would it be reasonable to believe that equities are bad investments and we should all move into treasury bonds?
TGR: Typically, gold was treated as a hedge against inflation and uncertainty. Is it still reasonable to look at it as a hedge?
DC: It’s a hedge against inflation for reasons that in the past we were told were inevitable, but which have not yet happened. You would think that a person who drinks a fifth of whiskey a day and smokes three packs of cigarettes a day is not going to live as long as a normal person. But, suddenly, he is blowing out the candles on his 75 birthday cake. And you say, “This is not medically possible!” It is beating the odds, but at some point, it is going to catch up with the smoker. There simply is no record of huge expansions of the monetary base, huge expansions of government deficits, the inability of politicians to manage and the inability of economies to grow fast and mop it up that don’t lead to inflation.
“This is the worst trading situation I have ever seen at a time of rising gold prices.” The supply of money relative to the total GDP is now the greatest in human history, and it keeps expanding relative to our actual output. This will lead to inflation. Will it be next year? In five years? Who knows? If you hand out free tickets to a rock concert, you may not drive down the price of the best seats, but if fans believe more than half the seats will be given away at the door, you can bet the promoters will have trouble selling tickets. And that’s eventually what’s going to happen to paper money.
TGR: The corporate sector is sitting on trillions of dollars and mostly non interestearning reserves. So why isn’t some of that trickling down to the junior gold explorers?
DC: There are not trillions of dollars sitting in the accounts of gold mining companies. The big gold mining companies who have cash need it because they’ve committed themselves to building expensive, new mines, which when completed will add an exiguous supply of new gold relative to the current supply.Unlike every other commodity, the amount of new gold produced is virtually irrelevant to the price because it only adds about 2–3% to the total existing supply of gold.
The “excess” corporate cash is an argument for buying gold, because that cash is land-locked. It cannot be brought back into the country without being taxed. Big hedge fund managers with assets in the Caribbean do not have to pay taxes on their income as long as they do not repatriate the money back to the U.S. This is one of the ways George Soros got so rich. He does not lead an extravagant lifestyle, and he became a billionaire by leaving his money offshore in the Caribbean where it could grow uninhibited. Most of Apple’s cash is in foreign domains. But after adjusting for the tax basis, there is not much loose cash in Cupertino. And after adjusting the corporations’ balance sheets for their real pension fund liabilities, the corporate sector is not really awash in extra financial resources.
TGR: What should gold investors do?
DC: As a director of a small-cap gold mining company, I understand the plight of the small exploration companies. This is the worst trading situation I have ever seen at a time of rising gold prices. Something is wrong with this story. Either it’s going to turn out to be a sensational buying opportunity, or there will be a deflationary depression and even printing money will not work. I do not really believe that deflation is in the cards, but I also didn’t know that we were going to get a man on the moon.
TGR: What is the significance of the current situation with the debt ceiling?
DC: After adjusting the U.S. national debt to account for all the bonds held in trust accounts, our debt/gross domestic product (GDP) ratio is close to that of the scary European countries. Our debt is growing much faster than Europe’s relative to our GDP. If the euro doesn’t bomb out in the next couple of years, it may turn out to be a strong currency relative to the U.S. dollar. By the end of this decade, the U.S. fiscal situation could degenerate to Spanish or Italian proportions, although certainly not to Greek proportions. By the way, financial experts who harp on Greece in their oratory destroy their own credibility.
It is best to compare the U.S. economy with real economies not built on fraud, and that is Spain and Italy, both of which are models of where the U.S.
