HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hey everybody and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. Well, how about a little bit of doom and gloom? My guest today is absolutely not the rosy kind when it comes to the outlook. His name is Al Korelin, host of the Korelin Economics Report. Al, thanks a lot for coming on the show.

Al Korelin, host, Korelin Economics Report (Korelin): "Doom and gloom?" Michael, I've got to tell you …

Norman: You're not doom and gloom?

Korelin: I've got to take issue with that. I'm a realist. Is that OK? I'm a realist, yes. Now, I didn't go to Wharton.

Norman: Why are you negative? Why do you say you're a realist? In what sense? What's really going to happen?

Korelin: Governments are spending money that they don't have. They're printing money that has absolutely …

Norman: Which government?

Korelin: Let's talk about the European governments; let's talk about the American government.

Norman: OK, well, there's a distinction to be made there, right. Like the European countries in the eurozone, they're currency users. They gave up their deutsche marks and their French francs and their Italian lira; so yes, they're spending money they don't have. But the United States, we issue the dollar. Did we run out?

Korelin: No, we didn't run out, and you know that. The dollar has no intrinsic value whatsoever other than the psychological value of it.

Norman: Did you ever try to pay your taxes in gold or yen?

Korelin: No, but I will tell you one thing: I'd rather have gold. I'm not so sure about yen. But I'd rather have gold than I would the U.S. dollar right now.

Norman: Well, I think if you went to the IRS with a tax liability and you said, "How about taking my gold?" they're going to tell you to sell that gold and come back with dollars.

Korelin: Michael, we're talking about financial security. I have dollars, sure; I've got a lot of dollars, you've got a lot of dollars. But the fact of the matter is, gold, I would have to maintain, and silver — and we put our money where our mouth is — are basically the only things that have any tangible value. Tell me where the dollar has a tangible value, Mike.

Norman: Well, again, in paying your tax liability — and if you don't pay that, bad things can happen to you.

Korelin: I agree.

Norman: But let's look at gold. That's the thing which you said has tangible value. For an investor who bought gold in 1980 on an inflation-adjusted basis, they're still not making their money. How is that good value? You could have bought Apple stock and made a zillion times the money.

Korelin: You could have bought porcelain dolls, that's true. However, having said that, how about the people who bought gold in 1990, 2001, 2002 …

Norman: So it's a question of timing.

Korelin: It's a question of timing, exactly.

Norman: All right, so now as we look at the current environment, we're seeing a lot of things really start to blow up. And I'm sure you had been forecasting or predicting these things for a long time. Gold is not performing so well. How do you explain that? Look, in the last year when central banks really started to expand their balance sheet, the so-called money printing, OK? If you look at the five major central banks — the Fed, the ECB, the Bank of England, the Bank of Japan and the Swiss National bank — about $6 trillion in this money printing, gold is down in the last year.

Korelin: In the last year-to-date, gold is up slightly. I'm not a short-term guy. I've been around for a lot of years; I'm a long term guy. Let's go back to when I totally changed the focus of our show from conventional business to hard assets.

Norman: When was that?

Korelin: This was in 2001.

Norman: I have to say, that was a great time.

Korelin: Timing is everything.

Norman: I mean, gold was $265 an ounce.

Korelin: $254. We totally changed the focus of our show to hard assets. Why did we do that? We did it because I was firmly convinced, based on past experience, based on my education, that there was no way that the U.S. economy — I wasn't even thinking about Europe at the time — could really continue unabated as it was going. It made absolutely no sense to me, Mike. And I have to tell you, we've done pretty well.

Norman: So, again, when you say the U.S. economy cannot continue as it's going, you're talking about the debt. Now, again, I think we made the distinction that the debt of the government is not a debt that it can never pay, because it's denominated in its own money, right? And isn't that debt an asset of the nongovernment?

Korelin: Well, let me ask you a question. USA Today, which is a paper I don't read on a daily basis, but staying at the hotel we got a copy, and I'm a cheap guy, so I read the front page. The headline today: People don't have savings left. People are going day to day in this country. In your mind, what is the natural evolution of what's going on in society today? I don't want to be a gloom and doomer, but I've got to tell you that I think we're in for some very, very interesting times beginning perhaps as early as this summer. Because people are unhappy.

Norman: Right, I do too, but not necessarily because of the debt. If there's anything about the debt which would translate into difficult times, it's the fact that we don't understand it. Like we could have another debacle like last year with the whole debt ceiling debate, which is very rancorous.

Korelin: It's going to happen at the end of this year.

Norman: Right; it's going to happen at the end of the year. And I think this time we could actually default as a nation voluntarily. Not because we can't make the payment. We might just decide to default from a political point of view. That would be terrible.

Korelin: I just want to tell all you folks out there, Mike Norman's coming into my camp.

Norman: I never said that I was not in your camp in the first place. So as a hedge, you're saying, continue to buy gold, continue to buy hard assets. Is that what you're saying?

Korelin: Yes. But let me be perfectly clear. What I'm saying is that I am fully convinced that gold has one use, and one use only, and that is insurance. As Rick Rule said this morning in an interview that I did with him, I'm hoping that I never have to cash in that insurance. It's like life insurance. Eventually my wife is going to get a large chunk of change because of that insurance. It's not going to be doing me any good, but it's going to be doing her some good. I look at gold as being the same thing.

Norman: But here's the thing. I could buy that argument. Like you buy insurance on your home, you buy insurance on your car. You don't expect your house to burn down, you don't expect to be in an accident, but you buy it. Sometimes it's mandated, like in the case of automobile insurance.

However, the people who say — and I'm not saying that's you — "Buy gold just as an insurance policy. Hopefully, we'll never have to use it," or whatever, at the same time, they're cheerleading and telling us it's going to go to $2,000, $5,000, $10,000. That would be like buying a fire insurance policy on your home and saying, "It's definitely going to burn down." People don't behave that way.

Korelin: And I don't subscribe to that philosophy in particular. I really don't. My philosophy can be summed up very simply by telling you what our actions are in the Korelin household, OK? We buy silver rounds. Why? Because silver has intrinsic value, point No. 1.

Point No. 2, if God forbid we should ever have a currency collapse in the United States, odds are better holding silver rounds that I'm going to be able to buy food, than if I had U.S. dollars.

Norman: Wouldn't it go back to a barter situation?

Korelin: Of course, but don't you think …

Norman: Food in exchange for something else?

Korelin: Of course. But don't you think that silver stands a fairly good chance of playing a role in there, as does gold?

Norman: I don't know. I don't know if I agree with the dollar-collapse scenario.

Korelin: I'm saying that that's a possibility. Possibility, is all I'm saying.

Norman: What about other commodities? What about oil, for example? If you talk about oil, for me it's a commodity where there are monopolistic forces. You have a cartel, especially the Saudis, who have really the only spare capacity in the world. So at the margin, they set prices. What about oil?

Korelin: I'm a big believer in energy. We invest in energy issues for the simple reason that if you consider the world to be a human body, the analogy is, oil is, in my opinion, the circulatory system of the human body. It's like blood. Our world cannot really exist in the environment that it's existing in today without oil. I'm a very big believer in investing in oil.

Norman: What about new technologies? We've seen an explosive amount of new production because of fracking. What about alternative energy, siphoning demand away from petroleum? How does that factor in, short term and long term?

Korelin: I don't see alternative energy as being a meaningful factor in the near term; I really don't. I've had experience with companies involved in that particular industry. I guess the point I would make is that how viable is solar energy, Mike, today, in your opinion, or for the next 10 years? How viable today, or for the next 10 years is, for example, natural gas as fuel for a car? Is it going to happen? Unquestionably. Is it going to happen in the near term? No.

Norman: So, near term, still gasoline; and so we're still pegged to the price of oil.

Korelin: Sure.

Norman: Getting back to gold. Assuming we see a real meltdown in the eurozone where the euro collapses. Where do you see gold going, pricewise?

Korelin: I think the U.S. dollar is going to do well then because it is, in my mind, the best of the worst. I don't think anybody can disagree with that. In my opinion, gold will then get a lot more people's attention.

You've been in this business a long time, and you're aware as I am that the gold market per se is miniscule compared to other financial markets. It really is. If the euro collapses, I think you're going to see a very meaningful increase in the interest, Mike, in gold, and I think it'll be positive for the price. Am I one of these guys that says $5,000, $10,000? Not a chance.

Norman: Is it kind of odd to you that you talk about the huge debt that America has, yet we see that the best-performing asset of all assets has been U.S. Treasurys. And interest rates now are 10 years at 1.8 percent, a two-year below, what was it, 50 or 40 basis points, 20 basis points? Isn't that odd to you that you're saying we have all this debt and we can't handle it, but yet interest rates are historically low?

Korelin: No. I think we're talking about two different issues here. I would take issue with the fact that you say that T-bills are the best-performing financial asset out there. We have zero money in T-bills.

Norman: I said Treasurys.

Korelin: Treasurys, I'm sorry. You're getting me excited. Anyway, having said that, no; I would disagree only because the sectors of the market that we are in — "we" being our family — are doing a heck of a lot better than that. We're getting a return … we are 25 percent in real estate, 25 percent in conventional markets . . .

Norman: What kind of real estate, farmland?

Korelin: Residential.

Norman: Now? That's been a terrible investment.

Korelin: Not when you buy it at 50 cents on the dollar.

Norman: All right, there you go. So you're a contrarian; that was good.

Korelin: Twenty-five percent in the conventional market that we don't even mess with, and 50 percent in the resource sector. Well, my resource sector stocks, which a lot of people don't believe, but I can point out categorically — we're probably up right now in the neighborhood of 15 percent. And even better last year.

But again, I consider myself to be a professional in that industry. I spend 8 or 9 or 10 or 12 hours a day on it. So I kind of know what I'm doing.

Norman: You know what you're doing. All right, great. Al Korelin; thank you very much for coming on the show.

Korelin: It really is a pleasure.