Ask The Expert - David Jensen - August 2016

Transcript:

Man: You're listening to "Ask The Expert" on Sprott Money News.

Craig: Welcome back to Sprott Money News. This is your monthly "Ask The Expert" segment. And this month is August of 2016. I'm your host, Craig Hemke. And joining us this month is David Jensen. David is a mining executive and mining industry consultant. He's also a student of Austrian economics. And we thought he would make an excellent guest for "Ask The Expert" and thus he is. David, thank you very much for taking some time to join us this month at Sprott Money News.

David: Well, thank you, Craig. It's great to be with you here this first time.

Craig: Again, for new listeners, what's fun about this format is all Sprott Money customers get the opportunity to submit questions directly for the guest. And so all of these questions were submitted over the last couple of weeks for David. And if you're ready, David, we'll just dive right in, and go right to question number one which is really has to deal with the paper derivative metals markets. This question is why is it so difficult to find out which firms and entities are massively short the paper metal markets? And why is it that the regulators seem so disinterested?

David: Right. To get right to the core of it, is a debt-based money system, which is as over-leveraged as ours as is, this $200 trillion of debt worldwide. It requires people not to fully understand the situation and understand where the real sources of wealth are. And what we have then is the financial industry, is really you can call it collusion. But really it's a rotating door here where you have people coming from the financial industry, which is dependent on people understanding, into the regulatory positions. And you also have the financial industry financing many of the campaigns.

If you look at the U.S. disclosures of who's financing the various political entities, you can see where the money comes from. So the revolving door ensures that you have people in these positions who really aren't too interested. I think probably the best example I can think of is Gary Gensler. He ran the CFTC, the Commodities Futures Trading Commission, there from 2009 to 2014. I mean he came, he was 18 years at Goldman Sachs. And he was cohead of finance when he left Goldman Sachs, and he went in to run the CFTC, which is supposed to be riding herd on the gold and the silver traders and the commodity traders.

So you know it's no surprise to me that we have regulations, and we have regulators that are unable to find, and unable to disclose, you know, the hardcore data on what is going on in the metals markets.

Craig: And I might add that Mr. Gensler after leaving the CFTC is now the head of the finance wing of the Hillary Clinton campaign. He's her finance director. Isn't that neat how that works?

David: Right. And you can see actually in 2010 when Adrian Douglas kind of blew the whistle on the paper trading there in London. Gary Gensler, you know, he couldn't have been...couldn't have looked less interested. He just kind of sat there, and was very droll about the whole thing. And of course, you know, very little came of it. Except for the fact that the next year the LBMA in 2011 actually released a few details about their daily trading.

They did their local London Liquidity Survey, you know, one year after Adrian Douglas had kind of asked the tough questions in front of everybody.

Craig: Well, that leads us in an excellent segue to the second question that was sent in by Sprott Money customers. And it has to do with the trading of the paper derivatives on the COMEX, and how they affect the price. And how they're allowed to set price. How can trading of the paper derivatives on COMEX still determine the physical price even after the emergence of physical markets such as the Shanghai Gold Exchange?

David: Yeah. Well, I mean the COMEX doesn't determine the physical price. Point zero four percent of the positions on the COMEX ever result in physical delivery. The physical price is actually set in London on the LBMA. And the London market, which is an over the counter market, meaning that it's very opaque, it accounts for roughly 90% of daily global metals trading. So that's where the price is set. That's where the, you know, the major institutions, and where the mining companies, for instance, get their price to sell their gold.

They go to a paper exchange, where, you know, 95% of daily trading in London is these unallocated contracts. And you know, so that's the first element there. I don't want to be...draw too fine a point on it, but it's London which determines the global price. Now in terms of the price differential, we can see that there is a price differential between London and the Shanghai Gold Exchange, and it's most marked in terms of the silver price.

And what's going to happen here is that the...there's a premium being offered, a regular premium being offered in China on the Shanghai Gold Exchange. And they are going to suck these silver and gold out of the West, until there's an unavailability on the western markets especially in London. I think that's the critical point we're getting to now, is that there are roughly 400 to 600 million ounces of claims in the London market for gold, and about $4 billion to $6 billion ounces of silver in London in the spot market there.

We're seeing these growing premia in Shanghai. It costs less than a nickel to move an ounce of silver from London or New York to Shanghai. And their premia there are running about 60 cents right now. So that flow is gonna continue until there is a crisis in the gold and silver markets. And we know from Larry Summers' work that the price of gold and silver affect interest rates.

So when the gold and silver paper game locks up because of lack of availability you're gonna have a bond market crisis which is the big thing. So Shanghai is, you know, I think of the Shanghai exchanges as sending us a regular signal about the incorrectness of the price of our exchanges. And you know, the old saying of Harry Truman. Somebody said you know, "Give them hell, Harry," on one of the campaign stops. And Harry Truman said, responded, he says, "Well, I'm not giving them hell." He says, "I'm just telling them the truth, and they think it's hell."

And that's what I think the Shanghai Gold Exchange is doing. You have to deposit a metal bar there to trade it. And we're seeing this continual premium offered there, and as a consequence there's a continual flow which is now greater than 2,000 tons a year of gold for instance. It's more than 60 million ounces of gold that's flowing into China per year. And it has a limited time that it can continue for.

Craig: Yeah, that arbitrage makes that possible. That's for sure.

David: That's right.

Craig: Let's move on to question three. Another potential stress in the system. The question is do you agree that there is a global movement against the U.S. dollar at present, and the dollars U.S...or I'm sorry, the dollar's reserve currency status? If so, could that lead to a massive loss in value for the U.S. dollar versus other fiat currencies?

David: Yeah, I think all fiat currencies have the same problem. There's nothing special about the U.S. dollar. But having said that, the BRICS countries headed up by Russia and China very much want to... I mean China in their news releases are pushing, or their official statements, pardon me, are pushing for a special drawing rights with gold playing an element there. But I think that they're moving towards this golden wand ultimately.

So there are countries that absolutely want to have an alternative, a unit of currency, and there are various facilities being put in place so that if you exchange, you don't have to exchange in U.S. dollars, and ultimately you know, with the SWIFT system it forces you to go through the U.S. banking system. So they want to go around these systems which force you to use the U.S. dollar facility. So yes, there is a movement to other currencies.

But I think that all of the paper currencies have the same sickness as the U.S. dollar does. There's nothing special about it. Until now it's been, you know, the leper with the most fingers, if you want to call it that, because of it's...the daily use of the dollar for trade.

Craig: Exactly, all right. We've got a few more questions that have been submitted. And these are more specific to your experience and your background, David. As I mentioned you were a student of Austrian economics, and a lot of...that term gets thrown around quite a bit. And the next question has to do with just an explanation. It says can you explain the critical differences between Austrian and traditional economic analysis and theory?

David: Yeah, at its most basic level I would say that the Austrian School believes in the...an object...has an objective view of the world, and says that because of human action, everybody is a free actor and free to make their own choices. And as a consequence, you can't steer people before, you know, by inducing certain inputs in the economy.

The Austrian School believes in theory of deduction. That basically that you can only tell what has happened after the fact. You can't deduce beforehand what is going to happen. As many of our, you know, there are a Keynesian monetarists, you know, they believe in pulling this lever and that lever. And it ultimately...they think that you can figure out what is going to happen with a central planning approach.

So ultimately, the Austrian School says that people are free actors. They're free to make their own choice, and they all make different choices. And as we've seen over and over, that when you think you're going to do something by applying central planning powers that you often get a diametrically opposite response.

Craig: I might add then the kind of a follow-up question. How would an Austrian economist, what would their monetary and fiscal policy look like, as opposed to the traditional Keynesian economists that we have in government today?

David: Yeah. Well, there would be no monetary policy. Right? They wouldn't set interest rates, and they wouldn't determine what money is. They would leave that to the market. The problem is is that you don't get the vig off that type of a system, where you can strip the wealth out of the pockets of the citizens as you can with a debt based money system that we have now in all of the West, and pretty much all of the world.

So they wouldn't set monetary policy, and the fiscal policy would be minimalist. In terms of they would allow the market to come up, determine what the needs are, and to address those needs to the greatest extent possible. So you'd have a court of law likely administered by the government, and you would have national defense likely administered by the government. And then you would have much smaller community-based decision making, as opposed to centralized decision making from the seat of power.

Craig: Yeah. All right. That leads to the fifth question. I presume I already know the answer, but it is are you a believer in sound money, and then if so, what would be the most logical steps for countries to take in order to move back toward a sound money system?

David: Yeah. Well, I am a believer in sound money, absolutely. It's kind of what's gotten me to this point here that you and I are talking. I mean the issue that we have is how do you get this money into circulation, a new sound money system?

Gold and silver are the most obvious units of exchange because they have a 4,000-year history as being money. And they also give the holder, pardon me, something tangible to hold, which you know, can't be created by fiat or by government dictate. So to get a sound money system into function, the best way to do it was to...it would be to open the doors to the mint, and to allow the mintage of coin into units of exchange, or if you wanted to take a more reserved approach, you would just stand back and let competing currencies start to function. But I think that because we're looking at a stepwise change you would need some sort of a legislated monetary unit to pick up the slack as it were from the current fiat based money system.

Now if you want to open up the mint and allow people to mint their gold and silver and to coin for exchange, we're going to need a stepwise change in the valuation of gold. And Bloomberg last year, for instance, said that if China had 10...or sorry, that was in 2014. But he said that if China had 10,000 tons of gold reserves, which is six times more than China admits to having, that they would have to reprice gold to the order of $64,000 an ounce for it to play a monetary unit for there to be enough of this money for it to circulate.

So the other thing that you really need is in an insurance. You know, the issue of sound money here is one that you have to ensure that you don't have this counterfeiting because the destabilizing influence that it has. And I think we're about to experience it. And it's interesting to note, Craig, that, you know, the Currency Act of 1792 prescribed into the death penalty for any mint employees who were debasing the currency.

So I mean they had just come through the continental currency era where there had been mass starvation and hyperinflation with that paper money, and that's how tough they were on people. So we really need a intervention at this point to bring money into circulation which is sound and also some kind of an organized write down in the outstanding debt. You know, the U.S. has a total debt now of $63 trillion on all levels, corporate, consumer, state, municipal, federal. All the levels rolled together. So we need some way to have an organized write down in the value of that versus the GDP so we can get the economy back on a sound footing again.

Craig: David, that leads us to our final question that was submitted. And this one plays on your experience as both a mining executive and a mining industry consultant. We've seen great moves in the mining shares just in the last seven months here in 2016. But recently prices have fallen back across the board. Just kind of speaking in general, are you still interested in the shares here, do you see some value still at these levels?

David: Yeah, Craig, I think it's a very difficult to choose an entry point given what we're seeing. I always advocate that people should own the metal itself and hold speculative positions in shares. That's my personal view. But you know, we are I think in the midst of this repricing right now, and I think that the tremendous growth in the value of the money shares that we've seen... Coeur d'Alene, for instance, is trading at roughly nine and a half times its January, 2016 value. And I think people that were trying to time the entry into that stock would have been...had a very difficult time doing it given the way the chart has looked. It's been climbing so intensely. So very difficult to choose the entry point from my standpoint because that we are in the midst of a new price point for gold and silver coming. And I don't think that we're going to see, you know, the standard classical trading patterns here, you know, going on for years.

So I think my personal view is I've just entered the market, and just hold on for dear life, I believe, as these prices start to go up, but also as unfortunate, we have a whole series of other economic issues coming at us.

Craig: Certainly seems that way, and we'll all try to weather it together. David, thank you so much for spending some time with us here today at Sprott Money News. You truly have been the expert for this month.

David: Thank you, Craig. I really enjoyed it as well. Thanks.

Craig: And from all of us at Sprott Money News, thank you for listening and we'll speak to you again next month.