Markets, Manias and Cranks, Part II

Brian Maher: We’ve covered a lot of ground yesterday, from Brexit to China to the dollar. Now let’s turn to gold, Chuck. Gold, as you know, has had a great year so far, the best year in 30 years. It’s up something like 20% so far this year. What’s your take on gold? Where’s it going, and what do you think is pushing it higher?

Chuck Butler: I think the driving force in gold right now is all these countries going with negative interest rates. And there’s even talk of it happening here in the U.S. I’m not sure it’ll happen here, but important people are seriously discussing it. And just talking about negative interest rates here in the U.S. gets people concerned about their cash. If they’re not going to earn any money on their cash, or they’re going to have to pay banks to store their cash, they might as well put it in gold.

So I think all this talk about negative interests rates is what’s driving gold right now. And then, you’ve always got the geopolitical stuff going on around the world. There’s just a lot of uncertainty in the world.

Brian Maher: We saw how the Japanese reacted to negative rates. Instead of going out and spending like the government expected, the only thing they bought were safes to hoard their cash. Many also bought gold.

Chuck Butler: Yup, and the talk of a ban on cash is also another thing. That just scares the bejesus out of me, it really does. There are so many other things that could happen if they started banning cash. Ever since I started writing about this issue, people have been sending me emails telling me, for example, that they were in Italy and tried to pay for their hotel room in cash and were told they couldn’t.

And this ban on cash is going to really drive the price of gold higher, I think. Right now you’ve got Mario Draghi fighting with the Bundesbank, the German Central Bank, about stopping printing of the 500 euro note.

I was surprised that the Bundesbank was against him on that, but still, the point is that he’s trying to get rid of cash and doing it under the guise of stopping money launderers, criminals and terrorists. But it won’t.

Brian Maher: Isn’t that always the excuse, though?

Chuck Butler: Yup, it’s very similar to some other arguments that have been used over the years to get rid of something. So anytime you see talk about banning cash, negative rates or even interest rate cuts, it should drive the price of gold higher.

Brian Maher: It seems like things are inexorably headed in that direction, that they’re going to succeed ultimately. I don’t know how long it’s going to take, but it seems like we’re heading for the cashless society, the banning of physical cash. It’s going to be the new barbarous relic, like gold was called. I don’t know how long it will take, but once these things start they just don’t stop. Agree?

Chuck Butler: Oh yeah, absolutely. And to me it’s like a government program that’s put in temporarily, it never goes away.

Brian Maher: Nothing’s so permanent as a temporary government program, right?

Chuck Butler: Right. And when Nixon removed the gold backing from the dollar, it was only supposed to be a temporary move. Most people don’t realize that.

Brian Maher: I’m sure those who orchestrated it knew otherwise, but it’s the old frog in the pot scenario. The elimination of cash is already well advanced in places like the Scandinavian countries, there are hardly any transactions conducted these days in cash.

So once a whole economic area goes cashless, ultimately it has to be coordinated on a larger scale. For practical reasons, you can’t have one area using cash and the other doesn’t. So eventually there’s going to have to be a convergence.

Chuck Butler: Exactly, and that was my point in one of my recent issues. You may not think that’s going to happen here in the U.S. But if all the other countries in the world are getting rid of cash, how’s it going to work for the U.S. to have cash? It’s not. So we’ll have to go along with everyone else.

Brian Maher: Scary. But do you think the Japanese experience has frightened some of these bankers out of negative rates, because the Japanese people’s reaction was the complete opposite of what was expected? So do you think that gave Janet Yellen and the rest of these people pause going forward?

Chuck Butler: No, in fact, I think what it tells them is that they probably need to do more of it. It’s sort of like the Krugman argument that when we were doing quantitative easing. We just didn’t do enough of it, that’s why it didn’t work.

Brian Maher: When theory confronts reality, they go with theory every time. They all attend the same schools, they have the same theories, and they just will not adjust their theories to reality.

Chuck Butler: Well, I truly don’t believe that the economists and everybody else at the Federal Reserve, are stupid. I really believe that they realize that all their Keynesian economic theory and everything else that they’ve done hasn’t worked for decades. However, I just don’t think that they have the courage to take a different course.

Brian Maher: God forbid the market is free to decide.

Chuck Butler: That’s always been my take, that we don’t need a central bank. We just need markets to set the interest rates.

Brian Maher: I read an interesting quote yesterday from an ECB official dismissing the idea that central banks have run out of powder as it were, or ammunition. He said, I think the quote was, we are magic people, we can, we have far more tools at our disposal than people realize, or we can do much more. It’s amazing.

Chuck Butler: Yeah, the whole thing has gotten out of control as far as I’m concerned.

Brian Maher: Jim Rickards, unlike that ECB official, warns that when the next crisis strikes, the banks won’t have anything left to handle it. Then it’s on to the IMF and special drawing rights to the rescue.

Chuck Butler: Yeah, I’ve read that, too. I can’t argue with him, but at the same time I’d like to think that it’s not going to happen.

Brian Maher: So what about China, do you think it’s got more air in the tire or do you think it’s going down?

Chuck Butler: I think China’s fine. They grew way too fast for too long and they have to go back and clean out those excesses. They have to take some lumps now and endure a period where they simply clean out the excesses. But they’ll work it out. I really do believe that they will and they’ve got a huge treasure chest of reserves, which I always remind people.

It has $3.4 trillion worth of reserves. It has decreased from over $4 trillion. But it’s still $3.4 trillion. And they can do a lot of things with that amount of money to correct problems in their economy.