David Morgan:\tThis is an interview conducted by David Morgan with Nick Barisheff. He\u2019s recently written a book called $10,000.00 Gold: Why Gold\u2019s Inevitable Rise is the Investor\u2019s Safe Haven.
\n\tNick, I haven\u2019t re-read the whole book. I read the preliminary, but it\u2019s an excellent job of characterizing why gold is so important. Before we start on that, what prompted you to switch from the real estate industry to precious metals?
\nNick Barisheff:\tWell I guess that would take us back to 1997. I\u2019d just finished a project and was looking at what the next trend might be. I concluded that it would be precious metals, the energy sector, and water. The thing that attracted me to precious metals in particular was that in Canada, there was no method of holding physical bullion in registered retirement accounts in a way that didn\u2019t compromise the fundamental attributes of bullion.
\n\tSo that\u2019s what I set out to do. I thought precious metals were going to rise, and I was going create a structure that would accommodate Canadian RRSP investors. At the time there was about $400 billion in retail mutual funds, and somewhere in the back of my mind I had this idea that everybody should have 10 percent in bullion. So I thought there could be great potential to create a bullion fund.
\n\tIt took four years of dealing with the Securities Commission to make it happen, because one of the things I didn\u2019t want to compromise was the liquidity. I didn\u2019t want to set up a closed-end fund, because then the liquidity is whatever number of shares you\u2019re trading. I wanted the liquidity to be the same as bullion itself. So the way to do that was with an open-end mutual fund trust that could be purchased and redeemed daily at Net Asset Value.
\n\tBecause a bullion fund didn\u2019t fit all the regulatory requirements and had never been done before, it took four years to establish the first open-end mutual fund. And then the big surprise was that I thought it would be readily accepted and that everybody would understand they should hold at least ten percent of their investment dollars in bullion. But the resistance to that simple idea was massive. There were enormous misconceptions, negative attitudes, and so on that I never experienced with any of the other investment projects I\u2019d ever done.
\nDavid Morgan:\tIt\u2019s been something of my experience as well that to get this educational process through to the public has been more than a struggle, and it seems so obvious\u2014the lessons of history. This, of course, leads me to the historical lessons of gold versus paper. You have several stages in here, one through five; can you outline what those are?
\nNick Barisheff:\tWell to begin with, a lot of mainstream commentators, and investors, lump precious metals (gold, silver, and platinum) in the same category as industrial metals (copper, lead, and zinc) and treat them as a commodity instead of as money. They don\u2019t understand why precious metals\u2019 prices are rising when in fact what\u2019s happening is the currency is devaluing, and this is happening in all currencies. It\u2019s simply because if you create too much of something it\u2019s going to lose its value. It\u2019s that simple.
\n\tSo that\u2019s really what\u2019s happening. Right now we\u2019re seeing that prices have been increasing since 2000 because of accelerating currency devaluation and increasing debtIf you chart the gold price against the U.S. debt you get an almost perfect correlation.
\nDavid Morgan:\tGreat, so can you go ahead and outline the five stages of the historical lessons of gold versus paper?
\nNick Barisheff:\tWell I guess just to make it short and quick is that throughout all of history there hasn\u2019t been a single paper currency that didn\u2019t end in hyperinflation and complete collapse. Now, for the first time, we are in unprecedented territory in that we have a global fiat currency in the form of the U.S. dollar as the reserve currency. It simply gets to a point where there are no other solutions but to create more currency to postpone the inevitable.
\n\tRight now you\u2019ve got a situation in the U.S., as well as Europe, Japan, and most of the Western world, where governments have few choices. You can increase taxation, or you can implement austerity measures. However, we\u2019re now finding those don\u2019t work in the short term; they make matters worse. The result is you reduce GDP, you increase unemployment, and you reduce government tax revenues, which then causes you to borrow even more currency and go further into debt. So governments around the world are caught in that spiral. The other way to get out of it is to grow your way out of it, but at this level of debt you\u2019d need in excess of ten percent annual GDP growth, and nobody\u2019s saying that\u2019s going to happen in the foreseeable future.
\n\tThe other thing that has worked in the past is the implementation of financial repression, which is a subtle form of reducing the debt-to-GDP ratio. It was done successfully after World War II. You simply create negative real interest rates. You devalue the currency through excess creation. You can change the rules and you force certain institutions, such as pension funds, to buy Treasuries and you eventually implement capital controls. If governments keep that kind of subtle form of financial repression going they can, over a long period of time reduce the debt-to-GDP ratio.
\nDavid Morgan:\tLet\u2019s talk about the aging population and what that meansfor the gold situation.
\nNick Barisheff:\tI looked at some of the trends because we\u2019ve got a lot of daily noise in terms of what may or may not happen, and we speculate on different possible outcomes. I tried to focus on a few trends that are not changeable. The first one is the aging population, the baby boomers in most Western countries. During the 1980s and 1990s, the baby boomers drove the economy as the largest percentage of the population who were buying homes, raising kids, buying products, and so on.
\n\tWell they\u2019re now starting to retire, and in the U.S. the number I\u2019ve heard is ten thousand a day, who are starting to draw on Social Security. So as this trend progresses you get an opposite outcome over the next twenty years, from what was the case during the lasttwenty years. The boomers have stopped spending money because they don\u2019t need to buy any more stuff. They\u2019re disinvesting in many cases, and they require drawdowns from the government in terms of Social Security, Medicare, and pension funds. That kind of shift is going to cause a reduction in GDP, a reduction in tax revenues, and therefore, an increase in annual deficits and total debt.
\n\tAnother issue is that over the past twenty years or so, we\u2019ve seen the offshoring of jobs. A significant number of jobs have gone to China and other third-world countries, and they\u2019re not coming back. If we ever get to the point where it is more profitable to return to the US, then manufacturers are going set up highly automated robotic plants, and they\u2019re not going to be staffed by the blue-collar workers who lost their jobs on the assembly lines. So that\u2019s another long term factor that\u2019s going to create systemic unemployment for a good deal of time.
\n\tA third issue is that of peak oil. While there\u2019s currently lots of talk about shale oil and fracking, the issue with respect to oil is actually the peak in terms of conventional cheap oil. We\u2019re either at the peak or close to the peak in terms of conventional cheap oil, and other than printing currency it\u2019s the only other thing that, as the oil price rises, causes inflation by affecting the prices of literally everything else. So you\u2019ve got these three macro trends that are going lead to even more currency printing, even more government debt, and gold\u2019s going to rise accordingly.
\nDavid Morgan:\tLet\u2019s discuss the myths about gold bullion ownership. It seems still that even though you and I are in this sector, and a lot of people we speak with are well aware of gold and its importance, I\u2019d say that\u2019s 1 percent of the population, but the other 99 percent are rather clueless. So\u2014
\nNick Barisheff:\tThat\u2019s right.
\nDavid Morgan:\tWhat would be the myths about gold ownership?
\nNick Barisheff:\tWell I guess in the book I\u2019ve covered the myth that gold is a risky asset, so we\u2019ve charted it against the Sharpe ratio and the Sortino ratio, which measure return against volatility. Gold, silver, and platinum outperform just about all of the Dow components. So if gold, silver, and platinum are risky, so are all of the Dow stocks. That\u2019s number one.
\n\tThe second major myth is that gold is useless because it doesn\u2019t pay any dividends or interest. Well neither does currency if you hold it in a vault. If you take a stack of hundred dollar bills or Swiss francs and put them in a vault, you\u2019re not going to get any interest or dividends. In order to get interest or dividends you have to take your money, or currency, out of the vault, give it to someone else in the form of shares or bonds, and hope that they will give you back your principal plus interest or dividends. But you\u2019ve put your currency, or money, at risk of never getting it back. That risk is the reason why you get interest and dividends. But if it\u2019s sitting in a vault, whether its currency or gold, it\u2019s not at risk, so you\u2019re not going to get dividends or interest.
\n\tYou can achieve similar cash flow objectives through the partial liquidation of capital gains. Since gold has increased by about 15% per annum over the past ten years, investors could have liquidated part of this gain, achieved higher cash flow than they could a with dividends or interest while at the same time preserving their remaining capital in inflation adjusted terms.
\n\tWe have now created a fund that does a fixed monthly distribution based on this concept.
\n\tThose are some of the major myths, but they\u2019re so well ingrained, and you\u2019ll see them repeated again and again in the media. I felt I needed to address them in detail in the book.
\nDavid Morgan:\tThat\u2019s one of the best explanations I\u2019ve heard as far as equating gold to physical currency. Any investment is at risk, and you do have a potential loss of principal and we could cite many examples.
\nNick Barisheff:\tThat\u2019s right.
\nDavid Morgan:\tUnfortunately we don\u2019t have time today to cover all of the examples you detail so well in the book. Let\u2019s talk about Chapter Six, legacy of gold, performance of gold, and what you see based on the last bull market.
\nNick Barisheff:\tThe first thing to remember is that in the 1970s, the rise in the gold price market was due to a decline in the value of the U.S. dollar after Nixon closed the gold window in 1971. It\u2019s something that was largely a North American phenomenon; it affected Canada, and the UK. But it wasn\u2019t a global rise in the price of gold. Gold didn\u2019t rise in German marks or Swiss francs, for example. China, Russia and India weren\u2019t participants. As a result, there was a lot more interest in mining stocks, in that bull market, from North American investors.
\n\tNow what we have is a price increase in all currencies Without exception, all currencies are declining against gold. The majority of the purchases are coming from countries like India and China, and those purchases are all in physical bullion. As a result you\u2019ve got a much higher level of demand for physical bullion than mining stocks because it\u2019s fueled by a growing global concern about the value of the currencies.
\nDavid Morgan:\tLet\u2019s talk about owning gold. You talk about the fundamental case. What is the fundamental case for owning gold?
\nNick Barisheff:\tWell the importance there is that you actually own gold, silver, and\/or platinum. That you\u2019re not simply purchasing a proxy or a derivative, and many people don\u2019t understand the difference. You\u2019ve heard, I\u2019m sure, that a bank in Holland refused to give a client gold that he thought he was entitled to; he was simply given cash to liquidate his account. It appeared that the bank defaulted on delivering the gold. Well the bank did nothing of the kind; the client never owned any gold in the first place. He had an account that was similar to any other cash account or foreign currency account, and basically what he had was an IOU for his supposed gold, from the bank. And in this case that\u2019s what many people have.
\n\tI know that we have clients from Switzerland who are switching out of the accounts that they hold in Switzerland that they thought were allocated gold accounts, but which turn out not to be the case. If you\u2019re buying small amounts and taking the gold home, that\u2019s not an issue. But if you\u2019re buying bigger quantities where it is impractical to self store, it\u2019s important to realize that the first step is to actually purchase the gold, and have the title to it transferred to you. You can\u2019t simply buy allocated gold. You need to buy gold, or silver, or platinum, and that purchase needs to have documentation confirming that the title is transferred to you. In order to do that, you have to describe the refiner, the serial number, the exact weight, and the exact purity of each bar that is transferred to you. You don\u2019t own anything if all you have is \u201counces\u201d on an account statement.
\n\tThe process is not much different than if you bought a car, a motorcycle, a boat, or a house. You always get a detailed description of the asset being transferred to you. Once that process has taken place, the second step is to enter into a custody agreement with a credible custodian\u2014ideally with an LBMA custodian to ensure maximum liquidity. That\u2019s part two, and in that custody agreement it will specify what the custodian can and can\u2019t do with your bullion without your permission.
\n\tThis is where there\u2019s a lot of confusion, and in terms of the accounts that people get in to, they\u2019re attracted to them because they think they\u2019re buying gold at a reduced price with very low storage fees. But the reality is that they haven\u2019t bought any gold at all.
\nDavid Morgan:\tVery important, and that\u2019s a lesson that I think a lot of people are going to learn the hard way, no matter how many times people such as yourself, myself, and others in the industry try to pound these facts home.
\nNick Barisheff:\tThat\u2019s right.
\nDavid Morgan:\tIt\u2019s the convenience. It\u2019s the simplicity. It\u2019s the law. It\u2019s done that way. I\u2019ve had this discussion with some fund managers; and some just seem to ignore it. Moving on, how would you buy gold? How would you buy it if you were a fund manager and you really want the physical? What\u2019s one of the methods to do that?
\nNick Barisheff:\tWell typically you want to deal with an LBMA member, and actually purchase the bars. We deal with ScotiaBank, which is an LBMA member, as well as BMG (a Dutch bank specializing in international financial services), and we deal with barswhich meet LBMA specs. We have a program where you can buy any number of gold, silver or platinum bars, and either put them in storage, or take delivery. You can do whatever you want with your bars. But we facilitate the process to accomplish that. Lately we\u2019ve had an influx of investors coming to the realization that they thought they owned bullion but in fact they had a bullion proxy or a derivative.
\nDavid Morgan:\tExactly, so in your last chapter you talk about gold never sleeping and the Chinese. Can you talk about where the gold shift has been moving and why?
\nNick Barisheff:\tYou\u2019re aware that China is the largest gold producer in the world now, and they\u2019ve been purchasing all their internal production. Russia\u2019s been purchasing about two-thirds of itsinternal production, and then China is importing as much on top of that. So I think it\u2019s clear that China wants to create a competing reserve currency, and I think they\u2019ve already signed about twenty trade agreements with different countries where they\u2019ll settle the trade deficits in their own respective currencies. As this moves along, they\u2019re building up the gold backing to support a stronger yuan, and make it a truly international reserve currency.
\n\tWe\u2019re not getting any accurate numbers out of China, and its central bank doesn\u2019t show that it\u2019s purchasing gold. What they\u2019ve done in the past is to purchase gold through a sovereign wealth fund that doesn\u2019t have to report any of its activities. Just like a few years ago, when they made an announcement that \u201cOh by the way, we just transferred six hundred tonnes from the sovereign wealth fund to our central bank.\u201d That\u2019s probably what\u2019s going to happen in the near future. They\u2019ve just been accumulating gold at the sovereign wealth fund.
\n\tBut the same thing is happening in terms of a number of the Eastern countries, whether it\u2019s South Korea, Russia, or India where they\u2019re increasing their gold reserves and trying to extricate themselves from the U.S. dollar while they can. That trend is in place, and when you consider that central banks used to sell about five hundred tonnes a year, and they\u2019re now buying in excess of five hundred tonnes a year-you\u2019ve got a one thousand tonne differential, when annual mine supply is about twenty-five hundred tonnes. That\u2019s rather significant, I would say.
\nDavid Morgan:\tYou talk about accepting individual responsibility; this is not positive head-in-the-sand daydreaming; it\u2019s the polar opposite; it requires training and discipline, as well as courage. Would you talk a little bit about that and why you wrote it?
\nNick Barisheff:\tWell I think that in Western society, we\u2019ve abdicated a lot of personal responsibility in various areas of our lives. But two areas where you can\u2019t abdicate your own responsibility are in terms of personal finance and health. You have to do your own homework and become knowledgeable. If you simply ignore those and expect someone to take care of your finances or your health, you\u2019re going be in for some unpleasant consequences.
\n\tSo when I talk to people about gold, I say: \u201cBasically 10 percent is a no-brainer, so just allocate 10 percent to your portfolio.\u201d But after that, start doing your homework and reading, and after you get more and more comfortable with everything, then you can decide what your personal allocation is. My personal allocation is 100 percent because I can\u2019t find anything that it would be worth parting with my gold to invest in. Because whatever I would buy, I would end up getting less gold back, in which case I might as well leave the gold in the vault.
\nDavid Morgan:\tVery good, well we\u2019ve done a brief outline of the book. It\u2019s an excellent read, one of the best to come out in my view. I think you\u2019ve covered this topic in ways that others haven\u2019t. Coming back to the title, the $10,000 Gold, you know, that startles some people. How did you come up with that number Nick?
\nNick Barisheff:\tI was meeting with a writer\u2014he\u2019s the author of many financial books\u2014and we were having lunch and talking about titles. So he said \u201cWell okay, so what do you think the price of gold is going to be in plus or minus five years from now?\u201d I said, \u201cWell, round number\u2019s $10,000.\u201d And he said, \u201cWell, that should be the title of your book.\u201d So that\u2019s what I did.
\n\tI\u2019ve been reluctant to project numbers like that in the past. But what changed my mind is when we had the U.S. debt ceiling debate in 2011, the price of gold went up 30 percent during that debate. And it was clear to me there was no political will to solve the budget deficit and the debt of the U.S. It was just going to keep going higher and higher. When you look at it, the debt has started to look like an exponential curve going straight up. So in terms of plus or minus five years you get to $10,000.
\n\tIf we have a repeat of the 1970s, if you recall, the gold price went from $35 to $200 by 1975. And then it dropped to $100. From $100 it went up to $850. So if you take an eight-fold rise from the current low, you get to $10,000. Same thing has just happened, the gold price took a big hit in the middle of the bull market, and the next rise is going to be exponential.
\nDavid Morgan:\tVery good. Well, let\u2019s talk a little bit about your company and how people could inquire about that and get some more information.
\nNick Barisheff:\tWe have two kinds of categories and products. We have three mutual funds that are public funds in Canada, and are sold to accredited investors throughout the world. One fund buys gold, silver, and platinum; one buys gold only; and one buys units of the gold fund and issues monthly distributions.
\n\tBut in addition to that we\u2019ve set up a program where high net worth investors can buy larger, what I consider investment grade, bullion bars and either take delivery or have them stored in one of the Scotia vaults in Toronto, New York, or Hong Kong. That allows people direct ownership of bullion, and we tried to make it as convenient to purchase actual bullion bars as it is to purchase a stock. It\u2019s taken us about five years to develop the software and the programming to facilitate the purchase process and the ongoing administration.
\nDavid Morgan:\tWell I thank you for a great interview. Before we close out, is there anything that you would like to leave with our listeners before we do close out?
\nNick Barisheff:\tWell as I mentioned, I think at this point in time people have been given a gift in terms of a low price. If they don\u2019t own any precious metals\u2014gold, silver, platinum\u2014this is one of the final opportunities they will have, I think, before the price really starts escalating. And they should at least get to the point of 10 percent, and it\u2019s always a good idea to have a mix in terms of gold, silver and platinum in the process. Then start educating themselves, and that\u2019s where I hope this book will do its job-will help people understand the fundamentals and get some of the myths and prejudices out of their heads.
\nDavid Morgan:\tVery good Nick, and we\u2019re looking forward\u2014or maybe we\u2019re not looking forward to $10,000 gold. I say that with a bit of humor because\u2014
\nNick Barisheff:\tWell that\u2019s not going to be the peak, and the real worry is what happens after that. Because if we hit $10,000 then we\u2019re really into hyperinflation, and the number it\u2019s going to head towards will sound ridiculous today. But that\u2019s what I think is going to happen.
\nDavid Morgan:\tThank you Nick, this concludes the interview.<\/p>\n","protected":false},"excerpt":{"rendered":"