Mike Maloney: Today's Low Gold & Silver Prices Are Not Realistic
The good news is that they can't last much longer
During this very tumultuous week for precious metals prices, Chris
sat down with Mike Maloney, founder and owner of GoldSilver.com, one of
the world's largest bullion dealers.
Mike is a true scholar of
monetary history. His reasons for getting into the bullion business have
their roots in a very predictable cycle that has happened time and
again over the centuries (more accurately millennia):
- A new monetary system is introduced, based on sound money (most commonly, using gold and/or silver)
- Currency (e.g., paper bills backed by sound money) is introduced to faciliate trade and commerce
- Governments
begin to tinker with ways to 'print' more currency than can be fully
backed (e.g., coin clipping, partially-backed notes, FRNs)
- A
false prosperity ensues. Those closest to the new money creation benefit
most and debase the currency further to forward their advantage.
- Reality begins to catch up with this deficit spending and the purchasing power of the currency weakens dramatically.
- The monetary system collapses under too many claims on a limited pool of sound money.
- Eventually, a new monetary system backed by sound money rises from the ashes (see Step 1, above).
Mike
believes that we are currently experiencing Step 6 and that we will
witness the birth of a new monetary regime within the next ten years.
What
makes this moment in history unique is that all past monetary regime
collapses have happened regionally. This is the first time in human
history in which all the world's major currencies are collapsing
together. Which is why he is so passionate about owning gold and silver.
In
his opinion, we will soon witness the greatest transfer of wealth ever
seen, as countries worldwide realize they need to revert to monetary
systems backed by sound money (i.e., the precious metals). Those
acquiring gold and silver beforehand will not only preserve their wealth
as existing fiat currencies are extinguished, but will see staggering
increases in their purchasing power. Those interested in learning more
of Mike's specific vision can watch Episode One of his new
Hidden Secrets of Money
video series. (Chris and I received advance screenings of the next few
episodes, which are excellent in terms of explaining the processes and
shortcomings of our current monetary system.)
On the Tightening Physical Market for Gold & Silver
What
most people do not understand is that the price of gold and silver are
not determined by how much gold and silver is being sold. It is how many
gold and silver IOUs are being sold. And you can write
as many IOUs, futures contracts and options, as you want. Those are
unlimited. The supply, though, of physical gold and silver is quite
limited, and so when people actually start asking for it and they want
the physical, then there is a divergence of the paper price versus the
physical price, and we are seeing that right now.
We are in a
back-order situation with all of the suppliers. Spreads are going up.
Silver eagles cost about fifty cents over spot more than they normally
cost because all of the suppliers have had to raise their price to try
and find the supply/demand equilibrium that the markets are for. The
markets are there to try and find a supply/demand equilibrium, so then
price is the arbitrator. Price rises; that draws more supply and reduces
demand. Price falls; that reduces supply and increases demand.
So
the price discovery mechanism of the markets is what is supposed to
ensure that things are in equilibrium. We have this broken system where
there are a few big players that manipulate the market, and it always
shows up when shortages start developing in the physical market. You
know that the price of gold and silver right now are too low to be realistic. And the good thing about that is that it cannot last.
On the Hidden Wealth Transfer Caused by Inflation Targeting
Everybody
got in an uproar over [the Cyprus bank deposit haircuts], but nobody
gets in an uproar over the central banks targeting 3% inflation. That
compounds out to 34% of your wealth that they are confiscating every decade.
People got mad because it happened all at once and they could see it.
One day their bank account said one thing; the next day it said another
thing. With this insidious confiscation known as inflation,
this is the inflation tax – you do not see it because the number on your
bank account might say that you could make a deposit and if there are
no fees or anything on that deposit, $100,000 deposit a decade ago still
stays $100,000. Except gasoline went from $1.25 to near $5. Measured
in gasoline, you lost 75% of that $100,000, but it still says $100,000.
So the central banks targeting this 3% inflation rate is a wealth transfer from the public to the financial sector.
On the Recent Price Weakness in the Precious Metals
You
do not want to stay in just one investment class your whole lifetime.
But it is a very powerful tool to be able to measure these classes
against each other and then jump from an over-valued asset class to an
under-valued asset class at the appropriate time for the road to true
wealth. And it only requires a few big decisions during your lifetime.
Now, when I discovered wealth cycles, I was looking at the Dow Gold ratio and thinking this thing has a cycle.
I made another check of the Gold Dow ratio instead the Dow Gold ratio,
and put them on top of each other. Lo and behold – there is a cycle. It
has a positive side and a negative side. If you are doing a Dow Gold
ratio, you jump from being invested in paper assets like stocks and then
back to gold for the long investment waves. I would say it is somewhere
between 8 and 20 years you spend in an asset class, and you can do this
with anything. If you measure your house in how many barrels of oil it
is worth over a century and you jump back and forth from being invested
in oil wells to being invested in real estate, it is the same thing as
being invested in gold or the Dow. It is a very powerful tool that I
believe has a high degree of predictability and safety to it, if you do
not let the short-term noise flush you out.
Right now we are in
consolidation. Gold has been chopping sideways for 19 months now, and it
has worn people out. But basically gold is up. It is not up from 19
months ago when it was nearing $2,000, but it sure is up over the last
decade. So I do not let the short-term noise affect me now that I know
that we have not reached the point where the price of gold equals the
points on the Dow. Right now gold’s value is one-ninth of the Dow, and
so I know that it needs to rise by a factor of 18 against stocks before I
need to get worried and start watching gold.
So I am very
comfortable in these pullbacks. It gets a little aggravating, but still
it does not bother me that much and is definitely not going to flush me
out.
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