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Ask The Expert - John Budden - July 27, 2015

Ask The Expert - John Budden - July 27, 2015
By Geoffrey Rutherford 4 years ago 1857 Views

John Budden has over 50 years of diverse, domestic and international investment experience. John is a renowned advocate of holding a portion of one’s portfolio in Gold Bullion, in an era of competitive devaluations. John has worked all over the world as an investment professional and continues to be one of the most sought after experts in precious metal investment in the North American investment community. John is also the co-author of a new book “The Dog Bone Portfolio: A Personal Odyssey into the First Kondratieff Winter of the Twenty-First Century” in which he and author Marget Kopala examine various long-term aspects of the financial world and the economy.

In this interview John shares his views on precious metals investment, manipulated financial markets, diversifying ones precious metal portfolio, and gold’s recent “Flash Crash”.


Geoff: Hello and welcome back to this month's Ask The Expert here on Sprott Money News. I'm your host, Geoff Rutherford, and on the line today we have Mr. John Budden. John Budden has over 50 years of diverse domestic and international investment experience. John is a renowned advocate of holding a portion of one's portfolio in gold bullion in an era of competitive devaluations. John has worked all over the world as an investment professional and continues to be one of the most sought after experts in precious metal investment in the North American investment community. John is also the co-author of a new book "The Dog Bone Portfolio: A Personal Odyssey into the First Kondratieff Winter of the Twenty-First Century" in which he and co-author Margret Kopala examine various long-term aspects of the financial world and the economy.

And with that we'd like to welcome Mr. John Budden. John, thank you for joining us today, sir.

John: Oh, Geoff, it's great to be with you and I look forward to this discussion.

Geoff: Excellent, excellent, John. So as usual, John, we have a number of questions from our listeners. The first question we have here has to do with banks. So the question is many too-big-to-fail banks have been fined huge sums for their scandalous fraud activities. To whom are these fines paid, John?

John: Well, the fines are paid using shareholders' money to regulatory authorities like the SEC, CFTC, etc. and it is in effect being paid to governments. It's a form of win-win penalty that allows bank executives to avoid the inconvenience of going to jail and governments collect quite respectable fines and look the other way. Now, the business rationale is that if a bank makes a $100 billion and they've been caught red-handed then they kick back $10 billion dollars by way of fines to the government that gave them the license to steal.

Geoff: So, John, here's another question that has come up with the clients. And the question is can you explain how the HUI Index works? And is it an important index to monitor for those who purchase physical precious metals?

John: Oh, I think it's a very important index to monitor. Now, the HUI Index, often referred to as the Gold BUGS Index, is a modified equal-dollar weighted index of companies involved in gold mining. Now, BUGS, B-U-G-S, stands for Basket of Unhedged Gold Stocks. The ticker symbol is HUI. The HUI Index is one of the most-watched gold indices on the market. The Gold BUGS Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond one-and-a-half years. The HUI Index was developed with a base value of 200 as of March 15, 1996, and the AMEX Gold BUGS Index currently consists of 15 of the largest and most widely held public gold production companies. Since bottoming in late 2000, the HUI went on to be the top-performing U.S. stock sector of the decade, rising about 1600%. And, Geoff, given the beating that the gold sector's taken in the past four years, the HUI represents exceptional value in my opinion.

Geoff: So, John, sticking with the beating that gold has been taking, let's take a look at what's happened in the last week or so. We saw gold basically plunge to its lowest level in around five years right now. So that being said, the question from our listener is how would you explain the recent flash crash in gold prices that now has brought gold to below $1100 U.S.?

John: Well, that's a dynamite question and I sent a note out to friends who are interested in my rationale and I said that at the current $1100 U.S. an ounce there is a cacophony of bearishness regarding the price of gold bullion that matches the bullish outlook back in 2011 when gold hit $1900 an ounce. And on Sunday, July 19, we had a paper crash in the gold bullion market and it really took the cake. I guarantee that the high-frequency traders who sold about $2.7 billion U.S. of futures contracts starting in sharp bursts at 9:30 p.m. that evening on the Shanghai Gold Exchange are not in possession of that quantity of physical gold bullion. I have a lot of scar tissue from markets over my 50 years of investing and I've been wrong many times about the intermediate trend, but the long-term trend has always ruled.

Just for a little background, bonds have been in an extended bull market for 30 years and equities have been in a bull market for about 7 years and manipulation and rigging have been prevalent in all major markets, including foreign exchange, LIBOR, and of course, precious metals. I maintain that people with wealth should always have a side pocket of gold bullion or proper proxy for same and that's as a hedge against inflation, deflation, and devaluation. Now, if you go back to 1999, the price of gold bullion tested $250 an ounce U.S. and there was virtually no investor interest in holding gold bullion as a non-correlated historic real money asset class. But early in September of 2011, the price of gold bullion had reached $1900 U.S. an ounce and that's pretty good performance for that period of time when Dow Jones had gone virtually nowhere. And since then, we've all experienced a very rough correction that's taken us down to last week's lows which were around $1080 U.S. an ounce.

And since the 2008 stock market crash, we've seen coordinated and unprecedented stimulus by most major central banks. Interest rates have been kept artificially low, ensuring that the global party continues. Now governments and consumers are weighed down with excessive debt. The world is contending with a confluence of these inflationary and deflationary forces that obscure the reality of a situation and investors have become complacent and rationalize that stimulus and new stock market gains are their due. I contend, and that's with trepidation, that this is a long-term buying opportunity in the precious metals markets. It may be a good time to initiate or at least to add to one's position and I think that starting with bullion position, coins, both silver and gold coins, and a complement of really good quality gold shares because a lot of people are going to be knocked out of the gold mining business. These prices are going to determine who will survive in the gold mining business.

Geoff: So, John, obviously you kind of covered the whole idea of manipulation of the gold market and markets in general. So the next question is kind of along the lines of looking at a resolution really. So the question is, it's a given that our markets have been corrupted with dirty money and perverted with manipulation to the point where we are arguably beyond salvage. If you were going to make one change, John, to begin to reform these crime-ridden markets, what would that be?

John: Well, I would make paper gold a separate class of trading asset and bullion, physical gold, a completely different class. And what has been happening, and that's what happened basically on the 19th in Shanghai, not just in Shanghai but on the COMEX, the high-frequency traders, and we can add to that maybe the central banks in cahoots with the bullion banks, major investment banks, are able to take paper gold and bash the market. And paper gold and physical gold are completely different animals and I try to ensure that anybody who was selling would have to declare and have to be able to deliver the physical on a moment's notice and I think that would sort out some of the nonsense that we've experienced recently.

Now, obviously the manipulators should go to jail, and, like that bankers, that's inconvenient for most of them, and they should not be able to pay fines to get themselves off the hook. But it's more complicated than that and more challenging because along with the investment banks, as I mentioned, the central banks and the Bank of International Settlements which is known as the bankers' bank, they're all in on the game. And the Bank of International Settlements, known as the BIS, located in Basel, Switzerland, is made up of approximately 60 central banks from around the world and, let's face it, it's tough to put those folks in jail. And by the way, the Bank of International Settlements has warned that the world will be unable to fight the next global financial crash as central bankers have used up all their ammunition trying to tackle the last crisis.

They have to discourage, this is the central banks, BIS, and it's obvious that they have to discourage the historic appetite that people around the world have for gold bullion because it creates great embarrassment for the central banks who have proliferated all these fiat paper currencies. And I think that that's a part of, we're going to call this a conspiracy, it's an effort to keep people's attention away from gold and really discourage them from investing in gold because it's, as a result of their efforts, so volatile that it keeps the paper currency on its perch, but for how long, nobody knows.

Geoff: So, John, the next question is, we're going to like move away from manipulation just for one moment here and just talk about something that I believe you'll be able to give some insight with your expertise in investment. So do you recommend precious metals to your clients as a defensive means of wealth preservation or do you recommend it more positively as an investment opportunity?

John: I provide strategies to institutions, endowments, and family offices, and mainly family offices, and I always qualify my references to gold as being an alternative to cash and I always emphasize, as I've done a couple of times in this discussion, that it's meant to protect one's wealth, purchasing power, against inflationary and deflationary forces and also the ongoing devaluation which we're all aware of. Now, the investments that I think make sense are the Sprott Physical Gold Trust and their gold is stored at the Royal Canadian Mint. The silver investment is the Sprott Physical Silver Trust and, again, it is also stored with the Royal Canadian Mint. And I believe that the complement of gold mining shares can be dealt with by having a holding in the Sprott Gold Miners ETF, and the symbol listed on the New York Stock Exchange is SGDM. And then finally a lesser, but I believe complementary ETF that represents junior miners, is the Sprott Gold Miners Junior ETF and it is listed on the New York Stock Exchange symbol SGBJ.

Now, I feel very strongly that people should have coins and by that, I suggest the Canadian one-ounce Maple Leaf gold and silver coins and if you have a substantial amount of money, you can buy what are called Monster Boxes with 500 one-ounce coins in a Monster Box. And the reason I like silver, apart from the industrial usage and the fact that it's very, very cheap and down from about $50 an ounce at its high point to somewhere around $14 an ounce U.S., is because if they close the banks, and we've seen the precedent of banks being closed in Greece and I'm not auguring that that's going to take place in Canada, but if you were traveling and you had silver coins, I am willing to bet that that will be pretty good walking around money. And this whole question of closing banks and bail-ins is not so remote. It may be coming to our own back yard sooner than we think.

Geoff: It's very true, John. It could be in the very close horizon, not so distant horizon at this point. So let's stick with the idea of banks, central banks. And the question is very simple. One could even consider it almost a philosophical question, but you go ahead and answer it. Describe a world without central banks.

John: Well, Geoff, my first response is heaven. But no, seriously and sadly they are a necessarily evil to manage a country's finances. There are good central banks and there are bad central banks, but there must be massive changes in the way they do their business and I think that the current cabal that controls the central banks, and maybe we should look towards the BIS, is going to fight that one tooth and nail. And I really believe that we're headed towards digital money and it's not going to be Bitcoin. Think about it. Governments will be able to monitor and tax all global transactions. There will probably be a global digital money, some sort of an iteration of the Special Drawing Right, and governments will also be able to quantitatively ease with a click of a mouse. And in addition, the 99% who have been unhappy about their state may become restless and dangerous along the way and central banks will be able to, in effect, create digital food stamps to avoid revolution.

By this way, this is described in the book that I have collaborated on over the past five years and it may well take place in what we describe as the Kondratieff Winter. I'm going to give you a quote, and this goes back a long way to Mayer Amschel Rothschild or Rothschild, and that quote is, "Give me control of a nation's money and I care not who makes its laws".

Geoff: Indeed, an infamous Rothschild quote. So, John, just closing off here. I think this is a very pertinent question in terms of kind of looking at your career and likewise in terms of the book you've written and looking at long-term trends and things that we've seen within the market, but the question is, as an investment professional, what do you see as the next big thing in precious metal investment?

John: Well, I think the next big thing in precious metals investment is to do what has worked in times of currency debauchery throughout history and that goes back let's say at least 2000 and possibly 4000 years. As I said, you should have some gold and silver in a side pocket. It's not for trading and hopefully you're able to buy it at times like this when the manipulators have drummed the price down. But as in year 1999, when it was $250 an ounce and it went up to a price of $1900 U.S. back in 2011, I think that as we enter Kondratieff Winter and the debt and the quantitated easing unravels and governments find themselves pushing on a strain that gold will come back into its traditional role. One of these days we're going to wake up and governments, coordinated central banks, will say, "Guess what, all your greenbacks, they don't work anymore. You've got a digital unit on your smartphone and that's how we're going to play the game." And I do believe that there is always a rationale to have a portion of one's portfolio allocated to gold shares, gold bullion, coins, likewise with silver, and that should be held in a safe place.

In the book, we talk about, the book is called "The Dog Bone Portfolio" and we talk about the clever dog who gets a precious bone and hides it in the back 40. Our clever dog doesn't tell anybody where that precious bone is and if he gets another precious bone he goes and hides it in a completely different place. And I think the safest place to hide your dog bones, if they're golden dog bones, is at the Royal Canadian Mint and the reason I mention that is because during the depression, Canada did not follow the U.S. and expropriate gold. The other thing is the Royal Canadian Mint does an awful lot of refining business for the gold mining industry, so it would be cutting off their nose to spite their face if they expropriated. And then, of course, the Royal Canadian Mint is a Crown corporation and I think that's the judgement that Sprott Asset Management have made, is to store their gold on behalf of their unit holders in our own backyard and in this insane world that we live in, I actually live in Ottawa, so I know the integrity of the mint and I think it's one of the best places in the world to store gold.

Geoff: Well, John, we'd really like to thank you for joining us today here on Ask The Expert and we'd like to invite our listeners to go John Budden, that's B-U-D-D-E-N, dot com [johnbudden.com] to hear what John has to say and likewise, we also invite our listeners to check out his book and it's on Amazon.ca and it's called, John, can you just repeat the name of the book?

John: Look for "The Dog Bone Portfolio". And I'll give you the full title, "The Dog Bone Portfolio: A Personal Odyssey into the First Kondratieff Winter of the Twenty-First Century" and it is a written by Margret Kopala who did all the heavy lifting with a bit of insight from myself.

Geoff: Excellent. And to our listeners, thank you for listening. This is Geoff Rutherford for Ask The Expert here on Sprott Money News. Have a great day.


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