Mike Maloney: Today's Low Gold & Silver Prices Are Not Realistic

During this very tumultuous week for precious metals prices, Chris sat down with Mike Maloney, founder and owner of GoldSilver.com, one of the world's largest bullion dealers.

Mike is a true scholar of monetary history. His reasons for getting into the bullion business have their roots in a very predictable cycle that has happened time and again over the centuries (more accurately millennia):

  1. A new monetary system is introduced, based on sound money (most commonly, using gold and/or silver)
  2. Currency (e.g., paper bills backed by sound money) is introduced to faciliate trade and commerce
  3. Governments begin to tinker with ways to 'print' more currency than can be fully backed (e.g., coin clipping, partially-backed notes, FRNs)
  4. A false prosperity ensues. Those closest to the new money creation benefit most and debase the currency further to forward their advantage.
  5. Reality begins to catch up with this deficit spending and the purchasing power of the currency weakens dramatically.
  6. The monetary system collapses under too many claims on a limited pool of sound money.
  7. Eventually, a new monetary system backed by sound money rises from the ashes (see Step 1, above).

Mike believes that we are currently experiencing Step 6 and that we will witness the birth of a new monetary regime within the next ten years.

What makes this moment in history unique is that all past monetary regime collapses have happened regionally. This is the first time in human history in which all the world's major currencies are collapsing together. Which is why he is so passionate about owning gold and silver.

In his opinion, we will soon witness the greatest transfer of wealth ever seen, as countries worldwide realize they need to revert to monetary systems backed by sound money (i.e., the precious metals). Those acquiring gold and silver beforehand will not only preserve their wealth as existing fiat currencies are extinguished, but will see staggering increases in their purchasing power. Those interested in learning more of Mike's specific vision can watch Episode One of his new Hidden Secrets of Money video series. (Chris and I received advance screenings of the next few episodes, which are excellent in terms of explaining the processes and shortcomings of our current monetary system.)

On the Tightening Physical Market for Gold & Silver

What most people do not understand is that the price of gold and silver are not determined by how much gold and silver is being sold. It is how many gold and silver IOUs are being sold. And you can write as many IOUs, futures contracts and options, as you want. Those are unlimited. The supply, though, of physical gold and silver is quite limited, and so when people actually start asking for it and they want the physical, then there is a divergence of the paper price versus the physical price, and we are seeing that right now.

We are in a back-order situation with all of the suppliers. Spreads are going up. Silver eagles cost about fifty cents over spot more than they normally cost because all of the suppliers have had to raise their price to try and find the supply/demand equilibrium that the markets are for. The markets are there to try and find a supply/demand equilibrium, so then price is the arbitrator. Price rises; that draws more supply and reduces demand. Price falls; that reduces supply and increases demand.

So the price discovery mechanism of the markets is what is supposed to ensure that things are in equilibrium. We have this broken system where there are a few big players that manipulate the market, and it always shows up when shortages start developing in the physical market. You know that the price of gold and silver right now are too low to be realistic. And the good thing about that is that it cannot last.

On the Hidden Wealth Transfer Caused by Inflation Targeting

Everybody got in an uproar over [the Cyprus bank deposit haircuts], but nobody gets in an uproar over the central banks targeting 3% inflation. That compounds out to 34% of your wealth that they are confiscating every decade. People got mad because it happened all at once and they could see it. One day their bank account said one thing; the next day it said another thing. With this insidious confiscation known as inflation, this is the inflation tax – you do not see it because the number on your bank account might say that you could make a deposit and if there are no fees or anything on that deposit, $100,000 deposit a decade ago still stays $100,000. Except gasoline went from $1.25 to near $5.  Measured in gasoline, you lost 75% of that $100,000, but it still says $100,000.

So the central banks targeting this 3% inflation rate is a wealth transfer from the public to the financial sector.

On the Recent Price Weakness in the Precious Metals

You do not want to stay in just one investment class your whole lifetime. But it is a very powerful tool to be able to measure these classes against each other and then jump from an over-valued asset class to an under-valued asset class at the appropriate time for the road to true wealth. And it only requires a few big decisions during your lifetime. 

Now, when I discovered wealth cycles, I was looking at the Dow Gold ratio and thinking this thing has a cycle. I made another check of the Gold Dow ratio instead the Dow Gold ratio, and put them on top of each other. Lo and behold – there is a cycle. It has a positive side and a negative side. If you are doing a Dow Gold ratio, you jump from being invested in paper assets like stocks and then back to gold for the long investment waves. I would say it is somewhere between 8 and 20 years you spend in an asset class, and you can do this with anything. If you measure your house in how many barrels of oil it is worth over a century and you jump back and forth from being invested in oil wells to being invested in real estate, it is the same thing as being invested in gold or the Dow. It is a very powerful tool that I believe has a high degree of predictability and safety to it, if you do not let the short-term noise flush you out.

Right now we are in consolidation. Gold has been chopping sideways for 19 months now, and it has worn people out. But basically gold is up. It is not up from 19 months ago when it was nearing $2,000, but it sure is up over the last decade. So I do not let the short-term noise affect me now that I know that we have not reached the point where the price of gold equals the points on the Dow. Right now gold’s value is one-ninth of the Dow, and so I know that it needs to rise by a factor of 18 against stocks before I need to get worried and start watching gold.

So I am very comfortable in these pullbacks. It gets a little aggravating, but still it does not bother me that much and is definitely not going to flush me out.

Click the play button below to listen to Chris' interview with Mike Maloney (59m:02s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/mike-maloney-todays-low-gold-silver-prices-are-not-realistic/

This line of reasoning requires careful consideration. 
Nicolle Foss argues that as debt that cannot be repaid, wont be repaid therefore debt/money will become scarce.Because the money evaporates, discretionary income that supports the PM's becomes hard to find and gold is forced down.

I interpret this to mean that the pools of wealth that have been created by the present wealth confiscation will be in a position to buy all the gold. The little guy will be left out in the cold.

This brings to mind the adage

"Gold is the money of Kings, Silver the money of Aristocrats, barter the money of peasants and debt the money of slaves."
I think that we are in a position to aim for the Aristocrat level. Remember that the greatest threat to the King is the Aristocrat.

To my mind Gold smacks of overreach. The Kings (Centeral banks) have not shown any weakness yet. They continue to buy gold at a price that suits them.

Go silver.

I'm a little guy( financially speaking), so from what I can gather from the resources on this site ; 
buy silver, don't sell the old farm, and pay off as much debt as quickly as possible. (?)

There is a huge amount of paper wealth existing that is yet to seek the safety of Gold.  The "deflation" in Gold is happening right now, as a result of manipulation and paper selling.  The amount of Gold for sale compared to the demand from people who are late to game of realizing that their fiat savings is at risk will be tiny… Nicole's interpretatation is completely wrong.  By the time the uninformed masses realize what is going on, the Gold will be gone, into strong hands, not for sale.    Nicole has no idea what she is talking about when it comes to Gold.  Gold is not for Kings… it is for normal people who want to protect their savings.  

Nicholle is a lot smarter than I. That does not mean that she can't be wrong.
My central point is that the Banks have enough currency to mop up all the gold. They cannot supress the price too much or else the little guy will nibble away at the stockpile like a lot of ants. Therefore it is being allowed to remain just where the Central Bankers want it.

Further, I think that the discretionary currency of the little guy is controlled through taxation to ensure that he cannot buy gold.(Do you get the impression that someone is watching every move you make with your currency, or is that just my Paranoia flaring up again?)

My experience with silver is that it is Heavy. Try lugging a fortune of silver around town. My experience with gold is that it is easily stolen. Which is disappointing.

So if we eliminate the issues of leverage, conspiracy, intervention, and the like, the price of gold boils down to two factors:1) what percentage of worldwide assets wants to be in gold
2) what is the aggreate value of worldwide assets
Multiply those two things together, and you get the gold price.  Note that money supply and inflation doesn't matter here - since its already factored in by the "value" part of #2.
So Jim's case is, increase #1, and gold price will rise.  This is 100% true, but only if we hold #2 constant.
But in Nicole's scenario, #2 will drop like a stone, because the value of those assets are pumped up by debt.  And here in the US, that debt has not been paid down.  And as debt gets defaulted upon, asset valuations will drop - dramatically.
Total US assets priced at market are perhaps 150 trillion dollars.  Nicole talks about 90% drops in asset prices due to widespread debt defaults.  So that 150 trillion turns into 15 trillion in assets, under her scenario.  Shrinking cash reduces ability to pay debt, which results in defaults, reducing asset prices & cash, reducing the ability to pay debt, spiraling downward, etc.
Now then, value of global gold supply is perhaps 4 trillion dollars at current prices.  Let's imagine the US has 25% of global assets, and 25% of global gold.  So right now, the Gold:Assets ratio is 1:150, or about 0.66%.
So under the Foss Scenario, if 150 trillion turns into 15 trillion,  people must decide to move from a 0.66% gold/asset allocation to a 6.6% asset allocation for the price to stay flat.  People, in a scarce-cash depression economy, must decide to either use spare cash or sell their other assets that have all plummeted in value and multiply their gold holdings by a factor of 10 for the prices to stay at their current levels in USD terms.
I'm not saying that Nicole's scenario will play out.  I'm saying that if it does the move to gold will have to be dramatic for the price to remain where it is right now.
That could happen.  Or it might not.  Do you think it's a slam dunk?
This wil hold true right up until the reflation event, when all the rules get changed again.  Nicole also believes such a reflation event will occur, but the length of the deflationary period will be too long for "most people" to hold onto their gold.  They'll be focused on shelter, food, and heat instead.  Gold will likely come last.
I am not saying this is the likely scenario, but it is a possible scenario, and that's the discussion point here.  And even if Jim is right, he has to be really right for the price of gold to rise in nominal terms under Nicole's scenario.
Now then, what drives the Nicole Foss Scenario?
Simply put, limitations on the Fed's ability to print.
Chris believes the Foss Scenario won't happen because the Fed and the US Government have enough political capital (ability) to print however much money is necessary to prevent the deflationary outcome from happening.
Nicole believes the political capital of the Fed is much more limited.  While the Fed would like you to believe that they can print infinite money, groups like Ron Paul & the Tea Party do provide an effective upper limit on how much printing can take place.  "End the Fed" was definitely noticed, and no bureaucracy wants to kill itself off - and there are 19,000 of them that work there.  Likewise, overseas manufacturers and oil suppliers also provide limits.  Ultimately, if the Fed prints too much, oil exporters will simply refuse to sell - AND the Congress may well just take away the printing press in a wave of popular disgust.
Whose theory do you find more persuasive?  For me, I'm on the fence.  But if the Nicole Foss scenario plays out, I'd expect big moves in the price of gold.  And likely not to the upside.  Greenbacks - currency, that worthless old FRN that everyone trashes - will be king.
In the meantime, I watch and read my tea leaves and await the logic of events.
And I stay out of debt.

My take is, from 3yrs and 33 weeks of hanging around here, that inflation is the last event. rolling periods of deflation must occur, cuz they are happening,and be factored in. I wish that it was either, or,but its both, and. During the absolute Foss deflation don't bring your money or skills(we have 'em) but you can bring your gold and silver for food,fellowship,first aid,firearms,  all off the Farm.   (i wish i could put a tongue in cheek emoticon in here)

I suspect if deflation rears its ugly head in a serious way the public reaction will drown out the teapartyteaparty/Ron Paul faction demanding more printing.  Our peers have a well established pattern of avoiding immediate pain in favor of our children shouldering the burden some time later.Doug

I am not so sure.  Many people are waking up to the fact that the current methods of printing money mainly benefit the banks and the politically connected.  I don't think it is that hard to imagine a scenario where the people on the street demand that the printing stop unless it is more directly aimed at helping the average person.  Maybe this money printing would take another form like directly sending checks to the people, ala Steve Keen.  If this happens, it would clearly be a game changer and I would expect the price of gold to skyrocket.

I know this is a bit of a contrary possition, but I am not in favor of PM's.  I may aquire some as a necessary evil at some point, but investments in the "homestead" have allowed me to put off that decision for now. But I think of it this way, central banks own and control most of the gold in the world.  They have the military might of the nation states behind them that do their bidding through the governments that they own. As George Carlin famously said, "Its a big club, and guess what, we're not it!"  To paraphrase.
To own gold is to be part of their system, they will continue to set and control the price of gold in a way that they see fit.  Waiting for the "free market" to reassert itself is again allowing ourselves to be dependent on a system that is out of control and out of our control.  I don't want to be in the control of that system in any way shape or form.

Local currencies will hopefully emerge when the SHTF, but in the mean time we can continue to use dollars as a medium of exchange, not as a store of wealth.  Store of wealth should be local productive skills, self sustaining local business and our communities.  To put our faith in anything material I think is putting our faith in the wrong thing at a lot of levels.

Doug -I don't have a "contrary opinion" in the way you mean.  In fact, I clearly stated I don't have an opinion.
If you look closely, I said a number of times that the Nicole Foss scenario was a possible outcome.  That's not a matter of opinion, its just a fact.  We can all assess for ourselves what the % chance we apply to that outcome, and likely it should change over time, as conditions in the world change.  Perhaps for you, that percent is currently 0.001%.  Its not zero, though - at least it shouldn't be, unless you have total global knowledge and the ability to see the future.
We can have a great discussion on the % chances we give to the various scenarios.  I'm happy to do that.  But its just not realistic to discuss "opinions on future events" as if one scenario had 100% chance of happening, and all the others were rated at 0%.  You can only assign 100% chance to things that are already in the past!
Back before the Challenger disaster, a NASA adminstrator was asked "what's the chance of a fatal shuttle event" - he said it was a million to 1.  An engineer was asked the same question.  His response: 100 to 1.  But interestingly, neither of them said the chance was zero.  They both acknowledged a fatal event was possible. Likely, the engineer's assessment was more accurate - less "hope-based" - but they both said it could happen.
This method of thinking is different from the usual "guru tells me what will happen" method of thinking and it takes a while to wrap your brain around.  We all want certainty but the reality is, the world doesn't work that way.  People are constantly getting stuff wrong, and if you admit it up front by seeing the future as a collection of possibilities - a la Taleb - then you end up being surprised less often.  "Boy, that 2% chance actually ended up happening.  Interesting."  This method of thinking also tends to avoid the issue of confirmation bias, since you are constantly looking for new facts to refine your % chance assessments rather than interviewing the same group of people trying to reassure yourself that "your opinion on the future is still 100% correct." [King World News, anyone?]
In the specific case of limitations on Fed printing - its not simply Tea Partiers.   Its also the response of the international community and holders of US dollars that feeds into the calculus as well.  Even if initial domestic response is exactly as you say, if massive printing drives oil and food prices through the roof by causing severe dollar FX declines, then printing will start to look domestically like punishment and stupidity rather than relief to the public at large.  At that point - does the Fed still retain its ability?  Perhaps it doesn't.  And I say if and perhaps because I don't know for sure.  Again, that's just a possible outcome to which I assign a percent change of occurring.  But if gas jumps to $10 because the bucks drops to 40 after a bout of massive money printing, then I think it's likely the Fed's mandate for printing starts to come under some severe criticism.  And at that point, I would closely monitor events to better refine my assessments as to outcomes.

I wasn't responding to you personally, you clearly stated that you were not expressing an opinion.  I was responding to Foss's thesis.I agree with you that there are no certainities and am only trying to get a rough idea of the probabilities so I can attempt to steer a course that will protect my family and our stake in the world.  As part of doing that, I have to admit to the Fed's success at avoiding rampant inflation and deflation at the same time.  They have walked a fine line waiting for signs of a slowing economy to print another bunch of USDs to levitate the stock markets.

Again, agreed.  But, I get an eerie sense that internationally things are spinning faster as China is increasingly making bilateral agreements with other nation for currency swaps and trading in their currencies rather than the USD.

Which brings us back to the subject of gold:

What happens to the price of gold and silver bullion and their relationship with the USD in a world where the flow of PMs is west to east.  And what are the impacts of a potential "black swan" like the Rio Tinto mine landslide I linked to here:
I don't know the answers to most of the big questions, but I am happy to be a part of this site where I feel like I at least gain a dim view into the workings of economic forces way above my pay grade.

is the one that pointed me to the Crash Course. In 2008, when the SHTF I would visit his site daily. I had read Maloney's "Investing in Gold and Silver" and he had a lot of information on the site and video interviews with hard money people.
One day the link to the Crash Course was front and center on his site. That's when all the pieces really really started falling into place for me.
It's good to see Chris pointing back.
AKA- Not One Man In A Million

Doug -Ok great.  I too disagree with Nicole's assessment as to the likelihood of her outcome.  In my discussions with her, it feels like she is playing guru - saying this is the 100% outcome.  And this of course I disagree with!  However I do think her scenario deserves attention as one possible outcome, with the likelihood of it coming to pass differing with locales and events.  Specifically, events in selected areas in Europe right now are unfolding according to her scenario, specifically in Spain, Greece, and to a lesser extent in Ireland.  In those countries you can see clear footprints of deflation, and its ugly.  It is what happens when your bubble pops, and you can't print.  I have charts.
But deflation just isn't happening in the US.  If and when it does, I'll start pointing out the evidence.  If anything, we have a mild inflationary bias - but its very mild, especially compared to 2005-2008.
Regarding the US losing our reserve currency status [61.9%] - I see that less likely while the Euro [23.9%] is engaged in its deflationary self-immolation, and Japan [3.9%] is engaged in its printing.  I thought Chris's comment about the BOJ attacking the trust in the Yen as a store of value particularly apt.  Central Bankers storing Yen are likely to pay attention more rapidly than normal people.  At the very least, they probably won't roll their JGBs.  But as always - I am going to validate all the stories I read against the data I have that seems trustworthy.  Stories in the news are often about selling something to someone - caveat emptor.
At the bottom of the following page is my chart on foreign currency reserves that you inspired me to create!  It "feels" like it corresponds to what I'd be doing if I were a central banker.  My gut tells me, Euro & Yen go first, perhaps USD stays the same, "other" increases, and only once the Eurozone implodes does the US have to pay the piper.  I have other evidence that also shows an increasing loss of faith in the Euro.  So that's where I assess the weight of probability right now.
But as always, watching what happens is the only real way to go.  You look at the chart and tell me what you think the trend is.

Mike says that 90% of newly printed money has not entered circulation. It has stayed in the reserve accounts of the banks.
He also says that QE is the reason for the recent rise in the stock market. 

How does QE cause rising asset prices if this newly printed money has not itself been used to buy stocks? It still lies dormant in the banks.

Still trying to get my head around this…

thanks everyone for these fascinating discussions.

[quote=goes211]I am not so sure.  Many people are waking up to the fact that the current methods of printing money mainly benefit the banks and the politically connected.  I don't think it is that hard to imagine a scenario where the people on the street demand that the printing stop unless it is more directly aimed at helping the average person.  Maybe this money printing would take another form like directly sending checks to the people, ala Steve Keen.  If this happens, it would clearly be a game changer and I would expect the price of gold to skyrocket.
To me, this is one of the next steps on our long road to the ruin of (yet another) fiat currency.  At first I would expect the Fed to directly monetize debt in proportion to a major federal tax holiday…perhaps equaling an entire year's worth of tax payments for every citizen.
Then, after that wears off, perhaps the rebate of all taxes paid by everyone for the past five years.
Then, after that wears off, something more dramatic…who knows?  All I know is that the Fed knows intimately that deflation is a stone cold killer in these highly leveraged times…certainly of private families, but the Fed is not at all concerned about them.
Instead the Fed frets about big financial institutions and, secondarily, keeping the power structures in DC stable.  Neither of those things can be maintained during a ruinous bout of deflation.  Has the Fed done all it can do?  No, not even close.
I got into heated debates with Nicole Foss years ago about how far the Fed could expand its balance sheet and she assured me it could not go this far, drawing a bright red line at a number well below $3 trillion.
And I suspect she would vigorously put down the idea that the Fed could go to $10 trillion, or $20 trillion, or $100 trillion.
I think that those numbers are all very likely because once the next deflation impulse comes along, they will have no choice but to fight it.  If the alternatives are inflate or die, you inflate.  This has been the way of humans for as long as money has been under governmental control.

Wise men say, and not without reason, that whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who have been, and ever will be, animated by the same passions and thus they must necessarily have the same results. - Niccoló Machiavelli, The Discourses. 1517.
I guess you can place me in the 'this time is not different' camp.  

Thank you Chris, Dave, and Doug for this great discussion about possible forthcoming scenarios.  It is for enlightening discussion like this that I view this site regularly. I too have discussed future developments with Nicole.  She makes many valid points, but PM's are, IMHO,  an important part of the defense against an unknowable, but likely volatile future.   

In the context of the inflation vs deflation debate, and Davefairtex' theoretical arguments for deflation, I want to delve a little more into the following statement Chris made,

   If the alternatives are inflate or die, you inflate.
The point Dave skirts in describing the theoretically possible Nicole Foss deflation scenario is that, in the process of this happening.... the debt kills us.  Dave didn't talk about the debt at all in his scenario, did he?  Doug was very smart I think to point out that the US dollar continues to lose reserve currency status based on swaps agreements.. and while this may not show up in the charts of central bank reserves right now, it is very, very ominous to those of us looking for a possible catalyst for future non-linear events.  That we could end up with a, "King dollar" scenario amongst this backdrop is, at least to me, absurd.  

So back to the point Chris made.  The FED is printing money in order to buy bonds via the primary dealers in order to keep US interest rates low.  With $16T + of debt to service, we would never be able to shoulder the burden of servicing this were interest rates to normalize, or mean revert to the historical ave. 10 year yield of 6%.  Were that to happen, debt service expense would rapidly approach $1T annually for the US… and that would be, to say the least, crippling.  So the choices really are quite plain… .continue printing, more and more… or die.  If the FED does not print, who will buy the bonds?  Where would interest rates settle out?  How much demand would there be in a world where there is incrementally less demand for dollars as trade settlement between foreign trade partners no longer uses dollars?        


Chris -I like your scenario.  Its one of mine as well - and the magnitude of the printing required I'm also in agreement with too.  Anything less won't move the needle were we to drop into a "real deflation."  But I don't rate it as the "100% likely" scenario.  (If you think the chance of the scenario you outlined as sub 100%, I'd like to hear it - and I'd be happy to be corrected).
I also have one important addition to your storyline.
Deflation is not death.  Spain is deflating like crazy, and they haven't died.  That's one of those "proof by example" deals.  Spain also has a choice.  They can leave the eurozone and inflate.  Instead, they've made the deliberate policy decision to remain, and endure deflation.  "Deflation isn't as bad as leaving the eurozone" is the conclusion they've come to.  How long this goes on, who knows, but for now, that's the track they're on.  Same thing happened in the 30s when nations were on the gold standard, and felt they wanted to stay there.  France stayed for a very long time.
Greece - same case, only more so.  They've stuck it out for 5 years.  There is evidence in polls suggesting a clear majority of Greeks want to stay in the eurozone, even though they hate the ECB, the Troika, the Germans, their own government, and all the rest by absurdly wide margins.  People are funny, and this causes outcomes that otherwise don't make logical sense.
So since deflation really isn't death, and there are other outcomes than printing that we are seeing unfold right now in real time, in addition to hearing about the scenario you've outlined - a scenario that I know about, agree with, and rate as "quite possible" - I'm very interested in hearing your set of OTHER possible outcomes, and your assessment (based on your current observations) of what would be required for them to come to pass.  I know you've thought about this, I just would like you to lay them out for us the same way you did for your primary scenario, which I like very much.

I am increasingly worried about future gold confiscation and nationalization of mines, especially because all global currencies are racing to the bottom. When the "reset" happens, I cannot see a way where global governments do not undertake a co-ordinated effort to seize all gold and precious metals "for the greater good".
So, yes, the prices cannot be this out of whack forever, and the long term direction is up, but I am very wary of congratulating myself for being long gold since around 1999, sometime down the road we're going to be punished for being right.

It's very scary where we're headed.