Gold Bugs AN INTERVIEW WITH BOB HOYE

AN INTERVIEW WITH BOB HOYE AND D. PESCOD

We are here today with Bob Hoye, who writes “Pivotal
Events” and he is one of those guys that had actually pre-
dicted what we’ve gone through for much of the last year.
And was it ugly! Now things seem to be going back to a
little bit of normality, and Bob is still not all that comfort-
able looking forward.

Dave Pescod: Bob, one thing that you do see with a good
future down the road is gold. First of all, how good do
you see it? Secondly, how long?

Bob Hoye: The thing about gold is that it is backwards to
what the gold bugs think. They get this idea that if the
U.S. dollar is going to go to zero, the price of gold will go
to $10,000. The gold miners will make so much money it
will make your head spin. The thing that they are missing
out is that for the last 20 years or so, every time the dollar
has been hit hard, commodities outperform gold on the
way up. If you have commodities such as crude oil out-
performing gold on the way up, then the cost of mining
gold is going up. So the ideal condition for your basic
gold bug is backwards.

What you want to do is watch
what happens and study previous post-bubble contrac-
tions and the evidence is reliable over 300 years. On
every bubble, the real price of gold declines and gold min-
ing underperforms the market because everybody is in
love with base metals, stocks and high-tech stocks.

Once the bubble is over, then the price of gold outperforms eve-
rything else as stocks, corporate bonds and commodities
head down.

That then restores profitability to the gold
mining business. This is where we are now.
With the belated boom our gold divided by commodity
index declined to 143 in May of 2007 and it was that May
and June that we were also expecting the credit market to
reverse eventually to a disaster.

So what you’ve had
since that spring is the real price of gold went up, and the
credit markets went down and commodities went down.

By our index, the real price of gold got up to over 500 and

then we saw that the crash was getting close to ending in
which case things could get rather good until around mid-

With the good stuff coming back into the orthodox world,

our real price of gold then has declined to about 300.

The main thing is on gold is just that increase over the

last two years reflects an increase in operating margins

and it has not been fully priced into the senior stocks

yet. The reason for that on the initial rebound out of the

disaster, we figured that most stock sectors would out-

perform gold stocks. Once this daylight in here rolls

over, then stocks and corporate bonds and commodities

are going to head down. That won’t be good for gold

stocks, but what it is building to is by late in the year,

this could be another disaster in which case it’s time to

be buying your favorite gold stock from the seniors

down to the juniors.

What you end up with in a few years after the top of any

bubble, the gold stocks will be very much up and the rest

of the stock market i.e.: New York and Toronto will be

very much down. This is just not imagination going be-

cause this is the way gold, the real price, and gold min-

ing stocks have performed through and following previ-

ous great bubbles.

D.P: Now according to your issue of August 6th, you

were expecting gold and related shares to start doing

some significant moving, potentially as early as the New

Year. You have these own ratios that you’ve got in the

gold price, but for the average investor out there, what

kind of a gold price and American dollar do you think

we’ll be looking at down the road?

B.H: It’s already gone up significantly in real terms. It

will go up and continue to go up. In previous post-

bubble contractions (can be called Great Depressions)

they’ve lasted for about 20 years and through that period

gold mining became the premier and the most reliable

side of the economy. So this one is what we are shaping

up for. There is very little point in forecasting the price

of gold in dollar terms. For those who want to trade gold

against US dollars or gold against Canadian dollars or

gold against sterling or gold again the Yen, go ahead –

do it. But if you want to invest and make some money

out of the gold mining business, you will watch the real

price of gold.

Most gold-bug clichés are just distraction.

D.P: Another commodity that you have been looking at

as well is oil. I think a lot of peak oil people or people in

Calgary will be a little concerned when you use the anal-

ogy of oil to peak coal?

B.H: Yeah! In a long period of rising prices, intellectu-

als go weird! The 1860’s were the end of a 20-year pe-

riod of rising prices when prices went up and politics

got hysterical.

The leading economist of the day was

Stanley Jevons and he did some important work in eco-

nomics, but he also suddenly came up with a personal

revelation that the world was about to run out of coal.

He calculated all of the reserves and all the mines in

England and Wales and Europe and he assumed a min-

ing depth of 4000 feet and said the world was going to

run out of coal and civilization as they knew it, will end.

We will all go back to hardship and hard labor and all

that sort of stuff. Then he flattered his readers in his

book called “The Coal Question” by saying that you had

to have a special intellect to be able to understand the

disappearance of coal and that is was almost a religious

experience! Now the thing that Jevons didn’t grasp was

that you had exceptionally high prices at the end of a

long period of rapid price inflation.

And then it all goes

away and nature being what it is, there are still ample

reserves of coal. The price will go up and down and I

expect the same parallel would work on the guys who

dressed up this peak oil thing. The work that Jevons did

was painstaking in documenting all of the reserves and

he proved that they were going to run out!

D.P: If you were someone advising Calgary, you’d be

saying that oil could see $50 again or is it worse?

B.H: Probably worse. We had sort of a favorable sea-

son through the summer for crude oil and we had an

overbought (a couple of months ago) at first to $73 and

expected a correction. That’s run its course, but now

what we’ve got is that we are at an important low for the

U.S. dollar index.

It stabilized the last few days, so it’s

not like anybody is going to firm up the U.S. dollar. What

it seems to be is that when the street wants to speculate

in oil or base metals, then the dollar will go down. Then

when that speculation has run its course, then the dollar

goes up. Last year, one of the best calls we did based

on this historical work was that we were expecting the

deterioration in the credit markets would continue. Last

fall, we expected another 1873, 1929 crash which we did

get. We knew that in both of those crashes in the fall,

the price of gold fell with the crash and so did gold

stocks. So it was very easy this time around to say yeah

– if we have another crash, the price of gold is going to

go down…like it did.

So at any rate, the credit markets have been quite

happy lately along with the recovery being quite ani-

mated and is close to running its course, so I think that

you can have another credit crisis and it could get

rather nasty in the fall and I think you will see most

stock sectors go down including the gold sector. What

we do when we see the probability of that is to advise

people to lighten up on the senior gold’s. If you had

some really good joy in some small cap stocks, great –

take some money off the table and short the big silver

stocks. On any hit in a post-bubble credit contraction,

silver will plunge relative to gold.

That’s what we had

last year. So you can make some nice money being

short silver stocks and then reposition in gold stocks

on the next low.

D.P: All this is rather depressing. Are you suggesting

down the road we are going to see 15% unemployment

and businesses going bust all over?

B.H: You know that last fall the establishment was very

quick to defend itself by saying this is not another de-

pression because in the last depression, unemploy-

ment got to 25%. Unemployment didn’t get to 25% until

1933, so what you are interested in is what the rate of

unemployment is the year after the stock market had

its high. It was 9% in 1930 and now it’s around 9%, but

that’s on a new calculation of unemployment. I just

saw one today by John Williams and if you use the old

method of 15 years ago, we are already at 12% or 14%

in the U.S.

D.P: So an average person these days should be

what? And once again, the key work is “average” per-

son…

B.H: The average person’s portfolio whether it is in an

RRSP or not will have had a very good appreciation

since the disaster ended in early March.

Time to take

some money off the table on most stock groups. On

corporate bonds – they have had a fabulous rally. Junk

bonds were yielding 10% at the high of the market in

October 2007 and early March they were yielding 42%.

A bond at par would have fallen to about $28.00 and

now it has rallied all the way to a 17% yield.

The whole

world is playing it leveraged so if you have any of these

lovely corporate bonds, long-dated, it is time to get out.

If you are long commodities, it’s time to get out and

then I would apply that money to your mortgage and

your house to get rid of debt.