Canaccord’s Global Resource Conference happening in Miami at the moment featured a lengthy interview with billionaire investor Frank Giustra where he said “he doesn’t want to sound apocalyptic,” but probably ended up scaring the bejezus out of the audience anyway.
In 2002 Giustra wrote a book called A Tarnished Dollar Will Put the Shine on Gold.
That was back when gold was trading below $300 and quantitative easing wasn’t even a glint in Ben Bernanke’s eye.
A decade later he’s sticking to his guns:
“I don’t know when and I don’t know how high. But gold is going a lot higher.
“Gold is the bubble of all bubbles. It’s the mother of all bubbles. It’s the bubble people will go to when they’ve exhausted all other bubbles.
“Here’s why: It is moveable. It is easily transferable across borders in times of crisis. It’s a currency. It’s liquid. It’s easily tradeable.
“I’m a fan of all hard assets, but particularly gold. It’s the largest part of my portfolio and it will continue to be until this cycle is over.”
The reason for Giustra’s confidence about the gold price – and gloom about the financial system – is all about US monetary policy.
While it started with the so-called Greenspan-put in the Nineties, Giustra said the Fed “crossed the Rubicon” when it first embarked on quantitative easing (in December 2008, when gold was worth $830 an ounce).
The Fed has already racked up close to $3 trillion and purchases of $40 billion a month for “at least the next 27 months” by the Fed’s own calculations under open-ended QE3 will add another $1 trillion.
“Everyone is frozen with fear. Everyone is in cash,” says Giustra.
“The only reason you haven’t seen inflation – hyperinflation – yet” with all the cheap money flooding markets is because the velocity of money – the speed at which money changes hands in the economy – is at its lowest since 1959, when it was first measured:
“If it [velocity of money] stays that way, you won’t get inflation. But the first whiff of inflation and things can pick up quickly.”
Giustra says like in chess the Fed is in an “inescapable trap”. It’s been cornered by the queen, a rook and a bishop – a triple threat:
It cannot reign in the excess liquidity by raising interest rates because it will destroy what is only a fragile recovery.
With debt through budget deficits on its way to $20–$25 trillion, the US government will be the first in trouble if the Fed tries to normalize rates.
Thirdly, the Fed’s own balance sheet is such that it could become insolvent – its debt:equity ratio is 51:1 with the bulk of its holdings in longer maturities which they won’t find buyers for.
“It’s the beginning of the end for the US dollar. I don’t want to sound apocalyptic, but how else does this end? You have to be on the right side of this trade.”
Giustra knows what he is talking about.
He made his money in a rare combination of two very different industries – gold mining and movie making. And he has a rare knack for timing the market.
Giustra started out at as mining industry dealmaker in the 1980s and got out when the market turned sour in the early nineties.
He then founded Lionsgate, today the biggest independent Hollywood studio.
By 2001 he was back in mining setting up among others Wheaton River which would morph into what is today the world’s number two gold (Goldcorp) and silver (Silver Wheaton) companies with a combined market value of $48 billion.
Click here to listen to the Canaccord Resource Conference webcast (registration required).
Click here for an interview with Giustra by Cambridge Group and CEO.ca’s Tommy Humphreys. Image is from this September 3 2012 interview.