June 29, 2016; Brexit = The People vs. the Elite Establishment

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

 

“I think the bull market in gold may be over as soon as 2020. For most investors, they are going to pass by this unaware that there is a powerful little math equation, and quite frankly, if you don’t pay attention to that little ratio, you are going to see what could have been 100 years of condensed wealth accumulation and growth – you’re going to see it pass you by.”

– David McAlvany

 

Kevin: We’re just returning, David, from the Seattle conference that we just put on this weekend. You did a great job. I think you had too little time and too much information, but it was refreshing to see so many people attend for the three days that we were there.

David: To be honest, there wasn’t much that I had to change in the presentation coming into Friday after all that happened in the U.K. Look at last week’s Commentary and these were things that were not only on our minds, but sources of instability which pre-existed the vote, and actually, are far more ubiquitous all over the map. And so we have one particular flashpoint in a world that remains increasingly unstable.

Kevin: It was interesting, I went back and listened to that program again to see if there was anything that we had said before the vote that we would have changed after the vote. I was amazed. The overall theme had to do with the elites being out of touch with the people. The vote just played itself out that way.

David: And the evidence of real strain in those areas of particular weakness, lo and behold, Italy’s banks sank 22% on Friday. That put them to a total decline for the year of 52%, and now here just in recent hours the Italians are talking about having to put together a bailout scheme for the banks, something between 40 and 50 billion dollars. So there is activity there of a real crisis nature, and very little is being offered by either politicians or central bankers with real specificity.

In other words, they are saying, “Look, we’ve got liquidity available.” The ECB came out immediately and said, “Look, we’ve got 345 billion dollars which we will pump into the system,” and they’re not giving any real specifics other than, “We have money to spend.” I’m not sure they understand the dynamics of what happened, and what the implications are, so the best they can do is throw a big wet blanket over it and hope that that is enough to keep the flames under wraps.

Kevin: Last week before the vote we were talking about how the bread and circuses were getting fewer and fewer, and I think that’s why they pulled out the stops after the vote. They basically said, “Oh, oh, the bread and circuses? Here they are again. You need not panic about this vote.” What they don’t tell you is, “We’re willing to provide anything at your cost, ultimately, to you to placate you at this point.”

David: John Hussman does some very good research on fixed income. He said over the weekend that if you think of the EU in its current mal-structured form as a kind of Ponzi scheme, Britain is the guy who just asked for his money back. So, of course, what does the ECB do? What does the Bank of England do? They say, “Look, we’ve got money for you. We’ve got money for you. Don’t worry about it, there’s no reason to be concerned.” And Britain is being treated like the group that made the terrible mistake, but it’s only a mistake if, in fact, it’s not a Ponzi scheme. If it is a Ponzi scheme, they’re the only ones with brains.

Kevin: In a Ponzi scheme, if you’re the first one to ask for your money…

David: You’re going to get it.

Kevin: You’re going to get it, but not the last one.

David: Oh, not even the second one.

Kevin: The timing for this seminar was perfect, Dave, and this is not the last seminar. We love going to Seattle, we have some great clients up there, people that we’ve known for decades. I just want to mention that this is not the only chance for a person to listen to your views on Brexit, on the overall economy, geo-strategy. We are going to be in Costa Mesa on July 9th. That is coming up Saturday, July 9th. The way these conferences work, for the listener who has never been, it starts out with a question and answer period. You did that for about an hour. People would come, they brought friends, and had wine, cheese, questions and answers. You ran out of time before you could answer all the questions, so then we moved across the room and you gave an excellent conference, which finished up with more questions and answers. Overall, everyone’s comments were that it was an insightful time.

David: There are a number of families that I know who are flying into Southern California for this particular briefing, and then of course there is our regular audience there in the Southern California area, so if you do need details on that you can find them on our website, or just call our office and we can provide them to you.

Kevin: We would love for all of our listeners to try to find a way to come.

David: Last weekend, over the weekend, I was very refreshed. Seattle is where we were spending time with clients and Commentary listeners, and I’m always impressed by the people we meet at our conferences. In some instances, these are people that we have known for two, three, or even four decades.

Kevin: Over the phone.

David: And in other instances, we’ve never met them, so you have people that we’re not personally acquainted with, but through the Commentary have gotten to know us quite well, and it’s a delight to get better acquainted. So, now having done the Commentary for eight years, having been in business for 44 years, the opportunity to create and deepen relationships is very satisfying.

Kevin: Some of these people, Dave, were reading your father’s newsletter when you were a child. When we were getting together with some of the clients for dinner Friday night, you had your seven-year-old son there, and it brought back memories of the times when you were younger, and you were attending those same types of conferences with your dad’s readers of the newsletter.

David: Well, my daughter has her first business trip with daddy coming up. She’s going to be with me at Costa Mesa, and we’re looking forward to it. It will be a lot of fun. We had dinner with a number of clients, along with a local Seattle radio legend, Frosty Fowler. He and my dad go back 30 years, which is about half of what Frosty spent in the media realm, a 65-year career on the air. It was not uncommon for us to reflect on those 20 and 30 years of ongoing relationships with everyone who was at our dinner the night before the conference.

We appreciate each and every one of those relationships, and we hope that people who are just getting to know us discover this is one of the key distinctives of our company, longevity, a long-term commitment to relationships, offering guidance and counsel that is not sort of a one-off event, as in a single transaction, but it’s just who we are. There is a seasoned team essentially on retainer to continue the education process and implement strategic plans, really, across multiple generations.

Kevin: Dave, on top of you giving an overall viewpoint on what’s going on over the next two, three, four years, what has happened over the last two, three, four years, the Brexit vote being a couple of days before we got there was really timely because the trajectory of the rest of the world has changed significantly due to this vote.

David: We titled last week’s program, The Vote Heard Round the World, and there was every market that was implicated in this change and the volatility that ensued. As we mentioned a minute ago, the ECB has automatically promised 345 billion dollars in liquidity. You have the Fed which has promised liquidity in the event it is needed, so yes, if anyone is caught off guard either Friday or Monday, frankly, they are probably made whole. The central bankers are there to make sure the markets remain a one-way bet.

Kevin: But this is a series of dominoes. You have other currencies now reacting to this, like the yen and the dollar.

David: The yen moved up very uncomfortably, and Kuroda, Abe, the teams in Japan, are having to intervene to keep the yen from appreciating any further. We have the headlines here on Tuesday, which read, “Stock futures rise in anticipation of coordinated central bank intervention.”

Kevin: Which cracks me up because this is after losing 1100 points. I think they rose about 120-150 points.

David: Right.

Kevin: They’re focusing on that, but gold – they don’t want that to signal any kind of crisis at this point.

David: It was fascinating, I was looking at the chart on Bloomberg. This was Sunday night, so with overseas trading, and gold clicked down $3. After being up almost $100, it clicks down $3, and the headlines read, “Correction in gold price as equities rebound.” And I’m thinking, “Wait a minute. Wait a minute, here. Wait a minute.”

Kevin: Do you feel manipulated at all?

David: So, gold will be down, stocks will rise, brokers are going to crow about owning stocks for the long run, they’ll crow about not panicking. They may even volunteer their personal tale about buying in the midst of Friday’s chaos, a bold move as Brexit is the only concern on anyone’s radar. And I think what we lose is context.

Kevin: Yes.

David: Again, if you go back to John Hussman’s comments, if this is the beginning of a Ponzi unwind, this is also the beginning of a reveal, a reveal of a lot of things that we didn’t know before. And what is very curious – we see Poland getting very antsy about their connection to the EU, not in the same way that you would expect Podemos and the people in the Spain, or the National Front, or the Five-Star movement in Italy, but this is sort of your middle of the road politicians in Poland saying, “Wait a minute. We’ve been an ally of Britain for a long time and we don’t really like the notion of federalism.

And it’s beginning to emerge that in response to Britain leaving that Brussels will propose a European Superstate, and the European Superstate, according to one news source, includes the elimination of an army for all of the individual EU countries, the elimination of country-specific criminal law, the elimination of unique tax systems or central banks, with all of those powers being transferred to Brussels. Basically, put under strain, what does a bureaucrat do? Does he say, “Oh, well, we’ll just be friendly?” No, in fact, they get real aggressive, and we’re likely to see that in response.

I was shocked and floored to see some of the responses of bureaucrats from Brussels. Instead of saying, “Look, we understand you’ve decided to leave.” They basically said, “You can’t leave. You’re not allowed to leave. That’s not the design of the EU project. People don’t get to vote whether to be a part of this or not.” And I’m reading all of this thinking, “Does anyone understand the real nature of this beast and how unfriendly it becomes if challenged in the least?”

Kevin: And it’s not just countries within the EU that are starting to become uncomfortable, Dave. There are countries that felt some sort of kinship with the EU that are now having to find other allies. I think of Turkey, and I’d like to talk about that in a little while.

David: The concerns in Europe are that Britain is the first olive out of the jar, and Greece may have been, or still is, a problem in the eurozone. That is kind of a perpetual thing, and the problem has to be solved. But it is relatively small. If you end up with Spain moving toward a similar kind of referendum, that is an economy that is six times that of Greece. Italy is approximately nine times that of Greece.

So Greece may have been a nightmare to handle, but again, we’re talking about two larger olives, which would really represent the death of the eurozone project. And Italy is, as we mentioned, in the aftermath of Brexit, is already discussing 40-50 billion dollars’ worth of bank bailouts – not bail-ins, at this point, which is good, but it’s going to raise concerns, nonetheless.

You have the ECB which is under pressure by the peripheral European countries to grant assistance, and guess what has changed? These peripheral European countries now are emboldened to ask for better terms. So, again, rather than going with hat in hand and requesting assistance, they can demand it, and Brussels has to basically say, “What are the terms going to be?” Which, quite frankly, makes sense why Brussels would, instead of waiting for them to be approached by the peripheral European countries, lead with a very aggressive, “You’re in, or you’re out. Let’s make this very clear. You are in, and here are the terms. We’ve just increased the stakes, and we will punish you – punish you – if you don’t go along with this.”

Kevin: That’s going to blow up in their face. I think the concept of creative destruction, though, Dave, in the long run – this was a project that was at least doomed to change the overall look of the European Union anyway. The European Union, without fiscal unity – we’ve talked about this for years – without fiscal unity, and giving up some sovereignty, was just not going to hold together.

David: But this ends up being the whole point of the Brexit issue. You can talk about the country bumpkins who have taken Britain off the rails, or you can say, “Wait a minute, this is actually the people versus the establishment.” And the people just scored a reasonably large point, one that makes, frankly, the news media look rather silly, makes the central banks look uninformed, and it makes the unelected European bureaucrats look as daft as ever, and out of touch as ever.

Kevin: Dave, they’re talking about how horribly the pound took a pounding, anyway they can make it look like it was the worst thing ever, they’re going to do that. But if they were manipulating the pound, or if the central bankers were in control of the pound, haven’t they done similar types of things with the currency? It was just planned, it wasn’t the market.

David: This is the same issue, the people versus the establishment. They’re only bothered that the market is making these moves versus it being orchestrated by people who are bigger and smarter and more well-informed than the market. So, the pound sterling, it’s a bunch of hullabaloo. We’ve had the sterling, which they are saying, “Yes, it’s at 30-year lows.” Well, as recently as 2009 the sterling was a few percentage points away from this level, and it had been deliberately driven there by the Bank of England.

So what do you see? You see that insincerity reigns, along with the King losing his clothes or being shown to have no clothes at all, insincerity reigns post-Brexit. Which is worse? If you think devaluation is destabilizing, you have a 30% decline, which the Bank of England stretched out over six months, or the decline which we saw on Friday which was an 8% decline Friday/Monday, so let’s call it 10% in two days, or 30% in six months.

Now, listen, if you’re a trader, then obviously the 8% move, because it probably caught you flat-footed, but if you’re talking about the British economy, remember this, it was the Bank of England who devalued with the intent of improving the economy by making the tradable goods, that is, the export sector, more competitive.

Kevin: Right. There are winners and losers.

David: Which they accomplished. So really, the concerns are not economic at all. That kind of volatility, yes, it hurts a few traders. Don’t cry for them. Impressive? It was. It was double to triple the price swings of the pound sterling when the exchange rate mechanism broke down in 1992, and yes, someone made a fortune then, someone made a fortune now, but there were probably more fortunes lost, presuming that that the Leave campaign was viewed to be insignificant, unimportant, a minority, wouldn’t happen.

Kevin: It seemed to catch them flat-footed, actually, Dave.

David: It did. So look, you have the people who have spoken, you have other voters in political parties across Europe who are now emboldened by that, and you have politics in Europe which just passed an inflection point.

Kevin: But the tools of propaganda, and I hate to say this, but that is including the rating services, the tools of propaganda from the publications like The Economist, Financial Times, what have you, they are doing their best to do damage control. Standard & Poor’s is even changing the rating of England now to make it look like they’ve made a mistake.

David: And not enough capital has flowed, nothing has changed of substance yet, for S&P and Fitch to change from a Triple A to a Double A rating for the U.K.

Kevin: It’s a punishment of the establishment, is what it is.

David: That’s a punishment by the establishment. That’s exactly right. Politically motivated? Certainly. Somebody in the U.S. administration made that call. That may have come from the oval office, that may have come from John Kerry. I don’t know who was in touch with Standard & Poor’s and Fitch, but this is a political operation. Because again, nothing has changed. If you go through a two-year messy divorce and all of a sudden economic variables have radically altered for the negative, it’s very understandable why Standard & Poor’s and Fitch would say, “Look, things have deteriorated and therefore we must downgrade.” But until those things of substance – material substance – have changed, it’s all speculation. Or it’s not speculation at all, it’s pressure politics.

Kevin: But the naysayers are saying that the strategic relationship has now shifted between the United States and England.

David: That’s right. Even the former Supreme Commander of NATO, Jim Stavridis – and to be honest with you, I’m very uncomfortable with a title like Supreme Commander. It’s something that if I had an ego problem it would actually be fun to have (laughs), but probably a dangerous one to just hand out. Jim suggests that this is going to make our relationship – the U.S./U.K. strategic partnership – less effective. I think that’s balderdash. I think that’s unmitigated balderdash. What changes between the U.S. and the U.K. in terms of our strategic relationship?

Kevin: Where are they going to go? Paris? Are they going to go to Spain? Are they going to go to France? Where are they going to get a better relationship at this point?

David: Are you thinking about Wall Street? Because Wall Street could migrate, but if you’ve ever done business in Paris, it’s a bloody nightmare. We spent years setting up a business in Paris – shut it down – do you know why? Because it’s a bloody nightmare. Even just going a short train ride away to Brussels, it’s a lot easier. You know why? Because it’s not Paris. Because it’s not France. So Wall Street is suggesting, and threatening, “We’re going to leave London.” Where are you going to go? Where are you going to go? Are you really going to pull up stakes and move your operations to Frankfurt? To Dublin? Are you kidding me?

I think there is a lot of stress and a lot of strain and a lot of surprise, and people are reacting, not responding. They are reacting, and they are reacting emotionally, and not in a very thoughtful way. You have the likelihood of replicating what already exists between Norway and the EU, which is the European economic area, and maybe it looks something a little bit more like what the EU has with Switzerland. There is free trade. You’ve had the Schengen agreement. You’ve had all kinds of flows of people, products and capital throughout Europe, even with countries that were on the outside of the 20-odd member group.

Kevin: And they are able to keep their sovereignty and their law-making ability.

David: That’s exactly right. So, apart from the economic flows of goods and capital, apart from the technological infrastructure, the legal leeway, it would be very difficult for your Wall Street firms to just walk away from what they already have in London. Frankly, I don’t think it’s going to change. But again, it’s speculation at this point. It’s all speculation at this point. It assumes going from something, all that we’ve had, to nothing. And on the basis of going from something to nothing, this change will require a shift to X, Y, and Z location.

But that’s just not the way things materialize. You may go from something to something else, but that is all subject to negotiation. And those negotiations don’t have to be rancorous. They may actually go quite smoothly. And we may find at the end of the day that nothing has changed, in which case, do you know what has just happened? S&P and Fitch have put their reputation on the line.

Kevin: Right.

David: There was no reason to downgrade them. Actually, they’re just political puppets.

Kevin: It’s downgrading before anything has happened, a little bit like Obama getting the Nobel Peace Prize before anything had happened. It’s like, “What are you doing here? We have absolutely no evidence.” But I was picturing this weekend, though, Dave, two chess players. The world is the chessboard, and if you’ve ever watched a really good chess game between two masters, it can look like nothing is happening for quite a while. One piece will move, and then the other will move, and then another piece will move. And then all of a sudden, in a flurry, you see this exchange of pieces, these sacrifices. The exchanges may happen three, four, five times, where all of a sudden there are all of the captures, and changes in power, on the board. I’m watching Putin doing this right now with Turkey.

David: You’re exactly right. But it’s not just Turkey.

Kevin: And China last week.

David: That’s right. So, Putin is making overtures to Turkey, Putin buried the hatchet with Erdogan over the weekend over the downed Russian pilot, and at the same time Russia is moving closer to China. Russia is actively filling a gap with Israel.

Kevin: And Saudi Arabia.

David: That’s right. So, U.S. foreign policy is creating these voids and Putin is very strategically filling the voids, and so, while the whole world is concerned about what happens with a slower flow of kippers, which are just small sardines which the English love to eat and do export to their various outposts across the planet, people are concerned about Brexit and they are not realizing that the geopolitical map is shifting. And I don’t know, is anyone paying attention?

Kevin: In life, Dave, there are certain things that happen in people’s lifetimes where you can say, “Hey, that was a real turning point in their life.” I think of my Uncle Jimmy. My Uncle Jimmy every year went duck hunting, and everyone knew that that was what he looked for every year. The year that Uncle Jimmy didn’t go duck hunting everyone looked at each other and said, “Something’s changed.” He seemed healthy enough, but he ended up passing away that year. It was unfortunate, but that was a sign that he was changing.

David: When I spoke with Ian McAvity in January, I asked him how his trip to Zermatt had been because every year for 40 years he had taken ten days to go skiing in Zermatt and he said, “Oh, it just didn’t happen this year. I had things that I was busy with, and what not.”

Kevin: He had stresses going on in his life, as well.

David: And we could talk about that, for sure. Unfortunately, Ian, for those of our listeners who don’t know, passed away March 16th.

Kevin: Yes, it was very sad. He was one of our favorite guests.

Dave: And there was that indication that something had changed. Something was off. And I honestly think what is happening in Saudi Arabia right now is of a similar nature. They are debuting 15 billion dollars in bonds, they will offer those to the market after Ramadan is over.

Kevin: But they’ve always loaned money, not borrowed money.

David: It’s a significant thing to move from creditor to debtor status, and obviously, the commodity cycle has been rough for them, but even with oil sitting at recovery levels near to $50 a barrel, it doesn’t diminish the Saudis’ need for liquidity, and so I would say, mark it down. Mark it down, this is a significant transition for the Saudis, to go to the debt markets for funds. What does it mean to debut, for the first time, welcome, the Saudis, and 15 billion dollars’ worth of bonds. These are changes. They are worth noting. They are worth noting because it hasn’t been done before. Remember that.

Kevin: Dave, depending on who you’re listening to, this was either the worst crisis that we’ve ever experienced, or it’s not a big deal. And I’m trying to weigh out where we put our emphasis right now because if we’re looking at points lost, there were a lot of points lost on the stock market. But like we talked about with the British pound, the pound had come down to new levels that we haven’t seen in 30 years, but they were pretty darn close to what we had seen just a couple of years ago.

David: Here is a contrast in studies. You have the Wall Street opinions which would say, “Look, it was so awful on Friday that if you can keep your wits about you, now is a great time to go bargain-hunting.” Barron’s ran a story titled, “Bargain-hunting for tech in the post Brexit rubble,” as if things had been so bombed out and trashed in the tech markets that now is the time to establish a position because things are of such great value. And on the other side of that, again, a study in comparisons, contrast and analysis, Bill King asked two questions. Are we going to spur other independence movements, or have we already done that? And secondly, if this is an emperor-has-no-clothes moment, then as he says, stocks are mispriced to both economic and political realities.

Kevin: Right.

David: And so, what they are saying is a major leg down – think about this, the S&P and the Dow are only a few percentage points off of all-time highs, and yet the news media is saying, “Gosh, with that kind of correction, you have to be a buyer.” What? What in the heck?

Kevin: Yeah. Everything is still way overvalued, but the shift, even with Bill Gross, the King of the bond universe, Bill Gross as this point is saying he thinks it’s going to be a recession.

David: Sure. So, we had odds of 10% recession three weeks ago, and then about a week ago it had jumped to about 20% that we would experience a recession here shortly. Gross suggests over the weekend that chances of the U.S. going into a recession have been raised to as much as 50%.

Kevin: What does this do, then, for the likelihood of any further interest rate increases? What is Yellen doing with this at this point?

David: It’s off the table. Uncertainty may, in fact, give them cover to explore more of what they have been doing over the last three, four, five, seven, eight years – unconventional monetary policy measures. So, that’s a big question. What is the central bank community willing to finance using their balance sheets as a catch-all? Are we going to see the launch of another Maiden Lane, but instead over in England, or over in Frankfurt. Where will it be, and what kind of garbage will they collect with it? They are of the mind, as we mentioned last week, quoting Mr. Turillo, that if what they have done has not worked, then clearly, what they need to do is more of the same.

Kevin: More of the same. Dave, when I talk about hearing that it’s either the worst situation or it’s a good time to buy, what have you, that’s a lot of noise. We encounter a lot of noise in our life. Sometimes it’s nice to just get quiet, step away from the news, forget about Brexit, forget about Yellen raising rates, forget about what’s going on geopolitically. I’m not saying do that all the time, but sometimes it’s nice to just get quite and say, “What is a ratio that we’ve been able to watch that has been very consistent for years and years and years? You talked about Ian McAvity. Ian McAvity loved the Dow-gold ratio, because for him, it was probably one of the easiest ways, taking all the news out of it, one of the easiest ways to determine whether stocks were over-valued or under-valued, relative to gold.

David: One of the things that is nice about dabbling in technical analysis is that there are ways of doing it and resources in that area that take away a lot of the emotion of the moment. For instance, if you are using point and figure charts, point and figure charts basically condense all time and just measure movements and things. So, you can look at an asset in a point and figure chart, be looking at 50 years and see where it has gone up and where it has gone down, and it eliminates the noise of the news pundits saying, “This is what’s jamming up the market today,” or, “This is what’s causing a forced liquidation today.” And it removes all of the noise and just allows you to look purely at price action.

The Dow-gold ratio does something similar in that it just shows you the ebb and flow of sentiment through time. It shows you when there is a greater amount of greed in the market, and when there is a growing sense of concern that something is not quite right, and that is really a transition to the other extreme in the emotional continuum of investing from greed to the far end of that continuum, which is fear. So, the Dow-gold target of, say, 2-to-1, 1-to-1, 3-to-1, is radically different than where we started. The target which you might say is a very conservative one of, say, 5-to-1 – that implies a $3500 gold price with virtually no decline in the U.S. stock market.

Kevin: I think it is relevant to go ahead and let the listener know, this is just simply dividing the value of the Dow Jones Industrial Average by what the price of gold is.

David: Right. And it tells you how many ounces of gold have the same equivalence to the stock market. You will tend to see the number very high, again 43-to-1 was indicative of the stock market peak in 1999 and the year 2000. And you will see the ratio very low when there is abject fear in the marketplace – nobody wants stocks, everyone wants gold, and you have gold at a very elevated price, which means gold relative to stocks is super expensive, thus a 1-to-1 ratio, which we saw as recently as 1980, and have seen three other times this century.

So, currently at 13-to-1, the ratio is, down from 43-to-1, the ratio confirms that something shifted in the minds of investors back in the year 2000 and has not changed since. We reached 6-to-1 in 2011, we have reverted from 6 up to 16, and now the journey which began at 43 and will ultimately end, as we think, at 3, or 2, or even a 1-to-1 ratio – it appears to be re-initiated.

Kevin: Again, sometimes it is hard to think this way, but if we were at a 1-to-1 gold ratio right now, gold would be…

David: $18,000.

Kevin: Yes, about $18,000. That sounds completely out of the question for most people thinking this way, but this happens whether the Dow falls down to gold’s level, or whether gold rises to the Dow level, it has happened numerous times, and that signals a usual top in the gold market, and a bottom in the stock market.

David: And it always happens in the context of economic and financial chaos, and occasionally there is political and geopolitical chaos layered in on top of that to exaggerate that negative sentiment, where people just think that, literally, it is the end of the world as we know it. And when people come to the conclusion that it’s the end of the world as we know it, they don’t want stocks, and they want one asset that gives them, like Linus and the security blanket, that feeling of, “It’s going to be okay if I just hold on to my ounces.” So, there is that extreme of greed on the one hand, which drives people into stocks, and fear on the other, which drives people into gold, and this ratio which tells you where you are in the journey.

So we’re fascinated by the ratio, not as mathematical geeks, but as financial observers who like to witness, and are currently witnessing, one of the greatest wealth transfers in modern history. To see one’s financial footprint grow and expand by three or four-fold in a lifetime – if you’re doing time-valued money calculations, that’s actually pretty normal. If you save a lot, and you give yourself 30, 40, 50 years to see your assets grow, then to see your financial footprint grow and expand by three or four-fold in your lifetime, that’s normal. To see it expand by ten-fold, now that’s exceptional. But to see it expand by as much as 20-fold, in less than one generation, that’s important. That’s remarkable. That’s rare. And Kevin, it’s happening right in front of us.

So further, to see the periods of time when tangible assets make more sense than paper assets. We had one gentleman at that conference in Seattle say, “Okay, you’re saying that gold is in a structural bull market. How long do structural bull markets last? Isn’t it typically about 20 years?” I said, “You’re right, it’s about 20 years, except for the structural bull market in stocks that we saw which started, depending on your time count, from 1974 to 1999, or from 1980 to 1999, roughly 20 years, and perhaps exaggerated by central bank intervention and pushing and accommodation. So maybe it was a little bit more than that 20-year mark.

Kevin: You talk about people who say that it’s the end of the world as we know it, they’re running away from anything that has to do with the world, that actually is when the person who has stayed liquid in gold can go buy the world for pennies on the dollar.

David: Right. You’re bringing me back on track. What I’m trying to say is that there are periods of time when tangible assets make more sense than paper assets, and if you can recognize the transition back to paper assets, capturing the massive increase in purchasing power between precious metals and stocks, this is exciting. This is that massive transfer of wealth.

Kevin: And it doesn’t happen all the time. This may only happen in a lifetime.

David: We’re not going to witness this again in our lifetimes. Some people want the price of gold to go up quickly so they can fund their retirement spending, and frankly, they are missing the point, that on a slow but sure basis, gold is providing us with the opportunity of not only one lifetime, but two, or three, or even four lifetimes, if you’re willing to be patient. The last 16 years have sketched this out. The Dow-gold ratio has gone from 43 down to 6, up to 16. It’s now with concerns in the marketplace that perhaps the Fed and the world central banks don’t control every outcome. It’s moving back into the limelight, something that is relevant, that is a necessary bet.

Again, it’s just an indication of a gradual migration that occurs when people are less confident and less greedy, and are in that shift toward a complete irrational fear. It’s not that we’re in love with the metal. I do believe that is has a place in a portfolio at all times, but at certain times it has an elevated position because of what it sets in motion that cannot otherwise be captured. You know what that is? It’s the condensing of time. What that ratio allows, what any ratio trade allows is for a condensing, a shortening of time, concentrating the shifts in the marketplace and allowing for compounding to take place, at first slowly, and then at ever faster rates.

If you can imagine that, if you can see that in the process, that is the process of this ratio shrinking. It begins slowly, and then as a migratory shift occurs where investors, first one at a time, start buying, then by the dozens, and ultimately by the tens of thousands, migrate from one asset class to another, to gold and silver, and what you see at the tail end of one of those things is a rate of change which is absolutely off the chart. And it’s the rate of change which ultimately is an indicator, again, going back to technical analysis and Ian McAvity, which tells you that you are at the end of that cycle. So, slowly at first, and then like a particle accelerator, so fast you might miss it if you don’t know what or where to look.

Kevin: The questions came up when we were in Seattle. “So what do we do with it?” That’s been a question for the last 30 or so years that I have heard from clients. But your answer was, you need to develop and exit strategy beforehand, and as this is occurring, what do you do with it? A lot of times people think, “How am I going to go buy a loaf of bread?” You hear the phrase, “You can’t eat gold.” That’s really not what you’re talking about here. You can’t eat dollars, you can’t eat bonds, either. What you’re talking about is redeeming it for whatever it is worth in currency at the time, and then buying things for pennies on the dollar, and you start early.

David: Or a direct exchange into the assets you prefer. We’re sitting there with my seven-year-old son at the conference, and I’m thinking back, and thinking, “My experience of direct exchange with gold and silver goes back to when I was about his age,” because one of the gentleman who worked for our company at the time took silver dimes, and silver dimes were worth dollars – lots of dollars – because of the price of silver (laughs).

And he took those silver dimes and he bought himself a beautiful convertible gold Trans Am. And I remember as a seven-year-old boy I went with him to pick out the car and I watched the transaction occur, this little cookie tin of dimes in exchange for a Trans Am, and I thought, for the first time, “I really like dimes. That’s what you can do with them? That’s what you can turn them into?” So granted, I’ve been corrupted, there is an experience early on in life with seeing a value exchange occur where, actually, going to a currency didn’t even have to happen.

Kevin: Right. So, if the person who is just sitting there looking at their gold thinking, “You know, I’m retired. I need to see this go up so that I can keep my standard of living,” they may be missing the larger point.

David: I think they’re missing the larger point, because what they could do is take their small slice of their retirement pie and create wealth that extends beyond their life, not only meets their immediate financial needs, but is also a blessing to future generations. The reality is, if they don’t have enough perspective on that, they’ll spend it all and leave their kids with nothing, because they won’t understand the value exchange on offer, or how to do it.

So, I find it a bit tragic, and I think there is a huge cost involved in not seeing a bigger equation in motion. Something as simple as the Dow-gold ratio is a very big deal, and this is a timeframe, there are a series of events which are bigger than us which are driving values, and ultimately I think we’re going to see a radical improvement in purchasing power in gold terms.

Kevin: In this Commentary you have repeated over and over to learn this ratio. This is not hard. This is not hard math and you don’t need to have an expert with lots of years of experience to understand it. You take the Dow and you divide it by the price of gold, and as you get closer to 1-to-1, you start selling some of your gold and buying other things.

David: But if that’s too conceptual, if you need a picture, then go to this website, pricedingold.com. We’ve had Charles Vollum on our program before, specifically, to elucidate this concept and, again, in a paint-by-numbers fashion, see what the cost of wheat is in gold terms.

Kevin: Pianos, in gold terms.

David: The cost of pianos. You may get frustrated that the price of a loaf of bread has quintupled in the last 15 years, and yet priced in gold, it’s about as cheap as it’s been in 100 years. What is your perspective? Are you saving in the wrong currency? Are you investing in the wrong currency? Sending subtle signals about how you ought to save, and where you ought to put your hard-earned dollars – we’ve tried to do that. The time is coming where, I think, the vast majority of our listeners, if they haven’t already, will be buying gold. I just hope that it is not at egregiously higher numbers. I hope they do it sooner than later, and are able to have this value exchange work for them. I see value opening up for you in a matter of years, and that has been taking place over a 20-year period. The Dow-gold ratio – again, I go back to 1990 and 2000 when the ratio was 43-to-1.

I think the bull market in gold may be over as soon as 2020, and that leaves a lot of condensed fireworks and movement of the metals between now and then. For most investors, they are going to pass by this unaware that there is a powerful little math equation – long division, you can do it. And quite frankly, if you don’t pay attention to that little ratio, you are going to see what could have been 100 years of condensed wealth accumulation and growth which is packed into this two-decade period – you’re going to see it pass you by.