Andrew Maguire is joined by Dr. Stephen Leeb, a renowned American economist and a financial author to contemplate the impending commodity scarcities and the dramatic consequences of a silver scarcity for the developing countries. The precious metals experts discuss how China’s growing prosperity affects the global economy, as the superpower’s appetite for gold-backed currencies keeps increasing.
Commodity Scarcities On The Rise
Andrew Maguire: Can you give us your thoughts on the major geopolitical events currently taking place and how they are affecting the global economy? What do you foresee… What are the drivers?
Stephen Leeb: The major driver is United States policy. When Nixon took the U.S. off the gold standard in the early 1970s, basically we had all the money in the world (literally) to spend. It took fifty years to come to fruition but it’s now become a critical issue. Just look at the Federal Reserve’s balance sheet. Nine trillion dollars is an awfully big number. My rationale is this:
“A nation isn’t truly free without discipline or any real cohesion.”
Unfortunately, America has become a society that’s gone downhill. I don’t know how else to say that! The United States economy still has a chance to rally and make a strong comeback. But what you’re seeing today… This is all about commodity scarcities.
Andrew Maguire: The U.S. is not looking very strong right now after Afghanistan- spreading itself out so thinly. We see Russia testing them out in Syria and the Chinese in the South China Sea. And all this condemnation that is going on now. In fact, Putin came out just the other day and said; “Well, actually, no one had ever published this before, but we wanted to join Nato and Clinton shut us down.” Any thoughts on that?
Stephen Leeb: I think America is going to have to learn a hard lesson here. And I fear that the United States will have to take a big step backwards in order to move forward. The catalyst for this will be again, a gold backed reserve currency.
On that same line of thought, the next gold backed reserve currency certainly will not be the Chinese yuan. The Chinese have made it clear they have no intent for the yuan to serve as a potential reserve currency. Hard evidence of this fact was cited by a highly regarded member of the PBOC, who wrote a white paper in 2009. Whereby, in the white paper he said; “The business of having a sovereign currency- also being a reserve currency- is crazy.” And he pointed to the SDR as an example of what could have and should have come out of Bretton Woods. If you read very closely, he states his case for a gold backed basket of currencies, but doesn’t mention gold by name.
In a world where you have commodity shortages, you can’t back up currency with something that’s going to run into short supply. What… Are we going to back the currency with copper? What sense does that make? Gold is truly unique in the sense that it’s prized not for its industrial uses (because other metals can be substituted) but for its beauty. And I will let the philosophers decide why that’s the case! The philosophers and the economists can come together to work out a platonic conclusion. Regardless, gold has been recognized as a currency for thousands of years and prized for its beauty.
Silver, too, should be a massive participant because it’s going to be in scarce supply. The world is not going to have widespread solar technology without using silver. When you take into consideration the amount of solar photovoltaic required to transition the planet into a totally renewable, sustainable society… We’re going to have a devil of a time accomplishing that without silver. And if you believe the world will continue to grow sustainably at an exponential rate, silver could actually perform better than gold.
When I discuss this topic, there’s a certain level of frustration when I think about the societal downfall America has suffered since Nixon took us off the gold standard. Let’s face the facts… A majority of the technologies the world has were invented in America- by Americans over the past century! These inventions came out of Bell Labs. And it was Bell Labs that created the internet, created the laser, created the transistor. Have we completely forgotten about the transistor- which is the basis of umpteen other inventions? Not to mention… The tech company Intel was founded in America by an American citizen. All computer technology from the 1980s to early 2000s centered around Intel. That’s why today, advanced micro devices (technologically speaking) are light years ahead of Intel. American technology has been usurped by companies like Taiwan Semiconductors… How in the world did we allow this kind of thing to happen?
Sadly, we allowed it to happen because we became obsessed with money and power. And that leads to complacency, total utter complacency. Ironically, the values that we share and want to protect (according to Biden in a recent speech) is freedom and virtue. These are exactly the values that we’re losing as a result of this overwhelming complacency that we have, at least in this country right now. We need to get our mojo back. Americans, if left to their own devices, are extraordinarily creative and innovative.
If you look back at history- the West basically founded modern technology. Present day, the East does not yet have the total upper hand from a technological standpoint, but they’re sure on their way to achieving it! The only viable way for Americans to reclaim our innovative edge is through discipline and we might have a fighting chance.
Andrew Maguire: That resonates so much with a discussion I had with a guest on another episode… Recently I interviewed Danielle DiMartino Booth, ex-Fed insider, very respectable. And we raised the subject of the United States and how it’s split ways, going on a divergent path away from Europe. From my perspective (located in Europe) we’re on a landmass with Russia and China attached. If we look at a bit of history, almost every single time there’s been any geopolitical upset- it’s been primarily instigated by the United States. As a result, the migrant crisis hits Europe. Now we’re talking about energy prices going through the roof! None of this affects the United States directly. On one side of things- a lot of Europeans are very angry with the way things are going economically. But the key thing is the gold side of this. We’ve tracked what’s going on with the Bank of International Settlements. And clearly when you look at the Fed and Danielle DiMartino Booth confirmed; “Look, the Fed has never once discussed gold. They have no interest in gold. It is not even a part of their vocabulary.”
And yet, on the other side of things, Europe has gold, discusses gold and talks about backing currency with gold. The Bank of International Settlements has brought in Basel 3, which has created NSFR standards for gold i.e. getting rid of the paper element of gold. Why are they doing this? Because they know gold has to be revalued. And they know, essentially, what history has revealed. This ‘gold window’ you talked about in 1971, when Nixon closed that window- the price of gold has been suppressed through the futures markets ever since.
In fact, the futures market was started basically two years after 1971 for the sole purpose of creating paper dilution. And what’s happened is suddenly Russia, China and smart people, including Europeans, are saying…
“I’ll tell you what we’ll do! Why don’t we exchange our devaluing dollars… There is a gold window after all! And guess what? It’s so undervalued and silver, too. It’s so undervalued that we’ll exchange our depreciating dollars quickly for anything. Whether it be land, forests, gold, silver, anything we can buy.”
So now we’ve got a divergence where Europe and the United States have a very divergent path and it probably doesn’t bode well ultimately for the United States.
Stephen Leeb: No, it doesn’t bode well at all. In America, our inflation rate here is actually higher than that of Europe by roughly 200 basis points. And I’m not referring to zealots that argue our inflation is at 25%. The CPI indicates our inflation is currently at 7.5% and rising. If you look at commodity prices (which are priced in U.S. dollars) they are at all time highs. Excluding oil, I’m referring to commodity prices which are across the board at all time highs. For example, copper, food prices, essential goods, ect. The disparity of income in this country means that many Americans are going to have trouble affording food and basic tangible goods.
Ironically, one of the United States news organizations recently reported the possibility of wage price controls. It’s almost like we have come full circle here in this country! We left the gold standard that necessitated wage price controls. Now, after nearly half a century, it’s suddenly dawned upon us to consider coming back to wage price controls. And I’m hoping it will also lead us back to a gold standard whereby gold will not only have to be revalued, but restructured. Part of the reason commodities are in such short supply is that America used the dollar to pre-emtively and unnecessarily buy as many commodities as possible.
Which leads me to another looming issue. Another reason we have this global oil crisis today is due to fracking. Now, fracking had a business structure around it… But the whole idea was not to start a business in which oil was advancing by two million barrels a year. That’s simply not sustainable! My estimate is that the United States actually lost $500 billion dollars by fracking for oil. Why… Because of how fast we geared it up. The reason was the nearsightedness of America wanting to be energy independent. Incidentally, the only thing we achieved by fracking for oil was wasting a tremendous amount of money and unbelievable amounts of oil.
Can you imagine how much cheap oil we carelessly wasted by fracking?
Currently, our nation desperately needs oil, so we’re asking Saudi Arabia to ramp up production for the United States. We’re in a Catch22 because we’re also constrained by climate change i.e. climate control action.
This world desperately needs to transition to renewable energy, but you cannot become green overnight by banning fossil fuels. People don’t realize it’s the major energy source for the entire world! Do people really think we are running the entire planet off solar panels? My goodness, before fossil fuels, there was coal- which is a fossil fuel. And before coal, there was wood! In fact, biofuel (wood) is a larger energy supplier globally than solar energy production!
Every viable energy source on this planet is essential and does not necessarily need to go away immediately… Especially If we are going to create a sustainable 21st century. I’ve said it before and I will say it again. We are going to need to use ALL the fossil fuels on this planet to build a global economic infrastructure reliant on renewable energy sources.
NetZero 2050 is a positive initiative but there’s no evidence that if we don’t 100% decarbonize by the year 2100 that the entire planet will incinerate. The UN’s estimate is that by 2100, if we did absolutely nothing to eliminate fossil fuel usage, the GDP growth (over those 80 years) would be approximately 1/10th less than it otherwise would have been. These statistics are extremely nominal- suggesting virtually little to no impact. Climate change is not an existential threat (right now) although it certainly could become one.
“The real existential threat is commodity scarcities.”
Commodity mining grades across the planet are declining. We’re reaching a point of inflection. This means we have reached the point where it requires much more energy to mine these industrial minerals and metals than previous. Does this world have the amount of oil we’re going to need to suffice? Are we going to have enough fossil fuels to produce the kind of copper critical for the production of electric vehicles? For electrical transformers and expanding the power grid? Will we have enough industrial metals to build out the infrastructure necessary for 80% of the developing world economy? Will the planet have the commodities required to make solar and hydrogen primary, sustainable energy sources?
China is doing all the things we should be doing, and we have to wake up to that. And hopefully Europe can wake us up too. I’m an American… I don’t want to see this country decline but it’s happening. When I think about Bell Labs, inventing the transistor and all the innovations America has achieved. Sometimes I wonder if the United States had not participated in the Vietnam War- if somehow we would have managed to stay on the gold standard. If that were the case, can you imagine the technologies the world would have today?
Andrew Maguire: You mentioned commodities and silver as well. All commodities are obviously undervalued at this point. Bear in mind everything we’ve just discussed. I understand what you’re saying, but let’s talk about silver. Not only is silver a currency (and has been for thousands of years) but it’s dually an industrial commodity. Silver has to be the most undervalued commodity on the planet.
Stephen Leeb: It certainly is, Andrew, it’s so undervalued. I’ve done a lot of research on silver. I’ve done the calculations to estimate how much silver the world needs to create the amount of photovoltaics required to build out a renewable energy infrastructure for this planet. Currently, photovoltaics account for 1% – 2% percent of total global energy production. That doesn’t even account for a meaningful part of electricity.
Once electricity becomes more widespread, silver will become a serious scarcity. And it’s not surprising when you consider the intrinsic qualities of silver. The most electrically conductive element is silver, followed by copper and gold. Silver also has the highest thermal conductivity of any element and the highest light reflectance. A metal that’s the best conductor of energy and heat… There’s going to be a lot of demand. You don’t have to be a whiz bang chemist to realize that!
Globally, we can attempt to reduce the amount of silver utilized industrially but you reach a point where you simply can’t reduce it anymore. And once you get to the point where silver becomes scarce and demand continues to rise… You’re praying for a technological miracle! I’ve written seriously about the possibility of having to go to the moon to mine Helium 3.
In the long run… We’re simply not going to have enough silver. If the global economic infrastructure is growing and we’re on our way to achieving goals of sustainability, the price of silver will hit three figures. And at three figures…. Silver would still be cheap. I don’t want to sound like a moonshot guy but I think the price of silver has been dramatically suppressed, maybe as much as 40 to 1.
Andrew Maguire: This week we approached 80 to 1. Eighty ounces of silver to buy one ounce of gold. And then you suddenly think; “Okay, you mentioned a three figure number. Well, of course it isn’t a conspiracy. It isn’t crazy to think about these numbers. It’s just that there’s been so much paper silver… There’s been so much paper gold. Then obviously, we’re almost symbiote into believing $24 to $25 per ounce must be the real price of silver.”
No, it’s not the price of silver! The real price of silver has not yet been discovered, and the real price of gold has not yet been discovered.
Stephen Leeb: You’re absolutely right. Here’s a perfect example. If you were to ask 100 different money managers… What was the top performing asset of the 21st century? Well, I’ll give you a hint! It wasn’t stocks or bonds. It was gold!
Gold outperformed the S&P 500, dividends included.
Silver outperformed the S&P 500, dividends included.
Copper outperformed the S&P 500, dividends included.
Iron Ore outperformed the S&P 500, dividends included.
I will bet you an ounce of gold that you cannot find a money manager in this country who will recommend any commodity for their client’s portfolio. It’s still 60/40 diversification. 60% stocks, 40% bonds and no gold, even though it outperformed the S&P 500 and was the top performing asset of this century. The difference between gold and financial assets is just enormous. Economically speaking, what we’re seeing right now is the 1970s repeating itself but on steroids! However, in the 1970s when the Saudis boycotted oil and temporarily ceased exportation to the United States, that was a political problem. We don’t have a political problem today. We have a fundamental economic scarcity problem, some of which is our own doing, as fracking illustrates. And this is not a problem that’s going away without seeing commodity prices really, really skyrocket.
Andrew Maguire: Amongst our clients, the most common question is; where do you think the price of gold will be? And if you want to support dollar hegemony, ultimately, it relates to gold. The gold collateralization of the U.S. foreign obligation has now reached historic lows. It’s currently around 6%. And I think the ratio has always been around 20% to 40%. If you apply those metrics to the price of gold, now you’re looking at $6,000 to $12,000 per ounce. If you go back to 1980s levels, we were at 140 to 1 collateralization of debt to gold. That factor would put gold at $43,000. Basically, if dollar hegemony is on a slippery slope, I think the Bank of International Settlements has introduced Basel 3 because they see gold must be revalued. They see Russia, China and the BRICS countries (all who want to back currencies with gold) realize that a higher gold price is actually going to assist them.
Stephen Leeb: I’ve talked about the value of gold in many different ways, and I do come up with very high numbers. Gold prices per ounce in the five figures. Although, gold is never mentioned by a central bank. It’s never mentioned by the Fed. China never mentions gold in any of their conversations about reserve currencies. You have to infer they’re talking about gold.
There’s a possibility that gold may go slightly down before it goes up. We’re very close to a point of inflection. After that, I think the price of gold per ounce will hit $5,000 and just keep going up from there. The world needs more gold because the scarcer commodities get- the higher your reserve currency is going to have to be in order to allocate those commodities in an effective way.
Governments across the world are going to have to change, but it doesn’t have to affect the sovereignty of countries. And that’s what I think we have to recognize. America can get back to its basic freedoms, which we have escaped. We’re not nearly as free as people conceive of us as being.
Andrew Maguire: You’ve raised so many good subjects. Your latest book, what you’re talking about now, it’s providing value… It’s pure gold! And I think people have to listen. If they have to rewind, they should really listen to some of the things you’re saying. It’s very deep and needs to be explored further. If we had to conclude with a simple soundbite… What would you suggest the average person should consider doing to protect themselves?
Stephen Leeb: Buy the physical precious metals… Buy gold and silver bullion. Right now, the spot price of gold is at $2,040 per ounce. And if that’s not within your financial reach, you can buy silver coins. The spot price of silver today was $26.20 per ounce. Here’s an idea… Instead of dollar averaging the stock market, buy physical gold and silver. And if you need evidence that this is a wise investment idea… Gold and silver both outperformed the S&P 500 (dividends included) over the first half of this century. The evidence is right in front of you. Just look at the performance of gold and silver versus the stock market in the first 20 years of this century…