Buying Gold in Hard Times

But what if the economy is improving...?

ACCORDING to the calendar, it is still winter and gold markets still face some tough sledding, says Jay Taylor, host of the radio show "Turning Hard Times into Good Times." Big investors are leaving the market and small investors hesitate to reenter. But in this interview with The Gold Report, Taylor points to some spots where selective investors can find value and growth potential. 

The Gold Report: There seems to be a general malaise in resource investing, particularly in precious metals. What will it take to get investors back in the market?

Jay Taylor: People buy gold in difficult times, and right now there is a sense that the economy is improving. The conventional wisdom says that the huge amounts of money Federal Reserve Chairman Ben Bernanke is pumping into the system will bring prosperity. To the extent that people are investing, they are choosing more traditional investments. People have been so badly burned that small investors have stayed out. They are gun-shy, and for good reason. 

TGR: While the mainstream media is reporting an economic turnaround, the markets do not reflect that, at least from the individual investor perspective.

Jay Taylor: Absolutely, and that is because the middle class is having a tougher and tougher time of it. The hedge fund managers and the people playing with wealthy people's money can speculate in the stock market and the commodities markets. They have done quite well recently, but the average investor is being squeezed very hard. In large part, that is because the cost of living is higher relative to their salaries and people have lost huge amounts of money in the value of their homes. 

I do not buy the notion that we are on the mend. To the contrary, I think the policies being used will be lethal for our economy in the long term. Printing money and capitalizing the banks, redistributing wealth—this is wiping out savings, investment and capital formation. 

In the last reporting period, the US was at negative gross domestic product (GDP). If you look at the real inflation numbers, I would think that few people believe their cost of living is rising only 1.7% a year, which is what the government is reporting. If the cost of living is actually going up more like 8–9%, as economist John Williams suggests, we are in real negative numbers once GDP is factored in. 

The misguided perception that things are getting better may make it difficult for gold and for silver, too. One of the reasons the precious metals mining sector is having a tough time may be that the hedge funds, having bought into gold shares and gold mining companies, are now finding other things to invest in. The investors who used to buy penny mining stocks are certainly not in the market now. 

TGR: Yet, people in Second- and Third-World countries are demanding more products that require raw materials to build, so many of the base metals analysts I speak to are fairly bullish on the global economy. Perhaps other economies are actually growing in a true sense.

Jay Taylor: That is probably right. China is an interesting example. 

Despite having a planned economy, you can make the argument that China is really a capitalist society. Despite its official use of the word "Communism," there is a real lack of regulation there. One recent guest on my radio show noted it was easier to open 26 for-profit schools in China than it would have been in the US. You can make an argument that its lack of onerous regulations makes the Chinese more free than we are. 

China also is a nation where people save money, something Americans have forgotten how to do. In our Keynesian economy, we punish savers; we tax and take away their wealth. Mr. Bernanke's zero-interest-rate policy is robbing American savers and is taking away capital formation. China has capital formation. It does not have all these so-called safety nets in place to take care of people. People save for themselves and their future. The US calls itself a capitalist country, but it is more of a collectivist society than China.

You can make a good case that China and other underdeveloped countries are just getting started. Ultimately, that is bullish for gold and silver because people in those countries understand the real wealth of gold and silver. 

TGR: Central banks in other countries are accumulating gold. Private investors in China, Abu Dhabi and Dubai are also acquiring physical bullion. Perhaps this bullish market will stimulate the precious metals industry.

Jay Taylor: I think that is right. People in those countries recognize that if they put their savings into the local currency, it could be gone tomorrow. They understand that gold and silver are real wealth. Americans are not that smart. We have been told to trust our policymakers, and most Americans do. 

I think there is bullish case to be made longer-term gold, although we are in for some tough sledding in the gold markets. 

TGR: Analysts and investors are clamoring for income in portfolios and are looking for dividend-paying stocks. Even some junior mining companies are paying a dividend. Will more mining companies follow this trend to deter investors from leaving the sector in search of dividends, or will the industry continue putting money into capital expenses and mergers and acquisitions, as it has historically?

Jay Taylor: That is a tough call. The mining industry is so capital intensive. On the other hand, companies realize that they need to get their share prices up to a reasonable level. There is a real push and a pull. 

There is no question that companies that can provide a dividend will do much better in the market. For my newsletter, I am looking for companies that are cash-flow positive, companies that do not have to raise capital. If a mining company has to raise capital to drill highly speculative holes in the ground, the market will not support that today. 

TGR: Brazil is a great mining address, although lesser known and understood. Do you see any issues there? 

Jay Taylor: Politically, Brazil is one of the better jurisdictions these days and it has the geology. 

TGR: I would like to talk about your radio show "Turning Hard Times into Good Times." Is that name applicable today?

Jay Taylor: It is. The Dow Jones Industrial Average is close to new highs. The Wall Street bankers still have their penthouses on Fifth Avenue and their houses in the Hamptons. However, the middle class is still being hurt. 

On the show, we try to help people understand what is true, not necessarily what they want to hear. We invite interesting guests. This week, we had Peter Schiff and Mark Skousen. Jim Rogers and a theologian named Dr. Albert Schmidt will be on soon. 

I like to reach beyond the financial because the spiritual is part of how people approach life. Markets are driven by sociological trends, by philosophical and theological thinking. 

But the main focus is how to survive in tough times; how to make money by recognizing the reality rather than pretending things are good when they are not. 

TGR: I hear you saying that there are opportunities for thoughtful, selective investors. 

Jay Taylor: Absolutely. The energy sector is the bright spot in the American economy right now. There are some extraordinary refinery stocks and energy sector plays. 

TGR: Are you excited about uranium?

Jay Taylor: I like uranium and believe we are close to a turning point there. 

TGR: Well, Jay, we may have not solved the problems of the universe, but thanks for your time and your insights. 

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