‘$5,000/ounce gold a reasonable target’

In a world where most investment classes are taking a knock, gold has been firmly on the way up. The way things are going, $5,000 an ounce (one troy ounce equals 31.1 grams) for the yellow metal maybe a reasonable target in a few years, says John Rubino, co-author of The Collapse of the Dollar and How to Profit From It, first published in 2003. The metal is currently quoting at $911 an ounce. Rubino spoke to DNA Money on the inverse link between the US dollar and gold.

You first forecast the fall of the dollar and the rise of gold way back in 2003. What made you come up with that prognosis?
I had spent the past couple of decades involved one way or another with financial bubbles, including gold in 1980, junk bonds (as a Wall Street analyst) in the 1980s and tech stocks (as a columnist with TheStreet.com) in the 1990s. So I was familiar with the characteristics of bubbles, and it was clear that housing was a classic bubble. Prices were soaring, people were borrowing insane amounts of money based on the premise that prices would keep rising, and traditional business practices were being tossed overboard in favour of “innovations” that were really just cons designed to get more deals done.

It was an easy call, in other words. It was also clear that housing was part of a bigger bubble, the dollar bubble that had been inflating since the 1970s. Gold, as a type of money that can’t be created in infinite quantities by governments, would likely benefit when the dollar bubble popped. So far, things are playing out according to that script.

The US dollar, in spite of all the printing that is happening, still seems to be holding strong. How do you explain that?
The dollar’s strength is a perverse result of so much dollar-denominated debt being created in the past couple of decades. As hedge funds, for instance, are forced to liquidate their investments, they have to pay off dollar-denominated debts, which means they have to acquire dollars. This drives up the exchange rate of the dollar. 

The other reason for the dollar’s strength is the fact that old ideas die hard. The belief that the dollar, as the currency of the world’s economic superpower, is a safe haven, drives investors around the world to accumulate dollars in times of crisis. Very soon, this will be shown to be an outdated idea, as US finances deteriorate to the point where no one considers the dollar a safe haven.

The only solution that the US government seems to have for all the financial troubles is printing more and more dollars…
It may seem to work for a while, as all those newly printed dollars offset the collapse in asset values and bank balance sheets. But that period of relative calm will turn out to be the eye of the storm.
When the growing mountain of paper currency causes the dollar’s value to collapse (against real things such as gold and oil, if not against the other paper currencies), then we’ll enter the next, much more serious stage of the financial crisis, in which falling currencies will push up long-term interest rates, which in turn will crush what’s left of the world’s financial system.

The British are also running the printing press big time. How will they pay for it?
The pound will fall in value until no one wants to hold it. To the British, it will feel like accelerating inflation as their currency buys less and less. But sterling isn’t unique. All paper currencies are heading the same way, just at varying speeds.

European Union seems to have held out against the idea of printing more euros…
There’s no way to know exactly when an oversupply of currency will cause a financial crisis. But eventually it will. The Euro Zone looks especially vulnerable because it’s made up of countries in vastly different situations. Germany can temporarily bail out Spain and
Greece, but eventually the system looks likely to spin apart, with hard-to-predict — but clearly dire — results for the euro.

Do you think the euro will survive?
I think virtually all paper currencies will die in the coming decade. The euro will fail when the Euro Zone spins apart, with the constituent countries going back to their old currencies, and those currencies will then be inflated away. Eventually, we’ll realise that the whole concept of government controlled currency is unworkable.
How much more money do you see the governments across the world printing?
Infinite amounts. They’ll run the presses until the global markets abandon these currencies.

The US government right now wants its citizens to start borrowing and spending money all over again in order to revive the economy. This, after the current crisis happened because of people borrowing more than they could repay. As one columnist recently put it, “The Government’s Cure for Alcoholism — Whiskey, More and More Whiskey.”

We’ve reached the final stage of currency destruction: “inflate or die”. The government sees no choice but to try to revive the old borrow and spend system, even though soaring debt levels make that impossible. The inevitable result is a currency crisis of historic proportions.

The feeling among a lot of experts right now is that the US dollar and the US treasuries are the biggest prevailing bubbles. Do you see a catalysing event that will lead to the outright capitulation of the US dollar and the US treasuries?
There are lots of possibilities. Another war (Israel or Iran would do it) or the collapse of another part of the financial system (though it’s not clear what’s left after Citi, AIG, etc) might do it. But even without an external catalyst, the sheer weight of all the new dollars being created will eventually cause a supply/ demand driven collapse. It’s inevitable at this point. The only question is when.

What are your views on the US government trying to rescue financial institutions?
We’re at the point where whoever needs money gets it. Since paper money isn’t real — it’s just a computer entry — the numbers have lost any meaning, and governments can just hand cash to anyone. This is a completely predictable stage in the death spiral of fiat currencies, and it will continue until the market stops it.

Which way do you see AIG and Citigroup heading?
They’re bankrupt, but can be kept alive as “zombie” banks for as long as the government wants to give them taxpayer cash. Again, the process contains the seeds of its own destruction. When the dollar begins to slide and interest rates go up, we’ll see another massive die-off of financial institutions. Can’t say which will die, but it’s safe to predict that many will.

Is investing in gold the right investment decision now?
Yes. Gold is the money that societies have used for thousands of years, so we tend to fall back on it when other forms of money fail. It can’t be created in infinite quantities by profligate governments, and so tends to hold its value. When the dollar is being inflated away as in the 1970s and today, astute investors swap paper for gold, which send the price of gold up in dollar terms. That’s happening now, and will accelerate in the future.

What price do you see gold rising to over the next one year, three years and five years? 
Timing is impossible to predict, but $5,000 an ounce is a reasonable target a few years hence. It’s crucial to understand that this is because the dollar lost value rather than gold changing in the same way. It’s unchanging, while the paper currencies in which it’s valued go down due to oversupply.

How will we know when the dollar has bottomed and gold peaked?
That will be the question on everyone’s mind in 2012. The general answer is that paper currencies will bottom when the world’s governments learn to limit themselves to what is absolutely necessary, rather than trying to do everything voters want and then borrowing to make up the difference. This will happen via the ballot box or via the market (with everyone abandoning national paper currencies), but it will happen. The question is when, and right now that’s impossible to predict

Do you see big institutional investors moving to gold, or are they still holding on to US treasuries?
They are doing both at the moment, but the momentum is clearly with gold. Soon, there will be a stampede out of treasuries and into tangible assets. Bonds will be the next great bear market, which is the same thing as saying long-term interest rates will spike.

What is your prognosis on silver as an investment?
If anything, better than gold’s. It’s in extremely limited supply, so just a few billion dollars flowing into physical silver will send it through the roof. $50 an ounce is very easy to envision.