Why the Dollar's Future as a Reserve Currency Means Big Things for Gold: An Interview with Bud Conrad

Joel Anderson  |

Next week, the 2014 Metals and Minerals Investment Conference will be coming to New York City on Monday and Tuesday to discuss everything one needs to know about the current state of affairs for the metals and minerals mining and trading. With over 20 years of assembly, it remains the premier conference for metals and minerals investing in the country.

And on Tuesday, keynote speaker Bud Conrad, the chief economist for Casey Research, will be a keynote speaker, providing his thoughts on the futures market for gold. Equities.com talked with Bud Conrad about the current geopolitical situation, American monetary policy, and why he believes the environment remains a strongly positive one for the price of gold.

EQ: A lot of market watchers are concerned about events abroad. What are your thoughts on the current geopolitical situation?

Bud Conrad: I fear that the conflict between the US and Russia will draw Russia towards China. We could see many BRIC countries use currencies other than the dollar for their trade, decreasing the value of the dollar in world trade.

That then leads to higher asset prices, all of them but gold in particular, of course. Gold is the major alternative to currencies, and that’s become important because the dollar was the basis for all international trade going back to the time when the Saudis in the early 1970s agreed to base all their sales of oil on the dollar.

But now Russia is moving into an agreement with Iran and planning to make agreements with both China and India to sell them natural resources, particularly oil, on a non-dollar basis. And that will weaken the dollar.

The world is entering a period of more serious crisis.

EQ: Driven by the Ukrainian conflict?

Bud Conrad: Yes, but you can name plenty of other small ones. North Africa in French-speaking areas, China vs. Japan, certainly the ongoing situations in the Middle East involving Syria and Iran, even Asia, possibly Pakistan, Somalia, there’s a lot of them.

But here’s the result of that: political powers are realigning and Russia is reemerging.

Russia was decimated in the mid-1990s with Yeltsin and the demise of the Soviet Union. Putin is now putting Russia back on the map, and I think we are driving him to it with the conflict over Ukraine. So we’re driving Russia to make alliances.

And the combination of these BRIC alliances is that they are wanting to do business without the dollar. We are driving them there, which will weaken the dollar.

The international political situation is changing, and that will lead to weaknesses of the dollar, which has had a privileged position as the world’s reserve currency. If you look at the reserve balances for all central banks, the dollar was 55 percent in the year 2000. Now it’s 33 percent, and it will go to 20 percent, I believe. And at 20 percent, we are no longer dominant enough to be able to maintain the privilege to buy anything we want by printing new dollars and still maintain the dollar’s purchasing power.

The dollar will decline, which is why I’m very Bullish gold.

Precious metals, commodities, agricultural, all these things are a much better investment than bonds, bank accounts, annuities, and so forth.

EQ: The Fed has been pretty aggressively tapering its QE program since the new Fed Chair, Janet Yellen, took office. What have the impacts been so far for gold?

Bud Conrad: Everybody’s a Fed watcher, so we all watch and worry about how big the effect of their actions can be. And the Fed has announced its policy, which has been to decrease its massive purchases of both government debt and mortgage debt to eliminate these new purchases by the end of this year.

But recognize, before 2008 and the big crisis, the Federal Reserve never purchased any of these toxic-waste, piece-of-crap mortgages, and the only purchases of government debt were to back up the currency issues. It was at a very consistent level, and it was orderly.

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This is an unorderly system that is now being turned around. Yes, Fed money printing is definitely bullish for gold, and cutting back on that printing is less bullish for gold, but, in the longer term, we have another problem in exploding government debt. And absent foreigners buying it with the trade surplus dollars they’ve won from our trade deficit, we have to print it up ourselves. There’s no way else, no other game in town.

I think the Fed will head toward zero [asset purchases] by the end of the year because they got ahead of the game with these massive purchases. But they’ll have to come back into the game to bail out the federal government, going forward.

I don’t think that QE ever goes away, they’re so far onto it. If they went to zero and waited a few months, interest rates would spike up. Interest rates on $20 trillion of debt by then would destroy the government’s ability to operate at a level where it can afford its deficits.

EQ: One of the major catalysts that you see for gold is JP Morgan’s (JPM) reversal of its position from seller to buyer. How long do you think it will take before this impacts gold’s current range-bound trading?

Bud Conrad: What’s actually happened is that a few other big players, like HSBC ($HSBC), have moved in to take up the cudgel and maintain a moderate, low gold position by delivering gold into the futures market. Relatively small amounts of leveraged money can be used to make big trades that can move the price of the futures market, and they do.

For example, a big hit drove the price of gold back down after it looked to be turning up at the beginning of April. Now, that drive down looks very suspicious. Of course, I don’t know the signature of who did it, but I suspect it’s the type of organization that would want to keep rates low and gold low.

Now, think about rates for a minute and why a big bank would risk its reputation by being actively involved in moving the gold market. The Federal Reserve needs gold prices not to take off because they need to maintain confidence in the dollar. If gold were to spike, it would suggest that the Federal Reserve is being punished for printing too much. And a bank gains by being able to borrow from the Federal Reserve at a zero percent interest rate and go out and make loans at a positive interest rate. It’s hugely profitable, and to the point that banks pay big bonuses.

So banks gain by maintaining the Federal Reserve’s power to keep rates low, and one of the keys that’s allowed the Fed to do that is low gold price. So I think there’s a wink-wink-nod-nod of “we won’t investigate the size of positions in the futures market.” They’re going to allow the gold position to be managed at a lower level, because the free market’s recognizing all the possible risks of government deficits and money printing would have already driven gold to the $2,000 an ounce level by now without this.

EQ: Are there any other catalysts for gold prices that investors should be watching for?

Bud Conrad: Well, the big one, and the bigger picture, is the loss of confidence. All currencies published by government aren’t even worth the paper they aren’t printed on. They’re just digits in a computer. And all of us should be fearful that the emperor doesn’t have any clothes. It’s clearly not understood by too many people because they’d all buy more real estate, agricultural grains, and other physical assets. And they would sell off their bank accounts and their bonds, fixed income assets, and insurance and cause a worldwide currency collapse.

My own view is that that’s an important enough problem for governments to want to avoid, but I don’t think they will over the generation of my lifetime. My long term, big picture prediction is that the dollar will follow what all fiat currencies do and eventually reach its intrinsic value of zero. Which is why I’m so bullish on physical assets and specifically gold.

EQ: So what can investors expect from your keynote presentation at the upcoming Metals and Minerals Investment Conference?

Bud Conrad: Of course, I will make a prediction. But more importantly, I’ll talk about the internal structures of how the futures market has taken disproportionate power of setting the price of gold as opposed to the physical market where people are actually buying real metals like coins, Krugerrands, Maple Leaves, and Eagles.

And the reason I make a point of this is to then point out that I think those powers only have limited abilities to manage the overall system. And as we understand what was perhaps going on, even with the London bullion market fixings in, gold’s price will rise.


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