Newmont Mining's Pierre Lasonde "Take Stock in Gold" published by the Resource Investor.com

Pierre Lasonde: Take Stock in Gold
By Tim Wood01

Dec 2004 at 11:05 AM EST
Resource Investor.com

If you really want to know what the next 5-10 years are going to look like, I tell people that the best thing to do is look back to the 1970s. I really loved the music of the 70s, but look at the economic conditions and you're going to find that today we live in a world that is very similar.

In the 1960s we had very strong economic growth in the US and high productivity and low inflation – same thing here in the 1990s – and then it was followed by the Vietnam War. Well today we have Al Qaeda's War. In Vietnam, America was fighting over communism. Today it's fighting Islamic fundamentalism. Same difference the French will tell you! Now the only reason the French know a little bit more is because they got their head handed to them in Vietnam, and they told the Americans "don't go there!". The French also had Algeria, and they said to the Americans you know what, don't go there. Because they got their backsides kicked in Algeria as well. It's not that they really are smarter, they've just been there first.

The next thing that happened in the 1970s is we had an oil shock. Oil went up five times between 1971 and 1974. Guess what? Between 1998 and 2004 oil has gone up five times!

The monetary policies of the 1970s were highly expansionary with a negative real rate of interest. Guess what we're having today? Negative real rate of interest for the last two years. The rate of inflation is actually higher than the Treasury Bill rate and it's likely to stay that way for a bit longer.

We also saw a huge increase in the budget deficit in the 1970s. Well, same today. We've gone from a surplus of $150bn to negative $450bn, that's a swing of $600bn in budget deficit. Look at the current account deficit in the US. It's now over $660bn. That represents 70% of the world's savings that this country has to have every year to live in the style we've been accustomed to. How long can that last? Not forever.

Finally in the 1970s we saw a huge increase in commodity prices and we can see that right here. Commodity prices represented by the CRB Index, the Commodity Research Bureau Index, went up 250% between 1971 and 1980. We're up 60% so far. Let me ask you, do you think that that's the end? Over a 10 year period 250% and over a two year period we're up 60%.

Let's look at the things that are not the same from the 1970s.

The first difference is inflation. In the 1970s, for those of you who have a few white hairs and for some who have no hair, inflation was a real problem. It peaked at something like 14-15%. Why? Well some of it was because of the dollar devaluation, some of it was because of price push inflation and a lot of it was cost push inflation that came from union bargaining who could afford to increase wages throughout the economy because there was no alternative.

Today we have a very different situation where China in particular, Asia in a global fashion, is exporting wage deflation. If you go to a Wal-Mart today 70% of the goods sold there are basically from Asia, a lot of it from China. These countries can produce anything at cheaper prices than anybody else. If there's one thing that you have to remember it's that China today is the world price setter for commodities that it buys and for the finished goods that it exports. That's a first in economic history where a country is so dominant in either what it buys or what it sells.

So, if you look at the US economy, do we have inflation? Yes. If you look at services, you know, Starbucks increased its coffee price; you try to go to a Broncos' game and tickets are up 50% over the last three years. Yeah, we do have some inflation but then on the other hand we have deflation that's exported in the products that you go buy at Wall-Marts or any other commodity.

It's like having your head in the oven and your feet in a bucket of ice. On average its feels pretty good and that's exactly what you've got – the inflation rate supposedly is around 2%, but in reality it doesn't feel quite that way because either it's really cold or it's really hot. And it's likely to stay that way for the next few years.

I think you're going to have some inflation that's going to come through on the finished product side because China's inflation rate is increasing and they're going to have at the end of the day to increase the currency too. So you will have China exporting a higher inflation but I don't think it's going to go from more than 4 or 5%, enough however to have real interest rates stay negative even if the Fed pushes interest rates to 3 or 4%. My view is that you're still likely to have negative real rate of interest which is very good for gold.

The next thing is savings. When you look at the savings rate: in the 1970s in the US it was about 8%. Today, believe it or not, it is close to zero. Last quarter in the United States the same savings rate was 0.4% of GDP.

How can you have a country continue to invest with zero savings? That's a huge problem and that's why the current account deficit is so high. It cannot go on forever. What's happened is that the rest of the world has been funding our current account deficit to the tune of over $600bn a year. Every year the US economy is being sold at the rate of 1% to the rest of the world. You can't do that forever. What's going to have to give is the currency.

The final difference with the 1970s is the amount of debt in the economy.

In the 1970s we had 130% gross total debt including corporate, government and private debt. Today we have that figure over 200% of GDP. The last time the US economy was over 200% of debt to GDP was 1930. Not a good reference point!

Consumers today are tapped out and over indebted; basically the Fed has painted itself in a corner. If the Fed was to raise interest rates to a level that would have a significant real rate of interest it would plunge the economy into a recession and possibly even worse.

It cannot afford to raise rates to 7,8 or 9%. Or even 5% for that matter. So, what gave in the 1970s? Who was the big winner and who the big loser? The big loser was the US dollar.

If you look back to the 1970s and you look at the two major currencies against which the dollar depreciated, well it was the yen and the Deutsche mark and funny enough the only difference between the two was two zeros. The yen was 350, the Deutsche mark was 3. 50, and where did they end up? They ended up at 165 and 1.65, for a depreciation of over 50% of the dollar against these currencies.

Who was the big winner? Well, there was one big winner and it was gold.

The gold price went up 2500% from 1970 at $35 to 1980 at $850; for one minute it was $850. That was okay! Gold was undervalued because don't forget at that point in time gold was fixed by the government so if you really think about it and you start in 1974 when gold was, had already been loose for a couple of years, gold really went up from about 100 to, it did go to $800 on a, but let's say 600, that's still about a 500% increase between 1974 and 1981 or 82.

Gold today is a currency once more.

If you look at the gold price vis-à-vis the dollar euro relationship what you're going to find is that that explains the correlation between gold and the euro dollar relationship. It explains about 90 to 95% of the change in the value of the gold price.

Gold today is as close to a currency as you will ever see and gold growing in the future and our view is and we've been saying it now for four years, the American dollar has got to go down. The dollar has been the best export that the US has ever manufactured!

The central banks of the world today have got 2.1 trillion of those dollars. The question is if they just stop buying, that's enough to send the dollar down by 50%. If they start selling it's going to get even worse.

We don't think it's going to go there because at the end of the day when we look at China and Japan in particular, they want the economy to continue exporting so if there's anything that's managed in the world it's those two currencies.

Some people have gold conspiracies, I don't know about that. The one thing I do know is that those currencies are managed currencies and they are going to probably let them revalue against the dollar but in a very stepwise way. I tell people that one thing about China is that they do things in a Chinese way, which means that on their own time. Tight now my feeling is – and I'm sure Marc Faber is going to talk far more about it and he knows more than I will ever know – but my feeling is it's going to be a very stepwise fashion, you're going to have to wait for that.

I would like to go over something that we first published in our annual report in 1999. It is the Dow Jones Industrial Average divided by the gold price. Some of you have probably seen it in other places; I think we were the first one to put this out.

What it gives you is a view of the last 100 years of paper versus hard assets. It's very interesting because if you go back to the 1920s, for example, that was your peak. In 1929 it peaked at 18:1 so the gold price was $20 and the Dow was 360 points. And then the excesses of the 1920s had to be corrected so then we entered into a hard asset bull market and by definition, a paper bear market that lasted 3.5 years and bottomed in February of 1933 at 1.95:1 so gold went up to $35 at that point and the Dow was around 42 to 44.

The Dow by the way lost 90% of its value in four years.

Then the ratio went sideways for about 10 to 15 years and then started a bull market right after the war in ‘45, ‘46 and peaked again in 1966 at 28:1. At that point gold was $35 if you remember. We needed another generation to correct the excesses that had been created in the previous 20 years and those were the 1970s.

Interestingly enough in the 1970s we saw a bull market in hard assets; commodity prices going up. I started in this business in 1973 when copper was $1.60. The equivalent today would be a 3.50 or 4 dollar copper price. Can you imagine if you had copper at these prices? You know what? It could well happen!

The bull market in hard assets lasted 14 years and it topped out in 1980 at a ratio of 1:1. The Dow in 1980 was 800, gold was 800. Twice in a century and then what happened? Well we had a bull market in paper assets and what a bull market we had; an incredible one.

The top end in 2000 peaked at 24:1. Now four years later we are 23 or 24 to 1 and here's the question. If that bull market in hard assets is to mimic what we've seen twice in the past 100 years and go back to the 1:1 ratio; I ask you, where do you think the Dow's going to bottom? And I'll tell you where the gold price could go. For some of you it's like, "well is that possible?"

The Dow today is 10,500 in case you haven't quite noticed, OK, so if you're real bearish on the Dow where do you see it? 5,000? I don't know where it's going to bottom and no-one knows and no-one knows the future and no-one knows how much inflation and how much money printing we're going to have here in the United States or anywhere else and you know when you talk about the US dollar having to go down against the euro and the yen. But believe me I don't think for one second that the euro is a better currency than the dollar or that the yen for that matter is a better currency. It's only a relative game. At the end of the day all of these currencies will have to depreciate against the only currency that is not a managed currency and that is gold.

When I look at the problems that the Europeans are going to have over the next 10 years with the baby boomer retiring and their unfunded liabilities in terms of healthcare and pension – those are in the trillions of dollars they will never be able to fund those. What are they going to do?

They're going to depreciate their currencies. Well heck what are they going to depreciate against? The dollar? The dollar's in no better shape. The yen? The debt in the Japanese economy, we're at 200% of GDP, they're even worse. The only place is the dollar.

When I look at the gold price and commodity prices over the next 5 to 10 years I do believe that you're going to see gold with three zeros at the end, but you're going to have to be patient because I don't think that you're going to see that this year or next year. I think it's going to be five to eight years down the road, it takes time for these things to happen.

I do believe that the dollar is going to continue to depreciate against mostly the Asian currencies at this point.

If I look at the euro, I was in Europe, in Italy a couple of months ago I had to get a haircut, it was $55 in a barbershop! I just don't think the euro is such a great currency.

When the Italians are going to Switzerland for shopping because it's cheaper in Switzerland, you've got a problem! And this is what's happening. I actually have a friend who has a shopping mall on the border in Switzerland, right on the border with Italy, he built it 20 years ago and said: "Pierre it was the worst thing I ever did". In the last six months he tells me: "you know what it's unbelievable, the place is full now".

So no, you're going to have depreciation of all of these currencies against the only currency that will appreciate and that is going to be gold. But over the next 12 months I think that you're going to see gold maybe up to $500 and then it could mark time until we see the next big move in the Asian currencies.

We could see the dollar against the euro going up to 1.40, maybe 1.50 but frankly I can't see it any higher than that, it's already well past it's due date, but against the Asian currencies I think you have a 50% move and that's going to be the next really big move.

Then the question is how do you fund all the retirement liabilities. These issues are going to start creeping up in the next 10 years when in the US for example 77m baby boomers are going to start to retire. In Italy in the next 10 years the average age of the population is going to go from 45 years to 54 years old. All of a sudden you've got a huge increase in the aged population. How do you fund the healthcare, the retirement? They haven't addressed any of those issues.

So when I look at that in the long run I am very, very positive on the gold price. And with that I thank you very much.