Leonard Melman: Are You Prepared for Hyperinflation?
Seeking Alpha | by The Gold Report
The Gold Report: You recently told a crowd of investors at Prospectors & Developer Association of Canada (PDAC) that precious metals are the best place to invest in an inflationary period. Why is that?
Leonard Melman: When prices are going up, you wouldn’t want to be in housing stocks or auto financing, but you would certainly want to be in precious metals. You also might want to short the bond market. That is why you have to be aware of the direction of inflation. It is important to the concept of precious metals pricing. If you’ve been around for a few years, as I’ve been lucky enough to be, then you can easily recall a time when high inflation was the absolute key ingredient in massive previous bull markets. That is why I thoroughly look at what has led to past inflation and hyperinflation. I use four examples: the Roman Empire, the French Revolution in the late 1700s, the German hyperinflation in the 1920s and the recent catastrophe of hyperinflation in Zimbabwe. I examine whether America and other countries in the world are perhaps following the same paths that led to those previous hyperinflations.
TGR: Do you think investors are going to see hyperinflation in the foreseeable future?
LM: Not immediately. It’s like a doctor looking at a patient who is showing all the early signs of cancer, but the actual tumor hasn’t yet developed. It would be unwise to ignore those developing symptoms. That’s where I think we are. We don’t have hyperinflation yet, but many of the pathways that led to previous hyperinflations are present, and I think it would be very foolish to ignore them.
TGR: In a recent edition of The Melman Report, you quoted Patrick Armstrong, head of investment selection at Armstrong Investment Managers, as saying, “We think a currency war will be the biggest story of 2013.” How is that likely to affect precious metals equities?
LM: There has been a lot of coverage about currency wars recently. So far the main participants have been countries like Japan and the European community, which are very concerned that strength in their currencies is going to limit their ability to export goods at a profitable rate. Japan has recently done everything it can to lower the value of its currency and the euro is now entering a new period of weakness. So far, the one currency that hasn’t played this game is the U.S. dollar. The other currencies look weak compared to the U.S. dollar. When the U.S. dollar looks strong, usually gold and silver perform poorly, which we are seeing now. As the year progresses, the dollars’ immunity will soften, which should spill over into higher precious metals prices.
TGR: Gold has fallen below the $1,600 per ounce ($1,600/oz) support level. What is your macro picture for gold?
LM: I’m not one to ignore charting. I’m a member of the Canadian Society of Technical Analysts. I can’t ignore the weakness that gold is showing. However, I believe powerful forces, such as inflation and currency devaluation, are going to appear stronger in the future. That should lead to higher gold prices over the second half of the year.
“As the year progresses, the dollars’ immunity will soften, which should spill over into higher precious metals prices.”
Another factor is that countries are now repatriating their gold holdings. Germany just announced it is going to be bringing back much of the gold now held in foreign storage, particularly in France and in America. Venezuela just repatriated all its foreign gold holdings and Switzerland is now moving forward with a referendum on whether it should reform or repatriate all its gold holdings held in foreign lands. A lot of underlying pressures will be positive for gold and silver ultimately.
TGR: Do you believe that the timeframe for Germany’s repatriation of its gold has a lot to do with the fact that its gold may not actually be where it’s supposed to be?
LM: Of course, that’s one of the most important questions this is addressing. I find it very interesting that there has not been an audit of the United States government-controlled physical gold holdings in facilities such as Fort Knox or Federal Reserve vaults in more than 33 years. Can you imagine a private company getting away without allowing an audit of its books for that length of time? That is what the government has done.
If the gold isn’t really there, a sudden buying surge could occur as guarantors scramble to fulfill the demands.
TGR: Do you see gold continuing to trend lower through 2013?
LM: I’m looking for the long-term bullish forces to exert themselves during the second half of the year, particularly in the last quarter. There is a great deal of gloom and doom for metals at the moment. The gold share indexes, like the Philadelphia Gold and Silver Index (XAU), the Amex Gold BUGS Index (HUI) and the Market Vectors Gold Miners ETF (GDX), are all in virtual freefall. But wasn’t it Baron Nathan Rothschild who once said, “Buy when there’s blood in the streets?” Usually isn’t that what happens? A selling climax terrifies everyone and then, all of a sudden, with surprising swiftness, prices begin to recover and head higher.
We may be in the process of that now because the selling is absolutely pervasive. Such a selling climax could easily be followed by stronger markets in the second half of the year.
TGR: Silver is falling too, though slower than gold. What’s your outlook for silver?
LM: I would dispute that statement. Silver peaked in the summer of 2012 at $37.50/oz and it’s trading at $28.50/oz this morning. That’s a $9/oz difference, a 20+% decline. In the same time, gold has fallen from $1,800/oz to about $1,580/oz. That’s $220/oz, which is only about 12%, so silver is making a much greater percentage move to the downside.
“I’m looking for the long-term bullish forces to exert themselves during the second half of the year, particularly in the last quarter.”
I recently completed a chart analysis comparing the five-year charts of gold and silver and the timing of the moves is virtually precise. When gold makes a bottom, silver makes a bottom. When gold makes a relative high, silver makes a relative high. But in virtually every case, silver’s move is exaggerated on a percentage basis. The reason is that it takes less money to move silver than it does to move gold and therefore you get bigger percentage moves.
The same thing will hold true in the next bull market wave gold will rally. Silver will rally in a greater percentage. Also remember, silver is an industrial metal and the beneficiary of many new scientific advances, which are increasing the demand for silver.
