Ed. Note:

This conversation with my colleague and seasoned journalist Chris Preston is a part of an extended interview he recently conducted with me. Below is “Part 2” of that conversation. Today’s topics were silver, gold, the U.S. government and where I think things are headed. We’ll be posting this conversation in parts every week. If you missed Part 1 earlier this week, you can find it here.

Chris: Let’s talk about silver. Do you think it has the same kind of potential that gold does?

Kevin: I think silver’s a little bit trickier. It’s not as pure a play as gold just because of its industrial uses. We know that most silver consumed every year is gone, we’re not going to get it back because it’s consumed in industry. You can recycle some of it, but a lot of it’s used up – it’s in landfills, it’s in the atmosphere, it’s being used in applications and electrical devices and we’re not going to be able to get back.

That’s a double-edged sword since there’s significant demand, but if we enter a recession that demand’s going to fall, which will severely impact the price of silver. On the other hand, that demand also puts a floor underneath the prices. For a lot of industries silver, while a vital component, isn’t a huge part of their overall costs. So even if silver triples or quadruples or goes up 10 times in price that wouldn’t necessarily impact demand from industry, but obviously it would be pretty great for anybody who owns physical silver.

Chris: So you think we’re headed for another recession?

Kevin: We’ve seen this happen over the past few years. Every time the Federal Reserve, liquidity, QE, accommodative policies – every time those policies start to run down we see the stock market, which is the broadest proxy that they use to measure growth, start to slip. We saw that in 2010. We saw it around this time last year. Until they step back in the market and promise liquidity, you see the market slide quickly. And they know this. That’s why people like Bill Gross say are saying QE3 – a substantial increase in liquidity provided by the Federal Reserve – is coming down the pike.

What’s keeping stock prices up? We’ve seen a lot of cost cutting from corporations. But why are people buying stocks today? It’s because they think Ben Bernanke is going to push the “Go” button on the stock market if it starts to falter again. So he’s kind of de-risking the market.

But yes, in the intermediate term, between now and the next 10 years, I expect a severe recession – if not depression – that will take the stock market down another 50, 60, 70 percent. And that kind of lines up with my overall gold investing strategy. You take an extremely long view of where gold prices are in relation to where stock prices are, in relation to where real estate prices are. You look at these asset classes and ask, “When are stocks truly cheap?”

It’s an important question for stock investors. And I don’t think it’s a question that’s being asked by anybody. I think if you talk to any financial advisors, any mutual fund managers, anybody on the “sell” side of this business – which, admittedly, we’re in – they’re saying it’s always a great time to be buying stocks because it’s impossible for anyone to pick a bottom. I say that’s completely false. You look at the world’s greatest investors – they’re always buying near or at the bottom of these huge moves in the stock market. There are legitimate ways to find out when stocks are actually cheap.

The one that I always talk about is the Dow/gold ratio, which I just wrote about last week. It simply takes the Dow Jones Industrial Average and divides it by the price of gold. In 1980, which was arguably the best time in 50 years to buy stocks, you could buy an ounce of gold for $800. The entire Dow Jones Industrial Average was trading at 800 points. It shows you that there are multi-decade lows for things and that’s a great time to be buying them.

So I think this is a question that long-term investors, which every financial advisor would rightly tell you to be unless you’re a brilliant day trader or you’re really good with options like our friend Andy Crowder, you should be more looking at asset classes than trying to find the next hot stock.

Published by Wyatt Investment Research at