In the January BIG GOLD
, I interviewed a plethora of experts on their views about gold for this year. The issue was so popular that we decided to republish a portion of the edition here.
Given their level of success, these fund managers are worth listening to: James Rickards, Chris Martenson, Steve Henningsen, Grant Williams, and Brent Johnson. Some questions are the same, while others were tailored to their particular expertise.
I hope you find their comments as insightful and useful as I did…
James Rickards is chief global strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He is the author of the New York Times best-seller The Death of Money and the national best-seller Currency Wars. He’s a portfolio manager, lawyer, and economist, and has held senior positions at Citibank, Long-Term Capital Management (LTCM), and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. He’s an op-ed contributor to the Financial Times, Evening Standard, New York Times, and Washington Post, and has been interviewed by the BBC, CNN, NPR, C-SPAN, CNBC, Bloomberg, Fox, and the Wall Street Journal.
Jeff: Your book The Death of Money does not paint an optimistic economic picture. What will the average citizen experience if events play out as you expect?
James: The end result of current developments in the international monetary system will almost certainly be high inflation or borderline hyperinflation in US dollars, but this process will take a few years to play out, and we may experience mild deflation first. Right now, global markets want to deflate, yet central banks must achieve inflation in order to make sovereign debt loads sustainable. The result is an unstable balance between natural deflation and policy inflation. The more deflation persists in the form of lower prices for oil and other commodities, the more central banks must persist in monetary easing. Eventually inflation will prevail, but it will be through a volatile and unstable process.
Jeff: The gold price has been in a downtrend for three years. Is the case for gold over? If not, what do you think kick-starts a new bull market?
James: The case for gold is not over—in fact, things are just getting interesting. I seldom think about the “price†of gold. I think of gold as money and everything else as a price measured in gold units. When the dollar price of gold is said to be “down,†I think of gold as a constant store of value and that the dollar is simply “up†in the sense that it takes more units of gold to buy one dollar. This perspective is helpful, because gold can be “down†in dollars but “up†in yen at the same time, and often is when the yen is collapsing against the dollar.
The reason gold is thought to be “down†is because the dollar is strong. However, a strong dollar is deflationary at a time when the Fed’s declared policy is to get inflation. Therefore, I expect the Fed will not raise interest rates in 2015 due to US economic weakness and because they do not want a stronger dollar. When that realization sinks in, the dollar should move lower and gold higher when measured in dollar terms.
The looming global shortage of physical gold relative to demand also presages a short squeeze on the paper gold edifice of futures, options, unallocated forward sales, and ETFs. The new bull market will be kick-started when markets realize the Fed cannot raise rates in 2015 and when the Fed finds it necessary to do more quantitative easing, probably in early 2016.
Jeff: Given what you see coming, how should the average retail investor position his or her portfolio?
James: Since risks are balanced between deflation and inflation in the short run, a sound portfolio should be prepared for both. Investors should have gold, silver, land, fine art, and other hard assets as an inflation hedge. They should have cash and US Treasury 10-year notes as a deflation hedge. They should also include some carefully selected alternatives, including global macro hedge funds and venture capital investments for alpha. Investors should avoid emerging markets, junk bonds, and tech stocks.
Steve Henningsen is chief investment strategist and partner at The Wealth Conservancy in Boulder, CO, a firm that specializes in wealth coaching, planning, and investment management for inheritors focused on preservation of capital. He is a lifetime student, traveler, fiduciary, and skeptic.
Jeff: The Fed and other central banks have kept the economy and markets propped up longer than some thought they could. How much longer do you envision them being able to do so? Or has the Fed really staved off crisis?
Steve: I do not believe we are under a new economic paradigm whereupon a nation can resolve its solvency problem via increasing debt. As to how long the central banks’ plate spinning can defer the consequences of the past 30-plus years of excess credit growth, I hesitate to answer, as I never thought they would get this far without breaking a plate. However incorrect my timing has been over the past two years, though, I am beginning to doubt that they can last another 12 months. Twice in the last few months the stock market plates began to wobble, only to have Fed performers step in to steady the display.
With the end of QE, a slowing global economy, a strengthening dollar, and the recent sharp drop in oil prices, deflationary winds are picking up going into 2015, making their balancing act yet more difficult. (Not to mention increasing tension from poking a stick at the Russian bear.)
Jeff: Gold has been in decline for over three years now. What changes that? Should we expect gold to remain weak for several more years?
Steve: I cannot remember an asset more maligned than gold is currently, as to even admit one owns it receives a reflexive look of pity. While most have left our shiny friend bloodied, lying in the ditch by the side of the road, there are signs of resurrection. While I’m doubtful gold will do much in the first half of 2015 due to deflationary winds and could even get dragged down with stocks should global liquidity once again dissipate, I am confident that our central banks would again step in (QE4?) and gold should regain its luster as investors finally realize the Fed is out of bullets.
