The Gold Report caught up with "Deliberations on World
Markets" writer Ian McAvity between sessions at the 36th New
Orleans Investment Conference, held October 27-30. In fact, Ian
was among the experts featured on the conference agenda,
graphically updating his big-picture expectations for stocks,
gold and the dollar.
The Gold Report:
Over time, Ian, you have accurately predicted the bull market in
the '80s, the housing bubble and the credit crisis. So the
obvious question: what are your key predictions going
Despite people thinking that with all of the bailouts and
everything else in the last year somehow the crisis is over, I
think basically that the crash of 2007 through 2009 was only the
first half of a much larger problem. I don't want to say the
worst is yet to come, but the second half may not be any more
pleasant. The housing, banking and financial industry situations
have not changed at all. The accountants changed the reporting
rules so you just don't see all the toxic paper still in the
banks, and they don't have to report it.
Since 1971 the dollar has lost something like 3.7% per annum
against the Japanese yen. The Japanese continue to buy long-term
U.S. Treasury bonds with a coupon of less than 3.7%. That's a
hell of a business. In the '90s, the argument as to why the
Japanese were still buying bonds in spite of the currency losses
was that they didn't have to mark the currency losses to market
in their banking system. This is one of the reasons why the
Japanese banks went on to have some problems. I like to use that
example to point out that we don't really know what's going on
inside the banks anywhere because they have their own accounting
rules. What's off balance sheets? What's on balance sheets?
What's the flavor of the month and what flavor do we want to
ignore this month? It's scary.
We don't know how deep this sewer is, and it really is a
sewer. Poor old Bernie Madoff is awfully lonely in jail. A lot of
the people involved in the bailouts really should be his
cellmates. We're not entirely sure who got that money, where it
went or what it did. The grandchildren of today's American
taxpayers have been handed $3.5 trillion of debt that's going to
hurt them their whole lives.
Many people, including speakers at this conference, would say
that bailouts were necessary so that the whole banking system
didn't collapse. Do you disagree?
Some sort of a bailout was necessary. I'm not sure that a little
pain was avoided at the risk of creating greater pain later.
Years ago, Lee Iacocca was the champion for getting government
money to bail out Chrysler and turning the company around. I had
a confrontation with Iacocca, and I told him he did a great job
turning the company around, but if the government had allowed the
company to fail, the receiver would have sold those factories.
Maybe the Japanese would have bought them and maybe it would have
resulted in a more successful auto industry that wasn't saddled
with the autoworkers' unions. It's the same with the banking
system on this occasion. Some of those banks should have been
allowed to fail.
What will be the impact of China, Brazil, India and so on buying
less and less U.S. paper?
The degradation of the dollar. The problem is that nobody wants
their own currency to take over as the transactions currency for
international trade because the minute you get into that position
you lose control of a lot of your own domestic monetary policy.
So the most significant development this year-and the American
media haven't touched on it-is the agreement between Brazil and
China to basically settle their trade balances with each other in
reals and renminbi. Those are two of the largest holders of
dollars in the world saying that they want to stop accumulating
dollars. With your national debt scheduled to go from $13
trillion to $18 trillion, who's going to buy that other $5
The Fed basically is trying to debauch the purchasing power of
the currency. They keep pointing their fingers at China saying
that China is artificially manipulating their currency and they
have to devalue the USD and revalue the Chinese RMB upward by
40%. China owns $860 billion of paper. Who's going to give them
the $344 billion that they're being asked to write off? It's an
interesting way to negotiate with your banker.
You've said that before-it's no way to treat your banker.
Exactly. Another element of this that's not being addressed in
the currency revaluation talk is that all of the surplus
countries are putting in capital controls to keep the hot money
out. Brazil taxes incoming capital. Everything in Korea is about
to have some sort of tax control imposed. China, Singapore and
many others are putting tight controls in place that will be a
contentious item at the upcoming G20 meeting in Korea.
When you say hot money. . .
International investment flows. It may be coming from traders, or
it may well be coming from corporations trying to redirect their
activity. But in essence they're building walls to keep unwanted
currency flows out because they don't want outside forces driving
their currency. It's the constriction of international currency
flows that really becomes a big issue. This is getting back to
the 1930s where you get a combination of competitive devaluations
and protectionism. Whenever times are tough, the first thing
America always talks about is protectionist barriers. We, the
great free traders, are free traders only as long as it works our
way. The rest of the world is getting a little fed up with
You did some analysis of a dollar crisis in the late '60s, early
'70s. Do any lessons from that apply today?
If you think about it, we've had several dollar crises since the
gold window was closed in 1971. From 1946 to 1971, the Bretton
Woods Agreement had served as the foundation for the post-World
War II monetary system. That was based on the U.S. dollar being
tied to the gold price; it was a gold-exchange proxy discipline.
The key is that it was an external, apolitical measure.
In the late '60s, the pressures were building so the central
banks ran a gold pool to stabilize the gold price. Finally in
1969 and 1970 the pressures were getting so big that they were
losing too much money. So they in turn put the pressure on
America to change its policy. This dates from Lyndon Johnson's
guns-and-butter speech in April of 1968. He said we're going to
fight the Vietnam War and we're going to have the Great Society
and we're not going to raise taxes. The rest of the world asked,
"How are you going to pay for it?"
What's different today?
Back then, the major holders of dollars-the Arab OPEC oil
producers-quadrupled the oil price. I well remember Sheik Yamani
making the argument that the U.S. was taking the oil out of the
ground and giving them pieces of paper that would become
Similar to what China's saying now.
Exactly. There were two separate rounds of big oil price spikes
in the '70s-first a tripling of the oil price in early 1974, and
then another tripling in 1979. The U.S. tried to print its way
through it. In October '78, there was a panicky moment when
currency markets were frozen. The German, French, Swiss, Canadian
and about half a dozen other central banks went to Washington and
said, "You have to stop this decline of the dollar." A massive
coordinated intervention to stop the dollar's devaluation
followed, and when that happened the gold price fell back from
$243 to $193, and then turned over the next 15 months and ran up
to $850 in January 1980. In fact, it was another currency crisis
that got me started in the gold market. In October of '67, the
British pound was devalued from $2.80 to $2.40. At the time that
was a huge event. I was working in an office in Montreal, and I
remember an old-timer there with tears in his eyes, saying,
"There goes the empire."
Back to the future, so to speak. What else do you foresee?
Proclaiming the end of the recession, I think, virtually
guaranteed a double dip. It's the same recession from 2007 in my
opinion, but if they insist that one bottom was a real bottom,
it's basically going to be a double dip. The U.S. consumer is
still buried in debt. The government is trying to fund everything
with debt. The notion of borrowing your way out of debt makes no
sense. In the long term, they have to effectively deflate the
purchasing power money or debauch the currency. This is going to
reduce the American standard of living.
I'm wondering how mad the kids who are 20 to 25 coming into
the workforce are going to get when they realize the extent of
the burdens that have been handed down to them. The American
standard of living and stature in the world will go down for many
years to come as a result of the recent bailouts and ballooning
budget deficits. Brazil, China and India are going to play much
more important roles.
As an investor what should I do with this information?
At the end of the day, on the other side of the deflation of
paper asset values, we'll have inflation, potentially
hyperinflation. In that kind of environment, tangible assets are
number one. The most viable tangible asset is gold in the context
of money that preserves purchasing power. But even quality
property that isn't mired in mortgage paper and questionable
titles will preserve some relative purchasing power when a phase
of prosperity returns. The tangible asset basis works the same
with companies; for instance, paper manufacturers with large
forestry reserves have something of enduring value. Those
reserves will grow every year as long as it rains and it doesn't
burn down and so on.
Many of the conference speakers have been talking about the big
resource bull market we're in. Beyond gold, what resources do you
consider tangible assets?
If you drop it on your foot and it hurts, that's tangible. Ross
Beaty, a geologist and resource company entrepreneur, is very
articulate about the need for copper. Almost anything in the
industrial process is going to use some copper. Silver comes in
both as an industrial metal and a monetary play as a leveraged
proxy for gold. In some respects, silver is like gold on steroids
when the wind is blowing in the right direction. But the simple
answer is gold.
You don't buy the talk about gold being in a bubble at this
With every $100 increase in the gold price since it crossed the
The Financial Times
has published a bubble article. They have no idea what they're
talking about. I find them more amusing than illuminating. In the
first place, get gold prices up to new highs in both nominal and
real dollars; then you can start talking about a bubble. That
would be $2,400 gold, or nearly double the current levels.
Secondly, I have a cycle model that I've been publishing in my
Gold Now Versus Then
chart for probably seven or eight years.
(Click to enlarge)
It overlays the cycle starting in 2000-2001 with the one
starting in 1970-1971. If we were to replicate the swings and
roundabouts on this, the January 1980 top would translate to
about $5,480 in this cycle and that would be scheduled to occur
in something like April 2011.
So the top should hit in April?
No. It would only happen if we were to exactly repeat the past
bubble, but that would be impossible to forecast. It's
interesting, though, that in the acceleration phase of the last
cycle, the October 1978 dollar crisis fueled the final run-up in
gold. In the current cycle, that coincides with all of the hype
last spring about the demise of the euro triggered by the Grecian
debt crisis and bailout.
For the past five years at all of the different gold shows, I
have been saying the final stage of the run in gold would come
when the credibility of the currencies themselves came into
question. This year we've had three bumps of a real currency
crisis. First came the euro, and then suddenly the Japanese
intervene because their exporters are going to get killed by it.
Now everybody's rejecting the dollar. In essence, we're
replicating the currency environment of 1978 that set the stage
for that last bout of inflation. If the market's going to go
crazy, this is when it's going to happen.
In some respects this currency crisis may be an even bigger
one than that of 1978, given the huge holdings of global reserves
in the hands of China and the other emerging countries and the
growing power they wield through the G20. They're flexing their
muscles now, which could set the stage for a blow-off run
comparable to 1980, but I can't forecast that $5,479 price in
April of 2011. It is a useful illustration of what a real bubble
run might look like.
But you think it will happen?
I can't rule it out. As I say, be careful what you wish for; the
economic circumstances resulting from a breakdown of the system
would not be pleasant. I don't want to see it, but I have little
confidence in the bureaucratic elites like Geithner et al coming
up with any successful resolution.
What will the changes in the Congress mean for investing?
I don't have a simple answer. One thing that worries me is a
resurgence of optimism that somehow we've put the crisis behind
us and we've printed our way through it. That conclusion is just
structurally wrong. The housing market is starting to fall again.
A new series of scandals reflects back on the banks. It's going
to get worse.
I think 2011 poses a number of shocks. Coming into December of
2010, we still don't know what the tax rates are going to be. An
awful lot of paychecks in January may have withholdings based on
the expiration of the Bush tax cut, so workers all over the
country will suddenly be asking, "Why is my paycheck $300 less?"
What's consumer spending going to look like in January? I don't
think consumers will be spending at the levels we saw earlier in
the decade, when they converted their houses into ATM machines,
for quite a few years to come.
We talked about your
Gold Now Versus Then
chart (Chart 1) earlier, but that's only one of many charts you
Deliberations on World Markets
and use in your presentations. What do you consider some of the
I love showing the
S&P Composite 1900 to 2020.
(Click to enlarge)
The key point I make from that chart is that the big bull
markets that excite people so much really represent only about
38% of those 120 years. The market had three big runs, topping in
1929, 1966 and in 2000. The rest of the time it basically traded
sideways for about 17 to 20 years. In essence we've been going
sideways since 1998.
(Click to enlarge)
If trading sideways is part of a natural course of cycles, what
does it mean for investors?
It basically means that investors better recognize there are
times to not get carried away with the perception that equities
always go up. In the "Other Phases," the bear market phases tend
to run longer and cut deeper than people got used to in the
1982/1999 era. Everybody's saying we're in a new bull market. If
the S&P and the Dow stay above last April's highs, they say
that's technical evidence. I'm dubious about that holding, but
I've been wrong many times before and I could be wrong again.
Over time the markets go up. But if I tell you that you're
going to get the stuffing knocked out of you between now and
2018, will you want to hold on for 2020? Wall Street wants you to
buy and hold but they have to sell you something new to buy and
hold every year; otherwise they don't make any money. So
basically the biggest risk for many investors is that their
long-term plan changes almost every time your broker calls.
How much do you rely on what you see in the charts versus your
knowledge about human nature and what's happening in the
It's basically 40 years of experience in one big cocktail, a mix
that includes the assumption that every single price at any
moment in time contains all the hopes and fears of everybody who
knows or thinks they know whatever evidence is out there. At the
end of the day if the background fundamentals are uncertain but a
pattern is visible where price has gone up and up and up, it
tells me that the buyers dominate at that point. In that sense,
the technicals would be the purist measure.
Having accumulated scar tissue over the years, I'm inclined
toward the fundamentals as well. Prices walk on a technical leg
and a fundamental leg. It would be naïve to ignore either, but
when in doubt I'll bet on technical analysis of price trends.
Where I probably differ from most of my age group until recently,
I've always focused on the international markets. I was
publishing global market charts back in the 1970s, long before
John Murphy published his book on
I didn't come up with that label, but having been brought up in
Montreal and Toronto, I was always in touch with the British
markets. For years I published charts showing that London led.
New York followed. Tokyo lagged and the Canadian market lagged
New York by one leg. I had an article on the Canada/New York lag
back in 1976, illustrating that when Canada actually had its
highs, New York was often making its first failing bear market
rally top before a decline. That worked from the 1950s into the
But when you do that kind of analysis you get pretty cynical
pretty quickly; the operative phrase today would be, "Every time
I find the key, they change the lock"-because it ain't easy. It's
really a question of balancing the different influences. For most
investors, the simple discipline would be to watch a couple of
longer-term moving averages under a trend. If the price is above
the 200-day moving average, that's governing the trend. If
something you own goes through its 200-day moving average, stop
and think and do some homework. Many free Internet charting
services let you customize a chart, and a good mix that I suggest
for patient longer-term investors is a combination of a 50-day
and a 200-day moving average. For as long as the 50 is above or
below the 200, that trend is going to continue for longer than
you think. It's a lagging confirmation tool, not a short-term
trading idea. When they cross, the market is telling you that
something's changing and you may want to revisit and rethink your
You also have analyzed the relationship between gold mining
equities and gold bullion. Can you explain that to our
I refer to it as the shares-to-metal ratio because prior to 1975
when Americans could not own gold, North American gold mining
shares typically were very expensive as the proxy for owning
gold. At times, the expectation levels that get priced in are
just outrageous. The shares-to-metal ratio, which I've calculated
going back to the 1930s, peaked in 2003 when the gold price went
(Click to enlarge)
When gold ran from 1971 to 1980, the miners' shares could not
keep up with it. The Miners Index in Chart 4 is a composite of
the leading miners of the day, with the modern period from 1993
being the GDM Index that underlies the popularMarket Vectors Gold
Miners ETF (
). The great growth and transformation of the Industry came after
gold stabilized, from 1982 to 1996. That was followed by a
vicious secular bear cycle that bottomed in 2000/01.
The gold-shares-to-metal ratio hit its highest level of
expectations in December 2003, as gold was moving through $420 to
confirm this new cycle.
The irony in this cycle is that the gold mining industry has
consolidated into bigger and bigger companies, a complete flip
from the industry's history. They're not finding many big
deposits anymore. Investment bankers, in my view, have been
harvesting the industry by promoting takeovers where the big
miner issues a bunch of stock to absorb the miner that's made a
discovery in the hope that the new deposit will grow. The 50%
premium over market that the bigger miner is willing to pay to
replace the reserves they just mined, and capture some growth
later, is popular with those being acquired, but in the meantime,
yesterday's shareholders of the major just got diluted.
The major gold mining stocks are barely keeping up with the gold
price since the crash. Yet all these new billionaires such as
John Paulson are running around singing the gold song. The theory
is that the miners always will make more money than the selling
price of the commodity they mine. It sounds great, and it makes
all kinds of economic sense-but I have a history of charts going
back to the 1930s that says it happens for a little while but
it's not a sustained trend. The miners right now are heading into
a period during which they'll probably outperform the metal
price. But if I'm right about the S&P 500 going back and
testing the lows of March of '09, I'd have to remind you that
gold mining shares are just shares. When the market goes down
they're going down with it, and in such declines the metal price
is likely to decline a lot less. Remember that volatility works
When do you foresee the S&P 500 going back and testing those
I expect the next six to nine months to be an interesting period.
During this window of time, with the gold price possibly spiking
in the second quarter, I'm very concerned about how the new
Congress will work with the White House. There's an awful lot of
stuff coming up in the first half that makes me very nervous. I
don't know how it's going to turn out, and I have little
confidence that it will be much more than political posturing
with an eye to the 2012 Presidential election. I just know that
I'm very nervous.
What advice would you offer under such circumstances?
Don't get carried away by recently rising prices. In this
climate, take some money off the table. Put your house in order,
i.e., reduce debt. Don't get yourself in a situation where a
sudden move in the market can cause margin calls that might blow
up your portfolio. Don't buy into all the hype about quantitative
easing, expecting to see money that's not being absorbed in the
economy to be sloshing around the financial markets.
People also have to know who they are and what they are.
Someone will tell me, "Oh, I bought gold because the world's
going to hell and it will ultimately go to $5,000." Then he'll
turn around and say, "Gee, I have so much gold in my account and
the 10-day moving average just crossed the 50-day moving
average." I'm saying, "So?" They say, "It's going to pull back
$100 or $200." I say, "So? You bought it because it's going to
$5,000, and now you're worried about a $100 or $200 (10% or 15%)
setback during a prospective 300% run?" Are you a trader or an
investor? You're unlikely to be successful at both. Some people
"get it" when I ask if they cancel the fire insurance on their
house because they haven't had a fire lately…
But with the market going sideways for 17 to 20 years after a
boom, as you mentioned earlier, don't you have to be a trader on
You should be an investor with a cyclical focus. When I talk
about going sideways, I don't think the four-year cycle rhythm is
going to go away. We had very good bottoms in 2003, and had a
very good bottom in the spring of 2009. But you've already had 18
months to bounce back from that bottom. If you reach another
bottom, it doesn't mean that the S&P is somehow going to blow
up and go away. There will be good bottoms. The harsh part of the
2009 bottom was that it happened almost too fast.
That was partly due to all the bailouts and the amount of money
being thrown in. Maybe that's something we'll have to learn to
live with-but by the time I was comfortable with that bottom, it
was practically over. I'm not one to get out there and start
catching falling knives, so I missed a good part of that bottom
because the whole thing was over way too fast. But then again, a
really good bottom never gives you a second chance. It just keeps
Because you're known for your predictions, Ian, are you telling
investors that we might be near a top in this market rebound from
Yes. I tell people that for $3.5 trillion in new debt for your
grandchildren to worry about, "they" bought a pretty good rebound
that's about 20 months old, and running out of gas.
And then have another pullback?
Yes. I don't think you'll see the October 2007 high on the
S&P, though. Not again for several years.
Will we go down to the 2009 bottom?
Yes, I expect to see it tested, and possibly even be broken. If
you think in terms of the broad range of 700 to 1,500 over past
decade on the S&P, we're currently around 1,200. We're more
likely to be in the 700 area rather than adding another couple of
hundred from here. Think in terms of 300 points or less upside
potential versus 500 or more points of downside risk. I think
we're much closer to a top as we enter 2011. And I really do
worry about the risk of making a lower low than the March 2009
low-but that is a risk factor rather than a prediction.
So your general feeling is that we'll pull back the economy in
the U.S. particularly. . .
Waves of fear will be coming up, because for $3.5 trillion they
bought a hell of a bounce. But most of that bounce is behind us
at this stage. And somehow when something people own is actually
down 50%, they tend to think of that as something more than a
pullback. I've often referred to it as a point in the market
cycle that calls for a national diaper change.
The reported "advance" GDP growth of 2.0% for the latest
quarter was the smallest positive number since the March 2009
lows. Seven of the last ten "Advance" GDP estimates have been
revised lower as they progressed to a final reading. I think the
economy is slowing a lost faster than people realize. Few ask
what changed from early last summer when Bernanke was talking
about withdrawing the quantitative easing liquidity, and only a
few months later he's done a 180 and is pouring in another round
Ian, this has certainly been informative. Thanks for your
Ian McAvity, involved in the world of finance for more than
40 years as a banker, broker, independent advisor and
consultant, has produc
ed "Deliberations on World Markets" since 1972. He
specializes in the technical analysis of international equity,
foreign exchange and precious metals markets, and has been a
featured speaker at investment confe
rences and technical analyst society gatherings in the
U.S., Canada, and Europe over the past 36 years.
Ian has been a director of Central Fund of Canada, the
original stock exchange tradable gold and silver bullion entity
listed on NYSE-Arca since 1983; a trustee of NYSE-Arca-listed
Central Gold Trust since its 2003 launch; and a trustee of
TSX-listed Silver Bullion Trust [TSX:SBT.U] since its 2009
In the 1980s he was extremely active in financing junior
exploration companies, but cut back that activity in the late
1990s. A member of the board of directors of Duncan Park
Holdings since 2004, Ian inherited this junior exploration
company's top job upon the death of its president in 2007. He
has revitalized the company with an earn-in deal on a block of
claims in Canada's well-known Red Lake Mining District. As Ian
describes it: "You couldn't ask for a better address to explore
for gold than to be within sight of the head frame of the
richest mine in the country."
Payrolls Up 39K, Jobless Rate Rises to 9.8%