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Fred Hickey: Why A Lifelong Technology Expert Favors Owning Gold

It's the safest & most undervalued asset today
Monday, February 19, 2018, 2:35 PM

Fred Hickey, frequent cited expert on Bloomberg News and Barron's Roundtable, has been publishing his author extremely well-respected investment newsletter, The High-Tech Strategist, for 31 years. And he is more worried about the state of the financial markets today than he's ever been.

While his primary focus has been on analyzing Tech stocks, over the years he has expanded into macro trend analysis as the central banks starting increasingly intervening in world markets and distorting the price of money.

He now finds asset prices dangerously overvalued (within Tech and without) and worries -- as we do -- about the risk of a major market correction and possible currency crises.

Ironically, this lifelong expert in "all things technology" has concluded that gold (the "barbaric relic") is the sanest asset to put one's capital in these days -- both due to its safety factor and its current level of undervaluation. He expects the precious metals to fare well during the downward market volatility he foresees, and he is now tracking the mining stocks closely as he predicts they will experience dramatic appreciation from here.

What’s happening to gold mining stocks right now is an amazing story. They're extremely undervalued. Just this year, we’ve seen the price of gold hold up during this market decline, yet the miners have been getting slaughtered.

One of the things we look at is the HUI-to-gold ratio, or the gold miner index to gold. That is down to 0.133. Now, that's lower than it was at the 20-year bear market bottom in 2000. It was slightly lower than that at the end of 2015, but we’re talking about near record lows here when the price of gold is up. It looks to me that gold is in a bull market. The charts look that way. It looks that we have higher highs and higher lows, and we’ve gone from $1,050 to $1,330. I think once we go over $1365, which is the old high hit in 2016, then more people will come on board and we’re likely to slingshot higher from there. But the miners have gone in the opposite direction. 

I think there’s some reasons for that. One of which is that we have a huge short position built up in the GDX ETF. In the technology world, the Facebooks, and Amazons, and Netflixes, and Googles -- the FANG stocks -- they get propelled higher as the money pours into the ETFs. Well, it works the opposite way in the gold miner area where money has poured out.

In March of 2017, we had 510 million shares outstanding on the GDX. Just a week ago, it was 310 million, or a 40% decline. Now, a lot of that was short interest. We went up to 55 million shorts of a now-310 million share total. 20% of the total shares outstanding in the GDX were short. Now, that’s like Tesla levels -- one of the most favorite shorts on Wall Street. And why would that ever be in a market where gold looks to be in a new bull market? Gold certainly is up more than 20%. And the charts all look like it’s in a new bull market. How could anyone put out this kind of short interest?

Well, it’s one of the problems with the central bank is when you make money as cheap as you do, and you can borrow as much money as you want, then you can play games. It becomes a giant casino. And the people who are playing the short game have helped to drive the price of the miners down at a time when people would have thought they would have risen.

We’ve had this turbulence; the miners should have gone up. Gold held its own. It's up slightly on the year, but the miners are getting killed. The owners can’t get their head wrapped around it, so they get demoralized and then they sell out. I think we saw that, maybe, on Friday (Feb 9). We saw a capitulative moment.

And then what these shorts will do is that then they’ll cover. Now, it’s unfortunate that they get stampeded like this, but it’s the kind of thing you can do when you have the ability to borrow at very low levels and to play games with people. Miners should be going higher. Today, this price of gold is only $30 away from a break-out high yet, the miners continue to go down.

Ultimately, what determines the profitability for miners is the price of gold. Look back at the margins for these miners now, compare them to the bottom. At the end of 2015, they were only making $225 net of all in sustaining costs, so the price of gold versus their all in sustaining costs. And now, it’s double that. It’s $460; yet, the miners haven’t rallied. It’s amazing. This is the same level, almost, that $460 was $490 in 2012 when the GDX was not 21 but 45.

So, we have this huge disconnect between the price of gold and the margins of the miners -- which are doing very well because they had to keep their costs low -- and the price of the stocks. Now, ultimately, that will get corrected. We saw the huge run in 2015, where gold went up 30% in the beginning of 2016 and the miners went up 180%. And we saw that in 2000, when gold went up quite a bit, and the miners went up 1600%. That’s 17 times the average. We saw that in the 1970s coming out of the bear market there. We saw that on the big net buyers went up at least 10 times, and some of them went up as much as 30 times. So, this happens regularly when the miners get depressed. They get out of whack with the price of gold and margins, and then they slingshot higher. And that’s what I think we’re about to see.

We’re right there. I think there’s going to be enormous amounts of money entering this sector once again, just as we saw in early 2000s, just like we did coming out of 2015, the bottom, just as we did coming out of the 1970s mid-cycle correction. So, I’m pretty excited about it.

Click the play button below to listen to Chris' interview with Fred Hickey (52m:41s).

Transcript: 

Chris Martenson: Welcome, everyone, to this Peak Prosperity Podcast. It is February 13, 2018, which is, it just so happens, my mother’s 80th birthday. So, quick happy birthday to you, Mom. I never do personal shout outs, but 80. Wow. Congratulations. Hi, I’m your host, Chris Martenson, and today we’re going to be talking about technology, the future, and whether or not these markets are a dangerous illusion as I’ve been saying for a long time.

Now, connecting these dots for us today is Fred Hickey, editor of the influential investment newsletter “The High-Tech Strategist,” one of the most subscribed newsletters of its kind. Fred is a regular guest on Bloomberg News, is highly sought after for his opinions on technology and gold stock investments. Welcome to the program, Fred.

Fred Hickey: Thank you very much. Glad to be here.

Chris Martenson: Fred, I want to cover three big areas with you today, as best we can. That would be technology, of course, these markets generally, and then gold specifically. To begin, Fred, how long have you been writing “The High-Tech Strategist,” and what’s the approach you take in each of your monthly issues?

Fred Hickey: I’ve been writing it now since 1987. So, that means we’re in our 31st year. The approach I take, I think you have to consider all variables. I learned that early on in life. And so, I start with a big macro view, top down view, and then I work my way down to the specific areas. For the first 20 plus years, it was nothing but technology in the micro area. But beginning in the early 2000s when I realized the central bank wasn’t going to stop defending markets, and I had thought that the gold bull markets after a 20-year bear market were likely to go into a bull market as a result of that.

I then moved into the miners as well and the precious metals, and I’ve been there since because, obviously, while I was trying to protect myself from what the central banks where doing, it was hard to envision, back then for sure, that we’d end up with a balance sheet of $4.5 trillion dollars and central banks all over the world following the fed’s lead. So, I do a mixture of both technology and gold right now. Ultimately, if our government and our central banks ever go back to the right path, then I hope to be able to drop the gold part of it. But for now, I’m in both.

Chris Martenson: Yeah. I have remarkably similar views on that. I’m not able to back out of gold at this point because of what we’ll talk about in a little while with the central bank printing. They continue. It’s not just the federal reserve we have to watch in these global markets.

But before we go there, Fred, you focus on technology a lot. Tell us what are the bright spots right now where people might be looking, or where you pin some hopes for actual economic improvements and serious quality of life enhancements. Where are you focusing now?

Fred Hickey: Well, I have to preface this by saying this is one of the most dangerous moments that we’ve had as technology investors. I’d liken it right up there with the 2000 bubble, and I wasn’t buying anything in the 2000 bubble top. In fact, I was shorting some put options at the time. And this is a similar kind of thing where valuations are crazy in the markets. You have the retail investors pour in, particularly into tech stocks and fang stocks.

I think everyone knows the Facebook, Amazon, Netflix, and Google. They poured into those. By January, we had record flows into those funds, the UTFs, many of them with the heaviest positions in the fang stocks, driving prices up to crazy levels. Amazon’s at multi-hundreds EE, and some stocks like Tesla and Netflix not having EE because there’s no E at all. So, it’s pretty crazy.

As a result, I’m extremely cautious. In the 1990s, I was in long tech stocks up until late 1998, and then I got out. Then I started to move into the put options. I’m in more put options now than long along the tech area. Although, after last week’s jump in the mix to near 50, that forced my hand. The premiums went so high I had to close out all of those positions, almost all of them.

So, I’m kind of flat with no positions right now. Now, we look at where the growth is. I can tell you it’s not in smartphones, which was the strong area in recent years. We saw this in the last quarter, fourth quarter numbers have actually dropped year over year a pretty staggering 9% year over year declining unit sales. That was led by a 14% in China.

It’s not PC sales, which have dropped six years in a row. It’s not tablet sales. So, there are some areas of strength. It’s not wire line or wireless equipment either. That’s in decline. The areas where we still have strength are cloud computing. That would be one of the biggest areas now where there’s great capacity additions going on. Oracle just announced yesterday they were going to triple their capacity. They’re going to add 12 data centers. So, that’s a big area where Amazon, Facebook, Microsoft--they’re all investing.

There’s a lot of people that are working on autonomous cars. That’ll be an area of interest in the future, but we’re really not there. They’re still testing. That’s a 2020 and on kind of thing. 3D printing is out of favor, but that’s still important new market emerging. But like I said, this is not a great time to be investing. This is a time to be more defensive.

Chris Martenson: All right. I understand that certainly. I want to talk maybe specifically about one of the things you mentioned in there, just to get people a flavor of this. Tesla--they were just rather hilariously, I thought and you did as well based on your Twitter feed, described as having reported a narrower fourth quarter lose than expected. Love the spin on that. That was in the Wall Street Journal.

And my criticism of Elon Musk, I’d love to get your views. Brilliant guy. The criticism is he is apparently not surrounding himself with people who can constrain his unbridled visionary qualities long enough to actual get something across the stable profitability goal. That’s how I see him.

He’s building hyper loops, proposing getting to Mars, running a major electrical vehicle company. He’s got a space company. He’s installing grid scale batteries in Australia. He’s launching a solar roof tile thing, and now proposing, just yesterday I saw, 30-minute rocket rides between global cities. That sounds like visionary-itis to me. What are your views?

Fred Hickey: Don’t forget mental telepathy and also the latest and greatest which were flamethrowers.

Chris Martenson: Flamethrowers, right. I love all of these, but collectively it feels like too much to me to really pull off. What are your views there?

Fred Hickey: Obviously too much. When the central banks go crazy the way they have and they print money and when you suppress interest rates, when you make the price of money that there’s not cost at all with zero percentage, it enables all sorts of crazy ideas. We’ve seen that in the past. In 2000, we had all kinds of dot com companies that were doing crazy things as well. When anybody can borrow any amount of money, and that’s where Tesla is, they borrow any amount of money.

They just did another offering here very recently. He can fund any idea he has, and he flits, seemingly, from one idea to the next. And the problem is is that he’s primarily, in Tesla, a car company. And a car company is a very mature business and it has huge players in it. And some of them are very great companies like Mercedes, and some of them make their cars for decades in Alabama, like Mercedes does, not in California as Tesla does.

It appears that he’s not able to produce cars at a profit. Right now, he’s losing $8,000 per minute, I think the number is. They’re making parts by hand, still. They’re making batteries by hand. There’re reports of that. He really needs to be focusing, or at least have managers that are focusing, on the very difficult task of making cars in an extremely competitive market where margins are low.

Right now, he hasn’t had to worry about margins. He has no margins. Well, he has margins, but his profit margins are all in the red. And as long as the market is able to fund that then he can keep sliding along and that’s been going on for several years. The probably will become if the market declines, as I expect it will and the funding gets shut off, interest rates rise, then the party comes to an end.

Chris Martenson: Right. I want to get to that party any moment in a second. But, Fred, first, do you have any views on resources or other limits imposing constraints that perhaps technology cannot overcome, at least not easily or without serious adjustments? Again, in the electric vehicle space, a lot of people, Fred, they approach me and they say, “Hey, Chris. Your views on oil are a bit outdated. We’re all moving to electric cars.” I want to tell them about cobalt and lithium as limiting substances in this story. Do you ever run across that or look into those sorts of issues when you’re analyzing these spaces?

Fred Hickey: I run across it, and, of course, some of these items are in difficult areas to find, like the Congo, which isn’t your best country to be doing business in. So, yes, there are some limiting factors there as well. It’s going to take a long time for autonomous cars to become real, and electric cars, obviously electric cars, to become real. Those aren’t my areas of expertise.

I’m aware of them. I’m not investing in them. It can get off into other areas. With the technology world, it’s hard to know. I don’t have enough time in the day as it is right now, but I am aware of them. And I know it will slow things down. I also was aware that this whole electric vehicle and autonomous vehicle push will take quite a bit of time.

Chris Martenson: Indeed, it will, and I look at unit sales of internal combustion engines worldwide standing at some 90 plus million. It’s still obvious that the internal combustion engine is the dominant piece of equipment on the landscape at this point. It would take quite a bit to unseat that.

Fred Hickey: Yeah. You’re talking a fraction of one percent of vehicles right now that are electronic. That’s not going to change. We’re going to be dealing with that for a long time, many, many years.

Chris Martenson: Right. Now, to slip back into, you bought gold--the first gold coin I bought was 2001. I was doing some research into federal reserve printing. Fred, I was horrified to discover they were printing upwards of $5 billion a month out of thin air. That was enough to worry me. I saw deficits that were unpayable. They were quaint by today’s standards. How do you make sense of--let’s turn now to what the central banks have done and are doing and why that’s such a source of concern for you?

Fred Hickey: I’d never invested into any kind of gold items, and my first purchase of gold coins was in 1998. At that point, I had seen what they’d done with long-term capital management. They built them up. I’d seen what they’d done with the Mexican crisis bail out. And so, I started buying a few coins, and it wasn’t much. I really started getting interested in it after 2000, when they slammed rates down to 1%. I knew then there was no stopping it.

When you go down that road, there’s not stopping it, unless you have somebody who’s going to be willing to take serious pain. So far, all we’ve ever done is push off that point of pain. So, we had, obviously, the tech bubble crash. There was a reaction. There was slashing rates then to 1%. That helped cause the housing bubble in the mid-2000s, which then crashed. Then we had the credit crisis, and that led to a crash. Each time we’ve had to go to ever more extreme measures to the point where we then had to start printing money.

Obviously, as you know, we went to QE1, and that wasn’t enough. When they slowed it down, they needed to go to QE2 because the market started to slip. And when QE2 ended, that market started to slip again, and they had to go to QE3. And that was infinite QE at that point, and then they stopped here and handed the baton off to auditors around the world and central banks such as Japan and the ECB. And they went on to print even greater amounts in total, so that we reached a point of over $2 trillion run rate last year.

And only this year, now, is the rate coming down. The Japanese are still printing, not as great a rate as they did. The ECB has cut their rate in half, and that will mean $6, 700 billion less on the year probably because they’re supposed to end in September. And the US is trying to tinker with the QT, quantitative tapering as they call it, and they’ll be reducing if they’re able to get through it. I doubt they will. But their plan is to drop their balance sheet by $420 billion this year as they increase it quarter by quarter. $250 billion of that will be treasury reductions, and the rest will be the mortgages.

So, personally, I don’t think--and I always believe this and Austrian economic theory tells you this--you have to keep doing more and more when you go down that path. And so, they’re not doing to be doing more and more, and I think that was, really, the trigger to what we started to see in the last couple of weeks, which is the market’s becoming very volatile and declining very sharply.

So, you can point to the 2.85% treasury rate that it went to, but I think it went to that rate because of the reductions by the fed and the other central banks around the world at a time when deficits need to be funded. Particularly in the US where Trump came up with a $1.5 trillion tax cut and hundreds of billions of spending initiatives at the same time they’re doing $400 plus billion of QT. I saw J.P. Morgan estimated that the treasury will have to borrow almost $1.5 trillion this year. They only had to borrow $500 billion last year.

So, that’s three times, and I’m not sure where you get that money when the Japanese and Chinese, who are the number one and two buyers outside of the US, when they are already started to cut back on their buying, as they have been doing in the last several months. So, what has to happen is rates rise when you have the kind of debt levels that we have in this country and the world. $65 trillion or so on the US, $230 trillion according to the Institute of International Finance overall in total overseas.

And you’re looking at that, which is up 55% from the gold financial crisis. So, what the central banks tried to do was they lowered rates and tried to eliminate a debt crisis with more debt. That’s not going to work. I think we’ve seen the first crack in the market as the result of that.

Chris Martenson: Yeah. So, in my world, the diagnosis was too much debt, and the prescription was more debt. We’ve tried this several times. My sense is of a monetary policy that’s in a dangerous skid. Bernanke, he oversteered into the first part of the skid. Bernanke continued that really oversteered. We have Yilin oversteering. This is, in my view, the mother of all bubbles.

Fred, prior to bubbles--and by the way, I’m only 55. I don’t think anybody should live through three bubbles in their lifetime, but here we are. In the prior two bubbles, you could still find undervalued areas outside of commodities, outside of things like gold. I can’t find any undervalued areas right now. Everything--

Fred Hickey: I can think of one are: gold miners. Gold miners are significantly undervalued, and we can get into that later. But in 2000, it was really concentrated in the tech bubble. The rest of the market was--much of it was either thoroughly valued or undervalued. All of the attention went to the Tech and the Latino T stocks, as they called them, and the rest of the market was left begging. At that time, I was hiding--I only had a small percentage of my money in put options, and I was funding them with 6% short-term, three-month treasury bills.

So, there were plenty of places to be back at that point. This is, some people call it now, the everything bubble because we have a great big bond bubble, as well as a stock bubble, as well as an art bubble. It’s almost every asset you can think of out there. They’re all at inflated prices, and, of course, that’s what you would expect when you go on such a money printing, global money printing binge.

Chris Martenson: Right. Well, if we had the notion from Buffet that you only find out who’s been swimming naked after the tide goes out, this has been a tsunami. Nobody alive has ever experienced any form of money printing like this. This is literally a sociological experiment as much as it is anything else because we have wealth gaps. We have income gaps. We have all of that. So, it’s really been just rather extraordinary to watch, and I trust, Fred, more what people do than what they say.

I’m looking at the Ardeni research here which tracks central bank balance sheets pretty closely. I can’t detest anything yet in their, I would call, tapering from the ECB or Japan. January is up. We’re still at a run rate of $2 trillion year over year. That’s down a little bit from about half a year ago where we were at $2.5 trillion run rate. So, think about that. These central banks last year were telling us everything’s awesome, unemployment’s falling, the economy’s improving, and their printing the most money on a run rate that they’ve printed through the entire cycle. What do you make of that? What emergency are they fighting, do you think?

Fred Hickey: Well, they’re very much aware of how dangerous the situation is, and that’s why they’re so careful to every once in a while--people thought back in the mid-2000s when they were doing what they call baby steps, quarter point hikes. Because I remember them. I’m sure you do. The fed used to do three quarter point hikes, one-point hikes, surprise hikes. None of that. They have to have everything telegraphed in advanced, and it has to be a quarter point every once in a while here.

If they can, they’re doing what they can to, hopefully, get themselves into a position where they’ll have a little bit of a wherewithal to address the next decline. But it’s ever so gingerly because they know the mess that they’ve created. They do. As soon as they dropped QE1 and QE2, the markets didn’t do so well. So, they saw that happen. So, they’re very gingerly doing this, and we haven’t seen much because the fed has only cut, I guess it’s $40 billion off of their $4.5 trillion. They haven’t done much, and the HEB is still increasing but it’s certainly not increasing at the rate it was.

That’s why I think the markets have trouble. I also think that’s why they’re not going to be able to go very far with the quantitative tapering or even the cut backs elsewhere because the markets will shutter and shake and decline. When there’s enough blood in the streets, they’ll be back again with another round of--even more powerful, initially not so, but they’ll try something less. But for them to get the markets really going again, hold them up, it’ll take more. It always takes more.

Chris Martenson: So, this model we have here is they’ll have to continue doing what they’re doing, as insane as that might be. So, here’s a question I get routinely from people: well, what’s to stop them from just printing more and more forever? Where does this actually end? I’m looking now at a headline from the Wall Street Journal very recently. It came out and says “New Worry for CEOs. Rising Costs from Metals to Meat.” I think you pointed this one out as well in your Twitter feed. We will see inflation at some point. Is that the rate limiting step here, or is something else going to stop this?

Fred Hickey: No, absolutely. Initially, this has happened before if you had a big asset in place and that is inflation. Limited it doesn’t go so much into the consumer’s hands because, obviously, the high end or the beneficiaries of the asset inflation. So, if it’s houses or real estate and stocks and bonds, well, only so many people in the country own those. And so, you have this inflation, but we also have seen it in other areas. My healthcare premiums just went up 67% year over year, after a similar increase the year before.

That’s not exactly deflationary that people talk about. Tuitions, rents--these are all up. Now, what they hadn’t seen was wage increases, and that has changed. So, the most recent unemployment report, or employment report, however you want to put it, they saw a pretty big jump in the wages. We’ve seen over the last year or so state after state raising minimum wages to $15, $11, $12 over multiple years, cities.

We’ve seen Wal-Marts and Targets and large employers all increasing their minimum wages to double digits. At some point, labor, they can’t keep getting squeezed. The average American is seeing their real disposable incomes decline as inflation has been pressing upon them. Now, the central banks have done everything they can through all their various measures of--not even central banks, but the governments themselves of economic deflating. Doing everything they can, stripping out spiky items.

They have suppressed the real rate of interest during the CPI or the PFC, whatever you want to use. They’ve been suppressed. Certainly, when you have housing prices running at 6.5% and healthcare expenses and tuitions and all of that going up, the rate of inflation’s not 1% like they’ve been telling us. But now, with wage growth, then it becomes a probably because corporations have been running the highest profit margins in history.

And you can’t keep doing that in a market where prices are difficult to raise. One of two things has to happen when your cost of labor and your cost of materials are rising, you either raise prices as well or your margins get cut. Obviously, that means lower earnings. So, it’s a problem. So, at some point, inflation was going to find its way to the consumer, and I think that’s happening now. And it’s one of the things that’s starting to scare the markets.

Chris Martenson: Well, and this is part of the erosion of the social contract. Take one example. So, the Bureau of Labor Statistics, most recently I was looking at new car prices, and they said hey, since 1997, the average new car price has declines by 2%. Now, the average new car price was $17,000 in 1997. Today, it’s well over $33,000. So, it’s nearly a 100% increase in your out of pocket cash cost to buy a new vehicle, but according to our government, it’s actually costing you 2% less. And the gap is all the hedonic improvements. Are cars better? Sure.

Fred Hickey: You’ve gotten a better catalytic converter out of that, you know? Well, that’s not as bad as the television market where the government says that television prices are actually negative now.

Chris Martenson: Really? I get paid to buy one? That’s amazing.

Fred Hickey: Yeah. Negative. So, that’s how hard they’ve gone with the hedonic deflating there.

Chris Martenson: It speaks to the trouble that the average consumer is experiencing. Of course, when the federal reserve dropped interest rates again, what we saw was a lot of private equity moving into markets and driving rents up extraordinarily. It’s very difficult to get by. This is where I feel that I’m looking for the thing that’s going to stop the central banks from just doing more of what they’re doing.

Because what they’ve done is they’ve entrenched inequality. They’ve picked winners and losers. They don’t create wealth; they redistribute wealth. And so, in this story, when you look into how this printing story may end, how bad do you think it could get? What are you personally preparing for here?

Fred Hickey: Well, yes, I have been very worried about, as you said, the social contract fraying here. You can see it everywhere. You could see it in the general elections, and even in the tenor of the discussion now. Trump rode to--I don’t even know if he knew he was going to win at first. I don’t think he did. But he was an outsider, and people were fed up. And so, they voted him in despite all of his issues. And they want change because they’ve been under financial stress for so long.

I worry that we have all these entitlements that just seem to grow and grow. And we never address them. Trump was supposedly going to do that, and then, just in the last couple of weeks, Congress and Trump decided that they were going to drop any major push to cut back on the entitlement spending. We never seem to be able to do that. And that’s taking up a bigger and bigger portion of the budget.

My concern then is that we have had a nine year, now, long recovery, sub-par as it is, but it still is a recovery. And we’re running deficits that are going to be back in the trillion dollar range. But if you have--not if, but when we have an economic recession, and they usually come following bear markets, actually, I think we’re due for that as well. But when we get another recession, then the entitlements are going to spike again. Obviously, unemployment, welfare, everything goes higher, food stamps.

Everything goes higher, and if we’re running at over a trillion already, we’ll be closer to $2 trillion. And we’re not going to be able to pay that at some point. Interest rates spike, we have to cut back, and all these people--you have a cultural dependency now for all these decades of time where they just keep growing and growing and growing.

Prior to the golden financial crisis, we had 20 something million people on food stamps. Well, it went up to 48, and it’s not much less than that now. I counter you to think what it might be given another recession. So, obviously, we have all these promises to retirees for Medicare and for social security that we won’t be able to pay. I don’t know what kind of reaction we’ll have there. It could, obviously, lead to trouble.

Chris Martenson: Well, I’ll tell you one of the more troubling charts I saw was that pensions, let’s say like Calipers, but generally pensions in the United States, they used to run a 60/40 portfolio. 60% bonds, 40% equities, and they have flipped that in the last ten years. Now, the average pension out there is carrying a 60% exposure to equities, which in your mind and mine as well and many others listening to this, are at some of their highest relative valuations they’ve ever been at. This, too, is just another area where I struggle to understand how we got here.

Fred Hickey: It’s the unintended consequences of the federal bank suppressing interest rates and printing money. When you don’t have reasonable prices for your rates or yields, it forces these state pension funds and all of these people who are dependent upon bonds, many cases, to get their returns to have to reach for yield. And that’s a very dangerous thing. There’s so many things that I think--you mentioned about with the tide going out, we’ll find out later. Around the world, these governments have been borrowing huge amounts of money at very low rates because they can. And there’s been no pressure on them to control their spending whatsoever. Obviously, it’s always fun to promise things to the general populace, but when the bill comes due, there’s trouble. So, we’re not talking about just trouble in the US. We’re talking about it globally, and this all is a result, or will be unintended consequences, of these desperate attempts by the central banks to keep the game going.

Chris Martenson: Well, Fred, bubbles are always fun on the way up. Let’s talk about on the way down. Corporate share buy backs--they’ve been a huge component of the earnings per share increases we’ve seen over the past eight or nine years. How do those work on the way back down?

Fred Hickey: Well, we know what happens. We saw they hit the absolute low in 2009, and they hit the absolute high right in 2007. So, we know what happens. They’ll go away. They always buy at the highest prices. They follow their peers. It’s worked out very well for all of the executives right now because their bonuses are all higher, stock prices are higher, earnings are apparently higher. Although, if you look into corporate tax receipts, they’re all down.

But you don’t pay money on EPS; you pay money on actual earnings. So, we all know what’ll happen. They will have all overpaid at these crazy prices. This is the price of sales basis. This is the most expensive market in history, even after this recent decline that we’ve had. Someone else mentioned seeing it as the second or third highest. In those cases, the other comparative years were 1929 and 2000, and those two ended in terrific crashes.

So, we’ll have a similar thing where markets decline a lot and corporations will have wasted their cash at these very high levels. And then they won’t be able to buy at the bottom.

Chris Martenson: And they may well be rolling over a lot of corporate debt at the time when interest rates are rising. On that front, we see the Trump administration just put out a budget that projects nearly $6 trillion in total deficits over the next five years, and that’s without a recession or any other sort of indicators that might come along and trash that number. Do you see interest rates just having--they have to go up from here with this kind of flood of money?

Fred Hickey: They’re already rising. We know consumer debt has gone up well over a trillion dollars, and the average rate on credit card debt is now up to 15%. We’ve seen the mortgage rates from what was in the threes, now they’re 4.5%. Actually, ten-year treasury have more than doubled here. So, they’ve already gone up, and I think they have to continue to go up to be able to attract the kind of money that’s need to pay for all of this debt.

I saw somewhere something like 20% of all the debt in the US is going to roll over in the next year or so. And those are going to roll over at higher rates, both for the government, the state and local governments who are hugely in debt as well, consumers, corporate--they’re all at record amounts. Student loans-- $1.5 trillion from what was nothing. Huge amounts of debt. Even in this last fourth quarter, we saw a pick-up in holiday spending. It was the largest jump in consumer credit in history over two months. So, rates will rise and that obviously crimps everyone’s ability to spend.

Chris Martenson: Wow. 20% roll over. Hey, turning very quickly now, a quick question about crypto-currency, Bitcoin being the leading example presently. First, your thoughts on the crypto-currencies as a store of value, and second, and maybe separate from that, your thoughts on the underlying technology.

Fred Hickey: Right. Well, as people have done, you have to separate the block chain from the crypto-currencies. The block chain is a legitimate technology. It’s an electronic ledger where you are able to store things independently. The set up where we are right now, it’s more efficient. A lot of people, banks, credit card companies, payment companies are all working on this, and it’ll be a plus for our future I think over time.

The crypto-currencies are what Charles Kindleberger of Maniacs, Panics, and Crashes called delusive objects. They are of little value or no value. They are speculative objects that occur at manic tops. In 2000, we had dot com companies that never had a prayer of making any money, and many of them never even had revenues.

In addition to that, we had the gaining baby craze. These are your babies, these are your dot com companies with no revenues, no hope of a--store value, well, at first, the argument was they were going to be used as a method of exchange, and we saw a few early adopters start to except Bitcoin, resellers and that sort. They basically all dropped them. Even the big online gaming place called Steam drop it recently.

There was a crypto-currency conference in Miami in mid-January, and they stopped accepting Bitcoin as payment. Why did they do that? Well, because Bitcoin runs from 1,000 to 20,000 to 8,000 and that’s a little bit difficult to deal with. In addition to that, the cost of transactions, processing, are hugely expensive. So, no one is using this as a method of exchange as was originally promoted.

So, when you talk about a store of value, well, we just saw 170 million stall out of an Italian online nano crypto currency. We just saw the police part of that. $530 million out of Japan, constant huge thefts by hackers. That doesn’t really lead to much confidence as a store of value for me. Running from it, and Bitcoin is their largest, it counts for a third of all the crypto-currency values. And that one’s the more tame of them, but that one went from 1,000 a year ago to 20,000 to 8,000 as I said. That’s not exactly your store of value either.

One other problem is that stores of value are supposed to hold their value in times when the rest of the world is crazy, when markets are crazy. And gold has always done that, but that is not the case here. The crypto-currency’s gone up because their delusive objects. As Kindleberger said, people gravitate to these things, just as speculative objects, away from originally what they were investing in, more valuable things. And then they crash.

Right now, if you saw a chart, and you probably have seen it, it shows the various stages of mania. And it starts from not much interest and goes through great delusion and then to crashes and goes to despair. Well, that Bitcoin has been following that pattern almost to a T. So, I don’t see the value in them. I don’t know--they have no intrinsic value whatsoever.

Obviously, the precious metals have other uses. Gold is used in technology. Gold is used obviously as a very attractive thing. It always has been for thousands of years. It’s used as jewelry. It has all sorts of uses. There are no uses, other than a speculative object, for crypto-currency. So, I expect they’re going to continue to go down on that path to despair and collapse in total.

Chris Martenson: So, let’s talk then about an actual store of value, gold. One of the reasons I invest is not because of its protection against inflation. It correlates poorly there. I do love it as a hedge against financial instability, institutional failure, maybe even sovereign decline, things like that. Tell us what’s really drawing you to gold here at this time, or what drew you, and then the gold mining stocks, and how you separate those two.

Fred Hickey: Well, as I mentioned earlier, what drew me was the irresponsibility of the central banks as it appeared to unfold to me in the early 2000s, and they’ve only gotten more irresponsible as time has gone on. So, I’m worried, obviously, yes. As a store of value, it’s always done that. In particularly turbulent times, that’s when gold does best. It also does best when the stock market’s doing poorly.

So, in the 1970s, it was a pretty powerful period for the country and for the stock markets. We had big declines in markets and huge increases in inflation. And gold had a big bull market. When the stock market turned around and we had a 20-year bull market in stocks that peaked in 2000, gold was in a bear market right along with it.

It’s a ying and yang, as I like to say. And so, we had the lost decade for stocks in the 2000s, and gold had a huge run from $250 or so to $1,900, to the top. So, we see this over and over again. It does well in times of difficulty, and we’re in one of those times. Or we’re about to head into the most difficult of times, likely.

And we have a stock market, bull market, it’s very old, and an economic recovery that’s very old--third longest in history. And things aren’t good. So, I think that we’re going to have another market decline. It’ll take time, years, at least a couple of years. And gold should do very well during that period of time. In addition, it is a hedge against inflation. We do have to worry about that.

As we all know, gold has held its value over years. You can by a Tonga suit in Rome for the same price you can by good suit today. You can take that, food, whatever it is. It holds its value. Gold doesn’t do anything. It holds its value over time, and the currencies decline against it.

And that brings up the dollar, which if you look at the chart of the dollar, it’s in free fall. It has broken through all support levels, and there’s reasons for that. The reason is is that it looks like the United States is going to go on a great big spending binge.

Back in 2000, when gold was sitting there at $250 an ounce, we had surpluses from 1998 to 2001. And then, we had 9/11 occur, and Bush went on a great big spending binge for some would say good reasons. But then they also continued. And then the Obama years were big spending years, and we saw budget deficits, or budget surpluses go to massive increases. We went to 8 to 10% as a percent of GDP, our debts. We went over a trillion dollars per year, and 8 to 10%. And that just so happened to be coincidentally at the top in 2011.

And in 2011, Congress initiated spending caps, and that just so happens to be the time when gold peaked. And it also is a time when the budget deficit or the percentage of GDP started to fall rapidly. And it fell all the way down to 2.4% in 2015, which just so happens to be the bottom of what I think is the last. It illustrates a cyclical bear market in gold. And now, it’s on the increase again very dramatically.

So, if you follow the pattern, gold’s going to rise as the deficits increase dramatically, as they did in the 2000s. And the dollar declines as well. Also, our trade deficits had been reduced, and we went down from $50 billion to $20 something billion. And now we’re back up to $54, a new high. So, the trade deficits are rising.

As trade deficit goes, so does the price of gold. So, everything seems to be, now, pointing towards a big move in gold hire. Go ahead.

Chris Martenson: Yeah. Part of my analysis, too, centers on the idea that there’s not as much gold in the West as there used to be. There’s been an extraordinary flood of gold from west to east. As well, the gold miners are reporting more difficulty in reserve replacement, reserve discovery, and so we might actually see a decline in mining output. Is that the level at which you’re analyzing this market as well?

Fred Hickey: There’s no question about that. They haven’t spent money on--they slashed their exploration and budgets because of the pressures they were under when gold fell in this most recent bear market. As a result of that, the forecasts are probably everyone. Whether it’s Southside brokerage houses or whether it’s Hendersy sources, they’re all saying we’re going to see year after year of declines in production going forward. That’s not going to turn around because it takes a decade or more to get a mine going.

We’ve seen grades fall from what were ten ounces per ton to--ten grams per ton to one gram per ton on average. They haven’t found an elephant find in decades now. It’s just not--and when you do find them, it’s often in geopolitically very difficult places. So, yeah, there’s no doubt that we are going to see a reduction in mining production, and we’ve already seen the peak I think.

Even China’s numbers were down last year, their production, which is a large producer in the world. We’ve already started to see that roll over, and that’s only going to get bigger deficits as we go forward. As you’re right, there’s been a huge shift. When the price of gold fell from $1,900 down to its low of $1,050 over these years, we saw an explosion of buying from the east, led by China, which has now become the largest consumer of gold in the world.

But Russia has been adding over 200 tons or more, 233,000 last year. Turkey--we had this huge movement of gold out of western vaults into eastern vaults. The great GLD, TF, it’s not even close to the level that it once was at the top. And that gold has moved out, and it’s not coming back. The Chinese do not sell their gold. The bank of Russia does not sell their gold.

It is not coming back, and we’re not producing what we were. When you have those kind of dynamics, it only leads to a hard press.

Chris Martenson: Now, Fred, I’m interested in directing people to your newsletter, “The High-Tech Strategist.” Are you also analyzing individual gold shares and strategies in that?

Fred Hickey: Yes. It might not be every month. A few months ago, I spent a lot of time on the miner’s themselves. Lots of times, it’ll be a lot of tech related, but I kind of all merge together what’s going on with the world in technology, and the ying and yang of all of it, and the miners. But I’ve been, personally, heavily invested in the miners for many years, decade plus now, and I talk about the miners that I own.

It’s an amazing story, what’s happened to those stocks right now. You mentioned there was nothing undervalued, but those are. Just this year, we’ve seen the price of gold hold up during this market decline. Yet the miners get slaughtered. To the point, one of the things we look at is the yearly the gold ratio, or the gold miner index to gold. And that is down as of last weekend, so just two days ago, to 0.133.

Now, that is lower than it was at the 20-year bear market bottom in 2000. It was slightly lower than that at the end of 2015, but we’re talking about near record lows here when the price of gold is up. It looks to me that gold is in a bull market. The charts look that way. It looks that we have higher highs and higher lows, and we’ve gone from $1,050 to $1,330.

I think once we go over $1365, which is the old high in 2016, then more people will come on board, and we’re likely to slingshot higher from there. But the miners have gone in the opposite direction. I think there’s some reasons for that. One of which is that we have a huge short position built up in the GDX GTF.

Now, in the technology world, the Facebooks, and Amazons, and Netflixes, and Googles, the fang stocks, they get propelled higher as the money pours into the ETS. Well, it works the opposite way in the gold miner area where money gets poured out. So, in March of 2017, we had 510 million shares outstanding on the GDX. Just a week ago, it was 310 million, or a 40% decline.

Now, a lot of that was short interest. I just found this out in the last couple of weeks. We went up to 55 million shorts on a 310 million, now, total. So, that’s almost 20%. 20% of the total shares outstanding in the GDX were short. Now, that’s like Tesla levels. One of the most favorite shorts on wall street. And why would that ever be in a market where the gold looks to be in a new bull market? It certainly is up more than 20%. And the assurance all look like it’s in a new bull market. How could anyone put out these kinds of shorts?

Well, it’s one of the problems with the central bank is when you make money as cheap as you do, and you can borrow as much money as you want, then you can play games. And it becomes a giant casino. And the people who are play the short game have helped to drive the price of the miners down at a time when people would have thought they would have risen.

We’ve had this turbulence; the miners should have gone up. Gold held its own. It fell slightly on the year, but the miners are getting killed. The owners can’t get their head wrapped around it, so they kind of get demoralized and then they sell out. I think we saw that, maybe, on Friday. We saw a capitulative moment.

And then what these shorts will do is that then they’ll cover. Now, it’s unfortunate that they get stampeded like this, but it’s the kind of thing you can do when you have the ability to borrow at very low levels and to play games with people. They should be going higher. Today, we have the miners, they’re pretty much down. The price of gold’s up another $6. You’re only $30 away, or so, from a break out high.

Yet, these miners continue to go down. They have round in the last couple of days, and I think that was the bottom on Friday. So, you have this extremely low level--ultimately, what determines the profitability for miners is the price of gold. So, if you look back and see at the margins for these miners now, compare them to the bottom, these miners are back to the lows almost.

At the end of 2015, they were only making $225 net of all in sustaining costs, so the price of gold versus their all in sustaining costs. And now, it’s double that. It’s $460; yet, the miners haven’t round. It’s amazing. This is the same level, almost, that $460 was $490 in 2012 when the GDX was not 21, or whatever it is at the moment. It’s very close to that. Let me look. Yeah, 21, but 45.

So, we have this huge disconnect between the price of gold, the margins of the miners--which are doing very well because they had to keep their costs low--and the price of the stocks. Now, ultimately, that will get corrected, and we saw the huge run in 2015, where gold went up 30% in the beginning of 2016 and the miners went up 180%. And we saw that in 2000, when gold went up quite a bit, but the miners went up 1600%. That’s 17 times the average.

We saw that in the 1970s coming out of the bear market there. We saw things go up on average--the little ones I look back on 1970s--we saw that on the big net buyers went up at least 10 times, and some of them went up as much as 30 times. So, this happens regularly where the miners get depressed. They get out of whack with the price of gold and margins, and then they slingshot higher. And that’s where I think we’re about.

We’re right there. I think there’s going to be enormous amounts of money, once again, just as we did in early 2000s, just like we did coming out of 2015, the bottom, just as we did coming out of the 1970s mid-cycle correction, or even before that. So, I’m pretty excited about it, and everyone else is completely despondent because they continue to go down while the price of gold goes up.

Chris Martenson: Well, and that’s always the right time to buy. And that Hughie gold ratio you just told me really is a real eyebrow raiser. I will tell you, Fred, I traded gold futures on an intra-day basis, and I would never do that without having the miners on screen because the games they were playing back in 2008 and ’09 when I was doing this--I would watch the gold miners all get crushed as somebody came and layered a bunch of shorts on. Then they would wander over to the futures market and do a dump there and then reverse everything and take their winnings. It’s games.

Fred Hickey: Especially with the volume as low as it is today. The volumes are very low because there’s little interest in them. The focus was all on the fangs and the prices that only go higher forever. They’ll never go down. So, the volumes have dried up. It becomes even easier.

The short interest ratio, last week, on the GDX went to 1.5. That’s only happened one other time in the last five and a half years. That happened to be July of last year, first week, and from that point forward at that short interest ratio, the price of gold went up $120. And the miners went up 20 something percent within a matter of weeks. That’s how explosive it can be when you get to this point. I think the shorts are about ready to cover.

Chris Martenson: Right. Well, from your lips to somebody’s ears. Hey, Fred, thank you so much for your time today. Please tell all our interested listeners where they can follow your work and how they subscribe to your newsletter, please.

Fred Hickey: I’m on Twitter. [email protected] That’s one way. Then we have the newsletter I’ve been writing for 31 years. If you have any interest in subscribing to that, it’s $140 a year by email, and $150 by mail. And if you’re interested, send us an email to [email protected]. That’s T-H-E-H-I-G-H, strategist as it’s spelled at yahoo.com.

Chris Martenson: All right. Well, thank you very much for that, and we’ll of course be putting that information at the bottom of the transcript and as well in the comments below so people can find that easily. Fred, thank you so much for your time today.

Fred Hickey: It was a pleasure.

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13 Comments

JohnH123's picture
JohnH123
Status: Bronze Member (Offline)
Joined: Apr 14 2010
Posts: 46
Christ Martenson

I feel sublimely confident knowing "Christ" Martenson is our host!smiley

cmartenson's picture
cmartenson
Status: Diamond Member (Online)
Joined: Jun 7 2007
Posts: 5830
Don't forget the first initials...
JohnH123 wrote:

I feel sublimely confident knowing "Christ" Martenson is our host!smiley

...and the most common first initials that precede that moniker are JHF.

/Occupational hazard.

 

Pipyman's picture
Pipyman
Status: Bronze Member (Offline)
Joined: Apr 24 2011
Posts: 64
*******$€$$$!

JHF Christ, it hurt to work that one out!

Can we try why did the chicken next time? Or is that more Alex Jones?

Mohammed Mast's picture
Mohammed Mast
Status: Silver Member (Offline)
Joined: May 17 2017
Posts: 196
I am shocked

I am absolutely shocked  that a gold bug would have little to say positively about crypto currency, (sarcasm duly noted) He did give a little credit to the underlying technology however.

 

It might be well to remember when and why btc was created. It is barely ten years old coming on the heels of the 08 meltdown. It was designed to be democratic and decentralized. That is it was designed to be the polar opposite of the central bank.

Are there issues? Of course. Is it perfect? Of course not. It is a nascent technology and to make any kind of broad generalizations in regards to their utility would be silly.

 

One would think that this community and site owners would be behind the concept philosophically given the daily rants about central banks. Cryptos have brought banking to the unbanked around the world without central banks (can I get an amen?).

 

It might be well to consider that if the objection to cryptos is that it is not suitable for currency then neither is gold. Gold will never be used as a currency again, that ship sailed a long time ago. So in comparing to two as investment vehicles it is clear that gold is an investment for those that already have considerable assets. That is a minority of Amerikans. Cryptos on the other hand allow opportunities for even the poorest among us.

 

The issues with btc and others are scalability and high fees these are being worked on and solved. The crypto universe needs time to mature. As a medium of exchange on a personal level I have no problem with its volatility. “I will work for crypto”  Value is determined by agreement. Pretty simple.

 

The state of Arizona is close to taking cryptos in payment for taxes. Venezuela is issuing its own crypto (the first state issued crypto currency). These seem like currency to me.

The cryptoverse is 24/7/365 it never sleeps. New developments are occurring daily.

 

With all the time and research Mr. Hickey does regarding gold I do not fault him. However it would be refreshing if people who have not done the research on this subject to say so and move on. Drive by comments serve no purpose.

 
Mohammed Mast's picture
Mohammed Mast
Status: Silver Member (Offline)
Joined: May 17 2017
Posts: 196
New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
unhelpful comments
Mohammed Mast wrote:

I am absolutely shocked  that a gold bug would have little to say positively about crypto currency, (sarcasm duly noted) He did give a little credit to the underlying technology however.

.....

 

With all the time and research Mr. Hickey does regarding gold I do not fault him. However it would be refreshing if people who have not done the research on this subject to say so and move on. Drive by comments serve no purpose.

 

  

 
MM - This is a thoughtful and insightful post that resonates with me a lot.  IMHO there's plenty room for both Crypto and PM's having varying degrees of utility, stores of value as insurance from the status quo.
 
There's definitely still so many dismissive judgments being made by some people without a comprehensive knowledge of the topic.  Whether that's out of simple ignorance or fear I'll leave others to consider.
pat the rat's picture
pat the rat
Status: Silver Member (Offline)
Joined: Nov 1 2011
Posts: 122
not decenteralizer yet !

I try to invest some of my crypto currencies in England, it was denied I had U.S.  computer address. If the crypto was truly world wide I could buy them anywhere?  

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
I'll accept them..
pat the rat wrote:

I try to invest some of my crypto currencies in England, it was denied I had U.S.  computer address. If the crypto was truly world wide I could buy them anywhere?  

Businesses still have their own regulations for investors.

Would they let you wire the funds in USD?

Please don't confuse investment with payment.

Otherwise your comment only proves my previous point.

Feel free to send your BTC/ETH to me in the UK, I'll happily accept it to show you how it works lol

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
California Farm Estate for Sale

Multiple properties and farmland for sale at this ranch in CA.

They'll happily accept BTC...
https://patch.com/california/escondido/bitcoin-welcome-34-9m-escondido-p...

That's looking like a medium of exchange to me...

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
PayPal accumulating???

Heard rumours the massive buying of $400MM of BTC in the last few months maybe PayPal themselves, since they have taken on an exec from CoinDesk that wouldn't be beyond the realms of possibility...

http://fortune.com/2018/02/19/400-million-bitcoin-anonymous-investor/

 

New_Life's picture
New_Life
Status: Gold Member (Offline)
Joined: Apr 18 2011
Posts: 366
PM's & DA's go hand in hand

Mike Maloney an advocate on PM's and Digital Assets as insurance for the "Everything Bubble"  

dhoulden's picture
dhoulden
Status: Member (Offline)
Joined: Sep 14 2014
Posts: 2
California Farm

 It would need to be listed with an asking price in Bitcoin to be truly using Bitcoin as the medium.  

Mohammed Mast's picture
Mohammed Mast
Status: Silver Member (Offline)
Joined: May 17 2017
Posts: 196
For sale

Lot's of junk but some gems as well

https://bitcointalk.org/index.php?board=51.0

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