Fabrice Drouin Ristori: Mish, you write a lot of commentaries about the European economic crisis, going from bad to worse. For instance Portuguese Bond Yield Spiked to 8%, How do you see the European situation evolve in the coming months ? Do you expect more bail-ins in the Eurozone?
Mish: More bail-ins are 100% certain. On August 20, German Finance Minister Wolfgang Schäuble officially admitted “Greece Will Need More Aid”. Rest assured it will not stop with Greece. Spain and Portugal will need additional aid. Don’t rule out Italy. The Italian economy is crumbling in a nightmare of regulatory nonsense and work rules.
FDR: Real estate already collapsed in Greece, Spain, Ireland but remains near all-time high in France and Sweden. You wrote "French real estate was massively overvalued: by 50% based on the price-to-rent ratio, and by 35%, based on disposable income. It makes France the most overvalued real estate market in the world based on disposable income, and the fourth most overvalued one based on rents." With an overvalued real estate market, bails-in an banking risks, how can investors protect themselves in this uncertain economic environment?
Mish: The easiest way is to stay liquid, shun leverage, hold some gold and wait for better opportunities. The stock market bubble certainly got much bigger than I expected over the past two years. The Fed (central bankers in general) also blew a huge bubble in bonds, especially corporates. As proof of how silly thing have gotten, covenant-lite loans (where debt is repaid not in cash but in debt) have made a comeback.
FDR: We have seen an important campaign against gold in the mainstream media, with Roubini's predictions and with bearish arguments like "The U.S. Federal Reserve could cut stimulus sooner rather than later" or "The Dollar is strong" to name a few. Do you really think these arguments are accurate?
Mish: I have been in a very tiny minority who likes gold while simultaneously suggesting the US dollar would not collapse. It didn’t and it won’t (at least any time soon). China is printing more than the US, the crisis in Europe is far from over (I expect a disorderly breakup), Australia is tied to a Chinese economy that is rapidly slowing, and the Bank of England headed by Mark Carney promises more QE. On a relative basis, that makes it tough for the dollar to collapse relative to other major fiat currencies. However, fiat currencies in general can sink against gold. And sentiment against gold has been massive, with Bloomberg leading the parade. For further discussion, please see Losing Faith in Gold at the Wrong Time; Did Paulson's Sale Mark the Bottom? Who's Left to Sell?
FDR: What are the fundamentals that will drive the gold market in the future ? Have these Fundamentals changed since the last all-time high in summer 2011 when gold traded at $1900?
Mish: Mish: Most people do not really understand gold. On May 28, I discussed sentiment in Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse. As far as fundamentals go, please see my June 26 article Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?
FDR: In your June 13 article "Mish Buys a Basket of Miners" you said "gold is a far safer play than silver" can you tell us why ?
Mish: Silver is an industrial commodity that is used up. Gold has little industrial use. Silver can and does plunge more than gold in pullbacks. The latest plunge in silver was far greater than the corresponding plunge in gold. I do like silver at current prices, but one needs to be aware of high volatility in both directions.
FDR: In May of 2012 you wrote "I'm Swapping Some Gold for Silver". Today silver close to $23 and was available below $20. Do you continue to swap more gold for silver?
Mish: I didn’t, but I may. The curious thing is I posted a belief for silver to fall back to the low $20s when it was close to $50. After it bounced twice in the mid-to-high $20s I changed my mind. I had it correct initially, but did not wait.
FDR: How do you weight your miners compare to you precious metals holdings in your investment portfolio?
Mish: I have more physical gold and silver than miners. The percentage varies. My ratio may be something like 3:1 right now. It can move in either direction.
FDR: Gold was down in June but at the same time premiums surged in China. Do you think the spread in between the gold paper price and the price of physical gold will continue to widen ? If so, Does that mean that the mechanism of price discovery for gold is broken in a way?
Mish: The only spread to speak of between “paper gold” and physical gold is a tiny commission or bid-ask spread. Those with accounts at various gold brokers can confirm. Thus, reports of huge paper-to-physical price differentials are nothing but hype, typically based on spreads on coins, when coins are in short supply. I do not advise investing in coins because of those spreads.
FDR: Anything else you wish to add?
Mish: Yes, thanks for asking. I do expect a full-blown currency crisis at some point and I expect gold to be the beneficiary. The global spotlight has been on Europe, and spotlights are typically a sign that problems will strike elsewhere. Japan is a crisis-in-waiting, and the emerging markets are taking a beating now, especially Brazil and India. I discussed India on Tuesday in Mish Video: Troubled Currencies (And There are Lots of Them), Gold, Bernanke, Carry Trades, Bubbles. These things have a way of spreading, so don’t be surprised if India kicks of some sort of Asian contagion currency crisis. Also, complacency in Europe is again on the rise, so don’t discount Europe. One can never predict these things with perfect timing, even if the end-game is relatively clear.
FDR: I would like to thanks again Mr. Mike Shedlock for taking the time for this interview.
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