The following interview is by GoldSilverBitcoin with The Dollar Vigilante’s Ed Bugos. To receive more of Ed’s insights, click here.
GSB: Ed, thank you for taking time to do this!
Ed Bugos: Justin, thank you for having me.
GSB: When did you become a gold bug and why?
ED: Justin, I first became bullish on gold in the late nineties, about a decade into my career as a stockbroker, as the “cult of equity,” as Bill Gross called it, reached a fever pitch. Thanks to the Greenspan Put, you could not go wrong. By the time 1999 came around nobody remembered the last serious decline in stock prices, at least in the US.
The worst correction in memory was the 1987 crash, which wiped out almost a third of index values in a matter of days, but that 700 point drop in the Dow became irrelevant with the averages four or five times higher then, and following year after year 20% gains in the S&P 500.
When Greenspan reversed the 20% drop in 1998, and then flooded the market with liquidity as everyone overestimated the Y2K threat, confidence in equity reached a new historic level, I thought. I had to go back to the Mississippi bubble to find precedent for the kind of activities and enterprises that were surrounding me in 1999.
It was the first time in my career, which started after the 1987 crash, that I experienced a genuine mania. It might be instructive to note how that tech/equity bubble was founded in very extreme bullish confidence, much like the real estate bubble grew out of the confidence that real estate values never drop, and perhaps even a little like gold when it spiked to $1900 –that also happened after 10-11 years of consecutive annual gains where bulls became over confident.
At any rate, I had read a lot in the late nineties looking for answers and explanations in history.
And I studied the empirical history of market fluctuations as best I could at a time when the Internet was still just coming into being but not yet robust enough to offer it all online.
I remember having to buy chart books back then to study this data.
Eventually I realized that banking and money inflation played a significant role, and I kept wondering why everyone around me kept telling me not to worry about it because the central bankers have it under control, and that all I needed to watch was the CPI. I was just learning that “central” banking was not really a free market institution, and I grew suspicious of the Bank of England’s determination to sell its remaining gold at the worst possible time – either they had a really bad trader or it was politically motivated.
I became interested in Bill Murphy’s claim that they were manipulating gold prices as part of the “strong dollar” prop. But ultimately my questioning drew me to the Austrian School, starting with Mises’ theory of money. This was all happening in the 1998-99 period when my business went south because of the scope of the Bre-X fraud. I was determined to bounce back but when I saw how my peers and colleagues had dealt with the bubble, I fell into total despair. I realized the first sales manager who ever fired me was right, I was not cut out for this business. I didn’t want to sacrifice clients to the altar of Mamon in order to survive. It was the beginning of the end of my brokerage career.
I first began to publish my calls for a secular bull market in gold in April 2000 when I left – I helped another retired broker start up a website called safehaven.com, and started my own proprietary website (goldenbar.com) a year later. We were part of the first or second genres of brokers and other financial professionals rebelling against this state of affairs on the web.
I didn’t even think of it that way at the time, I was just trying to make money on my own, without having to be part of a licentious band of thieves. I just wanted to do things my way.
But I knew my story was not going to be welcome in the industry, at least not then it wasn’t.
I was calling for gold $2k, which I raised to $2,700 in 2006, and then to $3-5k in 2010 when Jeff and I started The Dollar Vigilante, following the roll out of what is now the longest running interest rate suppression in the Fed’s history. I first expected the gold bull market to last only 13 years, but after the 2008 crisis I became convinced it would drag out a bit longer, so I extended my $3-5k secular bull market targets to 2017, and I still hold to this. But please note that this target is not a hyperinflation or dollar collapse target. I’m still just looking for a repeat of the stagflation outbreak that the US experienced in the late seventies. By all counts we are still headed there.
However, Justin, let me clarify something.
I do not claim that gold IS money, except in circumstances where it actually is used as money.
I am not a gold bug in that sense.
Being a fully evolved Misesian and Rothbardian I am in favour of sound money, which simply means the kind of money the market picks, voluntarily, and the government doesn’t tinker with at all. I believe it would pick gold, so on that basis I am happy to be among gold-bug company.
However, I find that the term applies to far too many undisciplined investors, promoters, and other cranks –many of which do not have the slightest grasp of sound economic theory, market history, or political philosophy. So I still prefer generally NOT to think of myself as a “gold bug.”
GSB: Well, Ed, since you’re a Misesian, it doesn’t surprise me that you don’t like associating with groups. So, what’s new in the longest running monetary intervention in the Fed’s history?
Ed: The ECB has joined in with a QE of its own; a global alliance has formed to suppress interest rates down to nothing (but it is dissolving with the swiss pulling out first); and the US commercial banks have finally awoken and replaced the Fed as the primary engine of money/credit growth.
However, the risk of a bust scenario approaching has increased because money growth rates in 2014 may not have been high enough to sustain the boom, traders bid sovereign debt values up too far in anticipation of the QE (which has still not even started), the swiss are out, and the BOJ is not being upfront about what it is really doing –I don’t believe it is printing new money supply.
Meanwhile, the capital foundation of the economy is being constantly chipped away at in most of the developed world by the ongoing interest rate suppression.
It continues to fool entrepreneurs into overspending on R&D, housing developments, and many projects they will not be able to finish when prices and interest rates turn up. The banks can continue to lend money for these projects and post pone the bust, but then they will revive the inflation monster and dollar collapse stories, which I think are all just around the corner again.
The fundamentals are brewing a scary cocktail, especially because debt levels have reached a point where they can no longer afford normal interest rates.
The elements are there for chaos geopolitically too, all in the run up to another election.
Our guess is that the goldilocks delusion is running on fumes.
GSB: Have some people been impatient with gold? Expecting it to increase quicker than it has?
Ed: Well, this is a hard thing to adjust to psychologically. For several years before we broke out past $500 the bulls were impatient with gold, often commenting on how slowly the facts were unfolding. Back in 2003 my $2000 forecast appeared way too far out of the mean, and nobody paid much attention to it.
Suddenly in 2010 it was too conservative, and the market began to move faster than we were expecting. In hindsight, given where we were on the price inflation front, clearly the market got ahead of itself when it spiked up to $1925. If you were just coming into the market after 2010, you were coming into the middle of an ongoing bull market, or just past the middle, and that pace conditioned your expectations. For this group then yes they are impatient and are likely not going to hold on. They are the ones probably creating the current opportunity. Gold and silver require inordinate patience because it is anti-establishmentarian.
That is, all the money and capital are behind on the other side –and behind the propaganda channels. But it is late in the story and the bad guys have stretched their resources too far.
We are going to transition into the later stages of the biggest bull market history will know.
It’s not going to take 10 years to rebuild confidence. Gold itself has held in rather well. The NASDAQ and many other bubbles fared much worse in their subsequent collapse. Of course, I have to stop here before someone thinks I am saying we had a gold bubble. We had a taste of one. It was relatively short in duration and extent compared to most bubbles, and in my view it was premature –both the run to $1925 was premature and the current conviction it has ended.
Gold can take a while to get going but it is hard to stop when it gets traction.
Its enemies know that, which is why they like to step on it so hard even when it’s down.
GSB: Can the Fed cease quantitative easing?
GSB: Can the Fed exit zirp?
GSB: Can the Fed ever let interest rates normalize?
Ed: Absolutely not! Normal interest rates would kill the government, especially today with its debts out of control, and the government is the source of the Fed’s privileged monopoly. The situation is markedly different even since the 2008 downturn. When I started writing about the gold story in 2000 the public debt was still at around 50% of GDP…up from the 30-40 percent level during the sixties, seventies, and eighties.
The last time the Fed got out of the way to let the market clear as completely as possible the malinvestment and imbalance between saving & investment that the economy had built up during the sixties and seventies (due to Fed policy) was 1978-80 under Volcker when the public debt was still just a trillion. Who knows what interest rate level it would take to clear today’s malinvestments and imbalances but the average rate of about 7.5% would gobble up over half the government’s annual federal tax receipts. At rates anywhere near what we saw in the late seventies, the market would invent a whole new term for “risk free” – not just in US government debt, but every government dependent on the same system and that has underwritten the same dollar system.
Although my gold forecast has not made the transition to a dollar collapse scenario, the risk of one in our lifetime is high as long as governments refuse to rationalize and make themselves smaller. The alternative is that the Fed (and governments) will never allow a Volcker style reset again until at a minimum they have been punished by the stagflation monster and have come too close to default for comfort. For now, the path of least resistance is to avoid rate normalization indefinitely – which is why we’re in the longest running monetary intervention in history – which is very risky to the world’s renowned reserve currency.
Allow me to go as far as to say this: if the banks don’t destroy the currency, the congress will; and in this latter situation, the public will aid. That is because if the Fed tries to normalize rates in order to protect the US dollar at some point it will result in a crisis perhaps as bad as 2008.
The public’s reaction at this point will be different than it would be if the banks (and Fed) instead adopted a hyperinflation policy right off. In the latter case the public might decry the Fed at last and push for a sound currency, but in the event that the Fed creates another crisis like 2008 by trying to micro manage the financial prices and interest rates the public will demand that the Fed relinquish its private charter. Once this is done, in my humblest opinion, the last check against the adoption of a hyperinflation policy will have been removed. Once monetary policy is 100% in the hands of government then it will proceed to destroy the currency as all others ever have.
So we’re on course for stagflation, and now you know what I think it would take to put us on the course for hyperinflation. We’re very close either way to the adoption of such a policy or major public revolt. But I fear the revolt will not come until price inflation and interest rates explode.
Both of these are increasingly inevitable.
GSB: What historical precedent is there for the current debt/GDP ratio?
Ed: Very little in the US except during WWII, but that debt was liquidated in the years following the war, which led to a period of immense prosperity in the fifties and sixties until JFK ruined it by adopting a Keynesian style monetary policy again –ultimately undermining the gold exchange standard (Bretton woods). As mentioned earlier, Russia’s debt/gdp ratio reached similar proportions and it chose a different route: to inflate its way out.
Although, it has implemented sounder currency reform (gold purchases) and is pursuing a relatively laissez faire policy with respect to the economy. If it resisted these paths the fallout would probably be worse. But in a broad general sense, with governments as big as Italy, France and Japan all at over 100% of GDP, or close to it, during peacetime, we are in uncharted water. But I put the blame on the monetary standard born in 1971 that we are operating under today. This system of crony-fiat monopoly currencies anchored by the fiat and inflation prone dollar has encouraged the policy of suppressing interest rates and accumulating large public debts…during peace time or not.
Academically Keynes died a long time ago but this currency standard brought him back to life.
GSB: Why have oil prices collapsed?
Ed: The main reason oil has collapsed is the increase in US and Saudi supplies – in the US it is due to the exploitation of shale oil, all good things from the consumer’s point of view. There is also an argument to be made for the possibility that the oil price decline signals the end of the boom.
GSB: Does the collapsing oil price hold implications for gold?
Ed: Not really. Over the long run we should expect the gold/oil or gold/commodity ratios to rise, as innovation and economies allow us to economize on the use of commodity inputs but inflation keeps up the value of gold. In the short term falling oil prices could undermine confidence in other commodities, and if there is a broad enough decline in commodities, then it hurts gold.
However, oil is typically a positive cyclical commodity while gold is often countercyclical.
GSB: What is significant about price inflation in Russia?
Ed: I don’t follow developments in Russia close enough to offer any unique insights other than to point out that the price inflation follows an enormous amount of monetary inflation over the past decade in Russia as the government tried to inflate its way out of a formerly high debt/gdp ratio.
Since the early 2000’s, with a debt/gdp ratio near 100%, they have grown their money stock by over 500%, or about two or three times the average OECD top 40…second only to Turkey.
Now they have a debt/gdp ratio of 10% but have to contend with the ruble’s collapse. It can be difficult to come out of a currency crisis, especially if you have a history of debasing money.
GSB: Is Russia being forced to sell gold because of the falling ruble?
Ed: I doubt it very much. There are bigger stakes they are vying for. If anything, to the extent that Russia has a long-term plan to go to gold related money, this would undermine the US dollar.
GSB: What is on your horizon?
Ed: Jeff and I are going to continue to build on the success of The Dollar Vigilante because we believe that people are going to need to know how to survive the debacle, and because we believe that central banking is not only the biggest scourge on the planet, but also, dying.
You can follow my general forecasts through basic subscription, and my specialized investment recommendations through the premium subscription. We are constantly upgrading the service, and plan to do more in the way of venture private placements in both private and publicly listed small cap businesses and start ups. Additionally, I am planning to launch a new subscription for hedge fund and high net worth personal money managers who need a sub-advisor to help them build a decent gold stock portfolio for the next stretch of the secular bull in gold & silver bullion.