HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today my guest is Matt McCall, president of the Penn Financial Group. Matt, how’re you doing? Good to see you again.

Matt McCall, president, Penn Financial Group (McCall): Good to see you, Mike.

Norman: So what’s going on? You’ve been here several times. I know you're a longtime commodity bull. Things now looking a little bit under pressure, I would say … liquidation in commodity markets. What’s your view now?

McCall: Well, short term, it does not look good. There’s no way, when you're watching gold fall through major support levels almost three consecutive days.

Norman: And I want to talk about that.

McCall: Overall, the only commodity that’s really hanging on that still looks pretty strong to me is oil. Even though we are concerned about its global economic slowdown, we still have oil holding on near that triple-digit level.

Norman: Well, you saw some crazy things recently, like the Iranian closure of the Strait of Hormuz. Even though it was a one-day thing for military exercises, still, that’s a little bit scary. If that happens, I think oil could really take off, right?

McCall: And that could happen. And that’s something that’s always weighing in the back of your mind, when it comes to oil. And that builds into premium. That may put a couple dollars into the contract of oil. I like oil, because I think, even though we have a lot of rocky times ahead, I still think we’re going to have some growth, global economy. We’re not bringing a lot of oil back online. So I think demand is going to outstrip supply.

So we will keep up above the $90 level. Any time you pull back to the high $80s/low $90s, I think it’s a buying opportunity, on the upper range about $105. So we’ll probably stay in this trading range. But I think that will hold up. Where we look at the ags, you look at anything else out there, all the metals, they're dropping, falling through supports. So that’s one area I’m going to stay away from right now.

Norman: I agree with you on the oil. From the geopolitical standpoint, and everything that’s happening with Iran, will there be a strike on Iranian nuclear facilities? Will they try to block off the Strait of Hormuz? If they did that, then name a price on oil.

But I want to talk about gold. Gold is interesting. Because, for the last three or almost four years now, going back to 2008, when we saw all the extraordinary measures by the Fed and other central banks, and there were a lot of people out there who were gold bulls, who argued, “Oh, this is printing money. This is the debasement of the currency. You have to buy gold because it’s an alternative currency.”

Yet, if you look at the dollar, and if you look at the dollar index over that period of time, very interesting. It’s really been going higher. So does this really throw water on this whole money printing argument? And if so, is gold kind of waking up to, “Hey, it really wasn’t inflationary”?

McCall: Well, let’s talk about gold first, then we’ll touch on the dollar. Gold is still my largest holding, even though it’s taken a beating recently. We started scaling at $600 an ounce, and scaled all the way up. I still like gold longer term, and I’ll tell you why. Two things can happen: 1) look at the Europe situation. If things fall apart, I think gold is going to be that safe haven. I think people will rush into the dollar and gold.

Norman: Seeing that, it’s not really happening. The European situation is deteriorating by the day, isn't it?

McCall: I know, but we’re not to that panic mode, I don’t believe, yet. If we get into that panic mode, where the EU falls apart, we see one nation pull out, they say, "You know what, I'm done with it," that could lead to basically the end of the euro, end of the EU. If that happens, that’s kind of the worst-case scenario for the market.

Norman: But wouldn’t that be bullish for the dollar?

McCall: I think that’s the one situation where the dollar and gold will move in tandem, because you're going to have money, obviously, run out of the euro, that will not be there anymore, running into the greenback. At the same time, you're going to have people who are thinking the entire world is falling apart, that maybe America is next with their deficit issues, that they would go into gold as well.

So we’ve seen several months, over the last year, where gold and the dollar have moved in tandem. Historically, they do not. But I think that this is one situation where it could. The other situation is, things get taken care of in Europe. And the euro finds some footing, moves higher, and the dollar comes back down. That, again, is good for gold longer term.

So, in the short term, though, we’re breaking through $1,600 an ounce. We can fall down to maybe $1,400 an ounce, probably get a big pop at that time, just because people are jumping back in.

Norman: So basically, gold has gone from an inflation hedge to a risk-on/risk-off trade. And now it’s more of a risk-on asset. If you want to play the risk on direction, you buy gold. If it’s a risk-off environment, you sell gold. And that seems like what’s happening right now.

McCall: Exactly.

Norman: The dollar. Let’s talk about that a little bit. Going back to what I said a few minutes ago, that despite everything that has been done by central banks over the last almost four years — going back to 2008, we’re almost in 2012 — the dollar has slowly but surely been trending higher. If you look at the dollar index, if you look at the trough that it put in, the low that it put in, in 2008, right around pre-Lehman, and where it is now, it’s up by several percentage points. And that comes even as we’ve seen the Fed balance sheet go from something like $800 billion to almost $3 trillion — ECB’s balance sheet topping the Fed’s balance sheet right now. What does it say? And also, does this say the dollar, now, is in for a longer-term ascent?

McCall: Well, I think it tells me that it’s the best of the worst. You look at all the currencies out there — what currency do you really want to own? People are rushing into the yen and the Swiss franc. Well, the Swiss National Bank jumped in. That ended this whole Swiss run. The Japanese yen, the Bank of Japan tried several times and knocked that down. Not too successful as of yet.

Norman: Half-heartedly, I would say. Not like the Swiss.

McCall: Exactly. And not too successful. I still own a lot of yen right now. Where you look at all the currencies, the U.S. dollar is really the best of the best. And it’s a safe haven, too. We have a lot of uncertainty out there in the world right now. So people are rushing into the dollar. And keep in mind, before we kind of built this base over the last three years, we were down basically 10 straight years in the U.S. Dollar Index. This was just one of the ugliest charts in the market coming down. So I think we’ve come to the point where yes, people are going to be moving money into the dollar. And why not? I went long the U.S. dollar a week and a half ago — the first time I could say, probably ever, that I’ve ever moved into the U.S. dollar. I’ve been a U.S. dollar bear forever.