Exclu­sive Inter­view
Nick Bar­ish­eff,
Pres­i­dent and CEO,
Bul­lion Man­age­ment Group Inc.

This week we inter­view Mr. Nick Bar­ish­eff, Pres­i­dent & CEO, Bul­lion Man­age­ment Group, and dis­cuss with him the impor­tance of gold bul­lion. Mr. 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.

For a PDF version, click here:[PDF] Inter­view with Nick Bar­ish­eff, BMG Inc.  Here is the inter­view: 

GreenLightAdvisor.com: What’s the most impor­tant thing peo­ple need to under­stand about gold?
 
Nick Bar­ish­eff: Many peo­ple think gold is a com­mod­ity like cop­per, zinc or pork bel­lies, but it has 3,000 years of his­tory as money. It was money that no gov­ern­ment cre­ated by edict.  It was just adopted for usage by itself, and it was and still is the best form of money.  Cur­rently, we have a 37-year global exper­i­ment in paper money.  All prior paper money exper­i­ments ended in hyper­in­fla­tion, with the cur­ren­cies becom­ing worth­less.  All pre­vi­ous hyper­in­fla­tions 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.

Right now, the price of gold is ris­ing while most cur­ren­cies are los­ing pur­chas­ing power as well as their value against gold.  Gold comes back into its mon­e­tary role when there's a loss of con­fi­dence in the finan­cial sys­tem or in paper money, and that's when peo­ple are attracted to it.
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. Then things changed.  As the US was get­ting into the Viet­nam War and into Pres­i­dent Johnson's pol­icy of guns and but­ter, US gold reserves started declin­ing.  Coun­tries hold­ing dol­lars were pre­sent­ing their US dol­lars and ask­ing for gold in return, and that led to US gold reserves drop­ping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, Pres­i­dent Nixon “closed the gold win­dow” and stopped the exchange of US dol­lars for gold.  Clos­ing the gold win­dow was a euphemism, but basi­cally the US declared bank­ruptcy. When you can’t meet your oblig­a­tions when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat cur­rency mon­e­tary system.

Since 1971, when the dol­lar was freed from the con­straints imposed on a cur­rency backed by gold, the US has expe­ri­enced increas­ing fed­eral gov­ern­ment and cur­rent account deficits.  The US is now bor­row­ing $800 bil­lion annu­ally to fund its con­sump­tion of foreign-made goods and com­modi­ties, and the fed­eral gov­ern­ment is run­ning a deficit of almost $350 bil­lion.  At some point, for­eign­ers will become unwill­ing to con­tinue fund­ing US expen­di­tures, forc­ing the Fed­eral Reserve to expand the money sup­ply at a faster pace.  This will result in ris­ing infla­tion, ris­ing inter­est rates and a con­tin­u­ous decline in the US dol­lar.
 
GLA: We’ve had the fastest money sup­ply growth in almost 40 years that’s result­ing in increased infla­tion. Why would an investor want to go into T-bills, given that inter­est rates don’t even cover half of the stated infla­tion rate, which we know isn’t even the real infla­tion rate?
 
NB: For the first time in his­tory, we have an unlim­ited abil­ity, by all cen­tral banks, to print,  how­ever much money we want, so to speak.  Apart from the US M3 money sup­ply grow­ing at about 20%, we also have India and China grow­ing theirs at about the same rate. China is at 18%, India is at 20%, and Rus­sia is at 45%. As China or India sell goods to the US, they take in US dol­lars and they print yuan or rupees against those US dol­lars.  Japan's a lit­tle dif­fer­ent; there, indi­vid­u­als and cor­po­ra­tions can take their US dol­lars and buy US assets them­selves. In China you have to turn your US dol­lars in to the cen­tral bank.

In today’s infla­tion­ary envi­ron­ment, many who invest in fixed income invest­ment do not appre­ci­ate that instead of being “safe” invest­ments, they are in fact guar­an­teed losses of pur­chas­ing power when you take infla­tion and tax­a­tion into account.  We have done some analy­sis into a sys­tem­atic with­drawal from our Fund for those investors requir­ing income.  Based on the fact that pre­cious met­als have a long track record of stay­ing ahead of infla­tion, an investor would be far bet­ter off in pre­cious met­als in terms of main­tain­ing prin­ci­pal after infla­tion and hav­ing more after-tax cash flow to spend.
 
GLA: What did you think of John Embry’s (Sprott Asset Man­age­ment) recent arti­cle about the manip­u­la­tion of the price of gold? His asser­tion was that the cen­tral banks are delib­er­ately keep­ing gold below $1,000 per ounce.
 
NB: John and Eric Sprott have recently writ­ten an exten­sive report called Not Free, Not Fair.  The report brings forth a great deal of evi­dence that the pre­cious met­als mar­kets may be manip­u­lated.  While it may seem like there’s a con­spir­acy to sup­press the gold price, I think it’s sim­pler than that.  It's a well know fact that it is the job of cen­tral banks to man­age their country’s cur­rency, that’s part of their man­date.  Cen­tral banks under­stand that gold is a cur­rency, but one that they can't expand as eas­ily as paper money.  I don’t think there is any lack of under­stand­ing on the part of cen­tral bankers that gold is an alter­na­tive cur­rency.
 
GLA: Isn’t gold con­sid­ered to be just a com­mod­ity with no real mon­e­tary role any­more?
 
NB:  I'd like to refer to an arti­cle by Tony Fell , and it’s par­tic­u­larly inter­est­ing, given that he was chair­man of RBC Cap­i­tal Mar­kets at the time of writ­ing. He talks about how gold has three attrib­utes: it’s a com­mod­ity, a store of value and a cur­rency. He says so many peo­ple now think of gold only as a com­mod­ity or jew­ellery, or as an archaic relic, that there’s a feel­ing of “who needs it any­more?”  Peo­ple don’t think of it as money.
 
How­ever, the daily sales vol­ume gives a con­clu­sive indi­ca­tor that gold is much more than an indus­trial com­mod­ity. The phys­i­cal turnover of gold by mem­bers of the UK’s Lon­don Bul­lion Mar­ket­ing Asso­ci­a­tion is about *$25 bil­lion per day. We’re talk­ing about net turnover between the LBMA mem­bers. The vol­ume is esti­mated at 7–10 times that amount. 
 
It’s pretty clear that these are cur­rency trans­ac­tions. That's why gold, sil­ver and plat­inum trade on the cur­rency desks of all the banks and bro­ker­ages, not the com­mod­ity desks.
What peo­ple need to know is that gold is a cur­rency [like dol­lars or euros or yen]. Gold is not trad­ing at these vol­umes as a com­mod­ity or as some archaic relic.
 
GLA: What are your thoughts on tech­ni­cal analy­sis, given that gold is a cur­rency?
 
NB: Tech­ni­cal analy­sis works if you’re look­ing at widely dis­trib­uted stocks like the S&P 500, for exam­ple, where there are many, many trans­ac­tions that accu­rately reflect pub­lic sen­ti­ment. The price of gold, how­ever, can be impacted by one coun­try, or one very wealthy indi­vid­ual who wakes up one morn­ing and decides to buy, and then you can throw the charts away. Or when a gov­ern­ment decides to sell or a gov­ern­ment inter­venes. I’ve looked at tech­ni­cal analy­sis for gold in the past and tried to back-test with var­i­ous tech­niques and found that they don’t work more often than they do.  In the most recent case, there is no jus­ti­fi­ca­tion for the drop in gold price; it should have been ris­ing because noth­ing has fun­da­men­tally changed. In fact, the fun­da­men­tals got worse and the gold price should have ral­lied.  None of the prob­lems went away; noth­ing was solved; the con­di­tions are as bad as or worse than they were pre­vi­ously. So the drop in gold’s price has been a false decline.
 
GLA: So, it’s the value of paper cur­rency that changes, not the value of gold [so to speak]?
 
NB:  One of the attrib­utes of gold as money is that you can't sim­ply cre­ate it at will, like paper money. It’s no one else’s promise of per­for­mance and it’s not some­one else’s lia­bil­ity. It’s not going to zero, no mat­ter what.  And, whether we're mov­ing the mea­sur­ing stick of infla­tion or defla­tion really doesn't mat­ter, because the way gold should be mea­sured is in terms of pur­chas­ing power.  It doesn't mat­ter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its pur­chas­ing power in either cir­cum­stance.
 
The first impor­tant step in the big pic­ture of under­stand­ing gold is that it is a store of wealth with a 3,000 year his­tory, and it’s money. Over the long term, it retains its pur­chas­ing power. That's why they say that an ounce of gold will always buy a man's suit.
 
Apart from that, the US dol­lar is down 85% in pur­chas­ing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce.  With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy sev­eral cars or a lux­ury car with 100 ounces, and a man­sion with 1,000 ounces.  You could also buy more units of the Dow Jones Indus­trial Aver­age with your ounce today than you could in 1971. So that ounce has pre­served its pur­chas­ing power while cur­ren­cies have lost over 80% of their value.
 
GLA: Appar­ently, in the last 40 or 50 years, there’s only been three years that there was net sell­ing by gold investors, three years out of almost half a cen­tury. Is this true?
 
NB: Peo­ple who hold bul­lion tend to hold it for a long time, as the core of their entire wealth.  It’s not sold once you under­stand its basic char­ac­ter­is­tics, because you have to have a rea­son to sell it, you have to use it to buy some­thing bet­ter.  I tend to look at invest­ment per­for­mance as to whether I end up with more gold ounces or less gold ounces rather than per­cent­age returns; you get a dif­fer­ent con­clu­sion then. For exam­ple, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.
 
This cur­rent cycle is not a con­ven­tional bull mar­ket in pre­cious met­als; I think we’re in the midst of a change in the global mon­e­tary sys­tem. This is not going to be like a typ­i­cal com­mod­ity cycle where we go up for four years and down for four years; I think we’re wit­ness­ing a tran­si­tion into another mon­e­tary sys­tem, what­ever form that may take. At the end of this period the US dol­lar will no longer be the world’s reserve cur­rency.
 
GLA: What hap­pens if the US dol­lar ceases to be the stan­dard?
 
NB: What hap­pened when the British pound ceased to be the stan­dard?  It just ceased to be the stan­dard.  Its decline in value is still ongo­ing.  It’s hap­pened to every empire through­out his­tory: the British, the Roman, the Greek, the Span­ish, the Per­sian, and the Chi­nese. Every sin­gle empire ended up debas­ing their cur­rency in order to main­tain the empire.
 
GLA:  Is gold likely to increase fur­ther going for­ward or has it topped and investors have missed out?
 
Cur­rently, we have a lot of noise in terms of the credit con­trac­tion, real estate bub­ble, record high debt at all lev­els, dan­ger­ous deriv­a­tives vul­ner­a­bil­i­ties and unsus­tain­able US cur­rent account and trade deficits.  These could still blow up into big­ger prob­lems at any time. How­ever let’s hope they get resolved or at the very least post­poned some­how.
 
But there are two fac­tors that are not change­able in all of this.
 
First: The US has to print money on an accel­er­at­ing basis. Has to – because of the under­funded Social Secu­rity and Medicare oblig­a­tions – which at present are about $60 tril­lion. If you took all of the net earn­ings of US indi­vid­u­als and com­pa­nies it would not be enough to pay that off. You can’t tax peo­ple enough and polit­i­cally you can­not tell every­body, “Sorry, we can’t give you your Social Secu­rity – we don’t have the money. And no Medicare either.” So they have to keep print­ing money.
 
Sec­ond: The issue of Peak Oil – it used to be a debate as to when the pro­duc­tion of oil would peak. Now it looks like that has already hap­pened, in March 2006.  As a result we have a sit­u­a­tion where oil pro­duc­tion is declin­ing while demand is increas­ing, par­tic­u­larly from India and China.  This will result in ever-increasing oil prices, and also increas­ing prices for almost every prod­uct and ser­vice.
 
As these two forces – increased money print­ing and peak oil – inter­act, the result is a declin­ing dol­lar along­side con­stantly increas­ing oil prices.  This leads to even greater oil price increases in an effort to off­set the dol­lar decline.  These two highly infla­tion­ary fac­tors are work­ing in tan­dem, and they can’t be changed.
 
There­fore, as oil rises and the dol­lar declines, com­modi­ties – and par­tic­u­larly pre­cious met­als – will con­tinue to rise.
 
GLA: What’s the rela­tion­ship between oil and gold?
 
NB: There’s not nec­es­sar­ily a great deal of cor­re­la­tion between the two in the short term. How­ever, in the longer term, the cor­re­la­tion has been in the order of about 16 bar­rels of oil for every ounce of gold.
 
GLA: Has that been con­sis­tent long term and what is the out­look for pre­cious met­als?
 
NB: With only short-term fluc­tu­a­tions, this ratio has held up over the long term. At this point the price of gold is under­val­ued com­pared to the price of oil. Gold should be closer to $1,500 an ounce if you use this mea­sure.
 
On top of this kind of infla­tion­ary issue erod­ing finan­cial con­fi­dence, we’re at peak pro­duc­tion in gold. When the price of gold was low, min­ers employed high-grading to get the most eas­ily attain­able gold out of the ground. As the price rises, min­ers resort to lower-grade min­ing, which has become worth­while – but in some cases you have to sift through tonnes of ore for each ounce.
Plat­inum, for instance; it takes six months to get an ounce of plat­inum out of roughly 10,000 tonnes of ore. Right now, almost all the plat­inum pro­duced orig­i­nates in South Africa, and the mines are miles under­ground, and elec­tric­ity inten­sive. Power short­ages in South Africa are inter­fer­ing with pro­duc­tion and slow­ing things down. All these forces are com­ing together, slow­ing pro­duc­tion and dri­ving up prices.
With sil­ver, most of the above­ground reserves have been depleted – most of the sil­ver that is pro­duced is con­sumed each and every year. Sil­ver also has two demand dri­vers – mon­e­tary and indus­trial. The num­ber of indus­trial appli­ca­tions are grow­ing every year while the mon­e­tary demand has also been grow­ing in the past few years. It is impor­tant to remem­ber that “sil­ver” means “money” in sev­eral lan­guages.
 
GLA: Why is gold so impor­tant as an ele­ment of diver­si­fi­ca­tion for investors?
 
NB: Take a look at the cycle from 1968 to 1982 – dur­ing that time it took stocks the whole 14 years to break even.  If you fac­tor infla­tion into it, it actu­ally took until 1995. So stocks didn’t look so good in the past cycle, and they are not look­ing very good now. The DJIA is well below its inflation-adjusted highs. Its per­for­mance is much worse when mea­sured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs.  It’s like tak­ing the Zim­babwe stock mar­ket and say­ing, “Look how well Zim­bab­wean stocks have done; the mar­ket was up 8,000%.”  But what if we adjust for the 100,000% infla­tion in that coun­try? Not so good, is it?
 
BMG Bul­lion­Fund is inter­nally diver­si­fied.  We buy phys­i­cal gold, plat­inum, and sil­ver in equal amounts. While some peo­ple like to focus on gold, they would miss out on the fact that sil­ver and plat­inum have both out­per­formed gold since the begin­ning of this cycle in 2002.
 
GLA: What do you do about infla­tion?
 
NB: First, it is impor­tant to look at real infla­tion. What is real infla­tion? The real num­ber is around 9%, not 3%. The cal­cu­la­tions the gov­ern­ment uses for the Con­sumer Price Index (CPI) are really mean­ing­less as a true infla­tion indi­ca­tor. The real def­i­n­i­tion of infla­tion is an increase in the money sup­ply that leads to an increase in prices. Prices do not increase on their own unless you have a short­age; when you increase the money sup­ply, what you’re really doing is debas­ing the cur­rency, and as the pur­chas­ing power of the cur­rency declines prices appear to be ris­ing. So with the US money sup­ply (M3) grow­ing at 20%, Canada’s grow­ing at 9%, and most other coun­tries’ grow­ing at around 15%, that’s going to result in ris­ing prices and real infla­tion.
 
If you take real infla­tion into account, Wain­wright Eco­nom­ics sug­gests that the appro­pri­ate bul­lion allo­ca­tion for a bond investor’s port­fo­lio is 18%, and for the equity investor’s port­fo­lio 40%, and that’s just to break even with infla­tion. Although this may sound incred­i­ble, think of the 1970s. How much bul­lion was required just to break even in an equity port­fo­lio?  Bul­lion went up 2,300%, while equi­ties were flat on a nom­i­nal basis. Infla­tion was 15%.
 
So with­out even get­ting wrapped up in a dis­cus­sion about the com­plex sub­ject of money, those two points are fairly straight­for­ward. Ibbot­son Asso­ciates con­firmed that pre­cious met­als are the most neg­a­tively cor­re­lated asset class to the tra­di­tional finan­cial assets, so it gives the biggest bang for the buck for the least amount of allo­ca­tion. In the process you also achieve a more bal­anced, diver­si­fied port­fo­lio. Advi­sors would do well to have an allo­ca­tion to pre­cious met­als to pro­tect their clients from under-diversification.
 
GLA: Do you think this pull­back in gold is an oppor­tu­nity to add to posi­tions at this time?
 
NB: Yes as long as there hasn’t been a major change in the fun­da­men­tals that drive the price. When these pull­backs occur, you always get some tech­ni­cal inter­pre­ta­tions, whether it’s con­ven­tional tech­ni­cal analy­sis or Elliot Wave, com­ing out with the idea that the bull mar­ket in pre­cious met­als is over and that it’s now going down for­ever and so on.
 
When these things hap­pen, you have to ask if any­thing changed fun­da­men­tally to jus­tify that decline.  If noth­ing changed fun­da­men­tally, the only con­clu­sion you can draw is that something’s wrong in the tech­ni­cal inter­pre­ta­tions.  In all like­li­hood the tech­ni­cal inter­pre­ta­tion is wrong because there’s been an inter­ven­tion by mon­e­tary author­i­ties. Tech­ni­cal analy­sis only works when the mar­kets are work­ing freely.
 
GLA: Well, what­ever it is they’re try­ing to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, sil­ver up close to 19% and plat­inum prices over 30%.
 
NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a sub­stan­tial increase, and performance-wise, we’re about 20% year-to-date.
 
GLA: Thank you very much for shar­ing your knowl­edge with us.
 
*All amounts expressed in US dol­lars, unless oth­er­wise noted.
For a PDF version, click here: [PDF] Inter­view with Nick Bar­ish­eff, BMG Inc. 
  

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Comments

One Response to “Interview: Nick Barisheff, Bullion Management Group Inc.”

1. Claude Croteau Says:
   June 18th, 2008 at 10:15 am

   very inter­st­ing comments