McEwen and Turk talk gold

The Northern Miner invited James Turk, the London-based gold analyst and founder of GoldMoney, and mining legend Rob McEwen of McEwen Mining (TSX: MUX; NYSE: MUX), to discuss their views on a number of issues ranging from the value of money, gold and gold mining stocks to the emergence of crypto-currencies.

Rob McEwen: The price of real estate in London is incredible. Recently a 7,000-square-foot pent­house sold for US$220 million. That really shows how cheap money has become.

James Turk: That’s it precisely. Money is a function of supply and demand, and as people understand that money is losing purchasing power, they start moving out of money and into things. The super rich get it. They understand they’d rather have a $100-million Andy Warhol painting than have the money on deposit in a bank. You’re seeing higher prices for paintings, real estate, stocks. The stock market is not going up because of good economic prospects, but because of central-bank money printing. And it’s only a matter of time before more money pours into gold and silver.

RM: Artwork is where I’ve seen big prices as well. Paintings are quite portable. You take a painting out of the frame and get it across the border without much notice. Are you noticing anything in London? Are people looking at gold or gold stocks more closely?

JT: The gold stocks are so cheap, Rob. I’ve never seen them this low before, which is the point of the chart I did a couple of weeks ago. I really haven’t seen any serious interest here in London, unless you talk to someone who happens to be Asian and living in London. That’s where the real demand is. Some people are picking away at shares because they recognize the value, but there really isn’t any flood of money from Western European or North American investors. It’s really Asia and to some extent, the Middle East.

RM: They’re the ones that are buying the bullion as well.

JT: Yes, they recognize it is cheap, and they recognize it is money. Asians understand this point intuitively. The Chinese characters for money and gold are the same. They also understand Gresham’s Law, that bad money drives good money out of circulation. Money can be spent or saved, and they’re just saving gold and spending the bad money.

RM: Exactly. But a change is coming.

JT: It’s coming, but my hair is getting grey waiting.

RM: When it comes, will your hair colour change back?

JT: It might be even worse. There is the old saying to be careful what you wish for. If we get a collapse of the international monetary system, it won’t be a lot fun. And even if you hold bullion, you need to be careful because governments can get quite nasty.

RM: There’s a concerted effort among the G20 nations to look at a one-time tax on anyone with more than US$150,000. It’s a politically motivated move to put something in the treasury, but does little to reduce the massive indebtedness of the Western world.

JT: I haven’t heard of any government imposing a one-time tax ever. It could become a permanent thing.

RM: Where is the next Damascus? When the Roman Empire fell people went to Istanbul or Constantinople and also to Damascus, where there was all sorts of tolerance for religion and economic and literary pursuits.

JT: It’s an interesting question. The way I typically answer it is — being a fan of Atlas Shrugged, which I’ve read three times — is that we have to create our own Galt’s Gulch, our own safe haven. I mean this figu­ratively, not literally, so it doesn’t have to be some remote valley in Colorado. You can live com­fortably in a variety of circumstances if you make your arrangements properly. So for example, London is an attractive place — if you’re a non-domicile — which offers favourable tax treat­ment, so you have a lot of wealthy people coming to London. The number of wealthy Chinese in­vest­ors putting money into London real estate explains in part the sky-high prices here.

RM: You’ve got a good climate and are also close to anywhere on the continent.

JT: Good climate, lousy weather.

RM: What do you think of bitcoin and Google’s “Wallet,” which they just announced? [Google Wallet is a free digital wallet that securely stores credit cards, debit cards, loyalty card offers and enables purchases at thousands of online stores.]

JT: I’m in favour of crypto-currencies. I spoke recently at the Denver Gold Forum in Europe, and after the dinner they organized a discussion between me and Trace Mayer, a bitcoin entrepreneur. There were a number of interesting questions, like: ‘Are bitcoins and gold competitors?’ I don’t think they are. I see them as complementary. Bitcoin is an efficient currency, and gold is money. Historically gold has been a store of value and is tangible, whereas bitcoin has a different nature from physical gold. Max Keiser describes them this way: Gold is a precious metal while bitcoin is a precious code. It’s a string of up to 34 alphanumeric characters that are basically im­possible to replicate based on exist­ing technology. So I think crypto­-currencies have a bright future because of the technological ad­vance they represent. For ex­am­ple, the idea is to you hold your liquidity — your money needs — in gold, but if you want to buy some­thing on the Internet you convert a little gold into bitcoin. In the same instant you make a pay­ment, and the recipient has the choice of holding bitcoin or converting it back into gold, or some national currency. You don’t really need to own bitcoin for more than an instant, but you can benefit from it when you use it as a currency.

RM: Does GoldMoney have a bitcoin interface?

JT: We did, but because of regulatory issues, we established a subsidiary company in London called Netagio to provide that interface, and it now operates separately from Gold­Money. Netagio exchanges bitcoin to gold as well as gold to British pounds and pounds to bitcoins. It is still early days, but Netagio is going to an­nounce later this summer some en­hance­ments for these transactions, which put it in a very good position. The important point is that currency evolves and becomes more effi­cient. Over the ages it moved from weights of metal, to paper, checking accounts, wire transfers, plastic cards and now we have the devel­opment of crypto-currencies. So because of its technology, I think it’s an important development that is here to stay. It’s like the Internet was in 1993–94. People didn’t really use it or know how to take advan­tage of it until along came Netscape in 1996. It invented the browser, which changed the whole per­cep­tion of how people saw the Internet. Crypto­-currencies today are like the Internet was in 1993–94. They offer tremendous potential for anyone who wants to make any kind of efficient, low-cost online payment.

RM: You certainly jump over a lot of hurdles moving money around.

JT: Yes, exactly, and at the end of the day, the more efficient you can make the payment system, the better off
you are. What you want are as few impediments as possible. Bottom line is you want to make it easy for people to interact with one another because the more this happens, the more opportunities for commerce arise. And when that happens, it raises everyone’s standard of living. This new tech­nol­ogy today though is going through some speed bumps. Banks recognize that their payments business is potentially made ob­so­lete, and they’re trying to resist that. So they’re trying to get governments to put more regulatory burdens on crypto-­currencies. Some govern­ments are more repressive than others, and have banned bitcoin, for example. Hopefully they’ll eventually under­stand that if you repress technology, you’re re­press­ing human advance­ment.

RM: It’s an interesting world we’re in. The Internet has disrupted and dramatically altered many in­dus­tries. The impact on the banking industry looks like it is about to accelerate. Consider for a moment how Tesla Motors took on the auto­mobile industry. It’s run by someone outside the industry and builds an award-winning car that uses elec­tricity, not gas. It is turning the industry upside down. Digital cur­rencies could have a similar impact on banking.

JT: Some Luddites in the car industry are fighting it. I understand they do not want to allow the sale of Teslas because they say the com­pany has no dealer network. But you’ve had Luddites throughout history. They want to maintain the status quo and stop the advancement of technology, but technology is going to continue to move things forward.If you look at the sweep of things over the last 15 years there are a couple of things that have been hurt­ing the mining industry, and I would probably go back to the collapse of Bre-X back in 1997–98, because what that did was it cast a pall over the industry. And then you had the gold price falling as well after the Bank of England an­nounce­ment in 1999 to sell one-half of its gold reserve. But what’s happened since then, even though the gold price has done well, is that the mining stocks have not kept up. The share prices haven’t kept up because the margins of the mining companies have been squeezed, because the gold price hasn’t risen as fast as input costs to mine.

Then you have the ETFs. Investors started thinking that it is safer to buy a bullion ETF, rather than investing in a mining company where you have risks of nationalization, salted assays and all kinds of other things. So they just buy an ETF instead of mining shares to get their exposure to the precious-metals sector. So the mining industry probably hurt itself with the creation of ETFs. But the bottom line is that the gold price is still very, very, undervalued. Even though it’s risen from US$250 per oz. to the present level of just over US$1,300, it’s still cheap because the dollar has been debased almost at the same rate as the gold price has risen. So gold is basically as cheap today as it was 15 years ago, and mining shares are even cheaper than back then, because their mar­gins have been squeezed.

Another thing that has shaken investor confidence in the mining industry is hedging. They see the big losses that companies like Ashanti Gold and Barrick incurred from hedging. Hedging has been a disaster because in a rising price environment where inflation is going up faster than the gold price, the last thing you want to do is limit your revenue. So bad decisions like these contributed to the loss of confidence by investors in the mining industry.

The bottom line is that mining shares are ripe for the picking. In December 2013 you saw the same kind of sentiment that you saw in 1999, when the Bank of England announced the sale of half of its gold reserve. It was the last of the weak hands throwing in the towel. A lot of shares, particularly juniors, were thrown out for pennies on the dollar. Tax-loss selling contributed to that rout. But that event to me was a turning point. We saw a change in mindset, and since December you’ve had investors coming back and looking at mining shares.

RM: Other financial practices that have been hurting the industry are hedging and the sale of metal streams and royalties. Companies using these practices are selling their profit margins, giving away the shareholders’ future capital growth. As James said, management is sell­ing their revenue but they haven’t capped their expenses, so the profit margins have been compressed or eliminated. The sales pitch for royalty and metal-stream companies is financing without share dilution. But the downside is lower profit margins! The impact is striking when one looks at the strong share price performance of royalty and metal streaming companies and com­pares it to the terrible share performance of the producers. Bottom line, much of the industry has sold its future upside, and shareholders don’t like that.

JT: Do you think mining companies were also excessively issuing capital?

RM: Absolutely: the “bigger is better” factor. We’ve seen the impact, and all the CEOs that have been removed following that strategy. In terms of sentiment, just looking at the market when we saw gold go down to US$1,242 per oz., I found it interesting that I didn’t see the gold stocks following gold down, they started to turn up. I believe we are at a bottom, and the path from here is up!

JT: I agree. In June 2013, both gold and mining shares reached a low point. Then in December 2013, mining shares made a new low but gold did not, so you had the first bullish non-confirmation in the correction that began in September 2011. So this recent relative strength that you mention is just another bullish non-conformation. The mining shares are holding up reasonably well, and an important “head-and-shoulders” technical pattern is forming. The left shoulder formed in June last year. The Dec­em­ber low is the head, and we’re now forming the right shoulder. If the [Philadelphia Gold & Silver Index] hurdles above 110 and the [Gold Bugs Index] moves above 250, these head-and-shoulder patterns will be com­pleted. Reversal patterns like these usually mark the beginning of new bull markets.

The Northern Miner: When do you think it will turn?

JT: I think it has turned, but you can’t really predict things. I’m a value guy and sometimes you have to be really patient. But if you look from the point of view that you have this non-confirmation between what hap­pened in June and December, and now you’re again starting to see to see a different interplay between bullion and shares themselves, I would suggest that this might mean an uptrend in prices is beginning that will continue with a strong close to the end of the year. So you’re probably seeing strength, which is rare, but it does happen. I remember that in [mid-1984], a Mexican debt default sent the gold price soaring. The other bullish thing is that with India largely out of the market last year, I expect the Indian gold-buying season this year to be ex­cep­tionally strong. So we are set up for a strong [mid-year] that will lead to a strong finish for gold and the mining shares.

JT: We need to see some short-term momentum in gold, silver and the mining shares. If gold hurdles over US$1,400 per oz. and silver finally rises above US$22 per oz., that strength will translate into higher mining-share prices. When that happens, then you’re going to get a lot of money coming into the sector. It will be a clear signal to investors that bullion and the min­ing shares have turned. Inves
tors will start paying attention to the sector, and a lot of money will come on-board.

RM: I agree. People have been sitting on the sidelines feeling quite comfortable that gold will be quiet and continue its slow slide down. But that isn’t going to happen. The big sellers have finished dumping their positions. The direction ahead is up. We had brief and exciting previews of the explosive upward share price moves in August 2013, and again in the first three months of this year. The sellers are gone and the buyers are seeing value once again in this sector.

JT: I agree. We’ve had such a large shakeout, investors are recognizing that they’re under-invested. So the upside move I am expecting could turn out to be explosive.

RM: Can you think of any time in history when the reserve currency of the world has been so debased?

JT: This is unprecedented. That’s why my new book is called The Money Bubble. In my view, 100 years from now, people are going to look at today’s money bubble and laugh and ask: “How could people have not seen that coming?” It will just be like us looking back at the South Sea Bubble and the Mississippi Bubble, which are major historical events. What happens in a bubble? In the dot-com bubble, everyone said prof­its don’t matter, only market share does. But only after that bubble popped did people realize how stupid that conventional wis­dom was. The same thing happened in the real estate market when people believed that housing prices could only go up. What we’re using in commerce today isn’t really money. It’s a money-substitute cir­cu­lating in place of money. The way we humans improve our standard of living is by working in order to fulfill our needs and wants. That’s another way of saying that goods and services pay for goods and services. Today when we use national currencies we are only paying with credit, which is part of the huge credit bubble that exists today. It’s even bigger now than in 2008, when a collapse rocked markets worldwide. When the money bubble pops, people are going to realize what paper cur­rency really is, and as a result, they will once again truly understand that gold and silver are money. They will understand the reasons for it. Mainly, it’s a tangible asset. It’s not credit.

RM: Interest rates have been artificially suppressed. Economic history suggests that such efforts by government can not last much longer. When rates turn around, watch out!

JT: I agree. In theory, gold should never go into backwardation. But over the course of the year it’s been in backwardation more often that not, which shows that gold is way too cheap. This anomaly also shows how interest rates are manipulated — not just currency interest rates, but gold interest rates as well.

TNM: Anecdotally we’re hearing about tightness in the market, and how it’s getting more difficult to buy gold.

JT: To me “supply” means the entire above ground stock of gold, because gold mined hundreds of years ago is no different from gold mined today. What one needs to do is assess the demand for gold relative to the demand for national cur­ren­cies. In terms of ability to acquire the metal, if you put in an order here in London to do a large transaction, say $50 million or more, you can’t get that order filled immediately. You have to wait, such being the tightness of the market. This strong demand and tight market conditions are indications that gold is cheap. And if gold is cheap, mining shares are cheap . . . The bottom line is that an ounce of gold today buys the same amount of crude oil it did 10, 20, 50 years ago, and that’s why gold is so important and useful as money. It is a consistent measuring stick. So what mining companies should do is prepare their financial accounts in gold to show a more accurate picture of their financial results as well as show what is happening to the monetary system, namely, that national currencies are losing purchasing power.

RM: You’d have a run-in with some accounting firms and maybe a few exchanges.

JT: We checked and learned that gold is not accepted as one of the world’s currencies, so it can’t be used for preparing annual accounts. It is just one indication of how governments are stacking every­thing they can against gold to main­tain their privileged position of controlling currency and printing
as much of it as they want.

RM: What’s the talk in London about ending the fix?

JT: We know the silver fix is ending on Aug. 14, and everybody is saying the gold fix will end as well. There’s a lot of discussion, but no decisions about what will replace it. My recommendation is that you have to control the margin that banks and traders are using when they trade gold. Barclays Bank was fined when their trader said he wanted to sell 150 gold bars into the London fix to manipulate the gold price. That is nearly 2 tonnes of gold. But he didn’t actually have that gold to sell. He just created it out of thin air to make people think he really had that much gold to sell. But he just wanted to manipulate the price to profit from his trading position, which needed lower prices. For­tu­nately he was caught. But this happens all of the time. 

I think in order for the credible price discovery people look for from the fix, you have to be able to say sellers of gold can only trade the fix if they actually have the physical gold they say they want to sell. The gold has to exist before they can enter an order because paper gold, which is just a promise to deliver gold in the future, is entirely dif­ferent from physical gold. So what we’ve been seeing in the fix is price discovery of paper gold. It is not the result of what is going on in the physical market, where supply is tight. These manipulations in the paper market are keeping the price of gold lower than if it were trading in a free market, without any manipulation.

So I recommend the process be changed to require that only physi­cal metal trade at the fix, or that there at least be a high margin requirement to trade the fix. Other­wise nothing is going to change and be no more effective in showing actual price discovery than the fix has been in the past. The fix is sup­posed to be a clearing of all physical transactions, but it’s being misused by what is happening in the paper market. But the bullion banks are not going to want to change the fix because they’re making so much money from the current system. So it will be interesting to see how it plays out over the next few weeks.

RM: Buy gold and buy gold shares.

JT: I wholeheartedly agree.