Gold is starting to move and David is of the opinion that a major pull-back is not likely.
David is focusing on the Canadian small caps as this is where the biggest moves can happen in the initial first run. Now is the time to invest to be able to make multi-bag profits. Many stocks are undervalued.
Japanese and European bonds are at negative interest rates, negative interest rates in general are pushing more and more money into the gold sector. Governments globally, particularly the US are in so much debt that a normalisation in interest rates would render them bankrupt. One of the major bond markets is likely to blow up, pricking the sovereign debt bubble.
Contrary to popular opinion other commodities are likely to rise along with gold. This may also be the result of highly inflationary money printing. If gold continues it rise at some point there is likely to be a major slap-down, probably in the form of a major event.
Palisade Radio Host, Collin Kettell: Hello everyone and welcome back to another episode of Palisade Radio. It is Saturday, March 12th, the weekend following PDAC, and for those that were not there it was an exciting show. Attendance was a bit lower, if my guess was correct. But the excitement of the show certainly mirrored the action of the gold stocks for the past month and a half. On that note, I am back in the Bahamas with my good friend, David Skarica. He, of course, is at the time right now a market bear and a gold market bull. We have talked to him about this in the past but not for a few months. David, welcome back on the program.
Financial Author, David Skarica: Thanks for having me.
CK: Let us start off with gold. That is what is on people's mind. It is moving. Some people think there is going to be a pull back. You have indicated to me you do not see a pull back for quite some time.
DS: Yeah, what I think we are in is if you look at the downtrend in gold, actually there is a most similar market I have seen to it. It is actually not a past gold market but it is this equity market from 1980-1982 in that the stock market, the S&P, or the Dow had this very choppy downtrend and then there was a lot of negative sentiment. Then in August of 1982 there was this huge breakout and essentially the market went almost straight up for eight or nine months and then there was a correction. Actually it went even a year the market went up and then there was a correction in '84 and then it went up into the '87 crash. That is what I see happening now.
Basically what happened in a nutshell and that is there was basically a huge four to six-month move in the stock market without a real big pull back. That is what I am seeing here in gold is that everyone keeps thinking there is going to be this 20 or 30% pullback in the stocks and gold is going to pull back to $1150 or something. I do not see that. I see that we were down $20 on the Friday before we did this episode, on Friday, March 11th. But I do not really see this huge pull back happening. I see these very shallow pull backs and just like we were like everyone sold into the rallies in the bear market, you are seeing them going to be buying the pull backs.
One of the major factors I think is the commitment of traders and all these things can still be used for trading gold, but because of the advent of these ETFs like the GLD, one of the reasons the gold went down for four years was the GLD had outflows for four years or five years. Now the GLD had something like forty or fifty straight days of inflows which is a record. When this money comes into the GLD it then has to buy in the physical gold market, so until there are outflows in the GLD it is going to be very difficult for gold to have a sustained decline. That is what I am seeing right now is that it sure can get to $1230 or $1225, yeah, why not? But I do not really see us having a huge pull back. From what I am doing in my newsletter is we are really mostly in these small Canadian-listed miners let us say have one resource or one property or one producing mine because these are the stocks where had the most leverage.
Even though I am a younger guy, this is now my, I guess, third or fourth bull cycle in the gold market. I have learned from the other cycles that in this kind of first move up these smaller producers of stocks that can go up 100, 200, 500, 1000%, that sort of thing. I am tended to be more invested in them now. You know I have small positions than some of the larger miners, but what was really where we have been we have already added a couple of these positions at 40, 50, 100% just in this first move of a couple of months. What is kind of funny is I have a large short position in the market. We did take some off when the market sold off and we are adding to that now. But even with myself gross about 20 to 30% short, I am still making a large amount of money in my portfolios because these smaller miners are doing so well.
CK: As a side note our friends over at Visual Capitalist just put together a great chart that came out last week. It has been quite impressive as David just noticed. David, we were just talking earlier about how looking too closely right now might actually hurt you. For example, people really studying the technicals right now, you were saying, well, that does not really work when things were just oversold and the bottom is in. People are looking for any excuse to wait to buy and then they jump in to buy because they think they are going to miss the boat. Talk to me about the thought process that is going into creating this bull and how something like this could sustain for three or four months straight before having a sizable pull back?
DS: I think on the fundamental side, one of the key things that happened on the last couple of months was when Japan went negative interest rates because I know some places in Europe have it and blah, blah, blah. But Japan is the second largest bond market in the world. When their 10-year bond went negative for a little while it actually meant that something like- there was already something like $2 trillion of bonds in the world that had negative rates, because Japan had so much debt and their 10-year bond market is so big when that went negative it jumped to $10 trillion or something. No one is going to want to buy a bond with negative rate.
This whole thing where gold does not pay interest, well, gold is actually going to keep its value, too. That pushed people into gold. I think it even helped the other metals: copper, iron, all had short squeezes. I think these negative interest rates play a big, big role in this and then even though it caused a short term selloff on Friday the European Central Bank just went more negative. I think that is something with when you are talking to people about following technicals and this sort of thing, they are ignoring that we are kind of in this unique situation no one has ever seen before where we have all these negative interest rates. Negative interest rates mean people want a return somewhere and that really makes gold even more and more attractive.
Then it works on the opposite side, too, where when you have negative rates it means the price of the bond is going higher. People can say, "What happens if the bond sells off 50 basis points in Japan or Germany?" Well, guess what? That means the price of that bond will tank. Even if you can say, "Oh, I am getting more interest," but anyone who owns the bond loses a lot of money when the rates go higher and that actually makes gold more appealing now. I think these kind of like bubble kind of conditions in this global bond markets are a big influx into the gold market.
I think that, again, a lot of the people who were just looking at technicals are kind of ignoring this kind of unique situation. I learned from my mistakes and that, too, is that I used to be like ten years ago more of a technical guy. I am actually much more of a fundamentally-based investor now because you see scenarios like this unfolding in one-time events like negative interest rates. For example, all financial engineering on the bear side in the stock market, you see these things that really technicals cannot explain and you either go short along based on more of these fundamental phenomenon.
CK: I think negative rates are going to play a huge role here. Our friend, Jordan, over at The Daily Gold wrote a book talking about this a few months ago. He has been pretty on point. We just did an interview, if our listeners have not heard it, with Etai Friedman that came out just a few days ago. It is going to be one of our most popular interviews ever, just gaining a ton of traction what he talks about. He is a super bear right now. He even thinks negative rates are going to come to the US which, of course, they are now in Japan and Europe which are the other two major instruments that people are looking at for treasuries. But he thinks it is going to come to the US now. What do you think?
DS: It is going to be a little more difficult to come to the US and this is why there has been more reluctance to bring them to the US. Yellen did mention it, but the problem is US has this huge, gigantic like annuity and insurance industry. Obviously, there are insurance companies in Japan and Europe as well, but the US even more so. Insurance companies need yield of long term bonds to survive. Really it is going to be much more difficult to do this in the US. But it could still happen because one of the reasons for negative rates, and no one never talks about, is these central banks lie. They say, "Oh, it is about inflation. It is about this."
No, part of it is like Japan has debt to GDP at 250%. Many of the European countries, not just Greece, like Italy, have well over 100% of GDP. Actually all levels of government in United States including state and municipalities, US have 130% of GDP. It is actually almost the same level as Italy.
One reason we have negative rates is if rates went to 3, 4, 5% normalized, these governments, even with low rates like that would almost basically broke. A lot of negative interest rates actually just to keep governments alive and in the end governments are going to do what they can to save themselves as opposed to like the insurance industry, right? I definitely think it could happen. It is going to be a little more difficult, again, because of the financial aspects of the American economy. I think when you look at the two most financialized economy it is probably the US and the UK, and that is why that is two of the places you have not seen negative interest rates.
I think that kind of financialization, huge financial sectors in the economy, are playing a large, large factor in us not getting negative rates. But, again, if you get another downturn in the global economy go look to what happened to the debt to GDP everywhere, from the US, from countries in Europe during the last recession because the deficits widened. Obviously economic growth slows down, so all of a sudden you go to 160, 170% debt to GDP at all levels of government in the US. You are going to want negative rates to kind of keep that system alive.
I think in the short term you will get it. But I think negative rates ultimately will kind to be the final nail in the coffin or top of the sovereign debt bubble and probably it will just take one country. Maybe it is Japan. Maybe it is Italy. Maybe even the US bond market blows up first because the disadvantage of being the reserve currency is when things get ugly Japan and China are going to sell their US bonds. I do not know who is going to be first. I would think it probably be one of the large western European economies like Italy or Japan, but one of these bond markets is probably going to blow up and that may start the sovereign debt bubble kind of unraveling.
I do not see that in the short term but I think that is where the negative interest rates will ultimately yield. But he could definitely be right. We can see negative rates before that happens because the central banks basically make stuff up as they go along and they change the rules as they go along, so they might do that as one final kind of desperation gasp.
CK: Many investors, including yourself, have been prudent to stick with the majors at the beginning of this move. Looking at Barrick at the price it was I know you would recommend buying some, you are up 100% which is a crazy amount to be up in just a couple months on a major stock. Not to sound like a broken record but I want to go back to the idea of investing in private placements in getting warrant exposure. I know that you made just a ton of money back in early 2000s with that strategy.
Just to use an example of the amount of money that can be made, Pilot Gold just closed a financing a few days ago and they had it done at $0.25 with a full warrant at $40 and the stock is already at $55.60. Rather than just going over a little more two times your money, the people who participated there have already tripled their money, just the type of gains that you cannot make investing purely. I know that you help some of your subscribers out with looking at private placements. Talk to me just generally about getting involved in placements and why you see so much value there in a bull market?
DS: Well, obviously, I am not like promoting these companies or anything. But if people are interested who are subscribers have a certain list that is a higher end list, if you ask me about it I can always tell people about something I am doing or what not. You can get in too. But the advantage is quite simply this like in a nutshell is that let us say you have a 10-cent stock and there is a warrant at $0.15. It is really simple math. You buy $10,000 of the stock, 100,000 shares, at 10 cents; the stock goes to a dollar, so ten goes to a hundred. Well, if you exercise that warrant at $0.15 it means that it costs you another $15,000 to also make that to be a hundred. All a sudden then instead of just buying stock at $0.10 and have a go to a dollar, so ten grand to a hundred, basically then if you take on that new money you put twenty-five grand in the deal to go to $200,000. You can even, of course, sell some of the stock at a dollar and then rotate it and exercise the warrant. You might still only have that initial ten grand on the table and all is said and done.
This is like really, really the way that more sophisticated investors can kind of play the market. Now I had been very disciplined where since the market kind of busted really in 2014 and 2015, I did not do one private placement because I just thought it was too early, right? But now I am starting to get involved again because it is a trickle-down effect. You said the majors go first and these mid-tier companies go, and then these smaller juniors will begin to go up. I think really begin to go up when gold starts going to $1300 or $1400.
But anyhow I think now is kind of the time to get in that mold and like you said. Yeah, really, in the last bull market I made some money doing it, but really that 2002 to 2007 period I made a significant amount doing that. Like I said it gives you this leverage. It gives you this ability to exercise and buy more shares. The junior marketing, the advantage of being in the States and Canada is probably the best junior market in the world is in Canada, so it is there on your doorstep. But if you are an American you are also buying the dollar, $0.75 on the dollar, and it is a great way for an American to get exposure outside the US dollar. Because let us say even though- I do not know. I am not that bullish on oil right now, but if all resources begin to move higher especially gold, Canadian dollar ultimately will continue to drift higher to the 80 and 90 cents range. Also being in these private placements gives you exposure to that.
But, really, you do not care about that. It is just more about making five or ten times your money and, really, this is the time to do it because, again, learning from my past experiences in bull and bear markets I am not going to be that interested in the private placement market when everyone else is; when the market is bubblish, when it is hot. But now if we are right and we are in the early stages; this is like the first inning of the next phase up in the gold market, then this is the time to start doing the private placements and really do them for the next few years.
CK: Yeah and I know that some of our listeners are quite sophisticated and participate in private placements themselves. If you ever have any further questions about that feel free to just flip me an email at email@example.com or also send David an email and ask him for more information.
DS: One thing I have done is I have a lifetime subscription for $2500 and also I have a shorting service, and it gives you also a three-year subscription to that shorting service. But also what I am going to do with this lifetime subscription because most of the people tend to be more sophisticated or credit investors is that I will post like private placements that I am doing there on the member's page for these lifetime subscribers, and then you could write me back if you are interested or what not.
CK: Yeah, thanks for that. Okay, I want to talk to you about something not quite as gold specific. There is such a convoluted definition of inflation versus deflation. On the one hand, inflation is purely the fact that there is more money out there and it is not worth as much. On the other hand, people are claiming we have been in a deflationary scenario for the last couple of years despite the fact that there is more money in almost every single currency. Because you are multiplying it times the velocity of money your "inflation" is lower. There is no point in arguing the definition to that.
What I want to get into there had been a lot of people that said gold and silver will go up, the other commodities will continue to go down because there will not be global growth. I call BS on that. I have been saying that once gold and silver starts to go up my feeling is that since everything is going down in tandem and all that really means is that the price of the fiat currencies are lower; that in fact copper and iron and ore and all these other industrial commodities will go up. Guess what? That is already shown that it is happening. We do not know that it is going to continue. I want to ask your opinion is gold the only place to be or are you interested in these companies that are producing other commodities?
DS: Well, I think at some of the commodities like iron ore there was just a big short covering rally. But some of the commodities that do have big gluts like iron ore they are going to take a little while because you got to work through that glut. Oil is the same way. But I tend to agree with Milton Friedman, the famous economist; he used to say about inflation. I do not agree with Friedman on everything, but I agree with him on inflation where he says that inflation always is and will be a monetary phenomena.
What he is basically saying is that if they print too much money- it does not matter if economic growth as weak. In every country that has hyper inflation like Argentina had or Venezuela right now, economic growth is weak. It is just that they are printing too much money and there is too much money flopping around chasing too few goods and prices go higher. My feeling is that- and this is actually my feeling from all along in 2000 when I started getting involved in commodities. I did not believe in the commodities super cycle or up cycle because of China and India. I believed it because all these western governments are broke and will have to print money and they will create inflation to kind of inflate away their debt.
For example, Japan, which has been in so called deflation, I say so called because, you know, go rent a one bedroom apartment in Tokyo for $4,000 a month and call that deflation, right? But, anyhow, I say Japan, which has been in deflation for 25 years; usually these deflationary debt spirals end in hyper inflation. Actually there was deflation in Weimar, Germany before hyper inflation. What I feel is in the next monetary kind of printing that goes on right now, this has been a financially induced bubble by monetary printing. It has all gone into stock market. It has all gone into buy backs. It has all gone into cheap debt. That was how you got the big boom in fracking and that sort of thing.
But the next time around when that bubble ends and people realize, "Well, that did not work," you know, putting all these money into financial assets did not work. I want to protect myself because these companies can issue more debt. They can issue more shares. The central banks can issue more money. I want to be in real stuff. They cannot print copper. They cannot print gold. They cannot print even oil and gas even though it is a glut right now.
I think ultimately this and the next monetary cycle it will go into commodities and people will not know what is happening. They will say, "Well, China's slowing down. This is not doing well, blah, blah, blah." I actually think when people say the commodity super cycle is at an end, they do not get that. They think it all had to do with India and China. My opinion it is going to have to do with monetary inflation.
Also look at it this way: In the 2000s when we had this commodity boom it was not just China. It was that was the peak of the dollar back in 2001, that was the first round of near zero interest rates under Greenspan during the housing bubble, and that also inflated the prices of commodities. I think we will see a certain area on the next move more similar to the '70s where you will have this inflationary spiral in commodities due to the monetary printing and not really due to economic fundamentals.
By the way, these commodity indices that they say are going to 15 or 17 or 18- year lows, it is kind of BS because what has happened is they get reweighted all the time. If oil and gas goes down 30% it is reweighted back higher and then it goes down another 30%. That is the problem when you are reweighting all the time because- give me one commodity outside, let us say natural gas, that is below its 1998 low. Silver was like $4 then. Silver still was like $14, $15. Gold was like $300 then. Gold is almost a thousand dollars higher. Even oil and gas bottomed in the mid teens then; oil and gas is north of $30.
Every commodity has doubled or tripled for the most part its 1998 low yet these commodity indices are saying things are getting 20-year lows. It does not make sense. My opinion is if you go look at some of the other commodity super cycles- I will quickly talk about one just to end off here. But the '30s and '40s, believe it or not, even though everyone thinks the '30s was deflationary and the Great Depression from '29 to '32 was, but actually there was a huge commodity boom from 1933 to 1951. In the middle of that boom during the '37, '38 recession, which is I think similar to what we are going to see here, there was this huge decline, took back almost all the gains of the move from '33 to '37. Then when the money printing came in and World War II came in and that inflated the prices and created demand for the war, whatever, for planes and tanks and blah, blah, blah, there was a huge commodity boom in the '40s.
I think we will see the same thing here where we are seeing this kind of bust which is taking away a lot of the gains the last ten or fifteen years. But then on the next move when they print money again you will see a boom higher.
CK: Alright. Let us finish off talking about the general market. Your newsletter actually has done so well in the last few years because you have not been invested in gold at the wrong time. You have been really focused on the market, trading it up, and now you are really adamant as was our guest a few days ago, Etai, that the market is probably about to enter a cliff event. I think you were talking the other day about the roadrunner going over the cliff and looking down and like, there is this huge drop. There are so many reasons that could happen. I think the last time that you came on the show you told our listeners about Sotheby's and you were short that. It was not like $35, $40 and it is down to low $20's now. You have been able to pick out some good stocks, but really the crash has not happened yet. We have had a pull back. Are you still adamant that a crash is coming and how soon?
DS: Well, see, here is what I think. I do not think it is a crash like '87 and '29. One interesting fact that no one talks about '87 and '29, both these crashes - and this is amazing when I tell you this - happen exactly 55 days after the market topped, which is unbelievable that 60 years later the exact same time frame for a crash to occur. But a crash like that when you have a parabolic blow off, they usually happen like that, like two months or so after the top.
I am looking at more like a bear market almost similar to what the gold stocks went through where the market basically spent a year or two topping out just like it did in like from about late 2010 into, say, early 2012 and then in about mid 2013 then boom, there was a huge smack down in the gold stocks. If you look at from about April 2013 to June 2013 the gold stocks fell almost 50% in just that two, three months. What I am looking for is we are still in this big topping formation between about $1800 and $2100 on the S&P500. The actual number is about $1810 to $2130 and we are still topping out. Many stocks have rolled over. Market is only off 5% from its top, but I can tell you a lot of the stocks I have shorted have fallen 20, 30, 40, 50%, so many stocks are down more than that. Even though they come off their highs all these fang stocks they are still kind of in the stratosphere. What I think is that at some point and I do not know if it is this spring, this fall, next year, we are going to have that big smack down move where the market breaks the 1800, and just like the gold stocks you have a 2, 3, 4-month whacking where the market can fall 20, 30% and that.
I think what will happen during that period is the market will not respond to monetary stimulus or whatever. It will be like 2008. It will just like really tank for that short period of time. But I think because the central banks, we just saw what Europe did. They are printing €20 billion more a month. They are doing negative interest rates. Japan, of course, the Fed will not hesitate to do QE again. I think what has to happen is we need some kind of an event. I do not know if the event is China devaluing in a big way, Deutsche Bank or something like that going under energy debt causing mass, say, bankruptcies in these regional banks in the United States. I do not know what exactly this event will be, but when you have an event like that like a credit event it is too big for the central banks to save right away like 2008 was.
I do not know when it is going to be, but I do know that at some point we are probably going to get some kind of event where the ECB cannot come in and say, "Oh, we are printing ten billion more month if the market goes up." No. It will like freeze up the system and the Italian banks are sort of in a lot of trouble, too, right now. I do not know what it will be, but that credit event will probably be the event. I do not know how gold will act during that event, but I can tell you out of that event- this is what we are talking about the inflation of all commodities when they print more out of that event that is when I think gold will just go completely gangbusters.
Right now we have a shorting service where we just straight up short stocks. I actually try to short based on total fundamentals of companies. I look for companies with too much debt, who have declining business models, who are using financial engineering to create earnings and their own fundamentals are slowing. I kind of short these companies like, "The hell with the market. I am just shorting this company because I am thinking go down no matter what." Then if the market obviously drops that increases the velocity and downward of the short. Then we also use put options and this sort of thing.
I think I am very well balanced right now. I do actually have some longs, regular longs. I look for beat up, cheap companies. We have longs in the precious metals market and then I am still keeping a 20-30% short position. Let us say everything else even the gold stocks went down 20-30% in a major market meltdown, I think that short position would go up 50 or 60% and then that would cut the loses or even if we can make money while the market kind of went down. Because like for example, last note here, it is not just the guys in the big short; George Soros took a big short position during 2008 and he was not doing CDS; he was just hedging like shorting the actual market, maybe buying some put options. But Soros' funds still made a couple percent in 2008 because he hedged.
That is, by the way, how the real good investors really make money in the end. It is not huge gains. It is like if you look at guys like Templeton or Soros or Buffett, they usually do not really outperform much in the bull markets. What they do though is in the bear markets if the market drops 30% their flat or only lose 5, so then they are set up for the next up move without losing a lot of money. If that is really kind of the key I think hedging is a huge key and I think this is a quick note for your listeners. I know a lot of people now can become complacent if you are bullish precious metals because now they have had a good move for a few months. But even if we do not see a 2008 scenario, even if we see the '01, '02 scenario where gold stocks go up while the market goes down and the last leg lower in mid 2002- and I remember this because I owned gold stocks at the time. The HUI which bottomed to 35 went to 160. It declined 40% in just a few weeks when the market just had the last smash lower, so it went to about a 90 to 100. All I am saying is probably when that last smash comes gold stocks will get taken down with everything else so it is good in my opinion to have these hedge positions on.
CK: Yeah, well, I appreciate that, David. You can tell in your voice you are passionate about these shorts. You actually call me a couple times a month and you are really angry and upset about the financial engineering and some of these crappy companies that you find. David, any other comments that you have for our listeners?
DS: Yeah, on the short side because that guest you had on talked about shorting subprime autos. Look we are average people. We do not have access to credit default swaps and these sophisticated things or the capital. What I do is I look for like I see- okay, there is a bubble in subprime auto lending and I have a stock, we were talking about earlier at breakfast, that I have a short on which is an indirect way to play the bursting of that bubble. This is a stock that actually in every bear market the last fifteen years has gone down 90% in value. It is a very leveraged company and that can obviously give it away. But that is what I am saying. If you are kind of interested in that kind of thing where, "Okay, you think this is a bubble or this is going to blow up."
Like, for example, with people talking about that China won blowup there are actually a couple companies that you can short instead of having to buy- no way you are going to buy credit default swaps in Japan or be able to do what Carl Bass is doing and short the won. The average person just cannot do that. But there are a couple companies that you can short that are multinationals, traded at NYSC, and they are totally depending on China for growth. You short these companies, they devalue the 120%, boom, that destroys a lot of these companies' profits and they tank. That is also a way I give away the average investor can profit from some of these kinds of things blowing up because they cannot use these tools that sophisticated investors can use.
CK: That is right. I think the title of this interview, David, I said earlier on this is just the first inning, the tides of change. The overall market is not looking as strong and gold stocks are really flying at this point. I do not usually promote anything but for anybody that is not familiar we also have an arm of our company called Palisade Research. Thank you so much for tuning in and many thanks to David for coming back on the show and giving us his insights.
David Skarica is the founder and Editor of Addicted to Profits, a popular newsletter known for its stellar performance in both up and down markets. Skarica entered the financial markets at a very young age and, at the age of eighteen, became the youngest person on record to pass the Canadian Securities Course. He is a regular speaker at trade and investment conferences in Canada and is a guest on the Business News Network (BNN), Canada's flagship business broadcasting network. His work has appeared in publications such as the Bull and Bear Financial Report, Barron's, Investor's Digest of Canada, and Canadian MoneySaver. Skarica also writes Gold Stock Adviser, an investment newsletter for the conservative media outlet, Newsmax. David's newest book, Collapse, is available on amazon.com.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.