By David Morgan
Silver Bear Cafe
This is an interview conducted by David Morgan with Nick Barisheff. He’s recently written a book called $10,000.00 Gold: Why Gold’s Inevitable Rise is the Investor’s Safe Haven.
David Morgan: Nick, I haven’t re-read the whole book. I read the preliminary, but it’s an excellent job of characterizing why gold is so important. Before we start on that, what prompted you to switch from the real estate industry to precious metals?
Nick Barisheff: Well I guess that would take us back to 1997. I’d just finished a project and was looking at what the next trend might be. I concluded that it would be precious metals, the energy sector, and water. The thing that attracted me to precious metals in particular was that in Canada, there was no method of holding physical bullion in registered retirement accounts in a way that didn’t compromise the fundamental attributes of bullion.
So that’s what I set out to do. I thought precious metals were going to rise, and I was going create a structure that would accommodate Canadian RRSP investors. At the time there was about $400 billion in retail mutual funds, and somewhere in the back of my mind I had this idea that everybody should have 10 percent in bullion. So I thought there could be great potential to create a bullion fund.
It took four years of dealing with the Securities Commission to make it happen, because one of the things I didn’t want to compromise was the liquidity. I didn’t want to set up a closed-end fund, because then the liquidity is whatever number of shares you’re trading. I wanted the liquidity to be the same as bullion itself. So the way to do that was with an open-end mutual fund trust that could be purchased and redeemed daily at Net Asset Value.
Because a bullion fund didn’t fit all the regulatory requirements and had never been done before, it took four years to establish the first open-end mutual fund. And then the big surprise was that I thought it would be readily accepted and that everybody would understand they should hold at least ten percent of their investment dollars in bullion. But the resistance to that simple idea was massive. There were enormous misconceptions, negative attitudes, and so on that I never experienced with any of the other investment projects I’d ever done.
David Morgan: It’s been something of my experience as well that to get this educational process through to the public has been more than a struggle, and it seems so obvious—the lessons of history. This, of course, leads me to the historical lessons of gold versus paper. You have several stages in here, one through five; can you outline what those are?
Nick Barisheff: Well to begin with, a lot of mainstream commentators, and investors, lump precious metals (gold, silver, and platinum) in the same category as industrial metals (copper, lead, and zinc) and treat them as a commodity instead of as money. They don’t understand why precious metals’ prices are rising when in fact what’s happening is the currency is devaluing, and this is happening in all currencies. It’s simply because if you create too much of something it’s going to lose its value. It’s that simple.
So that’s really what’s happening. Right now we’re seeing that prices have been increasing since 2000 because of accelerating currency devaluation and increasing debtIf you chart the gold price against the U.S. debt you get an almost perfect correlation.
David Morgan: Great, so can you go ahead and outline the five stages of the historical lessons of gold versus paper?
Nick Barisheff: Well I guess just to make it short and quick is that throughout all of history there hasn’t been a single paper currency that didn’t end in hyperinflation and complete collapse. Now, for the first time, we are in unprecedented territory in that we have a global fiat currency in the form of the U.S. dollar as the reserve currency. It simply gets to a point where there are no other solutions but to create more currency to postpone the inevitable.
Right now you’ve got a situation in the U.S., as well as Europe, Japan, and most of the Western world, where governments have few choices. You can increase taxation, or you can implement austerity measures. However, we’re now finding those don’t work in the short term; they make matters worse. The result is you reduce GDP, you increase unemployment, and you reduce government tax revenues, which then causes you to borrow even more currency and go further into debt. So governments around the world are caught in that spiral. The other way to get out of it is to grow your way out of it, but at this level of debt you’d need in excess of ten percent annual GDP growth, and nobody’s saying that’s going to happen in the foreseeable future.
The other thing that has worked in the past is the implementation of financial repression, which is a subtle form of reducing the debt-to-GDP ratio. It was done successfully after World War II. You simply create negative real interest rates. You devalue the currency through excess creation. You can change the rules and you force certain institutions, such as pension funds, to buy Treasuries and you eventually implement capital controls. If governments keep that kind of subtle form of financial repression going they can, over a long period of time reduce the debt-to-GDP ratio.
David Morgan: Let’s talk about the aging population and what that meansfor the gold situation.
Nick Barisheff: I looked at some of the trends because we’ve got a lot of daily noise in terms of what may or may not happen, and we speculate on different possible outcomes. I tried to focus on a few trends that are not changeable. The first one is the aging population, the baby boomers in most Western countries. During the 1980s and 1990s, the baby boomers drove the economy as the largest percentage of the population who were buying homes, raising kids, buying products, and so on.
Well they’re now starting to retire, and in the U.S. the number I’ve heard is ten thousand a day, who are starting to draw on Social Security. So as this trend progresses you get an opposite outcome over the next twenty years, from what was the case during the lasttwenty years. The boomers have stopped spending money because they don’t need to buy any more stuff. They’re disinvesting in many cases, and they require drawdowns from the government in terms of Social Security, Medicare, and pension funds. That kind of shift is going to cause a reduction in GDP, a reduction in tax revenues, and therefore, an increase in annual deficits and total debt.
Another issue is that over the past twenty years or so, we’ve seen the offshoring of jobs. A significant number of jobs have gone to China and other third-world countries, and they’re not coming back. If we ever get to the point where it is more profitable to return to the US, then manufacturers are going set up highly automated robotic plants, and they’re not going to be staffed by the blue-collar workers who lost their jobs on the assembly lines. So that’s another long term factor that’s going to create systemic unemployment for a good deal of time.
A third issue is that of peak oil. While there’s currently lots of talk about shale oil and fracking, the issue with respect to oil is actually the peak in terms of conventional cheap oil. We’re either at the peak or close to the peak in terms of conventional cheap oil, and other than printing currency it’s the only other thing that, as the oil price rises, causes inflation by affecting the prices of literally everything else. So you’ve got these three macro trends that are going lead to even more currency printing, even more government debt, and gold’s going to rise accordingly.
David Morgan: Let’s discuss the myths about gold bullion ownership. It seems still that even though you and I are in this sector, and a lot of people we speak with are well aware of gold and its importance, I’d say that’s 1 percent of the population, but the other 99 percent are rather clueless. So—
Nick Barisheff: That’s right.
David Morgan: What would be the myths about gold ownership?
Nick Barisheff: Well I guess in the book I’ve covered the myth that gold is a risky asset, so we’ve charted it against the Sharpe ratio and the Sortino ratio, which measure return against volatility. Gold, silver, and platinum outperform just about all of the Dow components. So if gold, silver, and platinum are risky, so are all of the Dow stocks. That’s number one.
The second major myth is that gold is useless because it doesn’t pay any dividends or interest. Well neither does currency if you hold it in a vault. If you take a stack of hundred dollar bills or Swiss francs and put them in a vault, you’re not going to get any interest or dividends. In order to get interest or dividends you have to take your money, or currency, out of the vault, give it to someone else in the form of shares or bonds, and hope that they will give you back your principal plus interest or dividends. But you’ve put your currency, or money, at risk of never getting it back. That risk is the reason why you get interest and dividends. But if it’s sitting in a vault, whether its currency or gold, it’s not at risk, so you’re not going to get dividends or interest.
You can achieve similar cash flow objectives through the partial liquidation of capital gains. Since gold has increased by about 15% per annum over the past ten years, investors could have liquidated part of this gain, achieved higher cash flow than they could a with dividends or interest while at the same time preserving their remaining capital in inflation adjusted terms.
We have now created a fund that does a fixed monthly distribution based on this concept.
Those are some of the major myths, but they’re so well ingrained, and you’ll see them repeated again and again in the media. I felt I needed to address them in detail in the book.
David Morgan: That’s one of the best explanations I’ve heard as far as equating gold to physical currency. Any investment is at risk, and you do have a potential loss of principal and we could cite many examples.
Nick Barisheff: That’s right.
David Morgan: Unfortunately we don’t have time today to cover all of the examples you detail so well in the book. Let’s talk about Chapter Six, legacy of gold, performance of gold, and what you see based on the last bull market.
Nick Barisheff: The first thing to remember is that in the 1970s, the rise in the gold price market was due to a decline in the value of the U.S. dollar after Nixon closed the gold window in 1971. It’s something that was largely a North American phenomenon; it affected Canada, and the UK. But it wasn’t a global rise in the price of gold. Gold didn’t rise in German marks or Swiss francs, for example. China, Russia and India weren’t participants. As a result, there was a lot more interest in mining stocks, in that bull market, from North American investors.
Now what we have is a price increase in all currencies Without exception, all currencies are declining against gold. The majority of the purchases are coming from countries like India and China, and those purchases are all in physical bullion. As a result you’ve got a much higher level of demand for physical bullion than mining stocks because it’s fueled by a growing global concern about the value of the currencies.
David Morgan: Let’s talk about owning gold. You talk about the fundamental case. What is the fundamental case for owning gold?
Nick Barisheff: Well the importance there is that you actually own gold, silver, and/or platinum. That you’re not simply purchasing a proxy or a derivative, and many people don’t understand the difference. You’ve heard, I’m sure, that a bank in Holland refused to give a client gold that he thought he was entitled to; he was simply given cash to liquidate his account. It appeared that the bank defaulted on delivering the gold. Well the bank did nothing of the kind; the client never owned any gold in the first place. He had an account that was similar to any other cash account or foreign currency account, and basically what he had was an IOU for his supposed gold, from the bank. And in this case that’s what many people have.
I know that we have clients from Switzerland who are switching out of the accounts that they hold in Switzerland that they thought were allocated gold accounts, but which turn out not to be the case. If you’re buying small amounts and taking the gold home, that’s not an issue. But if you’re buying bigger quantities where it is impractical to self store, it’s important to realize that the first step is to actually purchase the gold, and have the title to it transferred to you. You can’t simply buy allocated gold. You need to buy gold, or silver, or platinum, and that purchase needs to have documentation confirming that the title is transferred to you. In order to do that, you have to describe the refiner, the serial number, the exact weight, and the exact purity of each bar that is transferred to you. You don’t own anything if all you have is “ounces” on an account statement.
The process is not much different than if you bought a car, a motorcycle, a boat, or a house. You always get a detailed description of the asset being transferred to you. Once that process has taken place, the second step is to enter into a custody agreement with a credible custodian—ideally with an LBMA custodian to ensure maximum liquidity. That’s part two, and in that custody agreement it will specify what the custodian can and can’t do with your bullion without your permission.
This is where there’s a lot of confusion, and in terms of the accounts that people get in to, they’re attracted to them because they think they’re buying gold at a reduced price with very low storage fees. But the reality is that they haven’t bought any gold at all.
David Morgan: Very important, and that’s a lesson that I think a lot of people are going to learn the hard way, no matter how many times people such as yourself, myself, and others in the industry try to pound these facts home.
Nick Barisheff: That’s right.
David Morgan: It’s the convenience. It’s the simplicity. It’s the law. It’s done that way. I’ve had this discussion with some fund managers; and some just seem to ignore it. Moving on, how would you buy gold? How would you buy it if you were a fund manager and you really want the physical? What’s one of the methods to do that?
Nick Barisheff: Well typically you want to deal with an LBMA member, and actually purchase the bars. We deal with ScotiaBank, which is an LBMA member, as well as BMG (a Dutch bank specializing in international financial services), and we deal with barswhich meet LBMA specs. We have a program where you can buy any number of gold, silver or platinum bars, and either put them in storage, or take delivery. You can do whatever you want with your bars. But we facilitate the process to accomplish that. Lately we’ve had an influx of investors coming to the realization that they thought they owned bullion but in fact they had a bullion proxy or a derivative.
David Morgan: Exactly, so in your last chapter you talk about gold never sleeping and the Chinese. Can you talk about where the gold shift has been moving and why?
Nick Barisheff: You’re aware that China is the largest gold producer in the world now, and they’ve been purchasing all their internal production. Russia’s been purchasing about two-thirds of itsinternal production, and then China is importing as much on top of that. So I think it’s clear that China wants to create a competing reserve currency, and I think they’ve already signed about twenty trade agreements with different countries where they’ll settle the trade deficits in their own respective currencies. As this moves along, they’re building up the gold backing to support a stronger yuan, and make it a truly international reserve currency.
We’re not getting any accurate numbers out of China, and its central bank doesn’t show that it’s purchasing gold. What they’ve done in the past is to purchase gold through a sovereign wealth fund that doesn’t have to report any of its activities. Just like a few years ago, when they made an announcement that “Oh by the way, we just transferred six hundred tonnes from the sovereign wealth fund to our central bank.” That’s probably what’s going to happen in the near future. They’ve just been accumulating gold at the sovereign wealth fund.
But the same thing is happening in terms of a number of the Eastern countries, whether it’s South Korea, Russia, or India where they’re increasing their gold reserves and trying to extricate themselves from the U.S. dollar while they can. That trend is in place, and when you consider that central banks used to sell about five hundred tonnes a year, and they’re now buying in excess of five hundred tonnes a year-you’ve got a one thousand tonne differential, when annual mine supply is about twenty-five hundred tonnes. That’s rather significant, I would say.
David Morgan: You talk about accepting individual responsibility; this is not positive head-in-the-sand daydreaming; it’s the polar opposite; it requires training and discipline, as well as courage. Would you talk a little bit about that and why you wrote it?
Nick Barisheff: Well I think that in Western society, we’ve abdicated a lot of personal responsibility in various areas of our lives. But two areas where you can’t abdicate your own responsibility are in terms of personal finance and health. You have to do your own homework and become knowledgeable. If you simply ignore those and expect someone to take care of your finances or your health, you’re going be in for some unpleasant consequences.
So when I talk to people about gold, I say: “Basically 10 percent is a no-brainer, so just allocate 10 percent to your portfolio.” But after that, start doing your homework and reading, and after you get more and more comfortable with everything, then you can decide what your personal allocation is. My personal allocation is 100 percent because I can’t find anything that it would be worth parting with my gold to invest in. Because whatever I would buy, I would end up getting less gold back, in which case I might as well leave the gold in the vault.
David Morgan: Very good, well we’ve done a brief outline of the book. It’s an excellent read, one of the best to come out in my view. I think you’ve covered this topic in ways that others haven’t. Coming back to the title, the $10,000 Gold, you know, that startles some people. How did you come up with that number Nick?
Nick Barisheff: I was meeting with a writer—he’s the author of many financial books—and we were having lunch and talking about titles. So he said “Well okay, so what do you think the price of gold is going to be in plus or minus five years from now?” I said, “Well, round number’s $10,000.” And he said, “Well, that should be the title of your book.” So that’s what I did.
I’ve been reluctant to project numbers like that in the past. But what changed my mind is when we had the U.S. debt ceiling debate in 2011, the price of gold went up 30 percent during that debate. And it was clear to me there was no political will to solve the budget deficit and the debt of the U.S. It was just going to keep going higher and higher. When you look at it, the debt has started to look like an exponential curve going straight up. So in terms of plus or minus five years you get to $10,000.
If we have a repeat of the 1970s, if you recall, the gold price went from $35 to $200 by 1975. And then it dropped to $100. From $100 it went up to $850. So if you take an eight-fold rise from the current low, you get to $10,000. Same thing has just happened, the gold price took a big hit in the middle of the bull market, and the next rise is going to be exponential.
David Morgan: Very good. Well, let’s talk a little bit about your company and how people could inquire about that and get some more information.
Nick Barisheff: We have two kinds of categories and products. We have three mutual funds that are public funds in Canada, and are sold to accredited investors throughout the world. One fund buys gold, silver, and platinum; one buys gold only; and one buys units of the gold fund and issues monthly distributions.
But in addition to that we’ve set up a program where high net worth investors can buy larger, what I consider investment grade, bullion bars and either take delivery or have them stored in one of the Scotia vaults in Toronto, New York, or Hong Kong. That allows people direct ownership of bullion, and we tried to make it as convenient to purchase actual bullion bars as it is to purchase a stock. It’s taken us about five years to develop the software and the programming to facilitate the purchase process and the ongoing administration.
David Morgan: Well I thank you for a great interview. Before we close out, is there anything that you would like to leave with our listeners before we do close out?
Nick Barisheff: Well as I mentioned, I think at this point in time people have been given a gift in terms of a low price. If they don’t own any precious metals—gold, silver, platinum—this is one of the final opportunities they will have, I think, before the price really starts escalating. And they should at least get to the point of 10 percent, and it’s always a good idea to have a mix in terms of gold, silver and platinum in the process. Then start educating themselves, and that’s where I hope this book will do its job-will help people understand the fundamentals and get some of the myths and prejudices out of their heads.
David Morgan: Very good Nick, and we’re looking forward—or maybe we’re not looking forward to $10,000 gold. I say that with a bit of humor because—
Nick Barisheff: Well that’s not going to be the peak, and the real worry is what happens after that. Because if we hit $10,000 then we’re really into hyperinflation, and the number it’s going to head towards will sound ridiculous today. But that’s what I think is going to happen.
David Morgan: Thank you Nick, this concludes the interview.
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