The Greatest Bubble in History

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Recently by Jeff Clark: After the Fall: How Far Can Gold and Silver Climb?

It may not feel like it after a 12% correction in the past 30 days, but Mike Maloney – founder of GoldSilver.com – is convinced that we’re in a gold bull market that will be life changing for those who participate. I interviewed him for our current edition of BIG GOLD and am sharing some of what we talked about here. You may be shocked at what you read, because he’s devoted a larger allocation to gold and silver than we have. See why he’s convinced a bubble is ahead for precious metals, how high prices will go, and why he stores some gold overseas.

Jeff Clark: For those who don’t know you, why is Mike Maloney such a big believer in gold and silver?

Mike Maloney: Around 1999, my mother needed help with the estate my father had left her. My sister and I interviewed a dozen financial planners and picked the one that had the most glowing recommendations and gave him control of the assets. He lost about 50% of them in the next year and a half. What I’ve found is most financial planners get it wrong. They’re always chasing yesterday’s news. To be fair, there was a market crash, but with 50% of her assets gone by 2001, I ripped everything away from him, moved it to cash, and started studying the economy like crazy.

I discovered that the people concerned about budget deficits and trade imbalances at that time were in the precious metals sector, the hard money advocates. All the rest of the economists and newsletter writers didn’t really care. Concerns about international trade imbalances and how they were going to come back to bite us one day were coming from the hard money analysts. They also wrote about monetary history, something I just fell in love with. The fact that things just repeat over and over again is amazing.

I have hard data from 1918 to today, and anecdotal evidence before 1918, that shows that throughout history a society has a certain amount of real money – gold and silver. Then they either come out with debased coinage, or paper representations of gold and silver and expand the currency supply, which eventually cause prices to rise. People then realize there was something wrong with the currency and they rush back toward gold and silver to protect their purchasing power… and in doing so, they bid up the value of the gold and silver in the country until it matches the value of the circulating medium.

It appears to me this process has been going on since 407 BC, with the first great inflation in Athens. I have charts in my book, Guide to Investing in Gold and Silver, starting in the year 1918, showing the value of the gold held at the United States Treasury compared to the value of all of the base money or paper currency, and it was a 1:1 ratio.

Jeff: So history shows that the value of gold eventually equals the value of all paper money in circulation?

Mike: Yes. Back then, the US dollar was a claim check on real money – gold. Base money was the number of US Treasury gold notes in circulation. Before World War I, base money equaled the value of the gold held at the US Treasury. Then we established the Federal Reserve and did a bunch of deficit spending for WWI, expanding the currency supply, so now there wasn’t enough gold to cover all the dollars they printed. In 1934 the price of gold was changed to $35 per ounce and the values of base money and gold at the Treasury were once again in equilibrium.

Then we expanded the currency supply to pay for WWII, Korea, and Vietnam, and in the ‘70s the price of gold rose until its value at the Treasury exceeded base money. But, for a short time in 1980, the value of gold at the Treasury not only exceeded the base money, it surpassed base money plus outstanding credit card balances. This is important because credit cards are replacing cash in circulation, so you must include it if you want to estimate a price target.

Jeff: So how high do gold and silver go?

Mike: When I finished the book, it required a $6,000 gold price to cover base money plus outstanding revolving credit. I’m not saying that that’s going to happen, but if history were to repeat, that would be the price.

However, since the book was written, Bernanke created a whole bunch of base money to bail out the banks, and now it takes a $15,000 to $20,000 gold price. One caveat is that $1.6 trillion of excess currency is sitting on banks’ balance sheets. It has yet to enter circulation, and if it never does, then this price target changes. My point is that prices are a moving target. Putting a dollar figure on them is an exercise in stupidity, I think, because the dollar is always changing. You can’t use it as a measuring stick.

My target for gold is that it should be equivalent to 1/40 of a single-family, medium-priced home, or two shares of the Dow. So gold will probably buy you about 12 times more stocks and 3 times more real estate in the future than it does now. So those are my prices.

And silver will leverage you to that. There is more gold on the exchanges and with the dealers that investors can buy than there is silver. Their current prices do not reflect this. Gold is way too cheap compared to dollars, and silver is too cheap compared to gold.

Jeff: Sounds like it’s not too late to buy gold and silver.

Mike: No. What investors need to be aware of is that we are on the last legs of our currency system. History shows that the world sees a brand-new monetary system every 30-40 years – and ours is 40 years old. Right now all currencies on the planet are backed by debt. All of the previous transitions were baby steps from something (gold) to nothing (debt). In order to give confidence back to the currencies, we’ll have to go from nothing (debt) to something (most likely gold again) in one big, huge, gigantic leap. This will cause an economic convulsion the likes of which the world has never seen.

The end of this precious metals bull market will be marked by panic buying. Gold and silver will be going into an astronomical bubble one day, probably the biggest bubble in financial history. That is why I think gold and silver are still fundamentally undervalued.

Jeff: Investors reading this might be a little skeptical that a bullion dealer is telling them to buy gold and silver. Do you mind sharing what percentage of your assets is held in gold and silver?

Mike: My personal portfolio is 100% in gold and silver. I have no other investments. I am completely committed to this because I absolutely believe it. I spent 2-1/2 years writing what is now a bestselling book on gold, and I opened a precious metals dealership. There isn’t anything I do, no action I take, that isn’t somehow connected to gold and silver.

Jeff: What separates GoldSilver.com from other bullion dealers?

Mike: Everybody at GoldSilver.com invests in gold and silver. They have all been invested in precious metals since I started the company in 2005. Everyone is absolutely committed and very knowledgeable. So we are all on the same side of the boat as Casey Research. If you become a gold and silver client, you’ll know we’re invested just like you are. We’re walking the walk and talking the talk.

We also have a team of researchers who are constantly analyzing where we are in this bull market. It’s in our best interest to try to find the top of this bull market and sell when the time is right. I believe we can multiply your winnings by letting you know what we’re doing when it comes time to sell. The way I’ve set up my company is that if you don’t win, I don’t win.

Another thing you should know is that I am not a gold or silver bug. I couldn’t care less about these metals. They are just in their cycle right now and will be the best performing asset for the coming years – period – just based on history.

There are these brief moments in history where the safe-haven asset also becomes the asset class with the single greatest potential gains in absolute purchasing power. We’re in one of these cycles right now; as the currency supply gets ramped up and people realize there is something wrong with it, they’ll rush back toward gold and silver and bid the price up until it matches the value of the currency supply.

Jeff: You’re increasing the number of storage facilities outside the US; why should a US citizen consider storing bullion outside the country?

Mike: Some investors are concerned about “confiscation,” which is technically incorrect. The US government never confiscated gold; they “nationalized” it. In 1933, they bought it from US citizens at full face so that the Treasury could hold it as an asset for the entire nation. That’s the very definition of nationalization.

Jeff: Are you saying you don’t think gold could be confiscated?

Mike: It’s possible, but I don’t believe it would happen in the United States. More than half of our currency resides outside the border. We’re the only country in that situation. If Obama passed an executive order today once again nationalizing gold, I believe that banks and brokerage houses around the world would suspect something was wrong with the dollar, and they would immediately dump their dollars and buy gold and silver. That would cause the dollar to fall to zero and send gold and silver to infinity in a matter of weeks. I would hope there is someone in the government smart enough to know this. If so, then it makes nationalization very unlikely.

Jeff: Good point.

Mike: But I do believe that it is good to have some geographical diversity. I think we’re going to see governments trying to limit our financial freedom even more than we’ve seen since 9/11. They’ll do this by instituting such draconian capital controls that today’s IRS will seem magnanimous by comparison. I want to be able to travel freely and have access to my funds no matter what happens. Therefore, I keep some of my gold in offshore storage accounts in several countries.

Jeff: But why go to the hassle and bother with the reporting requirements?

Mike: Because if you’ve got ownership outside the country, you may be able to retain it, even in a nationalization. The point is, we don’t know the future. All we can do is look at what’s happening, try to figure out what governments are going to do, and then protect ourselves with a little bit of diversity. And of all the assets you could own offshore, I believe none are safer than physical gold or silver.

Jeff: Do you think foreign storage puts a target on my back with government officials?

Mike: Well, they want to make sure you’re declaring any capital gain. And I do think that precious metals investors will see some sort of windfall profit tax when the government tries to punish those nasty gold speculators that caused the dollar to crash. They will always point the finger anywhere but where it belongs – which is squarely at the government and the Federal Reserve. People are just trying to protect themselves from government stupidity and the Fed by buying gold and silver.

I think the reason they require the reporting is to make it difficult for people to cheat on their taxes. I don’t think it’s going to make you any more of a target than anybody else if you report everything. If you play within the rules, you’re not a target. I myself walk the straight and narrow. I make sure I comply with everything the IRS and the Treasury require.

Jeff: What about the small investor? Do you have any advice for the person who has limited funds?

Mike: Yes. It only takes $40 to become a silver investor. Regardless of what your income level is, you’re going to come out much better in the end. And once you take the leap and become an investor, your mindset changes and you find yourself starting to plan. A lot of people are not really planning on the future that much – but once you buy an ounce of silver and become educated, you give yourself a tremendous advantage over the rest of the population.

So just buy small quantities of silver. It has such leverage to it. And silver will probably go into some sort of super-spike that you will want to catch, which means you probably need some sort of guidance. That’s where subscribing to newsletters such as yours is very, very important for anybody who’s going to get into this.

Jeff: Thanks for your time, Mike. And we appreciate the discount you’re offering our readers.

Mike: You’re very welcome.

Want to take advantage of the special discount on storing bullion outside the US? Goldsilver.com is giving us six months’ free storage at a non-bank, Canadian vault. And the normal storage fees are the cheapest we’ve seen, with an order process as easy as buying bullion. Get the referral code with a risk-free trial to BIG GOLD. The savings from this one order alone will more than pay for your subscription, and more importantly, allow you to easily internationalize your bullion storage.

Reprinted with permission from the Daily Reckoning.

Jeff Clark is editor of BIG GOLD in Casey’s Daily Dispatch.

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