Wasington, D.C. -- (ReleaseWire) -- 06/09/2015 --DAWN BENNETT: Jeff Snider is the Head of Global Investment Research for Alhambra Investment Partners, and as a part of that research effort for Alhambra, Jeff authors and has published numerous in-depth investment reports that run contrary to established opinion in many regards. In the year and a half run up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy in markets, and he was right. One of his most recent articles was titled 'Gold Price Moves Since QE3 Have Been a Warning to Mainstream Economists," in which he suggests that gold price activity since QE3 has been a warning rather than a cause for celebration. Jeff, thank you for being here.
JEFF SNIDER: Good morning, Dawn. Thanks so having me.
BENNETT: We've had a drop in gold price, from around $1900 an ounce in 2011 to today, which is approximately $1180, isn't it?
SNIDER: Yes, it's back under $1200 again.
BENNETT: Has the Fed been suppressing gold to make the dollar look stronger?
SNIDER: I'm not sure that's exactly the way I would look at it. Gold is a funny thing, especially nowadays, in the wholesale system. It's kind of a confluence between the economy and the wholesale marketplace for money. So the price of gold is somewhat tricky, in interpreting what it's saying and what it's doing, especially why it's moving in particular periods of time. And so you have to be careful about exactly what individual discrete episodes mean. And I'll give you an example. When gold fell in April of 2013, it crashed, essentially, and economists were very happy about that, because they assumed that that meant that the fear bubble had collapsed, and everybody was happy again, and it was tremendously optimistic about the economy and finance and all that. But what really happened was the dollar system, globally, the euro system, was running into a period of extreme stress. A lot of that had to do with QE3 and how that handles collateral trades and wholesale transactions, to the point where dollar conditions globally really tightened, and so what the crash in gold prices in April of 2013, and then again in June of 2013, suggested, was not that the economy was getting better, or that the dollar system was more optimistic about the way the world was going, but rather that the dollar system was tightening, and tightening dramatically, and that was a warning.
BENNETT: Given all of that, you might have expected that gold would go even lower, maybe?
SNIDER: Well, yeah. That's the other side of it. So that's the selling side. The selling side is the wholesale system, where gold acts as almost a collateral of last resort. On the other side, is the people buying. And I think in that respect, the economists and mainstream has been somewhat correct, in that the buy side is essentially insurance against various extreme risks. And so when people are buying gold, they're buying gold based on fears of what may happen. And since the peak in gold in 2011, the tendency of the buy side has dropped off a bit. So, you have less buying for less fear, and at the same time you have a lot of what looks like selling through the wholesale collateral system, and that's why gold prices have fallen.
BENNETT: If the price of gold is now linked, to some extent, to the lack of economic growth, do you suggest that investors avoid buying it, if we believe the economy is going to continue to slide in the second quarter?
SNIDER: No, I wouldn't suggest that at all. In fact, gold is still a tremendous hedge for everything that we're talking about, everything that you might be afraid of. But you have to understand, given the dynamics that are in place here, it's going to be tremendously volatile. Go back to 2008; gold collapsed three separate times in 2008. Now overall, start to finish, gold was much higher, but you have to hang in through the ups and downs to get there. So you have to understand that it's a long term process, gold is extremely volatile because of the way it's handled in the modern wholesale system, and that it's not a straight line from A to B.
BENNETT: You've explained some of these random slams on the gold price over the last few years, and the massive moves south that don't seem to connect to any specific economic data. As I said before, many have speculated that this may be the result of efforts by the central bankers at propping up the value of the dollar, and massive money printing campaigns. It seems like you don't subscribe to that interpretation.
SNIDER: I don't think it's a direct relationship, where the dollar and the economy are exactly equalized. And again, I think that's the way the wholesale system works. When we're talking about wholesale money, we're talking about the euro, dollars and things like that, maybe people don't understand the relationship, or how exactly that works out. So when the price of gold falls in relation to the dollar, what that suggests is that globally, bank balance sheets are constricting, they're tightening. There are less dollars on offer than there would be normally. There's a lot of reasons for that, but mostly I think in this episode, or at least since 2013, the fact that all of the assumptions and premises—that QE worked, that the Fed could engineer a global recovery—are starting to unravel. It started with QE3, and it's become worse as we've gone into 2014 and 2015, where you have not only financial tightening, but you also have no real economic recovery to support it. You know, you go back to 2009 and the crash and all that, monetary policy was implemented with the idea of just buying time, essentially. In other words, 'extend the pretend,' people have used that term. It works well here because central banks are just buying time with the idea that the recovery itself would just happen. And so going over time, it hasn't happened, and so slowly that's starting to creep into the calculation, where you have a bunch of financial factors and economic factors, all combining together into what is essentially a warning.
BENNETT: For people who want to predict where the gold price is going, what kind of data points do you tell them to look at today?
SNIDER: In the intermediate term, I look more at the dollar, because the sell side, the wholesale part of it, is going to direct where it is in the short term. But I think longer term, which is probably more important, you have to ask yourself, if we're correct about our interpretation of QE, the myths of QE are falling away. Are there going to be more people on the buying side? Is there going to be a return to the trend on the buy side, where people realize that there's a lot more risk than is being generally recognized? And so you have that side, I think, which is probably going to be supportive in the long run, where the hedge element of gold is going to probably increase much more than the downside and the dollar.
BENNETT: Some of the real gold bugs—people like Marc Faber—predict gold prices are going to skyrocket in the near term. Some even predict as high as $5000, although I hate to even use a number like that on the air. What do you make of forecasts like this?
SNIDER: You know, I don't think you can forecast anything in terms of gold. Whether the price will rise to $5000 or anything specific.
SNIDER: So what I think-- what makes sense to me, and what we do, is essentially try to identify risks and opportunities, and do it starting in general terms and try to get specific. But really it's-- you try to figure out what's on the up side, what's on the down side, and maybe a general probability spectrum for any of those factors. So when I look at gold now, I think a lot of the negative factors that depress the price—the problems in the wholesale dollar and all that—are probably at an extreme, and that may get reflected over time, and not necessarily right away, but with a diminished amount of people using gold as a hedge for tail risk, even today, I think there's a lot of room for that to grow on the up side.
BENNETT: What about gold stocks?
SNIDER: Gold stocks? Especially the miners, they're probably one of the most hated groups of stocks that there is.
BENNETT: But they're performing this year.
SNIDER: Yeah, and that might be a signal.
BENNETT: A signal for what?
SNIDER: That might be a sign that if you're going to start hedging in gold, maybe that's the place where there's the most extreme value to do it.
BENNETT: Is there a specific percentage you're suggesting to investors to allot for gold in their portfolio, and maybe even some other precious metals, like silver, which has had a pretty good run this year?
SNIDER: To me that's an individual case by case basis. But if you're seriously concerned about the markets and bubble risk, then your allocation needs to be significant; you can't have just a small allocation of gold and expect that to be a good hedge. But it really is defined by how much of a risk you have in other areas of your portfolio.
BENNETT: So you don't have a general number for people? Should everybody have some gold, 1 percent, 5 percent? And should it be gold in a gold ETF, or should it be gold in their homes?
JEFF: Well, not all gold ETFs are the same. GLD is perhaps the most popular, but it's not necessarily a physical ETF. I would prefer, for my clients, something like the Central Fund of Canada that has actual bullion, without any short flow, actual physical ETF. And there are also various ways you can buy actual bullion and have it still be liquid. So there are different ways to add gold to your portfolio that are pretty efficient.
BENNETT: A lot of mainstream economists deride gold as a non-performing asset. And you pointed that out, actually, in a column that you had on Zero Hedge, actually. Is there a way to make money with gold?
SNIDER: Well, you know, I think that's probably one of the things that mainstream economics has done most, is to demonize gold. And it's true that gold doesn't hold any internal cash flow, but if you're talking about portfolio management, the role of gold is as a hedge, and so whether or not it generates cash flow isn't really the point. The point is that it's going to perform during periods when you want it to perform; when things are really bad, it's going to be your best asset. So that's the real way to look at gold.
BENNETT: Is silver going to be your best asset as well?
SNIDER: Silver has a lot of potential. As a binary metal, it's a little bit more tricky, because there's an industrial component to take into account there as well. It might be positive for monetary factors, but negative for industrial factors, in the actual physical clearing of silver. So it's a little bit more tricky, and it's a little bit more high beta. Same thing with gold. It's not going to move in a straight line; it's going to be all over the place. And as long as you can handle that volatility, it should be a very good complement to gold.
BENNETT: I'm going to change tracks. On Friday you wrote a very comprehensive take down of why the latest jobs report really doesn't add up, and you noted that the establishment survey usually has some correlation with productivity, but not in the current era. Can you explain why we shouldn't be celebrating the latest jobs data?
SNIDER: Well, I think you have to start with the idea of what exactly the jobs data is. What does the monthly payroll report tell us? It's couched in terms where it tells us what are the number of payrolls in the U.S. economy, but that's not exactly what it estimates. What the BLS actually estimates month to month is something called chain variation. In other words, there are different components, and these are all statistical processes that they put together, that starts with something called trend cycle. And trend cycle is a subjective interpretation of where we are-- where the BLS thinks we are in the economy. So with that as a baseline, I think what the BLS has done is overestimate the trend cycle components, so that their upward variation is overstated. And that has caused a number of downstream calculations to be completely out of whack. And among them is productivity. Productivity, as a basic economic factor, is an important component of economic growth, and businesses want to see positive productivity before they hire more workers. That's just basic common sense. But because the BLS is, in my opinion, overstating the payroll benchmarks, productivity has been forced into the negative. And it's not just this quarter; it goes back five quarters, and even longer. Ever since 2009, the productivity figures are all over the place, which to me suggests statistical problems based on overestimation of the trend cycle component.
BENNETT: You have also suggested weak productivity signals rough seas ahead.
SNIDER: Traditionally in the historical business cycle, when productivity starts to fall and unit labor costs start to rise precipitously, that's usually a recession signal. Though, you know, from the perspective of the BLS, they have two interpretations; one that they've been very overt and optimistic on the payroll report, or we're heading into recession, neither of which are very good interpretations.
BENNETT: I think there's a huge and growing problem of low wages and unemployment here in the United States. I think it's a crisis for millions. And I think if millions of even young Americans don't start earning more money, they can't afford to have children or take care of them properly, and a bad sign for us as a nation. Do you think this demands government action?
SNIDER: I think it is the problem. Every other problem that we have derives from exactly that. It's probably larger than we appreciate, because if you look at the economy in terms of employment, we've had a problem, not since 2009 but since 2000, maybe even earlier than that, when you talk about wages.
BENNETT: What do you suggest the government could do? What would be a reasonable suggestion, let's say, hypothetically, if they were listening?
SNIDER: Well, there's obviously a problem with regulation and the tendency of government overreach into specific industries. I would also suggest that the Federal Reserve stop trying to manage the economy through markets, and that the idea of serial asset bubbles is one of the biggest problems that we have, in terms of businesses setting their economic course. So if you're going to classify what the problem is or what government could do is they need to get out of the way more.
BENNETT: Less government, more private sector?
SNIDER: Yes, and it's the idea that economists and government workers and government agencies can create optimal outcome. That's been a drive of economics and social sciences for a long time, and in particular, econometrics. The idea is that economists can create an optimal economy, and they've been trying to do that for 40 years. And the more they do it, the less they seem to be able to do it.
BENNETT: Today the cost of employing workers is rising quickly, as we stated. Are mandates like ObamaCare starting to take a toll on the economy?
SNIDER: You know, that's a difficult problem to quantify, but that is something that I've seen in interacting with the public. People have talked about that more and more. I wrote something about the consumer spending that looks like it's in a recession already, and people sent me comments, 'Well, yeah. Our healthcare expenses have exploded. How are we going to spend on anything else?' So that doesn't necessarily show up in a lot of the figures, because there are no figures for it. There's nothing we can compare it to historically. So it's an anecdotal story, but it's one that is almost ubiquitous these days.
BENNETT: Do you think central bankers, who I think are the ones responsible for the conditions you're describing regarding jobs, actually understand this phenomenon you've outlined? In particular, Yellen.
SNIDER: I think they understand the contours of it, but they're prevented from full recognition, because they're absorbed in their ideology. Every time one of their monetary programs fails, their response is not: 'We should do something different,' it's: 'We should do more of the same.'
BENNETT: Isn't that odd?
SNIDER: 2008 should have been a huge wake up for these people.
BENNETT: But it wasn't.
SNIDER: Because they messed up every step of the way.
BENNETT: Why do you think they respond like that? I mean, we're supposed to be half as smart as them, and I sit there and think, they just keep doing the same thing over and over again, and we're still getting the same bad results.
SNIDER: Again, it's the ideology of the discipline. They think of themselves as science and scientists, and so they have a set of hard rules that they say is what you're supposed to do. So every Central bank around the world follows this same textbook, and inevitably it fails, so they follow it to an even greater degree, rather than thinking: 'Well, the paradigm is wrong to begin with.' If you think about it just in personal terms, Ben Bernanke in 2008 didn't want to be the guy who let the world fail. So he wasn't going to sit back and let things happen. He felt that he had to take action, and his action was dictated by the monetary textbook. But you know, it's very difficult for these people, who are normal human people. I don't think they're evil; I think that they're just wrong. So they react as they feel that they're supposed to react, and they cannot understand why that might be wrong.
BENNETT: What's your take on Janet Yellen and the likelihood she'll raise rates in 2015?
SNIDER: I don't think she'll ever get that far, because I think the economy is weak and they know that it's weak. And the reason that they're so insistent on saying that they're going to raise rates is because they want to engender the specific psychology where everybody thinks that, 'Well, if they're going to raise rates, then the economy must be good.' And this goes back to something called rational expectations theory, where they feel that they have to project optimism above all else. And so by saying they're going to raise rates, they're projecting the optimism that they think the economy is great, but when reality is not, and so I think that prevents them from ever acting.
BENNETT: Jeff, thanks so much for being on Financial Myth Busting.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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