Kenwood, CA (The Gold Report) –
The Gold Report: You recently wrote that these are not normal times. Perhaps the current macroeconomic picture is the new normal?
Jay Taylor: The new normal is being shaped. We haven’t seen the final product yet. The new normal will be a world in which most Americans do not enjoy the standard of living that they have enjoyed in the past. I think this directly results from a situation in which the people who are able to create money out of nothing wrestle wealth away from those who create it. The miners, the manufacturers, the investors, the farmers-people who actually do things that are good for people-are not getting their fair share because the banking class attached to the politicians has control of the system. This is one of the reasons that I think we should go back to a gold standard. The new normal will be a decline in the general standard of living for most Americans. And I don’t think we’ve seen the bottom of that yet.
TGR: Your Inflation/Deflation Watch (IDW) chart is up about 53% since you launched it on Jan. 31, 2005. However, you believe that the chart’s current neutral direction suggests that the market is running on speculative money, not growth. Can you explain your rationale for that?
JT: By “neutral,” I mean that it is just a momentum gauge. We actually saw a decline in the IDW, or a real deflation, for a few months after the Lehman Brothers crash in 2008. Huge amounts of money, trillions and trillions of dollars of stimulus pumped into the economy, have managed to get it back up to the positive 50%-plus you noted. Now, it seems that we could be topping out. What we’ve seen is a rise in commodity speculation and games played by Wall Street-not a substantial rise in the real economy globally.
TGR: Recently, some big companies have posted really strong earnings. That sounds like growth to me.
JT: Look at the economic statistics. Look at the unemployment numbers. I’m not saying that that top 20% isn’t going to do better. They are. Quite frankly, we have a fascist economic system and it’s becoming more and more so because the people who are really calling the shots are getting stronger.
TGR: Do you worry about marginalizing yourself by labeling this system a fascist economy?
JT: Go to the definition of fascism: government and corporate entities in bed together. What about the bankers getting bailed out at the expense of the poor? Is that good for poor people? Is that good for middle-class people? You might think it is. That’s the game. That’s the propaganda that we’ve been fed. I don’t buy it. The top banks, those that are “too big to fail,” know full well that they can enter into the next risky business and always get bailed out.
TGR: You had a conversation with Ian McAvity, the author of the Deliberations on World Markets newsletter, who suggested that we are in a secular bear market that dates back to 2000. He believes the Dow Jones Industrial Average will ultimately fall below its March 2009 lows. What do you make of Mr. McAvity’s projection?
JT: I think we are in a secular bear market. I’m not absolutely sure that we’ll see the nominal lows of 2009. In fact, if you look at what the equity market has done via gold, you’ll see that we are in a heck of a bear market right now in terms of the Dow Jones. In terms of purchasing power, there’s going to continue to be a decline in the wealth of the Dow.
TGR: What will be the impact of all this on gold and silver? There’s certainly been an unusually good run in July.
JT: I focus on the bigger picture. I look at the long-term secular moves. There have been 10 straight years of bull markets in silver and gold. I don’t know how much longer it’s got to run, but I think that it will keep running as long as the global economic picture remains unstable. The whole global system is in disarray right now. We have a system that’s broken. That’s why I don’t care whether the economy goes into a hyperinflation or deflation-gold has to be the cornerstone of a portfolio to preserve wealth. Investors want to own real money. They want to own what the markets have determined to be money over centuries: gold and silver. Fiat currencies have always failed. The U.S. dollar will eventually fail. This is a perfect storm for gold and silver.
TGR: Your model portfolio recently consisted of about one-third speculative mining equities. Why do you dedicate such a large position to one of the riskiest sectors of the market?
JT: I don’t think it is one of the riskiest sectors in this market. During the last 10 years, we’ve had triple-digit gains very frequently in those kinds of securities. Yes, we’ve had a soft patch in gold and silver stocks, which have not kept up with bullion markets. But they will. I remain very bullish on this sector because the majors need the juniors to replenish their resources and reserves. The large companies produce many millions of ounces of gold per year. They are not very good at replacing those ounces.
I caution my subscribers not to back up the truck and buy one or two of these stocks, but to spread out their portfolios and limit their allocation to about 5% of any one name. Taken as a basket, these types of companies will enhance returns very significantly, as they have over the last 8 to 10 years.
TGR: Any parting thoughts on a macro level?
JT: We are in a bull market of a lifetime for gold mining companies, caused by the macroeconomic situation, the loss of confidence in fiat money, the deleveraging that needs to take place in the credit markets and the need to go back to honest money rather than the fake stuff that we’ve been conned into using by the policymakers. Gold has gone from $250/oz. to $1,600/oz. within the last 10 years. This is probably the sixth major credit-deleveraging episode over the past 300 years, with the first four being U.K.-centric and the fifth being the U.S. in the 1930s. In deleveraging cycles, what an ounce of gold will buy rises dramatically. That’s good news for gold mining profits.
The real price of gold is up dramatically and that is not a fluke. That is the overriding theme that makes me extremely bullish-we are in a secular bull market of a lifetime for gold mining companies.
TGR: That sounds great, Jay.
A baby boomer born in Ohio, Jay Taylor was drawn to the world’s financial capital in 1973, when he went to New York to work for Barclay’s Bank International after earning his master’s degree in finance and investments. As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay’s interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. This led to his first investments in junior gold shares toward the end of the 1970s. Sometimes called “the buy and hold guy,” he began publishing North American Gold Mining Stocks in 1981. He was involved in the first modern-times gold loan made in the U.S. (to Amax Minerals, a 250,000-ounce loan facility led by Citicorp). To better understand the potential of the mining stocks he researched, Jay added a BA in geology to his C.V. in 1988. Pursuing his interest in researching and writing about mining companies as a sideline, Jay maintained his full-time banking career for nearly 10 more years. In August 1997, he left his position in the ING Barings mining and metals group to pursue his avocation as a new full-time career-including publication of his weekly Gold, Energy & Tech Stocks newsletter.
Article published courtesy of The Gold Report – www.theaureport.com