Gold Investment: Insights from a Banking Education

Quantitative easing and the coming redistribution...

FOUNDER of Beacon Rock Research, Mike Niehuser incorporates his banking school background into his Gold Mining industry analysis. In this interview with The Gold Report, Niehuser assesses the macroeconomic situation from a banker's perspective, explains why he is convinced gold is ready to take off. 

The Gold Report: You were at the Pacific Coast Banking School a couple of weeks back when Gold Prices dipped and then surged on Federal Reserve Chairman Ben Bernanke's comments. Why are you attending banking school?

Mike Niehuser: In a former life I was a real estate construction lender; I attended a mid-career banking school and found out there that I am not a banker. I also learned how to analyze banks and in 2000 transitioned to become a bank analyst. In 2004, I fell in love with the mining industry. I never forgot the school and was awarded faculty status eight years ago for providing lecture capture for long-distance learning. Staying active in the school has allowed me to see outside the bubble and this I hope has made me a better mining analyst. The skills as a banker—assessing project, credit and market risk—have helped me to compete as an analyst.

TGR: Regarding Bernanke's comments, how does this impact your forecast on Gold Prices?

Mike Niehuser: I think Bernanke's comments, as unclear as they were, demonstrate how polarized the world is in its thinking. The markets are looking for leadership and direction, something investors can trust to plan their investments. This became clear to me at banking school. One direction is to stable money, the other indecisive course will reap the whirlwind. 

Due to the election, we may expect significant volatility in Gold Prices through the end of the year. It should come as no surprise if silver traces a similar pattern.

TGR: In light of your involvement with the banking industry, how do you think bankers feel about the possibility of more quantitative easing and its impact on interest rates and inflation?

Mike Niehuser: There are individuals who feel strongly one way or another, but strangely indifferent overall. There are hints that all is not well. I am not talking about concerns we might have for deficits, increasing national debt and inflation, but concerns about the public perception of bankers as a class and on their careers with the impact of legislation like the Dodd-Frank Act that has not even been written. Bankers appear to be coming out of a state of denial on Dodd-Frank, but I believe they understand that it will lead to a declining return on equity and being required to hold more capital, receiving lower returns on investment and falling stock prices. 

There is also a split between large banks and community banks. This should lead to consolidation and the unforeseen consequence of even larger banks that are "Too Big to Fail," which, in my opinion, creates even more systemic risk. 

Interestingly, some bankers see low interest rates as a new normal that present selling opportunities to their customers. There are people on both sides. On the whole, bankers would rather have the Fed on their side openly, if they want to have access to funds and support for their banks. 

I fear with Dodd-Frank the banking industry is becoming more of an arm of the government than an investible class of investments. As long as politicians and their regulators, in the name of risk reduction, continue to pick winners and losers, there will be unintended consequences. On the whole, they appear to be in a bubble and to have convinced themselves that they have the ability to shed inflation or interest rate risk on their balance sheets.

TGR: Do most of the bankers you know feel that the general economy is in recovery mode?

Mike Niehuser: Yes, it would seem so. Most of the loans going bad today are small compared with just a few years ago. Not a lot of new loans are being created. It was said by one instructor that, "You have got to be terminally stupid to have a new loan go bad in the first year." 

As things are less negative or at least stabilized, bankers' careers are in less danger and this is how they view the world. This is interesting for a number of reasons. From a microeconomic perspective of demand and supply, artificially low interest rates would actually create a shortage of credit, just as price controls create shortages. Once again, just thinking of additional requirements brought on by Dodd-Frank, the over-regulation will likely lead to unforeseen consequences, distorting markets and misallocating credit. 

Imagine being a lender with stiff penalties to be assessed by the unaccountable Consumer Financial Protection Bureau or having lawyers regularly sitting in with regulators on bank audits. The culture of banking is to reduce risk, and Dodd-Frank is a healthy dose of reputation, regulatory and political risk. In any event, this will suppress lending and economic growth in the economy, which will lead eventually to more imports or higher prices.

TGR: What is the general sentiment among bankers regarding Gold Investment? Does the banking community regard the possibility of making gold a Tier 1 asset a real possibility?

Mike Niehuser: This was strange; in past years some students mentioned gold, but I didn't hear anyone talk about gold over the session except the economics professor. This was particularly odd because the school was held during the Republican National Convention, with its proposal to complete a study on the gold standard. One would think it would come up in conversation as this would impact the definition of the very lifeblood of the banking industry, money and leverage. 

I suppose this stems from a misunderstanding or lack of thought on their part of the definition of money. It was interesting that the recent partnership of PayPal and Discover came up. This advancement into mobile payments that skirt the banking system has the attention of both Warren Buffett and banks as technology innovates ahead and outside the banking system, challenging our understanding of money. 

It was also interesting that gold as a Tier 1 asset never came up. When I prodded some of the knowledgeable instructors on the subject, they said simply that this idea had been around but it never really went anywhere, except maybe in Europe.

TGR: How do you account for the indifference of a group of financial professionals toward gold, considering the higher prices over the last decade?

Mike Niehuser: I think the greatest pearl of wisdom I took away from being a student at the school in the 1990s was that people are different. They may look alike but they are different, not just because of their education or background, but how they process information and make decisions. People are individuals and they can be counted on to act one way or another in their own self-interest, and particularly in how they see the world. This is what makes markets so difficult to predict and makes it impossible to craft policies that micromanage business, investment decisions or personal behavior. 

On the other hand, groups of people bind themselves into special interests that in a silo or bubble become increasingly unstable over time. This is more than armchair philosophy. Demographics and an expanding culture of entitlement have hurt Europe beyond repair and are driving politics and economic trends in the US, perverting the role of money in an efficient economy, which is clearly the best case for higher Gold Prices in the near to long term.

TGR: Why does this make you so sure that this will lead to higher Gold Prices?

Mike Niehuser: It's just my opinion, but the world appears to be polarizing. I am in the minority where I come from, sort of a combination of a Classic Liberal, Austrian School, Friedmanite, Supply-Sider. I think, like Frédéric Bastiat, that the Law is to protect the individual's life, liberty and property. This requires free will, choice and belief in the virtues of mutually agreed upon free exchange, an economy regulated to eliminate deception and reinforce trust. 

Stable money is essential here and gold is the very essence of trust that all people desire. The other side is driving the boat in Europe and the United States. They work their own book and believe that they are smarter and can organize society. They believe demonizing the 1% and co-opting the bottom 50%, thereby destroying capitalism—moral capitalism—is actually going to benefit them. 

After they get done taxing the rich and destroying the economy, the only option left is to enforce redistribution of wealth through inflating the currency. It may be too late to turn back. I think this is why the US Presidential election is so important and historic for the global and national economies. 

TGR: That's a pretty negative perspective.

Mike Niehuser: Yes, I know, and I'm an optimist. At the current birth replacement rate the world population will voluntarily decrease without wars and pestilence for the first time in human history. The population of the world is expected to start declining around 2050. This is a big deal for Europe, India and China, and less so for the US. An aging population is likely to politically guarantee distribution and easy money, which is good for gold. 

On the other hand, in the United States, the baby boom each day is declining in importance compared to an equal size group, right around 75 million, born between 1982 and 2000. This group plus immigrants pursuing the American brand of moral capitalism is seeking a better future than the one I just portrayed. This group will outgrow the hang-ups of the aging and increasingly irrelevant baby boomers. Keynesianism has periodically relied on tricking people with easy money and counting on "money illusion." Then they count on wage and price controls, which always have and will always fail. Young people will figure this out—if only the hard way. This is my children's generation, but despite my negative prognosis, for them I am intensely positive. Until they move into leadership, gold is the best hedge for the market distortions caused by social justice.

TGR: You're from Portland, Oregon, and are an advocate of the business development in the northwestern US. Don't most of the locals feel negatively about expansion of mining in that general region?

Mike Niehuser: The funny thing about the Occupy Movement is that Portland has been occupied for decades. Private sector jobs here have declined for over 10 years. Decades ago environmentalists worked their book and succeeded in destroying the lumber industry. They had no concern for the communities, schools and lives they upset. As an optimist, my money is on entrepreneurs, including those in the mining industry, that continue to contest monopolies and special interests. 

Most people who feel negatively live in the cities. My son calls these the "haves" in the "moneyburbs." These folks just are not educated to understand that they could not exist without mining. Until the population of the planet begins to shrink, mining will become increasingly more important and so will the need to educate both investors and the uninformed. I built my business on this idea and I love my job.

TGR: Is there a significant core group of resource investors in that part of the US?

Mike Niehuser: Yes, primarily adults in eastern Washington, Idaho and Montana. They may be outnumbered by Californians, but the legacy of mining has not totally disappeared. In these areas even politicians recognize the importance of wealth-creating, good-paying jobs that fund schools and communities. 

TGR: With lackluster economic growth throughout the West, do you see mining projects in Oregon, Montana, Idaho and Utah progressing through the permitting process more quickly now?

Mike Niehuser: No, but there is a real effort in Montana to boost jobs in the energy sector. They probably see how neighboring states are benefiting. I suspect this is having some spillover to Montana, but it is a start. Idaho is pretty consistent. We are even starting to see some very real activity in Oregon after decades of inactivity. This is primarily a function of metal prices drawing entrepreneurial mining companies with willing allies in county government who have not given up on their communities. 

State governments are starting to look more favorably on mining but this may require a change at the top. Once again, a change in national leadership would be immensely positive for the mining and energy sectors, and we could have Friedman-like policies and expect a burst of economic activity as we saw under Ronald Reagan in the 1980s.

TGR: That's a great note to end on. Thanks for your time.

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