Interview With Michael J. Kosares About Gold And Other Markets

Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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Gold Eagle:  Welcome to the Gold Eagle website.  You do not do many interviews, in fact, I cannot recall any at all in recent years…though you continue to publish your newsletter and write articles on a regular basis.  So why did you consent to this exclusive interview at our Gold-Eagle?

MK:…..I think of Gold-Eagle as a kindred soul.  USAGOLD and Gold-Eagle both started on the Internet at about the same time in the mid-1990s -- and both with the same mission – to educate the public about the virtues of gold ownership.  Gold-Eagle took the journalistic approach and we launched USAGOLD as an adjunct to our brokerage business.  Both grew over the years as public awareness about gold took root then soared in the aftermath of the financial crisis. I see the two websites as heading in the same direction and as fellow travelers along the same road, and as a result, a good place to do an interview on the current gold market.  I appreciate the opportunity.

Question:  Do you see this as a special time for the gold market?  Some see it as ambiguous and in a state of flux.

MK:…..I believe that the gold and silver markets are at a watershed – a time comparable to the early 2000s just before gold launched its secular bull market. I also see the downside for gold as limited and the upside potential considerable. Even more importantly, I believe we have come to an important and dangerous crossroads for financial markets. A good many analysts are predicting a return, or resumption, of the 2007-2008 financial crisis, and within that group, some are predicting this iteration to be even more disastrous than the previous. Investors need to understand what’s at stake and the vital role precious metals can play in their investment planning.  As for the gold market being ambiguous and in a state of flux, there is no question about it, but what else is new?  The complications for me have always been part of the appeal. What is remarkable about it all though is the steady growth in demand globally and in the United States.  Few people know that the United States is the biggest consumer of gold after China and India.

Question:  What is your overall Investment Outlook for 2015 and 2016?

MK:…..I think there is a 75% probability we will continue with the disinflationary economic bias for the foreseeable future.  There will be quite a bit of talk about sliding into deflation, but I give that a low probability. Real deflation generally doesn’t occur in fiat money economies.  There is a small chance of an inflationary outcome.  If there is a recovery, it will be spotty and generally fail to translate to the middle class. The general consensus is that the Fed has run out of ammunition, hit a wall of sorts and that monetary policy is dead in the water.   Already some policy-makers, like former Treasury Secretary Larry Summers, are pushing for fiscal stimulation as an alternative – infrastructure projects – but one wonders if the dysfunctional federal government is capable of legislating along those lines in a presidential election year.  All considered, I see more of the same for the rest of 2015 and 2016, but at the same time, warn of the potential for an unannounced Patricia-like event in the financial markets.  Goldman Sachs recently issued its own assessment that the third stage of the 2007-2008 crisis has already begun.  Investors should take note.

Question:  Which asset class is most grossly over-valued today?

MK:…..I agree with Yale’s Robert Schiller who says stocks are dangerously over-valued and due for a correction.  In fact, his CAPE ratio is now at the same level it was just before the 2007-2008 financial crisis.  Also, the St. Louis Federal Reserve recently published a paper saying that quantitative easing did little to lift the economy out its disinflationary lethargy though it did seem to elevate stocks. The inference, of course, is the value pumped into the stock market via Federal Reserve monetary policy is artificial.  And it’s not just the market experts registering these kinds of concerns, but ordinary investors as well.  Over the past year, we have helped a large number of new clients hedge their portfolios with gold and silver.  In nearly every instance, they cite concerns about the stock and bond markets and a tenuous financial system they see as held together by the Fed’s monetary largesse. 

Question:  That leads me into the next question: What asset classes do you consider undervalued relative to historical standards and current global economic conditions?

MK:…..It is interesting to note that both stocks and gold are trading now pretty close to where they started the year.  The difference between the two is that gold is coming off a healthy correction, while stocks, as just pointed out, have been buoyed artificially by the Fed’s monetary policies.  That contrast leads many to believe that gold and silver are radically undervalued and a good place to park money if you believe a correction might be around the corner – or worse.  I keep coming back to Alan Greenspan’s comment that “Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments." Greenspan’s not alone in this assessment.  A number of prominent hedge fund managers look to gold ownership for safe haven purposes including Paul Singer, David Einhorn, John Paulson, Ray Dalio, and Stanley Druckenmiller – to name a few. These are some of the biggest names in the investment business and their financial acumen is the stuff of Wall Street legend.

Question:  What do you think drives this interest in gold?

MK:…..Ray Dalio from Bridgewater Securities reduced the motivation to a simple sentence:  “If you don’t own gold, you know neither history nor economics.”

Question:  In light of the US Fed fueling US stocks via the levitating action of Quantitative Easing (QE), do you foresee an imminent crash in the S&P500 Index during 2015 or 2016?  And If so, what percent do you expect US equities to crash?

MK…...I would not be surprised to see the Fed launch QE4 under current circumstances, but that alone might not be enough to keep the stock market headed in a northerly direction.  The problem lies in the price earnings ratios mentioned previously.  If Schiller is right, and I think he probably is, stocks could decline as much as 30% from current levels.  The historic norm for his CAPE ratio is 17 and the current level is 24.5.  A 30% decline in the S&P500 would put it in the vicinity of 1450 from the current level of 2075. 

Question:  And if indeed US stocks commence a new secular Bear Market, where might prudent investors seek safe haven?

MK…...I believe in the rolling bubble scenario.  Capital will go to the underpriced areas of the financial markets like precious metals and real estate in certain geographic areas.  When Soros called gold the ultimate bubble, I believe what he meant to say is that gold is the final bubble, or the final resting place for capital once all other bubbles have dissipated.  Gold has been called the asset of last resort for just that reason.  Those who have prepared their portfolios for such a shock, and I include the bond market in the analysis, will be in a position to capitalize on the opportunities it will ultimately present.  John F. Kennedy once pointed out that “In the Chinese language, the word ‘crisis’ is composed of two characters, one representing danger and the other, opportunity.”  Such considerations underline gold’s fundamental role as money and money in the last resort – capital you can rely upon when all else fails. 

Question:  What is your price forecast for gold and silver during these troubling and volatile times? And your Gold Price Forecast for 2020?

MK…..Since I do not see gold as an investment vehicle, but rather a savings vehicle and portfolio insurance, where the price is going is a secondary consideration.  I do, however, believe that the price will advance to higher levels, perhaps much higher levels, and will not necessarily do so because inflation is raging.  Analysts continually overlook the fact that gold made its most spectacular recent advances during a time when disinflation dominated the economy.  That advance was based on high relative demand associated with investors seeking a safe haven without counter-party risks and disassociated from the various national currencies.  That hints to us that even in a deflation, assuming the price of gold escapes official price controls, it is likely to rise essentially on the fundamentals, i.e. supply and demand.  The protections provided by gold in an inflationary and hyperinflationary environments are well-known and part of the historical record.

Question:  What do you see for the US Dollar and the Euro during the next 12 months?

MK…..I suspect all currencies will continue to be debased by their issuers including the US dollar and the euro.  How they will do relative to one another is a matter for the pundits to sort out.  The most important consideration for any investor with respect to the virtues of a currency centers around its function as a store of value or its impotence in that respect. I hate to sound like a broken record, but gold and silver owners can detach themselves from the currency wars simply by diversifying their portfolios with gold and silver.

Question:  As you well know, The Peoples Bank of China and Japan’s Central Bank are the world’s largest holders of US Treasuries. They own $1.3 TRILLION and $1.2 TRILLION, respectively. In your estimation do you feel the Peoples Bank of China and Japan’s Central Bank will soon awaken to the imminent FOREX danger this represents…and will subsequently dump Uncle Sam’s fiat paper to diversity their dire risks?

And in the event The Peoples Bank of China and Japan’s Central Bank divest themselves of US Treasuries, might that cause a crash in the US Bond market…and a related crash in the value of the US greenback?  

MK…..As you might gather, this is a very complicated question worthy of a treatise in and of itself.  China’s needs in this respect might be considerably different than Japan’s, so it is difficult to address both in one mini-analysis.  I will stick with China’s situation for our purposes here.  My own view, in brief form, is that China is not interested in upsetting the apple cart in this respect and the reason is obvious.  They don’t want to undermine the value of their own reserves.  I suspect China will continue to buy most of the world’s mine production of gold and store it for future value and for the very same reason an American private investor would. 

China, unlike Western countries, actually encourages its citizenry to buy gold.  Likewise, its central bank, as recent reports confirm, is in the gold acquisition mode and likely to remain there for a long time to come.  Instead of dumping Treasuries, it is in China’s best interest to liquidate its FOREX reserves and Treasuries only if forced to, or if it decides to purchase other reserve assets, most notably gold.  When you consider China’s approach to the London markets and the UK with respect to both gold and bonds, you get a sense how they are going to play this.  China is more interested in synthesis at this juncture than antithesis.

As for bond market liquidity and whether or not it might force renewed U.S. quantitative easing, the market (mostly global investors fleeing stocks) absorbed China’s recent FOREX and Treasury sales. So nothing – no quid pro quo – is etched in stone particularly if things get pushed out of whack by another financial crisis.  For the average investor this translates to circumstances potentially changing radically overnight and without any tangible warning sign.  All of this, of course, translates to dangers for the economy and financial markets – a feedback loop of sorts of which every investor should take stock. Once again, a gold portfolio position would go a long way in addressing such uncertainties.

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Gold-Eagle’s staff and its global readership are very grateful to Michael J. Kosares for taking the time to share his insightful and timely wisdom with us.  You can subscribe to his News & Views newsletter here free of charge. USAGOLD offers contemporary bullion coins and bullion-related historic gold coins for delivery to private investors in the United States, Europe, Canada, Australia, and New Zealand.