Dr. Stephen Leeb
The most vexing problem currently facing the world is finding
When push comes to shove, if oil still traded in a cyclical
fashion at around $20 per barrel and copper averaged about a buck a
pound, today's debt problems would be much more tractable, and
growth would be much easier to accommodate.
Indeed, a strong argument can be made that the 2007-08 bubble
occurred due to consumer borrowing to keep even with falling living
standards. And living standards continue to fall as corporations
resist higher wages in favor of cost controls - especially costs
related to commodities.
Historically one of the strongest correlates of corporate
profits has been core commodity prices. The reason: commodities are
the first assets to respond to greater demand. But in today's
world, demand from the developed nations has been flat, while
commodity prices continue to rise given their scarcity and demand
from emerging economies in the developing world.
The Western wage earner, therefore, pays two-fold: stagnant
wages (meaning decreased purchasing power) and higher prices for
life's essentials. These are not problems that are fixable though
new regulations, more government spending (as opposed to
investment), or false assurances that the world's financial
institutions remain sound.
Warren Buffett's recent "guarantee" that U.S. banks are sound
merely provides more evidence of how desperate our situation has
become, especially in view of the huge loss at J.P. Morgan (and who
knows how much larger it could have been?), massive financial
sector layoffs, and the still looming prospect of a major economic
recession. Essentially, economics are dragging us, kicking and
screaming, into a new world - and no one wants to face the problem
frontally. Of course, it is not surprising that those who have
succeeded so mightily in the old economy would fight so hard to
resist inevitable and probably very painful changes that will
accompany the new.
We have argued before that Buffett (and many others who accept
his words as gospel), is "talking his book" big time when he calls
gold a relic and asks a purportedly rhetorical question "which
would a sane person prefer, farm land or gold?" Actually, Gold is a
currency. It can be used to buy farm land, and as a currency has
appreciated far faster than other currencies (nearly 50-fold versus
the dollar over the past 40 years), not to mention far faster than
farm land. Unless a person were minutes from starvation, the sane
individual with a long-term perspective would take gold over other
ways to buy farm land. Moreover, even if one wanted farm land as a
hard asset, simply to exchange for something else in future, gold
would still be a preferable choice.
We fully concede that in the old world of plenty, with a
hegemony of financial assets, Buffett was among the best. Any
market group or stock he selects, we have often studied and
followed. His stock,
remains one of our favorites. But his advice, as we transition into
a new world of resource scarcity, is more likely to lead to
catastrophe than wealth. Investors of all stripes
own a healthy dose of precious metals in their portfolios to stand
any chance of navigating the turbulent journey upon which we have
The Bank of International Settlements ((
)) has often been called the central bank for central banks. One
reason: The BIS makes global regulations concerning bank reserves
and liquidity - regulations designed to assure that the banks -
which as 2008 proved are highly interconnected - will not set off a
systemic worldwide crisis.
But 2008 also proved that BIS regulations have not been
effective. Now the group is attempting again, with a newer set of
regulations named Basel III that may take effect a few years hence.
So far, the only more or less definitive part of Basel III released
in the first week of 2013, dealt with a single aspect of what
promises to be a full and complex new set of bank standards.
The particular rule the commission proposed - termed the
liquidity coverage ratio (LCR) - provides timetables and guidelines
for bank liquidity standards assuring that they have sufficient
liquid assets (assets easily converted into cash) to last at least
30 days. That arbitrary time frame is deemed sufficient to address
whatever problem would have led to a bank run, thereby
necessitating the need for liquidity.
This may all sound highly technical, but we think it boils down
to a vast misdirection away from the primary condition going
forward in today's world: Ultimately few if any liquid - or more
- assets, remain to be had, and the BIS must tip toe around the
elephant in the room to preserve any semblance of systemic
financial normalcy. "Normalcy" here is a worldwide financial system
in which reserve currencies - what Basel refers to as "cash" - are
largely composed of the dollar, and, secondarily, other paper
currencies including the euro, yen, British pound, and several
Actually, the LCR document was noteworthy for what it did
mention. While banks will be allowed to satisfy some new liquidity
requirements with assets like stocks and the lowest rated (BBB-)
non-junk corporate bonds, Basel III nowhere mentions gold or any
other precious metal. While gold may be needed later on, for now
the BIS and the West does not want to do anything suggesting that
gold is indeed a currency. This can only be characterized as
bizarre, since central banks around the globe have been steadily
accumulating gold. It's especially bizarre given that the
volatility of gold throughout the 2007-08 financial crisis was
considerably lower than that of stocks.
We project that once the BIS asserts that gold is tantamount to
a currency - even a currency in the same sense as low-rated bonds
and stocks, that must be valued at a discount to its actual value
to count toward liquidity - then the yellow metal could be off to
With any such move, the BIS would then undercut Buffett and
virtually all the Western bankers reliant on the dollar as their
exchange medium. Potentially there could be a virtuous circle in
which individual gold purchases would lead to higher gold prices
and higher gold prices would encourage banks to buy an asset not
easily debased and, that therefore, could satisfy liquidity needs.
Suddenly bankers and individuals alike could face a choice between
currencies undergoing debasement and one fixed in quantity.
Clearly the BIS is fighting a losing war. More importantly, its
resistance to gold gives China the time it needs to accumulate gold
to partially back its currency. Even China can no longer hide the
fact that it is accumulating as much gold as possible without
creating a worldwide market buying frenzy.
In 2012, China likely imported about 800 tons of gold through
Hong Kong, which along with what it produced domestically suggests
that the country added well over a 1,000 tons to its gold
stockpiles. Could there have been other imports? You bet - but just
stick with 1,000 tons and in a single year its imports and
accumulations exceed gold reserves in all but four other nations.
China last announced its total gold reserves in April 2009, nearly
four years ago. Since then, the country consistently has been the
world's largest gold producer - an enormous feat that required
production of nearly 40 percent of defined reserves in a year.
Recently China has also been a rapacious buyer of gold from all
other sources. It would come as no surprise then if China's gold
reserves were already number 3 or even number 2 in the world, at
more than 2,500 tons.
In 2013, China's plans for the yellow metal promise to be even
more grandiose than in all earlier years. The Shanghai Gold
Exchange, which five years ago was equivalent to a curbside affair,
has morphed into a full-fledged exchange for spot gold and
derivative trading. Indeed, it will serve two purposes: allow for
smooth accumulation of gold, and attract foreign investors,
lubricating ever more yuan-based transactions. And there's more.
The Chinese are close, if not finished, with due diligence on gold
. And what easier ways to accumulate massive amounts of gold than
through ETFs? In other words, the Chinese accumulation of gold is
arguably becoming exponential. Sooner rather than later such buying
will probably have a much bigger effect on gold prices.
In the end, if the BIS continues to resist gold as a qualified
bank asset, the Chinese will simply use gold-backed yuan as their
paper candidate. We imagine that virtually all the banks that can
will join as well.
The key point - and one that should be underlined over
and over again: In a world of scarce resources, countries or
individuals will not exchange critical minerals for paper.
Already we see phenomenon growing in the trend toward resource
We think this situation creates an exceptionally rare point of
inflection for investors; despite a 12-year run for gold, arguably
the bull market has not yet even begun. Indeed, gold reserves as a
percent of paper reserves have been nearly stagnant since the 21st
century started. Central bank buying has aimed only at keeping gold
at its low 1-plus percent of total reserves.
So it is a monumental understatement to say that gold has
enormous upside potential, and that mines with strong asset bases
have even better prospects. In the 1970's the gold miners on
average climbed 18-fold, while the metal jumped 20-fold. Those
numbers could be dwarfed in what is yet to come.
In addition to various ETFs such as the
SPDR Gold Trust (
iShares Gold Trust (
iShares Silver Trust (
- the analog for silver, the one metal that might even outperform
gold - there are the miners, which have so lagged the underlying
In many cases, this situation is even more bullish for gold, in
that the major miners have dug up most of the high-grade stuff, but
are having a devil of a time maintaining production. And this means
that the future likely lies with the juniors, especially those such
First Majestic Silver Corp. (AG)
, whose operations are in secure locations like North America.
For plays that will provide diversification through a group of
silver or gold miners, two of our favorite ETFs are the
Market Vectors Junior Gold Miners (GDXJ)
Global X Silver Miners (SIL)
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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