Brien Lundin: the Fed, the Dollar and Precious Metals

Brien Lundin, publisher of Gold Newsletter, sat down with Maurice Jackson of Proven and Probable to discuss precious metals and their relationship with recent Fed actions and the dollar.

Maurice Jackson: Joining us for a conversation is Brien Lundin, the president of Jefferson Financial, helping to protect your world.

Please tell us about Jefferson Financial and what type of services you provide.

Brien Lundin: We are essentially a provider of investment information. We publish Gold Newsletter, which is the oldest precious metals advisory in the world, having been started by Jim Blanchard in 1971 as a way for him to advocate for the return of gold ownership, legalized gold ownership to American citizens. And I also produce the New Orleans Investment Conference, an annual event that Jim Blanchard also started in 1974 after he was successful in helping to get gold legalized. He had an investment conference to teach American investors how to buy gold, how to invest in the gold markets, and silver, and it's been going on ever since. We have the oldest, and I believe the most respected investment event out there.

Maurice Jackson: We brought you on today to get your insights on a number of topics, and I would like to begin our discussion with the Federal Reserve and its commitment to increase interest rates and reduce its debt obligations on its balance sheet. I have to begin by asking you, is that even possible for the Fed to unwind its balance sheet?

Brien Lundin: Well, it can unwind its balance sheet, I think the key question is at what pace it can simply let the obligations run off as they mature, which would take quite literally decades for that to happen. But the key is, can the Fed do it without unforeseen, or dangerous consequences to the U.S. economy and stock market. And frankly I don't think it can, as it increase its balance sheet as it was the buyer of last resort to keep interest rates low. And as the Fed had, as you know, an unprecedented program called Quantitative Easing, which was just money printing, all of this to support the market. We saw the effects in not retail price inflation as many of us feared, but in financial assets inflation, which to be fair, was their goal all along.

On the way up, as the balance sheet was rising and as quantitative easing was hitting its stride, the correlation between the Fed's balance sheet and the S&P 500 was around 97%, so the Fed inflated the stock market, bull market. It was directly behind it.

And the question now is, if they had that much of a correlation on the way up, well, now that they're on the way down, are we going to have a similar correlation? And I think the events of the week when the DOW lost over 1,400 points over a couple of days is powerful evidence that the Fed won't be able to get away with it without some dire consequences in the equity markets.

Maurice Jackson: Speaking of those dire consequences, from a macro perspective, what type of impact are the Fed's decisions having on global markets? And should we be concerned about contagion and capital flight from peripheral markets?

Brien Lundin: Well, it's actually attracting some money to the U.S. because you have, on a relative basis, higher rates in U.S. treasuries than you have in similar instruments in Europe and elsewhere. So it is attracting money and helping to support the dollar, but I don't think it's making the dollar strong. If anything, it's preventing the dollar's decline because the Fed wants rates to rise now, it really can't do it much longer for a number of reasons.

First , the Fed is going to crater the economy if it gets rates to high. Second, we can't, because of the large debt loads we have right now; the U.S. simply cannot bear the burden of higher interest rates while we have this kind of a debt burden. If interest rates got to historic levels, and by historic levels, I'm talking of 10, 15 years ago where the interest rate burden on the Federal debt was on the order of 5-6%. If we got to those levels again, then the interest burden on the federal debt would be on the order of $1.2 trillion. And that's far greater than the whole deficit is right now.

So, I just don't think that's politically possible. So if we're looking at interest rates of 5-6% on the Federal debt, we're talking about a Fed funds rate that probably around 3%. I think that's the upper limit.

Maurice Jackson: You referenced the U.S. currency's decline. You know the U.S. for all intents and purposes is in a trade war. And President Trump recently shared he's not in favor of the Fed's recent rate hikes. Is the Fed jeopardizing his position in discussions with his adversaries in the trade war?

Brien Lundin: I don't think his trade war really affects that so much. I think one of the reasons why Trump is out there bemoaning and belittling the Fed so vociferously is because he's looking for an excuse in case the economy starts downward. Or in case there's a serious stock market decline. He wants to be able to blame it on someone except himself, and the Fed will be the obvious target. So he's kind of setting the table for that, I believe. Plus he's obviously in favor, and his administration is in favor, of low interest rates and debt. I think that's what we're going to keep getting.

Maurice Jackson: Now when do you foresee the Fed's rate hikes ending? And what may be the effects upon the conclusion, long term?

Brien Lundin: Well, if the upper limit is around 3%, that means we have about three more quarter-point rate hikes ahead of us. If the Fed does one in December, which everybody expects, then that means it will only need a couple more to get to 3%, and that could happen in the first half of next year.

I don't think that's a widely understood or appreciated fact right now. I think there's some spark money that's been seeing that for some time, in realizing that the Fed is in the back half of its rate hike campaign, while other currencies, other central banks, like the ECB and the Bank of England, have yet to begin their rate tightening. But they are on schedule to do so very soon. So I think there's already been a shift in large money allocations from the dollar into the euro and the pound. And I think we're going to continue seeing that, and I think that's the reason why the dollar has not been able to, say, break out of the 95 range on the dollar index and why I believe the dollar will be headed lower over the next six months or so.

Maurice Jackson: Speaking of smart money, we like to remind our audience that we refer to money as physical gold and physical silver. Talk to us about the recent price movement in gold.

Brien Lundin: What's really been interesting about gold is that it has risen on a number of occasions recently when the stock market was crashing and yet the dollar was strong. Now typically that would argue that the buying is safe haven related. And, Maurice, I never like that as a driver for gold. I'm never in favor of that as a reason for gold to go up for any sustained period because these, the safe-haven type buying, these geopolitical political issues, these little flash crises, they come and go, and they don't provide a sustained driver for gold. What really drives gold over the longer term are concerns over monetary issues, concerns over debt and currency depreciation and the like, and inflation.

So when you see the dollar going up along with gold, that's a sign that the buying is safe haven related and probably not lasting. However, at the same time, and even on those days when the stock market was crashing, the gold stocks were rising. They were very strong and that argues for a more of a long-term approach to the gold buying. That's an indication that people are buying gold because they see longer-term monetary based factors at play. So it's a little bit of both right now, and I find it very interesting. It's going to shake out one way or the other, but what's encouraging is that we're seeing indications of both types of demand for gold. But both are contributing to higher gold prices. And in fact, if we can get enough of a gain in gold to spark a short covering rally, by all the short speculators out there, then I'll take that. That's fine with me. That could be enough to really start a longer-term rally in metals.

Maurice Jackson: I have to ask this as well. What prudent action should someone take, based on today's discussion regarding physical precious metals?

Brien Lundin: Well, they need to own physical precious metals. That's what I tell everyone; if you're a newbie to the sector, make sure you have your physical precious metals component, the foundation of your precious metals allocation. Make sure you have that in place, make sure you have it accessible. Don't put it in bank safe deposit boxes. Make sure you have access to it. I'm a big fan of small denomination silver coins that are junk, you know, old junk silver. As an important component of what somebody should own, but they need to get the physical component in place. That's the first thing, and even some experienced gold and silver bugs to the sector, they like to play around in the mining stocks, but a lot of them don't have that physical component in place.

And you really need to, that's your insurance, it's something everyone needs. And has to have an insurance against not the unforeseen, but against the inevitable.

Maurice Jackson: You said a lot of information there. I'd like to just recover there for a second. Number one you referenced not to have it in a safe deposit box. Could you please expand on that for a little bit?

Brien Lundin: One of the things you're insuring yourself against or hedging against by owning physical metals is a bank holiday. So if they lock the banks, how are you going to get to your precious metals? Now that limits your storage options, but there are still a number of options out there, including some in a personal safe, some in other security centers. And then if you're going to have a fairly large allocation of physical, you can have some in storage facilities both domestic and international.

I tell people that I have very good friends in the precious metal storage business. Yet, I still recommend that if you're going to have a substantial physical bullion investment, to spread your storage around, because you just never know. You never know what's going to happen in each specific company or facility. And that's a risk that you can easily diversify and really should.

Maurice Jackson: You know another fact that a lot of people aren't aware of, is the safe deposit boxes at your banks, are they FDIC insured?

Brien Lundin: No, they're not a deposit. So they're not insured.

Maurice Jackson: That is very important for for our audience to understand.

Brien Lundin: And they're not insured. The authorities have access to those with a subpoena. Interestingly, one of the things we discovered here in New Orleans during Katrina is that you should also not have a safe deposit box on the first floor of a bank. Because there are a number of safe deposit boxes in the New Orleans area that were under 12 feet of water for a weeks at a time after the hurricane. And they are not waterproof by the way, so a lot of these things you need to consider when looking to store precious metals and valuable documents.

Maurice Jackson: Another point you made was regarding mining stocks. I think a lot of individuals who are investors, particularly in the secondary market, are not aware that they can own physical metals, so they're under the impression that they own mining company that owns gold and that is incorrect. You are only basically a company that is mining, but they don't provide you the physical metal. When you purchase the stock, you're going to get back cash, you're not getting back the metal. Very important for us to understand here. If I may ask you this sir, we all have our favorites, of the big five, which are gold, silver, platinum, palladim, and rhodium, which ones have your attention and why?

Brien Lundin: Gold and silver primarily; the other three have large industrial components to them. So there are other factors, and they make good investments and good speculations in certain times, but gold and silver are the pure monetary metals. A lot of people talk about the industrial component to silver, but quite frankly, if silver was only valued on its industrial value, it would be $5 an ounce or less right now. So the rest of that margin or premium in its price is really monetary value. If you like gold, you have to love silver because silver is going to follow gold, but it's going to move more than gold in the same direction. So it offers kind of an innate leverage to the gold price. If gold's rising in terms of the fiat currency, silver's going to also rise but to a greater degree.

Now there's the downside of that as well; it's going to go more quickly to the down side in a down market. But it is something that I tell people they really need a hold, a blend of the two. But for your hedging against financial catastrophe or a steady devaluation of the dollar, you really need to own gold and silver primarily.

Maurice Jackson: May I ask you this as well? The gold-silver ratio, how does that factor in your decision on purchasing?

Brien Lundin: Well, I think it determines the health of a market more so than timing, perhaps a little bit about value, or the relative value of the metals. But when the gold-silver ratio is falling, that means that silver is outperforming gold to the upside. And that is the hallmark of a good, strong, consistent, sustainable bull market in gold. And when the opposite is in effect, then it's not positive, it doesn't reflect on strength in the metals in general. I don't don't recommend that people trade the gold-silver ratio, because if you say sell gold and buy silver because the ratio is falling, then you're mitigating your potential gains because they're both going to rise, or they're going to head in the same direction.

So if they're both rising and you're selling gold, you're cutting a good portion of your potential gains out of the equation. So I don't like trading your ratio, I like to look at it as a signal of the relative strength of the trend in one direction or the other.

Maurice Jackson: Interesting perspective, and thank you for sharing that. Switching gears, the New Orleans Investment Conference will be conducted November 1-4 in beautiful downtown New Orleans. Mr. Lundin, tell us about the world's greatest investment event? Who are some of the featured speakers and discussion topics?

Brien Lundin: Well, I touched on it a bit earlier. The conference has been around since 1974 when Jim Blanchard started it, and Jim was a fairly flamboyant kind of a guy. He really went over the top with inviting big name speakers to the conference, so we've inherited that legacy and try to burnish as best we can. And so we get speakers here that you won't see elsewhere, in general the line-up of speakers that we bring to our attendees is higher quality I believe than you'll find anywhere else.

This year we have Robert Kiyosaki, we have political commentators Mark Steyn and Jonah Goldberg. We have James Grant who is one of the most eloquent advocates for gold in particular, most eloquent commentators on the financial markets out there. We have Doug Casey, of course, who's always a big fan favorite. We have Peter Schiff, we have Dennis Gartman, Rick Rule. We have Guy Adami from CNBC who's a really interesting guy. We have Ben Hunt who writes a blog, and doesn't speak very often at conferences, but he has a blog that's widely read by some really smart people in the markets.

And then we've got dozens upon dozens of other speakers, experts in just about every sector, but with a particular emphasis on metals and mining stocks.

Maurice Jackson: What type of attendees usually attend the New Orleans Investment Conference?

Brien Lundin: Well, they are smart, number one, because you have to be smart to pick this event to come to it, because it caters to really smart investors. It also caters to self-directed investors; these are people who are independent thinkers, maverick thinkers, they're information hungry. They may have a large portion of their portfolio with money managers, but a large portion of their portfolio is directed by them, and according to the views that they have.

And the conclusions that they have after a lot of investigation of the markets and trends and listening to a lot of people. So it's a smart group. It's a successful group. One of the things I tell our attendees every year is that, yeah, we have great people, top of the line experts on the stage, but look around you. There are literally hundreds of very successful investors around you at this event. And I've never seen one of them who wasn't willing to share his ideas and strategies, you know? And best thoughts on the markets and where they're heading. So there's a lot of fantastic market intelligence just within the crowd at our event.

Maurice Jackson: There's a number of intellectual capital there at the conference. And speaking of the attendees, this will be my third year in attendance, and I have to admit I'm looking forward to meeting the attendees equally as I am to the guest speakers. The networking opportunities with some of the best minds all in one place is priceless. If you do not have your tickets, we welcome you to visit our website, provenandprobable.com and on the right hand column of the website you will see an image for the New Orleans Investment Conference. Click on the image, and you will be taken directly to the registration page.

Before we close, tell us about the gold newsletter and how we can retrieve your information on a regular basis.

Brien Lundin: Well, Gold Newsletter, as I mentioned, before is the oldest and I would say one of the most respected and successful newsletters or advisories on precious metals and mining stocks out there. Jim Blanchard started it in 1971, literally the day that Nixon closed the gold window. And it's an important history in the hard money movement in advocating for the very legalization of gold in America. So we have a long, illustrious history. We're trying to build on that every day, and we cover not only the economy, geopolitics and the kinds of things that affect all of the asset classes, but we do specifically focus on precious metals and what's driving them and we cover a number of mining stocks. Typically junior mining stocks that have the potential to rise when precious metals prices rise or on discovery of new deposits. So that's kind of our casino as, or where we have a number of high potential, higher risk for sure, but much higher potential investment opportunities.

Maurice Jackson: You know, Mr. Lundin, for someone that wants to get more information regarding Jefferson Financial, please share the contact details.

Brien Lundin: Well, for Gold Newsletter you can go to GoldNewsletter.com very simply, and for the New Orleans Investment Conference, NewOrleansConference.com, although I believe you'll have some links as well, Maurice, that will get people some special opportunities to the conference.

Maurice Jackson: I certainly will sir. And as a reminder for our audience, we are licensed brokers to buy and sell gold, silver, platinum, palladium and rhodium, off shore storage accounts, and precious metals IRAs. To have conversation, please email Maurice@MilesFranklin.com, or call 919-274-5680.

And last but not least, please visit our website ProvenandProbable.com, where we interview the most respected names in the natural resource space. You may reach us at contact@provenandprobable.com.

Brien Lundin of Jefferson Financial, thank you for joining us today on Proven and Probable.

Brien Lundin: Great to be with you.

With a career spanning four decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.

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