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Nick Barisheff Interview

May 16, 2012, 5:43 PM

Nick Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion. He uses his understanding of the precious metals markets to develop investment strategies, products and services for clients looking to integrate bullion into their portfolio. Sunshine Profits interviewed him recently.

Q: You call gold the “anti-currency” Can you explain what you mean by that?

Nick Barisheff: I guess there is a fine distinction between currency and money and most people use them interchangeably but they’re quite different. Gold, and silver to lesser extent, have been money for thousands of years. What we have today as money is currency printed in unlimited quantities by governments. If you want to see how currencies are doing, look at the race to the bottom of currencies as governments purposely debase them to make their exports competitive. Gold is outside the currency world as it is real money. Currency, while it is a convenient medium of exchange, is not a store of value. It only derives its value by arbitrary fiat, government decree and hence the term “fiat currency.” Paper banknotes represent money but they are not money. They are simply promissory notes whose long-term “value” or purchasing power depends entirely on the fiscal and monetary discipline of the government that issued them.

Q: Is the U.S. Dollar doomed as a reserve currency?

Nick Barisheff: If you look at history, there hasn’t been a single currency anywhere that hasn’t ended by going to hyperinflation and then becoming worthless. There are examples that go back to Rome where they had gold and silver coins. They started debasing them by adding base metals and got to point where there was no gold left in the coins. You see the same thing happening in terms of the US dollar as well. The amount of credit is starting to go hyperbolic. If the Fed loses control, you get to hyperinflation. All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless. All previous cases of hyperinflation were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature. So the issue is that we’re heading into a situation where, I think, in about 5 to10 years, possibly sooner, the U.S. Dollar will no longer be the world’s reserve currency and may not even exist in its present form.

Q. What will be the alternative?

Nick Barisheff: Fiat currencies don’t work because the king, emperor, president or prime minister eventually prints too much money if there are no controls. This is true for many countries, not just the US. It won't be the first crisis with the US dollar. Other currencies like the euro, yen, British pound, will have problems before the US has a problem. What will be the alternative is anyone’s guess. Gold would have to be about $10,000 an ounce for it to work as a reserve currency.

If you just take the M1 measure of currency in the US, you would have to have a price of $5,000 an ounce to make it work as a reserve currency. Or, if you take the M3, you would need over $20,000 an ounce of gold, many multiples of today’s price, for it to work.

Q: Is that practical?

Nick Barisheff: It’s as practical as anything else. The issue, as I look at it, is that even today the currencies all work very well as a medium of exchange where they are convenient for electronic banking, checks, debit cards, etc.. What doesn’t work is currencies as a preserver of wealth. Since 1971 when US went off the gold standard, the dollar has declined in terms of purchasing power by 90 %. You can use the currency as a medium of exchange to buy stuff. For preservation of wealth you need to hold gold. Gold is not an investment. It’s cash. A $100 bill loses purchasing power every day.

We’ve done some research work on this subject. In 1971, 100 ounces of gold would have bought you a car. Today you can buy three cars, or a top-of-the-line Mercedes. In 1971, 1,000 ounces would have bought you a house. Today 1,000 ounces would buy you three houses, or a top-of-line estate home. It’s just that way with everything. The only exception is oil. Oil went up at a higher pace than gold. (Editorial note: Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar. Other countries could trade their US dollars for gold. Essentially, US gold indirectly backed all other currencies.)

Q: Should gold have some sort of a role in global monetary systems as suggested recently by the President of the World Bank Robert Zoellick?

Nick Barisheff: In order for that to happen its value would have to be in the $10,000 to $20,000 range to at least control the amount of currency that you can print based on the amount of gold you have. Those are the kind of number you would need to make the system work. If the US dollar goes the way of all fiat currency to hyperinflation and than collapse, the question will be how to stabilize the new currency. In order for the new currency to have credibility you would need something more than to simply pass rules in Congress. It doesn’t seem to work because they have been doing that in Congress in terms of debt ceilings. When they reach the debt ceiling they increase it. You would need some hard tangible control of the amount of currency and credit that is created. So the issue is that without controls on the quantity of the currency, the politicians, the kings, the emperors as they’ve done throughout all of history, will eventually debase the currency into oblivion by creating too much of it. Furthermore, we have an even greater problem right now. It’s not just that the treasury department is printing money but the treasury department is actually issuing treasury bills and bonds and the Federal Reserve is printing the money. So the money is being created through debt, which is worse than just printing the since there is interest to pay.

Q: Do you see any monetary future for silver or platinum?

Nick Barisheff: We hold the three metals in our funds because all three have had monetary history, silver even longer than gold. It was considered a poor man’s gold. While gold was used by kings and emperors, silver was used by ordinary people. Platinum was used as money in Russia for 300 years. They have the second largest reserves of platinum in the world.

While it is true that industrial metals have been mostly outperforming gold until 2008, the situation has changed since then with exception of silver. Platinum is a different issue since 80% of production and reserve is in South Africa and the other 20% is in Russia. If there will be a disruption of supply in either country that would affect the price.

We saw that in the spring of 2009 when electrical problems in South Africa shut down the mines there was a spike in prices. The issue of industrial metals outperforming is largely “catch up” from 2008 when commodities took a pretty big hit. They have been in catch-up mode since then. Where gold basically was up 5% per in the year in 2008, silver and platinum were down considerably and they are in catch up mode since.

Q. What advice would you give someone who would like to enter the precious metals market now. Is it too late?

Nick Barisheff: The first reason why we’re not even close to “too late” is that we have 200 trillion in global financial assets and that doesn’t include real estate. Above ground gold amounts to 6 trillion. Three of that is not bullion, its jewelry, religious artifacts and a lot of it is in museums and so on. So what s left is 3 trillion of bullion and of that, 1.5 trillion is held by Central Banks that have become net buyers. What they have isn’t for sale and they're trying to buy more. A trillion is in private hands, mostly held by the world’s wealthiest families and they don’t tend to sell. What is going to happen when more people wake up and decide they want to buy gold when most of it is not for sale?

The second reason is that unless governments all over the world stop running huge deficits and stop printing money then it’s not too late to enter the gold trade. If you think governments are going to continue on their path, then you haven’t seen nothing yet.

Q: What percentage of the portfolio should be in precious metals?

Nick Barisheff: I think in today’s world you need 20 percent of your net worth in precious metals. Various studies say between 7% and 17 % as a long- term strategic allocation. If you think there is going to be inflation then a conservative approach would be 20%. Most investors have nothing. Most institutions have nothing. They're just starting. When they get to 10 percent you’ll have multiples of today’s gold prices. We’re actually heading into a condition much worse than the 70s from the point of view of the global currency crisis and from my point of view, I don’t see anything worth investing in. There’s no rule that says I have to be invested so when I hold gold I’m not invested, that’s just money. I’d rather just sit on my money and wait on an investment opportunity than to have a diversified portfolio.

Q. Physical bullion or ETFs and stocks?

Nick Barisheff: When people allocate gold they need to make sure that it's bullion and not a paper derivative. They need to hold fully allocate title documents that identifies the refinery and serial number of their bars of gold. If you don’t have a document with that information, then you don’t own bullion. You have an IOU from someone. You can’t hide bullion in the backyard. You need a credible facility in which to hold your gold.

Q: With regard to the Modern Portfolio Theory, would you say that gold can be used to "diversify the normally un-diversifiable risk", as it is also a hedge against the "systemic risk", meaning that bonds cannot substitute it?

Nick Barisheff: The only thing that can help you with systemic risk is precious metals because everything else, financial assets correlated in crises situation, they all go. In systemic crisis anything but precious metals does not give you protection.

Q: What about bonds?

Nick Barisheff: The important thing from a risk point of view, is that bonds have several levels of risk that don’t exist in bullion, one of which is default risk. So although people think that bonds are safe, I would think that the investors in General Motors bonds, for example, wouldn’t agree. So, investors should understand that gold will never go to zero, while financial assets have done so in the past and will do so in the future. In addition, the default risks associated with corporate bonds is now being manifested in sovereign bonds and that’s likely to happen across the board.

The second risk that you’ve got in bonds is credit rating downgrades. When the credit rating of a bond is downgraded, investors react by selling the bond, which in turn drives the price of the bond down leading to a loss of principle. So they’re risky in that point of view also.

The ultimate risk is that if you take true inflation into account, then bonds are essentially like certificates of confiscation, where they’re losing money day in and day out. Today the real rate of inflation is close to 9% and if you’re holding a 4% bond, it’s a guaranteed loss of 5% a year. All of those risk factors don’t exist in owning bullion.

Q: If diversification is useful when taking the portfolio allocation into account, what would you say about diversification of strategies - meaning dedicating most of one's capital for long-term investments (including physical bullion) and leaving some for short-term speculation?

Nick Barisheff: The Rothschild formula for long-term generation of wealth is to hold one third in precious metals, one third in farm land, and one third in stocks and bonds, if you buy them during a crisis event. That’s the long- term holding strategy that seemed to have worked for them.

Short term speculation is very difficult. We have looked at traditional technical indicators and they’re wrong more often than they're right, unless you’re really good at it it’s a dangerous strategy to do. Buy gold by cost averaging and just hold it.

Q: ETFs or Physical gold? How to buy it and where to store it? Do you consider geographical diversification here as important as well (keeping parts of one's holdings under different jurisdictions)?

Nick Barisheff: As far as ETFs go, you need to read the prospectus carefully and understand it. If you’re a trader ETFs work fine and they have options. But in terms of long-term wealth preservation, there are no ifs, buts or maybes. You need to own the bullion. Pieces of paper will become worthless.

Q: Can you compare gold and bonds as asset classes based on a risk and volatility?

Nick Barisheff: Bonds in today's world should be called “certificates of confiscation” since your principal is eroding by a larger amount than the interest you’re being paid. Defaults and credit risks can also devalue the bonds. Gold is not anybody else's liability or promise of performance. How would you like to own GM or Lehman Brothers bonds, or all the other bonds that people thought were safe. The principal is eroding from a purchasing power point of view every day.

Q: Where do you see gold and silver finishing in 2011? While we know it's impossible to provide a detailed prediction, we are still interested in your opinion on how high the current bull market can take gold and silver and when do you expect them to form the final top?

Nick Barisheff: I’ve said that for 2011 we should be looking $1700-to $2,000 gold. If we just do an average increase that we have had for the past five years, you get $1,700. If we repeat the performance in 2010, we get to $2,000 an ounce.

Hasn’t worked so far, and usually printing more money and creating more debt doesn’t stimulate the economy. You need to get people back to work and to create an environment conducive to entrepreneurs and business. Western world problem of outsourcing a lot of manufacturing has led to a growing and systemic unemployment, factories shutting down and lost jobs.

Real estate looks like it will be years before it's normalized and real estate is one third of the economy. Consumers are tapped out, credit cards are tapped out, people can’t use the house for refinancing as an ATM machine. Those with jobs are saving rather than spending. It will take quite a while to correct and we’ve got major problems on the horizon with peak oil. All the money spent should have been concentrated on preparing for the energy crisis.


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