HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. My guest today is Jay Taylor. We’ll be talking a little bit about the macro picture. Jay, welcome to the show.

Taylor: Good to be with you.

Norman: Actually, you’re coming back. You were on several years ago. I’m going to pick your brain right now about how you see things. I know you’re a big gold bull. We’re seeing, I think, some questions start to emerge about gold. You’ve had some very prominent investors: Warren Buffett, for one; you actually had Bill Gates recently speak out against gold. What’s your feeling here?

Taylor: Well, Bill Gates and Warren Buffett never were in favor of gold. And they never will be, probably, until there’s no other choice for money. But no, I think we’ve had 10 years in a row of gold increasing in price. So I wouldn’t be surprised if we have a pullback. I wouldn’t be surprised if we saw gold go down in nominal terms, Mike. But what I really like to look at is the real price of gold. What can you trade an ounce of gold for?

And while gold has come down relative to the dollar recently, it has stayed up very nicely against the basket of currencies. And I measure gold against the Rogers Raw Materials Fund, which, before the Lehman Brothers debacle, an ounce of gold would have purchased only 17 percent of Jimmy Rogers’ Raw Materials Fund. And that’s a fund that’s sort of heavy energy, but it’s also got base metals and food items and clothing items. Jimmy Rogers says he put it together to measure the cost of staying alive.

Well, from August 2008, right before Lehman Brothers, an ounce of gold would have purchased 17 percent of that fund. By March 2009, it shot up to 44 percent, trailed back a little bit with stimulus, QE1, QE2, more confidence in the markets, people started …

Norman: Trail back with stimulus?

Taylor: Gold trailed back.

Norman: Because a lot of people use this stimulus as a bullish argument for gold. But look, using that same rationale, it really depends on what you measure it against, and when you start the measuring. If you look at it from 1980, it’s bought less, because you could adjust it for inflation using the CPI. So that’s kind of a specious argument, I think.

Taylor: Absolutely. I think the timing is everything. So you can pick 1980 to make a case that gold is a bad thing to own. Or you can pick before gold ran up back in the 1970s and look at it. You can do anything you want with statistics.

Norman: Does it make sense … let’s say 500 years from now, future generations are going to look back at this period in time, the 21st century: We had technology and computers and all kinds of amazing inventions. And they will read about how we still believed we were digging up our money out of the ground. Come on, seriously …

Taylor: I don’t know; 500 years from now with technology being what it is, I think we’ll have digital money of one kind or another.

Norman: We have it now.

Taylor: Yes, we do have it now. But in the end, gold has risen very, very dramatically with the Lehman Brothers decline. And people go back to gold when they lose confidence in the fiat currency system. Realize that fiat money is money by law that we are forced to use. It’s not what the markets choose.

Norman: Well, we’re forced to use it only to settle tax liabilities of the sovereign government. In other words, if you have a tax liability to the United States government, you must pay in dollars. You can’t pay in yen, you can’t pay in gold. If you came with a big block of gold to the IRS, they would say, “Go away, sell your gold, and bring us dollars.”

But for any other sort of transaction, the government doesn’t say you have to use dollars to pay for an automobile. You could do barter. You could exchange something for that car, or whatever the seller of the car is willing to accept.

Taylor: What you say is absolutely right. And that’s why gold is not allowed to compete with the dollar. Ron Paul, for example, would say, “Let’s not get rid of the Fed, let’s not get rid of the dollar; let’s just let the market decide what it wants to use.”

Norman: Ron Paul says, “Let’s not get rid of the Fed?” He has a big, “End the Fed.”

Taylor: Yes, I know he has a thing called “End the Fed,” but Ron Paul is also saying, “I wouldn’t get rid of the Fed immediately; I’d let the market do it, essentially.” He believes that the market would get rid of paper money. Maybe he’s wrong.

But the point is, gold has risen very dramatically since Lehman Brothers and since the world’s financial system has come under a lot of stress and strain. And I really believe that gold is probably overpriced now. You might be surprised to hear me say that. But I think from a …

Norman: I think you sound sensible when you say that.

Taylor: I know you hate gold …

Norman: No, I don’t hate it. Look, I loved it when it was $250 an ounce. It made a lot of sense to me.

Taylor: Yes, it did. And I think it was very undervalued then.

Norman: And by the way, I’m not saying it’s going back to $250 an ounce. I think commodities, if you look at their history, it’s generally a reversion back to the cost of production. I don’t know where that is. We’ve had guys on this show who said it’s $1,400 in the case of South African miners. I’ve had guys on this show who said it’s $700.

Taylor: Yeah, it’s marginal. Every mine is different. There’s mining companies that I follow that can produce gold at $300, but that’s unusual. So I suppose closer to $700 or $800 is more common, right now. But actually I wouldn’t equate gold with commodities, because I think gold is money the markets have chosen — silver too, to a lesser extent.

So what I think is happening, and why I think gold is overvalued is because there’s still an awful lot of anxiety in the global community about the monetary system right now. And Europe is not fixed yet by any means. And I think the real problem is that the global economy is over-leveraged: We have so much debt-to-income.

In the United States, for example, if you take every debt — not just the government debt, but private sector debt, every part of the private sector, every part of the government, local government as well — we have $57 trillion of total debt. And that measures something like 265 percent of GDP. And the previous high was 230 percent in 1932 when it spiked up because GDP fell off the table. This time we haven’t seen anything like that.

But the debt has risen, and risen and risen, and we’ve seen a little bit of a correction after Lehman Brothers. But the big problem that I think we see is anxiety in the global community. And I don’t think I’m confident about the United States economy until we see debt come back down to some normal levels, which have traditionally been 125-175 percent of total GDP.

So I think the markets are still anxious. And I think that’s why gold is overpriced now, from an intrinsic point of view.

Norman: Bill Gates had something interesting to say about gold. He said that there’s no real natural buyer of gold. What he meant by that is, let’s say gold is now $1,600 an ounce, and at that price, maybe people consume for jewelry or industrial uses. But if it falls to $400 an ounce, it doesn’t mean they’re going to buy four times as much of it. He says there’s no natural buyer. And it made a lot of sense.

Taylor: Well actually, gold consumption or gold is purchased more by the jewelry industry when the price goes down. And as the price goes up, the jewelry industry hollows it out. They use alloys and so forth; they use less gold because they’re trying to make a profit.

Gold goes up, and it’s gone up now not because of jewelry demand; it never has really. Gold is going up because of anxiety about the monetary system. And if we get that fixed, gold will come down.

Mike, I think the best thing that could happen is to get the economy fixed so gold comes down and we can start using our resources to produce things that are helpful to human beings.

Norman: I agree with that, but let’s talk about what you just said about the loss of confidence in the monetary system. And when I hear you say that, I think about Treasurys, for example, which are another form of money. They’re dollar-denominated liabilities of the federal government, just like a dollar bill is. The only difference is the Treasury has a duration and some coupon attached to it. But those have gone up.

Taylor: Yes, they have.

Norman: So there’s no indication in that form of money that there’s any lack of confidence. So it’s hard for me to accept that argument.

Taylor: Well, I would agree with you at this point in time when it comes to U.S. Treasurys. However, if you look at Greek Treasurys, if you look at Spanish Treasurys …

Norman: I know, but the distinction there is none of those countries — Greece or Spain or Portugal or Ireland, or Germany for that matter — are currency-issuing nations. They’re all currency users. It’s like me or you, or a state, or a business: If we’re out of money, we’re out of money. Any currency-issuing nation, like the United States, issues the very currency that spends it.

Taylor: Well, of course the euro is a competing currency, or it was. It still is a competing currency. I don’t know how much longer that holds out to be true. And I’m not a bear on the dollar, by the way. I’m not even bullish on gold in nominal terms. I’m bullish on gold in real terms, relative to other items.

On my own radio show I had on Robert Prechter. And he thinks the Dow is going below 1000. He thinks that gold is going to, I don’t know, back to where it was at $35 or some level. But no, he doesn’t think gold is going that low. But what he does believe is that gold will stay high relative to all the other commodities.

Norman: Hasn’t he been saying that for like 20 years?

Taylor: But at the same time, to his credit, he was bullish after Lehman Brothers, and he had his subscribers back in the market. So I don’t think it’s fair to say he doesn’t get it right sometimes.

Norman: To me it’s like saying, “One day the sun won’t rise in the east.” It won’t, because one day the sun won’t be here. And it won’t be rising in the east. But it’s useless information.

Taylor: Well, I don’t think it is entirely. Because I think that he makes some good points with respect to debt and the GDP. I think debt-to-income globally has been excessive. And it’s been excessive because we took gold away from the monetary system in 1971. And that really paved the way for one hell of a party. And it’s been a lot of fun.

But now the problem is we’ve got to pay the piper; we’ve got to pay for the party. And that’s going to come with some pain. One thing I’m very bullish about on the United States economy is the oil industry. If we can get around and make sure we don’t poison the water and the environment, I think there’s one reason to be very, very bullish about America, because it is lowering our energy cost.

And I’m even hearing some signs that we’re seeing manufacturing coming back to the U.S., and China’s getting more expensive and so forth. Actually, my birth city is Canton, Ohio. And I heard on Bloomberg not long ago that Canton just started up a steel mill to build the pipes that are being used for the fracking and the drilling industry. But we’re seeing natural gas prices very low, which means electricity costs can be really low, and manufacturing costs can be really low.

I think this is probably the best economy in the world. And I think there’s a lot to be hopeful about. At the same time I think there’s a lot of problems, and I think there’s a lot of adjustments to be made. And I think we’re going to have to learn to live within our means one way or another. I don’t know how that’s going to …

Norman: We have abundance here — this is a no-lack nation. So I don’t know what that means. But anyway, quickly, your big-picture outlook, let’s say, for the next year?

Taylor: I think that with respect to the equity markets, I’m bearish. I think we could see a decline in equity markets. And I think we go into a double-dip recession.

Norman: Oil?

Taylor: I think oil can stay where it is. If we go into a recession, it goes down. And I think base metal prices go down. I think gold goes down in nominal terms.

Norman: To what level?

Taylor: It could easily go to $1,200. My good friend, and a person that I admire a lot, is suggesting that gold in its real terms is only worth $900 an ounce. Well, if we remove the anxiety about the global economy, I think we could see much lower gold prices. And we could start to take capital and put it into uses that help human beings, rather than digging gold out of the ground.

Norman: I’m all for that. Thanks very much, Jay. That’s it for now folks. This is Mike Norman, signing off. See you here next time. Bye-bye.