Kaiser Research Online Founder John Kaiser on Why Today's Precious Metals Bull Market is Different & a Couple of His Favorite Juniors (Part 1)
Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the founder of Kaiser Research Online, Mr. John Kaiser. John, how the heck are you? It's been a bit since we chatted.
John Kaiser: I'm doing just fine. I've been working from home since March. I have a great picture window here that looks out on all this forest. I've been watching all the antics of the various birds and animals while I'm working. A lot of sexual activity too. It seems like I'm on some sort of a peeler bar here. I'm seeing the quail march by with their chicks. It's quite interesting.
But what's really making me feel good is that after a 10-year brutal bear market, with a brief little interruption in 2016, I think we are finally on the threshold of the awakening of a very powerful resource junior bull market that isn't just about gold. It's got multiple dimensions to it. It's got discovery exploration happening. It's got gold charging into new, real high price territory.
We're even seeing the other metals that aren't related to end of the world uncertainty, that are based more on optimism, the base metals, the critical metals, even those are starting to wake up because everybody knows that in a couple years, when this COVID horror is behind us, there's going to have to be done something to rebuild the nations, bring back the confidence of the people. That's infrastructure renewal. That'll make gold go higher because they'll be funded by debt. But that'll also push up demand for all these raw materials across the board. All of this is coming together beautifully right now.
Gerardo Del Real: You're absolutely correct that the decade-long – with a few head fakes in between – bear market was just brutal. With that being said, I agree with you wholeheartedly. I think we're in for a historic gold bull run and precious metals bull run.
Before we talk copper, before we talk critical metals, which I do want to get into later on in this conversation, Brien Lundin is known for saying that gold always leads a resource bull market. It certainly is leading.
How do you see the gold price aspect of it playing out? Then we'll have a conversation about how to play it as a speculator and the different risk tolerances that people tend to have.
How do you see it developing moving forward? Here we are at $1,920 gold. It appears that $1,900 seems to be the new floor.
John Kaiser: Well, I would say that I think $2,000 is going to be the new floor. Now, if you go back to 1980 when gold spiked to $850 and settled back to $400, it came from a base of $35 in 1970 to a level where it had been in prison for 30, 40 years. At $400, even adjusting for the inflation of the '70s, that was a 400% real price gain. If you inflation-adjust that to the present, that's about $1,266. And that $850 peak, well, that's about $2,700 today. So, we haven't even seen anything yet like the peak of 1980 when the world thought the United States was losing it, the Russians had invaded Afghanistan, the Tehran hostage crisis wasn't going anywhere, and inflation was 14, 15% at the time and seemed to be out of control.
What's happening here is very different. At $1,900, $2,000 gold, that's only a 60% real gain. You have to keep in mind that from 1980 until the present, the world almost doubled the existing above ground gold stock, which is about 6 billion ounces today. That's $12 trillion. As an asset class, this is a drop in the bucket. There's about $15 trillion of European sovereign debt that is negative yielding. In terms of US treasuries, US sovereign debt, although it's not nominally negative yielding like it is in Europe, the real yield is negative. That's with only a 0.65% interest rate recorded for the end of May. When interest starts creeping back to 2%, that negative real rate's going to become even worse. If we do see real inflation start to emerge in the next few years as the economy gets back on track, this is going to really make the yields negative.
Gold as an asset class finally can really compete against bonds. US bonds have traditionally been the safe haven for when things go wrong. I think gold's been re-pricing into the $2,000-3,000 range, which is sort of a 60-120% real gain. From a gold bettor, that's not particularly interesting in percentage gains. But the leverage for resource juniors, it is staggering because when gold was bumbling around $1,200, $1,300, there was no low-hanging fruit out there in terms of new deposits to be developed, and the margins on those that were in production weren't particularly great. But this move to this level, I don't even think that the market believes that it's reality yet. It's not even priced into this market yet.
Gerardo Del Real: I'm excited to speak with you, John, because – unlike a lot of the newbies in the space – you've seen multiple cycles. Not just in the gold space, but the critical metal space. I want to talk China geopolitical tensions and how that's going to contribute to escalating volatility that can only be beneficial for gold.
You talked negative interest rates. You mentioned the fact that gold is finally being taken seriously as an asset class by the institutional investors. I think that's going to accelerate.
How do geopolitical tensions with China play into the volatility that I see just all around, whether it's economically, monetary policy, fiscal policy, politically, socially? It seems like this is the perfect storm for gold. Regardless of why you believe the price will continue higher, you're probably right. Am I wrong in thinking that?
John Kaiser: When gold ran to $1,900 in 2011, it was on the back of the China super cycle and, of course, the 2008 financial crash. The whole narrative was, "It's all about fiat currency debasement and hyperinflation" that all this quantitative easing was going to create. The quantitative easing was just repairing the holes that had been created by the deflation of all these asset prices. This inflation never materialized, which is why the price of gold ended up sinking back to what was close to its inflation-adjusted price from 1980.
Globalization was still in vogue, but this whole idea of globalized free trade, it has changed. A story that I've always been long-term bullish about gold is I see the rise of China as something that's going to keep going. At some point, the size of the Chinese economy will become larger than that of the US economy. It makes sense because they have a billion and a half people and there's only 350 million or so people in the United States. If China continues to deal with the rest of the world, keep growing and its own population becomes consumers, that country will end up being the biggest economy. That I always saw as a source of stress.
The assumption here has always been well, China is going to become just like us. They're going to become democratic, the middle class will make it happen, and it'll just be this very competitive global economy. But since 2012 when Xi Jinping became the president, it's gone in reverse. He has has said, "We are a communist country, we are an autocracy. We control everything from Beijing. We are going to reign in all these semi-free businesses. We're going to make this China Inc., a part-capitalist but ultimately central command-driven economy.” A hybrid different from what the Soviets practiced, and which have burnt them out. This tension has been rising in the last few years. Both political parties are now on side that China is not going to become democratic, and they want to dominate not just economically, but ultimately technologically and militarily.
So now we are seeing all this talk about the new Cold War. For now, it is still about economic domination. The United States unfortunately has adopted an America First and only policy that has jettisoned all its natural allies in creating a counterbalance to the Chinese rise. This has created a lot of uncertainty about what the future will look like. That's why I think the demand for gold, it's not driven by these fears of inflation which could come down the road sometime when everything's properly back on track. But I see just the world becoming anxious. Who will win this tussle? How will it play out? Is there going to be a military conflict, or is it just going to be these peripheral conflicts? That is what's driving the re-pricing of gold in real terms. That's what I think.
$2,000 to 3,000 is almost a no-brainer with hardly any inflation on the table. $3,000-plus, which many of my peers like to talk about, that will kick in once inflation does start to make a comeback and you can start saying, "Oh, now we see where this is going." But this move here is the one that's important to the producers, to the developers, and to the explorers. Because suddenly, what had become high-hanging gold fruit, it's not super low like it was at the end of 1980, but it is a lot lower than it has been during this past 10-year bear market decade.
Gerardo Del Real: You mentioned inflation. Do you see that taking years? Because, frankly, I've never seen – granted, I'm in my early 40s, I'm 41 – as a student of history, I've never seen personally or read about fiscal and monetary policy in the US being as predictable as it is right now. Frankly, when I look at the index that tracks the price of lumber and eggs and medical costs, inflation in that aspect is already happening. And it's not by a little bit.
Do you see the inflation wave accelerating, or do you think that's something that won't be broadly recognized by the mainstream for another couple of years?
John Kaiser: Quantitative easing, the printing of money to buy assets such as bonds and now even corporate bonds, that money simply goes and creates asset class inflation. It is not the same as printing money to go on a massive infrastructure renewal, which hands jobs to every person in the country, puts money in their pockets, gives them a vision of the future.
“Hey, it's getting better. We're building bridges, our children are going to have a great future. Yeah, they'll be stocked with debt, but at least they'll have some legacy for it, so it's worthwhile paying it off.” Putting money into circulation consuming goods and services, that is what can drive inflation when you print too much money for that purpose.
But what we're seeing now, they print the money, they buy the bonds, those people have cash. Well, they don't want to buy more negative-yielding or low-yielding bonds, so they go buy stocks. That props up the stock market, even though you know that we had a horrible second quarter. The third quarter is not going to be super better. People are still concerned that COVID is going to be this lingering problem. Nobody at all has any confidence that there's a coherent strategy for dealing with it. It will probably be 2022 where we have enough of this behind us to treat it as being the same as getting killed in a car accident or something like that.
I see subdued inflation until money is being created that actually goes into circulation consuming goods and services. That's hard to do when we have these endless lockdowns. How many construction projects do you want to start? How many restaurants can you go to? How many stores can you shop at? It's this semi-lockdown, and in some cases completely locked down. It's an economic paralysis. That cannot really drive inflation.
But once COVID is behind us, there will be this awakening in the population. Powell has said he's not going to raise interest rates before 2021. So we have another year of really low interest rates, building up the pressures for an inflationary surge. In the meantime, we see gold going up in real price terms. Then by the end of next year, it doesn't matter who's in charge. They're all going to have to do infrastructure renewal to re-jump the economy. Then you'll see the inflation expectations start to be manifested in actual inflation. That will take the whole gold junior sector to the unbelievable level. Right now, it's still a relatively sane boom that we're witnessing.