Paul van Eeden: Why Gold Has Peaked; In Defense of Bernanke(?)

Paul van Eeden: Why Gold Has Peaked; In Defense of Bernanke(?)

Paul van Eeden, Agora Financial Investment Symposium

After a solid week of collective Bernanke bashing, Paul van Eeden had the guts to stroll up to the stage and say:

“Ben Bernanke has done an outstanding job of preventing deflation and controlling inflation.”

He said this with a straight face, he was sincere, and he managed to repeat this several times throughout his talk without hearing one boo from the audience.  A phenomenal delivery in hostile territory kicked off perhaps the most contrarian presentation of the symposium.

Scary – & Misused – Monetary Charts

Van Eeden pulled up a “scary chart” that he believes is frequently misused in the financial media and press.

US monetary base 1985-2012

“It’s not true,” that the Federal Reserve Bank creates inflation, van Eeden said.  “It is you all who create inflation.”

“When we borrow money, we create inflation.  When we pay down debt to banks, we create deflation.”

The steady increase from 1985-2008 in the chart above is mostly due to physical notes and coins, which are produced by the mint in response to demand.

The increase in the monetary base since 2008, he continued, is reserves that banks have on deposit at Federal Reserve Bank.

He disagrees with most of the attendees and presenters that there is potential for future inflation.  “If you don’t borrow, there will be no inflation.”

“We have not seen hyperinflation in the United States.  And it’s not going to happen”

US monetary inflation (not consumer prices, but actual monetary inflation), he continued, is running at 6% right now – which is below the 112-year average of the US monetary inflation rate.

Despite a couple of QEs, we are nowhere near danger zones, he stated.

“QE3 is not necessary from a monetary perspective,” he said, as unemployment is falling.  U6, his preferred measured, peaked over 16.5% and is now down around 14.5%.

Gold Has Peaked

“Gold price anticipates future events, and reacts to monetary events.”  It’s money, not a commodity, van Eeden said.

He thinks gold has peaked now fear has subsided.  Also, gold may have broken it’s  uptrend since 2009.

He pointed out that the equity markets also believe that the gold uptrend is broken, as gold stocks have rolled over.

Van Eeden estimates the fair price of gold is only approximately $900 today (based on his proprietary historical estimates that always seem credible yet cryptic to me).  His fair value in five years for gold is around the $1200 mark.

He agrees with previous presenter Rick Rule that the root problem has not been solved – the US economy still has too much debt

But what happened in 2008 wasn’t a problem of too much debt, it was a problem of quality, he said.  That debt still exists, but the problem has been patched up, which is why there are $1.5 trillion extra in the monetary base.

In 2008 nobody anticipated the problem and it caught them by surprise, he continued.  Now that everyone is anticipating it, they can avoid a catastrophic event.

US Primed for Recovery

Now that the fear of 2008 has subsided, he believes the US is primed for recovery.  He cites ample cash and liquidity in banking system, low wholesale electricity prices, low interest rates, an innovative “can do” society, and slowly recovering GDP as compelling factors that will drive the American recovery.

He continued that the US is ideally poised for renewed economic growth thanks to a trifecta of economically favorable ingredients:

  • Record low energy costs
  • Record low financial costs (interest rates)
  • Record high labor availability

Europe, Though, Not Under Control

“US is primed for a recovery.  Europe, however, is not.”  Van Eeden said Europe is 2-3 years behind the US in getting things under control.

The IMF expects bank assets to contract by EUR 2 trillion, which is deflationary.  He expects more monetary easing in Europe.

China in Worse Shape

“China is actually in worse shape (than Europe).  GDP is slowing down, but it’s the structural problems that are really problematic.”

He cited falling real estate prices, including 64 million empty apartments, as trouble for an economy heavily dependent on residential real estate development (12% of GDP).

Van Eeden said monetary inflation is out of control, running higher than 13% per annum.  The banking system is a mess, and furthermore, Chinese GDP is based on production rather than consumption (making him the second speaker of the week to bring up this point).

As a result he forecasted the renminbi will devalue against the US dollar, because they are printing so much of it.

In the long term, he has no doubt that China is going to have a fantastic economy.

“But in the long term, I’m going to be dead – so I don’t really care about that.”

Investment Picks

Van Eeden’s specialty is junior resource stocks.  He showed how they followed base metal stocks, not gold prices, after the 2007 top.

Base metals junior miners chartThe juniors have traded in tandem with the base metals – not gold.  (Click to enlarge, chart via Google Finance)

He sees no reason for junior resource stocks to suddenly and imminently go up in value.  “This is the beginning of a protracted, depressed market for junior resource stocks.”

Which he says is “absolutely fantastic” because if you have a long term time horizon, you can spend the next 2-5 years buying the best quality mineral exploration companies in the world when their prices are depressed.

In conclusion, he stated he would be buying base metals and speculative stocks – currently enduring a bear market – and selling gold and bonds, which are enjoying a fabulous bull market.

Paul van Eeden is the President of Cranberry Capital Inc., a private Canadian investment holding company.  He is well known as an investor for his macroeconomic research on monetary inflation and gold.  Paul is a regular speaker at numerous investment conferences in North America and abroad, and has been a guest on several business television and radio programs.