Mike Maroney Interviews CPM Group's Jeff Christian - January 2017
Mike Maroney: Good Afternoon! My name is Mike Maroney and we are coming to you today from the Monex precious metals studios. Today, I'm very honored to have a guest, Jeffrey Christian, who is the Managing Director of CPM. One of the foremost experts in the world on precious metals. Jeffrey has been in the commodity business for well over 40 years and I think of him as the expert's expert. I've been doing this now for well over 30 years. Ron Smoler, our trader downstairs, has been doing it for well over 40 years, but there are times that we have questions and who we call, Jeffrey Christian.
Today, what we're going to do is talk a little bit about the reports that Monex is making available to you, the precious metals investor for 2017. I've had a chance to review these reports and I believe without a doubt these are reports that every single investor, whether you've been involved in the precious metals industry at all in the past, needs to have, needs to read, and we would love to provide them for you. So, what I'd like to do is introduce you to Jeffrey Christian and then I'm going to ask some questions about the reports. So, you can get a general feel for what these reports will provide.
Jeff, great to see you today. I know a lot of people say, "Happy New Year," we've talked about that a little bit--we're almost to that cutoff date. It was interesting, when I read through the reports and many times in the past the reports that you have provided you always talk about different things, but the one thing that stood out to me when reading this report is... you have four reasons why you believe every investor should own precious metals. Can we talk a little bit about those?
Jeff Christian: Absolutely. Yes.
Mike Maroney: Now, you're first reason is, one, wealth protection. Can you extrapolate a little bit on that?
Jeff Christian: One of the problems that people have around the world is that most of their wealth is dominated in the domestic currency that they have. There are some people who can diversify away from currencies. In many countries, you're not allowed to have wealth stored in other currencies. One of the realities of currencies, regardless of which currency it is, they deteriorate in purchasing power over time and they are beholden to governments which rise and fall. So, people will say that the only currency system... that every currency system that wasn't backed by gold has failed. That's true, but its relatively meaningless. The reality is that the only currency systems that haven't failed are the current ones, because currency systems fail. An investor should have protection and diversification of the denomination of their wealth. So, having gold and silver in your wealth and having some of your wealth denominating in gold and silver as opposed to domestic currency or other paper currencies makes sense. It makes sense to have that... diversification of your wealth to protect yourself from the inevitable decline in purchasing power that occurs with anything that you can earn interest on.
Mike Maroney: Now, reason number two you have is catastrophic insurance. Before the presentation, we talked about what's taking place in the world and you stated in the report that you believe that there's more political and financial uncertainty today than any other time going all the way back to the Great Depression. Can you talk a little bit about that?
Jeff Christian: Well, yeah, I mean, I don't think it's actually something that you can argue about, because it's so demonstrable, in terms of the data that's around. We have had 70 years of liberal democracy in the United States and in Europe we've had relatively good times. Contrary to what some people believe, the economy in the United States has been far less volatile since World War II than it was prior to say the 1940's and 50's, and you've actually had a relatively good time economically. Those good times have been challenged for most Americans and most people in Europe over the last 15 years and they will continue to be challenged. There are a lot of problems out there and they're economic problems, there's the debt... deficit spending in the United States, Japan, and Europe. There's deficit spending in China and other countries. There are economic problems, fiscal problems, monetary problems, currency problems, political problems, financial stability problems, issues with banks, the banks continue to be poorly regulated. None of the regulations that have come in to place really since the Great Financial Crisis of 2008, 2009 have solved or addressed the problems that caused that financial crisis, but they've created new problems that are constraining economic growth. So, I think that it's quite quantifiable that you are in a greater period of uncertainty now than you have been at any time since the Great Depression. I'll just say this... Tim Geithner, for whom I have no lost love, was in, I believe, Foreign Affairs most recent issue writing about the fact that there will be a future financial crisis and it possibly could be more severe than the 2007, 2009, financial crisis, expressly because the protections that were sought to be put into place have not been put in place and the protections that have been put in place are counterproductive.
Mike Maroney: Interesting. Now, we'll get to some of those catalysts, that obviously, we're going to be very concerned about it in the future. The third reason was portfolio diversification. It's very interesting because modern portfolio theory has talked about having a none correlated asset in your portfolio as a way to offset risk and to balance things out. I've heard a lot of numbers tossed about, as far as, how much gold you should actually have. You've gone back and back tested a portfolio that holds stocks, bonds, and gold and found the optimum percentages. Can you go over those with us?
Jeff Christian: Yeah... The semanal work on this was in the early 1980's by a University of Chicago, I believe, economist named Ibbotson and Ibbotson Associates. He gathered data. Gold prices were freed to float in 1968 and he had data from 1968 to around 1980. He looked at... well if you have a portfolio that's 50% S&P and 50% T-bills or T-bonds and you start adding 5% increments of gold, what happens over time. One of the things that you have to do, that people don't do, is you do it on a rolling twelve-month basis... your calculations. So, you're not picking periods of time that are either high gold prices, or high stock markets, or low gold prices, or low stock markets, that way you get rid of any bias that you would get by picking a good time to start your calculations. Ibbotson showed that about 5% or 10% of your portfolio, optimally, should have been in gold, between 1968 and 1980. We took the data and we looked at it from 1968 through 2015, 2016 and the number is 27%-30%. It's a real jaw-dropping and when you show it to mainstream economists and mainstream financial market participants they're jaws drop. They say, "We thought it was 5%-10%." Well it was 1968-1980, but since 1980, we've had two big bond markets, we've had two big bond market collapses, we've had several stock market crises, and we've had two big gold markets--bull markets, including this gigantic one from 2011-2012, and so that means that gold has done much better relative to stocks and bonds. And really, you can argue that quantitatively you should have 27%-30% of your portfolio in gold and gold assets.
Mike Maroney: That's interesting, because everything that we're talking about today, obviously, supports that. Your fourth reason, which I think is the most exciting, and that's wealth accumulation. We talked a little bit about what sits maybe 3-5 years out, can you give us some of your views as far as that variable?
Jeff Christian: Ok. That ties back in with numbers one, two, and three too, because one of the things that we didn't talk about with number two is the idea of having cataclysmic insurance. CPM Group tends to advise its clients to buy precious metals based on greed and fear. A lot of people only buy gold because of fear. They're worried about the dollar collapsing and the financial markets collapsing or their personal bank collapsing, or their government collapsing, and those are all more or less legitimate fears, but if you look at history things tend not to collapse. They tend to go through very bad periods and look like they're going to collapse, but then the system pulls itself back. Our view is that over the next 5 to 10 years, you're going to have a series of economic, and financial, and political problems that are just going to get worse and worse and worse. There is probably a higher probability of a collapse in the next 5 to 10 years than there has been at any point since the Great Depression for a variety of issues that would could talk about for several days, but we think that the political, economic, and financial risks are higher so that gold prices are more likely to be stronger over the next 5 or 10 years. We're actually looking for record prices on a nominal basis between 2020 and 2025. So, over the next 5 to 10 years or 3 to 10 years, we think that you'll see record gold prices because of these factors. Part of it is the economic and political uncertainties and problems that the world faces, not just the U.S., but the world. The other issue is a set of fundamentals in the gold market. You have investors who have been buying more gold on a longer-term basis on a sustained basis since 2000-2002 than ever before in history and we saw them back away a little bit in 2014, 2015, but they started buying more gold again in 2016 and 2017 is starting off well too. We think that investors probably will increase their annual amount of physical gold that they're buying by something on the order of 50% to 100% over the next 5 to 10 years. When investors start buying... looking to buy another 10 or 20 million ounces compared to what they did this year in 2016, they will find that Central Banks are buying gold and it’s going to be a crowded market. Our expectation is that mine production peaks around 2018, 2019, and then it starts to fall sharply after that. So, our expectation is beyond 2018, 2019, you get a situation where investors are increasingly concerned about political and economic risks, they look to buy more gold, they find that Central Banks are already buying more gold, so, there's greater competition for a scarce resource, and mine production starts to fall right at that time. So, we think that there's a fundamental argument for higher gold prices that dovetails perfectly with what we're looking at as unfortunately economic and political problems.
Mike Maroney: Now, what you're talking about then here is... we have four reasons, but what I'm starting to hear is that after 42 years of being in the business, you think that right now may be one of the greatest times to own precious metals. Is that correct?
Jeff Christian: I think that is correct. I would clarify it by saying, I think, that it's always a good time to own precious metals. One of the things that we'd say to people is... because of those four reasons, you should always own some precious metals. There are times that you want to own more precious metals and I think going forward beyond the first half of 2017, it will be a great time to have a significant portion of your wealth in precious metals, because they probably will rise sharply in value due to those political problems.
Mike Maroney: Now, you talked about political uncertainty and financial uncertainty, let's look at what's happening here in the United States. We have a new President and there's a lot of uncertainty, as far as, what sits out on the horizon. What's your views, as far as, how the market is pricing in the Trump effect? Because in the report, you talked about how it's factored in three interest rate increases, it's factored in stimulus, it's factored in tax cuts, obviously, there's been a lot of promises made. Do you think all those promises will come to reality and do you think the current price levels that exist now may be a little bit off based on what they believe will happen?
Jeff Christian: I don't expect all those promises to be met. There's a topic called the limitations of Presidential power, and there are a lot of limitations on Presidential power, and they're going to be thoroughly tested over the coming months. We think that what you will see is initially a big tax cut, corporations and wealthy individuals, and a lot of that money that corporations will use it for stock buy backs, which will pump their stock prices up, and investors will put it into the stock market. We don't have a lot of expectations for infrastructure spending and we don't have a lot of expectations that those tax cuts will be invested in productive assets. The economy, it's showing its age, but it does have a lot of strengths going on. We think the economy continues to bump along in 2017, but when looking at those stock... those tax cuts and we think that will goose the stock market. We've used the term sugar-high a couple of times and we're using it again now. We think that the stock market will be on a sugar-high over the first half of 2017 and as the stock market continues to rise as this money pours into it then you'll see investors overseas buying dollars so that they can get into the U.S. stock market. So, we think the first half of the year sees higher stock prices, higher gold prices, and that sort of restrains gold prices from rising as sharply as they will. Once you get into the middle part of the year and the second half of the year, I think that you'll see several things. You'll see higher interest rates, as you said. You'll see an economy that is twelve months further down the road towards maturity and showing signs of possibly weakness, maybe even a recession in 2018 or 2019. You'll have a much more realistic assessment by the world of what a Trump administration is going to do. We think that all of those factors then will cause investors to start buying gold. We're looking for the gold price to rise more sharply in the second half of this year. We think that the first half you're seeing gold prices depressed, because people in the financial markets are focusing on the dollar and the stock market. It's an excellent buying opportunity, because we, quite frankly, expect the gold price to be 10% higher this time next year and maybe 70% higher this time 2020.
Mike Maroney: Interesting. Now, you talked about DOW 20,000 and potentially we break through there. A lot of times, people think that you shouldn't own both gold and stocks, but obviously, both of these products could rise in price and then inevitably, gold may actually rise a little bit slower, but suddenly really start to take off. Is that kind of what you're looking at?
Jeff Christian: That's exactly what we're looking at. You mentioned earlier the idea of having a diversified portfolio. The correlation between stocks and bonds is extremely low, it's less than 20%... stocks and gold, I'm sorry. The correlation between stocks and gold is less than 20%. The correlation between gold and bonds is virtually zero. If you measure it properly, which is percentage change in the bond interest rate versus percentage change in the gold price. The correlation between gold and the dollar is about -34%, which means that about 66% of the time gold is either rising in or falling in conjunction with the dollar, or it's moving independent of the dollar. So, gold is a really good portfolio diversifier against stocks, bonds, and the dollar, because it has low correlations with these things. It's quite possible that in the second half of this year you'll see a strong dollar, not because of strength in the U.S. economy, but because of relative strength in the U.S. economy relative to Europe, which is going to be going through a series of elections and the BREXIT negotiations, and Japan, and other parts of the world. It's quite possible that we will see both a stronger dollar and a stronger gold price in the second half of the year. We think that the stock market could come off sharply, possibly starting in the second half of the year, partly because it's already very top heavy and that sugar-high wears off.
Mike Maroney: Now, you talked about the debt and we talked about $20 trillion and I think what you said today was that the calculations, as far as, the 8 years out actually go out to $34 trillion. We know that the revenue, as far as, U.S. government is concerned is about $3.5 trillion and so we're talking about six times revenue. If you're going up to that $30, $35 trillion, when is the proverbial tipping point or is that just something that will happen suddenly, and that's why you have to have gold in your portfolio?
Jeff Christian: It goes back to those four points. First off, we don't think that it goes, I mean, those are independent evaluations from non-partisan groups like the Congressional Budget Office that look at what Trump has said he wants to do, so take it at face value. We handicap it. There's not going to be a lot of infrastructure spending. There's probably going to be a lot of other things, but we do think that the debt, which is at about $20 trillion now, will continue to... it will accelerate the growth of Federal debt and that the budget deficits will get high. We think that you're running a greater risk, as I said earlier, of hitting that tipping point over the next 8 years and that's a real risk that could be very beneficial for anybody who owns gold or silver. But, our habit is more like... has always... over the last 42 years... has tended to be more middle of the road. Yeah, we'll have financial problems. Yes, we may have a recession. It could be as bad as the recession in 2007 and 2009. We probably will have further financial crises. We definitely, will have further financial crises. They could be worse than the one in 2008 and 2009 and again the one in 2011, but we think that there is a tremendous capacity to muddle through. There is a lot of ammunition left on monetary policy and there are things that could be done in fiscal policy to improve things. So, our view is that what you'll see is not necessarily the financial collapse that people have been waiting decades for, but what we think you'll see is an extended period of hostile economic and financial situations with subpar growth, higher unemployment, unemployment rising as computerized manufacturing and services increase, lower interest rates, a lower stock market, a relatively hostile sort of muddle through subpar growth economic period, punctuated by financial failures, because the banks need stronger growth to paper over all the mistakes they've made over the last 40 years.
Mike Maroney: Obviously, Europe is having some issues and you've talked a little bit about the elections, we've seen 70 years of liberal democracy and it looks like populism is coming into play, what's going to happen over there? Is the European Union in danger of literally splintering?
Jeff Christian:I've been doing a lot of reading about the elections of 1932 and 1936, because the parallels are greater today than they have been since that time, in the United States and in Europe. After World War II, World War II to the mid-80's, you had the overriding political theory in the world was... larger and larger political unions. The EU and the Euro were all created in that period from 1950 to 1985. The Euro came into play in 1999, but it was agreed upon in 1987. Starting in the mid-1980's, you had the major political theme in the world being decentralization and devolution of power to ever smaller operations--you had devolution in China, you had devolution in Britain, you had the collapse of communism in eastern Europe, you had the Soviet Union break into 15 republics, and that has been going on. When they created the Euro, the master plan for rolling out a new currency excluded debit cards, because if you have a debit card you don't need a single currency. Technology, globalization, deregulation really preclude the need for a European Union, at least economically and politically too. So, it is possible that you will see the EU dissipate in power and maybe even be unwound at some point. It's hard to say. Part of the problem in Europe though, as is the case in the United States, is there are a lot of people who don't like the bureaucracy of the EU, who would like to see it replaced with a more human political system, but they don't have voice. So, the people who are talking about anti-Eu sentiment are the extremists on the right. Sort of the same way as you have it in the United States. Without politicians stepping up to give those, that silent majority in the middle a voice, you've really have the risk that it won't be a peaceful transition to a future political system. It could be much more hostile.
Mike Maroney: Now, we haven't spoken about China at all. There's a lot of things happening over in China. A matter of fact, there's a lot of geopolitical issues over there. How do you feel China and India fit in, as far as, the precious metals markets over the next 5 to 10 years?
Jeff Christian: Well, China and India traditionally are the largest two markets for gold and they're also very large markets for silver. India has actually seen some decline in the amount of gold and silver being bought by investors, because the economy is modernizing, the banks and financial system is becoming more stable, and investors are becoming more modern. So, they're moving away from the traditional economy that was gold and silver based to a more diversified portfolio. They're not exiting gold and silver. There is still a lot of demand for gold and silver and there will continue to be, but it's part of a diversified portfolio. In China, you had a country that for 400 years or so didn't have a central government. When the communists took over in 1949, the major currencies in circulation were U.S., Spanish, and Cuban coins, silver coins. Then for maybe 60 years, you had a very poorly run communist system. The communists realized that capitalism works. So, the communist party has been instituting managed economy, sort of a communist run capitalist system and it's done very well. You've seen in that environment, Chinese investors buying a tremendous amount of gold and a tremendous amount of silver. Their silver demand is holding up very well. Their gold demand has suffered a little bit in the last couple of years as the price came down. There's been some disenchantment, but it still is very high compared to levels prior to say 2010 and it's probably going to continue. So, China is a very interesting place, as is India. Both of them are modernizing. We're doing more work with financial institutions, industrial companies, and insurance companies in China and in India than we used to, as those economies modernize. I think, they're going to remain very important. You do have the uncertainty issue of what happened between China and U.S. political relations under the new President. The Chinese clearly would like to cooperate and it's really up to the U.S. government as to whether or not they will be willing to cooperate with the Chinese. The Chinese government, and we also work with the Chinese government increasingly, what you find with the Chinese government is they really would like to avoid confrontation and they'd like to find ways to cooperate wherever possible.
Mike Maroney: Now, there's a lot of talk about what's happening in India, because it looks like the government there is trying to go to this cashless society and I was amazed when I heard the statistic that less than 22% of all the people in India actually use banks. I guess they store a lot of their wealth in precious metals. Can you talk a little bit about that subject.?
Jeff Christian: I'm not sure that the government is going toward a cashless society. I think that might be an over simplification that some people use. As far as the government is doing things about cash, it's good for gold and silver, because a cashless society in India is gold and silver based. In fact, the current system is gold and silver based. There are perhaps 30% of the population... 28%-30% of the population that don't even have bank accounts and those people tend to hold their wealth in gold and silver. If you go to the souks, the precious metals market places, you'll find people buying and selling little pieces of gold and silver, because they need cash to buy food, or because they need cash for whatever reasons, and when they have more cash they don't have a bank account so they'll buy gold and silver. So that's almost a third of the population. The other 70% of the population does have bank accounts and they are increasingly doing things, but they continue to own gold and silver because they're smart people and they know that 10-15 years ago the banking system was much more unstable and it can be again. The stock market was a wild speculation and it can be again. There's a general distrust for the government. I mean, the government has introduced these gold backed bonds, but the fact of the matter... they've only collected a few hundred thousand of ounces of demand for these gold backed bonds, because most people in India who own gold hold it expressly because they don't want the government holding their gold for them and having a piece of paper that says oh please sir will you give me my gold back.
Mike Maroney: Now, we talked a lot about gold so far and obviously, a lot of investors are always interested in silver, because silver just seems to have a higher standard deviation and when it comes to a major move silver can be a big mover and quick. What's your views on silver?
Jeff Christian: I apologize, I use gold as an umbrella term for gold and silver. Silver is like gold. There is a lot of silver out there in the world right now, but that doesn't really matter. Silver is clearly a financial asset like gold. It trades like gold and currency. It doesn't trade like iron, or oil, or copper, or corn, it trades like a financial asset as does gold. Everything that I was saying about gold really applies to silver as well. Silver is a little bit less universally seen as an investment product, but if you look at the 1.3 billion people in the Islamic world, they see silver as a form of wealth, a form of money, and a form of investment. If you look at people in China and India, North America, you see the same thing, a little bit less though in Europe. I think that everything that I've been saying about gold applies for silver and, as you said, it’s a smaller market. It's probably, 5% of the size in dollar value as the gold market. So, it tends to be much more volatile. The price rises faster and falls faster. Right now, the price looks undervalued relative to gold. I think that silver will do well, because investors continue to buy 100 million ounces or more of silver every year as a form of wealth preservation and portfolio diversification.
Mike Maroney: Now, we also have two other metals. They are the PGMs and I think your report was incredible. It really pointed some key features out, as far as, what's happening in those markets. Of those two, is palladium your favorite?
Jeff Christian: Palladium is my favorite. There are a number of fundamentals that are stacked up against platinum in the long run. Most of the fundamentals that are potentially negative for platinum over the next 10 years, 20 years, 30 years are positive for palladium.
Mike Maroney: Now, if you're interested in insurance, if you're interested in wealth diversification, and if you're interested in capital gains and profits, these reports are an absolute must read. Jeffrey Christian, without a doubt, is one of the greatest analysts in the commodity markets today. Monex has found a way to provide these reports to you absolutely free. Jeffrey, it's been a pleasure. I look forward to your presentation this afternoon.
So, please give us a call so you can have a chance to update your information on what's happening in the markets and find out why you need to add precious metals to your portfolio.