Jay Taylor on Gold

The big picture outlook supporting Gold Prices today...

JAY TAYLOR, CEO and founder of MiningStocks.com, has been researching, investing in, and arranging big-money finance for the Gold Mining sector since 1973.

Here he speaks to HardAssetsInvestor.com about the current surge in world Gold Prices and the outlook from here...

HardAssetsInvestor: Before we get into the specific mining stocks, let's talk a little macro, a little big picture here. You like what you see – along with a lot of other people, I might add – with precious metals right now, gold in particular, right?

Jay Taylor, CEO, MiningStocks.com: Absolutely. Because you know what's happening is we're having a debasing of the currency, not only in the United States but throughout the world. Governments are deficit spending, monetary policy is very loose. And when you increase the supply of something, the value goes down. So as much as anything, it's not that I think Gold is going up in value, it's that the Dollar is being debased and is losing its value.

HAI: The Dollar's going down. But look, here's a question. To the extent that this money printing – for lack of a better term – supports economic output...ends up creating jobs, or leading to the creation of jobs, productive output, why should that be a negative?

Jay Taylor: Well, I'm not so sure that I agree that printing money does lead to productive jobs. What I think it does is leads to a concept that the Austrian economists know of as malinvestment. You can go back to the dot-coms. We pumped huge amounts of money into the system. Alan Greenspan did when he was the Federal Reserve chairman. Every time there was a crisis of one kind or another – the Asian crisis starting earlier, the Mexican crisis, the Russian crisis, Y2K was perceived to be a crisis – it was met with huge amounts of money that was pumped into the system.

So what happened? We saw the stock market boom. We saw prices get ridiculous...to heights that made no sense whatsoever. Dot-com companies – if they had a dot-com in their name – they were a buy. And then we saw that all collapse in 2000.

HAI: Didn't it collapse because the government started to run a surplus? I mean, Clinton ran a surplus in his last years. And by definition, you could say if the spending is all that money flowing in, as you point out, isn't a surplus when they're really taking it out? Wasn't that the pin that pricked the bubble?

Jay Taylor: Well, I don't know that I would agree with that. I think what happens is you had a lot of enterprises that were not viable. You had lots of dot-com companies that didn't have any economic prospects.

HAI: That's true...

Jay Taylor: And they were born because of this loose monetary policy. And then Greenspan started a tighter monetary policy, somewhat tighter. At least he took his foot off the gas pedal. And maybe that's what caused the market to collapse because I think somewhere he understood, as all central bankers ultimately do, that if you keep pushing money into the system, you're going to have a real inflationary problem.

And so I think that was an example of malinvestment that is a result of loose monetary policy and fiscal stimulus. But then look at what happened after that. I mean, the granddaddy of all malinvestments was the housing bubble that we've seen. And that, again, if you look at the M3 or other monetary aggregates, you'll see huge amounts of money pumped into the system. It has to go somewhere.

You know, I don't blame the bankers at all. I think this notion of greed on the part of bankers is absolutely wrong. I think what happened is, if I'm a banker and I have all this money sitting in my vaults, I've got to put it to work. I've got to maximize my profits. I've got to keep my shareholders happy.

And the problem is, as the bankers looked out into the economy, they couldn't find good places to put their money because there just weren't any. There weren't enough good places to put their money and so they started lending in a very lax manner and you had this housing bubble. So I think that's where we're at. I think we're having a correction now of that housing bubble. And again, we are now trying to overcome one bubble with a new one, I'm afraid.

HAI: So basically what you're saying is your rationale for being bullish on gold, for example, is that people are losing faith in fiat currency. They want to have something real; but is Gold really money? I mean, could you go to the store with a bar of gold and buy some bread and milk?

Jay Taylor: Well yes we could, if we were allowed to by law. But we've been disallowed by law to do that. Fiat means by law. We have to use paper money because that's what the government says we have to use. And, of course, Nixon took us off the gold standard in '71.

HAI: The fiat money is the money that the government spends in. But there's a lot of private money. I mean, bank credit is a form of money and all of us use bank credit. So if somebody was willing to take gold for bread or milk in exchange, there's no law that says I can't use that. The point is I think you have a hard time.

Jay Taylor: I think there's tax ramifications though if you do that. If your gold goes up in value, you're taxed on it, and so forth. If your currency goes up in value and it buys more, you're not taxed on it. So there's sort of tax issues.

HAI: You essentially see this still in its early stages? You're saying we're fixing one bubble with a new one that we're creating. Gold's at what right now, $1060? Let's call it $1100. By the way, if you bought gold in the last bull market, you still are not even close to making your money back yet.

Jay Taylor: You're exactly right about that. And I think therein lies one bullish case for gold. I think if you use the government's inflation numbers, you have to get to about $2000 of gold, and I doubt the government's inflation numbers. I think they're understated. I think John Williams of Shadow Stats probably has a better handle on what the real inflation rate is.

But if you take the government's numbers, I guess a lot of people who argue the bearish case for gold say, "See what a bad investment it is? See how bad it is?" Well, I would suggest that part of the reason for that is that there is quite a bit of bank manipulation – central bank, let's say – talking down job owning, selling their gold into the markets at times to try to push the price down.

Take the Bank of England, for example. The Bank of England, when it started selling gold at $250 or $260 announced to the world that it was going to sell gold in advance. Well, if they wanted to get the maximum price for their gold, they certainly wouldn't have announced ahead of time that they were selling gold, but they did.

There has been a central bank policy, the central bankers do not want gold to gain prominence because if it does, they lose their credibility and the paper loses its credibility. So I think there have been all kinds of games played by central bankers. And Alan Greenspan, in fact, said twice before Congress, central banks stand ready to lease gold in increasing quantities should the price begin to rise. So he was trying to assure people, assure fiat money advocates, that their money was safe.

But in fact, in the longer run, you can't fool Mother Nature. And when you create endless trillions of Dollars to bail out this bank and that bank and this social program and that social program, ultimately the currency loses its value. You can't increase anything by an infinite amount and expect it to retain its value. So it's not that I'm saying gold all of a sudden is worth a lot. I don't believe it is.

HAI: Well, where do you think it's going? You said at least it's got to get back to that inflation-adjusted high of $2000...$2300. In what time frame?

Jay Taylor: I don't even know if it has to get back there. Here's the reason. I think that looking at gold in terms of the Dollar is the wrong way to look at it. I think you need to look at gold in terms of its purchasing power.

Take last fall, for example. Gold rose dramatically in its purchasing power, bought six times more oil than it would have bought before the Lehman Brothers debacle. It bought two or three times more copper; two or three times more the Rogers Raw Material fund. So I think we really need to look at what an ounce of gold will buy. Gold in nominal terms could actually come down from here, I believe.

HAI: Really?

Jay Taylor: If we had a real deflationary bust like we had last fall or something worse than that – which a few people are suggesting is possible – then in nominal terms, I think gold could actually decrease, but it could actually increase in terms of its purchasing power.

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