Aggregated Awareness

The 2011 Sydney Gold Symposium was held at Luna Park during 2 days in mid November.

Keynote speakers included: Eric Sprott & John Embry (Sprott Asset Management); Ben Davies (Hinde Capital); Alf Field; Richard Karn (Emerging Trends Report); Egon von Greyerz (Matterhorn Asset Management); Dan Denning (Daily Reckoning); David Evans (GoldNerds); Louis Boulanger (LB Now) & Gavin Thomas (Kingsgate Consolidated).

This series of articles will eventually cover all 8 keynote speakers, however, this Part I of the series, will cover the first 2 speakers.

Below are selected quotes from David Evans & Eric Sprott, on the first morning at this year's conference:

David Evans

"Is Gold an investment?...No....Gold is primarily a currency....Gold only becomes a good investment when the other currencies are failing, inflating, their profligate, their corrupt...times like now...timing is everything..."

"Inflation will end in 2028...governments will have to make a credible committment to halting the rapid growth of the money supply by 2 things: cut government spending severely by a severe trimming back of the welfare system & business subsidies, and raise interest rates rapidly maybe to 15% to 20%...but the gold price will keep rising in that period at about the current rate of 21% per year. until you see those 15-20 per cent interest rates on the horizon, relax....alright...it will be volatile"

"...here are some nominal prices in US Dollars per oz...in 1980 the gold price was about 850 dollars, in today's value that's about 3300 dollars if you use money supply to track back...in 2001 it bottomed at around 260 per oz, and that's where the 21% per year growth started, currently 1750, 2015 I think it will reach about 3800, by 2020 it will reach 10,000 per oz...BUT...that will only be about 4600 in today's money.

25,000 an oz in 2025, and by the time you blow it off at the end it will be about 50,000 per oz in 2028, BUT...that will only be about 8600 in today's money because the US Dollar of today will only be worth 17 cents then.

There are a few risks to this: inflation might get out of control into a hyperinflation; ron paul and the tea party might get in power and cut back on government spending and we need less inflation; there might be a derivative blowup; london physical market might blowup because it's all a big myth..."

"Banks & governments have blown it...they've created a massive debt crisis...we are in it now. The way they did it?

Three parts: 1) first of all, the central bankers have a policy of keeping interest rates as low as possible, consistent with a CPI that didn't rise above a set amount, usually around 2 or 3 per cent. Central bankers now admit that they should've kept track of asset prices as well...

2) Several times during the last 3 decades they have changed the rules to make manufacture of money ever easier. If you were around in the 1980's and had to get a home loan, you basically had to suck up to your bank manager, because they only had a certain amount of loans they could make...and you had to be nice to them, but nowadays, they give a loan to anyone with a pulse and they think you can repay it.

3) And they've responded to every crisis by bailing everyone out with new money. You repeat those three steps often enough, and you get to where we are today..."

"We can graph how the bubble grew...first of all note how the amount of money around, is basically called the total debt. People keep track of the debt, you can see it for instance in the US, in the Z.1 reports. The size of the economy we'll take to be the GDP. SO a measure of the size of the bubble, is the amount of money to the size of the economy, and that's the debt to GDP ratio...

What I'm going to tell you now is the financial story of your life, and what's going to happen next. It started in about '82, and I'm going to focus on the Americans because that's where a central part of the world's money system resides, and they're easily the world's most powerful country. And they've got good statistics that they make public...

Total US debt to GDP...this graph runs from about 1870 to 2010..the last couple of years are missing, but this has been about a plateau...still roughly about 370%... Two features of this graph are obviously immediately apparent...the level is generally around 150% give or take 20 or 30%.

it's just the 2 episodes, first one was the depression, where we got a build up of credit in the 1920's, the market crashed when it reached 235%...the GDP plummeted which pushed the ratio up even further which is just an artifact, then after a while it got reset and we started again...

In 1982, we started the bubble again, we went through a series of ...where it stalled for a while just after the recession in 1990...Interestingly enough, when the ratio reach the 235% we had the market crash of 1987, so it's history repeated all over again. Money manufacture stalled there for a few years...

Clinton got it going again with some underhand steps and I'm not gonna go into much detail on, and we got going again, we reached about 385% in 2008, and then we got a bit of a problem...

The central banks didn't change their strategy, what happened was that the world just ran low on borrowing capacity. We found out where the end of the line was. There wasn't enough money to service the debt.

You can work it out roughly: debt's about 400% of GDP, interest rates say 4% for the big guys, so the interest payments are about 16% of GDP. When the economy is paying 16% of all the turnover that year in interest, things grind to a halt.

The world's also running low on unencumbered collateral. Banks require collateral for a loan. Most of the collateral around the world was used. So money manufacture in the private sector stalled at about 2008 and we got the Global Financial Crisis.

So governments took over. They picked up the slack. They started manufacturing money. The did some borrowing, a little printing, QE1, QE2, they lowered interest rates, by late 2011, governments are running out of capacity to borrow, that's pretty obvious in places like Greece & California, but everyone's...every governments level of borrowing is just too high at the moment...

There's now a widespread realisation that the private sector is in fact debt saturated. There's no return to the 2007 normal. All of us here in this room have lived most of our professional life in a bubble...During the time of our lives from 1982 onwards...those are bubble conditions. Historically they are unusual. You just buy any asset...it goes up. It goes up because there's more money than ever. People can bid it up easily. That's historically unusual. It's come to an end. Governments hope they can rekindle this spirit. What they consider normal merely by doing a bit of printing and it will kick start. Now they are realising that's not the case...

We're now at a fork in the road. Last year's debt has to be repaid...

Now this is the crucial point... It is an important constraint that hasn't been brought out in the mainstream media...Last year's debt has to be repaid WITH INTEREST... So every year, the stock of money has to increase slightly..cos if you paid back all of last year's debt with this year's money, but in order for everyone to pay it back..it's like a game of musical chairs...cos' there's a bit of interest on top...the stock of money has to increase each year. So if the stock of money growth ever stalls...we get widespread business & bank failures, just like we did in 1930.

So we can either take the inflationary route: helicopter ben, print & inflate, or we can have a 1930's style deflation, where the money supply fell by about 30%.

The arithmetic is really dismal guys...Just between '94 & 2007, the last frenetic years of the bubble...we borrowed from the future about 1 to 2 per cent of GDP each year, that's roughly how much the money manufacture above the usual levels was adding to GDP.

But it's just like borrowing as an individual...If you borrow, you have to pay it back. So essentially, you're borrowing from your future income. Roughly 20% of growth has been borrowed from the future.

Now we're going to undergo a massive mean reversion...as a world.

We're going to revert to those previous normal debt levels of 150% of GDP. To get there, we're going to have to pay back that 20% of GDP. A 10% fall in GDP is a depression. So a 20% fall in GDP is a double-depression. That's what we have install for us, and the political system will determine whether it happens quickly, in a matter of years, or whether they drag it out over a couple of decades.

Let's take a longer philosophical view about what's happening here:

Money, is a promise that you can buy something with a similar purchasing power sometime in the future...and we work, motivated by those promises.

Too much money is like too many promises.

The promises, cannot all be kept. The amount of unfunded liabilities, let alone funded liabilities, of the world's governments...let alone the privates...are just unpayable. There's no way it can be done.

So...there's going to be a lot of losers...A LOT OF LOSERS. The political system, not the economic rules, will determine who the losers are.

The politicians will change the rules, to determine who the losers are. Now, the losers won't be the people who are well connected, contribute to campaign finance and politically powerful.

Are any of you like that?

Watch out..you might be a loser.

The politicians are going to choose inflation for a very obvious reason. Lets go through a basic democratic calculation:

There are only a few lenders.

There are lots of borrowers. They vote...and they riot. These are pictures of riots, just this year in English speaking countries.

There are a lot of powerful business interests, they don't want to fail.

The "Keynesian Fog" will be invoked to excuse this choice of inflation. They'll be lots of talk about reducing the people's real debt burden. Keynesian-ism is rubbish but it's a great excuse for just printing. So inflation is coming.

The political system is already saying: there are a lot of banks, we don't want them to fail, they're too big to fail, are there businesses like that? Bernanke personally is a student of the 1930's and he has vowed not to let a 1930's style deflation happen. Establishment economists are already talking about: wouldn't it be a good thing if we perhaps, ran a slightly higher level of inflation, perhaps 6% for a few more years, just to clear the debt a little. Already in a lot of countries, government spending is more than the tax receipts and the government can't borrow anymore, which in the instance of the United States, in this year's budget they're spending about 3.8 trillion but the tax receipts is only 2.2 trillion...the spending on entitlements alone is 2.3 trillion. That is to say, that the world's premiere government can't even raise enough tax to pay for entitlements, let alone all the other goodies.

So, there are gonna be some winners out of this: Borrowers, hey... you can pay back the money in devalued currency, people without savings, well you got no savings to lose. Banks would go bust if their assets were marked to market, but not the Australian ones, the Australian ones are in relatively good shape. Businesses likewise, Owners of real assets that aren't tied to wages: so commdities, they would be winners, houses, they are tied to wages, so... not so good even though it's a real thing. Gold & silver of course, will win.

The losers? Lenders, if you're lending money out, you're getting derisory interest rates. Savers.. you're trying to lend money, what a waste of time. People on fixed incomes, well those fixed incomes won't be worth didley squat very soon. Most industrial companies, their market's going to disappear. The economy's having massive misallocation of money, and there's enormous friction costs of inflation, so everyone loses. Even the mainstream's starting to wake up..."

 

Eric Sprott

"…But the fact is that…you see…I call it following the money…And if you follow the money here, the money is going into silver…"

In speaking about where the trend in price for the monetary metals is headed, Eric Sprott asked himself a couple of questions:

"Who is not buying gold today who was buying it in 2000?"

"Where is the gold coming from?"

to meet the serious high level of demand coming out of Asia, and globally.

The first question pertains to the possibility of mass selling by those who have it to sell, whilst the second question looks at the avenues of supply, that could increase, considering that mine supply has been flat for a decade…so who is satiating this change of increase in demand by selling into it in order to satisfy it? An obvious answer is surreptitious central bank leasing & swaps.

Some of the changes since 2000 highlighted by Eric Sprott are that: central banks were net sellers in 2000, whilst this year it is estimated that they will be net buyers of 500 metric tonnes; and that ETF’s did not exist in 2000, whereas today they take down approximately 100 tonnes net per year on average, so where is the supply coming from?

"I would argue very strongly that the central banks are surreptitiously leasing their gold. Gold lease implies they lease it to the bullion dealer, the dealer sells it in the physical market. [And] it gets consumed in the sense savers like you buy it"

This leads to the idea that certain central banks and governments do not hold the gold that they claim to hold, since it has been leased and sold into the market, never to return. Thus the concerted effort to talk down gold, and deny it is money by these same short side players within the market.

Eric Sprott also relayed the Ron Paul question to Ben S. Bernanke: “Is gold money?” and the “No it’s not” reply, followed by the retort from Ron Paul: “So why do central banks have so much of it?” to which Bernanke replied that it was “Tradition”.

Sprott did this to illustrate what would have happened to the gold price should Bernanke have instead replied: “Yes, gold is money”. The price would be up by $500 per oz. in an hour, and the scramble would be on for these central banks and bullion banks to go back into the market to buy the gold, that they had previously leased & sold into the market. So, obviously they would not admit such a thing.

Concluding remarks:

"I believe the market has already determined that gold is the reserve currency...The market's decided that...not the central banks...and not the treasuries. The market's made up their mind that gold is the reserve currency...It's up 600% versus almost every currency...

And this diatribe of stuff we have to listen to everyday about the dollar versus the euro... the yen versus the dollar...the pound sterling...whatever. They're all crap! It's like "who's the prettiest horse in the glue factory?". And they're all lucky...that it's a close competition.

But if they ever start reporting: "Well...all currencies are down today against gold"...Imagine if you put on your "telly" on Saturday, and they said "All currencies are down 2% against gold on Friday"...and they kept repeating that day after day after day. Would you get the message? Would we finally get the message? But we don't report that...

So anyways...that's err...the ratio of currency to gold. OK...Concluding remarks: ....Obviously, gold's going to continue to rise. The concern about fiat paper that my partner John Embry was all over...way early...I was the incredible beneficiary of believing that there will be a physical shortage...only to be blessed...by printing of money, which of course made gold go up even higher. I wasn't counting on the stupidity of central bankers & governments even more so....I think gold continues to go higher...I would believe that James Sinclair is more likely...to be way more likely to be right than wrong. I think silver will go back to 16 to 1 ratio, and it think it will overshoot. I think it will go back to a 10 to 1 ratio. So, gold gets to three thousand, you can see silver at 300, and I'm not just trying to present some kind of fantasy for you. But I think the logic is there when I look at the buying. And lastly, be very concerned about where you have your money, cos' it's a tragically risky world out there. Thank you very much for your time."

Part II of this series will appear in the next week when we select quotes from Egon von Greyerz, Dan Denning & Gavin Thomas.