SmallCapPower.com recently spoke with Doug Casey, a highly respected author, publisher and professional investor, who warned that the U.S. is facing some type of financial catastrophe. He also mentions which precious metal he believes is likely to outperform in the coming months and describes a shocking possibility for certain gold and silver stocks.
Small Cap Power: In a recent interview, you
mentioned that the U.S. is facing some type of financial catastrophe. How do
you see things playing out?
Doug Casey: Essentially, in the real
world, cause has effect and actions have consequences. All of the problems behind
the near catastrophe of 2008 and 2009 are not only still in play, they’ve
compounded hugely. They have just been papered over with the creation of
trillions of more currency units. And at the moment, those currency units are mostly
sitting in big banks, insurance companies, brokers, and aren’t really moving
out into society, but all these new dollars exist. When they do start moving
into the economy, they’re going to cause a gigantic wave of inflation.
And it’s not only in the U.S. The same thing has happened in Japan, in China
and in Europe. The whole world has the same problem, and the results will be
similar everywhere, with local variations. But what happens in the U.S. is far more
important than any place simply because the dollar is the world’s currency.
It’s used as a de facto currency by 50 other countries around the world. Most
of the assets of the world’s 200 central banks are dollars. If something
happens to cause the market to lose confidence in these eight trillion, or
however many, dollars outside the U.S., it’s a very big deal. And I think
confidence—which is now the only backing for the dollar—will blow away like a
pile of feathers in a hurricane in the next few years. It’s not just another cyclical
recession we’re looking at in the U.S. It’s something of global proportions. I
don’t call it The Greater Depression as a joke.
Small Cap Power: If your prediction
is correct, then what can an individual do to protect their savings and can
perhaps prosper from this event?
Doug Casey: Well, it seems that most
Americans don’t have any savings to start with; they have no flexibility, no
cushion at all. Half of Americans at this point are net recipients of money from
the government and, in effect, living off the other half. Recent statistics
show that about half of Americans are one paycheck away from insolvency; that’s
a problem. People have to get their houses in order as individuals. And the first
thing they have to do is pay off debt, stop borrowing, and actually start
saving.
The problem
then is: What to use as a savings vehicle? The dollar isn’t the best choice.
The dollar is on the way to reaching its intrinsic value thanks to the actions
of the U.S government and its central bank, the Fed.
At this point, you’re forced to find other places to conserve capital. For
most people that amounts to the real estate market and the stock market, both
of which are quite overpriced at the moment. We’re in kind of a financial
twilight zone; there are very few bargains in the world today. There’s almost
no place that you could really hide with certainty.
When we go out the trailing edge of the financial hurricane that we entered in
2007– and we’ve been in the eye of the hurricane for the last five years. We
entered the eye of the storm in 2010. But we’re now going into the trailing edge
of the hurricane; it’s going to be much more serious, much longer lasting and
much different than what happened in 2008. Hold on to your hat.
Small Cap Power: Are you in the camp
that believes the gold price is being suppressed? If so, what’s to stop those
involved from continuing this indefinitely?
Doug Casey: No. I think the meme of
the gold price being suppressed is actually quite ridiculous. Any commodity
that’s gone from $35 an ounce in 1971 to $1900 an ounce in 2011 is hardly
suppressed. That’s a fantastic bull market. It had its ups and downs, but
everything should be suppressed that way. So, no. There’s nothing to the idea
of suppression. And no proof for it apart from miscellaneous comments of
government officials, which are usually taken out of context to start with. Not
that bureaucrats are ever a reliable source of information to start with.
Are there short-term manipulations in the price of gold by who knows who?
Undoubtedly. Just as there are in the price of everything from soybeans or jute
or copra… I’m trying to pick some crazy commodity. Everybody always tries to
manipulate the price of everything. Would governments prefer to have the price
of gold lower? Of course, just like they’d prefer to have the price of lumber
and cattle and oil and copper lower as well. And at the same time, they want
the prices of some things higher like stocks, bonds and house prices. But
they really don’t care about gold; they believe their own propaganda about it
being worthless for anything but filling teeth and making baubles.
So, yes, governments are always trying to move things one way or another.
This is how they create distortions in the economy, but as far as gold is
concerned, there’s no evidence of suppression since the dollar was delinked
from gold in 1971. That said, as we talk with gold at… What is it now, $1275?
I think that it’s a reasonable value. Not a giveaway as it was in 2001 at
$260, but a very reasonable value. I think that it’s going considerably
higher from here.
Small Cap Power: Speaking of which, last
year, you mentioned you believe there’s a bubble and a super bubble coming for
gold and gold stocks. Gold’s run up from $250 to $1900 an ounce in the past
decade. Why do you think it’s taking so long for this bubble to form?
Doug Casey: That’s a good question.
I can’t be certain of what the motives are of the other seven billion
participants in the world’s economy, but I can tell you this: The foundation of
everybody’s financial portfolio should be actual physical gold because it’s the
only financial asset that’s not simultaneously somebody else’s liability. It
can’t be destroyed in a bank or brokerage collapse. It can’t be created with
the flick of a pen. It’s money in its most basic form. You want to have a significant
position of physical gold, both in your possession and outside of your country
of residence because you don’t want all of your assets under the control of any
one government.
As to where gold is going and when, you’ve got to remember that, in the past, a
dollar was just a name for a specific amount of gold. It was a name for the
twentieth of an ounce of gold.
If every dollar were to be redeemed with a specific amount of gold, what would
the gold price have to be? Well, assuming all the dollars currently in
existence became redeemable, it would be an extremely high number. On the order
of fifty thousand dollars an ounce. Who knows? It’s a contest between
hyperinflation and a deflation where most of the debt in the world falls like
dominos. We’d have to do the math of the number of dollars in existence versus
the number of ounces of gold that the U.S. government supposedly holds. This is
said to be 265 million ounces. We can do the long division, but I don’t know if
there’s going to be a catastrophic deflation where billions or trillions of
these dollars are wiped out and cease to exist before or after trillions more
dollars are created. Forced to guess, I believe we’ll have much higher levels of
inflation.
It’s very hard to pick a number, but what I do is I buy gold constantly all the
time with any excess capital that I have. I suggest your readers do the same.
Small Cap Power: Which precious
metal, at this particular time, do you think is a better investment — gold or
silver? Why?
Doug Casey: Well, they are very
different. Silver is primarily an industrial metal and gold is primarily a
monetary metal. Because silver is a much smaller market, and there are no large
above ground stocks, and it’s mined mostly as a by-product, it tends to be much
more volatile. Although both metals can be described as superlatives, gold is
the most non-reactive, the most ductile, and the most malleable of all metals,
whereas silver is the most conductive and the most reflective. In today’s high
tech world, there are scores of new uses for both of them discovered every
year. I guess, from a speculator’s point of view, I like silver better.
Small Cap Power: Great. Finally can
you tell our viewers about any stocks that you like at this time?
Doug Casey: I’m not crazy about the stock
market as a whole; it’s become overpriced because of the trillions of new
currency units being created in the U.S., but all over the world. A lot of these
dollars have flowed into the stock market looking for a real asset in which to
hide. There are a very few world stock markets with real value. There’s very
little a Graham and Dodd style analyst– and I’m very sympathetic to that
approach—can buy. You can’t find very much value anywhere, in any market. That’s
another reason most people are going to be hurt badly.
That said, there are going to be other bubbles created in the years to
come. I think there will be a bubble created in the precious metals again,
and there’s likely going to be a bubble created in precious metals stocks.
I’ve long been involved in junior mining companies and mining exploration
companies. There are several thousands of them in the world, or at least
several thousand companies that claim to be.
Most of them are completely worthless. That said and you should look at them from
the buy side now. There are some that are genuine bargains as we speak today…
selling for less than cash. In fact, the only part of the market that’s cheap,
in my opinion, is the mining exploration stocks. Highly risky, highly
speculative, but capable of moving 10 or 50 or 100 times as a group. I’m not
even talking about individual stocks. That sector itself can go into a super
bubble because it’s so tiny and held in such low regard at the moment.
If we see gold trading at $5000, which is entirely possible, I’d say likely,
over the next five years, people are going to go crazy over these stocks again,
which they cyclically do. I hate to mention any individual companies because their
fortunes can change so quickly, but it’s a sector that people should really pay
close attention to today.
Small Cap Power: That’s great, Doug.
Thank you very much for taking the time for the interview.
Doug Casey: Okay. My pleasure.
