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Bubble Opportunity

Repeated inflation makes the big picture strong for gold and Silver Investment...

BEST-SELLING finance author John Pugsley entered the investment business in the late 1960s, first sharing what he learned in his book, Common Sense Economics, says The Gold Report.

Now a standard reference for stocking up on food and household goods as a hedge against inflation, it led John to start Common Sense Viewpoint, an investment-economic newsletter covering political, economic and investment topics, in 1975, which was succeeded by John Pugsley's Journal and now Stealth Investor, a weekly stock advisory that alerts subscribers to potential investments beneath the radar of the big funds and brokerage houses.

A popular speaker and talk show guest, John Pugsley suffered a major heart attack shortly after recording this interview with us here at The Gold Report. Our thoughts are with him and his family. Please note that new subscriptions to Stealth Investor have been temporarily suspended.

The Gold Report: Good morning, John. How might the tragedy in Japan and conflicts in the Middle East affect precious metals and Gold Mining stocks in the near future?

John Pugsley: We are in a particularly exciting period for speculating in the natural resource area and specifically the mining stocks. What's going on right now in the world is we've gotten totally into paper money. Governments have had a big backlash from all the money that was printed over the last 20 years in all of the major countries of the world. When the 2008 economic bubble swept across the globe, governments tried to solve it by printing more paper money. Every time they get into a problem, they think they can bail out their past credit excesses by creating more credit. This is absolutely going to lead to inflation. Whether we want to call it hyperinflation or not, it's going to come and it's going to come with a vengeance. That's the opportunity for all of us, because this pile of government debt is building in all the banks and pensions funds around the world.

TGR: So how does the situation in Japan fit into this picture?

John Pugsley: It is absolutely insane to think that rebuilding after the devastating earthquake and tsunami in Japan could act as stimulus for GDP growth. That would be like saying that building bombs and blowing things up during a war stimulates the economy. That doesn't create a better world for anybody. If wiping out entire cities really does create a rising GDP and standard of living, why not just go ahead and do that periodically and have a wonderful economy. That's just insane. Instead, they're going to print enormous quantities of paper Yen, which will result in passing the loss on to lower-income individuals just as the federal deficits in the United States are passing losses down to the lower classes.

When prices rise, the retired and those on limited incomes will be the victims. I feel sorry for them. But, by the same token, those of us who have some assets can take advantage of this by positioning ourselves outside of the paper-money bubble by investing in natural resource commodities like gold and Silver Investment. The real assets are the things we use everyday – copper, steel, zinc, lead and aluminum. These natural resources are the opposite end of money – they are what the price level is priced against. The opportunities are going to be enormous in the next five years. That's why every time we see a dip in any of these areas, we're going in and buying. If they fall more, we buy more. So, we're positioning ourselves.

TGR: When you point out copper, steel, zinc and lead, those are commodities that are used in an expanding economy. Are you so bullish on them because you're expecting that, worldwide, we're going to have an expanding economy over the next several years?

John Pugsley: Well, I'm very hesitant to ever try to judge the short-term direction of anything. I'm looking at the longer term. I don't think we're going to see a lot of expansion in one year, but that doesn't mean we're not going to be using these commodities. Clearly, when the world or one country goes into a recession there's a lot less copper, zinc, lead, aluminum and so on used. But, those are only temporary setbacks.

The fact is that I have a very, very long-term positive view on the progress of man. There's a wonderful book out now called The Rational Optimist: How Prosperity Evolves (Matt Ridley, Harper, 2010). It really helps you realize how, decade after decade, century after century, people are getting richer and richer. They're demanding more and more in the way of standard of living.

With India and China – and not too long ago, the Soviet Union – opening up to free market and free enterprise and breaking down some of the governmental barriers to individual initiatives, we're going to see rising demand for goods and services. Look at the automobiles, refrigerators, air conditioners and cell phones that we have. This has happened very rapidly over the last decade and it's going to continue. So, whether we have a brief setback here with this recessionary period of maybe two, three, five years doesn't really break the long-term trend. It's just one of those dips that provides buying opportunities.

TGR: How are you taking advantage of this situation?

John Pugsley: This is one of the reasons that we happen to be in the prospect-generation area. We're at the very beginning. Most of our companies are not producing companies. Most of the things we look for are very tiny, what are known as "prospect generators." They're at the hot end of the whole business. History proves that discovery, and then selling off to property developers is the more aggressive, explosive, profit-making area. This is where the real money's been made in the last decade and where we've made our money. You have to take a long view, however.

Between the time someone discovers a copper, gold or zinc deposit and the time it's actually put into production is three, four, five, six years or longer. So, we're not looking for instantaneous turnaround despite the fact that we've had some of those. The gap between picking up a few streambed samples, trenching and finally punching a hole and turning it into a mine is very involved. So, I don't really look at the short term. I'm very optimistic about the 5- to 10-year run going forward.

TGR: It sounds like your position really hasn't changed over the last year. So, despite the fact that most of these prices have risen substantially, you still believe that they present excellent prospects for investors out there?

John Pugsley: Yes, and they're coming all the time. You just have to find the young companies, the new companies with bright young geologists behind them to go out and look. Because commodity prices have gone up, it has created a tremendous interest in this area. That's one of the reasons that some of our juniors and some of our majors have improved so quickly. Rick Rule, who just returned from the Prospectors and Developers Conference (PDAC) in Toronto, said attendance at that event has exploded from 1,500 to 33,000 attendees in the 10 years he has been attending. That just tells you that people are flooding into a sector that's doing well.

TGR: Isn't that a dangerous sign?

John Pugsley: In 1928, every bellhop and elevator operator was touting stocks to anyone who would listen. Clearly, it was a bubble market. Whether this is a bubble market right now for these commodities depends upon the value of money. If I'm correct and the trillions and trillions of Dollars, Yen and Euros pouring into the banking systems continues, everything is going to go up in price.

One of the things that has to go up in price is the raw commodities that will be needed to continue civilization as we know it. So, I don't think we have to look at this last period as a bubble that must be corrected. Sure it could correct somewhat, but I think the offsetting event here is the printing of this paper money. At some point, this has got to start coming back into the market. When prices start going up, that means the prices of commodities have to go up proportionately.

TGR: How about some final thoughts on strategic changes readers might consider in their investment philosophies?

John Pugsley: Watch what the banking system and the government are doing. I published an article a couple of months ago called Rethinking Gold, a long-term historical look at money and commodities. A better understanding of the big picture should influence what you do in the short term heavily.

TGR: Thanks again for taking the time to share your insights on the investment implications of current world economic events and how this impacts our readers' relative to gold and metals investments.

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