A foremost authority on the precious metals markets and a leading expert on commodities markets, CPM Group founder and Managing Director Jeffrey Christian brings some holiday cheer to The Gold Report readers. In this exclusive interview, he debunks doomsayers who await the dollar’s demise, anticipates what may well be a more powerful recovery from recession than most pundits do and foresees bright days for gold, silver, PGMs and specialty metals.

The Gold Report: Perhaps you could begin by giving us your macro overview of the world economy and the outlook as you see it.

Jeffrey Christian: If you go back to 2006 or 2007, our view had been that we would see a relatively short and shallow recession in the first half of 2009. Beginning in late 2007, we said maybe the recession would start earlier, maybe in the fourth quarter of 2008. And then we said maybe the third quarter of 2008. Now we find from the National Bureau of Economic Research that the recession officially started in December of 2007.

We still see it ending around the middle of 2009. But it’s obviously going to be much longer and much deeper than we had expected a year or two ago. Economic problems are much worse. What we really have is a financial crisis, a freezing up of credit availability, which has led to a domino effect of reducing demand for products. We started with a bank panic and a freeze-up in the credit market that has now spilled over into final demand for goods and services across the real economy. It’s proving extremely difficult to treat. I happen to think that the U.S. government policies pursued in September, October and November have not necessarily been the best policies to resolve these issues. We’re looking to see what the new government does after January; a different approach may be more palliative to the economy.

But the bottom line for the overall economy is things are bad, they probably will get a little bit worse, and we’re probably looking at a pretty weak first half of 2009. Our view is that by the second half of 2009, maybe early 2010, you’ll see an economic recovery come along. That economic recovery may be a lot more powerful on the upside than a lot of people expect. One of the things that we’ve seen and have written extensively about over the last few years—and it’s become even more prominent with the government largesse—is an enormous amount of money sitting in cash and cash equivalents waiting for a signal that it’s safe to invest again. All of this money is standing by, ready to invest in precious metals, invest in commodities, invest in real estate, equities and corporate debt. So we think that in the second half of 2009, or whenever the recession ends, you could see a rather rapid recovery in overall economic activity globally.

So that’s our economic overview. I will say this. Everybody in the world is looking at the amount of money the governments have pumped into the market, saying it spells death and destruction for the U.S. dollar and inevitably will lead to hyperinflation. I’m not convinced that’s true and I think that’s a very important point. When you look at all of the monetary liquefaction that’s occurred, it’s definitely going to lead to a lower dollar and higher inflation than we’ve seen over the last 25 years. Still, we may well avoid a total collapse of the dollar and hyperinflation if the monetary authorities of the world effectively are able to sterilize the inflationary implications of this once the recovery starts. We won’t know that for a year or so.

TGR: What do you mean by “sterilize the inflationary implications”?

JC: It means suck the inflationary money creation out of the economy. I’ve spent a lot of time looking at what happened in the period of 1979 to 1983; the really critical point here is in the middle of 1982 we were two years into a double dip recession. At the time it was the deepest recession in the post-war experience. In the middle of 1982, Brazil, Argentina and Mexico were about to default on their government bonds. Paul Volcker called the central bankers of the world together and said, “We have to monetize ourselves out of this recession because it’s about to become something much deeper and harder to solve.”

The governments of the world opened the sluices and flooded the world with money. By December of 1982, the world was out of a recession, auto sales had rebound sharply, Geoffrey Moore’s leading index of inflation indicators, which was basically money supply, had gone off the chart. Gold had risen from $290 in July of 1982 to $500 by the end of the year because everybody was convinced that this was going to be inflationary and that the dollar was going to collapse. By the end of ’82, early ’83, it was clear that we were out of the recession.

Fortunately for Volcker, Reagan (Ronald) and an associate named Regan (Donald Regan, Reagan’s Treasury Secretary) had taken a $40 billion Carter (Jimmy) deficit and turned it into a $200 billion Reagan deficit and needed to finance it. So Volcker said, “That’s easy; Let’s sell $300 billion worth of T-bonds and suck $300 billion out of the economy.” And they did it. So they started selling a tremendous amount of bonds to monetize the debt that the government was racking up and thus sterilized the inflationary implications of their earlier monetary creation.

Then oil prices fell 15% in the first quarter of 1983, from $34 to $29 per barrel, gold prices fell $100, inflation went from about 7% to 3% and is only now getting back up there. We entered a 25-year period of the lowest inflation in a long, long time right when everybody was convinced that all of that money creation would lead to hyperinflation. The government has followed that model every time we’ve gone into a financial crisis since 1982. This time around everything is much bigger and the question is, “Can they do it again on an even grander scale?”

TGR: We didn’t have the fundamental problems back then that we have today. We didn’t have all these derivatives. So many things are so different, and we’ve seen nothing of this magnitude.

JC: Actually, the two biggest and most important differences are that we had extremely high U.S. interest rates then, and a very strong and persistently rising dollar. The dollar was rising then, as it is now, but it has been weak from 2003 until the middle of this year. You’re right—we didn’t have the derivatives and all of this enormous financial liquidity that we have now. And as I said, we’re playing a much higher-stakes game this time around and we’re doing it in a situation with low interest rates and a fundamentally weak dollar. People talk about how strong the dollar has been in the last few months, but it’s still very low compared to what it had been.

Funny, I just got an email from someone who attended a conference I spoke at in Zurich about a year ago. He said this is amazing, that a year ago everybody laughed at me because I said the dollar would be strengthening—but I didn’t say what kind of environment it would be strengthening in.

TGR: Isn’t another difference between the current situation and the one 30 years ago the fact that back in ’79 it was basically the U.S. and the Banana Republics that were having problems? It wasn’t Germany, France, Switzerland—it wasn’t everybody, was it?

JC: No. It was everybody. The U.S. was in a deep recession, Europe was in a deep recession. That’s when they coined the term “Eurosclerosis.” I was at J. Aron at the time and we were doing a lot of gold loans with Eastern European governments, because they needed the money. We found ourselves in workout situations with sovereign debt in Eastern Europe in 1981; whereas Latin America didn’t erupt until 1982. But it was pretty much universal. The U.S. was a bigger part of the world economy back then, too.

TGR: So a decoupling, when you look at the BRIC countries, will help carry us through or avoid an international recession this time around?

JC: I don’t think so. I think we’re in an international recession. The IMF seems to think so. When everybody started talking about how the economies of the world could decouple from the U.S., I said it’s just one of those pater nosters that makes no sense and doesn’t stand up to statistical scrutiny. You’re seeing that. You’re seeing India, China, and all of the other emerging countries really suffering from a decline in demand for their products, much of which are exported into the United States and Europe, and it’s having catastrophic consequences. Granted, there is a movement away from being dependent on the American consumer on a worldwide basis, but it’s a very slow movement and hasn’t progressed far enough to insulate the rest of the world from the problems in the U.S.

TGR: You were talking about Volcker, who issued something like $300 billion of debt—Treasuries— in the ’80s and sold them to cover it and continued to do more of that. At some point, don’t we have to pay that back? Isn’t there a Piper to be paid?

JC: In theory, yes. But there’s a problem with the doomsayers. Look at Jim Grant, who publishes the Interest Rate Observer. I think it was in 1980 that he said, “Oh, my God, look at this $37 billion debt that Carter’s ramping up. This is unsustainable; the Treasury market is going to collapse.” At some point, he probably will be right and the Treasury market will collapse. But in the meantime, we’ve had 28 years that make a $37 billion deficit pale. We wish we could have a $37 billion deficit.

In the meantime, several things mitigate against any imminent collapse. One is the fact that the world economy basically always has been and always will be a giant confidence game, in the sense that there has to be a certain level of confidence to keep things going. The other thing is that for the dollar to collapse, some other currency has to rise very sharply. The problem that the world’s in right now is that for the dollar to fall sharply, investors have to have greater confidence in some other currency. This is really great for gold. It makes you really bullish for gold. Another currency has to rise if the dollar’s going to fall. Ask people “Which one do you have more confidence in?” There’s silence in the room and then people buy gold. No one has any confidence in any of the other currencies or the governments behind them—the Euro, the Yen, the Swiss Franc or anything else.

In a speech a few weeks ago, I said, “The dollar is like your mother. You’ll sit around and complain about her and how she’s so mean and nasty and you’ve got to get away from her. But as soon as you cut your knee, you go running back to her crying.” That’s what’s happening right now in the world economy, in the financial markets. Everybody has been saying for five years that the dollar is toast and the dollar is no good and the U.S. debt is unsustainable. But as soon as you get into a banking panic, everybody converts their money into dollars and Treasuries and CDs held by banks that are guaranteed by the FDIC. Why? Because even though we’ve lost a tremendous amount of faith in the U.S. Treasury, we still have more faith in the U.S. Treasury than we do in, say, the European Central Bank or the Bank of Japan or the Bank of England.

TGR: So if the dollar devalues and some other currency has to rise, it bodes really well for gold. But considering the trillions of dollars of debt out there, is there enough gold for it to be a viable alternative currency? Or will the price for every ounce of gold become something cataclysmic like $3,000 or $4,000?

JC: Yes. If you tried to monetize the debt in gold, or if you tried to go back to a rigid gold standard, you would either have to have $3,000 or $4,000 or $5,000 or $6,000 gold, or you would have to severely contract the world economy back to where we were in, say, the 17th century. But I don’t think that’s what you’re looking at. Rather, you’re looking at some portion of the world’s assets moving into gold as an alternative to currencies. In that situation, you “only” see $1,000 or $2,000 gold.

TGR: Some of us might like $5,000 or $6,000 gold, but maybe not everything else that would be going on with gold prices at that level.

JC: Right. You definitely wouldn’t like everything else going on. It’s interesting. It depends on how a gold standard would be created. The last time we had a “serious” discussion of a gold standard in the United States was during 1980 election campaign. The Republicans actually had a platform plank written by Arthur Laffer to return to a gold standard. What Laffer said was that for the U.S. Treasury notes in circulation, you would have to have 40% of the value of the Treasury notes in gold held by the U.S. Treasury, or a 40% cover. It sounded really stringent, but then you realized that since the 1960s almost all of the bills printed actually had been Federal Reserve notes—not Treasury notes. When asked about that, Laffer said that’s right. What you need from a gold standard is the public’s sense of confidence in it. If you tell them Treasury notes are backed by gold, they’ll be more confident in the value of the dollar. They won’t bother looking at the fact that we’re printing Federal Reserve notes ’til the cows come home. It was a very disingenuous and cynical approach to the American voters.

TGR: So we may see some rush to gold, which may lift it up to $1,000 or $2,000. What about other precious metals like silver? Will that tail along with gold?

JC: I’m actually now in a situation where I like silver, platinum, palladium and the other platinum group metals as well as gold. I like silver for a couple of reasons. One is it’s a financial asset like gold, it is benefiting from the move of investors into silver and gold, and it will continue to benefit from that. But you’ll also see several other things. First off, there is not a lot of metal in the silver market, half a billion ounces in bullion and maybe a half a billion ounces in bullion coins. In gold you have a billion-plus ounces that investors own and another 980 million ounces that central banks own. There aren’t those large enormous stockpiles of silver if you’re looking at it on a dollar value basis. In addition, silver is an industrial metal with some very interesting new uses coming up. It’s losing some of its traditional uses such as photography; but in other uses, such as batteries and electronics, it’s actually growing very sharply and could grow more sharply over the next few years. So I think silver’s got a lot of good things going for it. It’s an alternative financial asset like gold. It’s a smaller, less liquid, more volatile market than gold. And it has the industrial base that gold doesn’t have. So I like silver for those three reasons.

Tune in tomorrow for Part II of this article

A graduate of the Missouri School of Journalism (University of Missouri, BJ, 1977), Jeffrey M. Christian chose his course of study because he was interested in chronicling developments in places such as Africa, Asia, Latin America and Central and Eastern Europe (well before they emerged as significant world economies). In 1980, Jeff left his job as an editor at Metals Week, an industry publication—having decided that metals markets he wrote about appealed to him more than journalism did. A year before Goldman Sachs acquired it, J. Aron and Company brought him on board and he soon managed the Commodities Research Group’s precious metals and statistical work there. In 1986, he engineered a leveraged buyout of this group—of which he was then VP—to create CPM Group, which he has led to become a world-class research, consulting, investment banking and asset management company that focuses on the fundamental analysis of global commodities markets. Jeff continues to write extensively.

Since the late 1970s, he has authored many pieces on precious metals markets, commodities and world financial and economic conditions. In 1980, he wrote World Guide to Battery-Powered Road Transportation: Comparative Technical and Performance Specifications. Now out of print, it remains a great index of many of the earliest electric cars. In 1981 he wrote one of the first market reports on the platinum metals group. Fast-forward to the 21st century, he and his staff of analysts write six major reports per year for publication and 12 monthly reports plus several more weekly reports and special reports. He published Commodities Rising in 2006. Jeff has pioneered application of economic analysis and econometric studies to gold, silver, copper, and platinum group metals markets, as well as efforts to improve and extend the quality of precious metals and commodities market statistics and research overall. As passionate about his work today as he was 22 years ago, he loves the fact that it gives him a tremendous network of contacts at high levels and a tremendous amount of discretion as to the work CPM Group undertakes. CPM counts among its clients many of the world’s largest mining companies, industrial users of precious metals, central banks, government agencies and financial institutions.