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Gold and Silver Continue to Consolidate

Chris Martenson on protecting against financial turmoil; CNBC anchor outed for her dislike of gold

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Announcer:

Welcome to Money Metals Exchange's weekly market wrap podcast. Helping precious metals investors during these treacherous times. Now, here's this week's market wrap with commentary and analysis from the fastest growing precious metals dealer in America, Money Metals Exchange.

Mike Gleason:

Welcome to this week's market wrap podcast, I'm Mike Gleason.

On deck we have an exclusive interview with scientist and economic forecaster Dr. Chris Martenson. He presents some unique insights of urgent importance to precious metals investors, so you'll want to stay tuned for that.

But first, let's take a look at the markets and what's moving them – as February trading kicks off today. Gold is rising this morning but continues to be range bound. Currently it trades at $1,679 an ounce, and is up about 1% for the week.

Likewise, silver is also stuck in its own range. Right now the white metal is trading at $32.05, up a little more than 2% from last Friday's close. As for the platinum group metals, after rallying sharply throughout most of January, they've had a quiet week with spot platinum coming in at $1,692 and palladium at $754 as we're recording this podcast on Friday morning.

Standard Bank reports that physical gold demand was unusually strong in January, especially out of Asia. However, India's move to raise import duties on gold and platinum could put a minor damper on bullion demand from the world's second most populous country. Time will tell.

What is clear is that central banks around the world are still working feverishly to stimulate failing economies. The U.S. GDP report that came out this week surprised to the downside, showing a slight contraction in the economy for the fourth quarter of 2012. That should influence the Federal Reserve towards keeping monetary policy ultra-loose and continuing with its Quantitative Easing campaign for the foreseeable future.

On the supply side, major miner Anglo American Platinum announced it would cut mine production out of South Africa by 20% due to an illegal union strike that has turned violent. Platinum and its sister metal palladium both outperformed gold in January, and they have the potential to continue doing so, at least for the intermediate term.

Gold and silver have struggled to gain traction for sustained rallies in part because investors have been lured back in to the stock market as it stair-steps toward new nominal highs – in spite of poor GDP and jobs numbers.

Now is a dangerous time to be over-exposed to U.S. equities, especially considering the political and economic headwinds. I remind you that from its October 9th top in 2007 to its 2009 bottom on March 9th, the S&P 500 fell by a devastating 57%. Yet over that same period, gold actually gained a healthy 24%.

You'd think the mainstream financial media would have learned a humbling lesson from the last financial crisis. But no. Here they are in 2013 stoking stock market euphoria once again – not even giving a thought to prudent diversification into precious metals.

In a remarkable exchange earlier this week with CNBC's Maria Bartiromo, Marc Faber extracted a very telling confession from Bartiromo concerning her own personal attitude toward gold.

As if we needed another case and point that gold is a contrarian investment, there it is. And that's a good thing, because if the mass media and the public were already behind gold in a big way, there would be little upside left to look forward to. If at some point everyone at outlets such as CNBC and the like finally come to agree that it's wise to have meaningful allocation of gold because it is a valuable portfolio hedge, then perhaps the bull market will have reached maturity. We're nowhere near that point yet.

And now, without further delay, here is our exclusive interview with widely known economic commentator, Chris Martenson.

Mike Gleason:

This is Mike Gleason with Money Metals Exchange, and it is my privilege now to be joined by Dr. Chris Martenson of PeakProsperity.com and the author of the fabulous work called "The Crash Course." Chris is a real scholar and commentator on a wide range of important topics such as worldwide economic and financial markets, monetary policy, precious metals, the importance of preparedness among other things. And we're very excited to get a chance to talk to him today.

Chris welcome! Thank you for joining us.

Chris Martenson:

Thank you, the pleasure is mine.

Mike Gleason:

I want to start out by asking you to give us a brief background of "The Crash Course," mainly what research and revelations did you come to before you put the video series together and what compelled you to launch into what's become a personal crusade to get this extremely important information out to as many people as possible. Just give an overview if you would about "The Crash Course" for those that haven't already seen it.

Chris Martenson:

Sure, I'd be glad to. The Crash Course is a body of work; it's in video form freely available on the web. It's in a book form as well, so whichever form appeals to people, we've got it available. What it really was was my attempt to create something that I thought was really missing from the landscape out there when I started to investigate what was wrong with our economy I was finding all kinds of troubling indicators, but I wasn't finding a synthesis of this larger story that really was starting to draw me and talk to me.

At the time, when I started putting this together was early 2001, 2002, and I was really just focused on the first "E", I'll call the economy. I was seeing rising levels of indebtedness and a propensity to print. I started looking at history and understanding that the way our currency was being managed, the U.S. dollar, in this case, but more generally fiat currencies, had a really poor track record historically. And then story became ... it was compelling then, but it became urgent when I started to look at where we really were in the energy story.

That broadened out into other resources which I include in this third "E" which would be the environment; so economy, energy, environment. I put all three together in "The Crash Course." I submit that we have to look at all three of these together at once. If you want to understand where we are today, how we got here, but most importantly, where we're going, I think you have to backup, get rid of some of some of the noise, look at the big picture and that's what "The Crash Course" really is.

It's a big picture to look at, some of the larger trends that are going to be shaping the next 20 years.

Mike Gleason:

Yes, it's an excellent macro piece there. I've really enjoyed it. I saw it several years ago myself and again, recently just as I was preparing for this interview. I definitely urge people to check it out. It really does change your way of thinking and gets you to take a step back and look at what's going on as a whole. One of the things that you talked about there, I guess underlying throughout the whole thing is the importance of individual responsibility as it relates to one's financial future.

Now, in terms of saving, maybe many people here in America just simply haven't been doing that and there is substantially too much that both of the individual level and certainly at the governmental level. Discuss, if you would, how precious metals plays into a sound savings plan and just how it fits into your overall philosophy.

Chris Martenson:

You're talking to somebody who put a little over 50 percent of his net worth into gold and silver back in 2002 and 2003. I was a net accumulator, 2002, 2003, 2004 and have been since trying to keep my portfolio rebalanced and failing, now having about 75 percent of my net worth in precious metals. The reason I'm failing to rebalance is because I can't find anything as compelling as holding precious metals right now.

What we're in, in my view, is we're in the middle of this extraordinary period of changes, the gigantic transition. We are still almost at the peak of a fascination with all things paper and paper-based, derivatives, U.S. government debt, money itself, stocks; all of these things are paper representations of wealth. Gold and silver represent to me real wealth, so as productive land, so are mineral rights, so are woodlands, so is water. All kinds of things that are actual, tangible wealth.

Gold and silver to me are a subset of a larger body of wealth I'll call tangible wealth. I really think we drifted away from understanding the importance of tangible wealth and really being the source, the primary source of wealth itself. Money is, many of your listeners already know, it's not what it used to be. We're printing 85 billion fresh paper dollars a month out of the Federal Reserve. Trillions have been created worldwide.

I understand what the Central Banks are trying to do here, but they're really running a very, very large experiment and it really has a binary outcome. It's either going to work or it's going to fail spectacularly. The reason I think the odds are really heavily weighted towards this spectacular failure is because all of the good people working at Central Banks only understand the economy, that first "E". They have no clue about limits that we're starting to hit in terms of resources.

I know people have heard this, a lot of energy out there. I would advise them to look deeper because the truth is energy is more expensive today than it's ever been and the trend says it's just going to continue to get more expensive on a per capita basis, on a per gallon basis. I don't care how you measure it. History is very clear. We have never had a sustained recovery and a paper-based economy with oil at a $100 a barrel. I don't see anything that's going to drag that down.

For me, gold and silver is a meaningful way to take part of my savings. Store it over to the side while I watch what happens with the paper games is being unfold. There's a chance that they could be successful in rescuing this whole thing, but I am personally not willing to bet very much on that outcome at this stage.

Mike Gleason:

Yes, we certainly agree. They are continuing to try a lot of things here to stimulate the economy. I've heard you mention before about how they're losing their effectiveness in achieving the types of results that they're looking for. Do you expect them to continue to go with programs like QE 1, 2, and 3 for instance and ultimately, what will it mean for currencies, not just here for the U.S. dollar but around the world? Are we simply past the point of no return when it comes to saving the paper currencies?

Chris Martenson:

Really, honestly, the time to have began to really deal with this was '94, '95. That would have been a perfect time to attempt to get us down from this parabolic rise in credit that we're in. We're about 30 years into a gigantic credit cycle at that point. Instead, Alan Greenspan at the time really basically smashed reserve requirements to zero for major banks and the rest is history.

We had this big blow off boom in equities and then that had to be rescued and then we had this big blow off in housing. Now, we're having a huge blow off in bonds. Each one of these successive crisis was larger than the last. When the bonds finally crack, that's where we're really going to find out that the prior crisis were basically walks in the park compared to what's coming next.

The bottom line for me is this: there is probably around 50 percent of all the outstanding claims in the world, that's all the debt, all the derivative, all the paper claims, they have to go away one way or the other. They either have to be defaulted upon which is a massive deflationary crashing event or they have to be inflated away. The problem is historically we don't have any examples where ruling bodies, central planners have managed to create just the right amount, the Goldilocks amount of inflation to make it all go away when we get into this area.

When we look at, and by this area I mean the amount of debt to GDP that we have worldwide. It's absolutely stunning. My view is that the chance here is really for some sort of a major wipeout, either on the default side or more likely on the inflationary side, meaning money becomes worth less and less until it becomes potentially worthless.

That's the area we're in right now. But for me, holding tangible wealth of which gold and silver are some of the primary examples for me, those have been winning strategies during periods of great crashing deflations and also inflations. Either way, that's been your best chance to preserve your wealth and to sidestep where we are potentially heading.

Here's the thing. Through all of history, we've burned the same trouble that has been experienced dozens, if not hundreds of times historically. Humans are still humans. We have better computers. We have better models, but we're still humans and so my prediction is we're going to continue to print and print and print until something forces us to stop. That forcing function unfortunately is going to be an extraordinary financial crisis, probably a fiscal crisis, and quite probably a currency crisis that follows right after that.

That's not a guarantee but the risks are just compounding. Every year that I've been studying this, the risks have gotten larger and larger. Things feel worse and worse to your listeners just because we're really on the wrong track. We are absolutely headed down a very, very dark canyon and we don't seem to have a plan.

Mike Gleason:

You touched on the exponential growth and the power of compounding. That's one thing that I loved about "The Crash Course" and the analogy that you gave there about the drop of water and the power of that whole mechanism. Staying on Central Banks and holding tangible assets, you just talked about this briefly a moment ago. Here we've got Germany recently announcing that they're going to begin repatriating their gold, and now there are ramblings of other countries in Europe looking to do the same. Do you believe we're starting to see a breakdown in trust between the Central Banks, and what would the result be should we get a widespread loss of confidence between the governments and Central Banks?

Chris Martenson:

This is a really important point here. First of all, there are two major relationships I like to keep track of. One is Central Banks and the political bodies within a country are supposed to be independent. They've grown really, really close both in Europe and the United States. I guess I'm going to include Japan here. They're really actually welded together, and of course, China. I don't think there is any difference there either. For most of the world economy, measured in percentage terms, central banking and politics have come together.

Now, the second thing that's important is the relationship across countries then and what I think we're seeing with gold repatriation is potentially that first sign that that cross-country trust is not quite there. When push comes to shove, if you don't have ... a bird in hand is going to be worth two in the bush is what I really think this boils down to. Now Germany hasn't really lost a lot of trust because they're not repatriating all of their gold, maybe half of it out of New York. They're taking all of theirs out of France. They're going to take till 2020 so they're giving themselves seven years to do this. Austria is now making the same rumblings. Switzerland is doing the same deal. Venezuela already took theirs back.

We are starting to see that. I think it could represent an important early moment where in this very large story where things are beginning to really unfold, this is a huge macro story that's playing out before us right now. What I think we're seeing is that early stage of countries starting to say, "Listen, it's going to be easier, better, safer if I actually have my hands on my own stuff."

Now, the amount of gold that we're talking about is actually chump change. While it's pretty exciting that Germany says they're going to repatriate 676 tons, I should note that Hong Kong through November of 2012, I don't have the December data yet, but through November had imported over 720 tons. China is basically accumulated more than what Germany is going to repatriate within a single calendar year.

That's really the larger story I've been looking at is not just what's happening at the Central Banks themselves, but the fact that the flow of gold has really been very, very heavily from west to east; meaning from the OECD countries back towards China and India particularly. I think that's probably the subtext to the story that's really important is countries like Switzerland and Germany, Austria, all those, I think they're starting to look at this and say, "We'd be more comfortable if we actually had our own hands on that gold" which could represent potentially a little loss of faith that the U.S. is going to behave responsibly or honorably if push ever came to shove.

And given what we've seen lately, I can't blame them.

Mike Gleason:

Do you envision that the end game here might be a potential return to the gold and silver standard?

Chris Martenson:

I seriously doubt silver standard because Central Banks don't own any of it and there's really not enough on a standard around unless the price goes up probably by a 100 fold because silver gets consumed on a yearly basis. Gold, there's, I'm sure, plenty of to form a monetary standard around. I am pretty sure, like 50, 75 percent sure, that we're going to have a monetary crisis sometime in the next five to ten years. And when we have that crisis, the world is going to need some way of coming up with a new system for conducting trade. If we have a currency breakdown, it's too hard for countries to go back to a simple barter system. We ship wheat and Saudi Arabia sends us oil. That probably won't work so well.

So in a moment of crisis, I have every confidence that the solutions that we're going to turn to are the ones that happen to be lying around. I know the World Bank has a special plan and I know the IMF has a special plan for drawing rights and all these fancy currency baskets that they want to propose, but in the moment of crisis, those are untested. I think we will probably, if we get this big currency crisis I'm talking about, we're going to have to revert to some form of a harder standard, something that people can trust, can't be rigged, can't be printed, can't be fudged. And the only thing we have that we know about that has worked, maybe imperfectly, but worked reasonably well was a gold standard.

So on that basis, I think there's a ... there's two main reasons I own gold. One is all of the tailwind pressures that are here to just help advance gold. Those are things like negative real interest rates and outrageous fiscal deficits in the money-printing countries; things like that. The option value of gold ... now, the tailwind, I think, will carry us to $2,000 and $3,000 and that's easy on their own.

The option value is that if gold ever does get re-monetized, now we have to pick a new number for what we think gold is worth. And just to set some context for this, if you take total world money that we understand and you divide that by total world monetary gold holdings, you come up with this ridiculous number of somewhere between $50,000 and $60,000 an ounce for gold.

That might be the high-end. That's with a 100 percent backing of total money by total monetary gold. I honestly am expecting something less than that if gold got re-monetized but what are you comfortable with, half that number, a quarter? Those are still pretty fine numbers for me and so that's one of the reasons I think everybody should be holding gold in their portfolio is because of that option value and it's really a very compelling story.

Mike Gleason:

Now, in terms of the everyday investor who understands the world is different today and the economy is different and the potential for a continuation towards a crisis is indeed very possible, what should he be doing to protect themselves? For instance, if somebody is going to own precious metal, should they be focusing more on silver because it might have a better play in a barter type society or what other types of things should they be doing and making sure that they have as part of a good preparedness strategy?

Chris Martenson:

Two things in there. Let me talk about silver very briefly because I actually don't use gold and silver as one word. There's two words to me, gold and silver. Silver I'm owning because of the scarcity that I see coming forward. When we look at total known supplies of silver, total reserves and we divide into that total current yearly production, we found out that known reserves are going to be exhausted within 10, 15 years, something like that. Silver is absolutely the most outrageously special industrial metal. I love it because I happen to be a believer that we are going to continue to have an industrial society. Just one example, there's about 0.1 grams of silver in every watt of solar panels that are produced. If you believe any of these reports that have come out by how much solar panels we're going to produce by 2030, then you have to believe that silver consumption by the solar panel industry alone is going to consume half of all the known silver in that period of time.

Okay, then what do we do with the fact that that's too much? Anyway, I love silver because its industrial metal, irreplaceable, has no substitutes. It's just wonderful. It may get re-monetized at some point under fairly dire circumstances. I am personally holding silver with the intention of possibly giving it to my grandchildren, if I ever have any some day, and it's a long-term holding and I love the industrial aspects. But I could imagine a couple scenarios under which I might actually be able to seed my little community with a valuable circulating currency if we ever came to that. Those are a couple of reasons I hold silver.

Beyond that, there's really just ... there are four things that everybody, I think should consider doing today to become more resilient. Now, I'm not here to say that I have any clue exactly what's going to happen in the future, but I do know there are few things that everybody can do today, that if you do them, no matter what future arrives, you're going to be better positioned.

Those things are... the very first thing is everybody should just get out of debt if at all possible. If you have any forms of debt where you're paying a rate of interest higher than you can earn safely on that money and you can rid of it, go for it. This is pretty good advice I think at any moment in time.

The second thing is just invest in yourself. Let's redefine the word investment. In times past, investment to me has meant you take your money and you hand it to Wall Street. You put it in the mutual fund, your broker investor's board, you buy stocks, it doesn't matter. Basically, you ship it away and that's an investment. Today, the best investments I know about are the ones I've made recently, for example, in my own home. Whether I've insulated my home, put solar thermal panels on, even solar photovoltaics, these are all things where I can show you absolutely guaranteed savings that will deliver rates of return between 10 percent and over a 100 percent depending on which one we're talking about, guaranteed, unless oil goes to zero dollars a barrel. That's my only risk in the story.

Invest in yourself, so these are all kinds of things people can do, putting in gardens, making sure your water is redundant, getting your energy system squared away. Most of these strategies are around spending less money in the future. That's what new form of investment. That's how businesses often invest. I'm going to capitalize something today so I spend less cash in the future. That's something that we can do around our own homes and homesteads pretty regularly.

Let's say you've gotten out of debt, you've invested in your home or your homestead... third thing you've got to get gold and silver, absolutely as a core portion of your portfolio. My minimum recommendation is 20 percent of your entire identifiable net worth, as a minimum. As I've mentioned earlier, I went a lot higher. I wouldn't recommend people following me. That's what made sense to me.

Assuming you've done all of that and if you still have money to manage, well then, you've got to find somebody who understands the true risks that are in this day and age and have that money managed and managed well. This is a tricky one for a lot of people. It's hard to change away from brokers who you've had longstanding relationships with, but if you can't go to your broker and/or your financial advisor, and have a conversation about what might happen to my holdings or net worth if the dollars suddenly tanks or the Yen suddenly tanks or there's another financial crisis or what if the Fed decides to triple the size of their balance sheet from here?

If you can't have a reasonable conversation with your financial advisor around that, maybe you should find somebody you can have that conversation with. A few people I know manage their own money but it's really a full-time contact sport today. For most people who have other passions, jobs, diversions, you have to find somebody who can really manage it.

I think if you've done those four things, you are now in far more resilient shape than somebody who hasn't done these things and regardless of how the future unfolds, those are things I'm very comfortable will help you sleep better and mitigate future risks and possibly even save your life at some point.

Mike Gleason:

That's all excellent information and certainly there's a lot more of that in "The Crash Course" and on your website. Definitely I want to thank you very much for your wonderful insights. Now if people want to learn more about the video, "The Crash Course" series or Peak Prosperity, tell them how they can do that and exactly what they'll find when they visit your website.

Chris Martenson:

Sure. PeakProsperity.com, if you just go there, you'll come to a home landing page. We have all kinds of articles there. About 90 percent of our content is free. We also have a paid newsletter subscription people could sign up for to get more of my insights and other featured authors who we brought into our fold here. If you're at the Peak Prosperity site, you look at the tabs at the top and you click on one called Prepare, you go to a completely different sister site of ours which is called Resilient Life.

On the Resilient Life side, we have groups that are formed there that are either by interest ... they could be ... the interest might be chicken farming, home insulation, firearms, things that people are interested in today. They are self-started groups. Or they could be geographically relevant. There could be a Boise one for instance or Muskegee, it doesn't matter. We also have a Wiki there that's starting to build a body of knowledge around how to be more resilient and we also have all kinds of daily tips there on things people can do around becoming more resilient whether that's around the homestead or other ways.

We have a gold and silver group there, for instance, while we talk about such things. At any rate, those two sites together are really there to help people first, understand what's going on in the world and the second, what they can do about it because we're not in the business of providing information that's interesting or frightening. We're in the business of providing information that's actionable and our position is that we can all have very high-quality of lives. We can enjoy ourselves. We can form deep connections with other people and hopefully become wealthier and healthier all the time.

So that's our mission in life is just saying "look these changes are coming. It's completely obvious and what are we going to do about it?" Those are the kinds of people you'll find at our site.

Mike Gleason:

Excellent! We've got a link to PeakProsperity.com right from our podcast page, but I definitely want to urge everyone to take a look at the material there, take the time to watch The Crash Course if you haven't done that before. It will certainly open your eyes and you won't be disappointed, I can guarantee that. It helps you protect yourself, and as Chris mentioned, there are a lot of great action items there.

Again, thank you very much to Dr. Chris Martenson and thank you for listening. This has been Mike Gleason with Money Metals Exchange, talk to you next time and have a great weekend everybody.

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