From his vantage in Geneva, Edward Karr, the founder of the investment firm RAMPartners SA, tells The Gold Report why European bankers are destined to inflate their way out of structural crisis and why that is good news for the price of gold. Karr believes gold has bottomed and should explode upward.
The Gold Report: Let's talk about the Foreign Account Tax Compliance Act [FATCA] of 2010. What is the FATCA regulation?
Edward Karr: In March 2010, Congress passed the Hiring Incentives to Restore Employment Act. The HIRE Act was intended to stimulate domestic jobs in the U.S. FATCA was quietly slipped in as a very small part of the HIRE Act. In a nutshell, FATCA makes every overseas bank, financial company, hedge fund, mutual fund, broker, and dealer an enforcement agent of the U.S. Internal Revenue Service. Starting July 1, 2014, these financial institutions are required to turn over their data on U.S. clients' and U.S. persons' accounts.
Implementing FATCA is costly because many foreign financial institutions did not have the compliance systems and information technology in place to report on U.S. persons' holdings. Banks are being forced to spend tens of millions of dollars to upgrade their systems. And if they do not provide the information to the U.S., the penalties are extremely severe. The U.S. government can levy a 30% withholding penalty on any business that the institution does in the U.S., including trading U.S. dollars, equities, bonds and fixed income instruments. Noncompliance effectively locks a firm out of the U.S. markets.
TGR: FATCA was set up to stop people from cheating on their taxes; will it have some effect?
EK: FATCA goes after a mosquito with a sledgehammer-or in mining terms, uses a D11 bulldozer to move a small pebble. There are 7.6 million [7.6M] U.S. citizens living outside the U.S. who are caught up in this war on tax evasion. However, an organization called Republicans Overseas is launching a constitutional challenge to FATCA lawyered by Jim Bopp. He is the attorney who took down the McCain-Feingold campaign finance law in the Supreme Court. Bopp is confident that FATCA will be overturned.
TGR: Looking forward, then, what is the economic outlook in Europe for gold, commodities and stocks?
EK: The overall European economic outlook is the same muddle-through situation that has dominated the continent for the last couple of years: slow economic growth and possible deflation. After the financial crisis of 2008-2009, the U.S. proactively recapitalized the financial system in the U.S. The European banks still need to be recapitalized. The European Central Bank [ECB] has done a really good job in defending the euro, but the underlying problem of high debt levels on the banks' balance sheets has not been addressed.
Greece is not really a big problem, but keep a close eye on France. It has a very slow growth rate, high debt levels and is basically an economic train wreck in slow motion. In addition, we are seeing a resurgence of ultranationalism in the polls. Europe desperately needs inflation. Deflation, of course, is a central banker's worst nightmare. The bankers need inflation to avoid deflation. The ECB is going to have to start running the money printing presses around the clock. I just see no other way out of the dilemma. The banks can only inflate their way out of their crushing debt loads. And rising, higher inflation means higher interest rates, which is very positive for the gold markets.
TGR: How will higher interest rates impact the gold markets?
EK: As inflation and interest rates rise, so does the consumer demand for gold. People buy gold as a safe haven and a store of value. I have a positive outlook for gold and gold equities as Europe recapitalizes its banking systems and the prices of precious metals explode upward.
TGR: What about banking systems in other areas of the world?
EK: China escaped its last financial crisis with a massive government stimulus program. As a result, China is trapped inside one of the biggest credit bubbles in the history of the human race. Some people believe that when the bubble pops there will be a very hard landing. But with the stroke of a pen, the Chinese government can address economic issues much more effectively than a bunch of European bureaucrats sitting around a table.
TGR: Will inflation hit the U.S?
EK: Because the U.S. banking system is in great relative shape, there will be a resurgence of domestic manufacturing. The U.S. has a lot of land and has plenty of capital and technological savvy. It has abundant, cheap energy compared to the rest of the world. As the manufacturing economy takes off, inflation will gradually pick up there, too, which is positive for gold. Today's gold price of $1,319/ounce [$1,319/oz] is the new base price, in my opinion. Precious metal stocks are extremely cheap right now. This is a great time to buy.
TGR: Do you have any precious metals stock picks for us today?
EK: I like the metal royalty companies, such as Royal Gold Inc. (NASDAQ:RGLD) and Silver Wheaton Corp. (NYSE:SLW). These stocks should be core positions in any portfolio. They are going to continue to do exceedingly well regardless of where the underlying precious metals prices go.
TGR: Thanks for your time.
This interview was conducted by Peter Byrne of The Gold Report and can be read in its entirety here.
Edward Karr is the founder of RAMPartners S.A., an investment management and investment banking firm based in Geneva. Since 2005, RAMPartners has helped raise more than $200 million for small capitalization companies in fields such as natural resources, high technology, health care and clean energy. Prior to founding RAMPartners, Karr worked for a private Swiss asset management, investment banking and trading firm based in Geneva. Prior to moving to Europe, Karr worked for Prudential Securities in the United States and has been in the financial services industry for 20 years. Before his entry into the financial services arena, Karr was affiliated with the United States Antarctic Program and spent 13 consecutive months working in the Antarctic, receiving the Antarctic Service Medal for his contributions of courage, sacrifice and devotion. Karr studied at Embry-Riddle Aeronautical University and Lansdowne College in London, England, and received a Bachelor of Science in economics/finance with honors from Southern New Hampshire University.
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