. We are headed for deflation, which is basically what the markets are saying. Right now, when you see a 10 year bond at 1.44, it’s suggesting deflation. There have been about 5 cases of deflation in this country since the republic was formed. All of those cases, every single one of them, gold has been a top performing asset. Don’t let the recent gold market plummeting shake you out. It is really, in my opinion, an attempt to keep the dollar on top but a futile attempt. It will not work, it’s not possible. The rest of the world will not permit it and gold will be the only thing left. No one is going to want to buy the dollar when they see that this economy is headed for the tubes. What you are seeing right now with gold is very short term. I imagine that it’s not going to last, it can’t. There is no precedent in history, not U.S. history, not global history that suggests in very tough, chaotic times which lead to deflation or perhaps on the better side inflation (not necessarily hyperinflation but maybe inflation of 5% – 7%) gold is going to come out the champion. It’s going to come out as the necessary investment to make. I think that for the first time ever, I’m going to suggest that if people have gold, they store it as bars of bullion. I’m not sure I trust the U.S. financial system at this point. I don’t know how far you want to go with it, I’m a little more optimistic than that. I used to think that people who stored golden bars were a little bit wacky to be honest. There’s ETFs, ect. I don’t think those people are wacky at all anymore. One thing that has been consistent whether I’ve been somewhat optimistic or kind of scared- is that gold is the only possible thing that can give you a chance for not only security but some sort of prosperity when the dust clears.