Basel III and Gold, Silver and Platinum
Commodities / Gold & Silver 2020 Sep 12, 2020 - 03:58 PM GMTBy: The_Gold_Report
Maurice Jackson of Proven and Probable talks with Andy Schectman of Miles Franklin Precious Metals Investments about macroeconomic policy and its effect on precious metals prices.
Maurice Jackson: Joining us for a conversation is Andy Schectman, the president of Miles Franklin Precious Metals Investments.
Let's begin today's discussion with gold, which has recently surpassed its all-time high since we last spoke, but this is no surprise. You forewarned us this would come to pass in our discussion back in December 2019, regarding the Bank of International Settlements and Basel III and its impact on gold. For those that missed that conversation, can you please shed some light on the importance of Basel III?
Andy Schectman: Readers should note, Basil III is the most significant event of my career. And really if people were to take a broad look at this and understand what it means, quite frankly, I don't think you need to know anything else. Everything else that we see is just noise. Since 1944, there's only been one tier 1 asset, and that has been United States Treasuries or fully funded dollar deposits. Gold was considered a tier 3 asset where only 50% of its value was allowed to be calculated on a balance sheet. Therefore, there would be four reasons that central banks would be de-incentivized to own gold. It wouldn't pay interest, costs money to store, it was unpredictable in its movements, but the tier 3 status meant that a 50% denigration on the balance sheet would limit a central bank's ability to sell bonds or transact international business. So really, the only purest form of collateral, and by the way, if your readers were to Google tier 1 asset, it's listed as a riskless asset.
So the Bank of International Settlements, which is the central bankers' central bank in Basel, Switzerland, reclassified gold in April of 2019, as the only other tier 1 asset in the world next to U.S. dollars in Treasuries. So since 1944, there's only been the dollar and the treasury bill that would give a tier 1 status for a central bank and or commercial bank collateral. Now, with gold brought up to that table, it's important to note that the central banks of the world front-ran this decision. In 2018, they bought more gold cumulatively as a group than they did in the 60 years previously. And in 2019, those numbers were up 90% and continue unabated higher now. And so you're seeing the most sophisticated, well-funded, well-informed traders on the globe accumulate what they call a riskless asset and have been front-running that decision, of course, now for over three years.
I think it's only a matter of time before gold goes higher than anyone thinks possible. And they'll continue to let it move up at this methodical pace with volatility inside of it, to keep people from really making a committed move to it. And before long they'll look at it and say, "Geez, we missed the boat. We waited too long." And I don't think that's the case right now, but I think that will begin to be conventional wisdom for most people, they will have thought that they missed the boat. I think it's going multiples higher.
Maurice Jackson: Speaking of central banks, let's take the conversation now home to the United States. What are your thoughts on the Federal Reserve's unprecedented fiscal policy, and what type of impact is this going to have on precious metals short term? And then the bigger picture long term?
Andy Schectman: Well, you're going to see inflation, and what they're trying to do is stave off global deflation, the deflating of all of the assets and the bad loans, and deflation is bearing down on the globe, and the Fed is doing all it can to fight it with the printing press, and the inflationary forces will have ramifications. When we talk about inflation in 2008, with all the money thrown at the system, it went to the Wall Street banks, and that that money was holed up in financial assets. And so stocks, bonds, and to a maybe a slightly lesser degree, real estate, but financial assets were inflated, and they were able to reflate the bubble of those assets.
This time around, however, you've seen trillions of dollars being poured into the real economy through the PPP and the CARES Act and the $1,200 checks to people, and all of this stuff that has impacted M1 and M2, the money supply, you will see, beginning to see, I think, the inflationary effects of the Fed pumping money into the system, not just to the banks, continuing to inflate financial assets, ala the Dow Jones at an all-time high, etc., with 50 million people unemployed, completely detached from reality.
But you're also going to begin to see, I think, real price inflation in the real economy, because on top of all the money that's been thrown into the M1 and M2, which is inflationary already, remember, Maurice, it took 300 years to create $800 billion in wealth in this country. And in 10 months, the Fed's created, what, $7, $8, $9 trillion, a good portion of which has already been sent directly to people in the form of subsidy checks. And now you have a situation where even people who have ridden this bull market back up, this illusionary recovery, created courtesy of the Federal Reserve's policies, I think they're beginning to sense that, Jesus, this just doesn't make sense that the market continues to roar higher, defy gravity, in an environment where so much of the economy has shut down, may never come back. A lot of it won't. And I think people are realizing that.
But here's where it gets crazy. When these people pull out of the equity market of the stocks and the bonds, where do they go? That money is going to buy things in the economy, anything, tangibles, real estate, precious metals, art, jewelry, you name it, as inflation begins to rear its head and money comes out of the equity markets. I think you'll see massive price inflation. So this is just the very beginning, but what the Fed has done, in my opinion, has sowed the seeds for perhaps a hyper stagflation type of scenario, where you have an environment of little or no economic growth and higher taxes, coupled with much higher prices.
Any way you look at it, I'm looking for inflation with an economy that is severely wounded, may not come back for a very long time. And that is, in essence, the printing press meets the Great Depression, and if I had to guess an outcome a couple of years from now before things get better, that's the environment we see, much higher prices and an economy that struggles to get going again.
Maurice Jackson: Speaking of higher prices, the old saying is: "Buy low and sell high." So one may conclude that it's not a good time to be buying gold right now since it is at or near an all-time high. Well, not so fast. Andy, what is the Dow gold ratio telling investors?
Andy Schectman: Well, we're right at the higher end of the Dow gold ratio. Typically, when the ratio is 5 or lower, meaning 5 ounces of gold by the Dow, you want to sell gold and buy the Dow. Currently, it takes 15 ounces of gold to buy the Dow, investors should be looking to sell the Dow and buy gold. But not only is the Dow horrifically overvalued in and of itself, one could argue that at this rate, selling the Dow and buying gold would be a very prudent decision based on the ratios.
Maurice Jackson: If you use those ratios in that perspective of 5 if you took the price of gold right now, and you multiplied it times five, the result is 9,700, and the Dow is close to 29,000. We have discussed perception in deception, and you see it in the numbers, but you have to know what numbers to look at. And that's what we're here to provide you, guidance, and not to be deceived by the nefarious tools of the Federal Reserve, because that is deception, and we want to make sure that you make the right decisions. Now, if we've convinced you that gold is on sale, let's move on to silver. What is the gold-silver ratio telling investors right now?
Andy Schectman: The same thing really, in that we are not at its upper, upper end like we saw in March of 110 or 120:1, which was the biggest discrepancy in human history. But even still at 70:1, people should be much more heavily in the silver than in gold. And when I talk about people playing these ratios, the gold-silver ratio, if someone were to be much more heavily invested in silver, to me, it is a temporary investment until the ratio normalizes. And when you talk to guys like Keith Neumeyer who I know you know, he'll tell you that what's coming out of the ground is 6:1 currently. And when you take a look at silver and the fact that it is a depleting asset, one that has such massive amount of uses in industry, when you see a company like JP Morgan amass a billion ounces of it, while holding down the paper price, there are all sorts of signs in the road pointing to that this is very relevant and very important, and some pretty sophisticated people have been holding down the price to corner the physical market.
I think that silver is still one of, if not the best investments on the planet, but I would tell you that when that ratio does normalize, in 2011, we saw a 35:1 ratio or thereabouts after it being 85:1 the year before. So if someone were to put $25,000 into silver today at 70:1, if we were to see it do what it did in 2011 and get to 35:1, the idea would then be to sell gold or silver rather and buy gold. And that money that would've gone into gold today, but instead went into silver, would be worth twice as much then when that ratio normalizes.
And so playing the ratio is really, really, really good, but when we look at the Dow and saying, at 15, you want to be in gold, and at five, you want to be in the Dow, well, here in at 70 or above, you want to be in silver, and 35 or below, maybe even 40, you want to be in gold. So we're closer to the be in the silver side of the equation, always mindful of that ratio and allowing us to double up the amount of gold we otherwise would be able to get. Or if someone were to trade 20 ounces of gold for silver at 70:1, when the ratio normalizes you go back and that 20 ounces turn into 40 ounces of gold.
Maurice Jackson: It's simple and it's brilliant. Bob Moriarty of 321gold has shared the benefits of applying the ratio with us many times. And I know that a number of your clients, as well as my clients, who are more heavily weighted towards gold, they've been taking advantage of the opportunity before us. Let's get into my favorite metal, platinum, which is currently trading at half the price of gold right now. What are your thoughts on platinum, sir?
Andy Schectman: Stupid and expensive. I wish it was easier to get, it's not very easy to get. The price is misleading, Maurice, because I mean, we can get it and we have had it, and we are lately having a hard time keeping it in stock, but the high premiums and the difficulty getting the product with any regularity speaks to me that the physical side is continuing to stay tight and maybe even get tighter. But if you are a ratio guy, the ratio between gold to platinum is every bit as out of whack, in fact, more so probably than the gold to silver ratio. The one thing against platinum is that it doesn't have the history as a monetary metal, the way that gold and silver do. It's more used or viewed as an industrial metal and mostly in catalytic converters for diesel automobiles.
But when something is so far away from historical price averages, the magnetism is pulling us back to the mean every day. So it's got to come back into line. Most of the last 100 years, platinum has been more expensive than gold, so I think it's as good of an investment as anything out there right next to silver. And the only reason I slightly have favored silver this whole way up, even though the ratio is every bit as good or better, is that I think silver always does first in these types of situations wear its industrial hat, but before it's all said and done is wearing its monetary hat as well. And people view silver as a substitute for gold, as a monetary metal, not just an industrial metal, whereas platinum is more as an industrial metal and an investment but not so much a monetary metal. But I do think it's a heck of a value, Maurice, and I'm continuing to buy it myself. To me, truthfully, it comes in third in my portfolio in terms of volume to gold and silver.
Maurice Jackson: I always share with my clients that I own a little bit of gold, a lot of silver, and a lot of platinum, but to me, the ultimate metal is gold. And the reason I'm buying silver and platinum is that I want to use those ratios as you've expanded upon and purchase more gold when the opportunity presents itself. So we've addressed gold as a great value proposition, but silver and platinum are even better value propositions right now. Let's switch topics here and let's address some questions that we received from prospective clients. And that is, I often hear, what is the minimum requirement to purchase from Miles Franklin?
Andy Schectman: No, there isn't a minimum order. We'd like to help anyone we can, so we don't have a minimum order, but I think you would at least have to spend a few hundred dollars to make it worthwhile when you factor in a $15 shipping charge on small orders. So no minimum, we work with everyone. And so whether it be a million dollars or $150, we'll work with the client.
Maurice Jackson: Absolutely. Every client is important to us. We do not look at you from a numerical standpoint. We understand that you're entrusting us with a big responsibility, and we wear that as a badge of honor. Here's the big one. Why aren't your prices listed?
Andy Schectman: I could list prices. I've chosen not to, Maurice, because the minute we took it off, the minute we said call for a price, all the fraud that we had fought for years stopped. And I know it frustrates a lot of people that our prices aren't listed, but we'll beat any price. Find a price, we'll match it, we'll beat it, we won't be undersold. And I know it takes another step, but we are old-school and analog in a digital world. And I think when you talk about privacy... precious metals, to me, deserve to be offline, and it's not a cop-out. I can turn our online store on again. But when I had it on, we fought fraud every single day, so much so that they found ways to try to hack our emails, try to do identity theft, tried to do mortgage fraud. The list goes on and on and on and on.
And every day we were dealing with, in many cases, state-sponsored Eastern European professional hackers, trying to find a way to disrupt our business and steal money from us or our clients. So I think it is every bit as important to the safety of our clients as it is to us. And for now, I guess I just choose to do things old-school, Maurice, and I know we'll lose some people who don't want to pick up the phone and call, but for those that do, I can assure you we'll make it worth your while. And if you find a nationally listed price better, let us know. We'll do our very best to beat it. In most cases, we can.
Maurice Jackson: Very responsible words there. I get that question asked to me several times, and also one last thing here. You talked about fraud. Somebody who's looking to set up an account with us, what's the best way for them to do that?
Andy Schectman: Just give us a call, get your questions answered. And literally, that's it. I mean, when it comes to placing an order after we've had a discussion, got all the questions answered, we need your name, address, phone number, email address, and how they want to pay. Regular check, ACH, or wire. Once all those boxes are checked, your order is placed, and if the funds need to clear, upon clearing, the client receives UPS-insured tracking numbers to follow it in, it's literally that simple. It's as easy of a transaction as there is any longer in the world of decreasing privacy and increasing complexity. This is one of the few simple, straightforward things that still is.
Maurice Jackson: As a reminder, if you're looking to set up an account with Miles Franklin, all you have to do is give me a call 855.505.1900. I'll get your information, find out what you're looking to purchase, and we'll find the best deal for you, but you would not set up your account online. We do that to protect your privacy. Last question regarding questions that we received from prospective clients. What about credit card payments? Why don't you accept those?
Andy Schectman: Same reason. Just a tremendous amount of identity theft and fraud. And to me, it's just not worth being on the wrong side of that, Maurice. And with a credit card, as an example, someone steals a credit card, does identity theft, they place an order for $5,000, we ship them the product, and then the charge is disputed due to identity theft. On a $5,000 order, we may make a hundred bucks, but the 90-day investigation pulls the $5,000 out of our account while the charge is investigated.
So have that happen five, six, seven times a month, 10 times a month, whatever, you end up making it not worth the while. I know there are a lot of companies out there that do it. I don't know what their level of fraud is. To me, it's just not worth it. You just open yourself up to identity theft, hacking, fraud, and experience demonstrated to me that the minute I shut that off, that side of things just disappeared.
Maurice Jackson: So to make my purchase, I can do it with a check, a wire, and ACH, is that correct?
Andy Schectman: Yes, sir.
Maurice Jackson: All right, sir. Last question for you here. Or actually, two. Let me ask you, my favorite one here is, what keeps you up at night that we don't know about?
Andy Schectman: I don't like the way the things are going in this country, and with the success that we've had as a company, we have had great success this year, working 15 hours a day, seven days a week, but there's nowhere to go and nothing to do. And kids going back to school, but doing so online, and the destruction of the economy right in front of us, and I just don't like the path we're heading down. I think this winter as we head towards the election is going to be incredibly bumpy. And I think it's going to come with some very scary things. I live in the epicenter of stupidity and insanity in Minneapolis, and it's been one thing to make it through what has been a really beautiful summer weather-wise, but I can't imagine what it's going to be like here in the northern states come wintertime, when the restaurants that are working 20% or 30% capacity, hanging on by a thread, are forced to shut down.
And all of the other establishments that are just hanging on in the winter, I think most of them will just go by the wayside. And I'm very concerned about what things look like over the next few months. And so I guess preparation is very important. People forget it's just a few months ago in March and April when people couldn't find bottled water and toilet paper anywhere. I think that that was the front edge of the storm. And I've been saying recently that I think we're in the eye of the hurricane right now, people have been lulled into a sense of complacency, but I think the trailing edge of the storm is coming. And don't forget that we had the repo market crisis last September before any of this happened. The banks have been hanging on by a thread for the past 10 months. Many of these banks have loans made to companies that are either bankrupt or close to being bankrupt.
And don't forget about real estate and commercial real estate and all of the things that are dependent upon loans and credit. These banks are in big trouble. I think we're in trouble as an economy, Maurice, and if anything keeps me up at night, it is that my success will come at the expense of everything around me that I love. Sitting at a bar, watching a Twins game, eating a hamburger and a beer. I can't tell you what I'd pay for that right now, but it's just, those are the kinds of things that mostly looking through my kids' eyes that keep me up at night above all else. And I'd like to be optimistic and hope things turn around for us sometime soon, but I guess I just can't logically get to that point yet. I think we're too far away from seeing anything like what was last year, we're a long ways away from that. And that keeps me up at night more than anything,
Maurice Jackson: I'm a vegetarian and you're referencing the hamburger, but I just find it disgusting that you would want to watch a Twins game. Last question, sir. And that is, what did I forget to ask?
Andy Schectman: You didn't forget to ask anything, Maurice, you asked the right questions. There are opportunities in ratios, and there's an opportunity in platinum, there's an opportunity in silver, there's opportunity to sell Dow and to get on the sidelines before things get crazy. You asked the right questions, you made the right statement.
Maurice Jackson: Well, thank you, sir, and it's a pleasure as always, but before we close, for someone listening that wants to contact you, please share the contact details.
Andy Schectman: I can be reached directly at andy@milesfranklin.com. That goes right to my cell phone. Please sign up for our newsletter, it's free, seven days a week, at milesfranklin.com. On the homepage, sign up for our newsletter, and it's a good way to stay in touch and in contact with what's going on. In the meantime, I wish you and all your listeners prosperity and health and safety and good fortune moving forward.
Maurice Jackson: And if you visit Proven and Probable, on the right-hand column, you will see a link for the Miles Franklin newsletter as well. I'm a licensed broker for Miles Franklin Precious Metals Investments where we provide unlimited options to expand your precious metals portfolio, from physical delivery, offshore depositories, and precious metals IRAs. Call me directly at (855) 505-1900 or you may email maurice@milesfranklin.com.
Mr. Schectman, it's been a real pleasure speaking with you today. Wishing you the absolute best, sir.
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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