Bill Kennedy: Simon Mikhailovich, co-founder
of the Tocqueville Bullion Reserve Fund, welcome
back to Real Vision.
Simon Mikhailovich: Thank you, Bill.
It's great to see you.
Great to be with you here in New York City.
So I think the last time you were on was last
November, just after the US elections, I believe
it was, and a lot has transpired since then.
In fact, since the inauguration we've seen
risk assets go up, both stocks and credit.
But we've also seen safe assets rise in price,
treasury bonds and most recently gold.
And we want to talk about gold in just a moment.
Tell me what you make of this environment
where everything is rising.
Well I mean the only thing that's become clearer
since the election is that there's less clarity.
That is clear.
Now that we are seeing President Trump in
action, I think everybody can form an opinion.
We don't know what that means yet, but I think
it's pretty clear that the uncertainty level
has increased.
Now if you're a long term investor, in let's
say gold, and you went to sleep at the election,
even if you knew who won, you went to sleep
at the election I think the election day the
price of gold was something like $1280 I forgot
$1282-$1283 and today it's $1275 Right back
where we started.
Exactly, you wouldn't have known anything
that happened in the interim.
I think there are two different, I mean there
are many different reasons why assets go up
and down.
There's the inflationary thesis, there's the
Trumpflationary thesis, there is reflationary
thesis.
And then there is the systemic risk thesis,
and the interaction of all of these things
are driving asset prices.
But the interesting thing is if one is a believer
in the efficient market theory would look
at these prices, you would have to conclude
that the risk is as low as it has ever been
in history.
Right?
Because the risk premium, which are spreads
plus the rate, the risk free rate.
So when you combine those they're hovering
near 5,000 year highs.
So the assets by extension are hovering near
5,000 year highs, as well.
I'm sorry the rates are near 5,000 year lows
and the spreads are near 5,000 year lows.
Which means that the asset prices are at 5,000
year highs.
The duration is as high as it's ever been,
and duration is a measure of sensitivity for
bonds.
So it means the bonds are sensitive to the
changes of rates as they've ever been.
So you put it all together you would say,
this is as risk free environment in some sense
as that's what the market price is telling
you, right.
I mean I don't know why would anybody conclude
that by looking at the facts.
So the answer is confusion.
So if you ask what changed I think there's
even more confusion than there has been before,
about facts versus where the markets are pricing.
Yeah I think that's right and we seem to be
going through this period of a reflationary
trade.
Which actually started well before the US
elections, in July of last year, almost on
the heels of Brexit, where we've seen the
reflation trade really pick up.
But recently in the last month or so that
seems to have reversed itself.
And I think we're starting to see some uncertainty
to your point about growth and what growth
is really going to be like under not just
this administration but globally in a world
that seems to be driven by populism, and this
whole theme and notion of populistic fervor
growing, whether it be through Brexit, or
the Trump election, the elections coming up
in France and Germany.
Talk a little bit about how you view populism
and its impact on the capital markets.
Well first of all populism itself, the word
populism simply means concern for the welfare
and interests and voice of the common people.
So the word itself there's nothing wrong with
that, and it in fact, describes democracy
or should describe a democracy the way it
was envisioned.
The way it is typically used is to describe,
I guess, people like Hitler who was described
as a populist, for example.
People who use rhetoric, empty rhetoric, demagogues
who use the cover of being for the people,
where in fact they are promoting their own
agenda.
And that's why populism is often tied with
totalitarianism, with different types of the
totalitarianism.
But that doesn't have to be that way.
It is also I think the way that the establishment,
or the word that establishment uses to describe
people who challenge its hegemony.
So a populist is somebody who is against the
established status quo.
But I think the bottom line is it describes
a movement in situations where the democracy
or the institutions seem to be not working
for the common people.
And so a movement arises that represents,
or purports to represent, common people, and
goes forward.
So we're seeing this dynamic evolve as you're
saying all over the world.
I mean Brexit, the election of Trump, I think
it's a symptom, or these are symptoms that
the system is not working.
I go into where I'm about to go with trepidation,
because I'm going to mention the name that's
very controversial, Vladimir Lenin who was
obviously a Bolshevik, a man eater on a global
scale, a villain on a global scale.
But he was also a very astute regime change
theoretician and practitioner.
And so he formulated principles-- he basically
said after the non success of the Russian
Revolution in 1905, having thought that through,
he came up with what he called a preconditions
for a revolutionary situation.
Now again let's not talk about Bolshevism
or communism, in that context, let's just
look at this in the context of regime change.
So essentially what he said was for a regime
change to take place, there are two conditions
that are both necessary and they both need
to exist, and they need to exist together.
Neither one of them is sufficient without
the other.
And the two conditions were is that the ruled
classes, classes that are ruled, proletariat
in his case, are no longer willing to abide
by the status quo.
But that was not enough he said.
It would also have to happen, is that the
ruling elite is unable to use the tools that
have worked before to manage the economy and
the political process.
So economic systems could change political
systems could crash.
Correct.
So essentially it's a very simple concept.
It's basically a combination of a percentage
of, significant percentage of, population
or up to majority of the population getting
fed up with things the way they are and willing
to do something about it, in the context of
democracy, vote against it.
But at the same time there has to be a situation
where the ruling, whether they are the ruling
parties or whether the government, are able
effectively to use the tools that have worked
before.
So if we look at where we are right now, the
reason I say these are symptoms, I mean you
clearly have a significant percentage of Western
populations that are unhappy with the status
quo, it's not working for them and they're
voting against it.
And even in France, for example-- In the Dutch
election, Wilders who is a populist, anti-immigrant
party in the Netherlands, he did not win.
But even though it was widely reported he
didn't win, he actually improved his position.
His party picked up seats and now he's the
second largest party in the Dutch parliament.
Whether the French elections go one way or
another, the fact of the matter is these movements
are growing in influence, and if they don't
pass this time, I don't think it's a trend
that's going to stop.
And the reason for that is precisely what
I just said before, you have large portions
of population that are not willing to abide
by the status quo but you're also, we're observing
in real time, how the tools that establishment
has used.
Look at the American political parties, neither
the Democratic or Republican Party was able
to field a candidate that got anywhere in
this election.
So the establishment Republicans didn't do
any better than the Democrats.
At the same time, look at the central banks
all over the world and look at the QE's and
the zero interest rate policies, I mean they
have worked to support the markets and to
prop up the asset values, but they have not
worked to create growth, organic growth, in
the economy for which they were intended.
So the reflation trade may have worked, but
the economic reflation, in fundamental terms,
has not worked.
I think I agree with that.
We've suggested that the populist movement
is a function that Joe Public has not had
a pay raise in almost a decade.
I think Hoisington Investment Management has
a very good chart.
It shows real disposable income per capita
going all the way back to the 1950s.
And you see a very clear period around 2004
2005 where that GDP per capita, or sorry disposable
income per capita, is falling and it continues
to fall.
That chart can be drawn for the UK, for much
of developed Europe, and I think it's this
notion that people have not been able to move
ahead economically, that's led to the symptom,
as you call it, that we're seeing in the populist
movement.
Exactly, yes.
No, I absolutely agree with that.
I mean clearly the globalization has not worked,
and is not working for significant portions
of the population.
And whether people think it's a problem or
people don't think it's a problem, it's in
fact a problem.
And we are seeing the expression of this problem
in these elections.
And elections do matter.
I think we are going to see that the Trump
administration is going to be different.
I'm not sure in which way it's going to be
different but it's clearly going to be different.
It is already different than what we've seen
before.
We don't know what kind of policies are actually
going to make it through the process, through
the institutions, through Congress or whatever.
But Trump is changing things and the impact
of those changes we cannot predict.
So I go back to saying, if anything has increased
with certainty, that's the level of uncertainty.
And yet the markets don't seem to suggest
that.
Although, I would suggest that the movement
up in gold and so far treasuries, are precisely
the symptoms of that unease that is starting
to develop among investors who are looking
at the early actions of the administration
and saying, we're not really sure what this
means.
He said all these things, but whether he's
going to do any of them, or whether he's going
to do some other things.
But what the impact of things he will do,
in the way that he will do them, is not really
clear.
So I want to drill down on that a little bit,
because one of the things he said he's going
to do a deal specifically with immigration.
For those viewers who haven't seen you before
and know your background I think you bring
a very unique perspective to the immigration
story.
So can you share with us a little bit about
your story, and how you see immigration impacting
the populist movement going forward.
There really two questions here.
There's the question that you ask, but there's
a bigger context behind.
So let me first answer what specifically you
asked, and then I will share how I view the
relevance of my experience to what you and
I are discussing.
Clearly, it is not surprising, and it should
not be surprising, that in an environment
where the economy is not working for a significant
portion of the population, the arrival of
more population that's competing for, or potentially
competing for the same jobs, and for the same
resources, and for the same social welfare
dollars, is not going to be positively received.
It also has to do with the nature of immigration.
The immigration this time-- American immigration
in the 1900s, immigrants came from all over
the world, but I don't think there was really
any ideological drive behind those immigrants.
And most of those immigrants were not really
driven from their lands by war, they were
more driven here by economic opportunities
and arrived willing to work hard.
There was no social welfare network, there
was no safety net, and so economically it
was a very different.
That's the American dream, that's what we
think about the American dream, you get here
with nothing, by the bootstraps, and the second
generation, hopefully, will do better.
Immigration we're seeing now is primarily
coming, or to a large extent in Europe particularly,
coming from the Muslim countries.
There's a significant cultural difference.
There's a significant religious difference.
There are welfare states which are being taxed
by the arrival of these immigrants.
There's economic situation that is difficult
for the native populations, for portions of,
significant portions of native population.
And I think this is creating a lot of problems.
This is creating a lot of enmity towards immigrants,
which on the one hand, you can understand,
on the other hand, from humanitarian grounds
it is difficult to say, how do you throw out
people or how do you not let people who are
literally running from being killed.
Well you know history even in the 1940s, the
United States refused to accept some of the
Jewish immigrants, there was a story of The
Ship of Fools it was called, turned them away
and, of course, they ended up going back to
Germany and dying.
So how do we, as a nation not repeat that
mistake?
So this is a tremendous bone of contention
that I think is feeding the populist frenzy,
if you will.
But in terms of what you asked about my experience,
as I told here before, I came from the Soviet
Union.
I grew up in the Soviet Union.
I came here in 1979, with $100 and a suitcase,
because that's all they allowed us to take,
and without a passport.
So my parents, myself, and my two grandmothers
were stateless for six years after we got
here.
But the environment was different and I was
able to go to college, and work my way through
college, and essentially realize an American
dream.
I don't know that people that are arriving
today would be afforded similar types of opportunities,
given the economic situation that we are in.
But from an immigrant perspective it's difficult
for me to see how we could not take the people.
But I can see why people that are in the country,
and particularly in a disadvantaged economic
position, would act politically to vote against
that.
And that is a part of what's creating these
terrible tensions that we are observing, and
is driving some of these populist movements.
Now the bigger question about immigration,
which my experience taught me, is that in
analyzing where we are today and understanding
how the process that we're going through is
proceeding in front of our eyes, and why most
people don't necessarily perceive the true
nature of this process.
And I think that has to do with the fact that
history is cyclical just like weather is cyclical.
If you think in those terms you realize that
by the age of 10 every human being has had
over 10 changes of seasons, I'm sorry forty
changes of seasons, right, four per year.
You know what's coming when the winter is,
when March comes you know what's coming next.
The ebbs and flows of empires, are not processes
that occur four times a year.
And frankly, they're not even the processes
that occur in every lifetime.
And so the concept of people don't learn things
from history, have to do more with human nature.
Just like kids stick their hand into the candle
to know that the fires is, even if the parents
tell them that they're going to burn yourself,
but they have to know that, in order to know
that.
So this whole human condition, I guess, whereby
we need to learn things for ourselves, and
only then do we really believe things and
recognize patterns, I think that's a very
important lesson that I learned through this
immigration experience.
Because we lived in the Soviet Union during
the decline of the Soviet empire, I guess.
And a lot of the, not that the United States
has anything to do with the Soviet Union the
1970s in any shape or form, but the nature
of the arc, I guess of the historical process,
there are a lot of similarities.
I mean the last 20 years of the Soviet Union
were in retrospect called the period of stagnation.
Nobody thought of them as stagnation at the
time, but they were, that's what it was.
It was a period characterized by vicious foreign
war, that the Soviet Union fought in Afghanistan.
Spectacularly, unsuccessfully more so than
American foreign wars because draft, and so
it affected everybody.
And corruption of the politics, corruption
the political process, the economy wasn't
working the perverse incentives I mean all
those types of things are difficult for people
to recognize if they've never seen them before.
So to that point do you see a clear demarcation
line between populism and totalitarianism?
Are their signals that you would say we're
tilting too far?
I'm not sure that I would tie populism and
totalitarianism, but I would say that I'm
definitely seeing signs of totalitarianism
in where we are.
Well this episode this week with the man getting
dragged off a United Airlines plane.
Chicago flight.
Chicago flight.
Think about that.
Think of could this have happened 30 years
ago?
I doubt it.
I think it's another symptom.
It's a symptom that speaks to the spirit of
the times, that combines this sort of security
state, the rise of the security state, where
people at the airport, we all go through them,
the indignities of travel, standing in these
lines like cattle.
Line through these waving queues and then
arriving and being told to take off your shoes,
and bend over, and raise your hands, and spread
your legs.
If anybody told anybody 30 years ago, or 25
years ago, or 20 years ago that this was going
to be the United States or that this was going
to be the United Kingdom, people would say
you're out of your mind.
And so here we are.
On one hand, we have this, now on the other
hand, we have no antitrust enforcement.
So we have four airlines that essentially
control the skies in the United States, and
they don't really care that much about you.
And so if you live in Atlanta, and if you
don't want to use Delta, if you want to boycott
Delta, then everywhere you fly is going to
be two or three stops.
That's just the way it is.
So if you bring this together, then you have
not very caring airline employees, who have
locked in, or at least think that they have
locked in customer base, and you have police
force that looks by the way like special forces,
as opposed to a white shirt and tie, yes,
ma'am, no, ma'am.
Completely militarized.
Completely militarized, acting like an occupation
force.
Now I'm saying that, sounds radical, well
this was said during the campaign by Sanders,
for example, said that.
Yes, I think these are symptoms.
I am clearly seeing signs of, not just totalitarianism
in political area but also in the financial
area.
Financial repression, the war on cash, tremendous
difficulties that the Americans have in opening
foreign bank accounts, all of these things
to me speak to constraining of freedoms, freedom
of movement, freedom of capital movement,
freedom of choice, impunity in financial affairs,
where big banks you know nobody ever went
to jail.
All those things, yes, it's very concerning
and this has been something that's been very
much-- And of course we're under surveillance,
add to that, everything you read, everything
you say in writing or on the phone is potentially
recorded.
And just again last week, I think it was,
Congress passed the law that enables internet
providers to sell your browsing information
to anybody.
Only for marketing purposes.
Only for marketing purposes, of course just
for marketing purposes.
But think about it, you don't have a choice
who your internet provider is, right?
Because usually cable it's a duopoly, or maybe
it's an oligopoly, maybe two or three choices,
and they are all doing it.
So, yes, these are very concerning.
I'm not sure that they're tied to populism
directly.
But yes, history tells us that populist movements
frequently evolve into totalitarianism dema-
whatever the word is.
So I think part of that is tiedDemagogues
--to that uncertainty created by that environment
with the economic system that we know today.
Now we're going to talk about gold.
We would have to go back to millennia to get
the entire history out, we don't have enough
tape to get through that.
I'd like you to maybe just focus on the economic
system as we know it today.
And I think we both agree it was a leaving
Bretton Woods, 1971, Nixon shock, the dollarization
of finance, the financialization of markets.
Talk me through how you think about the economic
system that we're in today and how you see
that changing in years ahead.
Well, I think going to the last question,
I don't think anybody knows where we end up,
or how we end up there.
But I think it's a reasonable observation
to say that the crisis that we are experiencing
today probably started in the 70s.
It is probably the same crisis that started
in the '70s.
Let's put it this way, a heart attack is a
symptom of heart disease.
It's an acute condition.
So we think, when financial investors think
of a crisis, they're thinking in terms of
a heart attack.
But heart disease is what causes heart attacks.
And heart disease is a long term condition
that you can have for a very long time until
it impairs you.
And in some cases it impairs you terminally.
And if you don't heed the symptoms then it
is certain to impair you terminally, if not
in the first attempt from the first heart
attack, then it would be the second or the
third if you keep not behaving correctly,
and don't change your ways.
So in that sense, I think that the heart attack,
that signified heart disease, economic heart
disease, happened in the 70s, which resulted
in going off the gold standard, and essentially
monetizing the economy, financializing the
economy.
I don't think anybody would argue that from
the 1980s, if you look at all the charts,
consumption which is 70% of GDP, has been
subsidized by debt.
So from production driven growth, we've moved
to consumption driven growth, and at that
it's a debt financed consumption driven growth.
And so this is only what now 40 some years
since the dollar has become pure fiat currency.
And I don't know of any precedent, and I don’t
believe there is any, for a fiat currency
to survive.
The record of fiat currency through history,
100%, is eventual failure.
That brings us to gold, because the history
of gold for 5,000 years, 100% record, is lack
of failure, to this day.
But I think it's difficult to understand how
we could ever change from a credit driven
economic system.
How do we have a shock like we had in 1971,
to go back to a gold standard or some other
fiat currency standard.
I just don't see, and I think a lot of investors
are skeptical of, us being able to go that
direction.
I would go back to what I started, history
repeats itself, because humans are humans.
This is not a new concept.
There's a great quote from John Kenneth Galbraith
talks about that no field of human endeavor
as the knowledge of history is as short as
in finance, where people don't remember what
happened before.
Santayana said, that the biggest lesson of
history, that people don't learn from history.
But actually this idea is in the Bible.
In fact, in Ecclesiastes 1:11-- I'm not Bible
quoting person just somebody brought it to
my attention, literally this week, and I looked
it up.
--there is actually a quote that specifically
addresses this issue.
It says and I paraphrase of course, that that
we do not remember things that came before
us, and those that come after us would not
remember things that happened to us.
That's clear.
So human nature is human nature.
So when you're saying, why is it that investors
are comfortable with that.
Why would one be comfortable looking at a
picture of lungs that have cancer in it, why
would you be uncomfortable if you've never
seen lung cancer.
How would you know what you're looking at?
It takes a doctor to know what he's looking
at.
And so just because somebody is observing
the facts, it doesn't mean they necessarily
have any reference point.
That doesn't mean I'm right.
It doesn't mean I'm right, but I am observing
something that is familiar to me from prior
personal experience.
And so I see the patterns that are disturbing
to me.
Now does that mean that these patterns will
result in a complete collapse of the system
as we know it?
It may be or it may not be.
The question really is, can somebody afford
to take a bet that that won't happen, given
the facts on the ground?
And if they can't afford to take that bet,
then what should they do to protect themselves.
And that's always been my idea about gold.
Is that gold can be seen as a trade, it can
be seen as a lot of different things.
And I would suggest that 99% of gold transactions
in the west are trading.
Druckenmiller sold his gold, I discussed in
my last interview, the day Trump was elected
and then he promptly bought it back after
January when gold started going up.
So if you're trading gold then you can be
trading pork bellies, it doesn't matter, it's
just all sentiment.
But in terms of its being an insurance, that's
why you have insurance.
And I would suggest that the reason there's
very little interest in gold in the West,
is precisely because people in the West don't
necessarily have first hand experience with
the kind of adversity that potentially can
happen.
By the way just to be clear, this is not the
end of the world.
Nixon closed the gold window, this happened
during our lifetime, we're still here.
Russia, everybody says collapse of the Soviet
Union, well if anybody goes to visit Moscow
it looks pretty spiffy.
Not that all Russia looks like that but it
certainly didn't slip under the waves and
causing a lot of geopolitical problems.
And the collapse supposedly happened only
25, 30 years ago.
So I would say that people should not confuse
the reorganization of a financial system and
the devaluation of currency with the end of
life as we know it, with the physical life
as we know it.
That's a very big mistake.
I think that's right but part of the volume
of noise around gold and the economic system
is our indebtedness.
Global debt to GDP today, 325%, $220 trillion,
$15 trillion added alone in 2016, those numbers
are mind boggling.
I don't know how big $220 trillion is.
How do we wrap our mind around those types
of figures.
I'll give you a couple of ways to think about
it.
One that I've used in the past, and that is
that a trillion dollars is a lot of money.
Nobody understands how much money it is, because
the numbers are beyond comprehension.
So one way to think about a trillion dollars
is, if one were to pay or receive one million
dollars per day, right, it would take 2700
years-- Years.
Years, yes.
-- to either pay off or just spend whatever
you want to do, a trillion dollars.
So you would have had to start seven years
before Christ was born, and continue making
payments or receiving payments through today,
that's a trillion dollars.
The other way to think about a trillion is
in terms of time.
So let's say we say that a trillion seconds,
right.
So a million seconds is about 11 days.
A billion seconds is about 31 years.
So these are humanly understandable.
Right so 11 days and 1,000 times more than
11 days is 31 years, but 1,000 times more
than 31 years is 31,000 years.
So a million is 11 minutes and a trillion
is 31,000 years, I'm sorry 11 days to 30,000
years.
That's the difference, so these numbers are
absolutely incomprehensible.
And nobody should try to comprehend them,
because it's impossible.
But the implication is not so much the numbers,
but the leverage.
It's always boils down to the leverage.
You can count, if you count it in Hong Kong
dollars multiply everything by seven and if
you count the Japanese yen multiply everything
by 100.
So the numbers, absolute numbers, don't so
much matter, the question is leverage, and
the question is debt service.
Those are really the questions.
So let's talk about debt service because we
hear from time to time the size of the debt
doesn't matter.
We can still grow, albeit slow, but the economy
can still grow, markets can still digest more
debt.
But I think the debt service is a critical
aspect that we forget, maybe you can talk
about that.
Many people, I'd say most people, are not
thinking in terms of debt service.
They're thinking in terms of absolute debt
numbers and they're thinking in terms of absolute
dollars, and that leads them to some conclusions
that I don't think are correct.
So for example let me give a specific example,
the trick in this debt accumulation that we've
been through, is very simple.
In 1988, the United States had $2.6 trillion
of debt, in that year the federal government
paid $214 billion in debt service.
In 2008 we had $10 trillion in debt, and that
year the federal government paid 430, I think,
something like that.
I'm sorry $450 billion of debt service.
So from 214 to 450 so the debt went up four
times, and the debt service went up two times,
a little over 2 times.
But from 2008 to today 2016, let's say the
last federal fiscal year, the debt was $19
trillion and the debt service was $432 billion.
So wait a minute in 2008 it was 450 and in
2018 or 2016 right, 10 years just about 10
years later, it was 432 and debt went two
time's up.
It's a pretty good trick.
That's the trick.
That's the trick.
So for the debt to continue to rise from today,
interest rates need to halve for the federal
government to be able to continue this trick.
And that may happen, in theory, but if that
happens we already have pension funds slipping
under the waves, where they have life insurance
companies having serious issues, because they
have annuities where they promised 4%, 5%
pay outs and of course they're having trouble
making that money.
So I think that the clock is running pretty
quickly because there are swaths of financial
establishment, that cannot live for much longer
with zero interest rates, or for these ultra
low interest rates.
So either the rates have to go up, which essentially
will tank the markets, because when discount
rate goes up value of financial assets goes
down.
That still works.
That still works.
Or conversely then people who rely on funding
their liabilities with- - People who rely
on interest to fund their liabilities, essentially
aren't able to do that.
And we're starting to see that.
Dallas pension fund is going down.
There's a Teamsters fund in New York that's
having major issues.
CalPERS has just started slowly to bring down
the assumed return rate from 7 1/2 to 7 I
think.
So these things are already under way.
So under that debt load, I think it's fair
to say, an inability to grow our way out,
be it the US or globally.
Austerity is not going to get there, we don't
have that much to cut.
It seems to be inflation or even a deflationary
scenario, are the likely outcomes.
So that brings us to gold, and to the TBR
fund.
So maybe you can talk a little bit about TBR's
position and how you're trying to solve that
problem with TBR.
Sure if one is trading gold for price appreciation,
in dollar price appreciation, and of course
using different financial instruments is fine
particularly if you're doing it in the short
term.
Although I have to say we were talking before
we started, yesterday LBMA London Bullion
Market Association fix, which is a daily fixing
of the gold price, I wouldn't call it broke
down for the first time, but I would say that
something went wrong because, It was about
1% versus spot, correct?
Yes, yes the pm fix, which in New York happened
at 10:00 a.m. 6:00 p.m.
In London, I think it was $1252 something
and the futures at the same time and actually
the trading in the spot market was going at
$1264 that's $12 difference, that's a huge
difference.
So what that highlights, is that financial
instruments that are backed by gold or use
gold or structurally rely on various types
of indices, are potentially exposed to the
same financial risks that the financial instruments
exposed in general.
So if you own gold as a protection against
various financial risks, then it shouldn't
be exposed to financial risks.
That seems to stand to reason that you shouldn't
buy insurance against problems with the insurance
industry from an insurance company, because
your chances of getting paid, or getting paid
correctly, at the right moment diminish.
So TBR was organized to own gold in a way
that protects the holders as much as possible
from all kinds of financial risks, the risks
of the banking system, the risks the financial
system, the ability to diversify the holdings
globally, and to provide investors with the
best possible property rights.
As a person who's spent the last, I don't
know what, 20 years running a private fund
I understand the difference between a product
and service.
Most people the best way for people to understand
what I'm talking about is when you're buying
app on your phone or when you're going sign
up for a mutual fund for something they thing
pops up where it says agree, those who would
look behind that would see that there are
many, many pages of agreements, that nobody
reads, so they just click, Agree, get over
the pain and they move on to things.
That's a product.
That's a product where the rights and obligations
are heavily tilted towards the provider of
the product and where the objective typically
is to harvest as many fees in as obscure a
way as possible.
Let's put it this way, from different shave
off fees in different places.
Fiduciaries which are typically managers of
private funds, represent the interests of
the client, and so they typically charge a
specific stated fee and their expenses, but
those expenses are at cost they are what they
are.
And so TBR is organized in that way.
So that's one feature where the difference
is there there's an alignment of interest.
Where in products there's not necessarily
an alignment of interest.
The other difference are the terms, it's always
about the terms.
Private funds in general and TBR just adopted
a structure that's used by thousands of private
funds, are privately negotiated because they
are not available to regular investors, and
they're typically heavily negotiated between
the managers and institutions.
And so over the years pension funds, insurance
companies, investment companies, family offices,
very sophisticated investors who employ lawyers
to vigorously negotiate on their behalf.
Right, so over the past 30 years these structures
have been heavily negotiated and have evolved
in a way that offers maximum protection, property
rights protection to the investors and it
offers a fiduciary environment so that should
prevent things like Bernie Madoff.
So owning physical, in a fiduciary framework.
Correct.
It's owning physical gold that's administered
in a way where the manager represents your
interests, the interests are aligned.
And where there's an infrastructure, like
independent administrator, that is not a part
of the manager, that reports on what the fund
owns of what everybody in the fund owns, where
their auditors, their custodians who report
independently, so triangulation.
There's a whole framework of how it's done,
to manage properly other people's money.
And essentially we didn't invent anything
we've just adopted it, to doing it this way.
And I think it's critical because if one owns
gold with the purpose of preserving purchasing
power, and you mentioned purchasing power,
of preserving purchasing power.
Preserving the purchasing power is as much
about preserving the claim to the asset as
it is about the price.
Let me give you an example.
Let's say if somebody bought gold or owned
gold and stocks in October of 2007, by March
of 2009 gold rose 25% and stocks declined
by close to 60%.
Gold didn't rise that much, all right, but
if you look at it, the dollar invested in
gold became $1.25, the dollar invested stocks
became $0.40.
So the purchasing power of gold in terms of
corporate assets, has increased threefold.
And if you use this example in the 1930s,
which was a much bigger dislocation, the dollar
was devalued, gold appreciated by 70%, stocks
declined by 90%.
Now of course, gold was nationalized, but
for those countries where that didn't happen
the purchasing power of gold increased 17-fold
relative to corporate assets and some other
assets.
So I think it's important to understand that
the purchasing power is not about necessarily
nominal prices, and this is why gold works
in deflation as well as inflation.
In inflation the price appreciation of gold
historically, has either kept price or even
outran the inflation.
And in deflation if you own it through the
right vehicle, where you preserve the ownership
of gold, then you keep the purchasing power.
Because having the gold locked up in a bank
that won't give it to you, has zero purchasing
power even though the price of gold may be
sky high or wherever it is.
So that's why I think it's very important
for people, not just to focus on gold itself,
but also on how they own gold and minimize
the types of risks that they're trying to
ensure against.
So final question to you how do you talk to
asset allocators, like myself, about what's
this pension paradox, the idea that a foundation
or endowment that has to meet their 5% distribution
every year cannot do it through the purchasing
power component of holding physical gold in
their portfolio.
Talk me through that.
Financialization of gold using GLD is one
thing but holding physical gold, how should
institutions think about that?
This is one of those situations where structurally
it's very difficult, if not impossible for
most institutions to hold physical gold because
their objectives-- On the one hand they have
long term objectives, of preserving the purchasing
power of the endowment, or foundation, or
whatever it is.
On the other hand the managers, the employees
typically, who manage the money day to day
are judged by short term results.
And so structurally it is very difficult for
people to, particularly when it's not their
money but it is their job, to do something
that may impair their job in the short term,
for the sake of potentially saving other people's
money in the long term.
I think it's almost too much to ask.
It is not surprising to me that there's virtually
no exposure that fiduciaries have to gold
across the Western world.
Therein lies a great opportunity, because
fiduciaries typically act after the fact.
So, if and when, or as and when, we go through
a transition from the current system to a
new system, which just mathematically is something
that has to happen over, I believe, over the
foreseeable future, without the end of the
world.
But financially fortunes will be lost and
other fortunes will be made.
It is my belief that, just like in the 70s,
fiduciaries after the fact will be allocating
money to gold just like they used to as a
prudent fiduciary measure after the money
has been lost, but that would be after the
fact.
And so before the fact that creates a tremendous
opportunity for people who are not constrained
by those considerations, such as private wealth,
private investors, who can and do buy gold
and even there the penetration is very low.
So because gold has no cash flow, it is purely
priced on supply and demand, I think it is
fair to say that increase in demand is bound
to increase the price.
And if that doesn't happen you could still
tremendously create purchasing power even
without the significant price change, and
that's what I think it's all about.
Gold to me is a tool that you use to protect
purchasing power, potentially enhance purchasing
power, and then redeploy that purchasing power
at the highest moment of hysteria, which inevitably
happens, against human history, happens over
and over again, into productive assets, which
at that point will be devalued.
So it's all about relative purchasing power
it's not about absolute price.
Good.
Simon we're going to leave it there.
Thank you very much.
Always an interesting conversation and we
appreciate your time.
