Greg McCoach of Mining Speculator newsletter, is not ashamed to admit he has taken a big hit in juniors in the last couple of years. What he has done in response is what he advises all investors to do in this interview with The Gold Report: Get rid of the also-rans and keep and build positions in those companies that have what it takes to gain in multiples when the market recovers.

 The Gold Report: You wrote recently, “The 2008 crisis will pale in comparison to what is now on the horizon.” Given that the 2008 crisis nearly destroyed the world economy, how bad will the next crisis be?

Greg McCoach: The derivative issues were never fixed after the last crisis. In essence, the laws were changed so that the banks didn’t have to keep derivative liabilities on their books. That way, bank stocks could soar again. But the banks have acted even more recklessly since 2008 and are now in bigger trouble. The recent White House meeting with all the big financial players should be a warning to investors that something big is about to hit. The media touted this as a meeting to discuss the debt ceiling, but I would say it was about the crisis that is about to envelope the big banks again. Barack Obama didn’t run that meeting, JP Morgan Chase ran the meeting and told everyone what was coming. The banks don’t have the capital to cover their interest rate derivative problems that are as big as the Pacific Ocean. I would tell investors to expect ten times worse conditions from what we saw in 2008.

TGR: I’ve read that even if only 4% of the derivatives held by the banks are at risk, and only 10% of that goes south, it would completely wipe out the net worth of the top five banks.

GM: At this point, the acceleration of what I consider tyrannical measures on the part of the U.S. government has reached such a degree it’s obvious that something is coming. Why would it buy billions of rounds of hollow-point ammunition? Why is it buying millions of ready-to-eat meals? Why would it take all these extra security measures? Obviously, the U.S. government knows more than the general public does and it reveals something is wrong and the government is worried about it.

TGR: We had this situation after the scandal with HSBC where the U.S. Department of Justice admitted that criminal acts were probably committed, but prosecution would be unthinkable because the big banks cannot be allowed to fail.

GM: Well, that pretty much tells the story right there. The bureaucrats, Rebooblicans and Dumocrats, as Jim Willie says, don’t represent the people of America anymore. They represent themselves and their elitist banker puppeteers. They’re trying to control the message and all the outcomes. It’s a train wreck in process, but you have to tip your hat to them—they have been able to keep it together for so long. We could have experienced the end game at multiple occasions in the past 12 years, but it now seems to me that the limits of their good fortune are quickly coming to a close.

If you’re just watching CNN and FOX News, you’re oblivious to what’s really going on. But if you’re a thinking person, you should start getting together food storage and get your investments in line for the major problems ahead. I can’t tell you when it’s going to happen because I don’t have a crystal ball, but it’s not a matter of if this is going to happen; it’s just a matter of when.

TGR: What will be the warning signs of the next crisis?

GM: The warning signs are all around us right now and have been for the last six months. The big meeting at the White House with all the financial people I already mentioned was a huge sign. The erratic behavior lately of the U.S. government with the Middle East, particularly Syria, is also a sign. In recent weeks we have heard about a worldwide currency reset that is to take place in the very near future. This is telling those who have ears to listen that the Keynesian fraud of creating monies out of this air has reached a limit so they need to reset.

All of this means that we’ll wake up one morning and life will be very different. You’ll see markets performing erratically. You’ll see civil unrest. Most people think it will have something to do with another banking crisis, a derivatives situation. It could be a new war. I think things could happen quickly and take us down a very dark path. All we can do is prepare for ourselves and our families. You have got to own physical gold and silver that is in your possession.

TGR: The macroeconomic indicators suggest that the prices of gold and silver should be much higher than at present. Why do you think that 2013 looks to be the year that the bull markets in these metals ended?

GM: I don’t think the secular precious metals bull market has ended. I think we’re just taking a pause. I liken this to the move that happened in the 1970s when we made the U.S. dollar the official reserve currency of the world, and people could again own physical gold and silver. Gold went from $35/ounce ($35/oz) all the way up to $195/oz. Then it collapsed to $105/oz. A lot of people thought that was it for gold. But then it ran to $855/oz.

Since then, we’ve hit $1,950/oz, which was then corrected back to the $1,200–1,300/oz level. We’ve been bouncing around $1,200–1,400/oz, and I believe this is just setting us up for the foundation of the next big move in gold, which will take us to much, much higher levels. I’m thinking $3,500–5,000/oz. It will be associated with collapsing currencies, the devaluing dollar, problems in the banking sector, etc.

TGR: What will be China’s role in this?

GM: China is the world’s biggest producer of gold, and now it is becoming the biggest holder of gold. It is dumping U.S. Treasury bills and buying anything it can get its hands on.

TGR: Is there no question in your mind that gold and silver are bargains now?

GM: Absolutely. People should be lining up to buy on this dip. This is a great opportunity. Nothing has fundamentally changed. Has the government started to become fiscally responsible? I laughed out loud when I heard about this “taper” of quantitative easing. What a complete joke. This should show thinking people the gig is up for the financial fraud being perpetrated at the Federal Reserve.

TGR: Many people argue that interest rates can’t go up because then the U.S. won’t be able to pay its debt, and the whole derivatives market will be threatened.

GM: If interest rates go up they are damned. If interest rates go down they are damned. Either way the Fed is screwed because of the derivative situation with their largest banks. I would expect interest rates to move in the direction that allows their banks and the U.S. government to survive the longest, but there is no way out of this that I can see.

TGR: What do you think of the argument made by the Gold Anti-Trust Action Committee that the big banks and the central bankers are suppressing the prices of gold and silver?

GM: The government doesn’t like rising gold and silver prices because it tells the public that something is wrong. Now, does the government come into our market and play games? Absolutely, but I don’t really pay too much attention because, ultimately, I believe free markets will dictate the course of the metals prices. It’s yet another sign on just how out of control the powers that be are when they seek to control the outcome of everything. They think they are God, but they’re about to find out otherwise.

TGR: You wrote on Sept. 20, 2013 that you’ve lost confidence in “a recovery this fall in our overall junior mining stock market.” If you are right, doesn’t this mean that many juniors won’t survive? And if this occurs, will it make the survivors stronger?

GM: Absolutely. This is an unfortunate chain of events, but in many regards it needed to happen. There were just too many junior mining companies. There are only so many talented teams of professionals in the industry that know how to make the discoveries that can be developed into producing mines. When you look at the monies that have been raised in this sector in the last 5–10 years, we have very little to show for it. All the low hanging fruit has already been discovered.

So this “wipeout,” as I’m referring to it, has been very difficult on investors, people employed by mining companies and newsletter writers like myself. I was hoping we would have a recovery this fall. The early signs in July and August seemed to indicate one because the strongest companies started to move and in many cases doubled from their lows in late June, early July. That is usually a sign that things are going to float again, but it all fell apart in September.

TGR: You have recommended that investors reduce their portfolios “to just a few of the highest quality stocks as we await the recovery.” What are the criteria that determine the highest quality stocks?

GM: Companies with plenty of cash on hand that don’t need to raise money right now. It is almost impossible to raise money in this sector at this juncture. Look for companies that are producing from high-grade projects with low costs, companies that will make money even if gold and silver go down further from current levels.

Even with companies like these, there is always something making things more difficult. There are a lot of great companies I like in Mexico, where the politicians are trying to change the laws to charge more taxes. Politicians have an insatiable appetite for other people’s money. It will affect companies in Mexico with low-grade projects to the point it may force them out of business.

TGR: When do you think the market will turn around?

GM: Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business. That will solidify the market for the survivors. Maybe that is as it should be. I do believe that monies we’ve lost in this sector in the last two years can quickly be made up if investors maintain a position, or build positions, during these low times in the highest quality companies. Because when the market does recover, it is going to be a screamer.

TGR: Many long-time investors in the junior space have been so battered over the last couple of years that they’ve given up. What is the best reason for people to stay invested in juniors?

GM: I can’t blame people for getting so frustrated. They’ve taken horrendous losses; we all have. Some of the sharpest people I know in this business have been hammered. And when you suffer a lot, you tend to say, “Hey, I don’t want to do this anymore.” Those who can gut it out, however, those who have the fortitude and the understanding have to dump the garbage. Just take the pain, and get it over with. Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers.

TGR: Greg, thank you for your time and your insights.

Greg McCoach is an entrepreneur who has successfully started and run several businesses in the past 30 years. For the last 14 years, he has been involved with the precious metals industry as a bullion dealer, investor and newsletter writer (Mining Speculator and The Insider Alert). McCoach is also the president of AmeriGold, a gold bullion dealer. He writes a weekly column for Gold World.

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It may be in the reader’s mind that somehow all gold markets come together at some point and an exact representation of demand and supply is given by the gold price. The reality is that most markets are entirely separate from each other and reflect the buying and selling in that individual market only.

These markets are only joined by the ‘arbitrage’ activity, usually only by the professionals in the market –banks mainly—who can both electronically and physically move gold from one market to another.

Arbitrage, or dealing between two markets for instant profits, has always been very profitable. An arbitrageur will often deal in gold and currencies simultaneously, profiting on each ‘book’ throughout a day.

With the world’s richest banks involved in nearly all global financial markets and capable of moving prices to suit themselves, it becomes easy to ensure prices either do or don’t reflect demand and supply. We look into the different markets and how that can happen below. We start with the best known of the U.S. gold financial markets: COMEX.

COMEX

A fact that is usually overlooked in the media when they comment on COMEX is that the physical transactions that take place there, account for a maximum of 5% of transactions. It is only these that could have a direct bearing on the gold price. How?

Ninety-five percent of transactions in the futures and options markets are terminated before they reach the date on which gold has to be delivered. The purpose of this is not simply to make profits (which are the sole purpose of the speculator) but to hedge a physical position. As we discussed in an earlier part of the series, such moves are to protect against the risk gold prices pose to a miner or manufacturer who profits from the business of producing gold products.

But they can be used by a speculating institution, such as Goldman Sachs or J.P. Morgan Chase, who as they did in April, sold around 400 tonnes of gold on COMEX with the full intention of buying the gold back before the contracts matured. Let’s be clear: this was not a gold transaction, but a financial transaction only linked to the gold price. It did not involve the movement of gold, nor did it affect the gold price directly (except through the psychological impact on the gold market itself).

In conjunction with the positions established in the futures and options markets, the banks and their clients sold 100 tonnes of physical gold very quickly so as to swamp the gold market, as the SPDR gold ETF was seeping gold from U.S. gold funds. Since the beginning of the year to May, the U.S. sold around 1,000 tonnes of gold. Together this huge amount of physical gold (in a market whose daily supply of gold is just over 11 tonnes) reaped around $6 billion in speculative profits and knocked back the gold price around $460 an ounce.

Speculators will argue that they are part of the supply/demand equation and they are, but are not part of the big picture of either supply or demand. This is because their short-term positions are always closed out. They are, as we described in the first part of the series, like waves on the seashore going both ways, but not affecting either the tide or the current.

Because they’re part of the highly sophisticated market mechanisms, including high speed computer trading, they can, and freely do, affect prices in the short-term.

But what happened to the gold that was sold out of the U.S.? It went to refineries in Switzerland, in particular, and from there to Asia, never to return. That final move is part of the current and tidal effect of the market.

Just as the massive hedging of the last century we looked at in the second part was ‘de-hedged’, post 2005, to accelerate the rise of the gold price, so will any attempt to buy back the gold into the U.S. impact the gold price and take it higher.

Distribution of Gold, Globally

As unseen, potential manipulator of the gold price lies in the distribution system itself.

You will note how in both China and in India, there are premiums on the gold price of varying sizes. For instance, in India the premium on the gold price has been as high as $40, but it has now dropped to between $5 and $7. In China it has also varied around $15.

The difference between the two nations is that in China, the gov’t wants the Chinese market to import more and more gold, whereas in India the gov’t wants to import less and less gold.

So why are there any premiums at all in China? The bullion banks that supply the Chinese market will no doubt cite the rising demand runs ahead of the volume of supplies they expected to be brought in. This is a weak argument, for any normal supplier carries stock to meet unexpected demand, particularly from a country where they know demand is rising. But for some reason, supplies have usually been less than demand, which has had to wait for new supplies, hence the premium. But this premium is the additional cost of gold over and above the price, which goes into the pockets of the suppliers. This is of course a form of manipulation.

That’s also why it is not surprising that the Chinese authorities have expanded the number of import licenses to include manufacturers importing more than 10 tonnes a year. As these licenses are used, we would expect these premiums to dissipate over time.

It may be that the banks that import bullion to China were delaying or reducing import orders to engineer the premiums that they received, but it would also happen if they wanted to slow the rise of the gold price. What is clear is that the importing banks have a means of manipulating the gold price in the shipping of gold.

Gov’t Price Manipulation

Over in India, the gov’t attacked the importing of gold by raising import duties, initially. Add to this the confusing nature of the actual legislation and Customs at the airports where gold is flown in, halted the release of the gold until they were clear on how the new system of 20% for export and 80% for import would work. Both these gov’t actions slowed imports of gold to almost a halt in August, resulting in 3.5 tonnes of gold imported in August against the usual amount close to 70 tonnes.

The aim of these measures was not to interfere with the price of gold, it was to reduce the Current Account deficit. We know that these measures will only work in the short-term as smuggling will replace the import deficit of gold.

The Indian family expects misgovernment and interference such as this and is happy to ignore it, for in the last century there was a period when gold imports were actually banned. But the gold continued to come in from Dubai and across the long coast of western India. Boats would meet the fast speedboats with silver and exchange it for gold, thus avoiding risks on the Rupee.

The Indian gov’t is fully aware of this, but the advantage of taking such a line is that the official Current Account Deficit will fall while unreported imports of gold avoid adding to the CAD. The CAD will in reality rise still but be off the books. This too is a manipulation of the gold price as pent-up demand adds to the premiums being charged.

Evidence of this was seen in the last couple of weeks when the premium fell from over $40 an ounce of gold to $5 – $7, as Customs released imported gold, to the internal gold market. Now gold imports volumes will jump, restrained only by the need to import 20% of the gold order for re-export. Indian importers are wily enough to export to known buyers who will alter the gold sufficiently so as to send it back to India.

With a superb Monsoon giving the farming community bumper harvests the demand from October onwards will be very strong.

So what’s the Indian government’s next move? We see it as a politically incorrect move on the part of gov’t to interfere with the Indian gold market until after next year’s elections.

Before then, the Indian gov’t may be faced with a reserves crisis as its indebtedness relative to reserves becomes critical. It has already made exploratory moves to see what gold they can ‘harness’ to support the Rupee. But this will prove a very positive for the gold price, but this may have to wait until after the elections.

The point is that gov’ts can act directly to manipulate gold prices inside their country, whether to its detriment or positively.

Additional moves that government’s use are the addition of Value Added Taxes, limitations on the amount to be imported, but most significantly –and one we expect in the near to medium-term—is outright confiscation of gold.

This need not take the form it did in the U.S in 1933. A gov’t can supply gold ‘bonds’ (3 years term, in the case of India is proposed) against the voluntary delivery of gold to its agencies with interest in the form of cash or gold paid to citizens. Then it is simply a matter of extending the term at the government’s option.

Where gold is already sitting in bank deposits, the ‘harnessing’ of gold is easier. We think of how cash and gold deposited in this way becomes unsecured loans (remember Cyprus!). It’s a small step to instruct banks to pass that gold to them ‘for a period’. When a country believes it is in its national interests to take such measures, they will be taken.

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Sell-Side Analysts Tripping Over Each Other With Bearish Pronouncements

While the debt ceiling farce is playing out, a full court press against gold has become visible in the media (once again), with mainstream sell-side analysts trying to out-bear each other. Never mind that not one of them told people to buy gold when the bull market started – in fact, they were for the most part completely silent until it moved above the $1,500 level, at which time they all turned bullish. Having done their clients the favor of telling them to buy high, they are now apparently quite eager to advise them to sell low.

….read more of It Is Unanimous: Gold Remains the Most Hated Asset Class HERE