November 26, 2014; Charles Nenner: “Gold Close to Major Bottom”

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“Gold and sliver can be for years on the wrong side. I happen to agree in this case that our cycles were bottoming by the end of the summer, and we placed some short-term up-moves and made some small percentages, and it’s getting very close to putting in a major low.”

– Charles Nenner


Kevin: That voice you just heard was Charles Nenner. We are going to go to some clips of that conversation with Charles Nenner toward the end of the program. David, you have the office read a book every month or so, and we get together and discuss the book, we have pizza, and it is really a great time for an office of people who think about the markets and think about life a lot, to get together and apply someone else’s viewpoint, and the book that you have us reading this month is a book called Deep Survival, by Laurence Gonzales.

David: There are very few things that I find more satisfying than building a library, growing a library, and in this case it is building out the libraries of everybody in the office, and you are right, we have these lively conversations about ideas, sometimes we agree with, sometimes we completely disagree with, but it is a part of our continuing education, and you are right, Gonzales writes a book, not about survival tactics, but about the emotional and psychological profile of people who do well, or don’t do well under pressure.

Kevin: I love a book that is written by a man who is trying to solve something that is really eating at him. He had a father that had been a bomber. He had flown in bombers in World War II and the bomber got shot completely out of the sky and only the fuselage fell to the ground thousands of feet, yet his father had survived. Then he had gone to a concentration camp and then he later became a prominent scientist, and Laurence, you can tell, the author of this book, was fascinated by what it was that made him survive, and so many other people in lesser circumstances die in a situation like that.

David: Yes, so to see what appears to be accidents of circumstance, or what have you. As he lays out the book he says, “Quite frankly, mistakes that are made, which seem extraordinary, are actually quite common.” And so, it should be a great discussion.

Kevin: One of the key concepts is, and I think this applies to today’s discussion, David, when you read a book called Deep Survival, maybe you are thinking it is about how to start a fire with flint. That is not what this is about. This is about life. And one of the things that he probably points out better than anyone that I know of is, being lost is not about not knowing the location you are in, it is a transformation of the mind. He said that there are many people who go to the woods and they don’t know exactly where they are. Most of us don’t know exactly where we are most of the time. But he said, being lost is not a location, it is a transformation. What happens is, when a person’s mind doesn’t match the map that they are in, they have a mental idea of where they should be, and if it doesn’t match, they start to realize that they might be lost, and a lost person has a tendency to bend the map. Survival practitioners and people in search and rescue use that phrase. They will bend the map to make it fit what they want, and David, I am seeing this in the markets. The central banks of the world right now, especially the Fed, the intervention of the Fed, they are bending the map to the point where people believe there is no longer risk in the market, just certainty.

David: Right, and if I could just say one more thing about that book. If you wanted a two-fer coming into the holidays, I would read that. I would also read, if you haven’t, Jason Zweig’s book, Your Money and Your Brain. This was another office read from about five years ago, but the combination of those two, looking at brain science and emotional response to pressure, you have the same kinds of emotional pressures in the marketplace, and understanding what is going on, knowing yourself, is very critical in the context of making financial decisions.

Kevin: And he likens emotion to a horse that a jockey would ride, and your brain, the intellect, as the jockey. And he said, there is a balance there. You are not going to eliminate emotion, but you had certainly better have a jockey on the horse to control it.

David: What you just mentioned in terms of the central bank’s role today, they really are the lynchpin in the financial markets, and you can see this through the various quantitative easing programs, Operation Twist thrown in the mix there, too. And it really is interesting, the Fed today is trapped, and their activity has been the lynchpin. Now, the lynchpin of the lynchpin is that they have to have buy-in and confidence in those central bank policies actually working. What has worked and what hasn’t, on the one hand you have had asset price inflation, and so they can pat themselves on the backs for that, because they are essentially creating a new bubble, and that is how they have dealt with the problems of the last 15 years. Rather than create structural reforms within the economy…

Kevin: They just fuel a bubble, and then they try to keep it from popping.

David: And that is precisely what they are doing today. Part of what they are trying to also do is create inflation. This is a very interesting thing, because increasing inflation was never really the role a central bank was supposed to play. In fact, if you look at the European Central Bank and the German influence within the ECB, quite the opposite. Price stability is the goal, not increasing the rate of inflation, and I guess what you really have to come to terms with is that we have entered into debtism. It is a new realm and a new sphere of existence, if you will, and debtism, an economy which is contingent, or based on, an ever-increasing expansion of debt, as we discussed a few weeks back with Richard Duncan. We now have the issue of having to deal with the consequences of having too much debt. Consider this. We have had 100 trillion dollars’ worth of government debt accumulated globally – 100 trillion dollars. Forty percent of that has accumulated in the last six years – 40% of that in terms of global government debt. And so, is it strange to encounter central banks wanting to increase inflation? Because, quite frankly, the only way you get in front of that size mountain of debt is to inflate away the debt. And so to ever increase inflation now is a survival tactic.

Kevin: Let me take the other side of this, though, Dave. I am looking at this and saying, it’s a hundred trillion dollars, but if I am the average Joe out there with a stock portfolio, the stocks are going up. Why should I worry about that? It seems that central bank intervention has now eliminated risk in my portfolio.

David: Right. I guess if you understand what is at stake. Yes, this is a bit of a ponzi scheme. It takes more and more money each time to get the job done, and we see this extreme dependence on central bank activity as you look at the U.S. stock market. You may say, well hey, let’s just run with the bulls, make some money while we can, we will always be smart enough to get out. Look at how dependent, and how system-dependent, the market is today, on Fed money-printing. QE-1, you know what happened when they ended QE-1. Within two months the stock market was down 13%. QE-2, when it expired, just within a few weeks, the stock market was down 16%. We talked about this a couple of months before QE-3 ended, but you know what we ended up with? A 9.8% decline before we had what is now known as the Bullard bounce. Bullard stepped in and verbally intervened, and again, we have the verbal intervention, which caused a V-shaped recovery in the stock market. We had dropped over 1400 points on the Dow, and then quickly recovered to move to new highs, subsequently. Again, following Bullard’s comments. What that implies to me is a system that is completely frail, and is utterly dependent on these outside stimuli.

Kevin: Richard Duncan said that last week. QE-1 was one size, QE-2 had to be bigger, QE-3 had to be bigger, and then, he said, QE-4 has to happen. His belief is we are going to go maybe a quarter, two-quarters, he didn’t give the exact time, but we have to have continued QE because there is really nothing fundamentally supporting these rises.

David: And that goes back to conversations that we have had with him for years, now. Income – you have to have it rising for there to be economic growth. Jobs growth – you have to have it rising for there to be economic growth. Credit growth – 2.2% is his number, if you want to check in with Bill Gross. He doesn’t take out the inflation variable, whereas Richard Duncan does, so Bill Gross would say that you need credit growth of 4.5%. The only difference between Bill Gross and Richard Duncan is that Richard Duncan is going ahead and saying, “We factored the inflation, 2.2% is a real number, and gross is not adjusted for inflation.”

Kevin: But the system is designed exactly opposite what we teach our kids and we have mentioned this in the past, that money doesn’t grow on trees, yet we have a Federal Reserve that says, “Oh yeah, we can print freely.” That’s the quantitative easing. The other concept that we try to teach our children is, do not go into debt that is unpayable, that you will never pay. The Federal Reserve, and the way this thing runs at this point is, you have to print money, and go further into debt. You are talking about credit growth, Dave. Whether it is Gross or Duncan, we have to go between 2% and 4% deeper into debt of our entire GDP, just to survive, so we are running on debt.

David: Here is the interesting thing. Studies have shown that when you combine public and private debt, any number above 250% of GDP ends up being a tax on the economy. In other words, a little bit of debt early on in a debt growth cycle is okay. You can handle it, and it probably adds to growth in the economy. But you reach a threshold where maintaining the debt is costly, in and of itself, and it actually begins to detract from total economic growth. 250% when you combine public and private debts together, that is the threshold where you begin to see a deleterious effect on the economy.

Kevin: Like we saw in Argentina.

David: Right.

Kevin: Argentina was a great example to us of a country that has gone too far into debt. It is now in default, let’s just say, and they are in 40% inflation, so it is the deterioration, again, of a system that we have never seen – let’s face it, Dave. This style of management, even though they say maybe this time it is different, maybe they are doing it right this time, it has never worked before.

David: The pressure that we are seeing on the economy today is, in large part, because there is too much debt in the system. If 250% is the threshold, we are currently at 334%, and the pressure that you see in the economy as a result of having too much debt, is not linear, so as we increase debt from this point forward, there is greater and greater pressure on the economy to just motor along, so to say, which would make sense, again, why the Fed is targeting inflation, because that is the only solution to paying down this mountain of debt.

Kevin: That brings up a question, though, Dave. Let’s say that the person who agrees with everything we are saying right now – yes, we have too much debt, we are printing too much money, but I have to try to earn an income on my money. I have to try to preserve what I have. And what I am seeing, and again, I am speaking for this person who is looking at it from the other side, saying, “I have a limited amount of time here on earth, and I am seeing the stock market go up, granted, for reasons that are not sound. Do we see, Dave, a mis-pricing of risk? Is there any risk left in the market?

David: Well sure. Granted, there is a benefit to the asset price inflation, direct consequence of the central bank intervention, money-printing on a grand scale, and a boost to asset prices. They have stated that as a goal. The hope was that would translate into real economic growth, and it hasn’t. So this issue of income is a very big one, although national balance sheet has improved and household net worth is improved, a 17% increase from the previous peak. We are now at 81 trillion dollars in terms of household net worth. It is very interesting that it is the top 10% of households which have been the beneficiaries, whereas 90% of households have actually seen a decrease in their net worth, and the bottom 50%? You are looking at demographics, lower middle class to lower class in the country, and they have actually seen a decrease in their household net worth by 44%.

Kevin: So we are seeing billionaires being made very day, but we are seeing everyone else really losing money.

David: And so this issue of income being a driver of economic growth, we are at levels, in terms of national income, real, adjusted for inflation rates of income, which we haven’t seen since 1996. We are at 17-year-ago levels in terms of income, and that is one of the reasons why there is a general concern in the marketplace. Take your straw poll, go to a friend’s house, or around the water cooler at the office. How are people generally feeling about the economy? Grant you, if they have a two-million dollar, five-million dollar, 20-million dollar portfolio, and it is racing higher as a consequence of Fed levitation of the asset in question, great, they’re happy. The polls that we see, whether they are Pew polls, or other polls, 60-80% of the general public are saying that the economy does not look hopeful. How is that possible, when you have the stock market at all-time highs? Well, I will tell you how it is possible. The stock market reflects central bank activism. It reflects intervention in the marketplace and rank speculation by banks and Wall Street firms. All is well, that is what we are being told, and the average consumer knows, no, all is not well. You get that sense. The international CEO for Walmart said this recently. This is David Cheesewright. “Everywhere I travel, I see tough economies and stretched consumers and that hasn’t changed through the course of this year. Walmart, I think, is a pretty good proxy for the man in the street. You haven’t seen huge improvements in Walmart’s numbers in a number of years. In fact, they have given lower revenue guidance, lower sales projections, nine quarters in a row. It is very intriguing to me that a Tiffany’s does well, and a Saks Fifth Avenue does well, a Macy’s does well. But guess what doesn’t do well? Guess where the average man, the common man, does a lot of his shopping? And it is an indication that no, not all is well.

Kevin: And we are all human. When you are told that household income is rising, or household savings is rising, and then you find that your own income is not, a lot of times the question isn’t, “Who is doing something wrong?” It’s, “What am I doing wrong? Maybe I need to be in the stock market.” You know, Dave, you brought up 1996. Our incomes as a nation are back down to 1996 levels. Our debt as a nation was a quarter of what it was. So, if we are back to 1996 levels of income, that debt has to be paid with revenues from that income. Yet, we were at 4 trillion dollars of debt in 1996, if I remember right. We are at 17, almost 18 at this point.

David: This is the basic point. Fiscally, this is a train wreck. And this is where any thinking person will listen to the Fed presidents hither and yon as they wax eloquent about raising rates by mid-year 2015, and if anyone is engaged, do you know what they are thinking? Do you know what they are processing? We can’t afford to have rates increase. You look at that interest line item and we don’t have the revenues increasing sufficient to match an increase in interest rates, and we have a large percentage of our debt which is financed on a short-term basis, making it incredibly interest rate sensitive, so you could see a couple of hundred billion, which is today about 9-10% of revenues, spiked and then dropped back again. We could see that at 4, 6, 800 billion dollars in terms of a line item, which would represent north of 30% of all tax revenue. This is Argentine type numbers and it is literally a stone’s throw away.

Kevin: Just like in Argentina, Kirchner did what she had to do, which was print money, if you can’t tax it. This is why ending QE-3 and saying you are not going to have QE-4 is pretty ridiculous.

David: But it does something very helpful for the marketplace, it communicates that they won and they are in control and their policies worked.

Kevin: Bad news is good news for the markets at this point. Any time there is bad economic news they get excited.

David: And it is the same language used at the end of QE-1, QE-2 and QE-3. Nobody wanted to acknowledge how system-dependent we were then to Fed money-printing and it is the problem of being debt-addicted. Once you begin printing money, that is a road that is very difficult to get off of. It is one of the reasons why I am very, very comfortable, and very, very confident in owning precious metals. I think that is where you see extremes in terms of market sentiment that we haven’t seen reflected since 2011 or 2012. As gold and silver were at $49 an ounce and $1920 respectively, and futures traders were very, very interested and active in the market, you had 96% of futures traders saying, “We’re in, we love it, we think it is the best investment going forward. What happens? At 96% guess what you run out of? You run out of new buyers, and the opposite is true today.

Kevin: So you think we may be running out of sellers?

David: We’re running out of sellers. Those same numbers from futures traders, there are only about 5% of people who are positive on the gold market. It is an extreme that has not been seen in 30 years.

Kevin: But this is amazing, Dave. Not to cut you off, but the man who would never mention gold while he was a Federal Reserve chairman is one of those 5% at this point. Two weeks ago he said that he would be buying gold because in the next five years it will be considerably higher.

David: Actually 3-5 years, a shorter timeframe. Think about that, because between the lines, when an ex Fed president says that interest rates and gold are going considerably higher, understand that that ex Fed president is saying the Fed is going to, in the next 3-5 years, completely lose control. Do you understand that that is exactly what that means?

Kevin: So that is the implied statement?

David: Yes, if you needed a translation of Greenspan’s gold and interest rates are moving considerably higher, he knows what he knows what he knows, and it is that the Fed is in the process of losing control.

Kevin: So, for those who have bent the map and believe that risk has been eliminated from the market because of central bank intervention, what does that do? Does that create that lost transformation where panic ensues?

David: Every market needs a patsy, and I think the person selling gold and buying stocks today is that perfect market patsy. You don’t understand that what you are subjected to is what every investor is subjected to, a tremendous amount of emotional pressure. What you have to do is try to make the best possible decisions you can in spite of overwhelming emotion, and guess what? Investors, if you are looking at Jason Zweig’s book, Your Money and Your Brain, do the wrong thing at the wrong time, almost all the time, and that is because it is easiest to operate on the basis of greed and fear, and not be able to distinguish yourself from the market. What does that mean? What does that look like, exactly? It means that it is easiest to buy gold as the price is going up. It is easiest to buy stocks as the prices of those assets are going up. Why? You have an immediate confirmation that you are on the right side of the trend, the price is moving up. And the opposite is true. So, yes, the best purchase you will make is actually the hardest one to make. The worst purchase you will make is the easiest one to make. Does that make sense at all?

Kevin: It makes perfect sense, but Dave, because gold has broken down below $1180, which was a support level, you are starting to see the one newsletter writer who has been selling more newsletters than anybody telling people they had better panic, they had better sell their gold because gold is just going down, it may be a newsletter selling ploy, but right now there are people who are scared, who are believing him.

David: Listen, we know the deflation camp well, Robert Prechter is a good friend. And I read the folks at Elliot Wave all the time. These guys are the brightest in the business.

Kevin: And they have been strong deflationists for years.

David: And then you have some hack newsletter writers who could pull numbers out of whoever knows where. And they can say whatever they want without supporting evidence, just on the basis of a theory. I will tell you the Elliot Wave guys, even though I sometimes disagree with them, provide supporting evidence for their position. And it is very interesting that the defining deflationist camp this last week sent a special interim report saying gold has bottomed. Gold has bottomed on an interim basis and they expect $1400-$1500 is the next price target.

Kevin: And these are guys who have been preaching that gold was going to go down.

David: Right. Just depreciate the larger context of deflationists. There are Harry Dents out there who are newcomers to the deflation camp.

Kevin: And they are selling newsletters.

David: They are selling newsletters. And guess what? Elliott Wave folks are selling newsletters as well. On the one hand, you have math-driven models, which again, provide some support and evidence, and then you have just wild, pull the numbers out of the air.

Kevin: It’s emotion-based. You can tell by his mailers that they are emotion-based. But given that, we also talked to, even psychoanalysts, guys who just look at cycles, they are completely neutral on every market. Charles Nenner, you just talked to him, and he has been a cyclical analyst for years and he started out as a medical doctor, David, and really found that his talent was in measuring cycles. He looked at the human body and he saw patterns. He went to the markets, he did the same thing, and worked for Goldman-Sachs for years.

David: A couple of other banks in Europe before that, but then, yes, about a ten-year stretch with Goldman-Sachs, and providing information for their in-house traders. Interesting cycle studies.

Kevin: Yes, and he is not necessarily looking at fundamentals, he is really just looking at charts. I would like to, Dave, if we could, go back and replay some of the comments that Charles had to you when you had your discussion with him the other day.

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David: I wonder if you could comment on the impact of central bank interventions on cycles. This is an era of remarkable activism by central banks, and from that standpoint, you could say, psychological manipulation. How does that impact cycles?

Charles: Well, let me explain to you, I have worked with big institutions, that means institutions who wanted to buy for 500 billion dollars currency. And even during the day wanted to know, “Shall we buy at two o’clock or five o’clock?” Now, you can buy whenever you want, but if the cycle is against you it is not going to help. So these comments are being made when the cycles are positive, and they only make them because the cycles are positive. It is not that there is a Freudian father figure who takes care of it. These people, like Greenspan as an example, are as much part of the whole society as the other people, and it is an illusion to think that it happens because they said something. No, they said something because the cycles forced them to be positive. And even if they would have said nothing, the market would have been up because of the cycle. If you will look at my latest performance on CNBC, I was on the New York Stock Exchange two days before, and we were at 2015 on the S&P and they said, “What do you think?” I said, “Well, my target [unclear] is 2020, 24 points away. Cycles are topping today. We are totally in cash. And look what happened. The market crashed 10%, the Russell did much more, and now suddenly all the guys come out of the woodwork and explain why it happened. So, why didn’t they tell us that before it happened? We tell things before they happen, and all those ideas why it happened have nothing to do with it, so then we came up with a price target of 1810 on the S&P and we went to 1814, and that was the target, so then it goes up again. So it means that, psychologically, people say, “Oh, it goes down, down, down,” and at certain moments, “Oh well, now it is a bargain.” How does that work? I remember when I was in gymnastics when I was in school and we were doing the ropes, and you go up the rope. At a certain moment, everybody stops at the same level, looks down [unclear]. So, that’s how it works with the market. The market goes up and down and at a certain level, people, for what instinct they have, if it is animal instinct or consciousness that the psychiatrist Jung is talking about. They feel, “Oh, now it is time to buy.” And then, the papers, of course, have to come up with a reason, so they come up with all kinds of reasons, but we always prove that since we have the target and the date before, it has nothing to do with the news that comes out, because how could we have known? But it is such an emotional problem for the people to take over that insight in how the world functions, that only really the very big banks and hedge funds are getting it, not so much because they believe in it, but they say, “Listen, even if [unclear] we are making big profits. You know, I did this 15 years for Goldman-Sachs, I was doing all the market timing for the [25:28] traders, and we made 40%, that was the secret of Goldman-Sachs, and we don’t know what he is doing but it works, so let’s just go with it. And they used to have a blackboard and it said corn is bottoming on this day, wheat is bottoming on this day, we were all ready, and everybody that came in and see what it says on the board, we don’t have to buy, and which level we have to buy, how many days going down and nobody was interested why corn or wheat was going up. So, to the smaller investor, I want to make it clear that nobody is interested in that stuff.

David: Let’s look out a little bit further on the timeframe because 2015 is nearly upon us. Beyond that, sort of a 2016, 2017, 2018 timeframe, you are not quite as bullish on the stock market, I don’t believe.

Charles: I am very bearish, I think we are going through 5,000 and we are going to be there in 2020, and the big down move is going to be from 2018 to 2020. Again, if you ask me why, I have no clue. But that is going to be horrible.

David: The short-term cycle for gold has been down for nearly three years. What might we anticipate moving forward. The down cycle leading to an up cycle, or an extension of the current trend? We personally feel that it is moving higher. Where do you land in your cycle studies?

Charles: I happen to agree in this case that our cycles there were bottoming by the end of the summer, and we placed some up moves and made some small percentages and it is getting very close to putting in a major low. Now, you can ask me why, gold can go up in inflation, gold can go up in deflation. Gold can go up because people are afraid, gold can do anything, so I don’t know why, I only know that we went out at $1900, we had a price target of $1180, and we had a very long-term cycle, [unclear] cycle that started to bottom after the summer. So now I am watching it very carefully to have an entry to go long gold.

David: So, setting aside any internal relationships, and perhaps it would be mere coincidence if there was this sort of a negative correlation, equities moving lower and gold moving higher. Do you see us returning to the old highs of 1920?

Charles: Yes, we have a target of $2100, and that crosses $3500. They could even monetize gold and it will go much higher, but to go step by step I am always afraid that people will take a mortgage on the house, buy a call option and then lose everything if at one time it doesn’t work, so I go step by step. We are looking at the next leg up, like you mentioned, maybe 50%, maybe less, and the target is $2100.

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Kevin: Charles Nenner felt like gold was putting in a major bottom.

David: That’s right. And our listeners probably know his colleague, David Gurwitz, who does a lot of speaking for the Nenner Research Group and he was on the program about a year ago. And I like these guys. Nenner came up with some models going back to the 1980s, he had finished medical school and was trying to sort of map the world, and understand the universe and figure out interrelationships and things of this nature, and he developed some algorithms which are, at times, very helpful, in terms of predicting where markets are going, either on the upside or downside.

Kevin: But when you talked to Nenner, it was impressive to me because every other market that he looks at, if it is going up he buys it, if it is going down he says sell it, but on gold he said, “Hey, inflation, deflation, it doesn’t matter. Gold goes up.

David: That is, I think, just a fundamental understanding of the role that gold has played through the years, and an appreciation of various cycles where it is not axiomatic that gold goes up in inflation and goes down in deflation. As he pointed out, it actually can go up in both of those contexts, and down in both of those contexts.

Kevin: Gold is not copper, let’s put it that way.

David: No, it’s not, but his suggestion was that you look at these cycles and there is more to the cycles than you may be aware. There is a lot of embedded information that you are not going to find just in the current price. So let’s talk about that. Current price. We have silver. Nenner was actually more bullish on silver in a number of recent reports than even gold, which is easy to be. You look at a 75-to-1 ratio and you are basically looking at something that is on sale by 50%.

Kevin: Seventy-five ounces of silver to one ounce of gold, is what you are talking about.

David: Right, with the average being closer to 30, it makes it very compelling. Well, look at this. Your annual silver production is about 800 million ounces. That is the physical silver market. Out of that 800 million ounces a year, you have industrial demand, you have investor demand. You have all the different normal demand. Now you know supply and demand for the silver market, it is pretty basic. But what you don’t appreciate is that the COMEX futures traders move in and out of silver to the tune of 1.1 billion ounces a day. So let’s look at this, 800 million annual ounces versus 1.1 billion ounces per day.

Kevin: There is no connection almost.

David: Right, so who is driving the price? It is COMEX futures traders. Meanwhile we are seeing very interested demand in silver and gold all over the world. What is our gauge for interest in the physical metals? Our gauge is looking at the premiums you pay to own the real stuff. In China today you are paying 22% premiums for silver over Western prices, and if you look at Western prices, you are already paying premiums here. So, literally, as you go around the world, you want to own it? Here is the market price. And it is very different than what it reflected on COMEX. Should I be discouraged by that? Should I conclude that well, gosh, I guess then the price of silver will always and ever only go down. Come on, really? Just what moved the price from $3.75 to $49? Things go up, things go down. Nenner’s point is, you have these cycles in place, and you want to appreciate what is in the process of happening to these cycles. Where are we at in the cycle presently? At a low. Well, gracious me, that makes sense. We should sell everything we have. No. No. That is the insanity of the market speaking. That is the insanity which investors sometimes subject themselves to as a response to difficult circumstances.

Kevin: David, the fact that 1.1 billion ounces are traded daily on paper, yes, it does affect the price, but we know that the U.S. mint has been straining just to keep up with demand. They are selling millions of silver eagles. That is not even counting the Royal Canadian mint.

David: What we have in the futures market is capitulation selling and it continues to drag the price down. What we have in the physical market is aggressive buying, because people are inspired by lower prices. It is the normal human value equation. You buy things when they are cheap, sell them when they are expensive if your head is screwed on straight. I would argue that the primary weakness in the precious metals market is with futures traders. And those futures traders, what are they doing? They are engaging in a set of conclusions which ultimately tie out to abnormal unhealthy and unstable behaviors in the marketplace. We have far too much confidence placed in the banking system today with off balance sheet financing of up to 75 trillion dollars. We have confidence in the dark pool trading, which is now so common. We have confidence in central banks who are now getting rebates for trading equity futures. We have confidence in too-big-to-fail institutions who were defined as the problem in 2008 and are now anywhere from 20-70% larger as a singular institution. We have confidence. And again, you look at the equity markets today, the stock markets, and where they are at, you see assets priced to perfection, and that is largely dependent on the Fed’s willingness to not only spend their capital, real physical capital, but also their verbal intervention capital, if you will, to drive the prices higher. They are dependent on creating a bubble to get us out of this mix and mess. And the reality is, what they are going to end up with is the largest bust of all time.

Kevin: I think some people see that bust coming and want to dismiss themselves or move way from it. We talked about Greenspan a little earlier; he came in as the Federal Reserve Chairman in the year I started working here, Dave, 1987. I remember Paul Volcker stepping down and Greenspan taking over, but Greenspan created and fueled – he can’t deny this – the largest bubbles in world history, and one of them was the tech stock bubble. And I remember when he wanted to dismiss himself from that about 1998 he came out with the phrase, “irrational exuberance.” He said the markets are displaying irrational exuberance. Sure enough, we did have a severe crash in March of 2000 in the tech stock bubble, and frankly, the NASDAQ has never even gotten back, in the 14 years since that happened, to the level that it crashed from. With Greenspan also stepping down in 2006 he had fueled the largest real estate bubble in history, and then he stepped aside and gave the Fed over to Bernanke. With him now saying interest rates are going to be considerably higher, gold is going to be considerably higher, but the one thing we haven’t talked about yet, Dave, is the quote that this quantitative easing, this money-printing, has created a tinderbox that is waiting to be lit. He is saying things that should chill people to the spine.

David: Right. Listen, this is one of the most fascinating times to be an investor, to be alive, and it can also be one of the most frustrating times because for the thinking individual, you look at risk and reward and there is far more risk in the marketplace today than reward on offer. You look at interest rates and they have been bought down through direct monetization, both corporate bonds, sovereign bonds. Now you have central banks buying stocks, 14 different central banks buying stocks.

Kevin: Directly intervening in the equities market.

David: Again, that helps asset prices, but what it underscores, for the student of economic history, is now unhealthy the markets actually are. You don’t get direct monetization of corporate bonds, sovereign bonds, and stocks until you are in the last phase of catastrophe. What we are doing, if you are looking at catastrophe math – you and I have talked about this – you stack up a pile of sand, and each grain adds pressure, but it seems to be stable, and you add more sand to your sand pile, and it seems to be stable. Just imagine what happens, you don’t know what grain of sand it is that hits the top, and automatically half of the mountain sloughs off.

Kevin: Right. You have talked about that in relation to avalanche, as well.

David: We have the perfect context for not only a sharp decline in the equity markets, but a financial collapse, and you have to appreciate the role that very assets play in the context of collapse. Cash, gold, these things have value. Real estate and illiquidity. There is a penalty to pay for illiquidity. You want as much flexibility as possible and a combination of cash and gold is the perfect approach to a crisis environment. Again, central banks have convinced the general public that their activism is sufficient, and in fact, we can print our way to financial success, but this has never worked in the history of mankind. This has never worked in the history of mankind. Let me be just mildly pedantic for a moment. Repeat after me. Money-printing doesn’t work.

Kevin: Money-printing does not work.

David: Money-printing doesn’t work.

Kevin: It never has.

David: And this is the context that we are in because we are not talking about a small amount of money-printing, we are talking about money-printing that is going directly to propping up asset prices to create an impression amongst investors that all is well. You look at the bond market and low rates suggest that there is little risk. You look at the equity markets, high prices suggest a return to economic strength. But when you look at the money-printing and where it is flowing, 14 central banks buying in the stock market, getting rebates – central banks getting rebates for trading in equity futures. This is insane. When you look at them directly purchasing corporate bonds, mortgage-backed securities, REITs, direct monetization of government bonds, again, there is an appearance that all is well, but that appearance is bought and paid for by the next generation because guess what? The money-printing and debt that we are accruing, it is all well and good for this generation of investors because guess what you get? Your balance sheet just improved. Guess what the next generation gets? You see the point?

Kevin: Oh, absolutely.

David: This is criminal in nature, and we are, on the basis of pragmatism, willing to engage in criminal behavior and look the other direction as the world’s central bankers create a bankruptcy for the next generation, create a zero balance in terms of an inheritance, so that we can live the life that we want to live, so that we can have the asset prices that we want to have, so that we can pretend that all is well. This is one of the greatest travesties of financial market history.

Kevin: And Richard Duncan brought out that this is not out of ignorance. A lot of these guys understand, they honestly know the outcome is, in Richard Duncan’s words, unsurvivable, unless they continue to do this. Isn’t that the description of why a bubble forms in the first place? A bubble doesn’t have to get bigger and bigger and bigger if it is not a bubble, but if it is a bubble, they have to continue to keep it inflated.

David: I grant you if Duncan is right, that this is a lesser of two evils, creating a bubble which may cause a financial collapse that we haven’t seen in recorded financial history. Is that a better alternative to World War III? Because as Duncan suggested last week, our only problem at this stage in the game…

Kevin: There is nobody big enough to fight us that doesn’t have a nuke, is what he said.

David: Right, because in times past that is exactly what you would have done at this point in time, if you were one of the mandarins pulling the strings in one of the major centers of influence and power in the world. Right about now, you can rally the troops and you can rally the entire population around a very popular theme. What is that popular theme? We’re going to war. The enemy has struck, we’ve got to respond. And guess what you get? You get a justification of inflation, you get a justification of accrued debt. You get a justification which the general public says, “I’m okay with it, because we have to do our patriotic duty.” To question would be tantamount to treason. We don’t have the right sized army to fight against. We don’t want to go to nuclear war. So, what are the central banks of the world doing? They are printing our way toward a façade of success. Challenging, frustrating, there are many ways of describing this particular period of time as an investor, but I would suggest to you, you should not lose your nerve. Continue to think, process, and choose wisely the assets that you want to own.

Kevin: Don’t bend the map.

David: Don’t bend the map. Don’t redefine reality to what appears or feels like crisis. Process this as best you can, in a rational and reasonable way. Be the jockey, not the horse. Control the horse, use the energy of the markets as they should be used, but don’t be abused or crushed by them. We are in a grand experiment here which has never ended well. This looks and feels like other periods of experimentation of a monetary nature, which have, in history, every single one of them, failed. So, should you lose your nerve? No. Should you own gold and silver? Absolutely. Should you add at these prices? With both fists. Should you reduce your exposure in the equity markets, bond markets, and increase a cash position? By all means. This is a period of time when you stay rational, calm, engaged, appreciate the world for what it is, appreciate the opportunities that we have today and will have tomorrow, but be very prudent and very wise about how you are spending your dollars and investing your wealth.