November 10, 2011; A Street View of the Current Gold Market: An Interview with Trader Roy

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, today, as promised, we are going to try to fill a gap that we don’t normally fill. We don’t talk to short-term traders very often, but Roy has been a contact of your family and this company for three decades.

David: Kevin, it is interesting, when you look at markets, you can look at them in the long-term perspective, the major trends, you can look at them in the intermediate perspective, which is what is happening over the next 12-24 months, or you can look at things on a very short-term perspective – what’s driving the market today, and what’s going to be the impact today, tomorrow, or the next day – where you really are shrinking time, Kevin. And actually, the markets do trade every day, so you have to be aware of all three, as a longer-term investor, the big picture perspective is going to be most helpful. But to know what is happening in any given market, on any particular day, it really is down to a trader’s perspective, and what’s happening and driving the market in this very moment.

Kevin: Last week, Dave, we talked to Ian McAvity. He has been in this market for going on 50 years, if you really consider his stock market background.

David: In fact, Kevin, we invited Roy on with the understanding that we would not use his last name so that he wouldn’t have to talk about his company and the responsibilities that he has directly for that company, and he would be able to share with us freely his thoughts and ideas, as a friend, and as a professional.

Kevin, it is interesting, we look back at the 30 years that Roy has been trading, specifically, in the metals markets, and in terms of dollar volumes, I would guess that there is only a handful, 4-5 of people in the U.S., who have seen as much physical metals traded as this particular individual. He is responsible for a tremendous amount in terms of dollar volume on a daily basis, on a weekly basis, and over his career – a man of exceptional experience, a man of exceptional insight, and when he says something, Kevin, I always take it to heart and factor it into a decision-making process.

Kevin: In fact, Dave, not only do you listen, but you have brought Roy in for the other associates here at the company, so that we can get insight. We have had conference calls with Roy in the past, and they are highly valued.

David: Kevin, as you and I have often discussed, and as many of our listeners are well aware, there is so much happening, any day of the week, that there are ample topics for us to cover, and we would need days to cover them adequately, so, we cannot cover all of the things that are happening in Europe, all of the things that are happening geopolitically and politically in that space right now, that the decision-making process of who will ultimately pay for this massive debt adjustment which has to occur. We are going to put that on ice for a few weeks, and come back to it, both after the Aden discussion, and our conversation today with Roy. This is a clean dose of what is happening in the precious metals market, and what some of the internals to the metals markets are. Hopefully, this is insightful for our listeners.

Kevin: I’ll tell you what, Dave, those conversations that we have had in the past with Roy have really been able to allow us to focus on that one issue, and that is what I think you are trying to do today. Granted, it’s price. We are looking at short-term, medium, and long-term, but there is probably no one better than Roy to actually say, from the ground level, from the trader’s point of view, what should be happening, and what is going to happen next.

David: Roy, thanks for joining us today. Since 1980, you have been actively trading in the gold market, and there are some complexities inside that universe which I would love to explore with you a little bit. The last ten years have been particularly interesting. We are in a bull market for gold, silver, platinum and palladium, and the price appreciation on an annualized basis has been something quite intriguing, and in fact, you could even say compelling.

The question, for many of our listeners, and certainly the work that we do here in our office, is to figure out where we are at today, and where we are going. If we are taking an honest appraisal of things, do we see a future for the metals markets heading higher? Do we see it heading lower? Frankly, I don’t care, as long as we get it right, and can be on the right side of that. Primary flows into and out of the metals? Again, this is something that has been unique about this bull market. It seems to us that it is more driven by international buying than by domestic buying. Perhaps you could look at both the international and domestic components, but also, who is coming into and out of the markets, whether that is in recent weeks, or months? What do you see?

Roy: The most interesting thing that I have taken notice of over the course of the last 6-9 months, specifically, but certainly dating back all the way to October of 2002 when the market was pretty much bottoming, and has maintained a steady level of appreciation ever since, on a year-by-year basis, has been the incredible increase in volume figures. The market continues to attract new participants on a daily basis, and with the widely accepted view that precious metals and commodities are now part of a traditional balanced portfolio, there is a great inflow of cash in the form of managed money that has come into the precious metals market in the last couple of years.

So many of the participants that are in the market right now, for us, are somewhat nameless and faceless. We have no direct connection to them because their investments are in the form of mutual funds and managed money. So I think, as long as that continues, and I see no reason why it will not, as long as volume stays great and continues to increase, the great likelihood is, so will the market, not only in the short-term, but in the long-term, and medium-term, as well.

To further elaborate on your question, speculative interest over the last 60 days has actually been in the form of profit-taking, and in my opinion and my experience, individuals, business entities, fund managers, etc., people who make money come back to trade another day, and the high percentage of individuals and entities that have sold precious metals in the last 60 days, have likely made money, and those types of inflows will be seen again as those participants re-enter the market.

David: It sounds like one of the significant changes, the real fundamental dynamic change, is the metals being viewed, not as an exotic investment, or a nontraditional asset class, but as a traditional asset class – core to a portfolio. That is probably more commonly held in Asia, the Middle East and Europe, and newly emerging, or should we say, re-emerging, as is the case here in the U.S.?

Roy: I would say that is correct, and the view that precious metals are part of a traditional, well-accepted, balanced portfolio, can only be certified by view of the type of press that precious metals have been getting, where the industry would have never received it before. Traditional newspapers like the Wall Street Journal, which would just barely cover precious metals, let alone tout their possibilities. The Journal now covers precious metals in depth on a daily basis, as does the Financial Times, and many of the business channels, where you would never see or hear precious metals being talked about, it is often the lead story now. There is continued acceptance, not only by investment professionals, but by the media, as well, that everyone from the small to the large investor is now interested in precious metals and it is no longer viewed as an alternative investment.

David: Let’s talk about price expectations, downside expectations, upside expectations. If you are looking at a 60-day window, or a 6-12 month period, we have gone from a peak of $1900 and change, down to $1540, $1550, and we have rebounded handsomely to about $1800 on the gold price, and do we see a new bull trend established, or are we still in a sideways chopping motion for some time?

Roy: I think in the short-term, and I’ll view the short-term as 60 days and the balance of this calendar year, we are likely to continue to see a continuation of choppy, and as we would call on the trading side, thin conditions, where the markets are prone and susceptible to rather violent price swings in very short periods of time. With that being said, I would expect gold, between now and the end of this year, to hold support at $1725, and I believe we will probably revisit that price one or two more times in the next 60 days, with selling and profit-taking likely to enter the market in front of the $1900 figure, and I will assume $1850 to $1875 will probably be the high for the next 60 days. Inside of that price range, there will be continued extreme volatility.

David: But those are very positive numbers for a year-end performance, and looking at 2012, there are a lot of things that are happening overseas that may be equity market and bond market negative. Do you see greater support for the gold market, moving forward, as we head into 2012?

Roy: I am very bullish for 2012, again, specifically, in gold, to a lesser degree the silver, platinum, and palladium market, which I hope we will discuss a little later on. The thing to keep in mind, as you mention the stock market, is that, as recent history has shown, the metals markets often travel in sympathy with a significant sell-off in U.S. and global equities markets, and from my perspective, I’m bearish on global equities.

With that being said, although I believe we will have a very productive year in 2012, with gold showing a year-on-year rate of return of somewhere in the 12-14% range, I can foresee gold, at some point, trading down to $1650, and I believe the high for the year will be at $2050. Those numbers are based on the assumption that gold settles, the end of this fiscal year, somewhere in the mid $1800s.

David: $1850, $1875.

Roy: Correct.

David: What this implies to me, Roy, is that we are actually still in a very normal market environment in which we continue to see two steps forward, one step back…

Roy: Absolutely.

David: Yes, and that it really hasn’t moved into a parabolic or manic phase. That, to me, is healthy. It’s long-term constructive. It’s the market where, frankly, the pace of change that we saw with silver last year, as it raced to 52, without really pausing at all – those are moves that, ultimately, are not sustainable, and require either a tremendous amount of rebuilding, or herald the end of the market. I don’t think that is the case with silver, but what you are suggesting is that we are still in the orderly phase of the market. What do you think would take us into the next phase, where perhaps the man-on-the-street is getting invested, whether it is in Krugerrands, or kilo bars, or a few silver dollars – what take prices to manic places? Is that $2013, $2014, $2016, or is that even in the cards?

Roy: I would actually say that would be over-estimating the market. I think the incredible intra-day volatility which we have seen, and can sometimes last for 2 or 3 business days in a row and be on and off inside of a calendar month. I think that is the craziness, the unexpected outside influences of other markets, global economic and political events that, unfortunately, hit all the markets. But our market has now become so big that it withstands those very short periods of extreme volatility and returns to a quite orderly marketplace. And as such, it is the reason I believe we will continue to see the precious metals complex led by gold continuing to appreciate 10-12% a year throughout the 20-teens. I can see this 10, 12, 13, 14% appreciation year on year, continuing well into the 2015-2016 time frame, at which point, perhaps we will all need to re-evaluate what our portfolios look like at that point.

David: Primary considerations, then, for the right white metals, because you suggest that gold is the leader in that area, less volatile, a larger market, cannot be driven up and down quite as radically as silver, platinum and palladium – what are your primary considerations with the white metals?

Roy: The white metals have taken great influence from many of their sister metals, commonly referred to as the base metals, and base metal pricing gives us a very good forecast on the economy, both domestically and internationally, in the short term and long term, as they are very price-sensitive to the monthly industrial demand of the countries that typically import those metals. Silver, to a lesser degree, but platinum and palladium, certainly to a much greater degree, have a price that is subject to the whims of the industries that they are used in.

For argument’s sake, automobiles have a great demand for platinum and palladium. I am of the opinion that the U.S. and global economy will continue to teeter on, but not technically be viewed, in a recessionary fashion, for several years to come. I believe the anemic growth and industrial and GDP numbers will continue to be very weak for at least another 2-3 years, and as such, although I believe platinum, palladium and silver will appreciated in price value, it will not achieve the 10, 12, 14% rate of appreciation that gold will achieve, simply based on the poor economic outlook.

David: Let’s talk a little bit about ratios, because in gold, relative to silver, we saw a spike to 30-to-1 last spring, and it really had had a limit, if you will, in the 45-50 range for some time. Where do you see that relationship? Do you see it maintaining its 40-50 range? Do you see it returning to 30 eventually? Do you see it even going lower? Or do we resume the 1990s trend of a move toward 60, 70, 80-to-1 on the gold-silver ratio?

Roy: I believe the likelihood is that we will not revisit the ratio in the 30s during calendar year 2012. With the gold and silver ratio currently trading either side of 51, at some point in time, simply due to the volatility of the silver market, I would look for the ratio to revisit the mid 40s, and take a look at the historical numbers that you just spoke about, where it traded for such an extended period of time. Specifically, I would look for the range to hold 45, and as I believe gold will outperform silver during the next year, I think the likelihood is we could see that ratio trade as high as 57 or 58.

David: 57-58 on the upside.

Roy: Correct.

David: At what price do you think it is compelling? Is it a 57, 58, where you think, absolutely, silver is a compelling value? Would you hold out for that?

Roy: I think above 55 you would have to view silver as a compelling value once again, yes. At this point, I would look to buy gold and perhaps take my profits on gold when I can plow those profits into silver somewhere in the 57-60 range.

David: Looking at platinum, we see about an 8% discount to gold today. What do you think that discount could stretch to? If you are thinking that gold may outperform, and platinum may get drug along, but at a slightly slower pace, what kind of a discount to gold do you think we could see platinum trade at? And at what point does that become compelling?

Roy: I look at that ratio in fixed dollar terms, not necessarily percentage terms, so I will address it in that fashion, if I may.

David: Yes.

Roy: Currently gold is trading at a $130 premium to platinum. Historically, at $250, which I believe it will revisit, the ratio traders, the professional arbitrageurs, have accumulated platinum and sold gold. So I am actually looking for gold to get to a $250 premium during the year, simply based on some of the issues and facts that we have already discussed, with platinum being subject to a weak economic environment, and gold being viewed simply as a greater store of value, I suspect we will see gold reach at $250 premium to platinum reasonably early in 2012. I suspect we could actually see that sometime in the first quarter of 2012.

David: So dollar premium-wise, $250. In percentage terms, that is not more than about 15%, 13-15% as a discount to gold. That is interesting. I have been assuming that it might reach as far as 20, but that may be an outside figure. I guess it depends on how bad you think the down-stroke is in the global economy. If we are looking at inventory builds in iron ore and some of the issues which the Chinese steel manufacturers are currently facing, we are seeing quite an accumulation of inventories, which would imply a slowdown of product at the end-user level, and we have also seen from a number of different miners, sales being off as much as 30-40% since the second quarter of this year, following through to this point. So, in the market place, there is, certainly, as you look at base metals and industrial metals, a slowing of volumes, and perhaps there is a greater awareness of a slowing in the economy early in 2012.

Roy: Here, domestically, during what is typically viewed as the best season for the U.S. auto industry, when new models are often launched and cars are being sold at their best pace of the year, August and September showed very poor auto sales, and we know the new home-building situation is just abysmal here in the United States. Those numbers are often lagging indicators, and you will likely see inventories not being replenished by those industries over the next couple of months, which will further add to the weakness in the platinum group metals and industrial metals, which is another reason why I think, with gold being a greater store of value, you can actually see this ratio drop $100 in the first quarter of 2012.

David: What do you think the distinctions are between today’s buyers of the white metals versus the profile of a gold investor?

Roy: They have gotten to be a rather lofty number. Someone buying 500 or 1000 ounces of gold is investing a very sizable amount of money into the market, and what I have seen in the last year or two, with gold at much higher prices, is that investors are also traders now. They are not just buying and accumulating for the long term. The investors, today, in all avenues of the marketplace, are much better educated than they have ever been before, and they will take profits when the market moves higher, and they will add to their portfolio on dips. But the market is being traded much more actively by physical traders than it has ever been traded before, and I am making reference to gold.

With silver, on the other hand, we see less trading, and by less trading I mean we see less silver in the physical market that comes back to where people are just liquidating a position that perhaps they are no longer happy with. Silver buyers tend to buy and accumulate, and buy some more, and accumulate, and I don’t believe they have an exit strategy or a profit target in mind when they are buying and accumulating. The person, the individual, the entity that is buying physical gold now, is clearly investing with a price target and an objective, and I think that has been the one big difference between gold and silver that I have noticed in the last couple of years.

David: Are we really talking about degrees of faith between one and the other? (laughter) That’s rhetorical, of course, but macro-economic themes that would impact both of those markets, the white metals and gold – what are the macro-economic themes that you are looking at that come into focus here in the fourth quarter or next year?

Roy: There are two big macro-economic themes that I think will continue to drive the market, both in the short term and the long term. Certainly, one of the foundations of the rally of the last couple of years has been the low interest rate environment, and as we have learned from our Fed chairman just a couple of weeks ago, the Fed has no intent of raising rates anytime soon. They have all but promised that rates will stay at historically low levels, at least through the end of 2012, and perhaps well into 2013, and we are probably looking at a QE3 package sometime in the first quarter of 2012, in my opinion, as well.

So, on the macro-economic side, clearly, the weak economic situation both here and abroad, which has driven interest rates to their lowest levels in decades, has been very positive for our industry. The EU situation speaks for itself. It continues to unravel by the day, and although Greece looks like it can, and will, be saved, there are much larger countries in the EU that have portfolios and debt problems that might be too big to solve. If that event actually comes full circle, and we do have a collapse of an EU member nation, we are likely to see an unraveling of the EU, and although that might lend itself to a broad short-term sell-off in all investments, the great likelihood is that gold will come roaring back and be viewed as the one safe global asset to own.

David: One of the interesting things about metals, particularly gold, is that there is an economic basis, as you suggest, low interest rates, and continued money-printing. Those are firm reinforcing behaviors that push the price of the metals higher. Gold, particularly, has a geopolitical component to it. Just months before you came into the business in June 1980, in 1979 the Russians invaded Afghanistan. We saw a tremendous amount of flight capital from the Middle East coming into gold because of a geopolitical thematic. I realize this is both speculative and imaginative, if you will, but are there geopolitical events that you think could materialize over the next 2-3 years, adding either upside or downside pressure to gold, where it is not just on the basis of macro-economics, but it is an unknown variable? It is the X factor that comes in and boom! If you were counting on a pullback, good luck, because it just raced ahead 200-300 points.

Roy: As history has shown in the 30 years that I have been in the business, with geopolitical events, I can’t think of one that actually had a long-term negative impact on the price of precious metals, and gold, specifically. More often than not, a geopolitical event adds to the anxiety of global uncertainty, and that is usually what helps gold flourish, and I see two on the horizon that need to be kept a close eye on during the next year.

It is very apparent that Israel and its leaders are growing weary with the Iranian nuclear enrichment program. Although it continues to fly somewhat under the radar screen and is not getting a whole lot of global press, the great likelihood is that Israel has already put in place a plan to attack the Iranian nuclear facility. If this does occur, it will add a tremendous instability to the Middle East, and the price of gold, and the price of crude oil, are likely to rally rather significantly. If I were going to look for a single geopolitical event that would cause a dramatic price appreciation in a very short period of time, that would clearly be the event to look for in 2012.

David: Before you move to the second one, on that point of Israel, it doesn’t seem that U.S. support, at least under the current administration, would be there. Constrained by the check, if you will, of China and Russia being on the U.N. Security Council and having significant votes, it would seem that if Israel does that, it would be done unilaterally, and would further estrange the relationship between Israel and the U.S., which has been, at least in a minor way, estranged during the current administration.

They would become persona non grata. That is, in itself, a destabilizing event in the Middle East, regardless of how you get there, the changed relationship between the U.S. and Israel, because they have long been considered a permanent military position, or ally, for the U.S., and that would be compromised.

Again, because of the conflict of our leadership goals and our sensitivity to our current stock of creditors, China, primarily, which has quite a few Treasuries, and I think at this point we are more concerned about economic contagion, and keeping on the good side of both China and Russia and their U.N. Security Council bias, for what it’s worth. I know you also had a second point that you want to make on the geopolitical things.

Roy: Yes, I was also going to address the uncertainty over the political scenario that will likely begin to unfold in earnest in 2012 for our next presidential election, and what a potential change in leadership in Washington might do to the price of gold, as well as how it might be viewed by our allies in the Mid East, and our allies and trading partners in the EU nations. We can’t lose site of the fact that we have a president that is running for re-election during a period of incredibly high unemployment here in the United States, and as it has been well documented, no president has ever won re-election with an unemployment rate above 7%, dating back to FDR. Unemployment here is 9%.

I am not going to predict which party will win the White House in the next election, but there is certainly going to be a great anxiety and a great uncertainty over what events may or may not change in Washington, and once again, during periods of uncertainty, of unpredictability, we usually find gold is an excellent investment, and I would be very surprised if we don’t see gold benefiting from what will likely be a very tight presidential race coming up very shortly.

David: Oftentimes, Roy, you and I will talk about the metals markets in the context of physical gold and silver. There is a separate market, a parallel market, which is the paper markets – options, futures, etc. They, too, have gained popularity among hedge funds and commodity trading groups. Where do you see the activity bias in the direction of the paper markets, in the direction of the physical markets? In the event that we do see some significant macro or geopolitical events begin to constrain the markets, do you think that will change the physical market dynamics? And what kind of premiums would you expect to see come into that, as a result of supply and demand constraints?

Roy: The physical market has absolutely grown faster than the paper market, as you make reference to. The paper market is still significantly larger than the physical market, but that spread continues to narrow, and one of the reasons the physical market is growing is the comfort level that investors, small and large alike, have in being able to have access, either immediately, because they have their investments with them, or they know they have their physical investments in a storage facility, where they have immediate access to it. The anxiety over paper trading, regardless of whether you are doing it on the exchange or via an ETF investment, is that uncertainty of “How do I access my metal if I need it?” I look for that trend to continue. Overall volume as an industry will continue to grow in 2012, but the physical market will be growing at a much faster pace than the paper market will be growing.

David: It seems the problem is that there is not a radical change, in terms of an increase in ounces coming to market. We have actually seen, year-over-year, for the last decade, a decline in gold produced from the mines, so we are talking about either the old static supply, or the little dribble of new supply coming into the market. If, in fact, that spread between the paper and the physical markets is changing in favor of people wanting a higher comfort level with physical metals, it seems like you are talking about a very constrained space. Can the market accommodate it? How does the market accommodate it?

Roy: As we have seen on several occasions in the last couple of years, most recently, during the run-up to 30-, 40-, and 50-dollar-plus silver, the ability of the global marketplace to produce and fabricate physical silver was not able to keep pace with the demand for physical silver, and many of the most popular items that you and I trade are on delay, yet today, and were experiencing shipping delays of 1-2 months at the height of the market just a couple of months ago. The great likelihood is the physical buyers will have to get accustomed to those types of delays for the foreseeable future, because, as you mentioned, there is only so much physical metal that is available, both in gold and silver, platinum and palladium, not only for investors, but for industry, and even if the raw metal is available, the ability to fabricate that metal is not an infinite number.

There are only so many physical ounces of silver in its various forms that can be produced on a daily, weekly, or monthly basis. One of the reasons we saw silver run up so dramatically was the incredible appetite that physical buyers had for physical silver, and it was no coincidence that at the height of the market when it exceeded $50, shipping delays on many of the most popular products were at their longest levels in years, with delays up to two months to get many popular items. I suspect we will see that more than once during 2012.

With regard to the premiums that the products command, simple supply and demand dictates that premiums and the prices that one is able to sell for go up when there are more buyers than sellers, and supply is limited. So I suspect consumers of physical metal, both the small and large, will likely be incurring increased premium costs several times throughout 2012.

David: Recently here in the future markets, and it affects all commodities, of course, but with the MF Global bankruptcy we saw a change in margin requirements, not moving to higher levels, but moving to lower levels, to accommodate the move of accounts from MF Global to other futures commodities trading houses. Is that a part of why we are seeing the metals peak up now? We certainly saw a draw-down in prices, a drop in prices, as a result of an increase in margin requirements. What are the dynamics, essentially, and is there any lasting impact from the MF Global bankruptcy, into the physical metals market space?

Roy: I don’t believe that the situation with MF Global, similar in many instances to what happened with Refco several years ago, actually played a significant role in the recent drop in metals prices. What I do believe we are looking at, in the foreseeable future, is the fact that people who have had bad experiences trading futures contracts with a clearing member, a clearinghouse, that went out of business for one reason or another, do not lose their interest in trading, they just find another mechanism to trade through.

That’s one of the reasons that I believe the physicals markets will be the beneficiary of the recent MF Global problems, because we offer investors, small and large, in the precious metals industry, the ability to participate in the market with our physical products, gold coins, silver coins, silver bars, etc., and we offer them that ability without having to worry about whether their investment is safe and their funds are safe, with a futures clearing member.

There are many other commodities and investments where the public and the investors that you and I are doing business with do not have that option. They are limited to trading in a paper type of environment. We have the luxury and the ability to offer our client physical delivery, and I believe that the ability to offer physical metal will only grow in its appeal to market participants, both large and small, and I would be very surprised if we have not begun to see that in the last couple of weeks as gold prices have appreciated rather sharply in the last week-and-a-half to two weeks, since the initial MF Global situation became front page news.

David: I am going to ask you a difficult question for a trader, because as a trader, you do think in terms of what is happening to the markets, not only in the next five minutes, five hours, five days, but I want you to expand out and take off your trader hat a bit, and extend your time horizon to five years. That’s not really a trader’s time horizon. But between now and 2016, if you were to have the opportunity to go sit on the beach and just enjoy running, getting sand between your toes, and getting a nice suntan, maybe more vitamin D than you’ve had since June 1980, then where do you put your money, that you are comfortable with, between here and there, given all of the external variables that you are aware of, and market sensitivities that you are concerned by?

Roy: Like I said earlier in our chat, I believe that the path that we are on, global macro-economic situations, geopolitical situations, all lend themselves to precious metals and gold continuing to have double-digit rates of appreciation every year throughout 2015-2016. If I am correct, and gold continues to appreciate 10-15% per year for the next five years, I would imagine most of our investors, and certainly my personal fortunes, will be served very well by maintaining a position in precious metals.

At this point, I don’t see any investment, though there might be other commodities that I don’t personally trade or invest in, that might outperform gold, but for the big picture in the metals that we trade together, I think gold is the place to be for the next several years. I wouldn’t be surprised if we continued to see a very large inflow year-on-year from the hedge fund community, from the managed funds community, into precious metals, because a 10, 12, 13, 14, or 15%, perhaps, rate of return in any given year, I strongly believe will far outpace the rate of return on U.S. equities and global equities, which would clearly be the benchmark that all other investments are gauged by.

David: So am I right to assume that over the next five years, you would see a comfortable estimate somewhere between $3000 and $3500, as an ultimate target for gold?

Roy: I believe gold is heading somewhere approaching $3500 before cyclical events eventually take hold and we need to rebalance our portfolios once again.

David: You assumed a modest decline in equities from here, not a catastrophic loss on that side. You would see about a 3-to-1 ratio at $3000, and roughly a 2-to-1, or even 1½-to-1 ratio by the time you get to $3500, and that number could be accelerated if you assumed a greater decline in equities.

Roy: Correct.

David: So, on a relative basis, and in terms of rebalancing, I think you are right – 2014-2016 is a range where people need to keep their eyes and ears open and remain flexible in their thinking. The challenge will be, and you saw this in 1980, when people get there, usually the events that bring gold to a high level have stirred a tremendous amount of concern and fear and lack of trust in the marketplace, and it is very difficult to convince people to do anything other than stay with what they own.

You suggested that there is more of a trading mentality coming into the metals. Does that greed get exchanged for fear as we see the exogenous events, whether geopolitical or macro-economic, as they come across the pond from Europe to the U.S. – do we see that change the character and dynamics of the investor who is looking at gold today, maybe more pragmatically, but ultimately, holds onto it as almost an issue of faith – “This is the only thing we have to hold onto?”

Roy: I think there has always been a mindset, a certain percentage of investors in precious metals, who believe there is some doomsday event that is likely to take place in their lifetime, and this is why they own precious metals, physical gold, physical silver, in the event of a total meltdown of the economic system. I would venture to say that that percentage of the investment community is rapidly shrinking as the more traditional investors enter our market.

And I don’t believe it is greed that is actually driving the investors as much as that it is much easier, and much more convenient now, to be educated on investment options than it ever has been before. One does not have to go to a university and have a master’s degree in economics to be a well-schooled, well-educated investor. It is incredible what you can learn on your own, what you can teach yourself, and what you have access to via the Internet. And investors are much, much more intelligent, and much more aware of investment options than they have ever been in the past.

I add all that up together and I say to myself that there is a growing number of investors, large and small, who look at the market, look at the world, and say to themselves, “The only clear path to financial security is having a growing percentage of my investments in hard assets, led by physical precious metals.” I try to sum that up as concisely as possible, not only for the chat that we are having today, but for anybody who seeks my opinion on what type of investments they should be looking at over the coming years.

David: We appreciate you sharing your thoughts with us, and of course, off the air, you and I have enjoyed sharing many conversations about where the markets are, and where they are going, and a kind of check and recheck. Your vantage point from being an active trader is always, always insightful, and we are glad you joined us today.

Roy: It has been my pleasure. I will look forward to our next visit.