"Coffee, Orange Juice & Gold!" - Transcription
Bill Murphy, Chairman of GATA, Gold Anti-Trust Action Committee
Audio Interview, January 11, 2003
Editor's Note: We have edited this Jan 7, 2003 taped interview in this transcription for clarity and readability. The original real audio interview may be heard on our Ask The Expert page for Mr. Murphy.
JIM PUPLAVA: Joining me on the program is Bill Murphy. He is chairman of the Gold Anti-Trust Action Committee (GATA) and he’s also purveyor of his own website called LeMetropoleCafe.com, an investment news site that is one of the best on the web today. He comes from a long background on Wall Street working for various firms, specializing in commodities with Merrill Lynch, Shearson Hayden Stone and Drexel Burnham before starting his own brokerage firm. Bill, welcome back to the program.
BILL MURPHY: Great to be back, Jim.
JIM: Bill, before we get to the topic of gold that is dear to us, I want to talk about some basic fundamentals of economics. I want to start our discussion with commodities which have been rising. The CRB Index had a nice 20 percent run up last year. But before we get to that, let’s talk about commodities such as orange juice and coffee.
Now if we were in a situation over the last, let’s say, ten or twelve years -- where every single year the demand for coffee has grown because we have more Starbucks and coffee cafés and orange juice demand keeps going up because people are eating healthier diets -- but each year this demand goes up and the supply goes down. So, we’re running a deficit. What would most people expect? Most people, I would say, would think that the price of that commodity would rise in value. Which indeed it has.
BILL: That’s right. The price needs to rise to bring the market into equilibrium.
JIM: But in the case of a commodity, where you have rising demand and diminishing supply, for that price to decline successively well over a decade, wouldn’t that be considered unnatural?
BILL: Oh, it’s very unnatural. Then it means that when you get down to certain prices, people can’t make any money growing oranges and coffee. They get discouraged as it’s a losing money proposition. So the supply situation worsens, because they go out of business or they don’t plant any more orange trees or coffee trees or bushes, and the supply then tends to get even worse.
JIM: And let’s suppose that the world wakes up one day and finds out that we just don’t have enough coffee beans to meet demand. There is a huge supply deficit and we don’t have enough orange trees planted to make enough oranges for orange juice. Prices move up because of greater demand than supply and the market finally recognizes this. But Bill, you and I know, that even if the market was to recognize that there’s greater demand for coffee or orange juice today, demand cannot be met readily. In other words, we can’t flip a switch and then all of a sudden we’re going to have a gazillion gallons of orange juice go to the grocery store or Starbucks is going to be able to get its hands on a gazillion pounds of coffee beans.
BILL: It would take years and years for there to be enough, especially in the case of coffee, to be able to get production up to speed to meet the demand. In the meantime, what has to happen is that the prices will skyrocket because there just won’t be enough supply. They won’t go up for years no matter, even though the price increases and everyone wants to get into the coffee and orange juice business, it’s just the gestation time or whatever it is, would take so long that there won’t be any supply coming on stream for many, many years.
JIM: And so prices are going to have to rise to a high enough level to discourage demand so there would be less people frequenting a Starbucks and less people buying orange juice until there is an incentive to increase supply. So growers plant more citrus trees and more coffee bushes. But that takes time. That takes two to three years, maybe five years to happen.
Let’s take that same scenario and transpose it to the gold and silver markets. We know for a fact that well over ten years now, gold demand has risen, silver demand has risen, and we’ve been running huge supply deficits in gold and silver. Yet throughout that decade of rising deficits, the price of gold and silver went down. Isn’t that unnatural?
BILL: It’s very unnatural. And of course in the case of gold, one of the ways they forced it down was using Central Bank supply of gold. They forced that price down for various reasons, but it’s a very unnatural situation. Your wonderful orange juice and coffee comparison is setting up a situation that is explosive.
JIM: We know that during this period of time, a lot of Wall Street firms have closed down their commodity departments. Most Wall Street firms don’t even follow commodities other than, let’s say, a few analysts who follow gold or perhaps energy. So Wall Street has closed down a lot of their commodity trading business. We know that mining companies have not been willing to go out and spend money for exploration, because it just hasn’t paid off. They are trying to conserve cash. We know the miner or marginal gold suppliers or silver miners have gone out of business because they just didn’t have the cash or the money to stay profitably in the business. So that keeps diminishing supply. Do we not have the same situation today as we look forward in this next decade where you could have growing demand for gold and silver and yet the supply deficit will get even bigger and not be made up in the short-term?
BILL: Well there are studies out there, very formal studies, where the gold mine supply is going down for years to come no matter what the gold price does. We could have $1,000 gold tomorrow and the gold supply is going down, not up. And that is a frightening situation. In essence, they kept the gold price down so low, for so long, that as you just said, only the lowest cost mines could make any money. Well nobody could make any money and certainly nobody was going to go looking for gold, which costs a lot of money. It wouldn’t matter if they found it anyway, because they lose money at it. Right now there’s very little exploration going on and there’s very little gold in the pipeline to come to the market when the gold price explodes. The only way this can be resolved, well I guess we’ll talk about it in a while, is for the women in the world who are wearing jewelry to bail out these people who have done this to the gold market.
JIM: And even if the price of gold was to rise and explode to the upside, miners in terms of reacting to that increased demand, are very limited. Bill, I wonder if you might talk for a moment about how long it takes a company to go out, explore, and find the stuff. Let’s say that some of these mining companies get lucky and find it. You just don’t turn a mine on by a flip of the switch. You’ve got environmental impact studies that could take years and there’s a growing environmental movement that is against mining. So that holds up getting a mine into production. So even if you could go out tomorrow and find it, let’s say, magically you know where huge deposits lay, it may be three to five years before that gold comes into the market.
BILL: That’s once they found it and are ready to go. So you’re really looking at a three to eight-year period before any meaningful amount of gold supply can come to market. That’s how serious this situation is.
JIM: When we look at the gold market, some will say we know for a fact that several banks have been selling off their gold reserves. We know that people have been borrowing gold from Bullion Banks, selling that gold and playing the Gold Carry Trade where they borrow gold at one percent and invest that difference at a higher interest rate. This has been going on for years now. Some people may call it a conspiracy. Some people may say that the gold market is manipulated. Others might refer to the gold market as being managed. But we do have evidence historically, that this was done in the past because it was in the interest of government to do so. I wonder if you might talk about for a moment, Bill, about the London Gold Pool that took place in the 60’s and how that led to a very explosive situation for the price of gold in the 70’s.
BILL: What we know is what happened in the 60’s and 70’s. Except it’s not disclosed today. In the 60’s and 70’s the United States artificially held down the price of Gold and it was held at a low price because all the gold was leaving the country. Everybody wanted it. Finally the United States realized it couldn’t hold down the gold price any longer and the gold price exploded. You had that culminating in the big move in 1980 to $880 an ounce. The situation today is far more severe than it was then. Today, you actually have some of these people that are in it, as you just described in the gold world, that are actually short gold. I think that number is around 15,000 tonnes of gold which actually represents the short position in the gold market So it is an explosive situation -- even greater than it was in the 60’s and 70’s.
JIM: As we take a look at this explosive situation, we see that these markets have been managed. I want to go back to our coffee and orange juice example. We’ve been running these huge supply deficits for years, which have been supplemented by the selling of gold by Central Banks. Now if we take a hard look at it, we can call this managed or manipulated. Bill, we know for a fact that there have been several Federal Reserve papers (we have them listed on our Fed Watch resource page, where they talk about going in and manipulating the price of gold. I wonder if you might make reference to Gibson's Paradox?
BILL: Well Gibson's Paradox was a paper written by Prof. Lawrence H. Summers when he was at Harvard. Mr. Summers was also the former Treasury Secretary and today he is the President of Harvard. In essence, he came up with a paper that showed the relationship between interest rates and gold. What we found through all of our studies was in 1994 and 1995 Robert Rubin started his strong dollar policy. Whenever I asked what his Strong Dollar Policy was, nobody could tell me what the United States does. So I assume with the Strong Dollar Policy, the essence of it was the rigging of the gold price. The reason for that was to keep interest rates lower in the United States than they would be, to keep gold low to make sure that it wasn’t competing with the dollar, to keep the dollar stronger than it would have been, to attract money into our stock markets, to hide inflation, and to keep the barometer from the public -- investing public.
Look at the gold price. The investing public sees gold as a barometer. You see gold start to rise. Everyone thinks something is wrong. Whether that is right or wrong, that is the popular obsession -- so it gets into the strong dollar policy. We believe this is one of the reasons, the motives, of the United States to lower the gold prices. They benefited from the strong dollar policy. And so did Wall Street and the Bullion Banks benefit because they borrowed the gold from the Central Banks in monster-like quantities and sold in the market that supplied others. And they were able to benefit from the gold carry trade by virtually having free money.
JIM: Well, we have a Fed research paper linked on our site called International Finance Discussion Paper 641 [pdf]. It was written in July of 1999. We highlight pages 26 to 28 of this Fed research paper that talks about direct manipulation or intervention in the financial markets.
Bill, more recently beginning in November of last year, there was quite a week of speeches beginning with Alan Greenspan before the Council of Foreign Relations, and also Fed Governor Bernanke, who talked about actually going into the markets -- whether they had to go into the bond market and buy bonds to peg interest rates to keep them manipulated within a certain range or if it involved other financial assets. And so we have a history here of government officials saying that they think it’s in the best interest for the country for government agencies or entities to go in and manipulate the markets. Yet people refuse to believe that markets are somewhat artificial. Why do you think that’s so?
BILL: GATA has produced a great deal of evidence/material of Federal Reserve people speaking about gold and swaps and various operations in their minutes and all kinds of things. Yet they deny that they are involved in the gold market in any way. It’s a complete contradiction. We have it in writing that makes a mockery out of the notion that they haven’t been involved in the gold market in some way. So I couldn’t agree with you more. It’s there for everyone to read.
JIM: Furthermore it’s a contradiction when it’s a known fact that we have Central Banks selling huge amounts of gold into the market. What is that, if not intervention in the gold market?
BILL: That’s right. The funniest thing was, just to interject one thing. Senator Bunning of Kentucky sent a letter to Alan Greenspan asking about comments about gold swaps in the Fed minutes. Alan Greenspan then produced a letter from Fed attorney, Virgil Mattingly, saying the tapes were garbled. They were inaccurate. Now if those minutes are inaccurate or garbled, you can’t trust any document ever written.
JIM: Given the fact that a commodity, and we refer to gold as a commodity, you and I also know that there’s something different about gold. It’s considered real money and has been considered real money for well over 5,000 years of recorded history. We now have a situation around the globe where no paper currency is tied to gold anymore. Although there’s a movement afoot with the gold standard, but our paper has nothing behind it other than faith in government.
We also have a situation in the United States -- and I’m just talking about last year -- where our trade deficit is somewhere in the neighborhood of $500 Billion a year. So we’re borrowing $500 Billion from foreigners -- nearly 80 percent of the world’s savings -- to finance our trade deficit. The money supply in the 4th quarter grew at over 22 percent. So the money supply, if we take the last quarter of 2002, is growing at an annual rate of one trillion dollars! Furthermore, we know that for example, in June, Congress raised the debt limit by $450 billion. Already now in the new year, we’re going to have to raise the debt limit again because we’ve already spent that $450 billion. So we've got government borrowing, growing at between $500 and $700 billion depending on which timeframe you take. We’ve got the money supply growing at an annual rate at nearly a trillion dollars a year and we’ve got a trade deficit at a half a trillion dollars a year. And people wonder why the price of gold is rising. Isn’t gold a barometer of the political and financial system?
BILL: Yes it is. It’s funny. It really needn’t be had they allowed gold to trade freely years ago, but it is apparently what they're doing now. What you just said, in essence, is you've got too many dollars and not enough gold. So the gold price is rising, reflecting this pouring in of the monetary system of all this paper.
JIM: There’s a big debate in the financial community about deflation or inflation. To me, I stick with the monetary definition of deflation, which is a contraction of the money supply. And we have not seen any evidence of that yet.
BILL: No. It is the commodity prices that are booming. The CRB has gone way up. There are certain price constraints because of foreign competition like the Chinese are bringing and so on. But if you look around, I mean any of us, at what’s going down in price, and we’re seeing it all over the place. It’s likely to accelerate from here because they're accelerating their efforts to pump up the system.
JIM: Well certainly we’ve seen deflation in manufacturing prices because of foreign competition from China. But, if I take a look at the things that you and I spend money on -- educating our kids, college education costs, the costs of health care premiums, the cost of energy, gasoline, utility bills, food prices in the store -- all of these are going up at very high single-digit rates, if not double-digits.
BILL: Now that brings up another very important factor of why the gold price is going to go through the roof. Right now we have a very rare situation. We have negative interest rates - meaning inflation is higher than our 1.25% Fed fund rate. So, not only are the interest rates very low, which makes gold a very compelling investment, but we also have the situation you’re describing in which real inflation is far above these very low interest rates. So we have negative real interest rates. And they’re not even thinking of raising these rates, because the system is so fragile. So it’s explosive for the gold market.
JIM: You know what was surprising? We’ve seen gold become the number one performing sector in the market two years running. If we take a look at gold indexes in 2001, the XAU and Amex Gold Index (HUI) far out-performed anything coming close to it. 2002 gold was once again the top performer and yet if we take a look at this performance in gold, they still don’t see it. I was surprised when I was looking at the investment predictions for 2003. I don’t care if you were looking at Money Magazine or if you were looking at business magazines, you know they're still recommending stocks. They're still recommending an economic recovery.
Yesterday, Byron Wein of Morgan Stanley said the markets will be up 25% in the first half of the year. I think Tom McManus at Bank of America securities said the NASDAQ’s going up 30%. But follow the logic with me, Bill. Their logic is based on the consumer going further into debt, borrowing money to maintain his lifestyle, and business profits going up as businesses fire the consumer to cut costs. Now can anybody follow that logic?
BILL: I think it’s nuts, but that’s what their promoting out there. It’s fascinating to me. It’s the strangest thing even in the gold world. There is nobody on Wall Street, or in the gold world, that would’ve predicted this move. Even now, none of them are bullish. You don’t hear any of the experts talking up gold. There aren’t any bulls. None. I mean they're talking five or ten bucks. It’s the strangest thing. And of course, the public isn’t getting the right information. And of course, we know part of the reason why they're not bullish. It's because the bullion dealer experts are short. They’ve got these gold loans on and they're scared to death of what they’ve done. But it’s a tragic situation.
JIM: Well it was interesting to hear some of the comments made by "experts" on gold for 2003. They said it was a mania and it’s not going to last. They keep attributing this to the Iraq war premium, which is ridiculous. You and I know it has a lot more to do with demand and supply and also the condition of the US dollar.
But Bill, you and I know any bull market has three phases to it. The first phase is when the smart money gets in. They recognize an opportunity. They recognize value. They get in quietly and accumulate when nobody else is watching. The second phase of a bull market is picked up when institutional money comes in. When fund managers, pension fund managers, insurance companies start coming into the market. And then the third phase of a bull market takes place when John Q. Public comes into the market and he’s the last guy to get in. The best example of that is the bull market that began in 1982. The public really didn’t get involved in the stock market until 1995, which is when 85 percent of the money that went into mutual funds came into the market.
Looking at the gold market today, would you say we’re in phase one, phase two or phase three? It appears to me, we’re only in phase one, because I don’t see the institutions being involved in this.
BILL: No. Phase one. Only a minute amount of money has gone into the gold market. Even the people with gold shares cannot wait to sell their shares. Recently the shares are lagging the bullion dramatically and there’s a big reason for this. In the Western world, it is because they have not been told the real gold story about the price manipulation and what’s coming. And they don’t have the true story and facts. The people in the East, the Arabs, the Iranians, the Japanese, the Chinese, the Russians are buying gold like crazy. We know that for a fact.
Huge buying surfaced out of the Middle East last week. They don’t own the gold shares. A lot of them know the real demand story and they may have been able to read because they don’t have a censored press like we have here. They know of how dramatic supply/demand deficit and the approximate 15,000 tonnes gold short position of the Western Banks (Central and Bullion), so they know the gold story. They're just buying it up and saying, "Thank you very much." to the westerners. In the meantime, the real story has not been told. That’s why we’re still in phase one. For any of your readers and listeners, it’s just still a tremendous opportunity to get involved even though we’ve come a long way.
JIM: It’s amazing to me. I have a good friend who has spent 15 years as a missionary in Asia. I remember in the 1990s, when our stock market was really beginning to take off and particularly after 1995, I was talking to him about investments over in Asia. He was stationed in Thailand at the time. When a wealthy Thai person gets money, he puts his money in gold because there is a long tradition of gold as money in those areas, particularly with the political turbulence and the lack of development of the financial world.
If you and I, Bill, were having this conversation and we were in the bazaar somewhere in the Middle East or Thailand for that matter, gold would have greater acceptance in conversation than it would in the US.
BILL: No. Here in the so-called sophisticated business world, they look at you cross-eyed when you talk about gold. Although that’s quietly beginning to change. Over the holidays, I talked to some family and friends. I said, by next year when we get together, gold will be a cocktail party conversation like it used to be. The reason it will be discussed so much is that most everyone can relate to gold. Women will talk about it because the value of their gold jewelry goes up and they will feel better. It’s such a simple subject. But that hasn’t happened yet, and as a matter of fact, it’s not even close. But, it’s coming.
JIM: And it usually happens when any bull market begins. When I got in this business in 1979, we had double-digit inflation, the dollar was tanking, we had the Iranian hostage situation, nobody respected the United States, interest rates were at close to 15 percent, everybody was putting their money in gold, silver, real estate limited partnerships, oil and gas. People had oil at 40 bucks a barrel and they were predicting it was going to 100. I mean I can remember going to an International Association of Financial Planners convention, and Bill, I would say you were lucky to see two or three booths for mutual funds. It was the International Investors Gold Fund and the Templeton Group. Most of the participants were hard assets. If you were to talk to somebody in the 80’s, early 80’s late 90’s about buying stocks, they would look at you cross-eyed. It's the same way they look at gold today.
BILL: Yep. Same way as it is today. It’s remarkable. Again, after this big boom we’ve had and it’s two year performance, they still relegate it to the junk yard in terms of investments. It’s like it's a fluke and oh well, it just had a brief flurry. There is no understanding of the real gold story. That’s why I’m happy to get an opportunity to let people know how serious the situation is as a result of this thing being manipulated for so long.
JIM: You know the one aspect about this, assuming that one is to look at this market and see the opportunity as the next bull market, I believe it is going to be hard assets and things which I wrote about in The Next Big Thing. Looking at the gold market today, I forget what the market cap of all the gold and money companies in the world. I think it’s $75 or $80 billion. Who knows. Let’s give them the benefit of the doubt and say it’s $80 billion. That’s nothing when you look at the market cap of a declining Cisco or a Microsoft, or a General Electric or a Coca Cola. And so if you look at this market itself, there’s very limited opportunity.
I wonder if we might address the leverage of mining companies to the price of gold, number one. And number two, when they see the price of gold stocks spike up when gold moves, they have to remember there’s a very limited supply. It reminds me, Bill, of the Internet stocks where they would release only certain amount of shares in the initial public offering, so the public didn’t get it. So if they wanted to buy it, they had to go to the market, and they’d bid up the price of these shares. There is a very limited offering in size in terms of the flow to many of these companies.
BILL: That’s right. As you said, the market cap of these companies is very small. When the story does get out about what’s really happened and what the price is going to go to -- and I firmly believe it’s going to $800 or $1,000 per ounce and then you can pick a number after that -- there is going to be a gold share buying panic, especially in the junior companies and exploration firms that are still priced near bankruptcy levels. The shares of those firms are going to go nuts. Going back to your orange juice and coffee story, everyone’s going to realize it at once. It’s going to become, "Uh oh, we need to go find gold fast!" And there’s going to be a gold boom and gold rush like the world has never seen. And so these little companies that are priced a head above bankruptcy, the good ones now, are going to just go up 10, 20, 40, 50 times.
JIM: A lot of people may say, "Well, that’s hard to believe." I mean just take a look at what happened to the price of Dell or Cisco or Microsoft during the bull market in technology. There's one aspect that, at least to me, if you take a look at some of these well-positioned junior mining companies, I mean you’re talking about companies with real accessible reserves in the ground. I can think of and you I can think of, several companies that are buying silver reserves in the ground at a nickel an ounce and buying gold in the ground as little as 1 to 5 dollars an ounce.
When it comes to gold, with these mining companies -- I’m talking about the Majors -- people are going to make some good money in the unhedged Majors over this bull market. But the real big money, in my estimation, is going to be made in these junior mining companies, because the big guys have got to replace the reserves or they are out of business. It's the same thing that we have seen in the oil business with Exxon buying Mobil, British Petroleum buying Amoco or Atlantic Richfield or Chevron buying Texaco. That’s what these big guys have to do. Because if they don’t replace their reserves, and as you and I have just talked about it, it takes three to five years maybe eight years from the time you try to go out and find it to the time you bring it to the market, they're out of business.
BILL: Jim, I would consider that the buy of a lifetime. And I tell my following and the people that follow my stuff, that there’s an historic investment opportunity here that almost very few people will ever see again. Most people won’t see it again. It’s here right now and it’s what you just articulated. That is exactly the way to go, there are returns are going to be staggering and for those people that say, "Wow, geez, that’s hard to believe."
It’s very important to keep in mind that the real gold story, the one about this explosion that’s coming -- this volcano that’s going to blow the price sky high -- is that almost the entire Western investment world doesn’t even know what the story is! All of them still have to find out. And when they do find out, it will be like in years past. They're all going to become buyers, so they're going to be the ones that you can sell to, that your listeners can sell the stock to in the years down the road. There’s no need to pull the trigger for a very long time. That’s what’s so important to understand. Nobody knows the story. If they did, and this is the best gold could do, I’d be a seller.
JIM: This reminds me in many ways of what was going on in San Francisco in Silicon Valley in the late 80’s and early 90’s with the venture capitalists who saw a lot of this new technology. Whether it was personal PCs, wireless communications, cell phones, the development of Internet and software, a lot of these venture capitalist guys saw this opportunity and funded these companies by putting up the start up capital. And then when the technology took off, I mean, think of the fortunes that were made in the start ups like Cisco and Dell Computer. It seems to me that a lot of these junior mining companies are priced cheaper than options and we all know that options have a time limit and they expire.
BILL: That’s what I again stressed for the past year or two. And by the way, you know, some are up from the bottom, some of my spec plays are up 300 to 600% already. I know that sounds like a lot, but that’s what happened. And they’re still priced at bankruptcy level. So that’s exactly right. What I’ve always said, when asked, is just what you’re saying. These companies are like options that don’t expire. And of course, if you have the right option, you can make fortunes. Well that’s what you’ve got with these little quality junior exploration companies. They’re like options -- the good ones -- and are not going to expire. The upside is just extraordinary.
JIM: I look at this market the way it is and who knows how all of this is going to turn out? But I go back to the late 70’s when the volume on the stock exchange -- I mean if you had a 30 million dollar day in 1980, that was a big move! If the markets moved up a couple points, that was a big move. There was the mutual funds section of the paper in the Wall Street Journal and I believe the entire mutual funds section was only a quarter of a page if that in the early 80’s. Now we look at a day like today, where you’ve got even the Dow trading at 8700 volume. On the New York Stock Exchange, it was 1.5 billion shares and on the NASDAQ, I think was almost as much. You could almost see, Bill, when this market takes off, there’s going to be this incredible demand. It’s just astronomical to think of what may happen to this market. The only thing I can even attribute a similar parallel to it is what happened to these technology companies once the public really caught on to technology in the 90’s. We saw Dell Computer literally multiply overnight or we saw America Online go up 100% in a single month.
BILL: My guess is I thought it would have happened by now. But it hasn’t and it’s not even close. As a matter of fact, a lot of people can’t wait to get out of their gold shares, much less look for the big picture. I think it’s going to probably take $400 gold before the bells and whistles start going off for the average investor.
JIM: How long do you think or how high do you think the price goes before it finally dawns on people that there’s something going on here? Even though it’s gone up for two years, even though the XAU was up over 100% last year and it was up double-digits the year before, people just don't see a two-year trend.
BILL: No, they don’t. As I said, I think $400 is when the bells and whistles will start to go off. Even then by the way, the investment world -- the mainstream Wall Street -- will try to tone down the excitement. I think a lot of it may also have to do with outside markets. When the stock market is going fine, people are just hoping the trade is going to come back for them. But I think what we have now is a stealth gold market. I expect it to blow through $354 in the very near future and then all of a sudden take a run for $400. I’m looking for a very big move in the gold price in one day. Once this gold cartel, as I call it, loses control or once they are forced to panic and cover, we should have some big moves up by the end of the month and then it will start gradually coming in. But you’re going to need at least $400 for some people to wake up.
JIM: What’s your position or how do you feel about silver? It looks almost equally, if not more, explosive?
BILL: You know it’s funny. We’ve got all of this evidence of price manipulation -- I mean four years worth in the gold market -- and I know that they’re involved somehow doing the same thing in silver. I know the fundamentals in silver are extraordinarily good. I think silver’s going to go nuts to the upside too. I just don’t have the depth and material and information that I have on gold. So I’m extremely bullish on silver. I agree with you. I just don’t have the backup to articulate why, except to say there is a huge silver supply/demand deficit too.
JIM: The surprising thing about all of this, and let’s just forget about government manipulation, artificial manipulation, or managed market, let’s talk about cycles in the market. If you take a look at the last 100 years, we know historically that bull markets don’t go up forever.
After the 1929 stock market crash, it would be 25 years before the Dow would reach the level it had reached in October of 1929. The bear market in stocks was followed by a bull market in commodities with a lot of that having to do with the war and the scarcity of some commodities. Then we had another bull market that began in 1952 that went all the way to 1966. It was another 16 years before the stock market would peak and surpass.
So we know that we have rising periods of paper assets that are generally followed historically by rising periods of hard assets. You know, if people look at that historically, the evidence is there. That’s happened. That’s a fact. But if you try to tell them now, that after 18 years of rising paper assets, that we are now entering a new bull market in "things" or hard assets, they still look at you cross-eyed.
BILL: Yep, that’s the way it’s always been and it’s happening again. It’s just the way the public habitually views investments. Unfortunately they’ve got media in Wall Street that’s fostering that notion. The average person has wife, kids, family, job -- all kinds of things to do -- and doesn’t have time to look into this stuff like we do. They just don’t have any idea what’s going on. They believe in Wall Street even though it’s given them nothing but a bum steer for years now. They just go with it. Unfortunately a lot of people are too lazy to do their homework. That’s the way it is and it’s good news for the people who are listening to Jim Puplava.
JIM: Well let’s talk also about something that could make this market explode. That’s this short position. I want to explain this to people. We know for a fact that for a number of years, it could have been hedge funds and Bullion Banks who’ve borrowed gold from Central Banks and paid an interest rate on that borrowed gold of let’s say one percent one percent to two percent. Let’s say it’s one percent on average. They turned around sold that gold in the market and it is now jewelry on some women’s neck or finger, and they invested that money in things like treasuries at five or six percent and pocketed the difference.
Now, if I’m going to sell something short, Bill, and I don’t have it as it’s been sold, I want to reduce my risk just in case the price of my metal that I’ve sold short goes up. So I’m going to hedge. So let’s say that I go to somebody and say, "You know what? I’ve just sold a thousand ounces of gold short. I’m going to buy a call on gold just to protect myself." So I’m going to buy ten contracts or ten calls to protect myself in case the price of gold goes up. In effect, I have hedged my position. If the price of gold goes up, and I have to cover that position, I can exercise my calls and buy that gold to cover my short position. This works fine and dandy as long as I can rely on the person that I’ve bought that call from and that person’s ability to go out in the gold market and buy that gold and deliver it to me. I wonder if you might discuss this scenario?
BILL: Well that’s exactly right. The sad part is a lot of these people have accessed the real gold risk because was managed for so long. It didn’t do anything, so they just got used to not hedging their risk exposure. But, the question now is whether the gold shorts (no matter what they’ve done to hedge themselves, assuming the ones that did), can get the gold and at what price.
Now for your listeners, it’s important to understand that at least from where we come from, two of our experts, Reg Howe and Frank Veneroso both came up with a gold loan/swap number of about 15,000 tonnes -- meaning that’s what Bullion Banks borrowed from the Central Banks and they owe to the Central Banks. But it’s something that they can’t get readily because it’s being worn as jewelry. Well we’ve already said mine supply is small and going down. This year they expect it to be only 2,500 tonnes. They have a big predicament about what you’re talking about to be able to get this gold. Now Reg Howe and Frank -- two of the smartest guys I know -- both came up with this same approximate number, using completely different methodology. It’s also important to know that this is more than three times what the gold world says the loans are. The gold world is trying to cover up what the real numbers are because this extra 10,000 tonnes has been used to suppress the price these past six, seven, eight, nine years.
So you have the potential of a squeeze in which these people who have written the calls you’re talking about for protection, when they go to exercise or go to get the gold, it won’t be there. Or the counterparty, the person that has to honor the call, can’t get the gold for them. It just won’t be there, because it’s just too many shorts trying to buy it as the price goes up. That’s one reason why I’m expecting a price explosion by the end of the month.
JIM: One thing we know from the past, looking historically, is where we had a similar situation in Tokyo with the price of platinum and palladium. I wonder if you might just talk about what happened there. As I recall, they shut down the markets.
BILL: I actually think they shut down the markets and there’s concern by some people in the GATA camp that they could be in dire jeopardy. That the short division is so vulnerable and you just cannot deliver the metal. And of course if the situation hadn’t been contrived all these years, that shouldn’t have been the case. That’s what the Commodities Exchange is for as a pricing mechanism. But because of the manipulation and because of what they’ve done to do that and the short position, we think that there is a very good chance that the exchange could be shut down because it’s just not functioning anymore. Somebody’s going to go to the exchange and say, give me the gold and the shorts can’t get it.
JIM: Do you ever see a situation where the central banks would, in order to avoid a crisis, lend out or loan out their last available gold? I don’t see it.
BILL: Well it’s a good point. But here’s what’s happening. We think they’ve already hit the wall. They can’t lend out anymore. They’ve gone to their limit. What’s happening is as I said, all of these foreigners are buying up the gold market and at some point it just becomes imprudent to keep doing what their doing. More than likely some Central Banks are actually going to start buying gold, not selling it. So, as it is now our number at 15,000 tonnes suggests that somebody doesn’t have the gold that they told their citizens that they had. So I think that they’ve overplayed their hand. It’s gone too far. The physical market right now is on fire. Just to think the supply and demand deficit per year right now is 1,500 tonnes -- meaning that’s how much demand exceeds scrap supply and mine supply. So, they have to continue going further into the hole to the tune of 1500 tonnes short just to keep the price from going bananas. If they stop, it’s going to go bananas. And of course they have to stop at some point. They’re running out. That’s why I say a squeeze is coming and the big smart money knows this. The Howe/Bolser report at GoldenSextant.com has been read all over the world and that’s what Wall Street and the US Financial circles don’t want the public to hear.
JIM: I want to talk about another situation in this market and that’s the gold derivatives position and particularly of certain banks like J.P. Morgan. Bill, I wonder if you might explain. Jim Sinclair has done this on our site about how notional value sometimes can become real value when the market moves against you.
BILL: Well the derivatives issue... I’m no specialist and this is really complicated. But in essence, a derivative is a financial instrument. What happened was we know that the gold derivatives in certain banks exploded in the last two years as they were manipulating the gold market. J.P. Morgan Bank, for example, has $41 billion on its books now and that dwarfs any other bank in the United States. These derivative positions are related to gold that Morgan has borrowed from the Central Bank. They represent gold Morgan owes to central banks. So we believe as we were just discussing, that there could be some real counterparty risk problems in the gold derivative area.
We gave a document called the Gold Derivative Banking Crisis to the Speaker of the House on May 10, 2000. We gave it to the Congressional Sub-Committee on Domestic and International Monetary Policy (with the gold oversight.) We told them that a gold derivative crisis is coming and there’s likely to be an incredible counterparty risk problem. I am told one hedger in Australia alone has exposure to something like 122,000 $310 gold calls right now. That means that they are $35 out of the money. [122,000 x 100oz per contract x $35 = $427,000,000] I mean it’s staggering. It’s like that would put that position, if it’s not hedged in any way, under water to half a billion dollars.
Now there’s all kinds of things in a derivative area with what they call these counterparty problems. We now have what you were talking about earlier where somebody can’t deliver, or somebody can’t cover, or a bank credit committee tells a gold producer, "We can’t do this anymore." It’s getting to be too big an exposure. We think once gold takes out and closes above $354 -- which is Jim Sinclair’s number that he mentioned a long time ago -- it is the real key and that’s when all heck could break loose.
JIM: Do you think that’s one reason why the Fed and certain Wall Street firms have been behind pushing legislation and the derivatives market to mitigate some of this counterparty risk? The exposure that one firm would have to another?
BILL: Yes, again that’s complicated. But the irony is they don’t want the derivatives market regulated or the gold derivatives market either. It’s the doggondest thing. You’ve had all these blow ups and they don’t want any regulation. We think, that is, that they’re just trying to hide things.
JIM: The one thing about the derivative markets for people to understand is it allows protection for an individual. I mean originally, Bill, my understanding of a derivatives market was that it was done as a result of when we went off gold backing the US dollar. All of a sudden businessmen had risk. They had currency risk now because all currencies weren’t fixed anymore and then there was interest rate risk as a result of that. So it made a lot of sense, if you were a businessman buying products from overseas, that you were going to hedge your currency exposure. And in the area of financing, hedge your interest rate exposure.
But over a period of time, and I think this really began in the 80’s, we saw this market begin to mushroom into a very profitable area for banking firms as a new source of business. We saw this thing backfire in the ’87 stock market crash where all these companies thought they were hedged with these derivatives and didn’t work and then periodically from 1987 going forward. It’s like every year or so we’re running into a crisis. We had a crisis in 1991, we had a crisis in 1993 with the German firm that sold energy contracts. We had a crisis in 1994 with derivatives here in Orange County. Proctor and Gamble and many of these companies got clipped by their derivatives. We had another crisis in 1997, yet another crisis in 1998. They just seem to mushroom and multiplying. The problem is when these crises hit, it’s either you’re dead or alive. There’s no in-between.
BILL: Well, we think there’s going to be a big one related to gold. The problem is the gold one is liable to set off the bigger one which could have to do with interest rates. The derivative position at J.P. Morgan Chase is something like 25 trillion dollars. Twenty-five trillion! I think the GDP in the US is 10 trillion. I mean it’s staggering. Who knows what would happen if that bomb goes off. I mean, they’re playing with just incredible things and that’s why they’re trying to hide the real gold problem. They don’t want people to know how bad the situation is.
JIM: You know the one thing I don’t think many people understand about this is related to technical analysis or inter-market analysis of the inverse relationship between the dollar and interest rates and that inverse relationship also to the price of gold. So, when you have the price of gold really taking off, it could almost become the detonator to the larger position in derivatives which is interest rate related. That’s what people don’t see.
BILL: Jim, that’s very important. That’s something I’m referring to. To get back to what we talked about earlier, that was the essence of the "Strong Dollar Policy." That was the rigging of the gold price for the very reason you’re talking about. And now what I believe is that most people say, "Why is gold going up? Because the dollar’s weaker." No. No. NO! It’s just the reverse! It’s a fact so far. Gold had led the way up which is the ending of the Strong Dollar Policy. So it’s backwards from what most people would think. Gold going up is signaling the demise of the dollar. Most people would tell you the opposite: "Well, gold’s going up because the dollar’s going up." No! Gold is the one that broke first at the beginning of last year. The dollar followed. That’s a fact and you’re going to suddenly see a gold explosion again and the dollar will follow again.
JIM: Well this is why I say the rise in gold is the detonator for the bomb because of intermarket relationships. For those listening on the Internet, there’s a book called Intermarket Technical Analysis written by technician John Murphy, that talks about this linkage between the dollar, gold, commodity prices and interest rates. Two things that have been somewhat abnormal lately are seen in this relationship with interest rates. Even though we’ve seen the dollar go up, we’ve had interest rates go down. We now know, Bill, with these speeches that were given by Greenspan, Bernanke and Ferguson in November, that the Fed intends to manipulate the bond markets by it’s monetization of government debt. I think -- what was it last week -- there was money supply increased by something like over $20 billion? I think almost 85% of that was monetized. So, people really don’t realize this interlinkage and why a little small area of the market by comparison -- and I’m referring here to gold derivatives -- to the larger market and interest rate derivatives, that gold could be the detonator.
BILL: That’s right and that’s exactly it. And that again goes back to Rubin and Summers and the Clinton Administration and now the Bush Administration because their foot is in it. That’s what the strong dollar policy was about. It wasn’t just gold. A lot of it had to do with interest rates as you were just talking about. I suspect the bond market pretty soon is about ready to tank. And that long-term rates are about to -- no matter what they’re doing now -- are really going to start to rise in the next couple of months.
JIM: Well the one thing along those lines that I think people need to understand is the US government went through half a trillion dollars of debt in seven months. We’re running a huge trade deficit. We’re running a huge budget deficit, which means that we have to keep borrowing and borrowing money. And we have foreigners that own 44% of our treasury bonds, 25% of our agency bonds, and I think almost an equal amount of our corporate bonds. People don’t realize the impact of that. I don’t think it would be any different, Bill, if you and I were looking at Brazil today. Would you want your money there?
BILL: No. That’s it again. You’re right on the money. You’re right on the button. That’s why they’re still -- this gold cartel as I call it -- is still trying to keep the gold price from exploding for the very reason you’re talking about. Because the higher the price goes, the more it exasperates everything we just talked about.
JIM: Unfortunately we’re running out of time. I think we could talk another hour on this. Bill, what would you tell listeners of this program? Number one, where they should go to get more information? I want to recommend GATA’s website and also your own website. At least it’s going to expose them to an opposing point of view than what they’re hearing.
BILL: The number one thing is for people to do their homework. I think LeMetropole Café, as you said is a fine Website. Our track record the past couple of years suggests that’s the case. If they want to learn the gold market, there are many contributors. I have a commentary four or five times a week. They can go back in the libraries and study what we've said over the past year or two. That’s the key, because there is still time before we have this gold share price panic that is coming. Now is the time to do it before the public gets in it. Like you said, we’re still at stage one. We have the opportunity of a lifetime. They may never see something like this again. To me, it’s a buy and hold strategy. These things are going to go up as I said 10 to 50 times. It’s coming and they still have time.
JIM: Why don’t you give out GATA’s website because there are a lot of the research reports that we have referred to in this interview on that site. Gibson’s Paradox is an example.
BILL: The website is gata.org. Another great website is Reg Howe's website, goldensextant.com. You can read or hear his report. I believe the title is called Checkmate. Reg Howe has done some absolutely brilliant work on it and then of course LeMetropole Café is my website.
JIM: Well the thing I would encourage anybody listening to this program is this. You can hear all of this and you can dismiss it, but I think you owe it to yourself to:
- Read Gibson's Paradox
- Read the Reg Howe Report on The Golden Sextant: Gold Derivatives: Moving towards Checkmate
- Read Bill Murphy's editorial on our site: Howe/Bolser Report Stuns Gold Investment World
- Read Frank Veneroso's editorial on our site: Gold Derivatives, Gold Lending, Official Management of the Gold Price and the Current State of The Gold Market
- Read some of the research that GATA has done and also the research on these other sites and draw your own conclusions.
Bill, let me tell you about one of the things that really was an eye opener for me. I got into gold in 1993. I had a nice big run up in gold stocks. And then, because I was just looking from an analytical point of view -- I was looking at the fundamentals: rising demand and supply wasn’t keeping up with demand. Then all of a sudden, the price of gold tanked. I didn’t understand with fundamentals so strong, why they did. But then I read your report published on GATA, the one you submitted to Congress. It was a real eye opener because in reading Gibson’s Paradox and some of the other research that was published on the site, a lot began to fill in some of the gaps that was missing for me left from just reading the Gold Fields Report, CPM Reports and some of the other reports. There was just something missing there. And those gaps were filled.
That’s what I’m going to encourage people to do. Don’t take my word for it. Don’t take Bill Murphy’s word for it. Go out and read this and form your own opinion. Then at least you can look at it and say, "Hey I don’t buy this." Well then, fine. You’ve at least looked at it. You’ve opened your mind to some different point of views than what you’re going to get from the mainstream press. One more time, Bill, why don’t you give out your website and GATA's website.
JIM: Bill, as always, it’s been a pleasure to have you on the program. I think if nobody stopped the clock, we could go on for another couple of hours. So, in that respect, I’m going to ask you to come back once again once we cross the $400 mark.
BILL: It would be my pleasure.
JIM: Thank you so much for joining us on the Financial Sense Newshour.
BILL: Thank you.
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