February 15, 2011; Are Gold Buyers the New Bond Vigilantes?

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, as promised, we are talking to you right now in Nassau, Bahamas, but you are there after having been at a conference in Orlando.  I know there were 10,000-12,000 people at the Orlando conference.  Tell us a little bit about that before we move to the Bahamas conference.

David: Kevin, I think there are several things that are worth mentioning.  It was an excellent conference.  We had a fantastic time meeting with clients, McAlvany Weekly Commentary listeners, the newsletter subscribers – just a wonderful, wonderful group of people.  We had about 140 of our people who showed up to the conference, out of that 10,000-12,000.

I had a room that we packed out.  Seating capacity was about 175, and there were well over 200 in the room, with standing room only.  But the scale of that, I think, is worth mentioning, because this was a conference of very interested investors, people who are trying to figure out what is happening in the world, what is happening with their portfolios, what they can do to either preserve or grow their capital.  Of the 10,000-12,000 people, if you take out the 140 people who already know us and would, of course, be interested in the topic that I was speaking on, specifically, precious metals, that leaves between 60 and 70 people, out of the 10,000-12,000, who have even a passing interest in the metals.  I think that is very, very telling.

It was encouraging to me, and I guess when I say it is encouraging, that probably needs some explanation.  It is encouraging to me because, for that few people to be interested in metals, after a 10-year move in the metals, ten years of an average of 12% gains per year, some years a little bit more, some years a little bit less, it is surprising to me that the general public still has no interest whatsoever in gold and silver.  That to me is a strong indication.

Kevin: From a bull market perspective, that is very, very encouraging to the owner of precious metals, because that shows, as you have said many times, we are definitely not in that third phase of the bull market where shoe-shine boys are coming in and buying gold and silver coins.  We are still at that phase where the general public is wanting to know how you day-trade tech stocks, I think.

David: I think probably the greatest success at the conference was folks selling software platforms for how to trade your way into millions – exactly what you just described, Kevin.  “How can I take my $5000 thousand in savings and turn it into $5 million over the next 18 months?”  Not only is this an unrealistic appraisal of how money is made and grown, but it is completely unrealistic in terms of an assessment of risk in the market.  Really what it boils down to is that people want to be told exactly what they want to hear, which is, “You can make your millions without blood, sweat, and tears.  You can do it with a subscription of $39.95 a month to our software package,” or something like that.

It was interesting, if nothing else, from a sociological perspective, and just as an anecdote I thought I would share that as we open this morning.  The breath of fresh air was the remarkable people that we got to spend time with, both at the main presentation, and then in the subsequent questions and answers, a private session with about 30-40 people, and then also the consultations which we had with a number of our clients.  We were busy for four days, back to back.

Kevin: Let me go ahead and reduce this broad scope down to the fine point.  Out of 10,000 to 12,000 people who were looking at software platforms to quickly trade, there were, as you said, this 200 or so people who really were interested in maybe taking a reality check and saying, “Okay, where are we really?”  Let’s take that and put a fine focus on that and talk about some of the questions that came out of that select group – that 200 people.  I know you did question and answer sessions, both in the general sessions, and then also privately, when you met with clients one on one.  What were some of the predominant questions that were coming up at the time?

David: I think it is important to look at those questions and share them.  John Maynard Keynes used to compare the market to a beauty contest.  He basically said that what is being determined is not who the prettiest girl is, but the market is essentially betting on who the judges will determine the prettiest girl is.  It is one step removed from reality.

The reality of the market, the reality of the economy, is secondary in some sense to how the participants are going to bet.  It was interesting, with 10,000-12,000 people betting uni-directionally, with great confidence, that the economy had already recovered, I opened up the presentation by saying, “While I have my prepared remarks, I am very interested in what is on your mind.  Why don’t you ask a few questions and I will include the answers to those questions in my presentation today.”

The very first question that was asked was this:  “If the economy is recovering, why do I need to own gold, and why would you expect the price of gold to continue higher?”

Kevin: If the economy is recovering, David, and we do not feel, necessarily, that that is the case, but let’s say it is.  If the recovery is truly in action right now, what was your answer as to why a person would own gold?

David: Kevin, as you have pointed out, our case would be that it is not recovering, that there are, on a very surface level, indications of recovery, but when you scratch beneath the surface, and it does not take much scratching at all, you find that the real story is nothing like that, that recovery is not anywhere close.  A lot of that has to do with the discussion of our fiscal status, what is happening on the U.S. balance sheet, the fact that in recent hours, we have gotten the fiscal year 2012 budget, and it is a blowout.  Instead of 1.5 trillion in deficit, we are looking at 1.65 trillion in deficit.

We are looking at greater headwinds, in a time period when we are rolling over 70% of our debt, we are adding to our total stock of debt, not what the CBO estimated at 1 trillion per year, but between 1.5 and 1.75 trillion per year.  This is the reality.  The economy is on life support, but it sure does not appear that the patient is having any problems, whatsoever, mainly because government spending has stepped up to the plate and is filling the gap that the consumer once filled.  Basically, 10% of GDP disappeared, the consumer went away, and the government stepped in.

Something we have talked about in the past is what Richard Duncan described as the shift from capitalism to debtism, which was destroyed in 2008, and now we move toward statism, wherein the state plays a greater role in the marketplace, and certainly, a predominant role in the economy.

Kevin: If it is truly a shift from capitalism, to debtism, to statism, there seems to be, as you said, this perception of a numbing that we have talked about in the last few weeks, of the body apparent, as far as the economy goes.  This numbing is allowing people to think that it is a recovery.  Let’s just hypothetically look at something, David.  Just pretend with me for a moment, that we truly are in a recovery, that it does not grate against your nerves that we are completely ignoring the facts, but let’s just hypothetically say we are in a recovery.  Is there a reason or a place for gold, if truly, a person believes we are there?

David: A part of the issue with us being in a recovery is that you then have to fall back very heavily on the skill set that the Federal Reserve has.  They have created a massive amount of liquidity over the last few years, and in fact, if you look at the total amount of government liquidity provisions and guarantees, since 2007, 50 different initiatives have been put in place, and since 2007, 23.7 trillion dollars has been committed.  Only about 3 trillion of that has been spent, but 23.7 committed to hold up the economy.  On par with 1932?  Not by a long stretch.  We have seen the government be more active here than in that 1932, 1933, 1934 period where the alphabet soups were launched, all the government agencies which came into existence in the FDR period.

But you ask a good question.  Let’s assume that we are recovering.  There are certainly things that we can point to that would indicate there is a recovery.  Auto sales have been stronger.  GM reported a 22% increase in January.  Retail sales in January were strong, and that is one way of looking at it.  Again, with retails sales, if you take out an inflation component, you realize that retail sales actually did nothing, whatsoever.

But this is me digressing, and perhaps deconstructing the recovery argument.  Let’s stay on track and assume that it is recovering.  If it is recovering, you really have to have faith that Ben Bernanke is going to take away the liquidity and shrink the amount of liquidity in the system very aggressively, and, if he does not, then what we will find is an inflation that is out of control.  He is running on the assumption that he has the reins in hand, and that inflation, like a mighty stallion, is something that he can rein in and control.  Better the inflationary stallion, than the deflationary dead horse, in his book, which he cannot do anything with.

But there is a grand assumption there, Kevin.  It is a grand assumption, and it would be the first time in Fed history, in fact, the first time in central bank history anywhere in the world, where inflation was, in fact, fine-tuned, and the Fed was able to contract liquidity at precisely the right moment to prevent a super-, let alone hyper-inflation, but more probably a super-inflation, as a result.

Kevin: It seems like an anomaly that a recovery at this point, a true, honest-to-goodness recovery, with all the money that has been created, could actually become the Fed’s worst inflationary nightmare.  Is that what you are saying?

David: It could become an inflationary nightmare.  The problem, again, with the idea that there is a recovery, is that the statistics used to support that notion are, themselves, flawed.  As I mentioned, with the retail sales figure, if you take out inflation, the inflationary impact, there really is no improvement in the January numbers.  If you are looking at GDP growth, with an understatement of inflation, you are overstating GDP, and on top of that, you have to subtract out the amount of government spending that is taking the place of private sector consumption – propped up aggregate demand.

Is it healthy for government to take a permanent place in the economy, larger by 10% of total GDP?  Is that normal?  Is that healthy?  Is that the sign of a true recovery?  I do not think so.  That does not mean that money cannot be made, and I think this is the big difference.  The financial markets can behave very differently than the underlying economy.

This is where bankers, whether it is bank bonuses or bank profits, or the financial sector in general, moving toward some sort of recovery internal to themselves – that is possible, when you create the kind of liquidities that Bernanke has created.  When you create that liquidity it has to go someplace.

We are talking about a misallocation of capital.  To the degree that that capital is misallocated, you will see someone benefit, because that money is going to end up in somebody’s pocket, but it is not Joe and Suzy lunchbox, it is not the man on the street, it is not the woman on the street, it is not the family out there in middle America trying to make ends meet, experiencing real world inflation, in spite of the CPI lies.  This is the disconnect.

We do see the stock market rising.  Why is it rising?  Is it because of fundamentals which are supporting a recovery in company profits?  Absolutely not.  It is simply because you have money flowing from the Fed into the financial system, and it is distorting values.

Kevin: David, we have talked so often about the negative effects of inflation, but you just mentioned something that is interesting, that the underlying economy may not be necessarily pointing to the way the financial markets react, at least in the short term.  Of all the negative effects of inflation, what would you say would be deemed a positive effect, even if it had a long-term bad outcome?  What are some of the positive effects of inflationary policy?

David: Kevin, there is an issue in defining what I mean by positive, because there is a positive effect for speculators and short-term investors, because there is this distortion of money going places that it really should not go.  There is “money to be made” as a result, but it really is of a speculative nature, and ultimately, we still have the debts to pay.

Ultimately, our debt-to-GDP numbers, when you factor in Fannie Mae, Freddie Mac, and our off-balance sheet items, are well over 140% of GDP.  If you factor out Fannie Mae and Freddie Mac, and the off-balance sheet items, we will exceed 100% by the end of the year.  We are well beyond the Reinhart and Rogoff threshold of 90%, wherein the red lights are going off and you have caution signs everywhere.

The economy is, in fact, in an ugly place.  But that does not mean that money cannot be made because of misallocated capital, because of the liquidity pushes.  That is what we are seeing show up in the commodities market.  That is what we are seeing show up in the emerging markets, to a lesser degree, now.

Kevin: I have been to carnivals in the past where I get suckered into playing the darts game where you throw the darts at the balloon, and most guys think that they can either shoot hoops or throw darts, so you pay your buck and you throw the dart and you pop the balloon, and they say, “Wow!” and they hand you some little thing that is probably worth a quarter.

Then you pay another buck and you throw the dart and you just keep doing that, and by the time you are into this thing, you may be $25 or $30 into a game where you are winning a stuffed animal that probably cost the carny all of $3.  In a way, you may feel like you are coming away with something, but as far as what was being taken away to get that stuffed animal, you have lost $30 to get a $3 stuffed animal.  Is that a little bit like what we are talking about here, where we feel like there is recovery, we feel like these things are occurring?  But you were talking about the government stimulus actually making up far more than the consumer spending deficit in terms of GDP right now.

David: If we are talking about the positive effects of inflation, because it is stimulus, which is artificial in nature, I think you have to question the enduring nature of it, and what is its long-term impact?  That is where it becomes much more questionable.  We had many questions while we were at the conference which related to the direction in particular markets, whether it was gold and silver, the dollar, emerging markets, lots of questions there, U.S. equities, bonds, municipal bonds, things of that nature, a number of questions which relate to a reduction strategy.

These are people who, at least those who attended that we knew and had a relationship with before, were interested in a reduction strategy in their metals position on a 3-5 year time frame.  Not today, but as the market matures, and as gold and silver see higher prices, they wanted to talk about our plans and our strategies – what our organizational strengths are, and what we have been discussing with clients now for a couple of years, in anticipation of a transition in the marketplace.  Again, not here, today, but something on the horizon.

Kevin: That seems to be one of the things that distinguishes you from a lot of the other precious metals dealers at these various conferences around the country.  You have a tendency to want to start talking about when they should sell their gold, oftentimes before they have even bought their gold.  For the new listener, for the person who is not familiar with the reduction strategy, could you give, in short order, a little bit of what you tell these audiences, as far as what to do when it is time to sell some of the gold?

David: Yes, and that is certainly in the context of what we think is the market direction for the precious metals.  We will look at some of the other asset classes in question, too, but for gold and silver, we remain in a bull market.  The notion that CNBC, and MSNBC, and the Wall Street Journal, and the Financial Times, and the Economist, have written about with great frequency, is that the bull market in gold is near an end because it is in a bubble stage, and there are so many people in that trade, and it is such a crowded trade.  I think they just need to go to the money show.  As writers, they need to do a little bit more due diligence in terms of the man-on-the-street, and the investor-on-the-street, out there trying to make these decisions.  There is virtually no one interested in the metals.

It really was surprising.  I would guess that if that kind of a financial conference was held in Europe, in the Middle East, or in Asia, you might find something very different in terms of interest.  But I don’t know.  I have seen other reports.  Recently Marc Faber was  at a conference in South Korea, and he asked, out of a thousand people, who owned gold today, and two people raised their hands.  This is hardly a crowded trade, if you are talking about an investor with, whether it is 100 thousand dollars or 10 million dollars – very tepid interest, at this point.

We see gold as in the second of three stages, with it maturing, probably over the next 5-7 years, maybe on a shorter time-frame, maybe even on a little bit longer time frame, depending on how many people come into the demand side of the equation.  We know that supplies are even more limited today with mine supply continuing to taper off, even while some demand is increasing here and yon.  It will be interesting to see what happens when the average consumer decides that they want to own a few ounces of gold or silver.

You are right, though, Kevin, when we talk to clients, it is with the idea that we want them to see the end from the beginning.  Making the decision to invest in any asset class entails a very thorough process of, “What am I going to buy? What is the reason why I am going to buy it? Is there a time and place that it makes sense to sell it? What would be the environment?  What would be the background information that I would need?  If I am wrong about this purchase, and it actually goes down significantly, is there something that I should consider as an exit strategy as a means of preserving capital?”

In other words, we embrace the client’s perspective, saying, “Don’t you want to know when it is time to sell?” Being a full-service company certainly helps with that, being on the asset management side and having an appreciation for equities, for bonds, for foreign currencies, for the traditional asset classes.  Gold and silver, for us, is an asset that we understand in a larger context.

Kevin: That being said, because of course, you never tell a person to put 100% in any one direction, it takes me back to the triangle where you have it broken into three different mandates.  One is a preservation mandate, one is a growth mandate, and of course, one is a liquidity mandate.  That brings the attention to the other markets.  Could you give an idea of what direction you think the various markets are going?  You mentioned municipal bonds, you mentioned equities, you mentioned the emerging markets, of course the currencies, and then you have been talking about gold and silver.  So take your pick, the order that you want to take them in, but those are all asset classes that I think people would like to have your read on right now as to where you think they are going.

David: We will have to start with U.S. equities, because I think that is where there is the most confusion, with the introduction of liquidity, QE-I and QE-II, with the accommodation that the Fed and the treasury have provided to the marketplace.  The stock market has responded very strongly to the upside and I think that may continue for some time, but that is the problem with artificial stimulus.  You have no idea when it runs out.

Literally, we, today, are running on fumes.  The question of when we simply run out of steam altogether, I do not know.  I really do not know.  But the reality is, it can continue in this vein, and certain market participants are factoring in the inflationary impact and trying to hedge themselves by owning equities, as a partial hedge against inflation.

My own view is that we should look at the corporate managers and corporate executives who run these businesses, and it is still astounding to me that in any week in the last six months, we have had corporate executives jumping ship, and not on a small scale.  With great frequency, we have talked about the buying versus selling in these companies, those ratios, and they remain off the charts.

Kevin: Corporate executives are still selling more shares than they are buying, of their own companies?

David: I think they realize that the economic headwinds have not gone away.  I think they realize that their businesses are not, in fact, in recovery, and they are doing everything that they can, personally, to clean up their own balance sheets.  Selling off equities as they are being driven to higher prices by the current lemmings in the markets is an opportunity for them to take some profits and pay down debt.  If they have a third, or fourth, or fifth home, which many of the corporate executives do – guess what?  They want to pare down that debt and own them outright.

If we shift over and look at the liquidity mandate in our perspective triangle, the dollar is, you could argue, due for a rally.  Whether it ever gets one or not is something that remains to be seen.  The dollar has been weak relative to the Japanese yen.  The dollar has been weak relative to the Swiss franc.  The dollar has been weak relative to a handful of currencies.  We will have to see if 2011 holds a rally in the dollar, but not on the basis of fundamentals.  I think as we look at the balance sheet of the U.S., it is something that is insolvent.  We are talking about short-term versus long-term trends.  Short-term, the dollar could rally.  Long-term, I think it pays a severe price, with a 30%, 40%, or 50% reduction from these levels.

Kevin: Wouldn’t a dollar rally actually be, partially, because of the weakness of the other currencies that it is being based on?  Europe is not out of the woods yet, and that is one of the major currencies that weights the valuation index of the U.S. dollar.

David: That is correct, and when we look at the emerging markets, also as an asset class that people were asking about at this last conference, if you look at the underperformance of most of the equity markets throughout Asia in the last 6-12 months, I think you have a telltale there.  They were overheated on the upside coming into 2008, never fully recovered, and remain anemic in their growth, and that is in spite of a massive amount of liquidity which has been thrown into the market.

If you look at how tepid the response has been on the Shanghai exchange, just as an example, with the trillions of dollars which the Chinese government has provided to the marketplace, I think it is very telling.  I think it is very telling, and it says to me, if that is the best you can get for the equivalent of a 4-trillion dollar stimulus, 1 trillion in actual point of fact, but on scale with a 4-trillion dollar stimulus here in the United States, as their economy is one-quarter the size.  What you are really talking about is a market to run from – run away from as fast as you can.

The story of the emerging markets is a story that will continue to emerge over a 15-20 year period.  Difficult to play the patience game as an investor.  The emerging markets will be very rewarding if you have 20 years to wait.  I think they can be very punishing if you want to stick around for another 12-24 months.

Kevin: That has been one of the points that Stephen Roach has made in the past when we have interviewed him.  Stephen Roach is very bullish on China, and Asia, in general, as a potential, but again, he said, “Patience,” just like you did.

David: Transitioning to municipal bonds, I think that is an area that has been sold off very heavily with concerns of defaults, with concerns of bankruptcy, with concerns that the same kinds of fiscal woes that the federal government has, the state and municipal governments have, as well.  The difference is, they do not have a printing press.

Having said that, we have seen a severe decline in those municipal bonds.  For probably 18-24 months we have encouraged clients to limit, or eliminate, exposure to municipal bonds.  They have been sold off severely.  I would guess that over the next 6-12 months they may see a recovery in value.  Our encouragement to clients is that they take the next 12 months, and if we do, in fact, see a recovery in value in the municipal markets, sell into that strength, exit any large municipal positions at this juncture.  Because just like the federal government issue, the state and municipal issue does not go away.

I mentioned this in the context of my comments, but if you took the State of Illinois and fired every state employee, where you basically had no current cash outflow to pay employee salaries, you would still have, in the State of Illinois, a 5-billion dollar annual deficit, because of all the pension liabilities, and medical liabilities, to former employees of the state.  The municipal issue is not something that goes way.  You may see a dead-cat bounce in the muni market, and then I think you still have to face the music when we get into 2012 and 2013.  So I would be aggressively, aggressively cleaning up a muni portfolio should we see a recovery here.

Kevin: That takes us, then, to the people who actually can print money.  We talked about municipal bonds not being able to be funded with printed money by the state, because the state cannot print, but the United States can print, so that takes us to government bonds.  What is your thinking on long-term, mid-term, and short-term bonds?  Maybe you could explain that a little bit, and where we are going from here, from a yield-curve perspective.

David: When you look at the bond market, you have to wonder how many hats exist, and how many rabbits can be pulled out of them. The bond market and the currency market have been a real question mark.  What is going on there?  How do we understand it?  If there is something that will allow us to preserve reserve currency status, and the IOUs which we have issued, can we maintain them?  Can we actually make payments on them?  Will we ultimately pay our creditors back, some value, or full value?  These are all questions that swim around in the backs of our minds when we are contemplating the U.S. treasury market, particularly.

When you look at the bond market today, it is worth looking at our current liabilities, north of 20.7 trillion, and our total unfunded liabilities, which bring us closer to 70 trillion, and you certainly do not see those liabilities showing up as a weighty issue when you look at current yields.  They do not factor in the risk of default.  They do not factor in anything at all, really, when you are looking at 4.5, 4.6, on the 30-year treasury.

Kevin, you and I both know that we have lived beyond our means as a country for the better part of 40 years.  You could probably trace that date back further, but at least the 30-40 years of the last credit cycle, we have lived well beyond our means.  The bond market is the way that we have supported our lifestyle.  It is the way that we have maintained dominance on the world scene, and you have to assume that a capitulation of the bond market would be really a sign that we have reached the end of the things that we have taken for granted for many, many decades, whether it is dollar reserve currency status, or the U.S. equity markets being the most liquid and deep financial markets in the world.  Some of these things could begin to be called into question if the bond market collapsed.

You have to know that the Fed and the Treasury will defend that market tooth and tong.  I just want to tie this into another question that was asked about IRA assets and whether or not the government would confiscate or utilize IRA assets to prop up the bond market.  My response, I think, took several people by surprise, and it was that I do not believe the federal government will utilize IRA assets to do that because they are yours, they are mine, they are “self-directed,” they are the individual retirement accounts of individuals all across the country.  When you begin to toy with those things, I think you create a lot of, shall we say, political volatility?  That, I do not think they can afford to do.

But what they can afford to do is capture 15 trillion dollars from the pension funds and do so as a knight on a white horse.  We have suggested this in the past, but it is becoming much more crystal clear to me, that the bond market will ultimately be defended with a very large resource to back it, and interest rates could very well be defended at low levels and prices propped up in the bond market, well beyond the time frame that would be natural or normal, with 15 trillion dollars’ worth of a war chest.  I think that is where you look at the pension funds, and with some volatility in the stock market, if you assume sort of a step-sequence, the first shoe to drop may be a 10%, 15%, 20% correction in equities, which creates an even greater problem with underfunded pensions.

Then I think the government has an excuse to come in and blame pension fund managers for mismanagement.  Whatever the scapegoat is, whatever the justification that is given, they will plead their case with pensioners, saying, you can either have 40%, 50%, or 60% of your pension as it is on track to give you now, or we will guarantee 100% of your pension, but we do need the 15 trillion dollars in assets to manage appropriately.

Kevin: That would be done in the form of some sort of an annuitized payout?  Is that what you are saying?  They would give you a longer-term guarantee as long as those pension fund monies would go into treasury bills?

David: That is exactly what happened with the Social Security Trust Fund.  It got spent on whatever it needed to be spent on, and got turned into a long-term liability.  They captured a present asset and turned it into a long-term future liability.  For them to do that – this  is the government doing what is normal to them.  Theft is not new, but you have to do it under the right guise, and there has to be enough desperation to get away with it.  I think the pensions are the perfect place where they will actually be able to justify it.

The reason I mention it is, in answer to the question if IRA assets are at risk, I would say, not they are not – not up to, or until, pension assets have already been taken, and then we might revise our view on the vulnerability of IRA assets.  The pension assets are the low-hanging fruit, and that is what would be grabbed first, but it has huge implications for the bond market, because I think you could spend quite a few of those trillions in supporting the bond market, and again, distorting the notion of risk or the indication of risk in interest rates and the long-term treasury market.

Kevin: In other words, it is a form of carry-trade.  It is saying, we can keep interest rates unusually low to stimulate the rest of this economy, as long as there are funds, as you said, the low-hanging fruit, that we can force through the machine.  We have talked about the need to sell debt worldwide.  But in reality, we have grown less and less dependent on international buying of our debt, at least through this crisis, because we have just been buying our own debt with whatever assets, or what looks like assets, that are hanging around.

With that being the case, there is an end to that game, and that takes us finally back full circle to where we started talking:  Gold and silver.  The direction for the market in gold and silver this year is something you have not really addressed, necessarily.  We have talked about the long-term direction, but what are your thoughts about the market as we sit right now?

David: To the degree that the government defends the bond market, I think they have more ammunition than the “bond vigilantes” do, and the assumption is that the long end of the curve will steepen and you will see interest rates spike.  This is the devil’s advocate position on a spike in treasury rates, which I think would be normal and natural at this juncture, but could be contained.  If they are willing to defend the bond market and keep mid-to-long rates down, I think the bond vigilantes really take on a different complexion, and instead of seeing high interest rates and low bond prices, where that market becomes utterly manipulated and a non-market, I think you see the same sort of vigilantism show up in the gold market.

If you do not have interest rates indicating real risk in the bond market, it is going to show up someplace else, and that is where I think you see gold and silver as a barometer – a barometer for instability, a barometer for insolvency, a barometer for inflation, a barometer for a lot of things, and I think you could almost consider the gold market and gold investors to be the new bond vigilantes.

Kevin: Let’s say we are looking at gauges on a dashboard, and the bond market is one gauge of rising risk and rising interest rates.  Then we have another gauge that is the gold price, but it is actually probably one of the smallest gauges on the dashboard.  What you are saying is, better to artificially manipulate the big gauge, the bond market gauge, the interest rate gauge, and go ahead and let that gold gauge spike, because not too many people are actually paying attention to that.  Is that what you are saying?  It is robbing Peter to pay Paul, but nobody is paying attention attention right now to one of the gauges.

David: I think you are exactly right, Kevin, and that brings us full circle to the original observations about the Orlando conference and the fact that investors today could care less about the direction of the price of gold.  After ten years of a sustained bull market, it really factors in as irrelevant in their minds.  It is not something they have had interest in, nor will they in the future, until it is something that they are forced to purchase by necessity.

Kevin, next week we have Marc Faber on our program.  I would like to quote something that was in his recent newsletter, a quote from Joseph Schumpeter:  “The modern mind dislikes gold, because it blurts out unpleasant truths.”  I think, Kevin, that is essentially why you have investors today still tied up in a world of hope, which is normal, it is human.  I think that quote goes a long way toward explaining why people neglect the gold market, because it is unpleasant to consider the reasons why gold has moved higher in the last ten years, and might continue to over the next 3, 5, 7 years.  It is more of a psychological blindness.  It is something that people do not want to come to terms with, because it means that the world we live in is not quite as stable, safe or beautiful as they want it to be.

I certainly agree with them, I would like to see it more stable, more safe, and more beautiful, and maybe we will see those transitions in the next 3, 5, or 7 years.  That has been our contention, and that is one of the reasons why we are here in the Bahamas today, to look at things from a global perspective, looking ahead, exploring different ideas as we consider transitions away from the metals in future years, with a very global perspective, we look at asset management and have to consider the direction that the world is going from a demographic standpoint.

We mentioned earlier that we consider emerging markets to be a huge bull story, just something whose time has not yet come.  To be early on that theme has been painful.  Fortunately, it has not been painful for us, nor do we intend it to be.

We are here in the Bahamas considering what it means to be a participant in the global financial markets, looking at asset management, at individuals’ lifestyles, in an international context.  That is what we call our inner circle briefing.  We have joined our partners from Switzerland, from Wealth Management and BFI Consulting, for an excellent two-day seminar.  Perhaps next year some of our listeners would like to join us.  We have a packed house this year, and look forward to the audience next year.

Kevin: David, I know you are heading to one of those conferences right now, so we will go ahead and wrap it up.