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A
highly regarded resource sector expert who discusses his field fervently
whenever possible and whose writings include the top-ranking Outstanding
Investments, Byron King brings his views direct to The Gold Report
audience in this exclusive interview. Unconvinced that the recession is
behind us, he is equally sure that the "bottomless pit" mentality
of stimulus spending will wreck the dollar. Those are among the reasons he
sees $2,000-per-ounce gold on the not-too-distant horizon.
The
Gold Report: We've seen quite a rebound in the markets since we
spoke in May, and governments across the world have begun releasing some
positive economic news. Are we out of the recession as Bernanke has told us?
Byron
King:
I don't agree with that all. It's like at the funeral home where they put
really good makeup on the corpse and people walk in and say, "Oh, he
looks so good." Then you think to yourself, "Wait a minute. If he
looks so good, why is he dead?" That's where we are now, I think, with
our economy. We're still in the recession, it has been well-masked.
Let me
digress and say that yes, the stock market rebounded. The "sell in May,
go away" thing didn't work this year. So if you stayed in the market,
you probably benefited very well from the market recovery. But it was a
recovery not rooted in fundamentals. Part of it is that we've had a banking
recovery, too. But that was because of massive infusions of new liquidity out
of the Federal Reserve and the Treasury Department into the financial sector.
That's not the prescription for long-term health.
As
with someone really sick in the hospital, the problem isn't putting him on
life support; the problem is getting him off the respirator. Now the question
is how to stop hemorrhaging public money into the system, and in fact, begin
pulling some of it back out.
TGR: Let's
assume for now that the government isn't prone to taking the patient off the
respirator. Do you expect diminishing returns in terms of less recovery seen
for every dollar the government puts into the system?
BK:
That's a great point. We're there, at the point of diminishing returns in
terms of what it takes to get another dollar of real GDP. It doesn't matter
how much green ink they use down at the Bureau of Engraving and Printing or
how many ones and zeros they create in the Federal Reserve. At the end of the
day, how much have we improved? How much have we built our economy? Look at
numbers like new business formations, numbers that indicate the health of
growing businesses—hiring, recalls, overtime—certain types of
gross output figures, job creation. You're not seeing healthy numbers for
those things in the economy.
TGR: And
unemployment.
BK:
Absolutely. Unemployment may be a lagging indicator, but it's lagging like an
anchor chain on your boat, especially when the numbers get up in the 9% and
10% range nationally. And then look at certain critical states. California,
Michigan, Illinois, New York and Pennsylvania are all big, populous, busy
states with lots going on and high unemployment rates. Where do you go with
your economy when you've got that level of unemployment?
And
what we're seeing is the nice numbers. There's a lot of ugliness behind them.
If you look at the shadow statistics, you may as well add 50% or 75%. You
know, 10% unemployment could really be 15% or 17% if you looked at who's
really not working. Look at numbers of people applying for early Social
Security or disability. They're up 45% and more this year. These are people
at the bow wave of the Baby Boom, exiting the workforce, and entering a life
of government dependency.
TGR: In a
consumer-based economy, can you really have a jobless recovery?
BK: No, I
don't think you can. And that's one of our problems. The consumer consumption
component of GDP is something like 70% as opposed to what it was
historically. In, say, the 1950s, the economy was maybe 55% consumption
versus a 45% level of production. At today's 70%-to-30% ratio of consumption,
with high unemployment and income insecurity, you can't get economic
traction.
A
report that just came out within last couple of weeks indicates that
something like 70% of households are living paycheck to paycheck. And
something like 35% or 40% of households that make more than $100,000 a year
are living paycheck to paycheck. Think about that. Almost half of the top
income demographic is one paycheck away from being broke. Suppose you get
laid off, you get sick, you get injured, some problem comes up, a death in
the family, a divorce, or some other big hit comes along. If you don't get
paid for a pay period, all of a sudden you're behind on your bills. You burn
through your savings, if you have any savings. You miss two pay periods,
you're really behind. Three pay periods, there goes the house, there goes the
car.
TGR: It's
somewhat ironic, but we do hear that people are saving more.
BK: We
are seeing big numbers in terms of the savings. The national savings rate has
gone from negative to something like 7% since the start of 2009. That's an
excellent savings number in the long term. That's a good number for the
individuals who are doing the savings, good for them. But in a macro-sense,
it's a very asymmetrical type of savings. People at the very high end have
cut back on discretionary spending. They're not buying the new Cadillac, they
didn't take the fancy vacation, they didn't buy that second house. I think
those cuts are what's driving that savings rate up, and they take big
consumption dollars out of the economy.
It's
not the secretaries, the paralegals, medical assistants or cashiers at the
shopping malls. Those folks aren't saving more money than before, not in any
gross aggregate kind of way that would move the economy.
TGR: Early
on, you said the government's doing a great job of masking the recession.
What happens when people see what's been so well-disguised? What will be the
impact on the markets?
BK: I
think we are living with a very vulnerable stock market. If large numbers of
people were to come to the same opinion that I hold, a lot of them would
probably want to take sell out. Would it be a meltdown like last year's? I
don't think we'd see an overnight crash, but I do think the market would
drift down as people take money off the table. I think it'll vary by sector,
though, because some sectors are doing well for the right reasons while other
sectors are doing well for the wrong reasons.
TGR: For
instance?
BK:
Sectors depending on the discretionary income I was talking
about—high-end home building, entertainment, travel and
leisure—those kinds of things have had what I'd call a false recovery.
It's a recovery based on antibiotics and steroids. On the other hand, the
energy sector and certain parts of the mining sector have done well because
there's been an underlying strengthening of demand for the product and a
realization that while the dollars in your bank account or your wallet may
not hold their value over time, that oil or ore in the ground will protect
value. It will hold value over time.
TGR:
That's a pretty smooth segue into gold. Can you give us an overview of what's
in your Gold $2,000 report and your thoughts about of the sector now that
gold's passed that $1,000 trading barrier?
BK: I
wrote that report when gold was at about $850, so we're moving in the right
direction. I think that gold could be $2,000 an ounce, and I'm not alone. Rob
McEwen, for instance, is making predictions of $1,500 to $1,600 an ounce
within about three years. (Rob McEwen founded (NYSE:GFI) Goldcorp [TSX:G)] (NYSE:GG),
serving as Chairman and CEO until taking the reins at US Gold Corporation [TSX:UXG] (NYSE.A:UXG) and Lexam Explorations Inc. [TSX.V:LEX], serving
both companies as Chairman and CEO).
I
think we're looking at the long-term loss of value in the dollar, what with
the tremendous levels of government expenditure—this so-called
stimulus. It's the bottomless pit mentality that Congress has toward the money
that the federal government spends. It's wrecking the dollar. All around the
world people are looking for alternatives.
In
China, 15 years ago it was illegal for the average citizen to own gold except
maybe for a little gold chain. Today, the Chinese government encourages its
people to buy gold. Almost every bank or post office in China now sells gold
coins.
If the
Central Bank of China ever says, "We're buying gold. We're going to buy
as much as we can and put it in the state coffers," the world gold price
would spike through the roof. But if the Chinese government tells a billion
of its people, "Okay, take a little bit from your paycheck every week or
every month, save it up and then every now and then, go down to the bank or
the post office and buy a gold coin," all of a sudden they've got a
stealth rally going. China will build up its gold reserves, but do it in a
distributed way. They're not putting all that accumulating gold in a Chinese
version of Fort Knox. They're putting it in safe deposit boxes all across the
country. Look around the world and you see people accumulating gold. I think
that what we see in China is a harbinger of things to come.
TGR: Are
they accumulating gold as a hedge against the U.S. dollar, or as a hedge
against their own economy? What's in it for the Chinese government to make
that recommendation to the citizens?
BK: It's
a way of getting a lot of gold inside the boundaries of China. I'd say that
the government wants its citizens to do the buying so as to keep something of
a lid on gold prices. They're reinventing the U.S. monetary economy of 100
years ago. The United States used to be a gold standard country. We had a lot
of gold and gold was in the hands of the people. And then in 1933 Franklin D.
Roosevelt issued a presidential directive essentially confiscating all
privately held.
TGR: Might
the Chinese government do something like that?
BK: They
could if they wanted to, but I think part of it is somewhat like the concept
of a "fleet in being"—it's not that you deploy a lot of
battleships at once, but if you add individual ships together, you have a
rather formidable military force. I would liken the Chinese approach to
"Fort Knox in being." They have a Fort Knox in China except that
it's not all in one place. It's scattered around in millions and millions of
households. If the Chinese government ever needed all that gold in one place
for some reason, they would cross that bridge once they got to it.
TGR So
if we're looking at this multi-year, dispersed approach to accumulating gold
while keeping a lid of gold prices, why would gold go to $2,000?
BK:
Because we're in a world that appears to have encountered peak gold as well
as peak oil. If you look at historical production, worldwide gold output
reached a top right around the year 2000–2001. Overall output has
declined and we're not replacing output from the big mines of the past.
Despite discoveries here and there, miners have to dig deeper and deeper into
the reserves. In a big mining country such as South Africa, for example, some
of the deepest mines now are at 4,000 meters. That's 13,000 feet.
TGR: So
your view is that scarcity rather than a weakening U.S. dollar will drive the
increase in the gold price?
BK: Well,
it's really both. More and more dollars are chasing less and less gold.
You're piling the monetary inflation coming out of Washington, D.C. on top of
the dwindling production coming out of the mines of the whole world. Beyond
that, a lot of what kept gold prices down and the dollar strong for years was
the impression that the United States had its act together and would pull
through over the long term, despite all of its various flaws and faults. In
the eyes of the world, we've somehow managed to blow off a lot of that
impression and I don't know what it will take to recover it. It took winning
World War II the last time.
TGR: How
would you characterize prospects for silver?
BK: I
think that silver has more opportunities to appreciate percentage wise than
gold. If gold goes from $1,000 to $1,500, that's a 50% gain. If silver's at
$15 and goes to $30, there's a 100% gain. Silver is a monetary metal, but it
also has more industrial-type uses than gold. We're seeing more and more
silver go into the electronics industry, even into biotech. With uses at both
the monetary end and the industrial end, there are a lot of good
opportunities in silver.
TGR: Since
their March lows, stocks in some senior and junior mining stocks—both
silver and gold—have doubled or even tripled, while the metals
themselves have not climbed nearly so steeply. Does the rapid appreciation in
these mining company shares leave any investment opportunity remaining for
the equities?
BK: I
think you have to be very careful. You have to pick and choose where you're
going to go with small companies, medium companies, large companies. A lot of
gold and silver, for example, are produced as byproducts of copper mining. If
you want to see some of the biggest silver producers in the world, you're
also looking at some of the big copper producers. But in terms of smaller
companies, one that's done very well would be like Pan American Silver Corp. [TSX:PAA] (Nasdaq:PAAS),
Ross Beatty's old company. It's a nice pure silver play. I've been watching
another smaller one called ECU Silver Mining Inc. [TSX.V:ECU],
which has operations down in Mexico. It's had ups and downs, but it's done
well for the investors.
TGR: Any
other interesting equity plays for gold and silver?
BK:
Another company that's done really well is Rob McEwen's new company, U.S.
Gold Corp. It's just an exploration play at this point, working out of Nevada
in the area that's related to the Carlin Trend. It has an incredibly good
land position in some very prospective acreage.
One
larger company that has done very well, is very well-managed and still
well-positioned to grow in the future with a rising gold price is Kinross Gold Corporation [K.TO] (NYSE:KGC).
Another one with room to go is AngloGold Ashanti Ltd. (NYSE:AU)
[LSE:AGD] [JSE:ANG] [ASX:AGG]. CEO Mark Cutifani, who's been there for about
a year now, has really taken that company by the horns, changed the whole
management style and turned it from the stodgy, sleepy South African gold
mining company into a real dynamo. The market has figured it out to some
extent, but I don't think it has yet given AngloGold Ashanti everything it
deserves. So in terms of a big mining company, I think AngloGold Ashanti can
still have some reward for investors.
TGR: Thank
you, Byron. We appreciate your good humor as well as your good advice.
DISCLOSURE: Byron
King
I personally and/or my family own the following companies mentioned in this
interview: ECU Silver, US Goldcorp
I personally and/or my family am paid by the following companies mentioned in
this interview: None.
A
self-described "old rock hound," Byron King earned his bachelor's
degree in geology (with honors) at Harvard, and then worked as a geologist in
the exploration and production division of a major oil company. He
"earned his wings" in the U.S. Navy and the U.S. Naval Reserve, logging
more than 1,000 hours of flight time in tactical jet aircraft and recording
128 aircraft carrier landings. Based in Pittsburgh, Pennsylvania—site
of the historic G20 Summit last week— Byron practiced law there after
earning his Juris Doctor credentials at the University of Pittsburgh School
of Law. A prolific author and popular speaker with a gift for wrapping
historical context around his observations, Byron contributes to Agora
Financial's Daily Reckoning, Whiskey
and Gunpowder and Penny Sleuth. He also edits Energy
and Scarcity Investor and Outstanding Investments newsletters.
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