L: Well, Doug, we've seen another quarter of high volatility and significant world events. What strikes you as most important at present?
Doug: Everything is still held together with chewing gum and baling wire, for which I'm grateful, considering what's coming. It's very clear to me that the global economy is in very much the same space as it was in 2007-in other words, on the edge of a precipice.
L: On the global economy, my question is this: If Obama and Yellen have saved the US and Merkel and Draghi are saving the EU, why are commodities selling off so dramatically? Iron, copper, oil-just about everything is selling off. How can an economy be recovering if it's not using raw materials?
Doug: That's another reason why I believe that the Greater Depression started in late 2007. During a depression, people are forced to consume less, and you see that reflected in the price of commodities-at least in real terms. This can be obscured in current price terms, depending on the debasement of the currency in question.
But it's important to remember that commodities are only a good bet when they're cycling upward, and that only lasts for a time. The longest trend of all is the downward trend of real commodities prices, as the march of technology makes them and the cost of life itself cheaper over time. Real commodity prices have been going down for at least 2,000 years, but probably 4,000 or 5,000 years-at least since the invention of agriculture. And I think they will continue falling, despite the fact that most large, high-grade, close-to-surface mineral deposits have been discovered.
L: Hubbert was right about "peak oil" in terms of West Texas Intermediate, but oil is still getting cheaper because of the fracking revolution.
Doug: Exactly. Because we've made so much money on commodities and because we believe in gold and silver as money, people think of us as commodity bulls. But actually, in the big picture, I'm a commodity bear, and always have been. Nanotech will transform city dumps into high-grade ore bodies. The asteroids will be mined at low cost. Ocean water will be processed economically. It's simply a matter of technology and energy. The future could be-should be-better than we can even imagine.
L: I understand that-but I have to step in here and remind readers that gold is not a commodity-or at least not a regular commodity, since it's also the most successful and enduring form of money ever devised.
Doug: Yes. No matter how many times we tell readers that no one can time the market, they still want to know what I think of the timing of the gold market.
So let me tell you that even I have been feeling a bit abused and unloved by the market over the last couple years. If I'm feeling that way, I'm sure the average person in the sector is feeling it in spades-and that's actually a strong sign of a bottom.
It's not as if we're buying at $35 in 1971 or $250 in 2001-both times when gold was clearly a one-way street. But at $1,200, it's very reasonable considering how explosive the world situation is.
L: That's why we call it contrarian investing.
Doug: It's pretty stark. Most of these crappy little mining stocks have no money, no management, no assets. In bull markets, they're still crappy companies, but they can raise money, drill some holes in the ground, and hope to get lucky. But now they're turning into shells, and that's another sign of a resource sector bottom.
On the other hand, Wall Street has been rising for about seven years now, which is record territory. Several major indices have hit new records. These are signs of a market top. If the market collapses, it can take everything down with it. Mining stocks are also stocks.
L: What about earnings? Don't higher Es justify higher Ps?
Doug: They do, but earnings can be pumped up by things like sacrificing sustaining capital to maximize near-term profit or buying back shares instead of investing in new growth. As per your question about commodities, I don't believe the real economy is truly in recovery, and I don't believe the earnings we've seen are sustainable; I expect them to collapse.
That in turn could produce a general stock market crash as happened in 1929 and on into the 1930s. The odds are overwhelming that that's going to happen to the bond market, and if the bond market crashes, that's going to devastate the stock market, which will in turn bring down the real estate market.
L: There you go again, Mr. Sunshine.
Doug: You know I'm not trying to be perverse-that's just the way the world is.
L: So what does that leave?
Doug: Most people would say cash, but as we've seen in the last few years, every government in the world-including the US and EU-is more than willing to print unbelievable amounts of money to try to paper their problems over. That's going to go into hyper-drive in the next round, trashing the value of currencies around the world as it does.
L: But gold is the real cash of the world-always has been.
Doug: Yes. We can't stress enough that the primary reason for owning gold today isn't to speculate on its price rising, but for prudence, for wealth preservation. For speculation, that's what gold stocks are for, especially the kind you follow in the International Speculator.
The good thing about all the money printing is that we can predict that it will create more bubbles. Hopefully these stocks will be among the bubbles.
Currencies come and go, but over the centuries, gold has always held value. About 100 years ago, you could buy a good suit with an ounce of gold, and that's still true today-and I expect it will still be true for the foreseeable future.
In fact, as unlikely as it may seem to mainstream economic thinkers today, one of the more likely outcomes of the financial turmoil ahead is that some country or another is going to reinstitute the gold standard.
We don't need a gold standard, of course, or any currencies at all, for that matter. People just need to be free to own and trade in gold. Period. Today, it can be represented by computer bits on your iPhone, of course.
I think it will probably start with China or Russia, or possibly an Islamic country serious about its interpretation of the Koran. You know that the Prophet, peace be upon him, said in the Koran-which everyone knows is the direct and incontrovertible word of Allah himself-that one should only use the dirham and dinar as money. These are units of silver and gold.
L: There have been attempts, but none has gotten very far.
Doug: The new ISIS caliphate says it will operate according to the Koran on all matters, including money. They may make it stick, at least in the lands over which they have sway. Whatever else one might say about them, you have to admit they really are sincere fanatics. If someone says they believe something and they actually try to do what they say they believe, that's worthy of some respect, even if you don't share those beliefs. They appear to be not just talking the talk, but walking the walk, in every respect.
L: Just the same, Doug, I wouldn't go pay my respects in person, if I were you.
Doug: No question. They are clearly… unpleasant people. I'm certain I'd end up in one of those orange jumpsuits if I did go back to Syria or Iraq, and I doubt they'd consider my opinion over whether to behead me or burn me alive in a cage. But that's got nothing to do with the fact that they appear to be trying to act consistently with their principles, and it's intellectually dishonest to dismiss that.
L: Well, I'd hate to see gold branded as "the preferred money of theocratic fanatics," but I do understand your intellectual point. Your remarks about evidence of a bottom are encouraging. I've heard it said by veteran investors with more experience than I have that the kind of bumping along the bottom we've been suffering through is actually a classic sign of a bottom in a long cycle. Do you agree?
Doug: Yes, I do. I still think that intraday low of around $1,140 last November was likely the actual bottom.
L: Personally, I was very encouraged then, because gold had broken below its December 2013 low, and it seemed that every pundit and blogger in the world was saying that there was nothing to stop the fall short of $1,000, or even $700. It was widely believed that breaching the prior low was the trigger that would take it much lower-but that's not what happened. Instead, the new low was a buying signal to Russians, Chinese, Indians, and others, and gold shot right back up again.
Doug: Agreed. In absolute terms, gold isn't as good a value as it was in 2001, when I was telling readers that if I could call their brokers and buy gold for them, I would. On the other hand, the world is far, far less stable, so the prudence of owning precious metals is more paramount than ever.
You've got to own gold, because as we've often pointed out, it's the only financial asset that is not simultaneously someone else's liability. That's particularly so when you remember that in reality, all of the major banks of the world are bankrupt. Between the fractional reserve system and the preponderance of bad loans and other factors, there isn't a one of them I'd trust.
Worse, if you have a lot of money in a bank, you may think it's an asset, but the bank thinks it's a liability, and it's subject to seizure, come the bail-ins such as we saw in Cyprus. The EU is already laying the groundwork for that.
For more contrarian investing tips, watch this video in which Doug, Louis, and six other industry experts discuss where we are in the gold cycle… why the best gold stocks will go vertical when the gold bull resumes… and how to prepare your portfolio for a shot at the jackpot. Or click here to get Louis' timely special report, The Top 7 Gold Stocks with Vertical Potential.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.