Gold, Green and the Fate of the Dollar

Let's face it: The dollar's in bad shape right now, and it's not clear when a rebound might be in the cards. But for John Rubino, the greenback's current troubles are no surprise: He and colleague James Turk predicted this would happen back in 2004's eerily prescient "The Collapse of the Dollar, and How to Profit From It."

A Wall Street veteran and longtime financial commentator, Rubino has written three other books, including his latest "Clean Money: Picking Winners in the Green-Tech Boom" (Wiley, December 2008). He now writes for CFA magazine and edits the popular blog/news sites Dollar Collapse and Green Stock Investing.

Recently, HAI's associate editor Lara Crigger caught up with Rubino to chat about the fate of the greenback, the gold/green connection and how investors can profit from the clean tech revolution.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Back in 2004, you and James Turk published "The Collapse of the Dollar," in which you predicted soaring mortgage rates, tumbling home values, skyrocketing commodities prices - even the government's response of printing gobs of money.

John Rubino, author, "Clean Money" (Rubino): Yeah, so far so good for all those predictions.

Crigger: I don't know if "good" is the right word.

Rubino: Well, basically, the scenario we envisioned back in 2004 involved a few stages. The first stage is that [The United States] would borrow immense amounts of money, more than we could ever hope to pay off, which is what we did from the 1970s through 2007. Then that load of debt would cause a financial crisis, in which the banks got wiped out, mortgages defaulted on an unprecedented scale and people went bankrupt. That too happened. Then the next step is that world governments would open the floodgates: In order to avoid a 1930s-style Great Depression, they print as much new paper currency as it takes. And that's what's happening now.

The final step in this scenario is that this supply of paper currency not backed by anything causes the dollar and other paper currencies to start dropping dramatically. At some point in the maybe-not-so-distant future, people realize the cash in their pockets and bank accounts are being inflated away, and they bail on the whole concept of paper currency.

That's when we have a "rush to the exits" by everyone who owns dollar-denominated debt and cash. They try all at once to convert their paper currency into hard assets. You get selective inflation: soaring prices for real things that can't be created in infinite quantities by governments, like oil, precious metals and some kinds of farmland.

Crigger: That sounds pretty dire. Is there no way to save the dollar then?

Rubino: Well, if we changed course and decided to let the financial collapse just happen and flush out all the bad debt, then it's conceivable. We would have something similar to the 1930s instead.

But that doesn't seem to be the political reality. No major government is willing to let that happen. So they've chosen to try to inflate their way out of the crisis. And they're going to succeed, because we've got a finite amount of debt and an infinite printing press on the other side. These guys can create as much paper money as they want to, with the stroke of a pen or a mouse click, and they've proven they're willing to do it. Trillions mean nothing anymore. So it really looks like the destruction of the dollar (and most of the other paper currencies of the world) is inevitable at this point.

Crigger: So as people "rush to the exits" and into hard assets, it sounds as if it will create a panic in the commodities markets in the next few years.

Rubino: It does look like the governments are going to inflate until they can't anymore. When that turns into a buying panic for commodities, we can't know. But it's a reasonably safe bet that at some point, there's so much increasingly worthless paper currency out there that you get everybody trying to pile into real assets. And when that happens, we'll have a spectacular move. But there's no way to know when that will happen.

Crigger: Would some commodities fare better than others?

Rubino: It's hard to say exactly which hard assets will outperform the hard asset market in general, but because most of them are in limited supply, they'll do better than financial assets, which can be created in infinite quantities by government printing presses.

So my strategy is, spread it around: Buy some farmland, high-quality oil stocks, and of course, precious metals.

Crigger: Speaking of precious metals, where do you think gold goes next? When Bill Murphy was on our site, he predicted $3,000-5,000/ounce in the next few years, but when we had Miguel Perez-Santalla on, he suggested $700/ounce by December. What are your thoughts?

Rubino: In the short run, I think it's really unknowable. But in the long run, I think $3,000-5,000 is very reasonable. That's a little more than the inflation-adjusted high of 1980, and today's financial imbalances are vastly greater than they were back then. So it's reasonable to expect that it will peak at a real number higher than its historic high of $2,000-and-change. In fact, the last couple of thousand could happen in a matter of months, when everyone starts piling in.

Crigger: Will we see the same thing happen in silver?

Rubino: Well, silver's a thinner market, so it should be more volatile. But when gold soars, silver should go up more quickly in percentage terms: If gold goes up 20% in a given month, then silver could go up 30-40% easily.

Because of that, there are some spectacular gains to be had in the smaller silver miners if you choose wisely. You want to be careful and you want to diversify, of course, but in general, the precious metals junior miners are going to be one of the best-performing sectors in the next few years. Silver miners ought to be just spectacular.

Crigger: So does that mean silver will outperform gold?

Rubino: I think in the long run, silver will go up more than gold. But they're both good. I don't think you should own one to the exclusion of the other.

As far as what you want to own physically, they function very differently. Gold would be a store of value, but because silver is worth so much less per ounce, silver coins may be a lot more utilitarian as money, should it ever be necessary to actually use these things to trade for goods and services.

Crigger: I notice you haven't once mentioned the precious metals ETFs.

Rubino: The ETFs worry me a little bit, because they don't seem to have the kinds of strict controls as actual allocated storage on what they can and can't own or what they define as physical gold and silver. It's possible that based on their rules of governance, they could own futures contracts, or store their gold with sub-custodians that aren't auditable. It's not quite as clear-cut. ETFs are more of trading vehicles, but they aren't a substitute for physical ownership.

Crigger: You once wrote that "gold and clean tech are two sides of the same coin." Can you explain the connection?

Rubino: The huge amount of money that the world's governments are pumping out right now has to go somewhere. To some extent, it's going into upgrades into the infrastructure, especially energy infrastructure: solar, wind and smart grid technologies-the next-generation "green" or "clean" technologies.

So the same thing that makes clean tech a good investment also makes gold and silver a good investment, and it's reasonable to think that if you build a portfolio of clean tech stocks and good-quality gold and silver miners, you make out both ways, at least for the next few years.

Crigger: Certainly if oil keeps rising, it should help out the sector.

Rubino: Absolutely. Although in power generation, for something like a wind or solar company, oil isn't a direct competitor; they compete with coal. But in the mind of investors, rising oil prices will send a lot of money into solar, wind and other kinds of clean tech. If oil spikes, you'll see a corresponding spike in the best clean tech stocks.

Crigger: You recently wrote a book on clean tech investing, "Clean Money." Can you give us a synopsis?

Rubino: Sure. It's really what we talked about - this government money flowing into clean technologies. And a lot of these technologies are finally ready. They've been percolating for years, even decades, getting cheaper and cheaper. Solar, for example, is just about competitive. Say you put solar panels on your rooftop. You generate electricity at a rate about comparable to what you'd pay the local utility. And that just opens the floodgates.

The clean technologies that work here and now, the ones with an economic rationale beyond government subsidies and stimulus payments, have a long, long growth arc ahead of them. Solar, wind, geothermal, smart grid - and water, that's going to be a huge market moving forward, because basically we're running out of it in a lot of places. So the best companies in these fields are going to be the growth stocks of the next few decades.

The book was first of all to explain that, and second of all, to explain how to pick out of the hundreds of clean tech stocks the few that are going to do relatively well.

Crigger: What sort of strategies do you suggest?

Rubino: First, stick with the leaders in each sector early on. For the next couple years, stick with the big-name players, because that's how the money flows at first. You can make a nice portfolio by picking the top two or three solar stocks and wind stocks and so on. They're pretty strong companies with good balance sheets, real orders in hand, and they're generating cash flow.

Also, differentiate between green utilities and the not-so-green utilities, and buy the power companies furthest along in deploying solar, wind and geothermal power and subsidizing smart grid technology in their territories. Other things being equal, they'll do better going forward, especially with meeting all the new requirements in carbon controls.

You can also look at the "picks and shovels" companies that make the components or supply the basic raw materials going into these technologies; for instance, solar. Next-generation solar thin films use a lot of exotic minor metals and rare earth metals that, up until now, haven't really been hot markets. But if one or more of these new thin film technologies take off, you'll want to look at the companies that have mines that produce indium or tellurium, and so on. You can make a career just out of figuring out who supplies what to the different clean tech sectors.

Crigger: What sort of advice would you give to investors looking to jump into clean tech without getting burned? Because, frankly, this is starting to sound an awful lot like the tech boom in the 1990s.

Rubino: Yes, and it is going to be like that. There will be a lot of hype. The main piece of advice in "Clean Money" is to avoid the "story" stocks. A lot of companies will promise to have these revolutionary technologies that, if they work, will change the world. Ten years ago, in the dot-com boom, the same thing happened. All these companies came out and they'd soar, but only one in 10 ended up being an eBay or an Amazon. The rest disappeared without a trace.

So you want to be very careful in clean tech; don't buy a stock just because a company has a revolutionary-sounding technology. That's not enough. You need real orders in hand, an actual cash flow, a real management team that's competent. You need to be willing to pass on the early pop in a stock like that, and wait until it's real to buy in. That will save you a lot of heartache.

Comments

[ZagnZig:]

Has anyone researched which of the junior miners are going to be the best-performing? What are the most important selection criteria?

Interesting quotes:
“spectacular gains to be had in the smaller silver miners if you choose wisely”

“the precious metals junior miners are going to be one of the best-performing sectors in the next few years. Silver miners ought to be just spectacular.”

Thanks in advance !

Jun 26 06:57 AM

[CLH:]

Commodities and gold topped last year with a huge bubble. They are now forming a smaller peak as investors continue to deleverage.

Jun 26 09:13 AM

[Dave Dorgan:]

In general, a good interview, but there is one point that I do not understand: "The huge amount of money that the world's governments are pumping out right now has to go somewhere. To some extent, it's going into upgrades into the infrastructure, especially energy infrastructure: solar, wind and smart grid technologies-the next-generation "green" or "clean" technologies."

I may sound jaded, but I am genuinely curious. I know that $12.5B just got paid out to senior citizens. I know that enough bail out money was paid to the likes of Goldman Sachs that they made $681B in trading in the first quarter (check the FICC in the Form 8-K). I do not understand the "upgrades into infrastructure" part. Or, I should say, I'm not seeing it.

Instead, I think:
1) The technologies are maturing to the point where it's not just the environmentally conscious doing the "right/trendy cool thing" by investing in this technology, but it's the big money starting to see the next Silicon Valley type opportunity emerge.
and
2) The rise in oil prices makes this technology more cost effective - much like oil from sand in Canada.

Jun 26 01:02 PM

[Lara Crigger:]

On Jun 26 01:02 PM Dave Dorgan wrote:

> I may sound jaded, but I am genuinely curious. I know that $12.5B
> just got paid out to senior citizens. I know that enough bail out
> money was paid to the likes of Goldman Sachs that they made $681B
> in trading in the first quarter (check the FICC in the Form 8-K).
> I do not understand the "upgrades into infrastructure" part. Or,
> I should say, I'm not seeing it.

Pres. Obama and his administration have made no bones about their desire to upgrade the U.S.'s energy infrastructure; I think he even called for it in his inaugural address. They haven't made much move toward it yet, but it will happen eventually -- it has to; our pipelines are falling apart.

I don't have much time free to do a ton of linking at the moment here's some info about the need for an infrastructure overhaul here: energyxxi.org/pages/Bl...

I think you're right about the other points you made, too.

Jun 26 01:10 PM

[Lara Crigger:]

I couldn't find a place for his recommendation in the edited interview, but Mr. Rubino specifically mentioned in our discussion that he considers John Embry a great resource on this exact topic, as well as the writings of Doug Casey and Jay Taylor.

On Jun 26 06:57 AM ZagnZig wrote:

> Has anyone researched which of the junior miners are going to be
> the best-performing? What are the most important selection criteria?
>
>
> Interesting quotes:
> “spectacular gains to be had in the smaller silver miners if you
> choose wisely”
>
> “the precious metals junior miners are going to be one of the best-performing
> sectors in the next few years. Silver miners ought to be just spectacular.”
>
>
> Thanks in advance !

Jun 26 01:13 PM

[ZagnZig:]

Hi Lara Crigger,

Thanks for sharing your info and providing the lead - I will research some of the juniors !

Thanks for sharing,

Jun 26 01:29 PM

[AssetReset:]

DD is a MUST regarding Junior Miners, Junior miners can be in any of the exploration, development, and production stages with the most in exploration less in development, and even less in production.

The first thing you want to research is: mines
What does the junior make claims to?
What are their proven reserves? Inferred reserves?

Do they have mining permits?
Cash flow? (probably not, but if you find junior with a cash flow its a huge plus)
Financing?

Follow just a few juniors as minor news can make/break a junior.
Find ones with partnerships or JV with a financing partner (ie Silver Wheaton partnership)

These are just a few junior questions
I dont pump my juniors, because I am slowly cost averaging in

Disclosures: LONG junior miners


What you want to look for it this:


On Jun 26 06:57 AM ZagnZig wrote:

> Has anyone researched which of the junior miners are going to be
> the best-performing? What are the most important selection criteria?
>
>
> Interesting quotes:
> “spectacular gains to be had in the smaller silver miners if you
> choose wisely”
>
> “the precious metals junior miners are going to be one of the best-performing
> sectors in the next few years. Silver miners ought to be just spectacular.”
>
>
> Thanks in advance !

Jun 26 04:07 PM

[Donald Ingram:]

Good place to find and research juniors is on the Canadian TSX Toronto. A great many mining/exploration companies begging for capital. Bonus point - you get to diversify out of USD and into CAD, with the added bonus of a favourable exchange rate, for now.

Jun 26 08:36 PM

[SageNot:]

You gold bugs make me laugh!

What, pray tell, would you suggest the world's population do for exchange related currencies? Some idiots think that bags of gold dust will prevail, seriously. Others think that certified script on gold hoards will do.

Unless you have an Army at your disposal, who's going to protect you & your loved ones from outright theft of your gold dust, or scripts & certifications?

What's more likely to happen one day is either a basket of the strongest currencies, &/or a basket of commodities with set values will suffice. Right now the country with the most formidable military/defense w/b the USA, & before us was England's lb. until WW II broke out.

If you don't read (& understand) world history who's fault is that? Follow these gold bugs & their selfish interests at your own peril.

Amen.

Jun 27 07:41 AM

[The Recusant:]

SageNot - Trying to preserve one's wealth whether investing in gold or TIPS or stocks is equally selfish. Capitalism = selfish interests. And THAT'S history. You may have missed the point that the fiat currencies are subject to hyperinflation from time to time and that precious metal stocks and bullion ownership are a way of preserving wealth - historically. One does not need to actually use bullion as a currency. Whether one cashes out their stock or sells their bullion for dollars, they are bound to get more back if the perceived value of gold and silver have risen. England's pounds and the US dollar USED to be backed by something - GOLD. Now, it's just promises, while China and Russia are buying up gold and lowering their dollars reserves. That should tell you something.

Jun 27 04:32 PM