-- Published: Thursday, 13 November 2014 | Print | Disqus
In this SchiffGold exclusive video, Peter Schiff sits with Axel Merk at the recent New Orleans Investment Conference to discuss gold investing in the midst of the currency wars. Like Peter, Axel was one of the few analysts to warn of the 2008 financial crisis and he remains one of the few analysts independent from the mainstream ďrecoveryĒ consensus. Their conversation covers the history of goldís price performance, the upcoming Swiss Gold referendum, the role of physical bullion in a portfolio, and much more.
Follow along with the full transcript:
Peter: Hi, this is Peter Schiff. A couple of weeks ago, I was down in New Orleans for an investment conference, and I had the pleasure of sitting down with well known money manager and hard currency advocate Axel Merk. We both agreed that owning gold is important, given todayís economic climate. I hope you enjoy our conversation.
When youíre talking about the history of gold, of course, you start correctly in 1970, because youíre going back to before we basically went off the gold standard. If you really want to compare the performance of gold to other assets, you really need to go back to when we left the gold standard. Of course, all of the people who want to play down the role in the returns on gold, they never start in 1970. They start in 1980 to try to show what a bad investment gold was when they take [a look at] a peak.
Axel: Go back a hundred years. Go back to 1914. We have run studies going back Ė obviously you werenít allowed to hold gold in some of that periodÖ [But] if you do a portfolio optimization with perfect hindsight (now thereís plenty of problems with perfect hindsight, plenty of problems with portfolio optimization) and choose between equities and gold, youíre coming up with numbers such as 30% allocations to gold. Iím not suggesting everybody should. I personally have more than 30%, but thatís not the right thing for everybody. Basically, if something has a low correlation and positive returns, you want to have it in your portfolio. If you think gold is going to have a positive return in dollar terms over the next couple of years, why not have it if it has a low correlation? Indeed, gold has a wonderful low correlation. No, not every day. There will be times when, for a couple of weeks, it will move in tandem with the markets. By the way, during the peak of the eurozone debt crisis, most people arenít aware, the euro and gold were extremely highly correlated.
Peter: What they really need to compare gold to is other currencies, like the dollar or the yen or the euro or pick a currency. If you want to compare gold to the dollar over extended periods of time and say, ďIf you were going to keep liquidity, if you didnít want to buy assets for whatever reason Ė you wanted liquidity Ė where did you preserve your purchasing power?Ē Were you better off holding dollars in a bank account or burying gold in your backyard? You want to go back a hundred years, even probably with the interest that you could have earned on a bank deposit, you still have more purchasing power today just burying gold than depositing dollars in a bank. Of course, if you stuff those dollars under your mattress, compared to gold, you have lost almost everything.
Axel: I agree. To us, there are different ways of looking at it, and they come down to different risk profiles. People invest in equities. Well, itís very risky, right? Gold obviously is volatile as well. When you buy currencies the volatility is less, but sometimes returns are less, as well. We think that if one believes that we have the better printing press than the rest of the world, well, then gold should do well, and other currencies should do well. If you think that we have currency wars, where things got whacked around, you might want to be a bit more tactical. Now, itís not everybodyís interest to be very tactical, and so youíd rather have a longer term position, but there are different ways to approach these markets. They all have their pros and cons, but if you look at longer periods and you donít want to be so active, buying gold is probably one of the better choices.
Peter: Of course, gold is the only true winner in a currency war because when everybody is printing money, then gold is going to rise in all currencies. While central bankers can all print their respective currencies, none of them can print gold. The supply of paper money continues to grow, and the supply of gold does not.
Axel: Every major central bank in the world has tried to talk down the dollar, and as you point out, the winner of that is, of course, gold.
Peter: The Swiss are going to vote to require the Swiss National Bank to have 20% of its reserves in gold. Now, I think Switzerland was really the last country to leave the gold standard officially. When they did, their reserves were substantially in gold. I think the Swiss, over the years, have sold more than half their gold. Meanwhile, they have been buying euros like crazy in order to prevent the franc from rising to protect their people from a falling cost of living Ė deflation. Now, they have enormous reserves, and their gold reserves are now down to about 7 or 8 percent. If this passes, theyíre going to have to buy a lot of gold. It also requires them to repatriate their gold that theyíre having stored in other countries. Bring it back to Switzerland.
Axel: First of all, as weíre speaking, the polls are leaning towards acceptance. Now, the experts in Switzerland say it will not pass. Now, the experts have been wrong before, but right now, it has a chance of passing. As you point out, the establishment is very much against it, which also means if it were to pass, the establishment is going to drag its heels implementing it. Itís not going to happen tomorrow that they are going to buy many, many tons of gold. Some estimates say that they will do that over five years or so. I think the most relevant thing here is that thereís a grass roots effort in an entire country to move there. This is, I think, just the beginning.
Peter: You mentioned earlier that Americans have a lot of debt, so they want inflation. Well, the Swiss have a lot of savings. They donít want inflation. They want to protect the value of what they have saved. They want to save their currency from these central bankers and politicians who are trying to destroy its value.
Axel: Yeah. I mean, obviously youíre talking about the people versus the government. The government wants to debase the currency. I sometimes think about the Swiss as Ė Think about youíre in this rotten neighborhood, but you have this one house with a beautiful back yard. In order to blend in, youíre going to dump your garbage into your own back yard, as well. Thatís what the Swiss are doing. They have been living off their reputation. Now luckily, underneath the surface, there are many things that are moving in the right direction. But the government policies are heading towards placing the garbage in the back yard. Then, of course, you have Mr. Jordan, the head of the Swiss National Bank, and he tells you, ďHey, weíre going to defend this peg no matter what.Ē Well, good luck doing that if you have to own 20% in gold. Itís going to get very difficult because suddenly itís not that easy anymore to print an unlimited amount to do that.
Peter: As investors in hard assets know, prices have been taking a beating. Recently, pretty much all the commodities have been under pressure. We know gold prices have come down, too. A lot of other fiat currencies have fallen. The dollar has strengthened. Even the new cryptocurrencies, they have come down. It seems like the only thing that is going up right now is the US dollar. This has really emboldened all of the dollar bulls and the defenders of the Fed and the QE to say, ďAha! This proves that all the gold bugs, the Peter Schiffs, the Axel Merks, those guys have been wrong. The Fed has been vindicated. The dollar has been vindicated.Ē What do you say to those people who are claiming a victory?
Axel: When everybody jumps on the same bandwagon, I get concerned, especially when, for the fundamental reasons, I think that we could have a crash in the stock market. When complacency is at record highsÖ Yes, thereís low inflation. Well, the time to buy gold is when thereís a low inflation environment. The time to sell gold was when Volcker came in to crush inflation, but Janet Yellen is no Volcker.
Peter: Not even close.
Axel: Not just in size, right? I have absolutely no problem with the market disagreeing with me. In fact, I get concerned when they agree with me. The more people that disagree with my views, the more emboldened I get with my positions.
Peter: Yeah. People always say, ďWell, if you know itís a fun ride, why not climb on board and enjoy it with everybody else?Ē See, the problem I have is you can only enjoy the ride if you donít realize how disastrously itís going to end. Since I know itís going to end in a wreck, I canít enjoy it. If I get on board, Iím going to be nervous the whole time.
Axel: We have to have an adjustment and where are you going to be? Even if you donít have Peter Schiff views, if you donít have my views, well, shouldnít you rebalance portfolio, and hasnít the equity portion of your portfolio gone up in price? Where on earth do you put this stuff? Are you going to put it into bonds? Bonds have done just fine, but Iím not going to touch them with a broomstick. We like currencies, we like gold. Iím sure there are other alternatives out there. Bernanke, the one thing that I liked about him, he said he had a toolbox. We got to have our toolbox to fight his toolbox.
Peter: What do you think about physical precious metals? What do you see as the role for physical ownership of gold in an investorís portfolio?
Axel: I have all of it. I have physical gold in my pocket, coins and bars. Well, not in this pocket here. I have an ETF. I have mining. I even have derivatives. So thereís a place for everything. If you are in a true crisis and you need to have access to a coin, youíre not going to get any change for your bar so you may want to have a coin. The nice thing about the coin is you can easily transfer it to somebody else. You can give some to your kids. Obviously, the core challenge with gold is that gold itself is risk free. Thatís why people love it. The problem is the moment you touch it, youíre introducing risk. Youíre introducing risk when you have it in a financial institution. Is it allocated? Is it unallocated? Youíre introducing risk when itís under your pillow. You need to buy the gun, as well, to protect it.
Peter: I think that if youíre prudent with your own gold, you can find ways of keeping it safe and storing it safely in your house. Certainly, if thereís a crisis, that gold thatís readily available might be more valuable to you, but you donít need all of your gold readily available.
Axel: Take it a step further. The reason why people buy the standard coins, like a gold Eagle or a Canadian Maple or whatever it may be, is because theyíre easily recognizable. When you buy a London bar, no retail person has an interest in one. Well, first of all, itís huge. The quality is inferior to the coin. What are you going to do with it? How are you going to trade it? Itís fine for institutional trading, but itís not fine for a person. Then, of course, you have numismatics, exotic coins, and whatever it is, but they all have their own place for different type of investors.
Peter: Of course, some people, they like to have coins that are private and anonymous. I mean, if you own a gold coin and you have it and you dispose of it, if you give it to somebody or barter it with somebody, the transaction is done. People like to have some assets where itís not all about paperwork and reporting and having to worry about all that. When you have at a brokerage account, you have ETFs, and you have all that, thereís all these statements, thereís all these transaction recordsÖ
Axel: Then, you get grey hair.
Peter: Yeah. People just Ė You never know. Itís not that people want to do something illegal but people fear that the government may do something illegal in the future, may do something oppressive in the future. They might want to confiscate gold but they canít confiscate it if they donít know where you have it. If you have it in a brokerage account, they know where it is and they can take it. But if you have it buried somewhere or in a safe, they canít get at it.
Axel: Exactly. So itís about the trade off between the ease of liquidity to trade it and the safety of having it. We try to combine the two and say, ďHey you can trade it and if you want delivery you can send it anywhere in the world.Ē For some people thatís not good enough and thatís absolutely fine. Some people say they get sent the coin to home. Now if you can publish your home address and say exactly on which shelf you hold all your gold, see youíre not comfortable with that either. Each of these choices has some trade offs.
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-- Published: Thursday, 13 November 2014 | E-Mail | Print | Source: GoldSeek.com