NOOB
14th June 2010, 12:39 PM
Gold close to boiling point - McEwen
Rob McEwen hopes we manage to avoid the "darkest hour" describing fearsome parallels between the Weimar Republic to the United States of today. Interview with The Gold Report.
The Gold Report
Thursday, June 10, 2010
www.mineweb.com
KENWOOD, CA -
The Gold Report: We see a lot of troubling scenes on the global economic landscape-from the bailouts in Europe to ever-increasing deficit spending in the U.S. to talk about a housing bubble about to burst in China. What's your view of all of this turmoil?
Rob McEwen: I think the economic news will continue to get worse. We've had a lot of monetary stimulation by the governments of the West. In Europe, we're seeing that not only were corporations levered, but governments used off balance sheet techniques to alter the appearance of their financials. Greece and Portugal and Italy and Ireland are all part of that, but I suspect it's even larger. It all goes back to people taking advantage of very easy, low-cost credit, believing the economy would continue to grow endlessly.
Then people began to realize they got overextended. In the Middle East and Far East, nations started moving money out of dollars into alternative currencies, the most significant of which was the euro about a year to 18 months ago. Iran said they were going to price oil in euros because they thought the dollar would get weaker and weaker and wouldn't be defended by the U.S. government. China started to diversify its huge foreign reserves out of dollars. They viewed the euro as the alternative to the dollar. Of course today there's a tremendous rush out of euros.
Europe's as much a mess as America, but ironically, the dollar now offers refuge because you can take money out of the euro (or any other currency) and put it into a dollar very quickly. From that standpoint, America looks better than Europe right now, but I believe that's a short-term view. It won't be long before people look around and say, "Let's not forget about the debts and the weakness in the U.S. economy. Where do we go next?"
TGR: What about gold?
RM: Gold came down but it's only temporary. The trend is up. Gold ETFs are surging ahead right now. We don't need much of a move in terms of percentage of assets into gold to start seeing some very powerful moves. The pressure is building up and we're getting closer to a boiling point where we'll see gold go quite a bit higher.
TGR: You have projected gold to be at $2,000 by the end of the year and $5,000 further out. A big part of that was based on what you were just explaining. It's growing debt, the uncertainty in fiat currencies, and ultimately the inflation that will result. Do you anticipate any sovereign debt defaults or U.S. state defaults that may abate this impending inflation?
RM: Definitely. Individuals and corporations and states and countries all grow accustomed to certain income streams. We're approaching that point when someone will say, "We can't lend you any more, certainly not at these rates. Interest rates have to be a lot higher and your collateral has to be better." It's almost inconceivable that major Western nations could be in that position-but everybody should be thinking about that possibility.
I recommend Tom Cammack's book, The Inflation Nation: Wise Investing in a Foolish Age. It's a quick read that very succinctly puts out a message of where we are and why we should be concerned about it. The environment we're moving into will steal money from the conservative, the prudent, the cautious investor-through currency debasement. You need to read a book such as Cammack's to appreciate what's going on. I'd hope that will motivate readers to shift their thinking. They have to understand that they have to work to protect themselves because I see a time coming that's going to be very painful. I hope it doesn't come, but I think it will.
TGR: Describe that worst case scenario.
RM: I can see strong parallels between what happened in Germany post World War I, the Weimar Republic, and what's happening in America today. That might seem a big leap, but if you know your history, you know that Germany entered World War I as one of the richest and most powerful nations in the world. It did a lot of damage in Europe but it lost the war. The Allied nations that fought Germany said, "Look, you have to pay for it, compensate us for all this damage. We're going to take the few working factories you have left and you're going to owe us this big debt."
Post World War I, the U.S. was the largest creditor to Europe and to Germany, lending for the reconstruction of the continent. At one point Washington said, "We're not going to lend you any more money." Germany had huge debts to repay, but no tax base. Industries had not survived. Most areas of employment had been reduced to rubble. The German government responded by printing money.
TGR: That sounds familiar.
RM: In 1919 you could buy an ounce of gold, valued at $20 at the time, with 170 German marks. Germany kept printing money to pay their debts and to keep money in circulation, but food prices, clothing prices, housing prices all started climbing. Inflation started to soar. If you go forward to November 30, 1923-about four-and-a-half years later- to buy that same ounce of gold took to 87 trillion marks.
TGR: Impressive illustration of hyperinflation; 87 trillion as opposed to 170.
RM: It was terrible. German citizens whose money was denominated in German marks were wiped out. If I'd had the equivalent of $1 million in German marks in January 1919, it would have been all gone before the second year had passed. Let's try $100 million. That's a huge sum of money today, but back then it was colossal. But if you had the equivalent of $100 million in German marks in your German bank account, you would have received less than one penny for it if you tried to convert those marks into dollars by September 1923.
TGR: Considering the U.S. role in conflicts around the world, would America face a situation like Germany did, where the conquerors come back and demand reparations?
RM: Well, if you go back to 1980, America was the world's largest creditor nation, undisputedly the most powerful, and it had a very strong industrial heartland. Today, large parts of that industrial heartland have been outsourced to the developing world, while the U.S. has become the largest debtor nation in the world, with China being its largest creditor. China's enthusiastic participation in U.S. Treasury auctions has declined measurably. Suppose they were to stop buying Treasuries altogether. Suppose suddenly the lending to America that allowed our lifestyle to be what it is stopped. Remember, the tax base has been hollowed out by outsourcing, and a lot of people are unemployed because there aren't enough jobs. Many people would have to declare bankruptcy.
TGR: And meanwhile, the printing presses run, as they did in the Weimar Republic about 90 years ago.
RM: Exactly. What governments can do is print money. The U.S. government can make sure dollars circulate, but each dollar they print buys less. The only value in any paper currency or what is called fiat currency derives from confidence in the underlying issuer. The Fed printing dollars endlessly without concern for U.S. debt-that's the darkest hour I see.
In prior periods of hyper inflation, keeping your wealth in bank accounts was probably one of the worst places to keep it. Such periods drives everybody who wants to survive to become a speculator, to take on debt, to do all the things that aren't prudent in normal times. But in these days, an era where the government is printing huge amounts of money, it is the prudent, the conservative, the majority of citizens who are the most harmed.
TGR:And I'd assume they hold gold. If it gets to your projected $2,000 by the end of the year, we're looking at about a 70% return in a year. Under those circumstances, would gold be a better short-term investment for conservative investors than equities, with equities having all the operational and political and discovery risk?
RM: Gold bullion should be a key component of anyone's gold investment strategy. Yes, gold could outperform the gold shares. Your readers should understand that at certain times the price of gold bullion and gold shares can go in different directions. One instance was back in late 1979-80 when the price of gold ran up from about $400 to $800 per ounce in four months but the gold stocks basically stood still. It was as though the market said that gold price wasn't sustainable. Gold peaked in January of 1980, but the gold stocks didn't reach their peak until a full nine months later when the positive impact on earnings was clearly evident.
TGR: Would it make sense to over-leverage on gold short-term and then shift over to the juniors when gold looks as if it's peaking?
RM: I happen to like having a portion in bullion and a portion in juniors, but most would consider my portfolio skewed to the high risk end of the investment spectrum. An investor who wants exposure to gold should own some bullion. They could buy some seniors. Seniors will participate in this move, but there could be some shocks to the system, too.
TGR:Shocks such as?
RM: In a few jurisdictions, governments are already putting in excess profits taxes, and I'd expect other governments to do the same. It's a very short-sighted move that can reverse capital flows dramatically in future investment in those countries, but these governments are thinking that mining doesn't have a lot of friends, and therefore taxing them will fill some short-term need without creating a lot of noise.
Rob McEwen hopes we manage to avoid the "darkest hour" describing fearsome parallels between the Weimar Republic to the United States of today. Interview with The Gold Report.
The Gold Report
Thursday, June 10, 2010
www.mineweb.com
KENWOOD, CA -
The Gold Report: We see a lot of troubling scenes on the global economic landscape-from the bailouts in Europe to ever-increasing deficit spending in the U.S. to talk about a housing bubble about to burst in China. What's your view of all of this turmoil?
Rob McEwen: I think the economic news will continue to get worse. We've had a lot of monetary stimulation by the governments of the West. In Europe, we're seeing that not only were corporations levered, but governments used off balance sheet techniques to alter the appearance of their financials. Greece and Portugal and Italy and Ireland are all part of that, but I suspect it's even larger. It all goes back to people taking advantage of very easy, low-cost credit, believing the economy would continue to grow endlessly.
Then people began to realize they got overextended. In the Middle East and Far East, nations started moving money out of dollars into alternative currencies, the most significant of which was the euro about a year to 18 months ago. Iran said they were going to price oil in euros because they thought the dollar would get weaker and weaker and wouldn't be defended by the U.S. government. China started to diversify its huge foreign reserves out of dollars. They viewed the euro as the alternative to the dollar. Of course today there's a tremendous rush out of euros.
Europe's as much a mess as America, but ironically, the dollar now offers refuge because you can take money out of the euro (or any other currency) and put it into a dollar very quickly. From that standpoint, America looks better than Europe right now, but I believe that's a short-term view. It won't be long before people look around and say, "Let's not forget about the debts and the weakness in the U.S. economy. Where do we go next?"
TGR: What about gold?
RM: Gold came down but it's only temporary. The trend is up. Gold ETFs are surging ahead right now. We don't need much of a move in terms of percentage of assets into gold to start seeing some very powerful moves. The pressure is building up and we're getting closer to a boiling point where we'll see gold go quite a bit higher.
TGR: You have projected gold to be at $2,000 by the end of the year and $5,000 further out. A big part of that was based on what you were just explaining. It's growing debt, the uncertainty in fiat currencies, and ultimately the inflation that will result. Do you anticipate any sovereign debt defaults or U.S. state defaults that may abate this impending inflation?
RM: Definitely. Individuals and corporations and states and countries all grow accustomed to certain income streams. We're approaching that point when someone will say, "We can't lend you any more, certainly not at these rates. Interest rates have to be a lot higher and your collateral has to be better." It's almost inconceivable that major Western nations could be in that position-but everybody should be thinking about that possibility.
I recommend Tom Cammack's book, The Inflation Nation: Wise Investing in a Foolish Age. It's a quick read that very succinctly puts out a message of where we are and why we should be concerned about it. The environment we're moving into will steal money from the conservative, the prudent, the cautious investor-through currency debasement. You need to read a book such as Cammack's to appreciate what's going on. I'd hope that will motivate readers to shift their thinking. They have to understand that they have to work to protect themselves because I see a time coming that's going to be very painful. I hope it doesn't come, but I think it will.
TGR: Describe that worst case scenario.
RM: I can see strong parallels between what happened in Germany post World War I, the Weimar Republic, and what's happening in America today. That might seem a big leap, but if you know your history, you know that Germany entered World War I as one of the richest and most powerful nations in the world. It did a lot of damage in Europe but it lost the war. The Allied nations that fought Germany said, "Look, you have to pay for it, compensate us for all this damage. We're going to take the few working factories you have left and you're going to owe us this big debt."
Post World War I, the U.S. was the largest creditor to Europe and to Germany, lending for the reconstruction of the continent. At one point Washington said, "We're not going to lend you any more money." Germany had huge debts to repay, but no tax base. Industries had not survived. Most areas of employment had been reduced to rubble. The German government responded by printing money.
TGR: That sounds familiar.
RM: In 1919 you could buy an ounce of gold, valued at $20 at the time, with 170 German marks. Germany kept printing money to pay their debts and to keep money in circulation, but food prices, clothing prices, housing prices all started climbing. Inflation started to soar. If you go forward to November 30, 1923-about four-and-a-half years later- to buy that same ounce of gold took to 87 trillion marks.
TGR: Impressive illustration of hyperinflation; 87 trillion as opposed to 170.
RM: It was terrible. German citizens whose money was denominated in German marks were wiped out. If I'd had the equivalent of $1 million in German marks in January 1919, it would have been all gone before the second year had passed. Let's try $100 million. That's a huge sum of money today, but back then it was colossal. But if you had the equivalent of $100 million in German marks in your German bank account, you would have received less than one penny for it if you tried to convert those marks into dollars by September 1923.
TGR: Considering the U.S. role in conflicts around the world, would America face a situation like Germany did, where the conquerors come back and demand reparations?
RM: Well, if you go back to 1980, America was the world's largest creditor nation, undisputedly the most powerful, and it had a very strong industrial heartland. Today, large parts of that industrial heartland have been outsourced to the developing world, while the U.S. has become the largest debtor nation in the world, with China being its largest creditor. China's enthusiastic participation in U.S. Treasury auctions has declined measurably. Suppose they were to stop buying Treasuries altogether. Suppose suddenly the lending to America that allowed our lifestyle to be what it is stopped. Remember, the tax base has been hollowed out by outsourcing, and a lot of people are unemployed because there aren't enough jobs. Many people would have to declare bankruptcy.
TGR: And meanwhile, the printing presses run, as they did in the Weimar Republic about 90 years ago.
RM: Exactly. What governments can do is print money. The U.S. government can make sure dollars circulate, but each dollar they print buys less. The only value in any paper currency or what is called fiat currency derives from confidence in the underlying issuer. The Fed printing dollars endlessly without concern for U.S. debt-that's the darkest hour I see.
In prior periods of hyper inflation, keeping your wealth in bank accounts was probably one of the worst places to keep it. Such periods drives everybody who wants to survive to become a speculator, to take on debt, to do all the things that aren't prudent in normal times. But in these days, an era where the government is printing huge amounts of money, it is the prudent, the conservative, the majority of citizens who are the most harmed.
TGR:And I'd assume they hold gold. If it gets to your projected $2,000 by the end of the year, we're looking at about a 70% return in a year. Under those circumstances, would gold be a better short-term investment for conservative investors than equities, with equities having all the operational and political and discovery risk?
RM: Gold bullion should be a key component of anyone's gold investment strategy. Yes, gold could outperform the gold shares. Your readers should understand that at certain times the price of gold bullion and gold shares can go in different directions. One instance was back in late 1979-80 when the price of gold ran up from about $400 to $800 per ounce in four months but the gold stocks basically stood still. It was as though the market said that gold price wasn't sustainable. Gold peaked in January of 1980, but the gold stocks didn't reach their peak until a full nine months later when the positive impact on earnings was clearly evident.
TGR: Would it make sense to over-leverage on gold short-term and then shift over to the juniors when gold looks as if it's peaking?
RM: I happen to like having a portion in bullion and a portion in juniors, but most would consider my portfolio skewed to the high risk end of the investment spectrum. An investor who wants exposure to gold should own some bullion. They could buy some seniors. Seniors will participate in this move, but there could be some shocks to the system, too.
TGR:Shocks such as?
RM: In a few jurisdictions, governments are already putting in excess profits taxes, and I'd expect other governments to do the same. It's a very short-sighted move that can reverse capital flows dramatically in future investment in those countries, but these governments are thinking that mining doesn't have a lot of friends, and therefore taxing them will fill some short-term need without creating a lot of noise.