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Financial Sense Newshour

The BIG Picture Transcription

October 25, 2008

Part 1

Bill Haynes, President, CMI Gold & Silver

JOHN: Welcome to the Big Picture everybody. This week, as you well know by now because we told you so, Jim Puplava is out for this part of the show. Eric King is sitting in the hot seat. Notice I’ve got it wired up for you there, Eric, so –

ERIC: Thank you.

JOHN: So when we say ‘hot seat,’ it’s really hot. And speaking of hot, there’s always hot things to talk about. It seems like in the business of news that when everything is going to heck in a hand basket out there, we have lots to do and lots to talk about. So we’ll have two hours here on the Big Picture today, and this first hour, who are your guests going to be? What’s the thrust?

ERIC: Well, we’re going to have Bill Haynes, who’s been in the business for decades of dealing in the precious metals. Bill’s a friend of mine and very knowledgeable. We’ll talk some gold and silver and some monetary history and what not, but then in the second part we’ll have Jeffrey Saut, who I was very pleased to get as well, Chief Investment Strategist from Raymond James; and Jeff will be talking about everything in the markets from bonds to crude oil to gold and silver, to inflation to deflation – you name it – so I think people will enjoy the interview with Jeff. [1:14]

JOHN: And then in the next hour, we’ll be looking at Ted Butler and Dr. Alan Lemerand will join us. So we’ll be right back with the Financial Sense Newshour at www.financialsense.com. Don’t go away, lots to come.

ERIC: If it’s been a rough ride for holders of precious metals for quite some time as gold and silver have been heading lower; gold near 700 dollars and silver below 10 dollars. Joining us today is Bill Haynes from Certified Mint, a precious metals dealer. Bill, you've been in the business for over three decades, you’ve been around. What are you seeing in terms of supply –meaning, as a business you need to be able to get product to sell it? What are you experiencing right now and did you ever dream that it was going to be the way it is right now?

BILL HAYNES: A couple of questions there Eric. Let me clarify also is that we've changed our names from Certified Mint to CMI Gold and Silver. Frankly, because of the internet we had to get the gold and silver in there so people could find it. But meanwhile, your question about availability – frankly, I never really dreamed that there would be a day when no wholesaler had any pre-65 90 percent junk silver coins for sale. That stuff used to trade five different bullion houses – I could buy a hundred bags from any one of the five houses for immediate delivery; the stuff was everywhere. Now you cannot buy it from a wholesaler. The shortage in silver is real. The 100 oz bars that are out there, people are willingly paying three dollars an ounce over spot to get 100 oz bars. This morning I was told that if anybody wanted any silver Eagles they were going to have to pay in the neighborhood of the few that got released of 6 dollars plus premium per ounce. Frankly, I think that’s ridiculous. I hope somewhere in there the public starts rebelling and says, Hey, these authorized distributors are kind of holding up the public with these premiums, and they will search for other products. We just had 90 percent coin available to us which frankly we expected to be gone within three or four days; there wasn’t a whole lot. The same way with 100 oz bars that we have. We have a few of those.

The shortage is real. I’ve long maintained that silver is a better investment than gold; I don’t care about the short term moves – whether over three months or six months gold has outperformed silver, I don’t care about that at all. I think we’ve just now entered probably the second leg of a three leg bull market in the metals; and that’s another discussion how this market ends. Will it end in a classic blow off like we had in 1980, or will this be the bull market in precious metals that destroys several generations’ faith in paper money? People may just run from paper money forever and always want to own some gold and silver because, you know, frankly I hear that Ron Paul claims the bailout of the financial system is going to approach 5 trillion. We’re talking about some massive inflation coming down the road. [4:14]

ERIC: Jimmy Rogers described it as an inflationary holocaust that the Fed is kind of putting in place. And I know right now there’s a lot of talk of deflation, but I don’t think you’re in that camp. Bill, you've been kind of astute and you've recommended to your people – now, this is when you had a lot more time obviously to interact with customers – but you would send them some literature and talk about what happened in France with their hyperinflation and what not; but looking at the monetary side of things, how do you see this because obviously we're having assets deflate right now, but with the massive paper money printing that’s underway right now, we're looking at tremendous inflation going forward, don’t you think?

BILL: Absolutely. When people talk inflation and deflation, I like to think about money supply. I don’t like to say the stock market is falling and we're having deflation in the stock market. The increase in the money supply is what we've really got to look at. The stock market money just moves one place to another. No money disappears. Money only disappears when the Federal Reserve shrinks the money supply, or banks collapse like the 30s and it flat disappears. We have an entirely different financial structure than we had in the 1930s, and Ben Bernanke is a student of the Great Depression – I think he probably read the wrong books – and he intends – you know, he once said that we have the equivalent of an electronic printing press. Remember, that’s how he got the nickname of helicopter Ben when he said he could fly over and drop money. That’s exactly what they’re going to do. Historically, whenever a paper currency has been delinked from gold and silver, the politicians have printed that money until it’s worthless. I know there’s a lot of people that say “we're Americans, things are different, we're smarter…” Human nature doesn’t change. The politicians will take the easy way out. Instead of saying like Ron Paul has said, Hey, we don’t bail these guys out, we suffer an 18 month recession – depression, if you want – and then we come back stronger. No. These guys are going to print a bunch of money and we've got hyperinflation coming. Some day we’ll get that depression as the assets wash out because of all this extra money that’s being printed, but for the short term, I think we're headed into a classic – I think we’ll probably go South American type of inflation. Within five years I don’t see a reason why we won’t have maybe sooner, we won’t have some 20 percent inflation easily if not more. [6:30]

ERIC: When you look at the monetary history which we were just briefly touching on there, but it’s hard to find examples where paper isn’t backed by anything where you get a true deflation. We saw one Japan, but a very different situation, I think, from what we're seeing in the United States today. As you said, and here comes another stimulus package; they’re already talking about; right? So the helicopter money is coming, but you have people, Bill, not just in the United States but all over the globe trading in their paper money for real gold and silver. Because the silver market is so tiny, what do you see – and of course, we’re hearing also it’s becoming very hard to get gold for large quantities, by the way, and this is a global situation not just in the US; so where do you see this thing heading? Obviously it’s a train wreck, right? But we have this deleveraging happening where they’re manipulating the paper prices down, the Commitment of Traders according to Ted Butler is set up the best it’s ever been basically, and so what do you see is resolving this great disparity between the paper prices that you have to pay for these metals versus where they actually have them currently trading on the COMEX?

BILL: As you know where the cash markets and futures markets meet is when the contract rolls around for delivery. People who have sold them issue delivery notices. People who are long the contract stand ready to take delivery. If come December there are enough people taking delivery of futures contracts –they want those 1000 oz bars, they want to get them out of the warehouse and turn them into product that they can retail to people – it will come with continued buying by the public of silver product and so they start pulling down on the number of bars that the COMEX claims backs up their futures contracts, or are available to back up those futures contracts. Personally, I haven't looked into it, but I suspect that those numbers are artificially inflated. In the past five years, there’s been a huge number of people who have put 1000 oz silver bars in their IRAs at HSBC, at the Delaware depository. Those bars are not available to be delivered against futures contracts; those bars are there, they’re owned by people who have them in their IRAs. I don’t know what the number is but people start taking delivery of the futures contracts because they need that silver. Maybe they need it for purposes that we're talking about, you know, our audience here; or maybe they need for industrial uses. So they can’t get it somewhere else - at times 1000 oz bars are not available, I can’t get them from major wholesalers. I do not have any 1000 oz bars and then you know, then they get some. We’ve discussed the shortage of the standard retail products, so when the rubber hits the road, somebody is going to take delivery of the futures contracts and going to make people realize that COMEX is really a paper market, not a real market. [9:14]

ERIC: Bill, when you look at the psychology of these markets because you’re one of the sharpest guys I know in the business, and we've known each other five, six years I don’t know, but I’ve always thrown a call into to you from time to time to kind of see where we are in terms of psychology. And I remember above 1000 dollar gold and above 20 dollar silver, you said something to me that was a huge red flag. You said, I have more people calling me now and putting their life savings into gold and silver, completely convinced that it’s the right thing to do. And I think we agree conceptually it’s certainly good to be out of US dollars and not have big exposure there and to be in the metals, but in terms of timing it was a huge red flag that you had that kind of psychology out there. Maybe you could talk just briefly about that, and also, where we are now in terms of this psychology because it seems like the spirit of people on the metals side has just been broken here.

BILL: It’s interesting about that. You do get different classes and different types of people who buy. Being in the retail business we get to see all of them because of our internet presence; people go to our website, they read about the different products. When you see a large number of 5,000 dollar orders or 10,000 dollar orders, it generally tends to put up a red flag that we might be seeing here is an intermediate top. This bull market’s got a long, long way to run – and we might talk about that here a little later – but we do see it. But it’s an interesting thing that’s happened here. A lot of those people – and remember, the top was put in right around March – those people were buying because of the price action; they saw the price going up, they extrapolated it higher, they read all of the articles (which are excellent) about what’s really going on and they thought they were doing the right thing by getting in. Long term they did the right thing. [11:06]

ERIC: Right.

BILL: But what’s happening now is the people who are coming in to the market are very successful business people who are making large purchases at a time. We had a million dollar trade – one guy – the only thing we could get for him were kilo gold bars; and by the way, kilo gold bars – small premium – a million dollars makes sense, you know, for someone like that. But the people coming to the market now are coming with large bucks and they are not complaining about lower prices; they simply see lower prices as opportunity to get more gold or silver for the dollar. It’s very positive. Somewhere in here I think we're going to have maybe a final down move in gold and silver; a lot of people will capitulate and say all the paper houses are in charge, but when the metal starts moving, I think –the metal starts moving, they’re going to move in a big way and I’m going to get dozens of phone calls of ‘I knew I should have bought when it was below 800,’ ‘I knew I should have bought silver down there below 10 dollars.’ That’s a human psychology – people are always afraid it’s going to go a little bit lower. If people understand money and what money is supposed to be and why gold and silver have stood the test of time and they are the ultimate forms of money, if they get rid of these digital dollars, paper dollars and they get something – gold and silver are the only two commodities that have been valued in all recorded civilization. As we talked about: Any time a paper currency is delinked from gold and silver, the politicians print that money until it’s worthless. When the smoke clears on the dollar – maybe the euro, the yen and every other paper currency – gold and silver will have value. And that’s what people need to be thinking in here. These guys, regardless of how many PhDs they have, Bernanke and how he’s extolled as the greatest economist and we did the same thing for Greenspan, who by the way, created the housing bubble with his one percent discount rate; he was supposed to be the smartest man in the world at the time. They’re not; they’re human beings and we have an untenable situation. We have decades of printing of paper money and it’s coming to fruition right now and now the only solution is to print more money. It reminds me of the French Revolution and the monetary situation – Andrew Dixon White, co-founder of Cornell University wrote a paper which was turned into a book called Fiat money and Inflation in France. And most people think of the French Revolution as the guillotine, heads being lopped off, Marie Antoinette talking about ‘let them eat cake’ (there’s some question whether she ever said that or not.) What we’re looking at here is a classic situation. The Assembly would meet in France and the economy would slow down. The Assembly would meet and they would decide to print more assignats – the currency of the day. It would be printed, the economy would be stimulated for a few months and then it would slow down and they would meet. And guess what their solution was? Let’s print some more money. [13:57]

ERIC: Absolutely. It sounds familiar by the way.

BILL: Is it déjà vu all over again?

ERIC: For people who understand monetary history, Bill, it is déjà vu all over again, but people in the United States by and large really don’t, or don’t study it, or they really don’t teach monetary history – probably on purpose, right?

BILL: I would say that’s true.

ERIC: Yeah, so people don’t know. They just don’t know. That’s why when you see people running around screaming deflation, deflation, deflation, you know, if you understand monetary history – and of course, you can have brief bouts of deflation like we're having right now, but it’s ultimately, we're headed much, much higher on these metals. So in terms of the psychology though, Bill, your buyers are coming in; now you’re telling me a lot of big money and these are people who buy and hold, and when it goes lower they just keep backing up the truck and trading in their paper money for the real thing.

BILL: That’s correct.

ERIC: Smart money then?

BILL: People who have made a lot of money in many different industries. It’s always interesting to get to know the clients who makes these, and we ask them what they do or they give us their name and the name of the company; and we simply google them and we find out who they are. It’s quite interesting when these people do this – it is solid money coming in here, and I would really hope people who are in gold and silver do not get panicky because of these low prices. I have a client who trades commodities for a living and he always wants to know if anybody is panicking on the downside. So he thinks that puts in a bottom. One guy who panicked; he placed an order earlier this week and today called up and said he wanted to sell it before we could even deliver it to him; and it was a 24,000 dollar loss on 184,000 dollar investment. We tried to talk him out and he said, I can’t sleep at night. We said, Sell it. We sold it out. We didn’t make any money. We made money when he went in; we didn’t make a dime on him when he went out. But he said he couldn't sleep. As for me, I couldn't sleep if I didn’t own a bunch of gold and silver. I couldn't sleep if my money was stuck in a bank; it’s just a piece of paper, you know. We have the worst form of money ever devised by mankind. [15:59]

ERIC: Agreed.

BILL: It’s a computer entry.

ERIC: Well, Bill, that’s the thing I’ve always told people – when you look at gold and silver or these people that are buying it, what they really have is they have a gold and silver bank account. I mean it doesn’t net them any interest, but that’s really what it is. And so when you hear things like, I couldn't sleep – I don’t think they really understand – probably somebody, like you said, who shouldn't have been getting involved to begin with.

BILL: He does not truly understand the financial situation. By the way, I’ll say this about the guy, he did not sell the other 200 ounces that he had purchased previously. He kept that. But this he decided he had gone overboard and wanted out. You know, frankly we told him: You come back to this market, you know, you’re going to get absolutely the best prices available when you go back in because I feel sorry for him. Now, maybe he’s smarter than I am, maybe he – this was the thing to do, but I don’t think so, not for the times. [16:52]

ERIC: Bill, since I’ve known you – and I hope you don’t mind me getting a little personal here, but I remember silver moved up from 11 and kind of have some pullbacks in the 8 dollar area, you took quite a bit of the firm’s money and said, Eric, I’d rather have silver and you bought a boat load of silver around 8 bucks I think, if I remember it correctly. And you said, you know, I’ll just hold this and I’ll sell it at higher prices. Does that sound about right?

BILL: It sounds about right, except we didn’t sell at higher prices. We use it to maintain inventory so we can get prompt delivery for people. My day starts now, Eric, with calling wholesalers saying, What do you have?

ERIC: Understood.

BILL: And then somebody comes to me and they buy some of the 100 oz bars that we have. I cannot replace them. I got to go buy the Royal Canadian Mint, now putting out some unique 800 oz silver bars. Have you heard about those?

ERIC: No. I heard they’re going to come around but I’ve no details. This is a pretty good move.

BILL: They’re putting out some odd weight 800 oz silver bars and they’re pouring them in moulds that permit the bars to fit in the post office’s flat rate shipping box. You know, with a $9.80 up to 70 pounds anywhere in the US, you buy the registered mail and you can get these bars economically; you can’t ship 1000 oz bars. Ship the bar that weights 800, right around 800 ounces, that’s about 56 pounds – the same as a bag of 90 percent – that’s manageable for people to pick up. Seventy gets pretty bad, but you know, you can’t get them in the post office flat rate box. So people get these products delivered to them economically. So I sell somebody 100 oz silver bars made available to me, I have to replace them with some – replace them with 800 oz bars. And the 800 oz bars are becoming very popular because people can get those and make those available at a $1.20 over spot versus three dollars over spot for the 100 oz bars, three dollars over spot for 90 percent coin when it’s available. It’s a good thing the Royal Canadian Mint did in making these available, but they’re not always readily available. Sometimes the delivery is three weeks out. And here’s the situation: the RCM has committed to make a bunch of Olympic silver coins for, you know, they get the Olympics in two years, so they’re making them of .9999 fine silver. So they run a batch of silver and if it’s not .9999 – if it’s .9998, they will not turn it into Olympic coins, or their silver Maple. So they pour that batch of silver into these moulds. Well, that silver only gets poured into those moulds when they come up less than .9999 fine silver. So we don’t always have the RCM Mint, the red bars, readily available, but we’re committed to get some on the next shipment that comes in. But that’s not always available. Getting a quick shipment is very important to people. We spend a tremendous amount of time – we will tell people, “When you buy this product it may be three weeks before we ship.” People tend to forget that. They just know that they sent us money and they want to know where the product is; and we spend a lot of time reassuring they’re going to get the product, but it is delayed. We don’t like to sell anything that’s delayed more than three weeks; that’s a real nightmare for us. [20:03]

ERIC: Not to put you on the spot here, Bill, but I’m going to do that for just a minute. Do you keep a tremendous amount – because you've been very successful in a number of businesses over the years, but do you keep a lot of your net worth in the metals as opposed to the dollar?

BILL: I have next to nothing in the dollar.

ERIC: Okay. I was just curious. I’ve never asked you that and I hate to do that on the air, but I know you understand monetary history and so that’s why I asked the question. It doesn't bother you when the metals are moving down like this. You don’t sit there and say, Well, my God, I’m losing my money.

BILL: Eric, you should see my portfolio of mining stocks. I don’t care. I think I know what’s going to happen. Here’s – I had some money sitting on the sideline for months and silver was up there back in March of 21 dollars, it drew back 15; I went in. It came on down here to 10. I still don’t care. I’ve got the metal. Obviously I’d like to have been smart enough to have traded that move down to 10 dollars; okay. I’d liked to have known that would happen and I could have bought 50 percent more silver. I’m happy to own it at the 15 dollars because I think when this stuff starts to the upside it will go through 15 dollars, you know, in a matter of days. I don’t think this is going to be a slow grinding bull market when it starts back up from here. I think we're going to see a big move to the upside. I don’t know what’s going to cause it; it may be the realization that there’s not nearly as much silver in the COMEX warehouses as those guys claim. [21:32]

ERIC: Well, I know that the commercials are heavily short the US dollar right now. The Commitment of Traders as Ted Butler said, is phenomenal for gold and silver, so I’m not sure we’ll turn the tide either – you know, possible downgrade of US debt – I don’t know. And I think as you said, it’ll happen and when it happens it will be very quick and then all of a sudden the phone calls will come in and I knew I should have done this, or I knew I should have done that. When you look at silver or gold – also look at gold for a minute, but where do you see gold heading, Bill?

BILL: 3500, 5000 dollar number without any problem at all. Silver – you know, the 50 dollars of 1980 during the Hunt days is absolutely realistic. I think it will pop 100. You know, when you get the public coming in, you get the public scared of bank failures, inflation may be cranking along maybe 20 to 30 percent per year, people seeing that there’s no way to save, you get inflation at those numbers, I mean you can’t save at all, I mean you’re a South American type of economy. I remember my visit to Brazil in 1979 and looking at how those people operated after five currencies had been destroyed; seeing how those people protected themselves against what the government was doing. People will catch on. Unfortunately, they won’t catch on that fast. The people in here who are buying now are people who, for whatever reason, have looked into it so they have an understanding of maybe – I know in my case I graduated University of Colorado with a degree in finance and I’m going to tell you I can’t remember anything I learned there that is of benefit to me today. And I remember an old miner from Montana handed me a book by Harry Brown, How to Profit from the Coming Devaluation, written in 1967. I learned more about money in that book, way beyond – I mean I didn’t learn anything about money at the University of Colorado. I mean I learned about supply and demand and the Federal Reserve of course was absolutely essential to everything that we did in the financial world; but it was Harry Brown’s book, How to Profit from the Coming Devaluation, that I started learning about money and of course that led me to the Austrian school of economics – the Hazletts, the Ludwig von Mises; even today, Lew Rockwell’s great editorials; Ron Paul (who has read more books than I’d ever begin to think about reading.) So I think I understand money today, and I think I understand where these people are headed. Frankly, that’s why I held onto this business in the 90s because it really didn’t pay to be in this business in the 90s for most of the years, but I thought this day would come. Bad to see it come, I didn’t have anything to do with it being here, I’m just here to help people to protect themselves against what’s coming. [24:10]

ERIC: Bill, let me ask you – I remember we used to talk, God, silver was in the fours, and gold was in the low 300 area, but we talked about where this market was headed and what was going to happen and you were ready to expand staff and all the necessary things – but let me throw you a curve ball here. Does it worry you – you know, you obviously sit there thinking supply was going to disappear. Does that worry you, running the business over there, the availability of supply? Are you concerned about that?

BILL: I am not concerned about it at the moment. We do not have the wide variety of products that we had but we have some unusual circumstances. Royal Canadian Mint having to devote their presses to their Olympic coins; small sales, huge margin of profit for them. And those are direct sale coins by the Mint. So they’re diverted from producing a bullion product right now. Now, that diversion may continue for a while and that’s an issue, but I believe that – we switch over to the US Mint. Now, they’re at the time of year where they just standardly say, No more sales this year until next year’s coins are available. That announcement could come any day. I had one of the suppliers – and these guys are authorized distributors, they’re usually kind of tight lipped with this kind of information, but he said last week the US Mint has produced 15 percent of what they produced the week before. They don’t have it. They just don’t have the product. I’m delivering the stuff I’m getting this week, stuff that I sold two and three weeks ago. And they’re really reluctant to sell into next week’s allotment because any day the US Mint could say, No more coins until the 2009s are available. So you’re not going to have any silver Eagles, any gold Eagles, Royal Canadian Mint’s an issue; we got Mexican 50 pesos – brand new Mexican 50 pesos coming out of Mexico – the mint in Mexico City. Are you aware of that? [25:59]

ERIC: Is that what you’re having to sell to some degree here?

BILL: They’re not even available all the time, but we had a mere hundred made available to us this morning on the Mexican 50 peso, but it’s a more reasonable premium. It’s like 4 percent cheaper than what gold Eagles would be if they were around, so it’s really a good buy. We have a page dedicated to the Mexican 50 peso on our website, CMI Gold and Silver, google it, or www.cmigs.com. And you can look at it; it’s wonderful coin. It’s a good way for people to go.

Hey, how about gold bars? Gold bars, you know, with the PAMP, the Credit Suisse bars, they’re 10 ouncers, 1 ouncers were gaining in popularity because they were lower premium than gold Eagles and Maple Leafs. What people aren’t aware of is that this crisis is going on in Europe also; we can’t get bars out of Europe. The Europeans are buying them. We're getting kilo gold bars from Brazil, Germany – kilo gold bars – Johnson Matthey making them available. what were the other hallmarks I saw? Johnson Matthey, Metalor – I don’t know the name of the hallmarks of the bars from Brazil – but kilo gold bars; they’re a quick pour, and it’s standard and it’s coming in. That’s what’s available at the moment. So we're going to have a tight supply between now and the end of the year is my guess. Now, this is a long answer to your question. I’m not concerned. I think there is money being poured into equipment for the production of new silver products, and I think there’s a major player who will come with 100 oz bars, 10 oz bars and it will increase the availability. We can get these premiums back to more normal. We’ll never see the premiums we saw in March where people could buy 100 oz bars at 45 cents, 35 cents an ounce over spot. Those days are gone. That’s below the cost of production because the bars then were being provided by people who had owned them for years and sold into the market place. We’re probably going to end up with premiums when the production meets demand and people actually – the sellers have to compete with each other. We’re probably going to end up with a dollar an ounce premium over spot, maybe a $1.20 because they’ll want to recapture their investment into that industry. [28:11]

ERIC: Well, Bill, I want to thank you for joining us on Financial Sense today. If people want to visit your site, or call you, how do they reach you to buy metals?

BILL: Okay. The toll free number is 800 528-1380; that’s (800) 528-1380. I’m not always available. I do take overload calls, but I have to work with suppliers; I have problems like I buy 20,000 ounces of silver and it turns out that, you know, it’ll be something like 20,257.23 and the next thing you know, they’ll say, We can’t deliver that exact amount. We've got to go back and work on what they can deliver, and realign those things. So I spend a lot of time in administrative work now; this is not what it was 20 years ago, when I and one of my kids you know, took orders for Krugerrands and gold Eagles. This is entirely different now. We have a lot of people around here to talk to people, but I’m going to tell you, there are times when we cannot handle the volume of phone calls. And I’m sure that’s true at all the other dealers around the country too. [29:12]

ERIC: And a website that they might go to?

BILL: Just a shortcut – www.cmigs.com, which is short for CMI Gold and Silver.

And we think we have the best website on the internet for explaining to people what the various products are and why you might buy them. We don’t give pricing on there because frankly a lot of the sites that give pricing, you know, it turns out the pricing structure doesn’t work. We would prefer to deal with people who want to call, talk to a person, lock in a price. I know there’s a lot of people who are listening who just want buy it at absolutely the lowest price and they’ll search and search and search until they find it, and I understand that concept, but we're finding that people want to deal with somebody they can get on the phone and answer questions. And there was a time, Eric –this may be humorous – there was a time when we called ourselves the Merrill Lynch of the precious metals business; you know, our prices were competitive but they weren’t necessarily the lowest. Now, I don’t want to be compared with Merrill Lynch. [30:16]

ERIC: Well, thank you for joining us today, Bill, and sharing some insights on what you’re seeing in the markets today. Very timely.

BILL: Eric, thank you for inviting me. I’ve enjoyed it. [30:33]

Jeffrey Saut, Chief Investment Strategist, Raymond James Equity Capital Markets

ERIC: We have a tumbling stock market as of late, as well as declining commodities; and joining us is Jeffrey Saut, Chief Investment Strategist from Raymond James. Jeff, in a piece you published on the 20th of this month, you talked about credit markets stabilizing and looking for that as the first clue for market stabilization. What are you seeing in the credit markets right now? Are we seeing signs of stabilization or not?

JEFFREY SAUT: Yeah, you’ve seen the credit spreads come in. One that I watch is the LIBOR over the OIS, the index swap spread. And at the peak, about 400 bps wide, and when I checked it this morning it was down to about 250, so it’s come in about 250 basis points in the past couple of weeks.

ERIC: You had a portion of your letter from the 20th that I’m just going to read here, and you included something from Merrill Lynch’s David Rosenberg where he basically said his view on the economy and on inflation can only lead us to one conclusion: These guys are not done cutting rates. And there is still 150 basis points separating the currents funds rate from where it ultimately went in Japan. Quantitative easing comes after that, if financial conditions fail to improve. We're not sure how many more rabbits policy makers have left in their hats outside of the Fed taking rates to zero and buying Treasuries outright.

What do you make of what David had to say about how many more rabbits the Fed may have in their hats and what type of tactics will be used by the Fed going forward?

JEFF: The Fed will use every trick in its hat. And I don’t know how many bullets they have left in the revolver to pull, but my guess is with everybody asking that question, at least in my stint in this business, it’s typically been the wrong question. I think the right question is perhaps: is the over-spent, under-saved US consumer finally so sated with debt that they are either unwilling or unable to take on anymore debt even if the interest rate is zero. I think that’s a better question than what the Fed is going to do. [33:12]

ERIC: And do you feel that, because there is some talk obviously another round of financial stimulus and I was talking with a guest earlier, but maybe you feel it’s the wrong analogy, but he sort of likened it to France when they had the eventual collapse of their currency; they would meet and the government would vote to print more money and the economy would get better for months, and then it would start to go downhill and they’d meet and print more money. Is that where we are in this country in your mind, or is that a useful analogy in any way?

JEFF: I think the illuminati, if you will, in this country has been working diligently for years to try and stave off the inevitable conclusion of the business cycle. And while Alan Greenspan tries to disavow any responsibility for it, the seeds of all this go back to Sir Greenspan. And every time you price capital poorly you create another bubble in some other part of the economy. And we've just about levered every asset on the balance sheet if you will; and again, I think the real question: Is the over-spent, under-saved US consumer finally tapped out? And there are signs that’s where we are. [34:27]

ERIC: Well, let me throw it back at you in a different way because I agree with your statement there, but let me just turn it around and say, what about the government? Is the over-spent, under-saved, over-indebted government – are they just about out of steam? And so as they continue to print money in almost manic fashion in my opinion, doesn’t that endanger the dollar?

JEFF: Not in the short run. Over the long term, ever since the Federal Reserve was created in 1913, the history of the country is to try and inflate our way out of things. And I think we will be successful at doing that again, but I think over the next 12 to 18 months, the fight is going to be against the potential slipping to a deflating environment. And right now, there is indeed a scramble for dollars. You can see it reflected in the Dollar Index, and the big rally that the Dollar Index has had over the past few months. [35:21]

ERIC: But as you review the debt of the United States, let me ask you this: If we were to have, let’s say, a downgrade of the debt of the United States, can’t that be like a thief in the night, Jeff, where the dollar has just a profound devaluation in a short period of time as a result of that?

JEFF: Nah, There’s a chart on my wall that shows when the Federal Reserve was created and ever since the creation of the Federal Reserve when a dollar was a dollar, it’s been in secular decline. Or if you go back and measure it in 1913 dollars, it’s worth about 2 cents. [35:55]

ERIC: Are you of the view of Jimmy Rogers then when he says the Federal Reserve is immoral and we should abolish the Fed?

JEFF: No. Not at all. I think the Fed is actually doing a Herculean job right now and has shown very innovative tactics to try and act as the lender of last resort. I mean the country’s credit markets were in deep weeds through a bunch of I would call them reactive rather than proactive, or ill-conceived rather than thoughtfully conceived, policies by the Treasury Department; one of which I think the really slippery slope we started to go down was when they nationalized Fannie and Freddie. Historically, when the government has come in to bail out a company like Lockheed in the mid-70s, or Chrysler in the late 70s, they have left the equity holders a stub of equity to save and to share in the survivability of the company’s long term recovery. And if you owned those stocks, below $3 a share, you made a lot of money over the next 15, 20, 25 years. But in Fannie and Freddie’s case, after months of telling the world as well as domestic investors that the equity was money good, I mean they even let them raise 7 billion dollars in a straight preferred with Fannie Mae two months before they nationalized it and wiped out all of the equity. So I get calls from Zurich and people I’ve done business with for 30 years asking me: Jeff, how can a rational investor – or why would a rational investor put any money in anything if it didn’t go the right way, or actually started going down or South, the government could come in and wipe you out. And I didn’t have an answer for that back then, and I do not have an answer for it now? But I think it was horribly constructed.

And then, they let one of the prime Treasury dealers go bankrupt with Lehman, and the spin was it was too big at 80 to 90 billion dollars to bail them out, and then in the same week they bailed out AIG that wasn’t even a primary Treasury dealer. And if you’ll recall, that’s when the media started picking up on money markets were freezing people’s assets and/or redeeming them at less than 100 cents on the dollar. And that’s when the politicians sprung into action, driven by the first Paulson plan; and there’s just been a series of wrong footed reactive mistakes, and here we are in the vortex we’re in. [38:25]

ERIC: Did you see this coming to a degree, Jeff, in the sense that we've been talking for years on this network about derivatives and Buffett’s comments that they were weapons of mass destruction created and devised by madmen and he likened them to hell because they were easy to get into and hard to get out of? Did you, over at Raymond James, see this coming because they try to come on TV and act like, Well, nobody saw this coming. But the leverage was tremendous. The dangers were tremendous. And you go back to that speech from Alan Greenspan that he gave in Belgium where he stood there in front of the Belgiums and the rest of the Europeans and said, We stand ready to create money without limit. And Jeff, he said that five times to them. “We stand ready to create money without limit.” And to me, I took that as a disclosure and that all of our savings could be wiped out in the blink of an eye if this government ran amuck. Is there a danger of that here?

JEFF: I don’t think so in the near to intermediate term, I could make a pretty cogent argument that the massive debt that is systemic in this economy; I mean the US went on a financial carpe diem like the world has never seen, and we’re left with the resulting debt of that, and I can make a pretty cogent argument that that debt build-up is a massive short against the dollar and now there is a scramble for dollars to try and pay back some of that debt. I mean Americans are paying off their mortgages at an unbelievable 60 billion dollar annualized rate; that’s never happened. So I think in the long run we will inflate our way out of this and I think you should have some storehouses of wealth because of that. I mean I have been on the precious metals since 2001, the fourth quarter of 2001, although we lightened up all of our ‘stuff’ stock and precious metals and international holdings by 30 to 40 percent in November and December of last year when we got another Dow Theory sell signal. [40:31]

ERIC: When you look at the precious metals markets, which you just brought up, they’ve sort of mauled gold and silver here. And I don’t want to put words in your mouth, but I certainly believe those are in a secular bull market. Is that your view on the metals, or what’s your take on the metals?

JEFF: I don’t do silver; I don’t buy all the 16 to 1 ratio like we were when we were on a bimetallic standard back in the 1860s, 70s, but I do do gold and I do concur with you: I do think gold is in a secular bull market. But I would make the argument in a deflating environment where people are in need of dollars, they’ll sell anything they can to raise dollars and that includes gold and silver. So it’s no surprise to me. I think it’s going to be a heck of a buy, probably once we get into November and we get through this hedge fund liquidation right now. [41:21]

ERIC: I agree with you because I understand the argument, people will sell whatever they have. I would also that people in that position are probably already spent, would be my comment or close to it. And if you look at the fund flows into the gold sector, they’re pretty staggering; aren’t they, Jeff? I mean really we have much more net buying of gold. And another issue has become that it’s difficult to obtain gold in large purchases, and I interviewed Ian MacDonald from Dubai on that; the City of Gold. But in his 30 plus year career he’s never seen anything like this. There’s a very difficult time for people to find quantities of gold; and I’m not saying you can’t get it, I’m just saying what his message was is that – and again, they’re the City of Gold there – but people all over the globe no longer trust fiat currencies, and they were trading in their fiat currencies and wanted to save in real money – gold – on a go forward basis.

JEFF: I think gold is in a secular bull market. I don’t know what you mean by large purchases. I can purchase all the gold coins I need and want, and I’m not so sure that the safest bet in the entire world isn’t Singapore sovereign debt denominated in Singapore dollars. [42:34]

ERIC: Well, if you look at the Singapore sovereign dollars, I actually agree with you on that and how long have you had the clients moving over to that asset type? Has that been just since this crisis started; or what’s your history on that?

JEFF: On which?

ERIC: On the Singapore sovereign dollar.

JEFF: We don’t do that here at Raymond James. I have done that personally, but we do not do that here at Raymond James.

ERIC: Okay. What other things are you looking at because I notice this also in your piece from the 20th; you talked about on September 29th, you guys put out a note because you basically had the House of Representatives turn down the Paulson Plan, but your theme seemed to be it was about survival. You suggested it to be the second mouse to get the cheese because the first mouse usually gets caught in the trap, and people who were trying to bottom pick were repeatedly losing money doing that. But you were readying a buy list – this was on the 20th now – and you were talking about some stocks or securities for uncertain times. What are you seeing right now in terms of the stock market because you talked about the odds of a bottom being in place; meaning they’ve increased but it wasn’t necessarily a firm call, but what are your thoughts here on the stock market? Should investors be buying select stocks here? Is this the time? [43:49]

JEFF: Yeah, I think that they can buy, but I think that you have to get a rifle out and not a shotgun. I think we made a panic low on October 10th, it actually gave my capitulation indicator its first signal since 1966. My over-bought, over-sold indicator, which is proprietarily developed by my dad, is as oversold as it was in November of 1974, so you know, the markets are spring-loaded here, and I think you can get your buy list ready and if I could script in terms of today’s pattern I would – in fact, I did on a TV show this morning – I said, Down hard early, attempts to rally that don’t get very far, down hard on the close, spills over into next week with a ‘I think I’m going to be sick type hour’ and then you get a pretty decent rally. Is that the start of a new secular bull market? Absolutely not, but I do think you could get a pretty sharp rally and then we go back and continue to be in a sideways trading range. [44:53]

ERIC: Let’s talk about that for a minute because I was seeing on a European channel last night some charts presented from 1937 to 38, and the suggestion there was that there is a tremendous amount of people waiting to sell this rally from whatever level it emanates from and that basically it would sort of retard the advance to a degree, meaning not really make it necessarily a legitimate retrace in terms of what one would normally look for because of the over-weight of supply. Do you view it that way and where do you see the balance if it started from, say, 8,000-ish? Where do you see it going, Jeff?

JEFF: I just think you’re spring loading the markets for a sharp rally. How high it goes is anybody’s guess. When you get into these emotional moves like this, you can throw all that stuff out. Markets tend to go further on the downside than people expect, and they tend to go further on the upside than people expect. We came into this year in very cautious mode, with a very high cash positive and I’m actually up on the year, so for the well prepared investor, these kinds of set-backs breed opportunities. [46:06]

ERIC: Do you believe that there’s a large number of folks waiting to sell the rally, or do you not care?

JEFF: I think what you’re going to see is retail investors don’t really understand percentages. What they understand is when they get their statement at the end of the month. And they’re still having their mind what their statements were reading at the end of September and they actually thought September was pretty bad. When they get their statements at the end of October and they realize how bad a month October was, yeah, I think you’ll see some people coming up in sell mode. But you could get a pretty sharp rally off of some kind of low next week before the statements go out. [46:43]

ERIC: You basically won’t give a number necessarily – meaning can we make it to Dow 10,000 or do you have –

JEFF: I don’t have a clue. Or anybody that tells you that they do is being disingenuous. That’s why I don’t make – you know, they always come to me at the end of the year, the New York Times and Barron’s and where’s the S&P going to be a year from now? And you might as well flip a lucky penny.

ERIC: When you look at the stock market in terms of valuation, let’s talk valuations a little bit here because in your piece you tried to make an argument that basically we were in a situation where we had some of these stocks trading near cash levels or below cash levels and there was a large amount of that going on and things were so overdone that you had people like Warren Buffett taking notice because investors en masse had been sort of adjusting their portfolios. Talk to me a little bit about valuations and elaborate on that, if you would, Jeff.

JEFF: Well, where you stand is a function of where you sit. And if you use Graham and Dodd type valuations – price to earnings; price to book; price to dividends; price to cash flow – stocks are probably fairly valued. However, if you use any interest rate geared evaluation metrics – the Fed model; the risk yield gap adjusted model; the dividend discount model – stocks are as cheap as they’ve been in 30 years, but that’s because short term interest rates have been forced dramatically lower by the central banks. So you know, people get up on TV or in the media and say, Stocks are cheap. And they are if you want to use that measuring tool. Or people get up and say stocks are neutral to expensive; and again, that’s where you stand is a function of where you sit. I will tell you on an individual stock basis – this is going to be generally correct numbers and precisely wrong – but of the 9200 stocks in Compustat’s database – something like 3200 of them are selling at single digit PE ratios. Historically that offers a pretty attractive hunting ground for a value-oriented investor. [48:54]

ERIC: What percentage of the stocks – or have you looked at that – are trading below their cash levels on these major exchanges that are considered sort of top-tier companies?

JEFF: Well, I don’t know about top-tier companies, based on the Wall Street Journal story of a few weeks ago, I had one of my gang run a screen on FactSet that are selling below cash to marketable securities; but that screen did not net out the debt. And on that particular screen we came up with around 900 stocks; and now if you net out the debt – if you just use net cash per share – there were only like 54 stocks selling below cash per share. [49:36]

ERIC: So a small number then.

JEFF: A small number if you’re using net cash impacted by the debt. But the Wall Street Journal’s article did not do that.

ERIC: When you look at interest rates, some have talked about a bond bubble – and I’m not saying that you’re in that camp at all, it doesn't sound like you are at all, but where are we on interest rates. Meaning, are interest rates set to reverse in the United States, or are they going to continue lower, or are they going to go sideways? What do you see when you look at the bond market?

JEFF: You tell me how bad the recession’s going to be and I’ll tell you what I think interest rates are going to do. I was one of the few people who came into this year in January and said, I don’t think we’re going into a recession in 2008; and about a month ago, I had to reverse that and say because of a bunch of wrong-footed moves, I think the odds that we're going into a recession in 2009 are near 100 percent. So in the near term, I do not expect interest rates to go up. Longer term, I think interest rates are going up and going up substantially. [50:37]

ERIC: Will that be because the foreigners have sort of gotten sick and tired of financing the debt of the United States and will become sellers? Or what do you see happening in the bond market? You know, let’s assume we get through this bad period of the economy, you said you see interest rates heading significantly higher; is that a cyclical thing that you’re looking at or just your feeling that we’ve got a - because I think the feeling out there, Jeff, and you correct me if I’m wrong – but it doesn't seem to me like foreigners feel that they’re being adequately compensated for the risk they’re taking buying US Treasuries and that they’re getting net negative real rates of return on US Treasuries, meaning it’s a loser. So how do you address that, or what are your thoughts there?

JEFF: Well, I think you have to take it country by country. I think with the European countries you’re indeed correct, but if you take a country like China or India, they are importing technology – proprietary information if you will – at a rate they could never develop it on their own. A case in point: GE said that they were going to build a plant over there, and China said ‘great, we’ll let you do it but we want the proprietary plans of the technology and how it works.’ And GE said, ‘no,’ and they said, ‘well, then no plant.’ And GE caved and is giving them the technology. And I think as long as they can continue to import that technology knowledge if you will, I think they will continue to fund our deficits. When they no longer need us, that’s when I think we've got trouble with the Chinas and Indias of the world. But I think that’s years down the road. [52:10]

ERIC: But your feeling is that eventually they are going to have to sort of turn on - because they’re sort of feeding our habit here, aren’t they?

JEFF: You bet.

ERIC: Okay. When you look at the resources of the globe and we’ll talk about oil here for just a second, but we've had a tremendous fall in oil and I think it’s sort of got to a goofy level because in bull markets as you know, things get ahead of themselves, right, so we had oil hit 145 area; now we’re in the 60s. What are your thoughts on the oil markets, Jeff?

JEFF: Again, we cut back 30 to 40 percent on our stuff stock positions in November, December of last year and that would include oil, gas, coal, precious metals, timber, cement, ag, fertilizer – anything that we consider ‘stuff.’ Longer term, I think you’re exactly right. I mean this country consumes about somewhere between 25 and 26 barrels per capita. China consumes about 2.7; India consumes about 0.7. It’s got nowhere to go but up. Now, whether the price gets back to 147 dollars a barrel in the next year or two is unknowable, but longer term I don’t think there’s any doubt that the consumption of oil is going to go up as these emerging middle class consumers demand more and more oil. I think we’re bringing on something like 300 million additional users of energy every year. [53:27]

ERIC: You mentioned that you cut back on the ags. Let’s talk about that for just a minute because you’ve got some stocks like Agrium, I’m looking at here, it’s fallen from 120 or close to it, in the 27 range. I’m looking at Mosaic now is – was 160-ish and its 27 and change. Do you go ahead and repurchase those positions that you offed at the tail end of last year? Do you go ahead and take those back now?

JEFF: I haven't yet but I’m close because I think a lot of the hedge fund liquidation – I think a lot of the hot money was wound up in those. That’s another bullish story for the dollar by the way: 75 percent of the world’s hedge funds are dollar based and they’re getting liquidated and so there’s a scramble for dollars. And I think some of the bloodletting gets gone after the end of this month. But I have in all candor haven't started repositioning in them yet. [54:23]

ERIC: So if somebody was to come in and say, you know, I’m going to go in and I know you’re waiting Jeff, but I’m going to go and start to buy some of the Mosaic, and AGU – it doesn't even sound like you necessarily think it’s a bad idea because of the dramatic decline that those have suffered. Are those – and I don’t mean to just pick those two, I’m just using as an example – but valuations got goofy on the ag stocks, didn’t they Jeff? And to contrast that where we are now – and obviously things have changed dramatically, but are we at good valuations on the ag stocks now?

JEFF: If you believe the forward estimates. I mean Potash is trading at 68 dollars a share and it’s got a consensus estimate of 20 bucks for next year. I mean you can run the numbers as easy as I can. [55:06]

ERIC: What is going to cause - because when you look at the levels of commodities I think world wide, I think you've got food near historic lows in terms of what’s out there, and I would even say that for base metals; but do you look at that situation with regards to food and say that’s your reason for – meaning are we looking at a secular move in these agriculturals longer term?

JEFF: Yeah, I think that’s exactly right. By 2050 if my information is right, there is going to be notionally 9 billion people on the planet. Most of those – the population growth is going to come from not the developed world but from the emerging markets and the middle class is going to be increasing there. And it used to be that we had – I think the number is like 0.45 hectares to feed each person on the planet, and that was back in the 60s, and now it’s dropped to I think it’s 0.25; and by 2050, when there’s 9 billion of us on the planet, it’s going to be 0.17 – so something’s got to be done.

And the other investment theme that we have there is in water. I mean the world runs on oil and water. And you can live without oil but you cannot live without water. [56:20]

ERIC: Let me ask you about one more sector before we close here, Jeff. We've seen the drug stocks maybe in an 8 year bear market. I hope I’m doing that right; I’m trying to remember some charts I looked at the other day.

JEFF: No, that’s about right.

ERIC: That’s fairly brutal. And then there’s some concern I think about the direction the next president might take with regards to sort of the ultimate taking over of healthcare and having this universal healthcare which has I think put a lot of questions out there about what that means for these pharmaceutical companies. But would you look to be – because these have big yields now and their debt levels certainly seem manageable, but the unknown is what kind of revenue stream will be there of course in the new environment – but would you be a buyer of the pharmaceuticals for the long term? What are your thoughts on that sector?

JEFF: Well, I think the demographics suggest that the healthcare sector is one that should be looked at. I think you have to take it on a case by case basis and you know, Johnson & Johnson is positioned pretty well I think. [57:28]

ERIC: Well, what about Pfizer, Merck and Bristol-Myers and just those? What are your thoughts on those?

JEFF: I have no opinion on them. I don’t own them. One that I have been nibbling away at is Schering-Plough which has a convertible preferred B that’s got a 12.2% yield. It’s actually up today with the Dow down 450 points. Schering-Plough got hit because of this study – this enhanced study that said that Zetia and Vitorin did pretty good things for cholesterol but they didn’t do what they were supposed to do in the platelets; and they cut the shares in half. They dropped them from 30 to 15. I called a couple of docs I know that were in my hedge fund at Hopkins and they said, Look, all those scrips aren’t going away because a lot of people can’t tolerate statins in their liver and these are the only two drugs that work in the gut. And so we have been nibbling away at the convertible preferreds; it’s arguably the company has a pristine balance sheet, a lot of cash on the balance sheet and I think the 12 percent yield gives me a margin of safety that Ben Graham ended his book with. The title of the last chapter in The Intelligent Investor is called The Margin of Safety. I can buy these shares at 123 dollars a share and they can go down 12 percent over the next 12 months and I haven't lost any money because of my 12 percent dividend yield. [58:52]

ERIC: In closing here, if you had a sector – just one sector – let’s assume we get your little mini-carnage going into next week – and we’re doing this here on a Friday with a couple of hours to gom but we’re starting to weaken a bit here down 430, I don’t know how we’ll close. But let’s say we get this spillover into next week, and you feel that it’s the time to step in and for the listeners, if there was one sector – if you had to pick one sector – I know you wouldn't do that – but if just that one sector that you favor – what would that be for your first buys or round of buys?

JEFF: Well, if you’re a trading type account I would use either the SSO, which is the S&P 500 levered 2 to 1 exchange traded fund; or the DDM, which is the Dow ProShares levered 2 to 1 to the upside. Because if you catch it into a downside ‘I think I’m going to be sick type’ hour on Monday or Tuesday of next week and you catch it right, those things will explode in a thousand point rally, or 2,000 point rally in the Dow Jones industrial Average.

If you’re talking about investment accounts, for the kind of environment I see we're going into, which I think is at best very slow growth I would take a hard look at healthcare and food. [1:00:16]

ERIC: Jeff, I want to thank you for joining us today on Financial Sense Newshour. I know that you’re busy over there at Raymond James and for you on short notice to take this interview I greatly appreciate it.

JEFF: It’s my pleasure.

JOHN: And you’re listening to the Financial Sense Newshour at www.financialsense.com. Don’t forget – part 2 of the Big Picture coming up right after this.

Part 2

Ted Butler, Butler Research

ERIC: It’s been a rough ride for investors in the gold and silver sector lately as gold is trading near 700 dollars and silver is below 10 dollars. Joining us today is Ted Butler who writes for Investment Rarities. Ted, when you look at the metals market at this point from a Commitment of Traders perspective, where are we in terms of how the commercials are positioned?

TED BUTLER: Hey, Eric. Positioned fine. This is just a way that the Commitment of Traders structure works. The worse the price action, the more improved the structure; meaning that the more speculators are flushed out of the market and commercials are buying every contract they can, either to close out shorts in the case of the very biggest trader or traders, or smaller commercials going long, so we’re at a I’d say an extreme point that we rarely reach from a Commitment of Traders point of view – no pain, no gain; and we've sure have had a lot of pain, but in terms of Commitment of Traders the gains are there too. It’s configured spectacularly bullish. [1:17]

ERIC: When you look at the gold market – and there’s no way to know when it would deteriorate on the upside, but what do you see in terms of what that means probably for the gold price in terms of an advance? What could we be looking at in terms of an advance?

TED: Well, an advance can start at any time. The Commitment of Traders has not been basically a timing indicator; you’ve got to rely on more technically oriented measurements, but it tells you that we're in the region from which a significant gold rally can commence at any time. At that point, once we cross over significant moving averages then we’ll have to measure what deterioration what commercial selling takes place, and what technical and technical fund buying takes place. That’s what causes the deterioration. But I will point out in gold and silver and now many other commodities, including oil and certainly base metals, the moving average, we’re so far below the moving averages that we could see, particularly in silver and in gold, some dramatic price rallies before we’ll even begin to start to measure whether there’s a deterioration. For instance, right now we’re about at the near 700 dollar mark on gold; we’re about 200 dollars below the 200 day moving average, we’re close to 7 dollars below the 200 day moving average in silver. These are numbers that have never been seen before. I mean gold in the last six or seven trading days has dropped 200 dollars. If you go back a month prior to that, we can see that almost in the same period of time, it rallied that same amount. The point being that the way the market is configured right now from a Commitment of Traders point of view and the extreme degree that we're sitting below critical moving averages, it is primed for hellacious rallies to the upside and we’ll take it when we get back (which eventually we will) to the moving averages, we’ll begin to measure the deterioration at that point; but the key element here is that we could go a long way up in price before we even have to begin to worry about deterioration. It’s set up for a dramatic price move from a Commitment of Traders and moving average point of view. [3:39]

ERIC: When you look at this Commitment of Traders, is it the most bullish that you've ever seen or have there been other times where it’s -

TED: Well, I can’t say that we haven't seen other times. I’ve followed this thing for maybe like 20 years, so you’re going to find times that might appear comparable in just a straight comparison to the Commitment of Traders, but I will say this: putting the whole package together – what’s going on in the real world with the economy and credit crisis and other markets and the extreme degree of the selloff that we've seen in the last couple of months, all those taken together and adding in the Commitment of Traders I would say this is the most extreme buy point that I’ve seen. That doesn't mean necessarily that we can’t go lower; but from a Commitment of Traders point of view the lower you go – if in fact, we do go lower – it just improves the situation. It’s not something that, oh my gosh, if it drops 20 dollars from here in gold or another dollar in silver, not that I’m predicting it, but if it were to do that, it wouldn't change anything in the sense of disproving or having to call the Commitment of Traders invalid. It just makes it better. It’s painful, no doubt about it, but this particular perspective or premise of the market, the more it goes against you, the better it is from the structural point of view. [5:06]

ERIC: Ted, you mentioned to me the other day that you had looked at the stock piles of some of the base metals and noticed that they were just –on a global basis – at very low levels and at the same time you had mentioned to me that mines were having to be shut down and mines that were going to come online are not going to be coming online; where are we in terms of the metals, mining stocks in terms of production? What do you see and what types of impacts will that have for silver?

TED: Well, we use the word unprecedented and extraordinary every other day in the current environment that we’re in. But these are truly unprecedented and extraordinary times and what I was mentioning is that normally in the base metals cycle, you’ll generally see prices slipping below the cost of production after we've had a tremendous build up in inventories. This is the law of supply and demand and the business cycle. Generally we peak out in prices when inventories are very high and because those inventories are very high and the prices generally high at that time, we kill off demand and encourage production; and that’s what creates a surplus and the high inventories. And then we have to work to cycle the other way; and the inventories have to be whittled down. The price comes down; in some cases below the cost of production and mines start to shut down and we live off the inventories for a while. And then we get to the bottom and there’s no more inventories left, prices start to reflect that and come up and encouraging more production and the cycle is repeated. So generally speaking, we top out in prices and go below the cost of production when inventories are high. That’s always been the case in the economic cycle since World War II.

This time it’s different. It’s weird. We have relatively low inventory levels compared to the last 10 years, in copper and in lead and zinc. We're not at the dead bottom as far as inventories, but we’re closer to the bottom than we are to the top when you step and look at a 10 year perspective. So what’s so unusual is that we've moved dramatically and quickly below the cost of production for all these metals – copper, lead, zinc, nickel; just about every commodity you can think of – we’ve moved sharply below the cost of production which will in time if we stay here affect mine production. Mines will cut back, shut down, smelters will shut down. It’s happening now as we speak; and it may be accelerated due to the current unsettled condition of the world economy. But what’s so weird about it is we're below the cost of production dramatically and have moved there quickly while we have relatively low inventories. So you've got to start considering what happens on the flip-side; after mines start to adjust and shut down production (as they will at these prices.) We don’t have big inventories to fall back on, so if things play the way it looks like it’s going to play out we could have a world recession and slow down in industrial consumption but because prices are below the cost of production already and mines do limit production, curtail production, very quickly we can run into shortages of just about everything. As this production falls and these already relatively lean inventories are eaten up (we don’t have any big inventories to eat into) so we could have this very unusual situation of being in subdued economic times, you know, down over the next year or so and at the same time have shortages pop up of everything because you just don’t flip a switch and turn a mine on and off at will. We will go through the inventories that we have –that are already lean – relatively quickly; and recession or no recession there’s going to be some demand for all of these resources. If they’re not available you could have very dramatic and volatile prices to the upside much quicker than people expect because of the low inventories. [9:13]

ERIC: As people begin to – because here’s an article that I think from the Journal, “strapped miners delay projects.” But as they’re shutting down some of these mines for the lead (which you said is happening right now) and the zinc et cetera – and silver is a byproduct – because we're having tremendous demand, are we not for silver, and as it comes out as a byproduct of these metals, what does the silver situation look like then?

TED: Well, I mean that’s the punch line. I mean I’ve never been accused of mincing words when it comes to silver and I won’t mince words now. I’ve already been – I’m on the record as being exceptionally bullish or feeling silver could explode any moment. I have to tell you that this development, which is very recent, it’s only in the last month or two has really hit home this decline below the production costs of all these base metals. I think it could and should have an impact on silver. A bullish impact on silver that is hard to comprehend. I would think it could be the single most bullish factor that I’ve seen in the silver market in the last quarter of a century. Basically, because of that byproduct. Let me back up just a second and tell you that for years people have asked me because of silver’s industrial consumption profile – it’s duality as both an investment asset and an industrial commodity – people would ask over the years, what would happen if we went into a world recession/depression and industrial demand consumption fell off dramatically for silver; would that change your mind about being bullish on silver? What would the effect be on price?

Well, it was always theoretical, but my answer –theoretical answer – was always that being an industrial commodity, silver being an industrial commodity that is basically consumed on a GDP basis, silver would not obviously be the only commodity that would be subject to a fall off in industrial consumption in a recessionary environment – a world recessionary environment – other things would as well. Obviously, copper, lead, zinc – these are purely industrial commodities. So if we have such a situation developing, you would see demand for copper lead and zinc and all other industrial items also decline. It wouldn’t just be silver that would decline in industrial consumption, it would be everything. And if everything did decline in industrial consumption, the price would come down and there would be less demand for it and as the price came down, mines would begin to shut and adjust to the new lower demand profile for everything; and in doing so, silver as a byproduct of these other metals, for the majority of its production profile, would also have a much lower production. But this was always theoretical.

Now it’s not theoretical. Now the prices for the first time in our lifetimes have suddenly and sharply dropped for reasons related to the macroeconomic picture and credit picture; prices have plummeted sharply in all industrial metals to below the cost of production and we are going to see impacts in production of copper and lead and zinc, and also in silver as a byproduct. And this is something that we've never seen before. This is something that’s always been theoretical. So if you look at the production profile of silver, where it comes from, of the 670 million ounces that were mined, according to the Silver Institute and Gold Fields Mineral Services, in 2007, of the 670, 60 percent of it or 400 million ounces of the 670 million ounces come as a result of byproduct production from lead and zinc mines and copper mines. They also get another 10 percent or 65 million ounces comes from gold mining. Well, you could easily take out conservatively 25 percent, okay, of copper and zinc and lead production in a very severe – which appears that we're in – economic slowdown; that would result in more than 100 million ounces being whacked off the byproduct production of silver.

Now, there will be lower industrial consumption for silver, no doubt about it, but the fact that we're in an investment rush for silver – I mean the data is clear, as I wrote about last week – the data is clear that more people are rushing to buy silver than ever before. I mean you've got shortages, you've got big premiums on a retail basis, I think it’s about to touch on the wholesale level. So in this environment to throw in production cuts (albeit with consumption demand also going down), I think production will go quicker because it’s more price sensitive. The users aren’t going to stop using silver because the prices are going down – you know, you use more of it – but miners will cut back much quicker on production because of price; and that combination will be just a devastatingly bullish impact on silver. I could see real easy if this thing plays out as it looks like it should play out, and production does come down in silver because of this base metal production; and by the way, primary production is certainly below the cost of production of silver as well. There are no silver miners that are making a profit, okay, at less than 10 dollars an ounce. It’s like they’re all losers too, so you might have cutbacks from a primary basis as well.

With this combination of very strong investment demand and promising to get stronger considering the nervous economic conditions that we have out there, and a production falling faster than industrial consumption might fall, you have the makings for a real shortage in silver. I mean the shortage looks clear to me; it looked like it was coming anyway, before we had this new potential of fall off in byproduct and primary silver production. It’s throwing fuel on the fire and it wouldn't surprise me at all if within several months that if this plays out, it would be hard to me to imagine silver not moving up to the 20 or 30 dollar mark, even if everything else stayed the same – copper and lead and zinc, they could all stay the same and you could have a situation because of the investment demand in silver that that could launch upwards easily to 20 to 30 dollars an ounce in the current set of circumstances. We’ll see what happens from that point on, but that’s what I think this impact is going to be. And it’s all new. I mean people are just starting to wake up to it. I think you’ll hear a lot more about it in the days and weeks ahead as people realize that wait a minute, the last thing we need in the silver market now, given the current tightness, is a dramatic fall off in production – particularly byproduct production. For the first times in decades – I don’t recall a time when silver production might have been so jeopardized by a decline in price of base metals than we have right now. [16:12]

ERIC: Ted, when you look at the investment side of silver because you’re connected to folks over there at Investment Rarities, what’s going on in terms of the premiums that people are paying, or do you know anything about that or why they are having a hard time getting the silver to sell to clients? And also, you talked about this big investment from the public, and it seems to be global but people are trading in their fiat currencies all over the globe and they’re taking in gold and silver because they want to save in gold and silver now, which is probably a smart thing to do. But investment demand for silver net is really much stronger than gold, you were pointing out in something that you wrote recently when you compare the two pound for pound; and what about the situation with supplies?

TED: Well, they’re tight. I mean you don’t have to go very far to see that – it’s funny. People are somewhat reluctant to use the word shortage. For some reason it conjures up a lot of different emotional factors, but you know, a shortage in a commodity is basically defined by delays if you have to wait for it and if the price goes up on certain forms of it. And that’s exactly what we have on silver on a retail basis is we have delays and rationing in terms of the US Mint in producing coins and you have to wait to get delivery for all different varieties of retail forms of silver, and you’ve got to pay big premiums for it. That just shows you that the market is tight. People have been quick to point that this is only on the retail side, it’s not on the wholesale side. But I say wait a minute, we've never really had these kind of shortages before on the retail side, so it’s not just – and it’s been going on for the balance of this year, it been going on since the beginning of the year so it’s a slow, consistent and persistent tightness that we see. The premiums have been building up. They’re the highest now that they’ve been all year long and that means they’re the highest in history; the delays are the longest. It’s only a matter of time I think before it slips over into the wholesale area, in which case then nobody can deny we have a bona fide shortage right now. Throw in this discussion about the potential fall off in production of silver – mine production of silver – both on a primary and a byproduct basis then you know, you've got a shortage that’s inevitable on a wholesale basis.

So, you want to put things in perspective. This is the first time in history we've had a shortage on silver. I mean there’s no – of any type, and it looks like it’s going to get worse. And you want to call a spade a spade. This is a shortage. It’s unprecedented. At the same time, okay, for the first time, up until the end of 2005 or so, we didn’t have any net silver investment at all for decades. People were basically dishoarding silver since 1980, so we had no net investment at all in silver up through the year 2005. The next year they introduced the silver ETF; other ETFs came out afterwards. And basically we went from the public or the investing world being net sellers of silver for decades up through 2005. But for the last three years we've flipped a switch and the world has become net investment buyers of silver in a dramatic way as I pointed recently: this year, something like 2 ½ billion dollars has so far been bought in various forms that we can document; probably more than that if you let your imagination run wild. But we can prove it; 2 ½ billion dollars went into silver. What’s so remarkable about it is that a few years ago, there was zero. So gold is still bigger. Gold has more investment coming into it given its price mainly, but it’s not as much more than silver is; and gold has always been – people have always invested in gold for hundreds of years. Certainly for the last 50 or 60 years there has been net investment into gold. The difference is that silver went from disinvestment – selling up until 2005; and basically it’s more dramatic in silver because we went from this net seller to net buyer switch just about three years ago. And that’s dramatic. That’s a turnabout you want to put in historical perspective. You couple that with the fact that we have such little silver remaining in the world due to the industrial consumption of the last 100 years or so, and you got the potential of an awful lot of money chasing a very small amount of material. And that combination generally speaking can be very explosive to the price; everybody trying to buy something that there’s not much of that exists in the first place and it’s a very exciting possibility, and it all seems to be coming into play. [21:07]

ERIC: Ted, you've talked for years about eventually a default on the COMEX, and I don’t want to put words in your mouth here, but I have people calling me now and asking me should they take delivery of their 1000 oz bars on the contract side with the COMEX and I’m telling them to do so. Now there will be to resell those there may be an issue; they may have to be assayed on this side or the other, but people can go in right now and buy silver in the 9s and they have to do it what, 5,000 ounces at a time where they have so many contracts? And I’m hearing on the COMEX side if you’re doing smaller deliveries they’re not giving people a hard time, but any large numbers and they’re giving people a hard time and wanting to know what the deal is. Have you heard anything on that and what does that say? Meaning, because the silver market is so tiny that one billionaire of the metal that’s out there could – you can’t do this because you can’t take delivery off the COMEX, but somebody could kind of check and just wipe out inventory theoretically, were it not for the problems of the limitations on delivery. Right, Ted?

TED: Well, I mean you don’t want to put words in my mouth. Look, default – I’ve been writing about the potential of default in COMEX for many years and I will say that if the price does not escalate rapidly and dramatically, default becomes a real probability if not a possibility. You have to remember, you don’t want to be irresponsible about this; I mean default – a contract default – a contract delivery default – is perhaps the most serious thing that could befall any exchange. So it’s not something that you want to toss around the words lightly or as if they don’t have meaning. It has serious meaning. It is probably the most serious thing that could happen to the exchange; it’s probably the most serious thing that could happen to the regulators, in this case because there has been so much warning of this because we've been setting up for this. At the same time, at this point, I don’t think default is a sure thing. I said before, just to preface it, it’s a probability unless prices go up; but I think prices will go up and I think that’s the one thing that will prevent a default is that there has to be a price solution here. In order for there not to be a default, you have to get the price up to a free market level in which people would no be so inclined to take delivery and other people who own silver would be more inclined by virtue of an attractive price of making delivery. We don’t have that now; we have too low of a price, in my opinion, and that is what is fostering the default talk which has become commonplace. It’s kind of dramatic and noteworthy how commonplace it has become. But the problem is the low price. If the price were not so low, this would not be a problem. So the solution is easy: Let the price go where it should go; break the manipulation. And I think all of these things are coming into play.

As far as the COMEX discouraging or limiting delivery, that’s not quite true. I hear a lot of talk that way, but they do have something like a 1500 contracts per delivery month limitation any one entity can take, but that’s still like 80 to 90 million ounces a year. If you took 7 ½ million ounces, 1500 contracts would be the equivalent of 7 ½ million ounces. If you took 7 ½ million ounces of delivery for a full year, you've got a big chunk of silver, so I don’t view that as an artificial restriction for delivery; they should have some kind of limit in any physical commodity. I mean you shouldn't let somebody come in – just like the shorts should not have been allowed to manipulate prices by selling too much; on the other hand, you don’t want somebody to just come in to intentionally disrupt the price by buying too much, artificially driving the price high – that’s not right either. So I don’t think there are any restrictions. I think what happens more times than not is somebody will call their broker or a broker with the idea of taking delivery of COMEX silver. Because it’s done so infrequently, nobody has any working knowledge of it so there’s a natural human tendency – and there’s no big commissions in it for the brokers – I’m not saying it’s mean-spirited, but there’s no real incentive for them to implicate a transaction that involves a lot of extra work for the broker, something he’s never done before; he’s got to talk to people, get something complicated done. He’s not interested in doing that and I think that gets translated back to those people that inquire about it as the COMEX doesn't want you to take delivery. I don’t think it’s – I’ve never had any problem and I’ve done it for 25 years. If you know what you’re doing, it’s not a problem. If you don’t know what you’re doing, you know, problems can arise.

I don’t deny however that there may be some jawboning behind the scenes, if a large delivery order comes in, but I don’t have any specific knowledge of that. I imagine it’s done because it’s in the exchanges and in the regulators bag of tricks; jawboning to talk people out of positions is a time honored and publicly acknowledged tool in their arsenal, and it’s not necessarily evil in itself, but the important point here is that if there is not enough silver to go around, as would appear to be the case, it’s going to be reflected in deliveries. It’s already reflected now – anybody who’s studied the current October contract of the COMEX can see that there has been persistent buying for the purpose of taking delivery; a few days later after the contracts are delivered they’re in turn taking the silver out. So there are some subtle signs that are becoming obvious that people are rushing to the COMEX to take delivery and that makes sense because the price is so low. It offers the cheapest price for silver in the world. You know, it’s logical and economic that people would do such.

As far as your question about encouraging people to do so, yeah, I think you should; in fact, I would go one step further. The people that have asked me about it, my advice would be for economic and also for tax reasons – we're not getting involved in it right now – if you’re going to do something like that, everybody seems to be eyeing the December contract as perhaps the line of demarcation for default or something. I don’t have any knowledge about that; every contract delivery is as good a prospect for big deliveries as any other month. But I would advise people if you’re going to do it, it’s probably in your best interests to do it now, don’t wait for December. Do it in the October contract, you've still got another week or so to run. If you can’t make the October contract I would do it in the November contract. These are not normal trading months for COMEX silver. December is a normal delivery month, but you can still do it, especially for smaller quantities – there’s nothing wrong with doing it and doing it now. So I’m in agreement. [28:22]

ERIC: Well, Ted, I want to thank you for joining us on Financial Sense. I know you normally don’t do interviews like this and it’s sort of a timely thing because there are many questions out there for people about the manipulation and the low price of silver, and is now the time to go to the COMEX and take delivery, and it sounds like you’re saying to do that.

TED: Exactly. Well, just for you Eric.

ERIC: Thank you! If people want to follow you and look at your writings you put out, where do they go to find you, Ted, and your writings.

TED: There are a number of places: Investment Rarities. I even have my own site where I just piggyback the things on www.Butlerresearch.com; you can get it on Silverseek. Google it and you can get a list of articles. [28:59]

ERIC: All right. And thank you for joining us again, Ted.

TED: Great, Eric, you take care.

Big Picture with Eric King and Dr. Alan Lemerand

ERIC: In this segment of the Big Picture, we have Dr. Alan Lemerand, private investor, joining us.

Al, you've been in the markets for decades and I appreciate you coming on here to help out from time to time when Jim and John are off.

DR. ALAN LEMERAND: Well, thanks, Eric, it’s great to be here. And Eric, I want to start this show off by playing a clip from an interview that you did with Jim, August 16th of this year. If we can get that to go.

ERIC: But again, and Jim, I’ve been doing this show for years with you, but I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson who is retiring in November, right after the election. They have been consistently wrong in all of their statements. They have lost control of the system entirely in my opinion and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated: the Federal Reserve and even the Treasury stand ready to create money without limit. We are about to go into that phase where we are going to have very serious money printing and the Fed knows it.

Eric, in reviewing this clip – and let me remind listeners, this clip was done on August 16th – but in reviewing this clip I was struck by the fact virtually none on the major events of the past few months involving the banking system had occurred yet when you did this interview. Washington Mutual was yet still to fail; Lehman Brothers was to fail, AIG was to fail, many other banks also were to fail. You were seeing these events before they happened. How was it that you were able to see these things coming?

ERIC: Al, it’s not a question of being a swami, as it is I think just looking at the situation and having an understanding of it and I think that over the years I’ve tried to concentrate as you know on a general theme or two because I think it’s better when you keep things less complicated and talking a number of times about the Greenspan speech in Belgium where he talked about being ‘ready to create money without limit’ and doing that five times; but he also talked about the fact – and this is more for some of the newer listeners, but the fact that there were making off-table bets in the form of derivative bets, and in the case the banks won those bets they keep the winning, but if they lose those bets the taxpayers basically stand ready to systemically bail them out. And that’s what he meant by creating money without limit. So when you started to look at the amount of derivatives – and of course, Warren Buffett likened these to weapons of mass destruction created and devised by madmen, and likened them to hell because they’re easy to get into and hard to get out of. The point there is that the banking system had become so tangled up in these derivative monsters and this leverage and with the credit swaps that when you started to see the first domino fall, it’s like a whole bunch of dominoes that just keep falling. And that’s why I made that statement on the air that the banking system of the United States was insolvent. It is a zombie banking system completely. Now we have the Federal Reserve and the Treasury trying basically to come in with rescue package after rescue package and is it 700 billion or is it a trillion, is it two trillion. And I hear five trillion now. Can I get a 10 trillion? Right? So when you start to look and understand what Greenspan was trying to say and focus on those just general themes, it was easy for me to see that we were going to have a derivatives/credit swap disaster.

And as you had the first domino, like I said, come down it just creates a domino effect where it just continues to spiral and that’s why this is happening all over the globe, not just the United States. And all of the central bankers around the world are trying to panic to keep the paper systems and the banking system together. And I think that’s why we are in a hurry to try to get some other form of currency together; and of course the word we're getting now is it’ll be some gold-backed currency or different type of currency, but this system is so broken that it was easy to see the banks were gone. Of course, you started to see that after August 16th, as you mentioned, you had Lehman go under, you had Washington Mutual go under, you had many banks go under, you had the AIG – they’re gone, they were insolvent; AIG wasn’t worth anything, they were so wrapped up in derivatives and all kinds of kinky garbage, who knows what was inside of that monster. And that’s why the government took them over, but they took them over because they were insolvent yet their business still runs. But that’s not the point. The point is that when you have this kind of leverage set up in the system, disaster was waiting to happen and that’s what we've seen happen. So I don’t know if that answers your question properly or not, but what I’m trying to say to you is that it was easy for me to see that coming. [35:26]

ALAN: You have answered my question, and I want to jump back to something that you did say when you talked to Jim about this Lawrence Parks interview on the radio in the past, you made another point – you didn’t just talk about the disaster but you talked about how severe it was going to be. In fact, in the past you did an interview with James Turk and John Embry, you talked about people needing to have gold and silver because they needed to protect their families, they needed to protect their wealth. But during that interview about Lawrence Parks you said, this is a quote from you: “So what that means to ordinary people is that your careful savings of a lifetime – your pension can be wiped out in the blink of an eye.” And that really hit me hard and I’m sure it’s hit a lot of other listeners. I just want you to talk a little bit about that for a second; this idea that not just that bad things are happening, or going to happen, but how bad they really can be.

ERIC: Al, if you look right now at the state of paper currencies globally because this goes back almost to the Dines interview that I did where he said basically you’re not going to have the US dollar go to zero, you’re going to have all these currencies hyperinflating. And that was Dines’ vision of it, right, because so much paper money has been created all over the globe; massive paper money printing backed by absolutely nothing. Nothing! That’s the problem with the whole globe right now. And everything has turned into a panic and you have so many countries that have watched the dollar devalue and they’re basically sitting there and saying to the United States, Why are we continuing to even sustain you? I mean they have negative net real rates of return on every single time they go in and buy a Treasury. Ut’s a joke. So, yes, when you look at the fact that people’s savings of a lifetime can be wiped out in the blink of an eye, people need to protect themselves. It’s the same thing that I said way back then as it is today, you have a chance right now to buy gold in the 700 dollar range. Do keep in mind it went up 25 fold in the 70s and we have what? Under a triple right now net from the 250 level; silver has barely doubled, right, because it’s around the 9 dollar area. [37:42]

ALAN: Right.

ERIC: In particular they should all own silver, but by owning those particular metals – James Turk talked about this today; they’re going to have to revalue gold significantly higher than what it is today because you've got central bank reserves because the dumdums have sold their gold, right? Most of them. So they’re down to 8 percent roughly of their reserves; it should be about 40 percent historically, so they’ve got to revalue, James said, the price of gold at least times higher to get the reserves back in alignment. So what does that mean – what would that mean to people to say they’ve experienced a tremendous devaluation of their paper monies. So you have to make sure right now that you have your money parked in gold and silver or gold and silver assets; that’s the bottom line. And this fallout that we've had where we've seen gold fall from over 1000 into the 700 area and will it go to 650; how do I perfectly time the entry point on this? Forget that! That’s not the point of the exercise. You want to be in these things as an insurance policy so that when that revaluation comes – and folks, it’s coming – you better make sure that you have your money in gold and silver and in gold and silver assets.

Let me say this: If you look at an investment firm like a Sprott securities or a Puplava securities, they’ve also got monies in places like energy and some of these other areas and that’ll be just fine as well. But you've got to have your money in things, Al. [39:14]

ALAN: In things. In things that are not paper.

ERIC: That’s correct. Tangibles is where you need to have your money.

ALAN: Let me read you a quote here because I want to give this to you and let you run with it because I bet you’ll like this; this is a quote form John Maynard Keynes – it was actually written in the 20s, but listen to this:

By a continuous process of inflation, governments can confiscate secretly and unobserved an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily and while the process impoverishes many it actually enriches some. The process engages in all the hidden forces of economic law on the side of destruction and does it in a manner that not one man in a million can diagnose.

I thought you’d like that because this is what we're seeing out there today. If you watch, I tend to believe what – I tend to take the same tack as you do. I tend to watch CNN and some of the Bubblevision stuff as sort of kind of contrary indicators when I turn those people on; but if you listen to these people talking, nobody is talking about these issues, nobody is talking about inflation and increasing the money supply and how people are destroying their currency. I mean you’re talking about it, Jim’s talking about it, Peter Schiff is talking about it, but who else is talking about it, Eric? How come everybody is missing this message that John Maynard Keynes gave to us almost 80 years ago?

ERIC: Because, Al, as it says right in that quote from him, it’s hard for people to understand it. It’s hard for people to identify it. I will interview people and I will ask them: Do you see this type of dramatic devaluation of the US dollar going forward? And they say, No. And these are supposed to be experts, Al.

ALAN: And these are smart people.

ERIC: They’re smart people, and it’s not a knock against them. It’s just if you understand monetary history and you look at it; and Bill Haynes got into this a little bit obviously in this third hour because he’s kind of a student of monetary history, but it really is no different than the French, no matter what anybody says – “well, the economy is different and you had this difference and that.” Nonsense. Look, the economy was bad and the French government would get together and they would agree to print more money; that’s what they would do. Does it sound familiar. And then the economy would get a little bit better and keep chugging along, then it would get bad again; and they would meet again and they would print more money. And they kept doing this until their currency went to worthlessness. That’s the bottom line. That’s what happens. That’s what happens when you print paper in massive quantities backed by nothing. That is the end result. Period. That’s it. It’s not a debatable situation. [42:02]

ALAN: Some people can’t see it. That’s the question that – you know, I’ve got sitting right in front of me When Money Dies: The Nightmare of the Weimar Collapse and this is from page 121. This is actually an interview with some people during that time.

His customers didn’t know. It had somehow to do with the dollar, somehow to do with the stock exchange, somehow maybe to do with the Jews.

They say in here: The Jews.

Unable to diagnose that it was just this massive printing of money, like you said, in France, like happened in Argentina, which is what destroyed these people and yet they can’t see it. Why is it these people have no eyes. Why is it that they can’t see it?

ERIC: Al, I think that, again, if you keep things simple. And I don’t want to knock people because – and I’ll tell you why - because I understand how they get lost; I understand how they get confused; I understand how they want to save themselves. My God, this has to be deflationary. I made a joke once before, and this goes back maybe six years ago but I was on with John Embry and I talked in an interview that we were doing with the dollar way back – and of course it was at much higher levels, but you know, this concept that we would have this great deflation and Prechter and that we were all standing around in Ancient Rome because the Romans were so clever, right? And they would kind of acid-base; we can’t have silver in our currency anymore, right, because the Treasury is completely – basically it’s gone, right. So what we're going to do is we're going to take copper and we're going to acid base and we’re going to put a little silver on it and we're going to acid-base and we’re going to do this over and over again, and pretty soon when they were done it looked like silver. And they ran these through the economy, Al. And people thought it was the real thing until after a few years it started to wear off. And then the currency collapsed, and it was collapsing to the Empire as well. So you know, it reminds me that we're all standing around in Ancient Rome and Prechter and all these different people are holding these things and saying to us, Man, there’s going to be a big bull market in these babies. I say the same thing I said then, I don’t think so, Al. It’s not going to happen. There was no bull market in those things. They collapsed. [44:10]

ALAN: And it was just for these people to realize that these things that they’re using as money were worthless. I remember something that you said on the show with Jim, where you were talking about the money that the people in Weimar, Germany, how they clutched their marks. As I’ve made a study of that time period, these people held on to the marks because they wouldn't trade them in for Swiss francs, they wouldn't trade them in for French francs because they just believed so much in that paper. And as we're seeing what’s happening now with the dollar, this rush into currencies, we're seeing the dollar strengthen for no other reason than it’s just simple laws of supply and demand; people are jumping into the dollar. And do you see that same sort of attitude in the minds of people, that there’s just something special about the dollar just because it has George Washington’s picture on it?

ERIC: I would say this about that. And this goes back to Weimar Germany. Yes, at that time the Germans were literally clinging to their Reichsmarks, clinging to them. They did not believe that it was possible for the Reichsmarks to go to zero. They didn’t. And they clung to them all the way until the end. People in the United States today, they don’t teach monetary history on purpose. But looking at the situation what I’m saying is if you go out and you do a poll with people, they don’t know the Continentals the country originally had went to zero. And then we had the Civil War and the Confederate notes went to zero and they say, Well, yeah, but they lost. No no no. Stop right there. The US Greenback went to zero also. That was on the US side. The winning side, okay? We've already had a couple of currencies go to zero in this country. Could the dollar go to zero? Yes. Is it going to go to zero? That’s difficult to say, but a great devaluation is in the works and I think that tangible assets – because when you get into these kind of secular bull markets, Al, and we're having one heck of a destruction here on this pullback, I think, to people’s psyche, right, and I’m not an Elliott Wave guy at all, but it very much is reminiscent of Wave 1 up and Wave 2 down. When you have that Wave 2 down, it almost completely wipes out all of the gains from Wave 1, and we haven't seen that in terms of gold, it’s held up much stronger but certainly with these stocks and even with silver to some degree we've had what feels like it’s just wiped out the whole bull market. But then you go into a Wave 3. And again, I’m not a big Elliott Wave guy, but sometimes this is the way it is. Those Wave 3s are about 2 ½ times the move of Wave 1 – and I’m being very crude in how I’m describing this – but when you get into that Wave 3, this next round when we actually get there, it’s going to be very, very violent when you see how gold and silver go up. Very – extremely violent. There’s almost no chance for people to get in. They keep waiting for the pullback that never happens and I think that that’s the kind of environment we're going into going forward.

And people say, Well, gold – and we tend to be so ethnocentric in the United States. “Well, gold is floundering.” Gold is not floundering. Very recently it was hitting new all time highs versus the pound. It was hitting new all time highs versus the Aussie. Wake up! This is a secular bull market. Gold is rising versus all currencies as is silver. Yes, we have this horrible correction happening, but that’s not the point. The point is this is a secular bull market. Gold will be in the thousands; if we have hyperinflation then all bets are off because it’s very difficult to measure things in units of dollars. So I think the bottom line here is that people need to steer clear as much as possible of paper during these kind of cycles. Not paper gold and silver shares, paper oil shares – those are ultimately great things to own – but paper dollars, paper euros, yen and these kind of things are the toxic things, bonds. When you get into these great inflations, and everybody is saying we're going into a deflation; we’ll see when the dust settles. This is not going to be deflationary. When you print like I said this was coming all these years. When you print money without limit, and I’ve warned people for years that you can be wiped out in the blink of an eye, I promise people that listened to this show you will see gold in the thousands of dollars. In the thousands. Minimum. We are heading to a Dow/Gold ratio of 1 to 1. I don’t know if it’s going to be 6,000 – in the 6000s area. In the 3000s. I don’t even know, if we get tremendous inflation, if we get much higher than that. But the winning assets to be in going forward are going to be things; real things. Tangible things. And that’s just the way these types of cycles are. People get hurt extremely badly that are in paper. But do understand this. This is going to be one of the single biggest – or if not the biggest – wealth transfer in the history of the world and the people in the tangibles are going to be the winners. It may not feel like it today, and they’re hurting today right now, but it’s like the Olympics, Al, it has nothing to do when you start the race. You look at the great swimmers that the US has had in history, it doesn't matter where they were half way through the race or a third of the way, or that they were way behind. If you look at a Michael Phelps, in a miracle he won at the end of that one race. It was almost unbelievable that he did it, but Al, that’s all that mattered: Where does this race end? That’s when they give out the medals. So right now, we're part of the way through the race and people are shook up and like Russell says, you don’t want to get bucked out of these bull markets, but it’s very difficult for people to hold. That is the place where we are right now. They must hold. They must hold tight. [49:56]

ALAN: Eric, you just made a very interesting point about Americans being ethnocentric. And I see this a lot with some physicians that I work with and other people in my investment group, but the fact that people just have never lived through hard times. And Richard Russell uses this a lot as a theme. But the fact that people have never experienced inflation, they’ve never know what it’s been like so they just can’t see it. They just can’t believe it. One of the investors in my group – in fact, one guy’s from South Africa, one guy grew up in Nigeria, but another guy grew up in Argentina and he was in Argentina in 1978 and he tells me a story of how he bought a microscope for 500 pesos in 1978; by 1981, that same microscope was 500,000 pesos. And Argentina at one time had a GDP I believe that was greater than France. This was a very, very advanced rich country, but now it’s sort of bordering on becoming a Third World country, and I just don’t think people can believe that can happen here. And is that just – people just can’t take warnings. I guess that’s the message I want to give the listeners there.

Eric, let’s shift gears here for a minute. On a show that you did with Jim, it was actually July 21st, 2007, you bought up a quote from Buffett’s commentary from his annual letter and I like this quote:

Certain perils that lurk in investing strategies cannot be spotted by the use of models commonly employed today by financial institutions...Independent thinking, emotional stability and a keen understanding of both human and institutional behavior is vital to long term investment success.

You always emphasize that factor of emotional stability. We're having some difficult times right now. The markets seem to be cratering, doing some very, very strange things and a lot of people are understanding. If you could just speak to this issue of emotional stability a little bit.

ERIC: I keyed in on that because of what Buffett did say about the emotional stability. You know, going back to that show and bringing it now. I don’t mean to laugh because people are so shaken right now and it’s not that it’s funny, it’s just you have to keep your head about you. And I’ve always said to people, whatever you do, do not panic. Do not panic. People are going through these massive corrections in the energy sector. We’ll use that as an example because I’ve talked about the gold/oil ratio many, many times on the show and how it was out of whack and how that needed to right itself. It’s sort of on the way to doing that now. But I will say this, I see oil heading much higher than it is over time. Much, much higher now. And I wasn’t bullish on oil before because you have to remember I was buying the oil service when it was 11, 12, 13 bucks a barrel; so over 100 bucks a barrel I just, you know, I just said that’s for somebody else, it’s not me. But you start to look at it now and look at it in the 60s and I do think it’s becoming very compelling somewhere in this area here. So people who are in those investments, that are getting hit, this is the time because if you’re in a Sprott Securities or a Puplava Securities or maybe even John Hathaway has the Hathaway funds, the gold funds over there and some of the other funds; but this is the time where people need to add to their positions. It’s very rare in secular bull markets that you’re going to see the kind of magnificent declines – almost like a crash which we've seen recently in these markets, meaning the oil service, the energy sector, and the gold and silver side. When you add in those kind of secular bull markets, you add to those positions and then you get into the Wave 3s and then eventually the Wave 5s, it’s almost unbelievable the kind of stratospheric gains that investors go through. And when you talk about emotional stability, Al, or Buffet talks about that, this is the time right here, right now to add cash. If you’re in those funds, if you’re in a Sprott Securities or a Hathaway fund or something like that, add to your positions and do it now. Don’t wait. It doesn't matter if you precisely time the bottom. That’s not the point of the exercise. The point is to buy very dramatic declines in these secular bull markets and that’s what people have a chance to do right now. Don’t let it slip by. It was like when Bill Haynes said to me, you know, Eric, when silver pops back to 17 or 18 dollars and everybody is going to be saying to me, Man, I knew I should have been buying below 10 dollars. And he knows he’s going to be getting those calls. People have a chance to do that right now with silver. They have a chance to get 700 dollar gold. They have a chance to get gold and silver shares that have been completely destroyed in terms of their market cap. Now is the time to buy. It doesn't matter if these things go lower; continue to accumulate those. Put money into those funds that you believe in because I’m going to tell you something right here on the air, and this is a fact, Al, when the dust settles and you have people like Eric Sprott and John Embry or John Hathaway or a Jim Puplava – I’m just going to use those guys as an example – but have positioned their clients correctly – which they have, mind you – minus timing these gyrations which Richard Russell advises do not do that; stay in these things; buy them and hold for the long term. Don’t trade them. So these guys of course have a buy-and-hold strategy and right now people that are in those funds are pretty shook up and nervous, or they’re thinking to themselves, Man, why didn’t anybody try to be like a trader and trade these things. That is not what you are supposed to do in secular bull markets. I’ve never ever ever in my life ever seen a trader that makes more money in a secular bull market than somebody that buys and holds. It is almost impossible. I would say that it is impossible. I’ll say that here on the air. You have to buy and you have to hold. And people that are in those funds, right now is the time to add to those funds. Forget being nervous – that’s not the point. You have a chance right now to add to those funds at unbelieveable discounts in these market places. [56:48]

ALAN: When you talk about independent thinking, that’s what Buffett is saying, you need emotional stability but you also need independent thinking. You have to go in and buy those things right now because that’s what everybody is telling you – if I’m looking at people around me they’re all talking about the gold market is going to crash. They’re laughing at me. They’re looking at commodities are crashing. But when really are going to be independently thinking, you have to do those types of things that other people aren’t willing to do.

ERIC: Well, look at Buffett. You brought up Buffett earlier. What did he say this week? He’s entirely in his own personal money 100 percent out of US Treasuries. He’s out. Buffett knows what’s coming, Al. He knows what’s coming. And he moved his money into the US stock market, but you have to park your money somewhere with what’s coming and personally, obviously, when you go back to the 70s and some of these very vicious cycles and look at them, being on the commodity side of things, that is where the fortunes are made. And I’ve never never – I’m not a goldbug. I’m not a silver bug. I’m in these things for the money. That’s the whole point of this exercise, which is why when I interviewed people sometimes I’ll say to them, What can people do to make some money? So this is just a cycle that we're in; eventually we will have some kind of stable currencies down the road, and you’ll want to get out of these gold and silver things and rotate into the next unloved or hated thing. But when people are laughing at you, that reminds me when I was buying up these oil stocks and I put 100 percent of our investment money into those oil drillers in the United States’ side of things; some of these things were trading for nothing, they were throwing them away and oil was 11, 12, 13 bucks a barrel. Then it went to 35, 40, you know, within 12 months and so when people are laughing, that’s a great sign. That is a great time. [58:42]

ALAN: Okay, so you've done your independent thinking, you've exercised emotional stability, but there’s a great quote that you've brought up on the air many, many times and it’s from Jesse Livermore and he talks about something that maybe might be even more crucial than any of those other problems and that’s patience. And here’s the quote:

It was never my thinking that made big money. It was my sitting. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

And Eric, you know as well as I do what an incredible trader Jessie Livermore was. How good he was at seeing trends and doing things that other mortals just couldn't do, and yet he says the hardest thing for him to do is to sit – just to sit there. And you know how hard that can be.

ERIC: Well, if you look at the segment Jim and I did together called The Wisdom of Mr. Partridge and that goes back earlier this year, but it’s kind of a funny segment because we go over this Jessie Livermore section of this book. But I will tell you this, Al, when you really look at what the man is saying there, basically what he is saying is you need to be an investor. That’s the irony. The greatest trader probably that ever lived was saying you need to just buy early in the bull market and you need to sit tight. But as he stated, people that can be both right and sit tight are uncommon. That’s no different than – you know, you've got somebody kind of like a living legend like Richard Russell who’s made so many phenomenal calls over time, but he says the same thing; so few humans beings can stick it out. So few can ride it out. This is that moment in time, Al, these gut wrenching moments because people 10, 20, 15 years from now, they’re going to have a story to tell. They can either talk about the time they made a mistake and they puked out of these things and they got out of them; or they can talk about how they held on for one of the greatest rides and wealth transfers in their lives. And how they even added to their positions. When you’re telling that story years from now believe me you don’t want to be telling it with a sense of regret. Nobody should be exiting this stuff. Nobody. [1:01:09]

ALAN: I want to jump to one last topic. You've mentioned a new theme. Basically there’s a new theme of yours and it’s a comment from George Soros where he talked about the decline of the US dollar, and George Soros made this statement: There is no suitable alternative. I just want to get your take on that, or just sort of give us a little bit more info and how you’re feeling about that comment by Soros.

ERIC: You will hear that in the coming years maybe in the same way you heard the Greenspan speech. That is the new theme. Quote: There is no suitable alternative. Soros knows what’s coming, the same way that Buffett knows what’s coming. What he’s saying there - because if you look at George, he tries to help people, you know, but he can’t – the powers that be don’t want George running around the globe telling them to buy gold and silver. So he just kind of says, he talks about the dollar and it’s tanking and it’s in this massive bear market but then he kind of politely says there is no suitable alternative; and nobody really catches that. Well, I caught it. People will be hearing that from me for years. There is no suitable alternative. If you understand what he just said there, you have to be in gold and silver to protect your family. I don’t care if you’re worth a million, 10 million, a billion or multi billions, you will have to be in gold and silver going forward to protect your net worth. It’s just like Greenspan said in the 1966 paper he wrote: In the absence of a gold standard there is no way to protect yourselves except through the ownership of gold. And I’m summarizing there, but you know, politicians are against gold; they’re angry at gold.

And I’ll tell you this also, Al, the politicians as they have just smashed – or they have orchestrated this smash in gold and silver – and meanwhile they’re busy behind the scenes, right, running around trying to figure how they’re going to set up the next currency which is going to backed by gold – this is the dirty little secret, right? Which means that gold is going to be, as James Turk said, revalued much higher than where it is today. But as they’re cratering this stuff, they don’t want people protecting themselves; they don’t want them protecting their families. You’re supposed to be burned by what’s going to happen. When you look back at the 30s and Roosevelt comes in and says, Look, everybody’s got to turn in their gold. So everybody goes in and turns in their gold because people were very polite in the 30s, right, unless they had it outside of the country because they knew what was coming. Well, that was what? $20.35. He immediately within a few months revalued it to 35 dollars an ounce. So that’s the point of the exercise. Everybody is supposed to go down. Nobody is supposed to be protected; it’s the same way now. And in order for people to be protecting themselves, they better know where their money is placed. They better know who’s managing the money. Again, when you look at somebody like a Sprott or Embry or Hathaway or Puplava, they know what’s coming. They know what’s coming. They know the big wealth transfer that’s coming down the line. They know how to take their clients money and make sure again, just like the Olympics, it’s not about where the race is now, it’s where it finishes. That’s when they give out the medals. When the dust clears and everything settles, it’s going to be the people who had money parked with people like that. Those are going to be the big winners. And there’s not going to be many of them because that’s the way the system is designed. It’s designed to take as many people down and devalue as many people’s money and wealth as possible. [1:05:03]

ALAN: You've mentioned twice now in this interview the idea of a gold-backed currency. Jim did an interview with Bud Burrell a couple of weeks ago, and Bud Burrell mentioned the idea there could be a new basket currency that might possibly be backed by the Russians, he actually talked about the Russians and the Arabs. Jim Willie recently did an interview where he talked about new gold-backed basket currency; the Arabs, eastern Europeans, the Russians and the Chinese. Have you heard much about that; do you have any thoughts about that, or even if you don’t, what do you think about the possibility of something like that occurring in the future?

ERIC: That is what’s going to occur. Jim Willie is right. If Bud Burrell was saying the same thing, he’s right on the money. That is what’s going to happen. But the people that pull the levers in the United States, if you look at the Trilateral Commission as an example, you can find out what’s coming down the road by looking at their writings and they talked about this, and they talked about it a while ago: the need to have a currency backed by gold. So, you know, that’s where we're headed right now, and that direction is where we're headed. However, the problem is you can’t very well do that with 700 dollar gold. And what I find interesting is you know, as you said, the dollar is moving higher right now, which is very artificial and has nothing to do with necessarily people fleeing to the dollar because on the other side of all those dollar purchases I can tell you right now are the commercials and they are short selling the US dollar. That’s what’s happening right now. So that’s who’s on the other side of those trades. And there are a lot of hedge fund things and kinky things going on, so it’s kind of artificially moving the US dollar up right now. But again, that’ll come down.

And the question comes for me, the interesting thing becomes: How are they going to eventually do this? Do they do it like a thief in the night where they just announce it overnight and it just happens, or are we going to start to see a dramatic move in gold because gold has to go way higher than where it is right now? That’s the question. How are we going to arrive at our new gold price? That’s the big question. So, I think – Is it going to happen? Yes, definitely I think it’s going to happen. But I think how we are going to arrive at that is going to be the interesting thing. Are we going to see gold start to head up in price or is it just going to be an overnight mark up by the central banks as James Turk mentioned, where you can just revalue almost overnight? And I think that will be the interesting question to see how that unfolds. [1:07:36]

ALAN: And that will be good for people that had the chance to listen to this interview today is that they’ll be looking for it. I think that is something that is very important for listeners and for people out there to be aware of: you can’t see any of these things coming if you’re not looking for them. So whether it comes quickly, or whether it comes slowly at least we’ll have some better eyes to see some of these things.

And I think that’s where we end up there.

Thanks a lot, Eric, for letting me do this interview with you and I hope that our listeners have a lot of knowledge that they took away from it and some new ideas and that they can continue to gain in wisdom and understanding as time goes on.

ERIC: And thanks for coming on, Al, and I think the bottom line here is in summary for people that are out there – three things: Don’t panic; exercise emotional stability as Warren Buffett says; and sit tight, like Jessie Livermore says. [1:08:24]

JOHN: Well, everybody, time has expired for the program. There will not be any Q-Lines this week as Jim Puplava is out. He will also be out next week. Eric, you’re going to be back again here. After that, we gave you a means to dissolve the epoxy that’s on your chair; we don’t want you to go until after the second show.

ERIC: That’s fine with me. You know, it’s funny, John, because right now is such a panicky time for everybody and everybody wants answers and I can only say this: I think pulling myself out of this for just a minute – I think a lot of people are thankful that Jim has this program and I think it’s absolutely the best network that’s out there for people to come and get the honest news. [1:08:59]

JOHN: The most important thing over the crisis window – 2009 to 2012 – is going to be getting accurate information, as you well know because remember in the run up to this crisis we were continuously assured that everything was AOK and even when things fell apart they would say, Well, remember that thing that we said wasn’t a problem, well we fixed that problem that wasn’t a problem, so don’t worry about it. And then finally the confidence in everything just began to fall apart. So, anyway, on behalf of Eric King and Jim Puplava, who is out this week, we’ll see you next week everybody. I’m John Loeffler and this has been the Financial Sense Newshour.

Financial Sense Newshour

The BIG Picture Transcription

October 25, 2008

Part 1

Part 2

Part 3

Part 1

Bill Haynes, President, CMI Gold & Silver

Jeffrey Saut, Chief Investment Strategist, Raymond James Equity Capital Markets

Part 2

Ted Butler, Butler Research

Big Picture with Eric King and Dr. Alan Lemerand