Nick Barisheffis the founder, President and CEO of Bullion Management Group Inc (BMG) and the author of$10,000 Gold: Why Gold' s Inevitable Rise Is the Investor's Safe Haven. Widely recognised as an international bullion expert, Barisheff speaks toVivek Kaulin a free-wheeling interview on the future of gold and why the current fall in its price is going to go away soon. As he puts it: "I would not be surprised to see gold hit new highs before year end."Excerpts:
Has your book, $10,000 Gold, been released at an inappropriate time, given that gold price has taken a big beating in the recent past?
I began collecting notes and research for the book soon after I decided to go into the precious metals business in 1998. Although the material was updated many times over the years, the core long-term trends that I feel are responsible for gold's rising price are still in place today as they were in the late 1990s when gold was trading below $300 an ounce (1 troy ounce equals 31.1 gm). The book will be just as relevant in two years as it is today for this reason. It is about long-term, irreversible trends. Those simply won't change until there is a complete purging of debt, as the trends I follow are all trends that result in greater debt as debt is directly related to the price of gold.
What do you think are the reasons behind the recent fall in the price of gold? How soon do you expect it to start going up again?
Estimates put the sales on the Comex on Friday, 12 April, and 15 April, Monday, between 125 and 400 tonnes. The most telling evidence that this was a deliberate paper gold attack at the highest levels was the size and speed of the sales that then triggered sell-stops and margin calls. (This article provides additional details).
In contrast to the lows in paper gold, unprecedented buying of physical gold was triggered. If this were truly a natural correction or the indication that the gold bull had turned into a bear, then the physical market would be panic selling, not panic buying. Over the long term, these artificial declines in the price of paper gold are good for gold as it lets a lot of big players enter the markets. I do not expect this "correction" to extend over a long period of time as it is artificial. However, it is possible this was coordinated to correspond with gold's slow summer season. I would not be surprised to see gold hit new highs before yearend.
One of the major myths about gold is that it is not a good inflation hedge. You suggest that its a great inflation hedge. Can you explain?
The best way to see how gold works to maintain purchasing power, and therefore a good hedge against inflation, is to think in terms of ounces rather than the more relative dollars or euros. As I mention in the book, it took 66 ounces of gold to buy a compact car in 1971. Today it would take about 10 ounces. We can see the same ratio with houses and even the Dow. Today you can buy three average size houses for the same amount of gold you would have needed to buy one house in 1971 even though the prices of houses have risen significantly in dollar terms since then. That's how gold serves as a hedge against inflation and maintains its purchasing power. One of the best books on how gold maintains its purchasing power over long periods is the Golden Constant.
Gold bugs have been suggesting holding gold because they expect very high inflation due to excess printing of money. But there's no big inflation yet...
To begin with, real inflation is running at a much higher level than official figures indicate. I've explained this in detail in the book. If we use the original basket of goods used to measure inflation before the Clinton government began understating inflation through substitution and other deceptive metrics, it is running at about 10 percent. (For a more detailed description read here).
Can you elaborate on that?
Real inflation has set in, but it's hidden through doctored government inflation reports. Anyone who eats, heats their home, drives a car or sends their children to college knows this, but governments need to hide this fact because, for each official point in inflation they would have to pay out hundreds of billions in indexed pensions. As well, the method they are currently using to keep the bond market strong is through low or negative real interest rates. I have discussed in several recent articles the methods governments use to secretly rob pensioners and savers through these low interest rates using a programme called "financial repression". Richard Russell, the famous newsletter writer, once stated that gold will preserve wealth equally well in an inflationary or deflationary environment as it is the ultimate store of wealth. This is also confirmed by the data in the Golden Constant.
So where will all this money printing that is happening ultimately lead us to?
All world fiat currencies eventually end in hyperinflation followed by complete collapse. Throughout all of history there has not been a single example that did not follow this pattern. The US dollar will fail for the same reasons the others failed, because politicians cannot resist the urge to print unlimited amounts of unbacked currency. This eventually appears as inflation brought about through currency debasement. The main reason this positively affects the gold price is because gold is not rising in value, currencies are losing purchasing power against gold. Therefore, gold can rise in price as high as currencies can fall. As Voltaire said, "Paper money eventually returns to its intrinsic value-zero."
What is the link that the oil, ageing population and population growth have with the price of gold?
As I write on Page 71 of my book, "Ultimately, we are most concerned with one measure when it comes to the price of gold: government debt. How will decreasing oil supplies impact gold? They will impact gold in the same way as the other irreversible trends: the rising population, the aging population and outsourcing. All create the need for more debt to compensate for slowing growth, and increased government debt equals more currency, lower purchasing power and a higher gold price."
Can you elaborate on that?
The debt-based model depends on perpetual growth as it, like a spinning top, will collapse if it stops moving. When natural economic growth does not come through productivity, manufacturing or the production of natural resources, then the government must fuel growth through debt creation. Dr Chris Martenson does an excellent job of demonstrating how much of the growth of the past century, growth that led to a population explosion, was due to cheap land-based oil. The trends described in your question along with the huge interest payments necessary to finance the debt are costing the government many more dollars to grow the GDP. In 2012, it cost the U.S. government $2.47 to grow the GDP by $1.
And that is a problem?
Stimulus works while the major portion of the population is working. Right now baby boomers in the US are retiring at a rate of 10,000 a day. Despite the claims of energy independence because of shale oil in the United States, the world's growth has been fuelled by cheap land-based oil, located mainly in the Middle East. Oil sands and shale oil are extremely expensive to produce by comparison and are, therefore, inflationary. Apart from money printing creating inflation, the rising price of oil will also be inflationary as it is used for virtually everything. The trends described in the book all impact growth negatively, they reduce taxation revenues, cause inflation and require ever greater government expenditure leading to ever increasing government debt. Therefore, this creates a need of more currency debasement, which naturally causes the value of gold to appear stronger against currencies.
Anything else that you would like to tell our readers regarding this?
We can also add that over the past 3,000 years the most effective solution to runaway inflation brought about through currency creation is the re-establishment of some type of relationship between currencies and gold. It doesn't need to be a 1:1 relationship, but whatever percentage it is, it will cause gold to trade much higher. We are in uncharted territory here. Several reputable analysts are calling for $10,000 gold for this reason, such as Socit Gnrale's Edward Alberts and the man Barrons labelled "Mr Gold" because of his proven understanding of the gold market - Jim Sinclair, who stated he expected gold to eventually trade at $50,000 an ounce. Again, it is easier to understand why currency debasement will result in rising gold prices when we realise gold is not rising in value, but currencies are losing value against gold.
You suggest that China is buying gold big time, though there is very little evidence available for the same. Can you get elaborate?
China leads the world in gold production. All of that domestic production remains in China. We know that China and India purchased 2,000 tonnes of the 2,700 tonnes of global production in 2012. This includes the public as well as official purchases and unofficial purchases by sovereign wealth funds. In the past, we know the Chinese government purchased its gold in a circumspect, but secretive, manner. They accumulated through sovereign wealth funds that can bypass the red tape and the transparency required of official central banks. It is safe to assume they are still doing this. In 2009, China announced its official gold purchases after the fact. In 2009 the world thought China had 454 tonnes, the same as it held at the time of the country's last official announcement in 2003. In 2009, they announced they had 1,054 tonnes.
Why are they being so secretive?
Of course, China is not interested in having the world know how much gold they have at this point because it is trying to accumulate as much as it can. I believe China hopes their yuan will replace the US dollar as the next world reserve currency. If the Chinese follow the pattern of announcing every six years, we may be in for a major surprise in 2015, especially since Ji Xiaonan, who chairs the supervisory board for the Chinese State Council's biggest state-owned companies, stated in 2009 that China planned to add 10,000 tonnes to their gold reserves before 2019.
Gold has always been seen as an anti-dollar. To what extent do you think the US will go to protect the dollar and discredit gold?
The US government is highly motivated to maintain its reserve currency status and to maintain pricing of oil in US dollars. The US is the world's largest debtor nation and the only reason it has been able to run up such a large debt is because it had the world's reserve currency, thanks at first to the Bretton Woods agreement in 1944. When they broke the peg with gold in 1971, the dollar's status came under scrutiny, but there were no other currencies challenging it at the time. In 1973 the Americans secured their position as the world's reserve currency when Opec agreed to denominate oil in US dollars alone. This is now being challenged as China has entered into trade agreements with Japan, Australia, Brazil, Korea, and numerous others to bypass the US dollar and settle trade with each other's currencies. This is a direct threat to the US dollar's reserve status.
Vivek Kaul is a writer. He tweets @kaul_vivek
Updated Date: Dec 21, 2014 02:28 AM