Ask The Expert - Rob Kirby - July 2016

Transcript:

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

Craig: Greetings again from Sprott Money News. This is your Ask The Expert segment for July 2016. I'm your host Craig Hemke, and joining us this month is Rob Kirby. Rob is the head of kirbyanalytics.com and a recognized global financial expert, and we're lucky to have him. Rob, thanks for joining us here at Sprott Money News.

Rob: Pleasure to be with you, Craig.

Craig: Rob, let's just dive right in. In this format, we have questions that have been submitted from Sprott Money customers, and they're all very excited to get your opinion on a number of subjects. I think we'll just get right to it. The first question recognizes your expertise in the derivatives market. This question deals with Deutsche Bank, and it is, "Deutsche Bank show's over €50 trillion in derivatives exposure. Are they a threat to the world economy, or can the ECB simply bail them out?"

Rob: The answer to that question Craig, in my humble opinion is that, Deutsche Bank's derivatives book, if we were to have a clear and transparent look at it, which German regulators have by the way, after they raided Deutsche Bank's offices a number of years ago, but if the general public were to have a look at that book, I think you'd find that it mirrors exactly the same constituent parts as JPMorgan's book, which is roughly the same size. I think we would find that both books have the U.S. Treasury as their prime counterparty, with the lion's share of interest rate derivative products, as being the other side.

The difference between the two is that, German banks report to German regulator named BaFin. BaFin is not in the business of perpetuating the US dollar as the world's reserve currency, where JPMorgan reports essentially, to the Federal Reserve, whose job is to perpetuate the role of the US dollar as the world's reserve currency. That's the difference between the two as I see it. The real difference between the two is who they report to and real truth be known, what JPMorgan is up to, in terms of managing US dollar interest rates, is a complete and uttered farce, and this is the world we live in.

Craig: Does the size of that derivative book make them too big to fail, Rob?

Rob: Yes, absolutely it does. At least in the eyes of our Keynesian-minded central banking community.

Craig: One extension of that then though. Is it doomed to failure regardless or can it be saved? Can it be managed by the ECB?

Rob: My view of the macro climate in economics is that, negative interest rates on a globalized basis with what? $12 or $13 trillion worth of sovereign debt currently trading at negative rates, it's not a sustainable model. The reason for that is, when you assign negative value to capital, human work is also capital and people don't work for free. Negative interest rates...negative interest rates Craig effectively imply that if we have them long enough, we will no longer have an insurance industry.

We will no longer have a pension fund industry and free market capitalist societies cannot operate without insurance. Insurance companies are mandated that they must hold sovereign debt, by edict. When you set insurance companies up to be failures long term, that's not a sustainable operation. At least if we're gonna have any sort of resemblance of a capital society.

Craig: Yeah. All right, question number two deals with Deutsche Bank as well, but in a different direction. Deutsche Bank recently admitted to rigging the London Silver Fix. Do you Rob have any updates on the legal process in this case?

Rob: No, there's nothing there. That's something that's gonna play its way through the legal system and who knows how many years that's gonna take.

Craig: Fair enough. It's something that we're all optimistic that since they were working with the regulators to help name names, that that might speed things along, but nothing else you've heard at this point?

Rob: No.

Craig: All right, fair enough. All right, next question has to do with the gold silver ratio. Something many people follow and something that has gotten out of whack in this paper derivative pricing scheme. In your opinion Rob, what is the true gold silver ratio, considering that silver is used and consumed yet gold generally is not?

Rob: My view of the gold silver ratio is that nature knows best and long term, I don't think it's nice to fool Mother Nature. Nature dictates that for every ounce of gold that is mined out of the Earth's crust, roughly nine ounces of silver are mined out of the Earth's crust. Silver doesn't tend to be recoverable on a percentage basis in the same way that gold is. To put that into simpler terms, there seems to be more gold scrap that is returned to supply each year, on a percentage basis than the corresponding percentage of silver that gets returned in scrap.

That might even be a good basis for arguing that the gold silver ratio could be less than nine to one, but I would think that long term, at some point, we will...in a mathematical term called it reversion to an historic mean, I think we could easily see the gold silver ratio at 10 to one.

Craig: Fair enough. Hopefully, that doesn't mean that gold is $200 an ounce.

Rob: Well, I don't think there'll be much mining occurring if gold is up to $200 an ounce.

Craig: Exactly, exactly. All right, the next question has to do with fiat currency, which, and it's specifically this, "Will fiat currencies continue to devalue, and how will gold be priced in the future if they do?"

Rob: Well, fiat currencies by their very design, when they're not backed by anything, they're designed to self-destruct or achieve their true intrinsic value, which is zero. This will continue to play out as we move along the timeline. I think the better question instead of asking us how gold will be priced, I think the better question is to ask yourself, how will wealth be measured? I do believe that we will in another reversion to an historic mean, I do think there will come a point where we don't value wealth in dollars. I think that wealth will be measured in ounces, ounces of gold and ounces of silver.

Craig: Very well stated. Again, as you said historically, the way it's always been done in the past.

Rob: That's right. Listen, if you put the last 3,000 years on a yardstick and for, let's just say for 32 inches of that 36-inch yardstick, wealth was measured in ounces not in dollars. When this occurs, when fiat money spectacularly fails, humanity will have some very...Even the clown Keynesian economists who currently run the show, they're gonna have to think hard about what replaces an utterly failed and disgraced system. I do think that people will turn to something that has stood the test of time and has proven itself that it actually does work.

Craig: Yeah, agreed. Okay, we've got three questions to go. Let me hit you with the next one. there's always talk about expatriation and holding your gold offshore in offshore IRAs and in vaults around the world, but that's often geared toward high-net-worth investors, people that have a lot of wealth to protect. What's the little guy to do as this madness continues? Meaning by little guy, I think the questioner wants to know, someone who has $100,000 or less in net worth, how do they protect themselves from this calamity?

Rob: Well, there are very efficient ways to hold this relatively small amounts. $50,000 or $100,000 worth of physical precious metal can be efficiently held in foreign jurisdictions by little people. They can do that through...I'm not sure whether Sprott Funds offer different storage solutions or not and I admit to being ignorant on that, but I know for instance, GoldMoney or BitGold, you can choose different vaulting up options. Whether you want to hold it in New York or I believe Guernsey Island and I think they have a Hong Kong Solution.

The company that I'm associated with Bullion Management Group, we offer storage solutions with Scotia in Toronto, London, Hong Kong or people can get their physical right outside of the banking system and start with brinks in different locations. There really are options available to retail customers, with retail amounts to hold your metal in different jurisdictions if one suits you better than another. Those options exist today.

Craig: To someone that doesn't have the wherewithal to buy a second home in another land or that kind of thing, do they just hunker down and try to ride it out the best they can, where they are?

Rob: I would suggest that and I think there's great value in community and I think there's great value in getting to know your neighbors. It's especially of great value I think to most people to try and spend time with like-minded individuals, where you have common ground. There's strength in neighborhood and I do think it's probably very intelligent to have a little bit of historical food at this point in time, because we live in a just-in-time economy, just-in-time supply chains, everything is just-in-time.

If there's any breakdown in the financial universe, this just-in-time supply chain is extremely vulnerable to stoppage, breakdown, delays and we only have what, a couple days' worth of food on the shelves of the average grocery store and that can disappear.

Craig: Oh, Rob, I've got to use that as a segue to the sixth question because it's a perfect segue. Speaking of just-in-time delivery, it seems the Bullion Banks operate under that mantra as well. The sixth question is what will finally end the bankers' control of the paper metals markets.

Rob: That will occur at some point in time when somebody or an entity makes a demand for physical bullion, or it may take two of them. It may take two entities making demands for delivery of physical bullion at the same time. They have both been told that they're the beneficial owners of a specific lump of metal sitting on a floor somewhere. It's the issue that's starting to crop up with all the additions, alleged additions to the inventory of ETFs so far this year. There are people who study this very, very closely starting to ask questions like, "Where's this new physical bullion coming from in a market that's already tight?" The logical conclusion is that, metal is being sold more than once. Reported inventories, it's starting to really smell rancid that these stories of bullion may in fact have more than one owner and may be three, four, or five owners. That's where my head's at.

When people demand to move their physical bullion, that's when the risks rise, that there'll be a default because, in theory, an ETF that claims to have bullion sitting in one place, in theory they could sell it how many times over. And if anyone shows up to look at the bullion, they can take them in and show them, there's the bullion, but how many other beneficial owners have been shown the same bullion and told it's theirs. it's not until you start to physically move it and demand it to be moved, that the real danger of revealing of the fraud becomes. But lo and behold, let's just say the Asians and the Russians when they buy physical bullion, they're not buying a promise and they don't want a piece of paper saying we own a lump of bullion somewhere in America or somewhere in London. They want the real thing.

Ultimately, the amounts that they are taking out of the market will drive us over the cliff. A default is coming, I can't tell you the day the default will happen, but default will come because the eastern part of the world is demanding more than the Earth's crust is supplying.

Craig: Just to be specific Rob, on my side, I hear a lot of folk read this off and I read this on the internet. People associate delivery default with COMEX default, but that's not what you're talking about. You're talking about default somewhere in the globe, correct?

Rob: Yes. Oh yeah, no. I'm not necessarily...To be honest with you, I don't think we'll actually ever see a default in COMEX. COMEX is a private club and as a private club, they don't have to ever default. They can just declare Force Majeure and settle everybody in fiat. Whether or not that's the case, if they declare Force Majeure and settle everybody in fiat money, you could call that I guess technically a default. It might happen there, or it might not happen there.

It might end up being in the case of a default, it could come from London. It could come from the Shanghai gold exchange, but at some point, there will be a default, because too much is being demanded and supplies are fining.

Craig: Right. All right, one last question for you Rob and this one has to deal with platinum of all things. This Sprott Money customer's noticed platinum trading at about a 25% discount to gold, which historically again, is rather unusual. What do you make of that? What might be causing that?

Rob: I think platinum is A, it's not a monetary metal. It's never been known to be a monetary metal, but it is in terms of the amounts of it to get mined, it's scarcer than gold. Boy, what to say about the price of platinum, it's a bit of a head-scratcher, but I've also been told that there are new solutions coming, where platinum is gonna be displaced in the...I think its biggest use is in catalytic converters.

My understanding is that there's a more viable, much cheaper alternative that's either in the pipe or on the way. I think this maybe has played back into the platinum sector, but you know what, at the end of the day, because of its scarcity and because of its deep discount, which historically didn't occur, I don't see anything wrong with holding a little bit of platinum, too.

Craig: Fair enough. Rob, I really appreciate your time and for answering all of these customer questions. Tell everybody a little bit about Kirby Analytics and where they can find you on the internet.

Rob: You can find me on the web at KirbyAnalytics.com. The writing that I do these days is just for my subscribers and my public commentary is you know, in the verbal or the audio video form, much like we're doing today.

Craig: What do your subscribers receive generally?

Rob: I don't know. Probably four, five touches a month, updates on interviews and commentary as I feel inclined to produce it.

Craig: Terrific and again, everyone can find that at KirbyAnalytics.com. Rob, thank you so much for spending some time with us at Sprott Money News, it's been a real pleasure.

Rob: Pleasure being with you.

Craig: From all of us at Sprott Money News, thank you for listening. We'll visit with you again in August.