Podcast - May 12, 2019

Why Gold and Silver are Still Important

AGE President Dana Samuelson discusses the ongoing importance of gold and silver in this interview with Rob Colville of The Lazy Trader. Topics covered include gold in the time of debt and deficits, the Gold Standard and gold recall of the 1930s, gold and Bitcoin, getting started with gold and silver investing, and using gold and silver as portfolio insurance, among others.

(Note: This transcript has been edited for clarity.)

Rob: Okay folks, today we are joined by Dana Samuelson to talk about investing in precious metals and why it hasn't lost its raison d'etre throughout time.

Since the 1980s, Dana has seen over $1 billion worth of gold transactions and founded the world-renowned American Gold Exchange, a precious metals and rare coin boutique in Austin, Texas. Welcome, Dana and thanks for joining.

Dana: Well, thank you very much for having me on.

Gold, Silver, Debt & Deficits

Rob: Oh yeah, an absolute pleasure to have you. So, first things first. Would you say that in the current climate there is an increasing appetite today, with people wanting to hold precious metals in physical form?

Dana: Yes and no. Right now, in the United States, we're having a pretty good economy, one of the better we've seen in the last four or five years. The public has been attracted to the stock market and traditional paper assets because they are feeling a little bit more confident than normal at this particular moment in time.

But we are seeing a much bigger trend, which is much more important. Central banks worldwide have been accumulating gold in a major way-- China, India, Russia, and Japan to a modest degree, among others. Central banks are buying gold primarily as a hedge against all the paper money that has been created to help world economies recover from the Great Recession in 2009.

The amount of paper money has just ballooned incredibly over the last 10 years. The U.S. has gone from about a $1 trillion on its balance sheet to $4 trillion. The national debt has gone over $22 trillion and it's rising fast. If I remember my numbers correctly, in 2009 the total worldwide debt was about $99 trillion and today it's close to $180 trillion. So, it's almost doubled in the last ten years, and that's all paper.

It's mind-numbing because the numbers are so big, and people cannot relate on a personal basis. I think to pay down the U.S. debt is about $70,000 per person.

I got into the business in 1980 on the tail end of the first big precious metals boom since the U.S. went off the gold standard in 1971 under President Nixon. The nation started printing more money than it had in gold reserves, dollar-wise, in Fort Knox.

So, we created the modern version of fiat money in 1971, and by the end of a decade, gold went from $40 to $800 an ounce. Inflation was 18% and interest rates were 18%.

What's happening now, over the last ten years, is the whole world has done the same thing. We've printed much more money and created much more debt than ever before. But we haven't seen the effect of that all printing yet. I think legendary investor Doug Casey is right. When that chicken comes home to roost, it won't be a pretty sight for paper currencies worldwide.

This is an important reason why gold makes sense for everyone today. As the currency of last resort, the oldest and most trusted form of money in the world.

The Gold Standard and Gold Recall in the 1930s

Rob: And it's a fantastic hedge against a future which is unknown. I mean, tomorrow is not guaranteed.

What is interesting is gold was once illegal in America. In 1933, Roosevelt urgently needed to cover rampant government spending to cope with the Great Depression. Back then the Fed could not just print money, as the law required 40%, I believe, of every dollar to be backed by gold. But the government did not own enough gold. Where better to get it than from American citizens? Gold was recalled and private ownership was banned.

This ban was lifted in 1974, a few years after the abolition of the gold standard. But given today's enormous deficit and bloated national debt, what could stop the government from doing this again?

Dana: Back then, Roosevelt was forced to make this drastic move because countries around the world didn't want to take dollars in payment. They wanted gold. So gold was flooding out of the Treasury as international payments, usually in the form of old $20 gold coins, primarily into France and Russia. To stabilize our finances, he had to take gold out of the currency and move to a paper currency.

Up until 1933, gold was money. People had the choice between getting paper notes or gold coins, here in the United States and around the world. In Britain they had the gold sovereign, and in France and Switzerland the gold 20 francs.

But when Roosevelt made gold illegal to own, all the circulating gold was called in. If you were caught, it was confiscated.

Back then, almost everybody had gold. Today, maybe 5% to 10% of the public actually owns physical gold. So, I think the fear of confiscation today is a bit overblown. If it were going to happen, it would have been in 2009, 2010, or 2011. During the peak of the financial crisis, everybody wanted gold, and nobody trusted paper at that point in time.

Also, the U.S. Mint is now in the business of making gold coins for investors and collectors. The Mint would have to stop this business and pull back everything they've already put out. And it would be for a very small segment of the population. So, I don't think confiscation is as big an issue in modern times as it was back in 1933.

Silver Investing Compared to Gold

Rob: Silver is sometimes called gold's emotional sister, given that its price swings are generally far greater than gold's, even though it's far cheaper in price. Do you think silver is as valuable a commodity to keep long-term, relative to gold, even though it cost less per ounce?

Dana: Absolutely and here's why. Gold is real value, high value that you can transport easily. You can hold a hundred ounces of gold in both of your hands. It's about the size of a paperback novel, yet its worth around $130,000 at a market price of around $1,300 an ounce. So, the fear bid is into gold right now because it's an easy way for people to transport and store real wealth.

Silver is a transactional precious metal. It's much more useful in daily transactions if we ever get to that kind of an extreme situation. So, silver is your spending money if you want to have a little hard money for a crisis, whereas gold is your ability to transport real value real wealth easily. $130,000 in silver, you need a truck to cart around. It'll take up, you know, it'll cover a desktop very easily. It's much more cumbersome.

And you're right, silver does oscillate to a much wider degree than gold does when it really moves. If you measure gold and silver relative to each other right now, you can see that gold is catching more of the fear bid in the world.

The gold-to-silver ratio, historically for 2,000 years, was 20 to 1. When we went off the gold standard in 1933 it went up to about 30 to1 or 40 to 1. In modern times, it's usually between 60 and 70 to 1. Right now, the ratio is 86 to 1, which is about an all-time high. This means silver is cheaper relative to gold than it almost has ever been.

People are buying gold now to hedge their own paper bets. Silver is not quite getting that bid. But it should if we go into a weaker economy, or the Fed decides to start easing again, or the world starts to really ease and print more money again. Silver will play catch up hard and fast. There won't be $15 an ounce silver; it'll be $20 an ounce or $25 an ounce. Proportionally, it can go up much further and faster than gold in the current market.

Getting Started with Gold, Silver Investing

Rob: So, given that silver is relatively more cost-effective for, say, people who are looking to enter into the world of precious metals investing, do you think it might be an idea for people listening to buy silver with the idea, potentially, of either holding onto it or swapping it into gold when that gold-to-silver ratio becomes more favorable?

Dana: Yes, that's a very smart strategy. Silver is cheaper, so if you've never bought precious metals before it's an easy way to get started, to get used to the physical precious metals process.

We're a national mail-order business so we do business through the mail with most of our clients here in the United States. Most people are a little leery about sending real money to someone they don't know. They're not buying a pair of pants; they're buying an investment. So silver is a good starter metal because it is relatively inexpensive.

If you spend a few hundred dollars, you can get 20 ounces in 1-oz. coins produced by the US Mint, Canadian Mint, or the British Royal Mint. They all make 1-oz. silver coins. You could also buy silver bars—1-oz., 10-oz., or 100-oz. bars. It's a great way to get started and you're getting, I think, an excellent value because silver is so cheap relative to gold.

We do suggest that arbitrage strategy at times when the market is at extremes. In the last 10 years, the gold-to-silver ratio has been as low as about 55 to 1, where silver was much stronger relative to gold. At that point in time it made sense to sell silver and buy gold. Right now, it makes more sense to sell a little gold and buy silver or start with silver because it's so cheap relative to gold.

Gold and Silver Compared to Bitcoin

Rob: Yeah, well, that's exactly what I've done—as someone who has a lot more faith in precious metals compared to, and this is my personal opinion, cryptocurrencies. This neatly leads me into talking about cryptocurrencies. Do you find that the proliferation, say, of Bitcoin has challenged flows of money into precious metal investing? Now that Bitcoin is regarded by some leading luminaries in the industry as a safe haven, whereas gold silver were the traditional ones?

Dana: Well Bitcoin certainly attracted a lot of attention two years ago when it was surging up to almost $20,000 per Bitcoin. To be honest with you, our sales suffered as a result. We had several customers who had big holdings of gold and silver, and they dumped some of it to buy Bitcoin. I don't know if they got out at the top or whether they're still holding big losses right now.

Bitcoin and other cryptocurrencies have allowed people who are independently minded, which are precious metals buyers, to use a currency that's not a government-backed currency and make private transactions amongst individuals. That is a big draw for the cryptocurrencies. Younger people are much more drawn to the cryptocurrencies than precious metals in the current market.

So, we've seen a lot of younger people, you know, Millennials, who have been drawn into Bitcoin and some of the others, and it is a viable way to trade. But I don't know if they're good investments yet.

The thing that concerns me about the cryptocurrencies is they're eminently repeatable and replaceable. It's like beta versus VHS years and years ago. You don't know which one is going to be left standing when all is said and done.

Governments around the world are competing, as are major companies, to create their own cryptocurrencies. The dust hasn't settled. I would be very wary of using them as an investment, but to trade privately, yes, it's an excellent way to go. But it's not a replacement for gold and silver, which are the oldest and most trusted currencies of last resort.

Rob: I mean, what is interesting about cryptocurrencies is around Christmas 2017 the last trading day for stocks trading day before Christmas 2017, suddenly Bitcoin absolutely plunged. I thought this was smart money quietly pulling out while the rest of the world was suitably engaged with Christmas. The bubble popped.

When you look at bubbles and how they historically formed, certainly Bitcoin in its current form could be classed as a bubble that's popped. Now people who are riding on losses have that horrible wait in purgatory. They don't know when they'll have to realize that loss. If they are hoping to make a profit just not knowing how long they have to wait for that profit must be quite agonizing.

Investing in European Gold and Silver Coins

Rob: The Morgan silver dollar is generally viewed by coin collectors and numismatists as having dual benefit. People can simultaneously own a coin that appreciates in its historical, collector value—and that is of course, dependent of the grade of the coin—as well as its underlying bullion value.

As many of the listeners here are from the United Kingdom, what would you recommend as an appropriate alternative for Brits for silver coins?

Dana: Well you know, we do a big business in British gold sovereigns—the old "kings," like King Edward, King George, and Queen Victoria sovereigns. Not so much the new Elizabeth sovereigns because they're modern pieces.

There are not as many good options in silver that I'm aware of for old collector coins in Europe.

In Europe, things are not considered old unless they are from the 1500s or 1600s. Most of the coins minted from the late 1700s into the 1800s and early 1900s don't have the equivalent collector value as U.S. coins of the same era. In part, that's because there are so many different places where they were made. In what's now the eurozone, you have 17 or 18 countries that mint made gold coins up to 1933, 1934, and 1935. So, you can buy these old British sovereign, Swiss 20 francs, French 20 francs, Denmark 20 Kroners, Dutch 10 guilders basically at gold value today for historically old gold coins.

The U.S. is a much bigger market in numbers of buyers, and it's simpler. We essentially had only had four denominations in two different designs from 1850 to 1933.

Conversely, you have so many countries making their own gold coins in Europe during the same period that there's a lot more choices. And a lot of coins that are truly rare were minted in the 1700s and earlier, which is really where the numismatic market is in Europe.

This doesn't mean there aren't good or great European collector coins to be owned in the 1800s, but they're fewer and farther between. Does that make sense?

Collector Gold Coins as Investments

Rob: Okay, so it makes perfect sense, absolutely. I mean, I think a lot of people listening would, apart from the historical value, appreciate the underlying bullion value increasing over time. But the historical value, if it's a "hybrid" coin, can increase over time regardless of the bullion value, based on its historical value, that's the sweet spot in my opinion. What do you reckon?

Dana: Yes, I agree completely. We do a big business in the old U.S. $10 and $20 gold coins minted pre-1933. Right now, premiums for those coins, the collector premiums, are as low as we've seen. This is for two reasons.

First, we've we've had a complete reset with the gold price. For most of my career, from 1980 until around 2004, gold was between $300 and $500 dollars an ounce. These old $20 gold coins that we do a big business in, they were all worth, you know, double or triple their gold value as collector coins.

Now we've seen a reset with the gold price where gold is, on a basal level, three to four times that at $1,200 to $1,300 an ounce. So, the bullion value of these coins is risen dramatically, compressing premiums.

Second, now that we're in a bit of a better economic situation and people are going back into traditional paper assets, the premiums on the classic gold coins have compressed further. We haven't quite adjusted for the reset and the gold price in the collector-coin market here in the United States yet. When we do, the premiums will go a lot higher than they are right now.

There's a lot of value to be had right now in the old U.S. $20 and $10 gold coins minted in the 1920s, and earlier including pre-1900 gold coins as well. I see a lot of value there. You can get a classic, historical coin—one that's had a much higher historical trading value relative to its intrinsic bullion value—on the cheap for 10% or 20% percent gold content. In the past, these coins have been 80%, 100%, even 150% over gold value.

The Gold Price Going Forward

Rob: As we knock on the door of another all-time-high with the Dow Jones Industrial Average, and we are due for a recession, given that is has been over 10 years since the last, where do you see prices of gold of the silver moving forward?

Dana: Let me just say one other thing really quickly. As far as demand goes, you know it's unusual because we're a little confounded right now in our market. Premiums are so low on some of these older gold coins and I looked back to see if there were parallels in the past, and there are. If you look at how many 1-oz. Gold Eagles the US Mint makes on an annual basis as a proxy for physical gold demand in the United States, we've got three years where demand for physical gold was very low—20070, 2007, 2017-2018. All three times, the stock market hit record highs during those years. This is a perfect analogy for why demand is down.

When the stock market is strong, the general public doesn't care about gold. People tend to chase markets, not buy fundamental value on the cheap. They chased Bitcoin when it went in the bubble over $12,000 to $14,000 up to $20,000. They chased gold when it went from $1,600 to $1,900 an ounce. The public was all-in, just like they are now with stocks.

So, contrarian investors can do exceedingly well in the physical gold market right now. What is that old expression from Warren Buffett? You should be greedy when people are fearful and fearful when other people are greedy. Certainly, looking at equities, there's a massive state of hubris now.

Gold Bullion as Portfolio Insurance

Rob: As interest rates from the Federal Reserve and the Bank of England are steadily increasing, I think this is also having an impact on gold. People who are holding it, maybe paying a storage fee, are thinking, well, I could get a return on my money elsewhere, even if it's in a bank, even though the interest rates are not particularly high like they were 10 or 20 years ago.

Dana: Gold is unloved at the moment, relatively speaking. But we see gold an excellent insurance policy for the rest of your money. If you have 5% to 10% of your assets in physical gold, you have a wonderful hedge against uncertainty in paper assets. If you look at it as an insurance policy instead of an investment, that may be a better way for some of your listeners to get started.

You have a car insurance policy, a house insurance policy, health insurance. You must keep paying the premiums every year. But when you buy gold as an insurance policy, you pay the premium once and most of the time you're going to get 80% to 90% it back, or even 150% to 200%, if you ever really need it.

Rob: Well there you go. Dana thank you so much for your time. For those people who want to find out more about you and what you offer, where can they find you?

Dana: I'm President of American Gold Exchange, Inc., in Austin, Texas. We're a physical precious metals dealer specializing in modern bullion coins, classic pre 1933 U.S. gold and silver coins, and some of the European gold coins I mentioned, like the earlier British gold sovereigns, French gold 20 francs, and Swiss gold 20 francs.

Our website is www.amergold.com

Rob: Dana thank you so much once again.