by Sean Rakhimov
Basically we're in a situation that we've long expected. We all anticipated a big financial crisis, all sorts of problems, an end-of-the-world type of scenario—not literally, but the world as we know it. And I think we're there. This is the big one and it's for real. Where we go from here is largely a function of what the powers-that-be will do. We have some idea of what they will do; they will do all the things that will make it worse. I go by the theory that they will always do the right thing, but only after they exhaust all other options.
The economic crisis, I think, is going to last for a generation. I foresee a twofold crisis here, or maybe three stages. The first one is what we're going through right now - a debt crisis.
At some point down the line we're going to have a currency crisis, where the dollar will stop being the reserve currency of the world. I don't know how long before that happens. It's a matter of whoever runs first to the door, basically. I was just reading some articles. Iran is converting their foreign exchange reserves into gold. China is trying to do some of that. It only takes a few of these until there's a domino effect and when that happens, things should play out quickly.
This crisis, I think, has been a good example, where within three months we ended up in a completely different environment. If the dollar stops being the reserve currency of the world tomorrow, I expect things to happen quickly. It may take a decade until it gets started, but once it starts, I expect things to unravel quickly. The reason for that is we have maybe 20 to 30 major players in the world that can make a difference. I'm talking about countries and maybe some other entities such as sovereign funds. And I believe it's going to be very difficult to bring everybody to the table and get them to agree on a plan that everybody would sign on to. Even if they did sign on, I think it's going to be very difficult to make sure everybody sticks with it.
As soon as they break ranks, I think within six months the whole thing is going to break apart. Whatever accord they come up with, if it's going to be Russia or China or somebody of that size, things are going to happen even quicker. If it's going to be a smaller player like Iran or Venezuela, that may take a bit longer. The significance of it may be downplayed for a period of time. But ultimately I think most people understand the dire straits we're in. At some point it's going to be "everybody for themselves" and that's when I think the current system is going to fall apart.
I foresee maybe several stages of this crisis unraveling and that's why I say it's going to take about a generation. As I said, the first one is the big debt crisis we have now. Maybe an extension of it will be some sort of a currency crisis. It's not just a dollar that won't be worth anything, but most other currencies as well. And then I believe what's going to really, really change the environment and exacerbate the situation will be an oil crisis. I do expect oil to hit a new all-time high, say, by 2011. So within two to three years I would think that's going to happen.
Suppose three of us represent countries. One has oil, the other has wheat, and I have copper. If I want to buy your oil, I go back to my printer and print up as much money as I can and buy your oil. Well, the one with the wheat will do the same thing, print up as much money as possible and try to buy your oil. At some point people will stop accepting these currencies, whatever they are, because there's no limit to them. Money is printed like leaflets. There's no backing to it. When we get to the stage where there isn't enough to go around—like you go to a gas station and you can't get all the gas you need—the reevaluation will be forced on the market and will be forced on all the players. So, unless you have something else to offer, something of substance other than your paper money, I don't think you're going to get any of whatever it is you're looking for.
Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it's going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don't think it's going to be paper. That's my longer term outlook.
As for precious metals, the trick here is gold and silver markets are not based on large amounts of buying. Let's say tomorrow Warren Buffet says he's going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we're not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.
It is important to remember you don't want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won't take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.
Today's metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it's worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don't believe in the rational market theory. I think the market is always wrong in the short term.
If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don't endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
